Spirit Airlines, Inc.
Spirit Airlines, Inc. (Form: 10-Q, Received: 07/24/2015 15:44:24)


 
 
 
 
 
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 June 30, 2015
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 July 17, 2015:
Class
 
Number of Shares
Common Stock, $0.0001 par value
 
72,911,853





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 amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Operating revenues:
 
 
 
 
 
 
 
Passenger
$
308,573

 
$
302,487

 
$
582,039

 
$
556,365

Non-ticket
244,848

 
196,850

 
464,737

 
380,959

Total operating revenues
553,421

 
499,337

 
1,046,776

 
937,324

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Aircraft fuel
127,907

 
154,852

 
240,333

 
303,323

Salaries, wages and benefits
97,037

 
77,440

 
186,094

 
153,689

Aircraft rent
53,127

 
48,222

 
105,915

 
94,609

Landing fees and other rents
33,364

 
25,831

 
63,910

 
49,847

Distribution
22,349

 
20,159

 
42,846

 
38,728

Maintenance, materials and repairs
21,271

 
19,205

 
40,431

 
36,819

Depreciation and amortization
17,139

 
11,344

 
32,002

 
22,465

Other operating
58,173

 
36,408

 
101,920

 
71,856

Loss on disposal of assets
415

 
715

 
1,010

 
865

Special charges
324

 
17

 
749

 
26

Total operating expenses
431,106

 
394,193

 
815,210

 
772,227

 
 
 
 
 
 
 
 
Operating income
122,315

 
105,144

 
231,566

 
165,097

 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
Interest expense
4,419

 
103

 
7,231

 
210

Capitalized interest
(2,829
)
 
(103
)
 
(5,362
)
 
(210
)
Interest income
(177
)
 
(83
)
 
(311
)
 
(151
)
Other expense
44

 
1,439

 
116

 
1,476

Total other (income) expense
1,457

 
1,356

 
1,674

 
1,325

 
 
 
 
 
 
 
 
Income before income taxes
120,858

 
103,788

 
229,892

 
163,772

Provision for income taxes
44,154

 
38,939

 
84,186

 
61,217

 
 
 
 
 
 
 
 
Net income
$
76,704

 
$
64,849

 
$
145,706

 
$
102,555

Basic earnings per share
$
1.06

 
$
0.89

 
$
2.00

 
$
1.41

Diluted earnings per share
$
1.05

 
$
0.88

 
$
1.99

 
$
1.40

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

1



Spirit Airlines, Inc.
Condensed Statements of Comprehensive Income
(unaudited, in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
76,704

 
$
64,849

 
$
145,706

 
$
102,555

Unrealized gain (loss) on interest rate derivative instruments, net of deferred taxes of $749, $0, ($191) and $0
1,238

 

 
(356
)
 

Other comprehensive income (loss)
$
1,238

 
$

 
$
(356
)
 
$

Comprehensive income
$
77,942

 
$
64,849

 
$
145,350

 
$
102,555


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


2



Spirit Airlines, Inc.
Condensed Balance Sheets
(unaudited, in thousands)
 
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
769,324

 
$
632,784

Accounts receivable, net
30,856

 
22,685

Deferred income taxes
9,643

 
9,643

Prepaid expenses and other current assets
62,088

 
66,029

Total current assets
871,911

 
731,141

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
549,517

 
204,462

Ground and other equipment
66,290

 
57,012

Less accumulated depreciation
(47,219
)
 
(36,099
)
 
568,588

 
225,375

Deposits on flight equipment purchase contracts
267,344

 
242,881

Aircraft maintenance deposits
217,932

 
213,147

Deferred heavy maintenance, net
108,051

 
123,108

Other long-term assets
71,511

 
66,744

Total assets
$
2,105,337

 
$
1,602,396

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,751

 
$
13,402

Air traffic liability
270,185

 
188,870

Current maturities of long-term debt
29,676

 
10,431

Other current liabilities
207,879

 
152,921

Total current liabilities
529,491

 
365,624

 
 
 
 
Long-term debt, less current maturities
398,975

 
135,232

Long-term deferred income taxes
76,378

 
76,010

Deferred gains and other long-term liabilities
18,213

 
22,455

Shareholders’ equity:
 
 
 
Common stock
7

 
7

Additional paid-in-capital
539,443

 
526,173

Treasury stock, at cost
(83,336
)
 
(3,921
)
Retained earnings
627,240

 
481,534

Accumulated other comprehensive loss
(1,074
)
 
(718
)
Total shareholders’ equity
1,082,280

 
1,003,075

Total liabilities and shareholders’ equity
$
2,105,337

 
$
1,602,396

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

3



Spirit Airlines, Inc.
Condensed Statements of Cash Flows
(unaudited, in thousands)  
 
Six Months Ended June 30,
 
2015
 
2014
Operating activities:

 

Net income
$
145,706

 
$
102,555

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

 

Unrealized (gains) losses on open fuel derivative contracts, net
4,257

 

Equity-based compensation, net
4,743

 
3,872

Allowance for doubtful accounts (recoveries)
8

 
(33
)
Amortization of deferred gains and losses
397

 
(178
)
Depreciation and amortization
32,002

 
22,465

Deferred income tax expense (benefit)
559

 
(395
)
Loss on disposal of assets
1,010

 
865

Capitalized interest
(5,362
)
 
(210
)
Changes in operating assets and liabilities:


 


Accounts receivable
(8,137
)
 
(14,188
)
Prepaid maintenance reserves
(4,621
)
 
(14,286
)
Long-term deposits and other assets
(10,930
)
 
(27,020
)
Accounts payable
7,856

 
(1,462
)
Air traffic liability
90,056

 
64,331

Other liabilities
39,327

 
7,819

Net cash provided by operating activities
296,871

 
144,135

Investing activities:
 
 
 
Pre-delivery deposits for flight equipment, net of refunds
(70,971
)
 
(94,009
)
Purchase of property and equipment
(308,163
)
 
(7,430
)
Net cash used in investing activities
(379,134
)
 
(101,439
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
296,000



Proceeds from stock options exercised
23

 
63

Payments on debt and capital lease obligations
(8,940
)
 
(511
)
Proceeds from sale and leaseback transactions
7,300

 

Payments to pre-IPO shareholders pursuant to tax receivable agreement

 
(5,643
)
Excess tax benefits from equity-based compensation
8,504

 
1,225

Repurchase of common stock
(79,415
)
 
(1,222
)
Debt issuance costs
(4,669
)


Net cash provided by financing activities
218,803

 
(6,088
)
Net increase in cash and cash equivalents
136,540

 
36,608

Cash and cash equivalents at beginning of period
632,784

 
530,631

Cash and cash equivalents at end of period
$
769,324

 
$
567,239

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest (net of capitalized interest)
$
1,758

 
$
326

Taxes
$
54,198

 
$
52,093



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


4



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, 2014 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.
Certain prior period amounts have been reclassified to conform to the current year's presentation.
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, 2017 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 be impacted by the adoption of the standard.

