Spirit Airlines, Inc.
Spirit Airlines, Inc. (Form: 10-Q, Received: 10/28/2014 16:11:37)


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________________
Form 10-Q
_______________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35186
_______________________________________________________________________
SPIRIT AIRLINES, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________
Delaware
38-1747023
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
2800 Executive Way
Miramar, Florida
33025
(Address of principal executive offices)
(Zip Code)

(954) 447-7920
(Registrant’s telephone number, including area code)  
_______________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý   No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes   o     No   ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on October 21, 2014:
Class
 
Number of Shares
Common Stock, $0.0001 par value
 
72,766,894





Table of Contents
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. Financial Information
ITEM 1.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Spirit Airlines, Inc.
Condensed Statements of Operations
(unaudited, in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues:
 
 
 
 
 
 
 
Passenger
$
317,038

 
$
279,499

 
$
873,403

 
$
739,515

Non-ticket
202,731

 
177,126

 
583,690

 
494,886

Total operating revenues
519,769

 
456,625

 
1,457,093

 
1,234,401

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Aircraft fuel
171,584

 
144,986

 
474,907

 
411,903

Salaries, wages and benefits
79,087

 
66,805

 
232,776

 
192,758

Aircraft rent
50,009

 
42,134

 
144,618

 
125,121

Landing fees and other rents
27,735

 
22,106

 
77,582

 
61,508

Distribution
20,202

 
17,916

 
58,930

 
50,874

Maintenance, materials and repairs
19,622

 
16,908

 
56,441

 
43,890

Depreciation and amortization
11,338

 
8,475

 
33,803

 
22,403

Other operating
39,190

 
38,884

 
111,045

 
110,799

Loss on disposal of assets
793

 
165

 
1,658

 
426

Special charges (credits)
18

 
442

 
45

 
488

Total operating expenses
419,578

 
358,821

 
1,191,805

 
1,020,170

 
 
 
 
 
 
 
 
Operating income
100,191

 
97,804

 
265,288

 
214,231

 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
Interest expense
878

 
36

 
1,088

 
140

Capitalized interest
(878
)
 
(36
)
 
(1,088
)
 
(140
)
Interest income
(84
)
 
(87
)
 
(235
)
 
(308
)
Other expense
81

 
115

 
1,557

 
252

Total other (income) expense
(3
)
 
28

 
1,322

 
(56
)
 
 
 
 
 
 
 
 
Income before income taxes
100,194

 
97,776

 
263,966

 
214,287

Provision for income taxes
33,194

 
36,673

 
94,411

 
80,562

 
 
 
 
 
 
 
 
Net income
$
67,000

 
$
61,103

 
$
169,555

 
$
133,725

Basic earnings per share
$
0.92

 
$
0.84

 
$
2.33

 
$
1.84

Diluted earnings per share
$
0.91

 
$
0.84

 
$
2.31

 
$
1.83

The accompanying Notes are an integral part of these Condensed Financial Statements.

1



Spirit Airlines, Inc.
Condensed Balance Sheets
(unaudited, in thousands)
 
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
588,474

 
$
530,631

Accounts receivable, net
26,515

 
23,246

Deferred income taxes
15,166

 
16,243

Prepaid expenses and other current assets
73,969

 
78,955

Total current assets
704,124

 
649,075

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
16,064

 
9,847

Ground and other equipment
69,676

 
50,987

Less accumulated depreciation
(32,345
)
 
(25,221
)
 
53,395

 
35,613

Deposits on flight equipment purchase contracts
269,693

 
157,669

Aircraft maintenance deposits
194,867

 
161,484

Deferred heavy maintenance, net
128,304

 
125,288

Other long-term assets
63,171

 
51,636

Total assets
$
1,413,554

 
$
1,180,765

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,954

 
$
23,104

Air traffic liability
216,477

 
167,627

Other current liabilities
160,386

 
145,262

Total current liabilities
394,817

 
335,993

 
 
 
 
Long-term deferred income taxes
47,443

 
48,916

Deferred credits and other long-term liabilities
25,979

 
26,739

Shareholders’ equity:
 
 
 
Common stock
7

 
7

Additional paid-in-capital
523,476

 
515,331

Treasury stock
(3,792
)
 
(2,291
)
Retained earnings
425,624

 
256,070

Total shareholders’ equity
945,315

 
769,117

Total liabilities and shareholders’ equity
$
1,413,554

 
$
1,180,765

The accompanying Notes are an integral part of these Condensed Financial Statements.

2



Spirit Airlines, Inc.
Condensed Statements of Cash Flows
(unaudited, in thousands)  
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities:

 

Net income
$
169,555

 
$
133,725

Adjustments to reconcile net income to net cash provided by operations:

 

Unrealized (gains) losses on open fuel hedge contracts

 
3,489

Equity-based compensation, net
6,315

 
3,970

Allowance for doubtful accounts
(63
)
 
128

Amortization of deferred gains and losses
(228
)
 
(452
)
Depreciation and amortization
33,803

 
22,403

Deferred income tax
(395
)
 
8,795

Loss on disposal of assets
1,658

 
426

Capitalized interest
(1,088
)
 
(140
)
Changes in operating assets and liabilities:


 


Accounts receivable
(3,206
)
 
(5,038
)
Prepaid maintenance reserves
(28,955
)
 
(10,166
)
Long-term deposits and other assets
(36,449
)
 
(37,062
)
Accounts payable
(5,524
)
 
(1,206
)
Air traffic liability
48,736

 
49,318

Other liabilities
22,136

 
5,441

Net cash provided by operating activities
206,295

 
173,631

Investing activities:
 
 
 
Pre-delivery deposits for flight equipment, net of refunds
(115,955
)
 
(41,328
)
Purchase of property and equipment
(26,261
)
 
(17,028
)
Net cash used in investing activities
(142,216
)
 
(58,356
)
Financing activities:
 
 
 
Proceeds from stock options exercised
140

 
675

Payments on capital lease obligations
(922
)
 

Proceeds from sale and leaseback transactions

 
6,900

Payments to pre-IPO shareholders pursuant to tax receivable agreement
(5,643
)
 

Excess tax benefits from equity-based compensation
1,690

 
1,635

Repurchase of common stock
(1,501
)
 
(1,106
)
Net cash (used in) provided by financing activities
(6,236
)
 
8,104

Net increase in cash and cash equivalents
57,843

 
123,379

Cash and cash equivalents at beginning of period
530,631

 
416,816

Cash and cash equivalents at end of period
$
588,474

 
$
540,195

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest
$
398

 
$
26

Taxes
$
88,884

 
$
60,942

The accompanying Notes are an integral part of these Condensed Financial Statements.


3



Notes to Condensed Financial Statements
(unaudited)
1.
Basis of Presentation
The accompanying unaudited condensed financial statements include the accounts of Spirit Airlines, Inc. (the Company). These unaudited condensed financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly the financial position, results of operations and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements of the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The interim results reflected in the unaudited condensed financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.
2.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2014-09, (ASU 2014-09), "Revenue from Contracts with Customers." The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract's performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the planned method of adoption. While the Company is still evaluating the impact, it expects the accounting for its frequent flier program and certain ancillary fees to change.


4

Notes to Condensed Financial Statements—(Continued)

3.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per common share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Numerator
 
 
 
 
 
 
 
Net income
$
67,000

 
$
61,103

 
$
169,555

 
$
133,725

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic
72,755

 
72,632

 
72,727

 
72,571

Effect of dilutive stock awards
548

 
371

 
557

 
363

Adjusted weighted-average shares outstanding, diluted
73,303

 
73,003

 
73,284

 
72,934

Net Income per Share
 
 
 
 
 
 
 
Basic earnings per common share
$
0.92

 
$
0.84

 
$
2.33

 
$
1.84

Diluted earnings per common share
$
0.91

 
$
0.84

 
$
2.31

 
$
1.83

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares


1

 
38

 
1


4.
Accrued Liabilities
Other current liabilities as of September 30, 2014 and December 31, 2013 consist of the following:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Federal excise and other passenger taxes and fees payable
$
42,790

 
$
26,979

Salaries and wages
30,775

 
26,174

Aircraft maintenance
29,738

 
36,165

Airport expenses
18,155

 
17,109

Fuel
11,799

 
13,819

Aircraft and facility rent
9,153

 
7,993

Federal and state income tax payable
5,031

 
794

Other
12,945

 
16,229

Other current liabilities
$
160,386

 
$
145,262


5.
Financial Instruments and Risk Management
As part of the Company’s risk management program, the Company from time to time may use a variety of financial instruments to reduce its exposure to fluctuations in the price of jet fuel and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company is exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks to mitigate exposure to the financial deterioration and nonperformance of any counterparty by monitoring the absolute exposure levels, each counterparty's credit ratings, and the historical performance of the counterparties relating to derivative transactions. The credit exposure related to these financial instruments is limited to the fair value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds. As of September 30, 2014 , the Company did not hold any derivatives with requirements to post collateral.

The Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's credit risk. The Company's derivative contracts generally consist of United States Gulf Coast jet fuel swaps (jet fuel swaps) and United States Gulf Coast jet fuel options (jet fuel options). Both jet fuel swaps and jet fuel options are used at times to protect

5

Notes to Condensed Financial Statements—(Continued)

the refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel prices. Fair value of the instruments is determined using standard option valuation models.

