Spirit Airlines, Inc.
Spirit Airlines, Inc. (Form: 10-Q, Received: 07/27/2017 16:25:16)


 
 
 
 
 
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, 2017
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and "emerging growth 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
(Do not check if a smaller reporting company)
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.      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 20, 2017:
Class
 
Number of Shares
Common Stock, $0.0001 par value
 
69,369,045




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,
 
2017
 
2016
 
2017
 
2016
Operating revenues:
 
 
 
 
 
 
 
Passenger
$
371,922

 
$
296,401

 
$
671,684

 
$
569,027

Non-ticket
329,760

 
287,732

 
621,744

 
553,249

Total operating revenues
701,682

 
584,133

 
1,293,428

 
1,122,276

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
129,892

 
112,930

 
257,030

 
229,340

Aircraft fuel
142,294

 
113,192

 
282,076

 
199,174

Aircraft rent
52,566

 
49,864

 
109,636

 
102,066

Landing fees and other rents
45,592

 
39,944

 
86,040

 
74,751

Depreciation and amortization
35,331

 
24,957

 
66,840

 
48,066

Maintenance, materials and repairs
28,985

 
20,627

 
55,297

 
41,567

Distribution
29,908

 
24,692

 
56,406

 
47,625

Special charges

 
8,052

 
4,776

 
24,254

Loss on disposal of assets
1,493

 
529

 
2,598

 
743

Other operating
102,885

 
67,511

 
180,588

 
131,556

Total operating expenses
568,946

 
462,298

 
1,101,287

 
899,142

 
 
 
 
 
 
 
 
Operating income
132,736

 
121,835

 
192,141

 
223,134

 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
Interest expense
13,746

 
10,166

 
26,219

 
18,226

Capitalized interest
(3,342
)
 
(2,771
)
 
(6,922
)
 
(6,096
)
Interest income
(1,828
)
 
(1,447
)
 
(3,141
)
 
(3,013
)
Other expense
104

 
157

 
107

 
227

Total other (income) expense
8,680

 
6,105

 
16,263

 
9,344

 
 
 
 
 
 
 
 
Income before income taxes
124,056

 
115,730

 
175,878

 
213,790

Provision for income taxes
45,913

 
42,646

 
65,800

 
78,786

 
 
 
 
 
 
 
 
Net income
$
78,143

 
$
73,084

 
$
110,078

 
$
135,004

Basic earnings per share
$
1.13

 
$
1.03

 
$
1.59

 
$
1.90

Diluted earnings per share
$
1.12

 
$
1.03

 
$
1.58

 
$
1.89

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
78,143

 
$
73,084

 
$
110,078

 
$
135,004

Unrealized gain (loss) on short-term investment securities, net of deferred taxes of ($6), $0, ($14) and $0
(11
)
 

 
(24
)
 

Interest rate derivative losses reclassified into earnings, net of taxes of $31, $32, $62 and $65
53

 
56

 
107

 
113

Other comprehensive income (loss)
$
42

 
$
56

 
$
83

 
$
113

Comprehensive income
$
78,185

 
$
73,140

 
$
110,161

 
$
135,117


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


2



Spirit Airlines, Inc.
Condensed Balance Sheets
(unaudited, in thousands)
 
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
869,153

 
$
700,900

Short-term investment securities
100,464


100,155

Accounts receivable, net
47,996

 
41,136

Aircraft maintenance deposits
155,093


87,035

Prepaid expenses and other current assets
57,798

 
46,619

Total current assets
1,230,504

 
975,845

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
1,809,747

 
1,461,525

Ground property and equipment
140,954

 
126,206

Less accumulated depreciation
(161,191
)
 
(122,509
)
 
1,789,510

 
1,465,222

Deposits on flight equipment purchase contracts
317,867

 
325,688

Long-term aircraft maintenance deposits
146,162

 
199,415

Deferred heavy maintenance, net
75,858

 
75,534

Other long-term assets
114,444

 
110,223

Total assets
$
3,674,345

 
$
3,151,927

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,186

 
$
15,193

Air traffic liability
312,587

 
206,392

Current maturities of long-term debt
95,428

 
84,354

Other current liabilities
244,629

 
226,011

Total current liabilities
685,830

 
531,950

 
 
 
 
Long-term debt, less current maturities
1,089,159

 
897,359

Deferred income taxes
372,998

 
308,143

Deferred gains and other long-term liabilities
18,125

 
19,868

Shareholders’ equity:
 
 
 
Common stock
7

 
7

Additional paid-in-capital
555,704

 
551,004

Treasury stock, at cost
(219,909
)
 