In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest." The standard requires debt issuance costs to be presented on the balance sheet as a direct deduction from the related debt liability rather than as an asset. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. ASU 2015-03 is effective for annual periods ending after December 15, 2015, and interim periods within those fiscal years and early application is permitted. The Company has elected to early adopt the standard, effective January 1, 2015.


5

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share amounts)
Numerator
 
 
 
 
 
 
 
Net income
$
76,704

 
$
64,849

 
$
145,706

 
$
102,555

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic
72,518

 
72,740

 
72,784

 
72,712

Effect of dilutive stock awards
283

 
554

 
299

 
562

Adjusted weighted-average shares outstanding, diluted
72,801

 
73,294

 
73,083

 
73,274

Net income per share
 
 
 
 
 
 
 
Basic earnings per common share
$
1.06

 
$
0.89

 
$
2.00

 
$
1.41

Diluted earnings per common share
$
1.05

 
$
0.88

 
$
1.99

 
$
1.40

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares
56


57

 
42

 
56


4.
Accrued Liabilities
Other current liabilities as of June 30, 2015 and December 31, 2014 consist of the following:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Federal excise and other passenger taxes and fees payable
$
48,557

 
$
42,628

Salaries and wages
34,549

 
34,209

Airport expenses
27,086

 
21,726

Federal and state income tax payable
24,944

 
3,286

Aircraft and facility lease obligations
20,485

 
10,089

Aircraft maintenance
17,604

 
16,127

Fuel
12,006

 
9,508

Other
22,648

 
15,348

Other current liabilities
$
207,879

 
$
152,921


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 June 30, 2015 , 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.




6

Notes to Condensed Financial Statements—(Continued)

Fuel Derivative Instruments

The Company's fuel 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 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 accounts for its fuel derivative contracts at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities. The Company did not elect hedge accounting on any fuel derivative instruments entered into during the three and six months ended June 30, 2015 and 2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. During the three months ended June 30, 2015, the Company did not acquire any jet fuel options. During the six months ended June 30, 2015 , the Company paid $2.1 million in premiums to acquire jet fuel options.
The following table summarizes the components of aircraft fuel expense for the three and six months ended June 30, 2015 and 2014 :

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

(in thousands)
Into-plane fuel cost
$
127,344


$
154,385


$
235,468


$
302,856

Realized losses (gains) related to fuel derivative contracts, net
4,232




6,839



Unrealized losses (gains) related to fuel derivative contracts
(3,669
)

467


(1,974
)

467

Aircraft fuel
$
127,907


$
154,852


$
240,333


$
303,323

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.
As of June 30, 2015 , the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 25.5 million gallons, or approximately 19% of its remaining 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $1.93 per gallon. As of December 31, 2014 , the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 88.7 million gallons, or approximately 35% of its 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $2.07 per gallon.
Interest Rate Swaps
As of June 30, 2015 , the Company had six forward interest rate swaps with a total notional amount of $120 million . These interest rate swaps fix the benchmark interest rate component of the forecasted interest payments on the debt related to three Airbus A321 aircraft with expected delivery dates ranging from July 2015 to September 2015. These instruments limit the Company's exposure to changes in the benchmark interest rate in the period from the trade date through the date of maturity, ranging from July 2015 to September 2015. The interest rate swaps are designated as cash flow hedges. The Company accounts for these interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities with changes in fair value recorded within accumulated other comprehensive income (AOCI). Realized gains and losses from cash flow hedges are recorded in the statement of cash flows as a component of cash flows from operating activities. For the three and six months ended June 30, 2015 , an unrealized gain of $1.2 million and an unrealized loss of $0.4 million , net of deferred taxes of $0.7 million and $0.2 million , respectively, were recorded within AOCI related to these instruments. As of June 30, 2015 , the interest rate swaps were recorded as a liability of approximately $1.7 million . As of December 31, 2014 , the interest rate swaps were recorded as a liability of approximately $1.1 million .
During the three and six months ended June 30, 2015 , the Company recorded no ineffectiveness associated with the Company's interest rate cash flow hedges. The Company expects the swaps will be highly effective in offsetting changes in cash flows attributable to the hedged risk. However, given that there may be some uncertainty regarding the exact date on which the Company will issue its fixed-rate debt, the Company will evaluate the effect of such uncertainty on the effectiveness of the hedging relationship designated for each reporting period. Any ineffectiveness will be recorded within other non-operating expense in the Company's statement of operations.
Subsequent to the issuance of each debt instrument, amounts remaining in AOCI will be amortized over the life of the fixed-rate debt instrument.

7

Notes to Condensed Financial Statements—(Continued)


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 June 30, 2015 , the Company's aircraft orders consisted of the following:
 
 
Airbus
 
Third-Party Lessor
 
 
 
 
A320
 
A320NEO
 
A321
 
A321NEO
 
A320NEO
 
Total
remainder of 2015
 

 

 
6
 

 
1
 
7
2016
 
3
 

 
9
 

 
4
 
16
2017
 
8
 

 
10
 

 

 
18
2018
 
2
 
6
 
5
 

 

 
13
2019
 

 
3
 

 
10
 

 
13
2020
 

 
13
 

 

 

 
13
2021
 

 
18
 

 

 

 
18
 
 
13
 
40
 
30
 
10
 
5
 
98

The Company also has four 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 2017 through 2023 . Purchase commitments for these aircraft and spare engines, including estimated amounts for contractual price escalations and pre-delivery payments, are estimated to be approximately $285 million for the remainder of 2015 , $597 million in 2016 , $763 million in 2017 $618 million in 2018 , $701 million in 2019 , and $1,515 million in 2020 and beyond . The Company has secured debt financing commitments of $120 million with third parties for three of the six remaining aircraft deliveries from Airbus scheduled for delivery in 2015. In addition, the Company has secured financing for five aircraft to be leased directly from a third party, scheduled for delivery in 2015 and 2016. The Company does not have financing commitments in place for the remaining 90 Airbus firm aircraft orders scheduled for delivery between the fourth quarter of 2015 through 2021, including 9 scheduled for delivery in the next twelve months.
As of June 30, 2015 , the Company had a fleet consisting of 73 A320 family aircraft. During the six months ended June 30, 2015 , the Company took delivery of eight aircraft financed under debt arrangements. These aircraft are capitalized within flight equipment with depreciable lives of 25 years and estimated residual values of 10% . As of June 30, 2015 , the Company had 61 aircraft and 11 spare engines financed under operating leases with lease term expiration dates ranging from 2016 to 2027. The Company entered into sale and leaseback transactions with third-party aircraft lessors for the majority of these aircraft and engine leases. Deferred losses resulting from these sale and leaseback transactions 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.
Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under the majority of 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 supplemental 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.
The Company has 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, which began in the fourth quarter of 2013.