The Company did not elect hedge accounting on any fuel derivative instruments entered into during the three and nine months ended September 30, 2014 and 2013 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. Premiums paid for fuel options are recognized in earnings within aircraft fuel expense as the fair value of the time value portion of each option changes.
The following table summarizes the components of aircraft fuel expense for the three and nine months ended September 30, 2014 and 2013 :

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

(in thousands)
Into-plane fuel cost
$
171,138


$
143,978


$
473,994


$
402,066

Settlement losses (gains)


6,663




6,348

Unrealized mark-to-market losses (gains)


(5,655
)



3,489

Premium expense recognized related to fuel option contracts
446




913



Aircraft fuel
$
171,584


$
144,986


$
474,907


$
411,903

Premiums and settlements received or paid on fuel derivative contracts are reflected in the accompanying statements of cash flows in net cash provided by operating activities.

During the third quarter of 2014, the Company became aware of an underpayment of Federal Excise Tax (FET) for fuel purchases during the period between July 1, 2009 and August 31, 2014. The commencement of the period in which the Company underpaid FET coincided with a change in its fuel service provider that took place in July 2009. The amount of underpayment of jet fuel FET from July 1, 2009 through December 31, 2013 is $9.3 million along with an additional $2.1 million for the nine months ended September 30, 2014. The total amount of $11.4 million is recorded within aircraft fuel in the statement of operations for the three and nine months ended September 30, 2014. Approximately, $0.8 million of interest was incurred related to the past-due tax payments. The Company does not believe the error to be material to the 2009 through 2013 financial statements nor for the cumulative out of period error to be material to the current year financial statements.
Historically, during peak hurricane season (August through October), the Company has entered into jet fuel derivative contracts to protect the refining price risk between the price of crude oil and the price of refined jet fuel. As of September 30, 2014 , the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 32.0 million gallons, or approximately 29.2% of the Company's fourth quarter 2014 and first quarter 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $3.19 per gallon. As of December 31, 2013 , the Company had no outstanding fuel derivatives in place.

6.
Commitments and Contingencies
Aircraft-Related Commitments and Financing Arrangements
The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. As of September 30, 2014 , the Company's aircraft orders consisted of the following:

6

Notes to Condensed Financial Statements—(Continued)

 
 
Airbus
 
Third-Party Lessor
 
 
 
 
A320
 
A320NEO
 
A321
 
A321NEO
 
A320NEO
 
Total
remainder of 2014
 
7
 
 
 
 
 
 
 
 
 
7
2015
 
8
 
 
 
6
 
 
 
1
 
15
2016
 
3
 
 
 
9
 
 
 
4
 
16
2017
 
8
 
 
 
10
 
 
 
 
 
18
2018
 
2
 
6
 
5
 
 
 
 
 
13
2019
 
 
 
3
 
 
 
10
 
 
 
13
2020
 
 
 
13
 
 
 
 
 
 
 
13
2021
 
 
 
18
 
 
 
 
 
 
 
18
 
 
28
 
40
 
30
 
10
 
5
 
113

The Company also has six spare engine orders for V2500 SelectOne engines with International Aero Engines (IAE) and nine spare engine orders for PurePower PW1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2014 through 2024 . Purchase commitments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations and pre-delivery payments, are estimated to be approximately $287 million for the remainder of 2014 , $658 million in 2015 , $601 million in 2016 $757 million in 2017 , $615 million in 2018 , and $2,208 million in 2019 and beyond . The Company has secured financing commitments with third parties for all seven aircraft deliveries, scheduled for delivery in 2014, and for six of the aircraft being delivered in 2015. The Company does not have financing commitments in place for the remaining 95 Airbus aircraft currently on firm order.
During the first nine months of 2014 , the Company took delivery of four aircraft which were financed via sale and leaseback transactions with third-party aircraft lessors. The four sale and leaseback transactions resulted in net deferred losses of $2.5 million . Deferred losses are included in other long-term assets on the accompanying balance sheet. Deferred losses are recognized as an increase to rent expense on a straight-line basis over the term of the respective operating leases. Deferred gains are included in deferred credits and other long-term liabilities on the accompanying balance sheet. Deferred gains are recognized as a decrease to rent expense on a straight-line basis over the term of the respective operating leases. The Company had agreements in place prior to the delivery of these aircraft which resulted in the settlement of the purchase obligation by the lessor and the refund of $20.4 million in pre-delivery deposits from Airbus during the nine months ended September 30, 2014 . The refunded pre-delivery deposits have been disclosed in the accompanying statements of cash flows as pre-delivery deposits for flight equipment, net of refunds, within investing activities. All leases from these sale and leaseback transactions were accounted for as operating leases.
Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the lease agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination upon a breach of the Company's obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition provisions. These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as additional rent expense when it is probable that such amounts will be incurred. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.
During the fourth quarter of 2013, the Company entered into an agreement for the lease of two quick engine change kits, classified as capital leases. Payments under the lease agreement are fixed for the three -year term of the lease.


7

Notes to Condensed Financial Statements—(Continued)

Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at September 30, 2014 were as follows:  
 
 
 
 
Operating Leases
 
 
Capital Leases
 
Aircraft and Spare Engine Leases
 
Property Facility Leases
 
Operating Lease Obligations
 
 
(in thousands)
remainder of 2014
 
$
511

 
$
50,185

 
$
7,449

 
$
57,634

2015
 
1,244

 
201,304

 
22,212

 
223,516

2016
 
1,044

 
199,479

 
13,320

 
212,799

2017
 
44

 
182,977

 
9,549

 
192,526

2018
 
44

 
159,290

 
7,286

 
166,576

2019 and thereafter
 
12

 
634,537

 
24,541

 
659,078

Total minimum lease payments
 
$
2,899

 
$
1,427,772

 
$
84,357

 
$
1,512,129

Less amount representing interest
 
$
253

 

 

 
 
Present value of minimum lease payments
 
$
2,646

 

 

 
 
Less current portion
 
$
1,265

 

 

 
 
Long term portion
 
$
1,381

 

 

 
 
Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the related operating leases and is recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent. Supplemental rent is made up of maintenance reserves paid or to be paid to aircraft lessors in advance of the performance of major maintenance activities that are not probable of being reimbursed, as well as lease return condition obligations which the Company begins to accrue when they are probable and can be estimated. The Company expects supplemental rent to increase as individual aircraft lease agreements approach their respective termination dates and the Company begins to accrue the estimated cost of return conditions for the corresponding aircraft.
A majority of the Company’s master lease agreements provide that the Company pays maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. Maintenance reserve payments are either contractually fixed or utilization based amounts. Fixed maintenance reserve payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, are expected to be approximately $1.8 million for the remainder of 2014 , $7.6 million in 2015 , $8.0 million in 2016 , $7.4 million in 2017 , $5.8 million in 2018 , and $18.4 million in 2019 and beyond . These lease agreements provide that maintenance reserves are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (1) the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance event.
The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system and advertising media as of September 30, 2014 : $0.9 million for the remainder of 2014 , $3.9 million in 2015 , $3.9 million in 2016 , $3.9 million in 2017 , $2.6 million in 2018 , and none in 2019 and thereafter .
Litigation
The Company is subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. The Company believes the ultimate outcome of such lawsuits, proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on its financial position, liquidity or results of operations.

8

Notes to Condensed Financial Statements—(Continued)

Credit Card Processing Arrangements
The Company has agreements with organizations that process credit card transactions arising from the purchase of air travel, baggage charges, and other ancillary services by customers. As it is standard in the airline industry, the Company's contractual arrangements with credit card processors permit them, under certain circumstances, to retain a holdback or other collateral, which the Company records as restricted cash, when future air travel and other future services are purchased via credit card transactions. The required holdback is the percentage of the Company's overall credit card sales its credit card processors hold to cover refunds to customers if the Company fails to fulfill its flight obligations. If the Company fails to satisfy certain liquidity and other financial covenants, the processing agreements provide the processors the right to require the Company to maintain cash collateral up to approximately 100% of the Company's air traffic liability, which would result in a commensurate reduction of unrestricted cash. As of September 30, 2014 and December 31, 2013 , the Company continued to be in compliance with its credit card processing agreements and liquidity and other financial covenant requirements, and the processors were holding back no remittances.
The maximum potential exposure to cash holdbacks by the Company's credit card processors, based upon advance ticket sales and $9 Fare Club memberships as of September 30, 2014 and December 31, 2013 , was $250.6 million and $188.6 million , respectively.
Employees
Approximately 60% of the Company’s employees are covered under collective bargaining agreements. The table below sets forth the Company's employee groups and status of the collective bargaining agreements as of September 30, 2014 .
Employee Groups
 
Representative
 
Amendable Date
 
Percentage of Workforce
Pilots
 
Air Line Pilots Association, International (ALPA)
 
August 2015
 
25%
Flight Attendants
 
Association of Flight Attendants (AFA-CWA)
 
August 2007
 
34%
Dispatchers
 
Transport Workers Union (TWU)
 
August 2018
 
1%
In August 2014, under the supervision of the National Mediation Board (NMB), the Company and AFA-CWA reached a tentative agreement for a five -year contract with the Company's flight attendants. The tentative agreement was subject to ratification by the flight attendant membership. On October 1, 2014, the Company was notified that the flight attendants voted not to ratify the tentative agreement. The Company will continue to work together with the AFA-CWA and the NMB with a goal of reaching a mutually beneficial agreement. On July 8, 2014, approximately 250 ramp service agents directly employed by the Company voted to be represented by the International Association of Machinists and Aerospace Workers (IAM). These ramp service agents currently serve 4 of the 56 airports where the Company operates. The Company is in discussions with the IAM to begin the process of negotiating a collective bargaining agreement.
The Company is self-insured for health care claims, up to a stop loss amount for eligible participating employees, and qualified dependent medical claims, subject to deductibles and limitations. The Company’s liabilities for claims incurred but not reported are determined based on an estimate of the ultimate aggregate liability for claims incurred. The estimate is calculated from actual claim rates and adjusted periodically as necessary. The Company has accrued $2.5 million and $2.1 million in health care claims as of September 30, 2014 and December 31, 2013 , respectively.
Other
On October 15, 2013, a Company aircraft experienced an engine failure shortly after takeoff. The aircraft immediately returned to the airport, and the passengers and crew safely disembarked from the aircraft. The airframe and engine incurred damage as a result of the failure. In 2013, the Company expensed the insurance deductible related to this incident of approximately $ 0.8 million. As of September 30, 2014 , the Company has received insurance proceeds for a portion of the damage incurred. After the conclusion of a lengthy investigation into the incident, the Company now anticipates it will receive a new replacement engine from the manufacturer, in exchange for a $ 2.3 million payment to the manufacturer. Upon receipt, title to the engine will transfer to the lessor. The Company expensed $ 2.3 million within maintenance, materials and repairs in the statement of operations for the three and nine months ended September 30, 2014.