(218,692
)
Retained earnings
1,173,711

 
1,063,633

Accumulated other comprehensive loss
(1,280
)
 
(1,345
)
Total shareholders’ equity
1,508,233

 
1,394,607

Total liabilities and shareholders’ equity
$
3,674,345

 
$
3,151,927

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,
 
2017
 
2016
Operating activities:

 

Net income
$
110,078

 
$
135,004

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

 

Losses reclassified from other comprehensive income
167


178

Equity-based compensation
4,671

 
3,905

Allowance for doubtful accounts (recoveries)
(51
)
 
221

Amortization of deferred gains and losses and debt issuance costs
4,761

 
2,810

Depreciation and amortization
66,840

 
48,066

Deferred income tax expense
64,789

 
45,810

Loss on disposal of assets
2,598

 
743

Lease termination costs
4,776


24,254




 


Changes in operating assets and liabilities:


 


Accounts receivable
(6,808
)
 
(12,662
)
Aircraft maintenance deposits
(17,940
)
 
(29,721
)
Prepaid income taxes
(1,598
)

69,444

Long-term deposits and other assets
(44,900
)
 
(22,055
)
Accounts payable
16,388

 
3,024

Air traffic liability
105,486

 
66,531

Other liabilities
14,234

 
25,269

Other
239

 

Net cash provided by operating activities
323,730

 
360,821

Investing activities:
 
 
 
Purchase of available-for-sale investment securities
(68,459
)


Proceeds from the maturity of available-for-sale investment securities
67,857



Proceeds from sale of property and equipment

 
50

Pre-delivery deposits for flight equipment, net of refunds
(79,357
)
 
(60,772
)
Capitalized interest
(6,375
)

(4,554
)
Purchase of property and equipment
(269,519
)
 
(303,175
)
Net cash used in investing activities
(355,853
)
 
(368,451
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
255,827


300,547

Proceeds from stock options exercised
29

 
92

Payments on debt and capital lease obligations
(50,099
)
 
(19,665
)
Excess tax (deficiency) benefit from equity-based compensation

 
(511
)
Repurchase of common stock
(1,217
)
 
(62,278
)
Debt issuance costs
(4,164
)

(107
)
Net cash provided by financing activities
200,376

 
218,078

Net (decrease) increase in cash and cash equivalents
168,253

 
210,448

Cash and cash equivalents at beginning of period
700,900

 
803,632

Cash and cash equivalents at end of period
$
869,153

 
$
1,014,080

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest, net of capitalized interest
$
16,869

 
$
21,804

Income taxes paid, net of refunds
$
4,340

 
$
(36,142
)
Non-cash transactions:
 
 
 
Capital expenditures funded by capital lease borrowings
$
(1,370
)

$
(31
)

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 fairly present 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, 2016 filed with the Securities and Exchange Commission on February 13, 2017.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect both 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 may 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

Revenue from Contracts with Customers

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. The new guidance is effective for the Company in the first quarter of 2018. Entities have the option to use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company currently anticipates utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented, and plans to adopt the standard as of January 1, 2018. While the Company is still evaluating the impact, it currently believes the most significant impact of this ASU will be the elimination of the incremental cost method for frequent flier program accounting, which will require the Company to re-value and record a liability associated with customer flight miles earned as part of the Company’s frequent flier program with a relative fair value approach. The Company also expects the classification and timing of recognition of certain ancillary fees to be impacted by adoption of ASU 2014-09. While the Company believes the adoption will not have a significant impact on earnings, the classification of certain revenues, such as bags, seats and other travel-related fees may be deemed part of the single performance obligation of providing passenger transportation. The Company expects that these revenues currently classified as non-ticket revenue, approximately $1 billion annually, will be reclassified to passenger revenue after adoption.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10).” ASU 2016-01 makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for the Company for interim and annual periods beginning January 1, 2018 and is not expected to have a material impact on the Company’s financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with durations greater than twelve months to be recognized on the condensed balance sheet and is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the new guidance and believes adoption of this standard will have a significant impact on its condensed balance sheets although adoption is not expected to

5

Notes to Condensed Financial Statements—(Continued)

significantly change the recognition, measurement or presentation of lease expenses within the statements of operations and cash flows. See Note 8, Commitments and Contingencies for information regarding the Company's undiscounted future lease payments and the timing of those payments.