8

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 June 30, 2015 were as follows:  
 
 
 
 
Operating Leases
 
 
Capital Leases
 
Aircraft and Spare Engine Leases
 
Property Facility Leases
 
Operating Lease Obligations
 
 
(in thousands)
remainder of 2015
 
$
722

 
$
107,632

 
$
16,605

 
$
124,237

2016
 
1,044

 
213,120

 
27,063

 
240,183

2017
 
44

 
196,610

 
27,445

 
224,055

2018
 
44

 
172,885

 
27,422

 
200,307

2019
 
12

 
144,774

 
25,073

 
169,847

2020 and thereafter
 

 
596,581

 
78,210

 
674,791

Total minimum lease payments
 
$
1,866

 
$
1,431,602

 
$
201,818

 
$
1,633,420

Less amount representing interest
 
$
114

 

 

 
 
Present value of minimum lease payments
 
$
1,752

 

 

 
 
Less current portion
 
$
1,249

 

 

 
 
Long-term portion
 
$
503

 

 

 
 
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.
Some 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, will be approximately $3.8 million for the remainder of 2015 , $8.0 million in 2016 , $7.4 million in 2017 , $5.8 million in 2018 , $4.2 million in 2019 , and $14.1 million in 2020 and beyond . Some of these lease agreements that provide maintenance reserves are reimbursable to the Company upon completion of the maintenance event in an amount equal to either (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. Substantially all of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft. Some of the master lease agreements provide that the Company will receive full reimbursement of the maintenance reserves at the final respective maintenance event, or do not require that the Company pay maintenance reserves so long as the Company's cash balance does not fall below a certain level. As of June 30, 3015, the Company was in full compliance with those requirements and does not anticipate having to pay reserves related to these master leases in the future.
The Company is contractually obligated to pay the following minimum guaranteed payments for its reservation system and advertising media as of June 30, 2015 : $2.9 million for the remainder of 2015 , $3.9 million in 2016 , $3.9 million in 2017 , $2.6 million in 2018 , none in 2019 , and none in 2020 and thereafter . The Company's current agreement for its reservation system expires in 2018.
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.

9

Notes to Condensed Financial Statements—(Continued)

In August 2014, two cases (entitled Rosen v. Spirit Airlines and Legg v. Spirit Airlines) were filed against the Company in federal court in Illinois and Florida, respectively. The Rosen case has now been transferred to Florida. The cases, which contain identical claims, allege violations of the Fair and Accurate Credit Transactions Act (FACTA) based on incidents of unlawfully including more information on the electronically printed credit card receipts provided to customers from our airport kiosk machines than FACTA permits. Both cases are styled as class actions and the Legg case has been certified. The plaintiffs seek statutory damages, attorney’s fees, litigation expenses and costs. The Company believes it has valid arguments in its defense and intends to vigorously defend against these claims. The Company believes the estimate of probable losses is not material; however, the outcome of any litigation is inherently uncertain and any resolution may differ materially and could have a material adverse effect on the Company’s business and its financial position.
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 100% of the Company's air traffic liability, which would result in a commensurate reduction of unrestricted cash. As of June 30, 2015 and December 31, 2014 , 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 June 30, 2015 and December 31, 2014 , was $314.1 million and $217.1 million , respectively.
Employees
Approximately 72% 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 June 30, 2015 .
Employee Groups
 
Representative
 
Amendable Date
 
Percentage of Workforce
Pilots
 
Air Line Pilots Association, International (ALPA)
 
August 2015
 
27%
Flight Attendants
 
Association of Flight Attendants (AFA-CWA)
 
August 2007
 
40%
Dispatchers
 
Transport Workers Union (TWU)
 
August 2018
 
1%
Ramp Service Agents
 
International Association of Machinists and Aerospace Workers (IAMAW)
 
June 2020
 
4%
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, certain ramp service agents directly employed by the Company voted to be represented by the International Association of Machinists and Aerospace Workers (IAMAW). In May 2015, we entered into a five -year interim collective bargaining agreement with the IAMAW, including material economic terms, and we are continuing the process of negotiating a final collective bargaining agreement with the IAMAW. Currently, ramp service agents represented by the IAMAW service 1 of the 57 airports where the Company operates.
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 $3.3 million and $3.1 million in health care claims as of June 30, 2015 and December 31, 2014 , respectively.

10

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.
Fuel Derivative Instruments
The Company’s fuel 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 fuel derivative instruments. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company did not elect hedge accounting on any of the fuel derivative instruments. As a result, the Company records the fair value adjustment of its fuel derivatives in the accompanying statement of operations within aircraft fuel and on the balance sheet within prepaid expenses and other current assets or other current liabilities, depending on whether the net fair value of the derivatives is on an asset or liability position as of the respective date. Fair values of the fuel derivative instruments are determined using standard option valuation models. The Company also considers counterparty risk and its own credit risk in its determination of all estimated fair values. The Company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The Company determines 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 categorizes these instruments as Level 2. As of June 30, 2015 and December 31, 2014 , the Company had no outstanding jet fuel swaps. Due to the fact that certain inputs utilized to determine the fair value of jet fuel options are unobservable (principally implied volatility), the Company categorizes these derivatives as Level 3. Implied volatility of a jet fuel option is the volatility of the price of the underlying commodity that is implied by the market price of the option based on an option pricing model. Thus, it is the volatility that when used in a particular pricing model yields a theoretical value for the option equal to the current market price of that option. Implied volatility, a forward-looking measure, differs from historical volatility because the latter is calculated from known past returns. At each balance sheet date, the Company substantiates and adjusts unobservable inputs. The Company routinely assesses the valuation model's sensitivity to changes in implied volatility. Based on the Company's assessment of the valuation model's sensitivity to changes in implied volatility, it concluded that holding other inputs constant, a significant increase (decrease) in implied volatility would result in a significantly higher (lower) fair value measurement for the Company's aircraft fuel derivatives.
Interest Rate Swaps

During the fourth quarter of 2014, the Company entered into forward interest rate swaps designed to fix the benchmark interest rate component of the forecasted interest payments on the debt related to three aircraft anticipated to be delivered in 2015. The fair value of the Company's interest rate swaps are based on observable inputs for active swap indications in quoted markets for similar terms. The fair value of these instruments are determined using a market approach based on inputs that are

11

Notes to Condensed Financial Statements—(Continued)

readily available from public markets; therefore, the Company categorizes these instruments as Level 2. The interest rate swaps are designated as cash flow hedges and, as a result, the changes in fair value of these derivatives are recorded in accumulated other comprehensive income within the balance sheet and statement of other comprehensive income.
Long-Term Debt
The estimated fair value of the Company's non-publicly held debt agreements has been determined to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes a discounted cash flow method to estimate the fair value of long-term debt and has categorized these instruments as Level 3.
The carrying amounts and estimated fair values of our long-term debt at June 30, 2015 and December 31, 2014 were as follows:
 
June 30, 2015
 
December 31, 2014
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
(in millions)
Senior long-term debt
$
387.2

 
$
377.8

 
$
132.0

 
$
132.0

Junior long-term debt
48.6

 
48.7

 
16.0

 
16.1

Total long-term debt
$
435.8

 
$
426.5

 
$
148.0

 
$
148.1

Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2015 and December 31, 2014 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.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
 
Fair Value Measurements as of June 30, 2015
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
769.3


$
769.3


$


$

Jet fuel options
1.5






1.5

Total assets
$
770.8


$
769.3


$


$
1.5












Interest rate swaps
$
1.7


$


$
1.7


$

Total liabilities
$
1.7


$


$
1.7


$

 
Fair Value Measurements as of December 31, 2014
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
632.8


$
632.8


$


$

Jet fuel options
4.8






4.8

Total assets
$
637.6


$
632.8


$


$
4.8













Interest rate swaps
$
1.1


$


$
1.1


$

Total liabilities
$
1.1


$


$
1.1


$


The Company had no transfers of assets or liabilities between any of the above levels during the periods ended June 30, 2015 and December 31, 2014 .