On July 22, 2014, the Company purchased $ 13.1 million of rotable spare inventory which was previously rented. The cost to rent this inventory was recorded as maintenance, material and repairs within the statement of operations. As a result of the purchase, the inventory will be capitalized and the cost will be amortized over the remaining useful life of the assets. The amortization will be recorded as depreciation and amortization within the statement of operations.

9

Notes to Condensed Financial Statements—(Continued)


7.
Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosures , disclosures are required about how fair value is determined for assets and liabilities, and a hierarchy for which these assets and liabilities must be grouped is established, based on significant levels of inputs, as follows:
Level 1 —Quoted prices in active markets for identical assets or liabilities.
Level 2 —Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s financial assets and liabilities. The Company's derivative contracts generally consist of jet fuel swaps and jet fuel options. These instruments are valued using energy and commodity market data, which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities.
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
 
Fair Value Measurements as of September 30, 2014
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
588.5


$
588.5


$


$

Jet fuel options
0.1






0.1

Total assets
$
588.6


$
588.5


$


$
0.1












Total liabilities
$


$


$


$

 
Fair Value Measurements as of December 31, 2013
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
530.6


$
530.6


$


$

Total assets
$
530.6


$
530.6


$


$












Total liabilities
$


$


$


$


Cash and cash equivalents at  September 30, 2014  and  December 31, 2013  are comprised of liquid money market funds and cash and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions. The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2014 and the year ended December 31, 2013 .
The Company did not elect hedge accounting on any of its fuel derivative instruments, and as a result, changes in the fair values of these fuel derivative contracts are recorded each period in fuel expense. Fair value of the instruments is determined using standard option valuation models. The Company also considers counterparty risk and its own credit risk in its

10

Notes to Condensed Financial Statements—(Continued)

determination of all estimated fair values. Within the Condensed Balance Sheets, the Company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. All derivative instruments are presented on a gross basis in the table above.
The Company determines the fair value of jet fuel options utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.
The fair value of the Company's jet fuel swaps are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these instruments as Level 2. Certain inputs utilized to determine the fair value of the Company's jet fuel options are unobservable (principally implied volatility); therefore, the Company has categorized these instruments as Level 3.

The Company records the fair value of its aircraft fuel derivatives on the balance sheet within other current assets or other current liabilities, depending on whether the net fair value of the derivatives is in an asset or liability position as of the respective date. Changes in the fair value of aircraft fuel derivatives are reflected in the accompanying statement of operations within aircraft fuel.
The Company's Valuation Group is made up of individuals from the Company's Risk Management, Treasury and Corporate Accounting departments. The Valuation Group is responsible for the Company's valuation policies, procedures and execution thereof. The Company's Valuation Group reports to the Company's Chief Financial Officer and seeks approval for certain fuel derivative transactions from the Audit Committee. The Valuation Group compares the results of the Company's internally developed valuation methods with counterparty reports at each balance sheet date and assesses the Company's valuation methods for accurateness and identifies any needs for modification.

The following table presents the Company's activity for assets and liabilities measured at gross fair value on a recurring basis using significant unobservable inputs (Level 3):


Jet Fuel Option Activity for the Three Months Ended September 30, 2014

(in thousands)
Balance at June 30, 2014
360

Total realized or unrealized gains (losses) included in earnings, net
(446
)
Purchases
164

Sales

Settlements, net

Balance at September 30, 2014
$
78



Jet Fuel Option Activity for the Nine Months Ended September 30, 2014

(in thousands)
Balance at December 31, 2013

Total realized or unrealized gains (losses) included in earnings, net
(913
)
Purchases
991

Sales

Settlements, net

Balance at September 30, 2014
$
78






11

Notes to Condensed Financial Statements—(Continued)

8.
Tax Receivable Agreement
On June 1, 2011, the Company completed its initial public offering of common stock, or IPO. In connection with the IPO, the Company entered into a Tax Receivable Agreement (TRA) and thereby distributed immediately prior to the completion of the IPO to the holders of common stock as of such time, or the Pre-IPO Stockholders, the right to receive an amount equal to 90% of the cash savings in federal income tax realized by the Company by virtue of the use of the federal net operating loss, deferred interest deductions, and alternative minimum tax credits held by the Company as of March 31, 2011, which is defined as the Pre-IPO NOL. Cash tax savings generally will be computed by comparing the actual federal income tax liability to the amount of such taxes that the Company would have been required to pay had such Pre-IPO NOLs not been available. Upon consummation of the IPO and execution of the TRA, the Company recorded a liability with an offsetting reduction to additional paid-in-capital. The amount and timing of payments under the TRA depends upon a number of factors, including, but not limited to, the amount and timing of taxable income generated in the future and any future limitations that may be imposed on the Company's ability to use the Pre-IPO NOLs. The term of the TRA continues until the first to occur of (a) the full payment of all amounts required under the agreement with respect to utilization or expiration of all the Pre-IPO NOLs, (b) the end of the taxable year including the tenth anniversary of the IPO or (c) a change in control of the Company.
In accordance with the TRA, the Company is required to submit a Tax Benefit Schedule showing the proposed TRA payout amount to the Stockholder Representatives within 45 calendar days after the Company files its tax return. The Stockholder Representatives are Indigo Pacific Partners, LLC and OCM FIE, LLC, who represent the two largest ownership interests of pre-IPO shares. The Tax Benefit Schedule shall become final and binding on all parties unless a Stockholder Representative, within 45 calendar days after receiving such schedule, provides the Company with notice of a material objection to such schedule. If the parties, for any reason, are unable to successfully resolve the issues raised in any notice within 30 calendar days of receipt of such notice, the Company and the Stockholder Representatives shall employ the Reconciliation procedures. If the Tax Benefit Schedule is accepted, the Company has five days after the acceptance to make payments to the pre-IPO shareholders. Pursuant to the TRA's Reconciliation procedures, any disputes that cannot be settled amicably, are settled by arbitration conducted by a single arbitrator jointly selected by both parties.
During the second quarter of 2012, the Company paid $27.2 million , or 90% of the 2011 tax savings realized from the utilization of NOLs, including $0.3 million of applicable interest, to the Pre-IPO Stockholders.
During 2013, the Company filed an amended 2009 income tax return which resulted in a reduction to the estimated TRA liability from $8.0 million to $5.6 million . On September 13, 2013, the Company filed its 2012 federal income tax return, and on October 14, 2013 the Company submitted the Tax Benefit Schedule to the Stockholder Representatives. On November 27, 2013, pursuant to the TRA, the Company received an objection notice to the Tax Benefit Schedule from the Stockholder Representatives. After several unsuccessful attempts at resolving the objections, on April 7, 2014, the Company received a demand for arbitration from the Stockholder Representatives. Prior to commencing arbitration proceedings, on June 17, 2014, the Company and Stockholder Representatives agreed on a settlement amount of $7.0 million in addition to interest of $0.3 million . The agreed upon settlement was in excess of the outstanding liability of $5.6 million at the time of settlement. The excess payment of $1.4 million was recorded within other expense in the statement of operations and recorded as cash from operations in the statement of cash flows. As of September 30, 2014, the Company had made all payments in accordance with the agreed upon settlement terms and had no outstanding obligations related to the TRA.

9.
Subsequent Events

The Company has entered into a Framework Agreement, dated as of October 1, 2014 (Framework Agreement), with a bank syndicate which will provide up to $379 million of debt financing for seven Airbus A320 aircraft and three Airbus A321 aircraft scheduled for delivery under the Company's existing purchase agreement with Airbus between October 2014 and September 2015. Each loan to be extended under the Framework Agreement will be funded on or about the delivery date of each aircraft and will be secured by a first-priority security interest in the individual aircraft. Each loan will amortize quarterly on a mortgage-style basis, with senior loans having a 12 -year term and junior loans having a 7 -year term. Loans will bear interest payable quarterly on a floating rate basis, provided that the Company may elect in advance a fixed rate basis. On October 16, 2014, the Company took delivery of an A320 aircraft financed through the Framework Agreement and recorded debt of $37.0 million in relation to this transaction.

On October 23, 2014, the Company entered into forward interest rate swaps that fix the benchmark interest rate component of the forecasted interest payments on the debt related to three Airbus 321 aircraft with expected delivery dates ranging from July 2015 to September 2015 to limit the Company’s exposure to changes in the benchmark interest rate in the period from the trade date through the date of actual delivery. The interest rate swaps will be designated as cash flow hedges.