Share-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. The Company adopted this guidance on January 1, 2017. As a result, excess income tax benefits and deficiencies related to share-based compensation are now included within income tax expense rather than additional paid in capital. For the six months ended June 30, 2017 , $0.6 million of income tax deficiency related to share-based compensation was included within income tax expense on the Company's statements of operations. Additionally, excess income tax benefits and deficiencies for share-based payments are now included in net operating cash flows rather than net financing cash flows. The changes have been applied prospectively in accordance with the guidance and prior periods have not been adjusted.

Accounting for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." The standard requires the use of an "expected loss" model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2020, with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial statements.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows." The standard is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2018, with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial statements.

3.
Special Charges

During the six months ended June 30, 2017 , the Company purchased one engine which was previously financed under an operating lease agreement. The purchase price of the engine was $8.1 million , comprised of a cash payment of $3.8 million and the non-cash application of maintenance and security deposits held by the previous lessor of $4.3 million . The Company estimated the fair value of the engine to be $3.1 million and has recorded the purchased engine at fair value within flight equipment on the condensed balance sheets. The Company determined the valuation of the engine based on a third-party appraisal considering the condition of the engine (a Level 3 measurement). The Company recognized $4.8 million as a cost of terminating the lease within special charges on the condensed statement of operations, made up of the excess of the purchase price paid over the fair value of the engine, less other non-cash items of $0.2 million .
    
During the six months ended June 30, 2016 , the Company purchased three A319 aircraft which were previously financed under operating lease agreements. The purchase price of the 3 aircraft was $65.9 million , comprised of a cash payment of $33.8 million and the non-cash application of maintenance and security deposits held by the previous lessor of $32.1 million . The Company estimated the fair value of the aircraft to be $41.2 million and has recorded the 3 purchased aircraft at fair value within flight equipment on the condensed balance sheets. The Company determined the valuation of the aircraft based on a third-party appraisal considering the condition of each aircraft (a Level 3 measurement). The Company recognized $24.3 million as a cost of terminating the leases within special charges on the condensed statement of operations, made up of the excess of the purchase price paid over the fair value of the aircraft, less other non-cash items of $0.4 million .


6

Notes to Condensed Financial Statements—(Continued)

4.
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,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share amounts)
Numerator
 
 
 
 
 
 
 
Net income
$
78,143

 
$
73,084

 
$
110,078

 
$
135,004

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic
69,370

 
70,770

 
69,359

 
71,173

Effect of dilutive stock awards
191

 
143

 
217

 
174

Adjusted weighted-average shares outstanding, diluted
69,561

 
70,913

 
69,576

 
71,347

Net income per share
 
 
 
 
 
 
 
Basic earnings per common share
$
1.13

 
$
1.03

 
$
1.59

 
$
1.90

Diluted earnings per common share
$
1.12

 
$
1.03

 
$
1.58

 
$
1.89

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares
17


54

 
52

 
69


5.
Short-term Investment Securities

The Company's short-term investment securities consist of available-for-sale asset-backed securities with contractual maturities of twelve months or less. These securities are stated at fair value within current assets on the Company's condensed balance sheets. Realized gains and losses on sales of investments, if any, are reflected in non-operating income (expense) in the condensed statements of operations. Unrealized gains and losses on investment securities are reflected as a component of accumulated other comprehensive income (AOCI).

As of June 30, 2017 and December 31, 2016 , the Company had $100.5 million and $100.2 million in short-term available-for-sale investment securities, respectively. For the six months ended June 30, 2017 , these investments earned interest income at a weighted-average fixed rate of approximately 1.4% . For the three and six months ended June 30, 2017 , an unrealized loss of $11 thousand and $24 thousand , net of deferred taxes of $6 thousand and $14 thousand , respectively, was recorded within AOCI related to these investment securities. For the three and six months ended June 30, 2016 , the Company had no unrealized gains or losses related to these instruments as the Company did not invest in them until the third quarter of 2016. The Company has not recognized any realized gains or losses related to these securities as the Company has not transacted any sale of these securities. As of June 30, 2017 and December 31, 2016 , $46 thousand and $23 thousand , net of tax, respectively, remained in AOCI, related to these instruments.


7



6.
Accrued Liabilities
Other current liabilities as of June 30, 2017 and December 31, 2016 consist of the following:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Federal excise and other passenger taxes and fees payable
$
62,708

 
$
42,064

Salaries and wages
49,109

 
54,578

Airport obligations
47,230

 
43,989

Aircraft maintenance
33,092

 
30,233

Aircraft and facility lease obligations
12,919

 
10,378

Interest payable
8,953

 
8,499

Fuel
7,846

 
14,828

Other
22,772

 
21,442

Other current liabilities
$
244,629

 
$
226,011



7.
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 counterparties relating to hedge 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, 2017 , 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.