12

Notes to Condensed Financial Statements—(Continued)

The Company's Valuation Group is made up of individuals from the Company's 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 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 tables present 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 June 30, 2015

(in millions)
Balance at March 31, 2015
$
2.5

Total realized or unrealized gains (losses) included in earnings, net
(0.6
)
Purchases

Sales

Settlements, net
(0.4
)
Balance at June 30, 2015
$
1.5


 
Jet Fuel Option Activity for the Six Months Ended June 30, 2015
 
(in millions)
Balance at December 31, 2014
$
4.8

Total realized or unrealized gains (losses) included in earnings, net
(4.9
)
Purchases
2.1

Sales

Settlements, net
(0.5
)
Balance at June 30, 2015
$
1.5




8.
Long-Term Debt

On October 1, 2014, the Company entered into a Framework Agreement with a bank syndicate which provides up to $379 million of debt financing for seven Airbus A320 aircraft and three Airbus A321 aircraft. Each loan extended under the Framework Agreement is funded on or near the delivery date of each aircraft and is secured by a first-priority security interest on the individual aircraft. Each loan amortizes on a mortgage-style basis, which requires quarterly payments, with senior loans having a 12 -year term and junior loans having a 7 -year term. The loans require interest payments quarterly on a floating or fixed rate basis, at the Company's election. As of June 30, 2015 , the Company has taken delivery of seven Airbus A320 aircraft financed through the Framework Agreement and recorded fixed-rate debt of $259 million . The remaining three Airbus A321 aircraft are scheduled for delivery under the Company's existing purchase agreement with Airbus between July 2015 and September 2015.

On February 24, 2015, the Company entered into two Facility Agreements, which provided up to $185 million of debt financing for five Airbus A320 aircraft. Each loan extended under the Facility Agreements was funded on or near the delivery date of each aircraft and was secured by a first-priority security interest on the individual aircraft. Each loan amortizes on a mortgage-style basis, which requires quarterly payments, with senior loans having a 12 -year term and junior loans having a 7 -year term. The loans require interest payments quarterly on a floating or fixed rate basis, at the Company's election. As of June 30, 2015 , the Company took delivery of all five Airbus A320 aircraft financed through the Facility Agreements and recorded fixed-rate debt of $185 million .

13

Notes to Condensed Financial Statements—(Continued)

Long-term debt is comprised of the following:    
 
 
As of
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
June 30, 2015
 
December 31, 2014
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
 
(weighted-average interest rates)
Senior term loans due through 2026 - 2027
 
$
387.2

 
$
132.0

 
4.04
%
 
N/A
 
4.04
%
 
N/A
Junior term loans due through 2021 - 2022
 
48.6

 
16.0

 
6.89
%
 
N/A
 
6.89
%
 
N/A
Long-term debt
 
$
435.8

 
$
148.0

 
 
 
 
 
 
 
 
Less current maturities
 
29.7

 
10.4

 
 
 
 
 
 
 
 
Less unamortized discounts

 
7.1

 
2.4

 
 
 
 
 
 
 
 
Total
 
$
399.0

 
$
135.2

 
 
 
 
 
 
 
 
During the six months ended June 30, 2015 , the Company made scheduled principal payments of $8.2 million on its outstanding debt obligations.
At June 30, 2015 , long-term debt principal payments for the next five years and thereafter are as follows:
 
 
June 30, 2015
 
 
(in millions)
remainder of 2015
 
$
15.2

2016
 
31.4

2017
 
33.0

2018
 
34.6

2019
 
36.2

2020 and thereafter
 
285.4

Total debt principal payments
 
$
435.8


Interest Expense

Interest expense related to debt consists of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2015
 
2014
 
2015
 
2014
 
(in thousands)
Senior term loans
$
3,426

 
$

 
$
5,620

 
$

Junior term loans
678

 

 
1,097

 

Amortization of debt discounts
230

 

 
389

 

Total
$
4,334

 
$

 
$
7,106

 
$


14

Notes to Condensed Financial Statements—(Continued)

9.
Subsequent Events

In December 2014, the Company filed a request for an advance consent for a change in tax accounting method for its lease payments on certain leased aircraft, effective for its 2014 tax year. The estimated tax impact of this tax accounting method change reduces income tax payable in the amount of $35 million, with a corresponding increase in long-term deferred tax liability. On July 13, 2015, the Company received the advance consent from the Internal Revenue Service for this tax accounting method change and, therefore, has not included the tax impact in the balance sheet as of June 30, 2015.  The estimated impact of this tax accounting method change will be included in the balance sheet as of September 30, 2015.

Subsequent to June 30, 2015, we have repurchased approximately 180,000 shares for an aggregate of $10.9 million including commissions and fees.

On July 10, 2015, the Company took delivery of one A321 aircraft financed through the Framework Agreement and recorded debt of $40.0 million. Refer to Note 8 herein for further discussion of the Company's Framework Agreement.

15



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, 2014 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 Fit Fleet TM currently operates more than 350 daily flights to 57 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, or ULCC, business model allows us to compete principally by offering customers our Bare Fares TM , which are unbundled base fares that remove components traditionally included. We then give customers Frill Control TM , which provides customers the freedom to save by paying only for the options they choose, such as bags and advance seat assignments, which we record in our financial statements as non-ticket revenue.

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 address an underserved market, which helps us to increase passenger volume, load factors and non-ticket revenue on the flights we operate. We also have high-density seating configurations on our aircraft and a simplified onboard product designed to lower costs, which is part of our Plane Simple TM strategy. 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. 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.

We allow our customers to see all available options and their respective 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. In 2015, we continued our aggressive efforts to educate the public on how our unbundled pricing model works, how that gives them control over frills and ultimately how it saves them money.