12



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical factors are “forward-looking statements” for purposes of these provisions. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” and “potential,” and similar expressions intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in this report and in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequent Quarterly Reports on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview

Spirit Airlines is an ultra low-cost, low-fare airline headquartered in Miramar, Florida that offers affordable travel to price-conscious customers. Our all-Airbus fleet currently operates more than 280 daily flights to over 55 destinations in the United States, the Caribbean and Latin America. Our stock trades on the NASDAQ Global Select Stock Market under the symbol "SAVE."

Our ultra low-cost carrier business model allows us to compete principally through offering low base fares and charging separately for select optional services, thereby allowing customers the freedom to save by choosing only the extras they value. We have unbundled components of our air travel service that have traditionally been included in base fares, such as baggage and advance seat selection, and offer them as optional, ancillary services (which we record in our financial statements as non-ticket revenue) as part of a strategy to enable our passengers to identify, select, and pay only for the services they want to use.

We are focused on price-sensitive travelers who pay for their own travel, and our business model is designed to deliver what we believe our customers want: low fares. We aggressively use low fares to stimulate air travel demand in order to increase passenger volume, load factors and non-ticket revenue on the flights we operate. Higher passenger volumes and load factors help us sell more ancillary products and services, which in turn allows us to reduce the base fare we offer even further, stimulating additional demand. We strive to be recognized by our customers and potential customers as the low-fare leader in the markets we serve.

We compete based on total price. We believe other airlines have used an all-inclusive pricing concept to effectively raise total prices to consumers, rather than lowering fares by unbundling each product or service. For example, carriers that tout “free bags” have included the cost of checking bags in the total ticket price, which does not allow passengers to see how much they would save if they did not check luggage. We believe that we and our customers benefit when we allow our customers to know the total price of their travel by breaking out the cost of optional products or services. Before they pay, our customers are able to see the total cost of flying with us and then compare it with the total cost of flying with another airline.

We allow our customers to see all available options and their prices prior to purchasing a ticket, and this full transparency illustrates that our total price, including options selected, is lower than other airlines on average. We recently launched an aggressive new brand campaign to educate the public on how Spirit's unbundled pricing model works and how that gives them choice and saves them money compared to other airlines.

13




Comparative Operating Statistics:
The following tables set forth our operating statistics for the three-month and nine-month period ended September 30, 2014 and 2013 :
 
 
Three Months Ended September 30,
 
Percent Change
 
2014
 
2013
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
57.8

 
50.9

 
13.6
 %
Aircraft at end of period
58

 
51

 
13.7
 %
Airports served in the period
55

 
54

 
1.9
 %
Average daily aircraft utilization (hours)
12.7

 
12.8

 
(0.8
)%
Average stage length (miles)
964

 
956

 
0.8
 %
Block hours
67,704

 
60,009

 
12.8
 %
Passenger flight segments (PFSs) (thousands)
3,752

 
3,374

 
11.2
 %
Revenue passenger miles (RPMs) (thousands)
3,656,842

 
3,241,309

 
12.8
 %
Available seat miles (ASMs) (thousands)
4,174,397

 
3,637,951

 
14.7
 %
Load factor (%)
87.6
%
 
89.1
%
 
(1.5) pts

Average ticket revenue per passenger flight segment ($)
84.50

 
82.84

 
2.0
 %
Average non-ticket revenue per passenger flight segment ($)
54.04

 
52.50

 
2.9
 %
Total revenue per passenger flight segment ($)
138.54

 
135.34

 
2.4
 %
Average yield (cents)
14.21

 
14.09

 
0.9
 %
RASM (cents)
12.45

 
12.55

 
(0.8
)%
CASM (cents)
10.05

 
9.86

 
1.9
 %
Adjusted CASM (cents)
9.80

 
10.00

 
(2.0
)%
Adjusted CASM ex fuel (cents)
5.92

 
5.86

 
1.0
 %
Fuel gallons consumed (thousands)
51,688

 
45,521

 
13.5
 %
Average economic fuel cost per gallon ($)
3.13

 
3.31

 
(5.4
)%

(A) See "Glossary of Airline Terms" elsewhere in this quarterly report for definitions used in this table.

14



 
Nine Months Ended September 30,
 
Percent Change
 
2014
 
2013
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
56.5

 
49.0

 
15.3
 %
Aircraft at end of period
58

 
51

 
13.7
 %
Airports served in the period
55

 
54

 
1.9
 %
Average daily aircraft utilization (hours)
12.7

 
12.7

 
 %
Average stage length (miles)
979

 
944

 
3.7
 %
Block hours
196,574

 
170,552

 
15.3
 %
Passenger flight segments (PFSs) (thousands)
10,584

 
9,253

 
14.4
 %
Revenue passenger miles (RPMs) (thousands)
10,452,588

 
8,833,712

 
18.3
 %
Available seat miles (ASMs) (thousands)
11,967,631

 
10,185,421

 
17.5
 %
Load factor (%)
87.3
%
 
86.7
%
 
0.6 pts

Average ticket revenue per passenger flight segment ($)
82.52

 
79.92

 
3.3
 %
Average non-ticket revenue per passenger flight segment ($)
55.15

 
53.49

 
3.1
 %
Total revenue per passenger flight segment ($)
137.67

 
133.41

 
3.2
 %
Average yield (cents)
13.94

 
13.97

 
(0.2
)%
RASM (cents)
12.18

 
12.12

 
0.5
 %
CASM (cents)
9.96

 
10.02

 
(0.6
)%
Adjusted CASM (cents)
9.86

 
9.97

 
(1.1
)%
Adjusted CASM ex fuel (cents)
5.98

 
5.96

 
0.3
 %
Fuel gallons consumed (thousands)
147,766

 
126,832

 
16.5
 %
Average economic fuel cost per gallon ($)
3.15

 
3.22

 
(2.2
)%

(A) See "Glossary of Airline Terms" elsewhere in this quarterly report for definitions used in this table.



15


Executive Summary
For the third quarter of 2014 , we achieved a 19.3% operating margin, a decrease of 2.1 points compared to the prior year period. We generated pre-tax income of $100.2 million and net income of $67.0 million on operating revenues of $519.8 million . For the third quarter of 2013 , we generated pre-tax income of $97.8 million and net income of $61.1 million on operating revenues of $456.6 million .
For the nine months ended September 30, 2014 , we achieved a 18.2% operating margin, an increase of 0.8 points compared to the prior year period. We generated pre-tax income of $264.0 million and net income of $169.6 million on operating revenues of $1,457.1 million . For the nine months ended September 30, 2013 , we generated pre-tax income of $214.3 million and net income of $133.7 million on operating revenues of $1,234.4 million .
Our adjusted CASM ex-fuel for the third quarter of 2014 was 5.92 cent s, a 1.0% increase year over year. The increase on a per-ASM basis was primarily due to an increase in salaries, wages and benefits, landing fees and other rents, depreciation and amortization and aircraft rent expense per ASM. This increase was partially offset by lower passenger re-accommodation expense year over year driven by better operational performance during 2014, as compared to 2013.
As of September 30, 2014 , we had 58 Airbus A320-family aircraft in our fleet comprised of 29 A319s, 27 A320s, and 2 A321s. With the scheduled delivery of 7 A320s during the remainder of 2014 , we expect to end 2014 with 65 aircraft in our fleet.

Comparison of three months ended September 30, 2014 to three months ended September 30, 2013
Operating Revenues
Operating revenues increase d $63.1 million , or 13.8% , to $519.8 million for the third quarter of 2014 , as compared to the third quarter of 2013 due primarily to an increase in traffic of 12.8% . The year-over-year increase was driven by our growth in flight volume and higher operating yields.
Total revenue per available seat mile (RASM) for the third quarter of 2014 was 12.45 cent s, a decrease of 0.8% , compared to the third quarter of 2013 . A year-over-year increase in our average stage length contributed to a 0.4 percentage point decline in RASM for the third quarter of 2014. In addition, an increase in our flying on non-peak travel days resulted in a 1.5 point decrease in our average load factor year over year to 87.6%, which also contributed to the decrease in RASM.
In spite of the slight decrease in RASM, total revenue per passenger flight segment increased 2.4% from $135.34 , in the third quarter of 2013, to $138.54 in the third quarter of 2014. Our average ticket fare per passenger flight segment increased from $82.84 to $84.50 , or 2.0% , compared to the prior year period, and non-ticket revenue per passenger flight segment increased from $52.50 to $54.04 , or 2.9% , compared to the prior year period. The increase in non-ticket revenue was primarily driven by a higher volume of passengers electing to purchase seat assignments, largely due to a recent software update that enables us to sell seat assignments through more channels as well as a more rigorous approach to managing our seat inventory.

Operating Expenses
Operating expenses increase d $60.8 million , or 16.9% , to $419.6 million for the third quarter of 2014 compared to $358.8 million for the third quarter of 2013 , primarily due to our 14.7% capacity growth. The increases in operating expenses were driven mostly by aircraft fuel, salaries, wages and benefits, aircraft rent, and landing fees and other rents, which outpaced our growth in capacity, offset somewhat by lower re-accommodation expense as a result of improved operational reliability.
Aircraft fuel expense includes into-plane fuel expense (defined below), realized and unrealized net gains or losses from fuel derivatives which includes cash paid or received from settled derivatives, mark-to-market adjustments on our outstanding fuel derivatives, and premium gain or loss recognized related to fuel option contracts. Into-plane fuel expense is defined as the price that we generally pay at the airport, including taxes and fees. Into-plane fuel prices are affected by the global oil market, refining costs, taxes and fees, which can vary by region in the United States and other countries where we operate. Into-plane fuel expense approximates cash paid to the supplier and does not reflect the effect of our fuel derivatives. Management chose not to elect hedge accounting on any fuel derivative instruments during 2014 or 2013 and, as a result, changes in the fair value of these fuel derivative contracts are recorded each period in aircraft fuel expense.