Fuel Derivative Instruments

From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. Historically, the Company's fuel derivative contracts have generally consisted 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 have been 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 such instruments is determined using standard option valuation models.

The Company accounts for its fuel derivative contracts at fair value and recognizes them in the condensed balance sheet in prepaid expenses and other current assets or other current liabilities. The Company did not enter into any fuel derivative instruments during the six months ended June 30, 2017 and 2016 . Historically, the Company has not elected hedge accounting on any fuel derivative instruments entered into and, as a result, changes in the fair value of fuel derivative contracts, if any, were recorded in aircraft fuel expense.
As of June 30, 2017 and December 31, 2016 , the Company did not have any outstanding fuel derivatives.
Interest Rate Swaps
During 2015, the Company settled six forward interest rate swaps that were designed to fix the benchmark interest rate component of interest payments on the debt related to three Airbus A321 aircraft, which the Company took delivery of during the third quarter of 2015. These instruments limited the Company's exposure to changes in the benchmark interest rate in the period from the trade date through the date of maturity. The interest rate swaps were designated as cash flow hedges. The Company accounts for interest rate swaps at fair value and recognizes them in the condensed 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). As of June 30, 2017 and December 31, 2016 , the Company did not have any outstanding interest rate swaps.

8

Notes to Condensed Financial Statements—(Continued)

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. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized over the life of the fixed-rate debt instrument. During the three and six months ended June 30, 2017 and 2016 , there were no unrealized gains or losses recorded within AOCI related to these instruments as they settled in 2015. For the three and six months ended June 30, 2017 , the Company reclassified interest rate swap losses of $53 thousand and $107 thousand , net of tax of $31 thousand and $62 thousand , respectively, into earnings. For the three and six months ended June 30, 2016 , the Company reclassified interest rate swap losses of $56 thousand and $113 thousand , net of tax of $32 thousand and $65 thousand , respectively, into earnings. As of June 30, 2017 and December 31, 2016 , $1.2 million and $1.3 million , net of tax, respectively, remained in AOCI, related to these instruments.

8.
Commitments and Contingencies
Aircraft-Related Commitments and Financing Arrangements
The Company’s contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers. During the first quarter of 2017, the Company negotiated revisions to its A320 aircraft order. The Company originally had four A320neo aircraft scheduled for delivery in 2018 of which two were converted to A320ceo aircraft, to be delivered in 2017, and the remaining two are deferred until 2019. As of June 30, 2017 , the Company's aircraft orders consisted of the following:
 
 
Airbus
 
 
 
A320ceo
 
A320neo
 
A321ceo
 
Total
remainder of 2017
 
3
 

 
7
 
10
2018
 
5
 

 
5
 
10
2019
 
1
 
14
 

 
15
2020
 

 
16
 

 
16
2021
 

 
18
 

 
18
 
 
9
 
48
 
12
 
69

The Company also has six spare engine orders for V2500 SelectTwo 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 expected to be $413.2 million for the remainder of 2017 , $528.4 million in 2018 , $764.4 million in 2019 $829.8 million in 2020 , $784.8 million in 2021 , and $24.6 million in 2022 and beyond . As of June 30, 2017 , the Company had secured debt financing commitments of $310.0 million for 8 aircraft, scheduled for delivery in the remainder of 2017, and did not have financing commitments in place for the remaining 61 Airbus aircraft currently on firm order, which are scheduled for delivery in 2017 through 2021 .
Interest commitments related to the secured debt financing of 36 delivered aircraft as of June 30, 2017 are $25.5 million for the remainder of 2017, $47.5 million in 2018 , $43.3 million in 2019 , $39.0 million in 2020 , $34.8 million in 2021 , and $125.3 million in 2022 and beyond . For principal commitments related to these financed aircraft, refer to Note 10, Debt and Other Obligations. As of June 30, 2017 , principal and interest commitments related to the Company's future secured debt financing of 8 undelivered aircraft under bank debt is approximately $5.1 million for the remainder of 2017 , $32.6 million in 2018 , $32.4 million in 2019 , $33.3 million in 2020 , $32.1 million in 2021 , and $256.5 million in 2022 and beyond .
As of June 30, 2017 , the Company had a fleet consisting of 104 A320 family aircraft. During the six months ended June 30, 2017 , the Company took delivery of seven aircraft financed under secured debt arrangements, two aircraft under operating leases and purchased one previously leased engine. For further discussion on the previously leased engine, refer to Note 3, Special Charges. The purchased aircraft are capitalized within flight equipment with depreciable lives of 25 years and estimated residual values of 10% . As of June 30, 2017 , the Company had 61 aircraft and 10 spare engines financed under operating leases with lease term expiration dates ranging from 2017 to 2029. 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 condensed balance sheets. Deferred losses are recognized as an increase to rent expense on a straight-line basis over the term of the respective operating