16




Comparative Operating Statistics:
The following tables set forth our operating statistics for the three-month and six -month period ended June 30, 2015 and 2014 :
 
 
Three Months Ended June 30,
 
Percent Change
 
2015
 
2014
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
71.4

 
56.6

 
26.1
 %
Aircraft at end of period
73

 
57

 
28.1
 %
Airports served in the period
57

 
54

 
5.6
 %
Average daily aircraft utilization (hours)
12.9

 
12.8

 
0.8
 %
Average stage length (miles)
974

 
976

 
(0.2
)%
Block hours
83,861

 
65,732

 
27.6
 %
Passenger flight segments (PFSs) (thousands)
4,514

 
3,569

 
26.5
 %
Revenue passenger miles (RPMs) (thousands)
4,481,064

 
3,506,459

 
27.8
 %
Available seat miles (ASMs) (thousands)
5,213,299

 
4,008,507

 
30.1
 %
Load factor (%)
86.0
%
 
87.5
%
 
(1.5) pts

Average ticket revenue per passenger flight segment ($)
68.35

 
84.75

 
(19.4
)%
Average non-ticket revenue per passenger flight segment ($)
54.24

 
55.15

 
(1.7
)%
Total revenue per passenger flight segment ($)
122.59

 
139.90

 
(12.4
)%
Average yield (cents)
12.35

 
14.24

 
(13.3
)%
RASM (cents)
10.62

 
12.46

 
(14.8
)%
CASM (cents)
8.27

 
9.83

 
(15.9
)%
Adjusted CASM (cents)
8.33

 
9.80

 
(15.0
)%
Adjusted CASM ex-fuel (cents)
5.80

 
5.95

 
(2.5
)%
Fuel gallons consumed (thousands)
63,134

 
49,401

 
27.8
 %
Average economic fuel cost per gallon ($)
2.08

 
3.13

 
(33.5
)%

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


17



 
Six Months Ended June 30,
 
Percent Change
 
2015
 
2014
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
69.3

 
55.8

 
24.2
 %
Aircraft at end of period
73

 
57

 
28.1
 %
Airports served in the period
57

 
54

 
5.6
 %
Average daily aircraft utilization (hours)
12.8

 
12.8

 
 %
Average stage length (miles)
982

 
988

 
(0.6
)%
Block hours
160,896

 
128,870

 
24.9
 %
Passenger flight segments (PFSs) (thousands)
8,494

 
6,833

 
24.3
 %
Revenue passenger miles (RPMs) (thousands)
8,498,622

 
6,795,746

 
25.1
 %
Available seat miles (ASMs) (thousands)
9,942,762

 
7,793,234

 
27.6
 %
Load factor (%)
85.5
%
 
87.2
%
 
1.7 pts

Average ticket revenue per passenger flight segment ($)
68.52

 
81.43

 
(15.9
)%
Average non-ticket revenue per passenger flight segment ($)
54.71

 
55.76

 
(1.9
)%
Total revenue per passenger flight segment ($)
123.23

 
137.19

 
(10.2
)%
Average yield (cents)
12.32

 
13.79

 
(10.7
)%
RASM (cents)
10.53

 
12.03

 
(12.5
)%
CASM (cents)
8.20

 
9.91

 
(17.3
)%
Adjusted CASM (cents)
8.20

 
9.89

 
(17.1
)%
Adjusted CASM ex-fuel (cents)
5.76

 
6.01

 
(4.2
)%
Fuel gallons consumed (thousands)
119,857

 
96,078

 
24.7
 %
Average economic fuel cost per gallon ($)
2.02

 
3.15

 
(35.9
)%

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


Executive Summary
For the second quarter of 2015 , we achieved a 22.1% operating margin, an increase of 1.0 point compared to the prior year period. We generated pre-tax income of $120.9 million and net income of $76.7 million on operating revenues of $553.4 million . For the second quarter of 2014 , we generated pre-tax income of $103.8 million and net income of $64.8 million on operating revenues of $499.3 million .
Our adjusted CASM ex-fuel for the second quarter of 2015 was 5.80 cent s, a 2.5% decrease year over year. The decrease on a per-ASM basis was primarily due to a decrease in aircraft rent and salaries, wages and benefits, offset by an increase in other operating expenses.
As of June 30, 2015 , we had 73 Airbus A320-family aircraft in our fleet comprised of 29 A319s, 42 A320s, and 2 A321s. With the scheduled delivery of 7 A320s and A321s during the remainder of 2015 , we expect to end 2015 with 80 aircraft in our fleet.
Comparison of three months ended June 30, 2015 to three months ended June 30, 2014
Operating Revenues
Operating revenues increase d $54.1 million , or 10.8% , to $553.4 million for the second quarter of 2015 , as compared to the second quarter of 2014 due primarily to an increase in traffic of 27.8% , partially offset by lower passenger yields.
Total revenue per available seat mile (RASM) for the second quarter of 2015 was 10.62 cent s, a decrease of 14.8% , compared to the second quarter of 2014 . Total revenue per passenger flight segment also decrease d 12.4% , year over year, primarily driven by a decrease of 19.4% in ticket revenue per passenger flight segment. These decreases were driven by a

18



13.3% decrease in average yield period over period due to lower fares, driven down by increased competitive pressures, as well as our growth into new markets and additional capacity in mature markets.
Our non-ticket revenue per passenger flight segment remained relatively stable, declining by only 1.7%, despite the increased competitive pressures noted above. Our unbundling model provides a more stable revenue stream as demonstrated during periods of lower passenger ticket yields. The decrease in non-ticket revenue per passenger flight segment was primarily attributable to lower bag revenue and the outsourcing of our onboard catering to a third-party provider. The outsourcing of onboard catering not only resulted in a decrease in revenue, but also contributed to a decrease in catering costs improving operating margins.  

Operating Expenses
Operating expenses increase d $36.9 million , or 9.4% , to $431.1 million for the second quarter of 2015 compared to $394.2 million for the second quarter of 2014 , primarily due to our 30.1% capacity growth and 27.8% increase in traffic, mostly offset by a 17.4% decrease in aircraft fuel expense resulting from lower fuel prices per gallon, as compared to prior year period.
Aircraft fuel expense includes into-plane fuel expense (defined below) and realized and unrealized gains and losses associated with our fuel derivative 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 2015 or 2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded each period in aircraft fuel expense.
Aircraft fuel expense, our largest operating cost, decrease d in the second quarter of 2015 by $26.9 million , or 17.4% , compared to $154.9 million in the second quarter of 2014, due primarily to a 33.5% decrease in fuel prices per gallon, offset by a 27.8% increase in fuel gallons consumed.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Three Months Ended June 30,


 
2015

2014


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
63,134


49,401


27.8
 %
Into-plane fuel cost per gallon
2.02


3.13


(35.5
)%
Into-plane fuel expense
127,344


154,385


(17.5
)%
Realized losses (gains) related to fuel derivative contracts
4,232




100.0
 %
Unrealized losses (gains) related to fuel derivative contracts
(3,669
)

467


(885.7
)%
Aircraft fuel expense (per statement of operations)
$
127,907


$
154,852


(17.4
)%
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 decrease of 35.5% was primarily a result of a decrease in jet fuel prices.

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 and realized gains or losses on fuel derivative contracts. 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. Many industry analysts evaluate airline results using economic fuel expense and it is used in our internal management reporting.