16



During the third quarter of 2014, we became aware of an underpayment of Federal Excise Tax (FET) for fuel purchases during the period between July 1, 2009 and August 31, 2014. The commencement of the period in which we underpaid FET coincided with a change in our fuel service provider that took place in July 2009. The amount of underpayment of jet fuel FET from July 1, 2009 through December 31, 2013 was $9.3 million along with an additional $2.1 million for the nine months ended September 30, 2014. The total amount of $11.4 million is recorded within aircraft fuel expense in the statement of operations for the three and nine months ended September 30, 2014, and considered a component of into-plane fuel expense. Approximately, $0.8 million of interest was incurred related to the past-due tax payments.
Aircraft fuel expense, our largest operating cost as a percentage of operating expenses, increase d in the third quarter of 2014 by $26.6 million , or 18.3% , due primarily to the 12.8% increase in block hours as well as an additional $11.4 million recorded in the current period for unpaid jet fuel FET.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Three Months Ended September 30,

Percent Change
 
2014

2013


(in thousands, except per gallon amounts)



Fuel gallons consumed
51,688


45,521


13.5
 %
Into-plane fuel cost per gallon
$
3.31


$
3.16


4.7
 %
Into-plane fuel expense
$
171,138


$
143,978


18.9
 %
Cash paid (received) from settled derivatives, net


6,663


(100.0
)%
Impact on fuel expense from unrealized (gains) and losses arising from mark-to-market adjustments to our outstanding fuel derivatives


(5,655
)

(100.0
)%
Premium expense recognized related to fuel option contracts
446




100.0
 %
Aircraft fuel expense (per Statement of Operations)
$
171,584


$
144,986


18.3
 %
Gulf Coast Jet indexed fuel is the basis for a substantial majority of our fuel consumption and is impacted by both the price of crude oil as well as increases or decreases in refining margins associated with the conversion of crude oil to jet fuel. The into-plane fuel cost per gallon increase of 4.7% was primarily a result of an additional $11.4 million, or $0.22 cents per gallon, of jet fuel FET recorded in the third quarter of 2014 described above.

We track economic fuel expense, which we believe is the best measure of the effect fuel prices are currently having on our business, because it most closely approximates the net cash outflow associated with purchasing fuel used for our operations during the period. We define economic fuel expense as into-plane fuel expense, realized gains or losses on derivative contracts, plus the economic premium expense related to fuel option contracts in the period the option is benefiting. The key difference between aircraft fuel expense as recorded in our statement of operations and economic fuel expense is unrealized mark-to-market changes in the value of aircraft fuel derivatives outstanding and the timing of premium gain or loss recognition on our outstanding fuel option contracts. In addition, in our calculation for economic fuel price for the current period, we are excluding the prior years' additional jet fuel FET amount of $9.3 million expensed in the third quarter of 2014, but including the year-to-date 2014 additional jet fuel FET amount of $2.1 million. Many industry analysts evaluate airline results using economic fuel expense and it is used in our internal management reporting.
The elements of the changes in economic fuel expense are illustrated in the following table:
 
Three Months Ended September 30,
 
Percent Change
 
2014
 
2013
 
 
(in thousands, except per gallon amounts)
 
 
Into-plane fuel expense
$
171,138

 
$
143,978

 
18.9
 %
Cash paid (received) from settled derivatives, net

 
6,663

 
(100.0
)%
Economic premium expense related to fuel option contracts
151

 

 
100.0
 %
Prior years' additional federal excise tax
(9,278
)



100.0
 %
Economic fuel expense
$
162,011

 
$
150,641

 
7.5
 %
Fuel gallons consumed
51,688

 
45,521

 
13.5
 %
Economic fuel cost per gallon
$
3.13

 
$
3.31

 
(5.4
)%

17




We did not pay or receive cash from any derivatives that settled during the third quarter of 2014 . Total net loss recognized for derivatives that settled during the third quarter of 2013 was $6.7 million . This amount represents the net cash paid for the settlement of derivatives. We had no unrealized gains and losses arising from mark-to-market adjustments to our outstanding fuel derivatives during the three months ended September 30, 2014 . Total unrealized gains arising from mark-to-market adjustments to our outstanding fuel derivatives of $5.7 million for the quarter ended September 30, 2013 was mainly the result of increases in the fair value of our fuel hedge contracts (or decreases in our derivative liabilities) as our hedge contracts settled and were recognized as realized losses. For the quarter ended September 30, 2014 , total premium expense recognized in earnings related to fuel option contracts was $0.4 million . We had no premium expense recognized in earnings for the quarter ended September 30, 2013 .
Historically, during peak hurricane season (August through October), we enter into jet fuel derivative contracts to protect the refining price risk between the price of crude oil and the price of refined jet fuel. As of September 30, 2014 , we had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 32.0 million gallons, or approximately 29.2% of the our fourth quarter 2014 and first quarter 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $3.19 per gallon.
We measure our operating cost performance on a per-ASM basis, since one ASM is the unit of production of an airline’s capacity. The following table presents our cost per-ASM, or unit cost, for the three months ended September 30, 2014 and 2013 , followed by explanations of the material changes on a dollar basis and/or unit cost basis:
 
Three Months Ended September 30,
 
Per-ASM Change
 
Percent Change
 
2014
 
2013
 
 
(in cents, except for percentages)
Aircraft fuel
4.11

 
3.99

 
0.12

 
3.0
 %
Salaries, wages, and benefits
1.90

 
1.84

 
0.06

 
3.3
 %
Aircraft rent
1.20

 
1.16

 
0.04

 
3.4
 %
Landing fees and other rents
0.66

 
0.61

 
0.05

 
8.2
 %
Distribution
0.48

 
0.49

 
(0.01
)
 
(2.0
)%
Maintenance, materials and repairs
0.47

 
0.46

 
0.01

 
2.2
 %
Depreciation and amortization
0.27

 
0.23

 
0.04

 
17.4
 %
Other operating
0.94

 
1.07

 
(0.13
)
 
(12.1
)%
Loss on disposal of assets
0.02

 

 
0.02

 
NA

Special charges (credits)

 
0.01

 
(0.01
)
 
NA

CASM
10.05

 
9.86

 
0.19

 
1.9
 %
Adjusted CASM (1)
9.80

 
10.00

 
(0.20
)
 
(2.0
)%
Adjusted CASM ex fuel (2)
5.92

 
5.86

 
0.06

 
1.0
 %
 
(1)
For the three months ended September 30, 2014 , adjusted CASM excludes premium expense related to fuel option contracts of 0.01 cent per ASM, loss on disposal of assets of 0.02 cent s per ASM, special charges of less than 0.01 cent per ASM and prior year jet fuel FET of 0.22 cent s per ASM. For the three months ended September 30, 2013 , adjusted CASM excludes mark-to-market gains of 0.16 cents per ASM, loss on disposal of assets of less than 0.01 cent per ASM, and special charges of 0.01 cent per ASM.
(2)
Excludes aircraft fuel expense, loss on disposal of assets, and special charges and credits.
Our adjusted CASM ex-fuel for the third quarter of 2014 was up 1.0% as compared to the third quarter of 2013 . The increase on a per-ASM basis was driven by an increase in salaries, wages and benefits, landing fees and other rents, depreciation and amortization and aircraft rent expense per ASM. This increase was partially offset by lower passenger re-accommodation year over year due to better operational performance during 2014, as compared to 2013.
Labor costs for the third quarter of 2014 increase d $12.3 million , or 18.4% , compared to the third quarter of 2013 , primarily driven by a 14.4% increase in our pilot and flight attendant workforce resulting from the introduction of seven new aircraft since the third quarter of 2013 . On a per-ASM basis, labor costs outpaced our capacity growth due to an increase in our group health care costs and pilot wage costs resulting from the implementation of new crew duty and rest rules (FAR 117), that became effective January 2014, and from the ramping up of flight crew hiring in preparation for future aircraft deliveries. In