19



The elements of the changes in economic fuel expense are illustrated in the following table:
 
Three Months Ended June 30,


 
2015

2014


(in thousands, except per gallon amounts)

Percent Change
Into-plane fuel expense
$
127,344


$
154,385


(17.5
)%
Realized losses (gains) related to fuel derivative contracts
4,232




100.0
 %
Economic fuel expense
$
131,576


$
154,385


(14.8
)%
Fuel gallons consumed
63,134


49,401


27.8
 %
Economic fuel cost per gallon
$
2.08


$
3.13


(33.5
)%

During the three months ended June 30, 2015 , we did not acquire any fuel derivatives. Total realized loss recognized for fuel derivatives that expired during the second quarter of 2015 was $4.2 million . Total realized losses include cash paid for premiums in previous periods of $4.7 million which expired in the current period and cash received for settlement of fuel derivatives in the current period of $0.4 million . We had $3.7 million in unrealized gains related to our outstanding fuel derivatives during the three months ended June 30, 2015 . We had $0.5 million in unrealized losses related to our outstanding fuel derivatives and did not have any realized gains or losses related to fuel derivatives contracts during the three months ended June 30, 2014 .
From time to time, we enter into fuel derivative contracts to protect the refining price risk between the price of crude oil and the price of refined jet fuel. As of June 30, 2015 , we had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 25.5 million gallons, or approximately 19% of our remaining 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $1.93 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 June 30, 2015 and 2014 , followed by explanations of the material changes on a dollar basis and/or unit cost basis:
 
Three Months Ended June 30,
 
Per-ASM Change
 
Percent Change
 
2015
 
2014
 
 
(in cents, except for percentages)
Aircraft fuel
2.45

 
3.86

 
(1.41
)
 
(36.5
)%
Salaries, wages, and benefits
1.86

 
1.94

 
(0.08
)
 
(4.1
)%
Aircraft rent
1.02

 
1.20

 
(0.18
)
 
(15.0
)%
Landing fees and other rents
0.64

 
0.64

 

 
 %
Distribution
0.43

 
0.50

 
(0.07
)
 
(14.0
)%
Maintenance, materials and repairs
0.41

 
0.48

 
(0.07
)
 
(14.6
)%
Depreciation and amortization
0.33

 
0.28

 
0.05

 
17.9
 %
Other operating
1.12

 
0.91

 
0.21

 
23.1
 %
Loss on disposal of assets
0.01

 
0.02

 
(0.01
)
 
NA

Special charges (credits)
0.01

 

 
0.01

 
NA

CASM
8.27

 
9.83

 
(1.56
)
 
(15.9
)%
Adjusted CASM (1)
8.33

 
9.80

 
(1.47
)
 
(15.0
)%
Adjusted CASM ex-fuel (2)
5.80

 
5.95

 
(0.15
)
 
(2.5
)%
 
(1)
For the three months ended June 30, 2015 , adjusted CASM excludes unrealized gains related to fuel derivative contracts of 0.07 cent per ASM, loss on disposal of assets of 0.01 cent s per ASM and special charges of 0.01 cent per ASM. For the three months ended June 30, 2014 , adjusted CASM excludes unrealized losses related to fuel derivative contracts of less than 0.01 cent per ASM, loss on disposal of assets of 0.02 cent per ASM and special charges of less than 0.01 cent per ASM.
(2)
Excludes aircraft fuel expense, loss on disposal of assets, and special charges and credits.

20



Our adjusted CASM ex-fuel for the second quarter of 2015 was down 2.5% as compared to the second quarter of 2014 . The decrease on a per-ASM basis was primarily due to a decrease in aircraft rent and salaries, wages and benefits, offset by an increase in other operating expense per ASM.
Labor costs for the second quarter of 2015 increase d $19.6 million , or 25.3% , compared to the second quarter of 2014 , primarily driven by a 26.7% increase in our pilot and flight attendant workforce resulting from the introduction of sixteen new aircraft since the second quarter of 2014 . On a per-ASM basis, labor costs decrease d primarily due to scale benefits from overall growth as well as larger gauge aircraft. This decrease was partially offset by an increase in our group health care costs on a per-ASM basis.
Aircraft rent expense for the second quarter of 2015 increase d by $4.9 million , or 10.2% , compared to the second quarter of 2014 . This increase in aircraft rent expense was primarily driven by the delivery of four new aircraft, financed under operating leases, subsequent to the end of the second quarter of 2014 . On a per-ASM basis, aircraft rent expense decrease d due to a change in the composition of our aircraft fleet between leased aircraft (for which rent expense is recorded under aircraft rent) and purchased aircraft (for which depreciation expense is recorded under depreciation and amortization). Since the prior year period, the Company has taken delivery of twelve purchased aircraft which increased capacity but had no effect on aircraft rent expense, as these assets are being depreciated over their useful life. Had the respective aircraft been leased, the change in rent expense, on both a dollar and per-ASM basis, would have been greater than the increase currently experienced in depreciation and amortization as result of these purchases.  
Landing fees and other rents for the second quarter of 2015 increase d $7.5 million , or 29.2% , as compared to the second quarter of 2014 primarily due to a 26.9% increase in departures. On a per-ASM basis, landing fees and other rents remained stable, as compared to the prior year period.
Distribution costs increase d by $2.2 million , or 10.9% , in the second quarter of 2015 as compared to the second quarter of 2014 . The increase was primarily due to increased sales volume. On a per-ASM basis, distribution costs decreased primarily due to a decrease in credit card rates resulting from a renegotiation with our primary credit card processor in late 2014.
Maintenance, materials and repairs expense for the second quarter of 2015 increase d by $2.1 million , or 10.8% , compared to the second quarter of 2014 . The increase in maintenance costs on a dollar basis was due to routine and ongoing maintenance on a growing fleet. On a per-unit basis, our growth outpaced the increase in maintenance costs during the period, as compared to the prior year period, due to a change in the timing and mix of maintenance events resulting in lower cost events in the current year period as compared to the prior year period. In addition, on a per-unit basis, maintenance expense decreased due to the purchase of $13.0 million in rotable inventory that was made in the third quarter of 2014 to support our aircraft fleet. The expense for these rotables is recorded under depreciation and amortization expense versus maintenance expense as they were in prior year period when the rotables were owned by a third party. We expect maintenance expense to increase 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 $5.8 million compared to prior year period. The increase on both a dollar and per-ASM basis was primarily due to depreciation expense resulting from the purchase of twelve aircraft made during the fourth quarter of 2014 and first half of 2015. The amortization of heavy maintenance costs was $10.2 million and $9.0 million for the second quarters of 2015 and 2014 , respectively. As our fleet continues to age, we expect that the amount of deferred heavy maintenance events 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 earlier of the next heavy maintenance event or end of the lease term. 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 $31.5 million and $28.2 million for the second quarters of 2015 and 2014 , respectively.
Other operating expense for the second quarter of 2015 increase d by $21.8 million , or 59.8% , compared to the second quarter of 2014 primarily due to an increase in overall operations, the impact of numerous cancellations related to the irregular operations precipitated by adverse weather conditions in June 2015 and an increase in travel and lodging expense. As compared to the prior year period, we increased departures by 26.9% and had 26.5% more passenger flight segments, which drove increases in variable operating expenses. In June 2015, our operations were negatively impacted by numerous cancellations related to adverse weather conditions. These cancellations contributed to an increase in passenger re-accomodation expense which was the primary driver of the increase in other operating expenses on a dollar and per-ASM basis. Our travel and lodging expense was also higher as compared to the prior year period due to increased training of pilots and flight attendants resulting from our fleet growth, and higher rates at certain hotels.


21



Other Income (Expenses)

Our interest expense and corresponding capitalized interest for the three months ended June 30, 2015 primarily represents interest related to the financing of purchased aircraft, which began in the fourth quarter of 2014.

Income Taxes
Our effective tax rate for the second quarter of 2015 was 36.5% compared to 37.5% for the second 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 and the magnitude of any nondeductible expenses in relation to the respective pre-tax income.

Comparison of six months ended June 30, 2015 to six months ended June 30, 2014
Operating Revenues
Operating revenues increase d $109.5 million , or 11.7% , to $1,046.8 million for the six months ended June 30, 2015 , compared to the prior year period, due primarily to an increase in traffic of 25.1% , partially offset by lower passenger yields.
Total RASM for the six months ended June 30, 2015 was 10.5 cent s, a decrease of 12.5% compared to the same period of 2014 . This decrease was primarily driven by a 10.7% decrease in average yield period over period due to lower fares driven by increased competitive pressures, as well as our growth in new and mature markets.
Total revenue per passenger flight segment decrease d 10.2% from $137.19 for the six months ended June 30, 2014 to $123.23 for the six months ended June 30, 2015 . Our average ticket fare per passenger flight segment decrease d from $81.43 to $68.52 , or 15.9% , compared to the prior year period, and non-ticket revenue per passenger flight segment decrease d from $55.76 to $54.71 , or 1.9% , compared to the prior year period. The decrease in non-ticket revenue per passenger flight segment was primarily attributable to lower bag revenue and the outsourcing of our onboard catering to a third-party provider. The outsourcing of onboard catering not only resulted in a decrease in revenue, but also contributed to a decrease in catering costs improving operating margins.  
Operating Expenses
Operating expense increase d for the six months ended June 30, 2015 by $43.0 million , or 5.6% , compared to the same period for 2014 primarily due to our 27.6% capacity growth, offset by a 20.8% decrease in aircraft fuel expense resulting from lower fuel prices per gallon, as compared to prior year period.
Aircraft fuel expense for the six months ended June 30, 2015 decrease d $63.0 million , or 20.8% , compared to the prior year period primarily as a result of a 35.9% decrease in fuel prices per gallon, offset by a 24.7% increase in fuel gallons consumed and an increase of $4.4 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:
 
Six Months Ended June 30,


 
2015

2014


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
119,857


96,078


24.7
 %
Into-plane fuel cost per gallon
$
1.96


$
3.15


(37.8
)%
Into-plane fuel expense
$
235,468


$
302,856


(22.3
)%
Realized losses (gains) related to fuel derivative contracts
6,839




100.0
 %
Unrealized losses (gains) related to fuel derivative contracts
(1,974
)

467


(522.7
)%
Aircraft fuel expense (per Statement of Operations)
$
240,333


$
303,323


(20.8
)%

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

22



 
Six Months Ended June 30,


 
2015

2014

 
(in thousands, except per gallon amounts)
 
Percent Change
Into-plane fuel expense
$
235,468


$
302,856


(22.3
)%
Realized losses (gains) related to fuel derivative contracts
6,839




100.0
 %
Economic fuel expense
$
242,307


$
302,856


(20.0
)%
Fuel gallons consumed
119,857


96,078


24.7
 %
Economic fuel cost per gallon
$
2.02


$
3.15


(35.9
)%
During the six months ended June 30, 2015, we paid $2.1 million in premiums to acquire jet fuel options, with options scheduled to expire in the current and future period. Total realized loss recognized for fuel derivatives that expired during the six months ended of 2015 was $6.8 million . Total realized losses include cash paid for premiums in previous and current periods of $7.4 million which expired in the current period and cash received for settlement of fuel derivatives in the current period of $0.6 million . We had $2.0 million in unrealized gains related to our outstanding fuel derivatives during the six months ended June 30, 2015 . We had $0.5 million in unrealized losses related to our outstanding fuel derivatives and did not have any realized gains or losses related to fuel derivatives contracts during the six months ended June 30, 2014 .
As of June 30, 2015 , we had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 25.5 million gallons, or approximately 19.1% of our remaining anticipated jet fuel consumption, at a weighted-average ceiling price of $1.93 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 six months ended June 30, 2015 and 2014 , followed by explanations of the material changes on a unit cost basis and/or dollar basis:
 
Six Months Ended June 30, 2015
 
Per-ASM Change
 
Percent Change
 
2015
 
2014
 
 
(in cents, except for percentages)
Aircraft fuel
2.42

 
3.89

 
(1.47
)
 
(37.8
)%
Salaries, wages, and benefits
1.87

 
1.97

 
(0.10
)
 
(5.1
)%
Aircraft rent
1.07

 
1.21

 
(0.14
)
 
(11.6
)%
Landing fees and other rents
0.64

 
0.64

 

 
 %
Distribution
0.43

 
0.50

 
(0.07
)
 
(14.0
)%
Maintenance, materials and repairs
0.41

 
0.47

 
(0.06
)
 
(12.8
)%
Depreciation and amortization
0.32

 
0.29

 
0.03

 
10.3
 %
Other operating
1.03

 
0.92

 
0.11

 
12.0
 %
Loss on disposal of assets
0.01

 
0.01

 

 
NA

Special charges (credits)
0.01

 

 
0.01

 
NA

CASM
8.20

 
9.91

 
(1.71
)
 
(17.3
)%
Adjusted CASM (1)
8.20

 
9.89

 
(1.69
)
 
(17.1
)%
Adjusted CASM ex-fuel (2)
5.76

 
6.01

 
(0.25
)
 
(4.2
)%
 
(1)
For the six months ended June 30, 2015 , adjusted CASM excludes unrealized gains related to fuel derivative contracts of 0.02 cent per ASM, loss on disposal of assets of 0.01 cent per ASM and special charges of 0.01 cent per ASM. For the six months ended June 30, 2014, adjusted CASM excludes unrealized losses related to fuel derivative contracts of less than 0.01 cent per ASM, loss on disposal of assets of 0.01 cent per ASM and special charges of less than 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 six months ended June 30, 2015 decrease d by 4.2% as compared to the same period in 2014 . The decrease on a per-ASM basis was primarily due to a decrease in aircraft rent and salaries, wages and benefits, offset by an increase in other operating expense per ASM.