18



addition, an increase in outstanding equity grants and an increase in our stock price over the last year has driven an increase in equity compensation expense.
Aircraft rent expense for the third quarter of 2014 increase d by $7.9 million , or 18.7% , compared to the third quarter of 2013 . All our aircraft are financed through operating leases. This increase in aircraft rent expense was primarily driven by the delivery of seven new aircraft subsequent to the end of the third quarter of 2013 and an increase of $1.0 million in supplemental rent in the current period. On a per-ASM basis, aircraft rent expense increase d due to an increase in supplemental rent as well as higher rent rates on the new A320 aircraft added to our fleet since the corresponding 2013 period, as compared to older aircraft in our fleet which primarily consist of A319 aircraft.
Landing fees and other rents for the third quarter of 2014 increase d $5.6 million , or 25.5% , as compared to the third quarter of 2013 primarily due to a 11.9% increase in departures as well as increased rates at certain airports where we operate. On a per-ASM basis, the increase in landing fees and other rents of 8.2% , as compared to the prior year period, was due to increased rates at certain airports as well as increased volume at higher-cost airports.
Distribution costs increase d by $2.3 million , or 12.8% , in the third quarter of 2014 as compared to the third quarter of 2013 . The increase was primarily due to increased sales volume. On a per-ASM basis, distribution costs decreased slightly due to a decrease of approximately 0.5 percentage points, year over year, in sales through third-party travel agents, which are generally more expensive than selling directly through our website. Furthermore, stability in credit card fee rates period over period contributed to the stability in distribution costs on a per-ASM basis.
Maintenance costs for the third quarter of 2014 increase d by $2.7 million , or 16.1% , compared to the third quarter of 2013 . The increase in maintenance costs on a dollar basis was primarily due to $2.3 million of expense recorded in the third quarter of 2014 in connection with an engine failure incident that occurred in 2013. For a detailed discussion of the engine expense, please see "Notes to Financial Statements - 6. Commitment and Contingencies." As our fleet ages, our aircraft require more comprehensive work during routine scheduled maintenance. We expect maintenance expense to increase significantly as our fleet continues to grow and age, resulting in the need for additional or more frequent repairs over time.
Depreciation and amortization increase d by $2.9 million primarily due to higher amortization of deferred heavy maintenance. As our fleet continues to age, the amount of deferred heavy maintenance events will increase and will result in an increase in the amortization of those costs. In addition, we had higher depreciation expense resulting from the purchase of $13.1 million in spare rotable parts made during the third quarter of 2014.
We account for heavy maintenance under the deferral method. Under the deferral method, the cost of heavy maintenance is capitalized and amortized as a component of depreciation and amortization expense in the statement of operations until the earlier of the next heavy maintenance event or end of the lease term. The amortization of heavy maintenance costs was $8.5 million and $6.5 million for the third quarters of 2014 and 2013 , respectively. If heavy maintenance events were amortized within maintenance, materials, and repairs expense in the statement of operations, our maintenance, materials, and repairs expense would have been $28.1 million and $23.4 million for the third quarters of 2014 and 2013 , respectively.
Other operating expense for the third quarter of 2014 increase d by $0.3 million , or 0.8% , compared to the third quarter of 2013 primarily due to our growth offset by a significant decrease in passenger re-accommodation expense due to improved operational reliability.

Other income (expenses)

Our interest expense and corresponding capitalized interest for the three months ended September 30, 2014 primarily represents interest related to underpayment of prior year jet fuel FET. Our interest expense and corresponding capitalized interest for the three months ended September 30, 2013 primarily represents interest charged under the tax receivable agreement (TRA). For a detailed discussion of the TRA, please see "Notes to Financial Statements - 8. Tax Receivable Agreement."

Income Taxes
Our effective tax rate for the third quarter of 2014 was 33.1% compared to 37.5% for the third quarter of 2013 . The decrease in rate was related primarily to permanent foreign tax credits which we were able to utilize in the third quarter of 2014. In arriving at these rates, we considered a variety of factors, including our forecasted full-year pre-tax results, the U.S. federal rate of 35%, expected nondeductible expenses, and estimated state income taxes. We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate for the full year is dependent on the level of pre-tax income

19



and the magnitude of any nondeductible expenses in relation to the respective pre-tax income. We do not believe our effective tax rate for the third quarter of 2014 is indicative of our effective tax rate for the full year or for future periods.

Comparison of nine months ended September 30, 2014 to nine months ended September 30, 2013
Operating Revenues
Operating revenues increase d $222.7 million , or 18.0% , to $1,457.1 million for the nine months ended September 30, 2014 , compared to the prior year period, as we achieved an 87.3% load factor on an increase in traffic of 18.3% .
Total RASM for the nine months ended September 30, 2014 was 12.2 cent s, an increase of 0.5% compared to the same period of 2013 . Total revenue per passenger flight segment increase d 3.2% from $133.41 for the nine months ended September 30, 2013 to $137.67 for the nine months ended September 30, 2014 . Our average ticket fare per passenger flight segment increase d from $79.92 to $82.52 , or 3.3% , compared to the prior year period, and non-ticket revenue per passenger flight segment increase d from $53.49 to $55.15 , or 3.1% , compared to the prior year period. The increase in non-ticket revenue was primarily driven by a higher volume of passengers electing to purchase seat assignments, largely due to a recent software update that enables us to sell seat assignments through more channels as well as a more rigorous approach to managing our seat inventory. Additionally, in July 2013, we increased our passenger usage fee (PUF) helping to drive the increase in PUF fees year over year.

Operating Expenses
Operating expense increase d for the nine months ended September 30, 2014 by $171.6 million , or 16.8% , compared to the same period for 2013 primarily due to our 17.5% capacity growth. The increases in salaries and wages, depreciation and amortization, landing fees and other rents and maintenance, materials and repairs expense, which outpaced our growth in capacity, were offset by lower re-accommodation expense as a result of improved operational reliability as well as lower aircraft rent resulting from renegotiated lease terms.
Aircraft fuel expense for the nine months ended September 30, 2014 increase d $63.0 million , or 15.3% , compared to the prior year period primarily as a result of a 15.3% increase in block hours, offset by a decrease of $8.9 million in net realized and unrealized losses from fuel derivatives year over year.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Nine Months Ended September 30,

Percent Change
 
2014

2013


(in thousands, except per gallon amounts)



Fuel gallons consumed
147,766


126,832


16.5
 %
Into-plane fuel cost per gallon
$
3.21


$
3.17


1.3
 %
Into-plane fuel expense
$
473,994


$
402,066


17.9
 %
Cash paid (received) from settled derivatives, net


6,348


(100.0
)%
Impact on fuel expense from unrealized (gains) and losses arising from mark-to-market adjustments to our outstanding fuel derivatives


3,489


(100.0
)%
Premium expense recognized related to fuel option contracts
913




100.0
 %
Aircraft fuel expense (per Statement of Operations)
$
474,907


$
411,903


15.3
 %
The elements of the changes in economic fuel expense are illustrated in the following table:

20



 
Nine Months Ended September 30,

Percent Change
 
2014

2013

 
(in thousands, except per gallon amounts)
 
 
Into-plane fuel expense
$
473,994


$
402,066


17.9
 %
Cash paid (received) from settled derivatives, net


6,348


(100.0
)%
Economic premium expense related to fuel option contracts
151




100.0
 %
Prior years' additional federal excise tax
(9,278
)



100.0
 %
Economic fuel expense
$
464,867


$
408,414


13.8
 %
Fuel gallons consumed
147,766


126,832


16.5
 %
Economic fuel cost per gallon
$
3.15


$
3.22


(2.2
)%
We did not pay or receive cash from any derivatives that settled during the nine months ended September 30, 2014 . Total net loss recognized for derivatives that settled during the nine months ended September 30, 2013 was $6.3 million . This amount represents the net cash paid for the settlement of derivatives.
As of September 30, 2014 , we had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 32.0 million gallons, or approximately 29.2% of the our fourth quarter 2014 and first quarter 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $3.19 per gallon. We had no unrealized gains and losses arising from mark-to-market adjustments to our outstanding fuel derivatives during the nine months ended September 30, 2014 . Total unrealized losses arising from mark-to-market adjustments to our outstanding fuel derivatives of $3.5 million for the nine months ended September 30, 2013 was due to a decrease in the market price, as indicated by the forward curve, for jet fuel when compared to that market as of the time of our derivative trade. For the nine months ended September 30, 2014 , total premium expense recognized in earnings related to fuel option contracts was $0.9 million . We had no premium expense recognized in earnings for the nine months ended September 30, 2013 .

We measure our operating cost performance on a per-ASM basis, since one ASM is the unit of production of an airline’s capacity. The following table presents our cost per-ASM, or unit cost, for the nine months ended September 30, 2014 and 2013 , followed by explanations of the material changes on a unit cost basis and/or dollar basis:
 
Nine Months Ended September 30,
 
Per-ASM Change
 
Percent Change
 
2014
 
2013
 
 
(in cents, except for percentages)
Aircraft fuel
3.97

 
4.04

 
(0.07
)
 
(1.7
)%
Salaries, wages, and benefits
1.95

 
1.89

 
0.06

 
3.2
 %
Aircraft rent
1.21

 
1.23

 
(0.02
)
 
(1.6
)%
Landing fees and other rents
0.65

 
0.60

 
0.05

 
8.3
 %
Distribution
0.49

 
0.50

 
(0.01
)
 
(2.0
)%
Maintenance, materials and repairs
0.47

 
0.43

 
0.04

 
9.3
 %
Depreciation and amortization
0.28

 
0.22

 
0.06

 
27.3
 %
Other operating
0.93

 
1.09

 
(0.16
)
 
(14.7
)%
Loss on disposal of assets
0.01

 

 
0.01

 
NA

Special charges (credits)

 

 

 
NA

CASM
9.96

 
10.02

 
(0.06
)
 
(0.6
)%
Adjusted CASM (1)
9.86

 
9.97

 
(0.11
)
 
(1.1
)%
Adjusted CASM ex fuel (2)
5.98

 
5.96

 
0.02

 
0.3
 %
 
(1)
For the nine months ended September 30, 2014 , adjusted CASM excludes premium expense related to fuel option contracts of 0.01 cent per ASM, loss on disposal of assets of 0.01 cent per ASM, special charges of less than 0.01 cent per ASM and prior year jet fuel FET of 0.08 cent s per ASM. For the nine months ended September 30, 2013 , adjusted CASM excludes mark-to-market losses of 0.03 cents per ASM, loss on disposal of assets of less than 0.01 cent per ASM, and special charges of less than 0.01 cent per ASM.

21



(2)
Excludes aircraft fuel expense, loss on disposal of assets, and special charges and credits.
Our adjusted CASM ex-fuel for the nine months ended September 30, 2014 increase d by 0.3% as compared to the same period in 2013 . The increase on a per-ASM basis was primarily due to an increase in salaries, wages and benefits expense, landing fees and other rents expense, depreciation and amortization expense, landing fees and other rents expense and maintenance, materials and repairs expense per ASM. This increase was partially offset by lower passenger re-accommodation year over year, due to better operational performance during 2014, as compared to 2013. In addition, on a per-ASM basis, aircraft rent expense decreased due to reduced rent expense related to 14 A319 aircraft for which lease extensions with reduced rates were negotiated with the lessor at the end of the second quarter of 2013.
Labor costs for the nine months ended September 30, 2014 increase d $40.0 million , or 20.8% , compared to same period in 2013 . The increase was primarily driven by a 19.1% increase in our pilot and flight attendant workforce resulting from the introduction of seven new aircraft since the end of the third quarter of 2013 , the implementation of new crew duty and rest rules (FAR 117) beginning in January of 2014 which resulted in the hiring of additional pilots to fly our schedule, as well as a ramp up in hiring of pilots and flight attendants in anticipation of the seven new aircraft deliveries in the fourth quarter of 2014. On a per-ASM basis, labor costs outpaced our capacity growth primarily due to an increase in our group health care costs and the implementation of FAR 117, which resulted in carrying a higher ratio of pilots compared to the prior period.
Aircraft rent expense for the nine months ended September 30, 2014 increase d by $19.5 million , or 15.6% , compared to the same period in 2013 . This increase was primarily driven by the delivery of seven new aircraft subsequent to the end of the third quarter of 2013 . On a per-ASM basis, aircraft rent expense decrease d due to lease extensions that effectively lowered the lease rate for 14 A319 aircraft at the end of the second quarter of 2013. Therefore, we had a full nine months of reduced rents in 2014, compared to only four months of reduced rents in 2013.
Landing fees and other rents for the nine months ended September 30, 2014 increase d $16.1 million , or 26.1% , as compared to the same period in 2013 primarily due to a 12.0% increase in departures as well as increased rates at certain airports where we operate. On a per-ASM basis, landing fees and other rents increase d, as compared to the prior year period, due to increased rates at certain airports, expiration of incentives, as well as increased volume at higher-cost airports.
Distribution costs increase d by $8.1 million , or 15.8% , for the nine months ended September 30, 2014 as compared to the same period in 2013 . The increase was due primarily to increased sales volume and an increase of approximately 1.8 percentage points, year over year, in sales from third-party travel agents, which are more expensive than selling directly through our website. On a per-ASM basis, distribution costs remained relatively flat due to stability in credit card fee rates period over period.
Maintenance costs for the nine months ended September 30, 2014 increase d by $12.6 million , or 28.6% , compared to the prior year period. During the third quarter of 2014, we recorded $2.3 million of expense in connection with an engine failure incident that occurred in 2013. For a detailed discussion of the engine expense, please see "Notes to Financial Statements - 6. Commitments and Contingencies." In addition, the increase in maintenance costs on a dollar basis and per unit basis resulted from an increase in both the number and cost of scheduled maintenance events during the nine months ended September 30, 2014 as compared to the prior year. As our fleet ages, our aircraft require more comprehensive work during routine scheduled maintenance. We expect maintenance expense to increase significantly as our fleet continues to grow and age, resulting in the need for additional or more frequent repairs over time.
Depreciation and amortization increase d by $11.4 million primarily due to higher amortization of deferred heavy maintenance. As our fleet continue to age, the amount of deferred heavy maintenance events capitalized will increase and will result in an increase in the amortization of those costs.
We account for heavy maintenance under the deferral method. Under the deferral method, the cost of heavy maintenance is capitalized and amortized as a component of depreciation and amortization expense in the statement of operations until the next heavy maintenance event or end of the lease term. The amortization of heavy maintenance costs was $26.5 million and $16.3 million for the nine months ended of September 30, 2014 and 2013 , respectively. If heavy maintenance events were amortized within maintenance, materials and repairs expense in the statement of operations, our maintenance, materials and repairs expense would have been $82.9 million and $60.2 million for the nine months ended September 30, 2014 and 2013 , respectively.
Other operating expense for the nine months ended September 30, 2014 increase d by $0.2 million , or 0.2% , compared to the prior year period primarily due to our growth. The decrease on a per-ASM basis was due primarily due to lower passenger re-accommodation expense due to improved operational reliability.

Other income (expenses)

22




Our interest expense and corresponding capitalized interest for the nine months ended September 30, 2014 primarily represents interest related to underpayment of prior year jet fuel FET and interest charged under the TRA. Our interest expense and corresponding capitalized interest for the nine months ended September 30, 2013 primarily represents interest charged under the TRA. Other expense of $1.6 million for the nine months ended September 30, 2014 primarily relates to the settlement paid, during the second quarter of 2014, to the Pre-IPO Stockholders in excess of the liability we had previously estimated related to the TRA. For a detailed discussion of the TRA, please see "Notes to Financial Statements - 8. Tax Receivable Agreement."

Income Taxes
Our effective tax rate for the nine months ended September 30, 2014 was 35.8% compared to 37.6% for the nine months ended September 30, 2013 . The decrease in rate was primarily due to permanent foreign tax credits which we were able to utilize in the third quarter of 2014. In arriving at these rates, we considered a variety of factors, including our forecast full-year pre-tax results, the U.S. federal rate of 35%, expected nondeductible expenses, and estimated state income taxes. We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate for the full year is dependent on the level of pre-tax income and the magnitude of any nondeductible expenses in relation to the respective pre-tax income. We do not believe our effective tax rate for the nine months ended September 30, 2014 is indicative of our effective tax rate for the full year or for future periods.

Liquidity and Capital Resources
    
Cash at September 30, 2014 was $588.5 million , an increase of $57.8 million , from December 31, 2013 . Our primary use of cash is for working capital needs, aircraft and engine pre-delivery deposit payments (PDPs), maintenance reserves and other capital expenditures.
Currently, our single largest capital need is to fund the acquisition costs of our aircraft. PDPs relating to future deliveries under our agreement with Airbus are required at various times prior to each delivery date. In the nine months ended September 30, 2014 , $20.4 million of PDPs were returned to us related to delivered aircraft and engines in the period, and we paid $136.4 million for future deliveries of aircraft and spare engines. As of September 30, 2014 , we have $269.7 million of PDPs on our balance sheet.
In addition to funding the acquisition of our fleet, we are required to make maintenance reserve payments for a majority of our current fleet. Maintenance reserves are paid to aircraft lessors and are held as collateral in advance of our performance of major maintenance activities. In the nine months ended September 30, 2014 , we recorded an increase of $29.0 million in maintenance reserves, net of reimbursements, and as of September 30, 2014 , we had $247.7 million ( $52.8 million in prepaid expenses and other current assets and $194.9 million in aircraft maintenance deposits) on our balance sheet.
We have secured third-party financing commitments for our next seven aircraft deliveries from Airbus, scheduled for delivery in 2014, and for six aircraft being delivered in 2015. We do not have financing commitments in place for the remaining 95 Airbus aircraft currently on firm order. Future aircraft deliveries may be leased or otherwise financed based on market conditions, our prevailing level of liquidity, and capital market availability.
Net Cash Flows Provided By Operating Activities. Operating activities in the nine months ended September 30, 2014 provided $206.3 million in cash compared to $173.6 million provided in the nine months ended September 30, 2013 . The increase resulted from increased net income for the nine months ended September 30, 2014 as compared to the prior year period, slightly offset by higher payments made on prepaid maintenance reserves.
Net Cash Flows Used In Investing Activities. In the nine months ended September 30, 2014 , investing activities used $142.2 million , compared to $58.4 million used in the prior year period. Paid PDPs, net of refunds, increased period over period driven by the timing of aircraft deliveries expected through the end of 2014 and 2015. Capital expenditures increased slightly period over period driven by the purchase of $13.1 million million in rotable spare inventory during the third quarter of 2014.
Net Cash Flows (Used in) Provided By Financing Activities. During the nine months ended September 30, 2014 , financing activities used $6.2 million primarily due to a payment made to pre-IPO shareholders, pursuant to the tax receivable agreement, during the second quarter of 2014. For a detailed discussion of the TRA, please see "Notes to Financial Statements - 8. Tax Receivable Agreement." In the prior year, financing activities provided $8.1 million mainly resulting from a sale and leaseback transaction of a spare engine.

23




Commitments and Contractual Obligations
The following table discloses aggregate information about our contractual obligations as of September 30, 2014 and the periods in which payments are due (in millions):  
 
 
Remainder of 2014
 
2015 - 2016
 
2017 - 2018
 
2019 and beyond
 
Total
Operating lease obligations
 
$
58

 
$
436

 
$
359

 
$
659

 
$
1,512

Flight equipment purchase obligations
 
287

 
1,259

 
1,372

 
2,208

 
5,126

Other
 
1

 
10

 
7

 

 
18

Total future payments on contractual obligations
 
$
346

 
$
1,705

 
$
1,738

 
$
2,867

 
$
6,656


A majority of our master lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our required performance of major maintenance activities. Some maintenance reserve payments are fixed contractual amounts, while others are based on utilization. In addition to the contractual obligations disclosed in the table above, we have fixed maintenance reserve payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, which are approximately $1.8 million for the remainder of 2014 , $7.6 million in 2015 , $8.0 million in 2016 , $7.4 million in 2017 , $5.8 million in 2018 , and $18.4 million in 2019 and beyond .