23



Labor costs for the six months ended June 30, 2015 increase d $32.4 million , or 21.1% , compared to same period in 2014 . The increase was primarily driven by a 21.9% increase in our pilot and flight attendant workforce resulting from the introduction of sixteen new aircraft since the end of the second quarter of 2014 . On a per-ASM basis, labor costs decrease d primarily due to scale benefits from overall growth as well as larger gauge aircraft. This decrease was offset by an increase in our group health care costs on a per-ASM basis.
Aircraft rent expense for the six months ended June 30, 2015 increase d by $11.3 million , or 12.0% , compared to the same period in 2014 . This increase in aircraft rent expense was primarily driven by the delivery of four new aircraft, financed under operating leases, subsequent to the end of the second quarter of 2014 . On a per-ASM basis, aircraft rent expense decrease d due to a change in the composition of our aircraft fleet between leased aircraft (for which rent expense is recorded under aircraft rent) and purchased aircraft (for which depreciation expense is recorded under depreciation and amortization). Since the prior year period, the Company has taken delivery of twelve purchased aircraft which increased capacity but had no effect on aircraft rent expense, as these assets are being depreciated over their useful life. Had the respective aircraft been leased, the change in rent expense, on both a dollar and per-ASM basis, would have been greater than the increase currently experienced in depreciation and amortization as result of these purchases.  
Landing fees and other rents for the six months ended June 30, 2015 increase d $14.1 million , or 28.2% , as compared to the same period in 2014 primarily due to a 25.1% increase in departures. On a per-ASM basis, landing fees and other rents remained stable, as compared to prior year period.
Distribution costs increase d by $4.1 million , or 10.6% , for the six months ended June 30, 2015 as compared to the same period in 2014 . The increase was due primarily to increased sales volume. On a per-ASM basis, distribution costs decreased primarily due to a decrease in credit card fees resulting from a renegotiation with our primary credit card processor in late 2014.
Maintenance costs for the six months ended June 30, 2015 increase d by $3.6 million , or 9.8% , compared to the prior year period. The increase in maintenance costs on a dollar basis was due to routine and ongoing maintenance on a growing fleet. On a per-unit basis, our growth outpaced the increase in maintenance costs during the period, as compared to the prior year period, due to a change in the timing and mix of maintenance events resulting in lower cost events in the current year period as compared to the prior year period. In addition, on a per-unit basis, maintenance expense decreased due to the purchase of $13.0 million in rotable inventory that was made in the third quarter of 2014 to support our aircraft fleet. The expense for these rotables is recorded under depreciation and amortization expense versus maintenance expense as they were in prior year period when the rotables were owned by a third party. We expect maintenance expense to increase 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 $9.5 million compared to prior year period. The increase on both a dollar and per-ASM basis was primarily due to depreciation expense resulting from the purchase of twelve aircraft made during the fourth quarter of 2014 and first half of 2015. The amortization of heavy maintenance costs was $19.7 million and $18.0 million for the six months ended of June 30, 2015 and 2014 , respectively. As our fleet continues to age, we expect that the amount of deferred heavy maintenance events 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. 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 $60.1 million and $54.8 million for the six months ended June 30, 2015 and 2014 , respectively.
Other operating expense for the six months ended June 30, 2015 increase d by $30.1 million , or 41.8% , compared to the prior year period primarily due to our growth. During the latter part of the current period, our operations were negatively impacted by numerous cancellations related to adverse weather conditions. These cancellations contributed to an increase in passenger re-accomodation expense which was the primary driver of the increase in other operating expenses on a dollar and per-ASM basis. Our travel and lodging expense was also higher as compared to prior year period due to increased training of pilots and flight attendants resulting from our fleet growth, and higher rates at certain hotels.

Other income (expenses)

Our interest expense and corresponding capitalized interest for the six months ended June 30, 2015 primarily represents interest related to the financing of purchased aircraft, which began in the fourth quarter of 2014.

Income Taxes

24



Our effective tax rate for the six months ended June 30, 2015 was 36.6% compared to 37.4% for the six months ended June 30, 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.


Liquidity and Capital Resources
    
Cash at June 30, 2015 was $769.3 million , an increase of $136.5 million , from December 31, 2014 . Our primary use of cash is for working capital needs, capital expenditures, aircraft and engine pre-delivery deposit payments (PDPs) and maintenance reserves.
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 six months ended June 30, 2015 , $25.8 million of PDPs were returned to us and $49.5 million of PDPs were utilized for delivered aircraft and engines in the period. During the six months ended June 30, 2015, we paid $96.8 million of PDPs for future deliveries of aircraft and spare engines. As of June 30, 2015 , we had $267.3 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 portion 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 six months ended June 30, 2015 , we recorded an increase of $4.6 million in maintenance reserves, net of reimbursements, and as of June 30, 2015 , we had $253.5 million ( $35.5 million in prepaid expenses and other current assets and $217.9 million in aircraft maintenance deposits) on our balance sheet.
We have secured third-party debt financing commitments for three of our remaining six aircraft deliveries from Airbus, scheduled for delivery in 2015. In addition, we have secured financing for five aircraft to be leased directly from a third party, scheduled for delivery in 2015 and 2016. We do not have financing commitments in place for the remaining 90 Airbus aircraft currently on firm order scheduled for delivery between the fourth quarter of 2015 through 2021, including 9 scheduled for delivery in the next twelve months.
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 six months ended June 30, 2015 provided $296.9 million in cash compared to $144.1 million provided in the six months ended June 30, 2014 . The increase resulted from higher net income, lower spend on heavy maintenance events in 2015, higher cash collections on flights sold not flown and higher cash collected on pass through taxes.
Net Cash Flows Used In Investing Activities. In the six months ended June 30, 2015 , investing activities used $379.1 million , compared to $101.4 million used in the prior year period. The increase was mainly driven by the purchase of eight aircraft in the six months ended June 30, 2015, offset by a decrease in paid PDPs, net of refunds, driven by timing of future aircraft deliveries.
Net Cash Flows Provided By Financing Activities. During the six months ended June 30, 2015 , financing activities provided $218.8 million . We received $296.0 million in connection with the debt financing of eight aircraft and retained $8.5 million as a result of excess tax benefits related to share-based payments. We spent $79.4 million to repurchase common stock primarily under the stock repurchase program, which became effective in December 2014, and $4.7 million in debt issuance costs to secure the financing on eight aircraft in the current period and three aircraft expected to be received through the remainder of 2015.


25



Commitments and Contractual Obligations
We have contractual obligations and commitments primarily with regard to future purchases of aircraft and engines, repayment of debt, and lease arrangements. The following table discloses aggregate information about our contractual obligations as of June 30, 2015 and the periods in which payments are due (in millions):  
 
 
Remainder of 2015
 
2016 - 2017
 
2018 - 2019
 
2020 and beyond
 
Total
Long-term debt (1)
 
$
15

 
$
64

 
$
71

 
$
285

 
$
435

Interest commitments (2)
 
10

 
34

 
28

 
46

 
118

Operating lease obligations
 
124

 
464

 
370

 
675

 
1,633

Flight equipment purchase obligations
 
285