Off-Balance Sheet Arrangements
We have significant obligations for aircraft as all 58 of our aircraft are financed under operating leases and therefore are not reflected on our balance sheets. These leases expire between 2016 and 2026. Aircraft rent payments were $50.5 million and $43.1 million for the three months ended September 30, 2014 and 2013 , respectively, and $147.5 million and $125.3 million for the nine months ended September 30, 2014 and 2013 , respectively. Our aircraft lease payments for 53 of our aircraft are fixed-rate obligations. Five of our aircraft leases provide for variable rent payments, which fluctuate based on changes in LIBOR (the London Interbank Offered Rate).
Our contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. As of September 30, 2014 , our aircraft orders consisted of the following:
 
 
Airbus
 
Third-Party Lessor
 
 
 
 
A320
 
A320NEO
 
A321
 
A321NEO
 
A320NEO
 
Total
remainder of 2014
 
7
 
 
 
 
 
 
 
 
 
7
2015
 
8
 
 
 
6
 
 
 
1
 
15
2016
 
3
 
 
 
9
 
 
 
4
 
16
2017
 
8
 
 
 
10
 
 
 
 
 
18
2018
 
2
 
6
 
5
 
 
 
 
 
13
2019
 
 
 
3
 
 
 
10
 
 
 
13
2020
 
 
 
13
 
 
 
 
 
 
 
13
2021
 
 
 
18
 
 
 
 
 
 
 
18
 
 
28
 
40
 
30
 
10
 
5
 
113
We also have six spare engine orders for V2500 SelectOne engines with IAE and nine spare engine orders for PurePower PW1100G-JM engines with Pratt & Whitney. Spare engines are scheduled for delivery from 2014 through 2024 . Committed expenditures for these aircraft and related flight equipment, including estimated amounts for contractual price escalations and aircraft PDPs, are expected to be approximately $287 million for the remainder of 2014 , $658 million in 2015 , $601 million in 2016 $757 million in 2017 , $615 million in 2018 and $2,208 million in 2019 and beyond .
As of September 30, 2014 , we had lines of credit related to corporate credit cards of $18.6 million  from which we had drawn $4.2 million .
As of September 30, 2014 , we had lines of credit with counterparties for both physical fuel delivery and jet fuel derivatives in the amount of $34.5 million . As of September 30, 2014 , we had drawn $11.7 million on these lines of credit. We are required to post collateral for any excess above the lines of credit if the derivatives are in a net liability position and make

24



periodic payments in order to maintain an adequate undrawn portion for physical fuel delivery. As of September 30, 2014 , we did not hold any derivatives with requirements to post collateral.
As of September 30, 2014 , we had $6.3 million in uncollateralized surety bonds and a $25.1 million in unsecured standby letter of credit facilities of which $10.1 million had been drawn upon for issued letters of credit.

25



GLOSSARY OF AIRLINE TERMS
Set forth below is a glossary of industry terms:
“Adjusted CASM” means operating expenses, excluding mark-to-market gains or losses, the change in value of the option premium recognized in earnings and prior years' federal excise tax, including the cost of economic premium recognized over the period the option is benefiting, loss on disposal of assets, and special charges (credits), divided by ASMs.
“Adjusted CASM ex fuel” means operating expenses excluding aircraft fuel expense, loss on disposal of assets, and special charges (credits), divided by ASMs.
“AFA-CWA” means the Association of Flight Attendants-CWA.
“Air traffic liability” or “ATL” means the value of tickets sold in advance of travel.
“ALPA” means the Airline Pilots Association, International.
“ASIF” means an Aviation Security Infrastructure Fee assessed by the TSA on each airline.
“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown, also referred to as "capacity."
“Average aircraft” means the average number of aircraft in our fleet as calculated on a daily basis.
“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.
“Average economic fuel cost per gallon” means total aircraft fuel expense, excluding mark-to-market gains and losses, the change in value of the option premium recognized in earnings and prior years' federal excise tax, plus the cost of economic premium recognized over the period the option is benefiting, divided by the total number of fuel gallons consumed.
“Average non-ticket revenue per passenger flight segment” means the total non-ticket revenue divided by passenger flight segments.
“Average ticket revenue per passenger flight segment” means total passenger revenue divided by passenger flight segments.
“Average stage length” represents the average number of miles flown per flight.
“Average yield” means average operating revenue earned per RPM, calculated as total revenue divided by RPMs.
“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.
“CASM” or “unit costs” means operating expenses divided by ASMs.

“CBA” means a collective bargaining agreement.

“CBP” means United States Customs and Border Protection.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

“FAA” means the United States Federal Aviation Administration.
“FCC” means the United States Federal Communications Commission.
“FLL Airport” means the Fort Lauderdale-Hollywood International Airport.
“GDS” means Global Distribution System (e.g., Amadeus, Galileo, Sabre and Worldspan).
"IAM" means the International Association of Machinists and Aerospace Workers.
“Into-plane fuel cost per gallon” means into-plane fuel expense divided by number of fuel gallons consumed.

26



“Into-plane fuel expense” represents the cost of jet fuel and certain other charges such as fuel taxes and oil.
“Load factor” means the percentage of aircraft seats actually occupied on a flight (RPMs divided by ASMs).
“NMB” means the National Mediation Board.
“Operating revenue per-ASM,” “RASM” or “unit revenue” means operating revenue divided by ASMs.
“OTA” means Online Travel Agent (e.g., Orbitz and Travelocity).
“Passenger flight segments” or “PFS” means the total number of passengers flown on all flight segments.
“PDP” means pre-delivery deposit payment.
“Revenue passenger mile” or “RPM” means one revenue passenger transported one mile. RPMs equals revenue passengers multiplied by miles flown, also referred to as “traffic.”
“RLA” means the United States Railway Labor Act.
“TWU” means the Transport Workers Union of America.
“TSA” means the United States Transportation Security Administration.
“ULCC” means “ultra low-cost carrier.”
“VFR” means visiting friends and relatives.
“Wet-leased aircraft” means a lease where the lessor provides for aircraft, crew, maintenance and insurance, also known as an “ACMI.”


27




ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk-Sensitive Instruments and Positions
We are subject to certain market risks, including commodity prices (specifically aircraft fuel). The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided below does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
Aircraft Fuel . Our results of operations can vary materially due to changes in the price and availability of aircraft fuel. Aircraft fuel expense for the nine months ended September 30, 2014 and 2013 represented 39.8% and 40.4% of our operating expenses, respectively. Increases in aircraft fuel prices or a shortage of supply could have a material adverse effect on our operations and operating results. We source a significant portion of our fuel from refining resources located in the southeast United States, particularly facilities adjacent to the Gulf of Mexico. Gulf Coast fuel is subject to volatility and supply disruptions, particularly during hurricane season when refinery shutdowns have occurred, or when the threat of weather related disruptions has caused Gulf Coast fuel prices to spike above other regional sources. During peak hurricane season (August through October), we may enter into fuel derivative contracts to protect the refining price risk between the price of crude oil and the price of refined jet fuel. Gulf Coast Jet indexed fuel is the basis for a substantial majority of our fuel consumption. Based on our fuel consumption over the last twelve months, a 10% increase in the average price per gallon of aircraft fuel would have increased aircraft fuel expense by approximately $61.5 million . To attempt to manage fuel price risk, from time to time we use jet fuel options or jet fuel swaps to mitigate a portion of the crack spread between crude and jet fuel. As of September 30, 2014 , we had jet fuel option agreements in place to protect 32.0 million gallons, or approximately 29.2% of our fourth quarter 2014 and first quarter 2015 anticipated jet fuel consumption at a weighted-average ceiling price of $3.19 per gallon.
We measure our financial derivative instruments at fair value. Fair value of the instruments is determined using standard option valuation models. Changes in the related commodity derivative instrument cash flows may change by more or less than this amount based upon further fluctuations in futures prices. Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet their obligations.
Interest Rates . We have market risk associated with changing interest rates due to LIBOR-based lease rates on five of our aircraft. A hypothetical 10% change in interest rates in 2013 would affect total aircraft rent expense in 2014 by less than $0.1 million .

ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014 . The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2014 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28



PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

We are subject to commercial litigation claims and to administrative and regulatory proceedings and reviews that may be asserted or maintained from time to time. We believe the ultimate outcome of pending lawsuits, proceedings and reviews will not, individually or in the aggregate, have a material adverse effect on our financial position, liquidity, or results of operations.

ITEM 1A.
RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A Risk Factors contained in our Annual Report on Form 10-K for the year ended  December 31, 2013 . Investors are urged to review these risk factors carefully.


29



ITEM 6.
EXHIBITS
 
Exhibit Number
 
Description of Exhibits
10.1
 
Framework Agreement, dated as of October 1, 2014 by and between Spirit Airlines, Inc., BNP Paribas, New York Branch, Landesbank Hessen-Thuringen Girozentrale, Natixis, New York Branch, KfW IPEX-Bank GmbH, Investec Bank PLC and Wilmington Trust Company.
 
 
 
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1*
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2*
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
*
Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act or the Exchange Act, except as otherwise specifically stated in such filing.



30



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
SPIRIT AIRLINES, INC.
 
 
 
Date: October 28, 2014
 By:
/s/ Edward Christie   
 
 
Edward Christie
 
 
Senior Vice President and
Chief Financial Officer


31
        
Exhibit 10.1


FRAMEWORK AGREEMENT
dated as of October 1, 2014
among
SPIRIT AIRLINES, INC.,
as Borrower,
BNP PARIBAS, NEW YORK BRANCH,
LANDESBANK HESSEN-THÜRINGEN GIROZENTRALE,
NATIXIS, NEW YORK BRANCH
and

KfW IPEX-BANK GMBH,
as Original Senior Lenders,
INVESTEC BANK PLC,
as Original Junior Lender,
BNP PARIBAS, NEW YORK BRANCH,
as Senior Facility Agent,
INVESTEC BANK PLC,
as Junior Facility Agent,
NATIXIS, NEW YORK BRANCH,
as Documentation Agent,
and
WILMINGTON TRUST COMPANY,