9

Notes to Condensed Financial Statements—(Continued)

leases. Deferred gains are included in deferred credits and other long-term liabilities on the accompanying condensed balance sheets. 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.
In July 2015, the Company executed an upgrade service agreement with Airbus Americas Customer Services Inc. (Airbus) to reconfigure the seating and increase capacity in 40 of the Company’s A320ceos from 178 to 182 seats (reconfiguration). The reconfiguration of the aircraft commenced in the first quarter of 2016 and is expected to be completed in the fourth quarter of 2017 for a remaining committed cost of $1.0 million , as of June 30, 2017 . These amounts will be capitalized within flight equipment on the condensed balance sheets.
In September 2015, the Company executed a lease agreement with Wayne County Airport Authority (the Authority), which owns and operates Detroit Metropolitan Wayne County Airport (DTW). Under the lease agreement, the Company leases a 10 -acre site, adjacent to the airfield at DTW, in order to construct, operate and maintain an approximately 126,000 -square-foot hangar facility (the project). The project allows for the development of a maintenance hangar in order to fulfill the requirements of the Company's growing fleet and will reduce dependence on third-party facilities and contract maintenance. The lease agreement has a 30 -year term with two 10 -year extension options. Upon termination of the lease, title of the project, which will be fully depreciated, will automatically pass to the Authority. The Company completed the project during the first quarter of 2017 and as of June 30, 2017 , the Company had a remaining commitment of approximately $0.2 million related to this project.

Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at June 30, 2017 were as follows:  
 
 
Capital Leases
 
Aircraft and Spare Engine Leases
 
Property Facility Leases
 
Total
Operating and Capital Lease Obligations
 
(in thousands)
remainder of 2017
 
$
268

 
$
108,237

 
$
21,496

 
$
130,001

2018
 
537

 
206,595

 
41,024

 
248,156

2019
 
504

 
188,212

 
33,034

 
221,750

2020
 
188

 
180,235

 
21,817

 
202,240

2021
 
28

 
170,613

 
12,800

 
183,441

2022 and thereafter
 

 
570,087

 
73,285

 
643,372

Total minimum lease payments
 
$
1,525

 
$
1,423,979

 
$
203,456

 
$
1,628,960

Less amount representing interest
 
136

 
 
 
 
 
 
Present value of minimum lease payments
 
$
1,389

 
 
 
 
 
 
Less current portion
 
460

 
 
 
 
 
 
Long-term portion
 
$
929

 
 
 
 
 
 
The majority of the Company's capital lease obligations relate to the lease of computer equipment used by the Company's flight crew. Payments under this lease agreement are fixed for the 3 -year term of the lease which began in the second quarter of 2017.
Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the Company's aircraft and spare engine lease agreements recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent. Supplemental rent is made up of maintenance reserves paid or expected to be paid to aircraft lessors in advance of the performance of major maintenance activities that are not probable of being reimbursed, and probable return condition

10

Notes to Condensed Financial Statements—(Continued)

obligations. 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 pay maintenance reserves to aircraft lessors to be held as collateral in advance of the Company’s required performance of major maintenance activities. Substantially all of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, while some maintenance reserve payments are fixed contractual amounts. Fixed maintenance reserve payments for these aircraft and related flight equipment, including estimated amounts for contractual price escalations, are expected to be $3.9 million for the remainder of 2017 , $7.0 million in 2018 , $5.7 million in 2019 , $5.4 million in 2020 , $5.5 million in 2021 , and $17.7 million in 2022 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 either (1) the amount of the maintenance reserves held by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance event. Some of the master lease agreements do not require that the Company pay maintenance reserves as long as the Company's cash balance does not fall below a certain level. As of June 30, 2017 , 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, advertising media, maintenance for new airport kiosks, data center, weather system and call center as of June 30, 2017 : $3.4 million for the remainder of 2017 , $4.9 million in 2018 , $0.8 million in 2019 , $0.6 million in 2020 , $0.2 million in 2021 , and $0.1 million thereafter . The Company's current agreement with its reservation system provider 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.
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 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.
The Company's credit card processors do not require the Company to maintain cash collateral if the Company satisfies certain liquidity and other financial covenants. Failure to meet these covenants would provide the processors the right to place a holdback resulting in a commensurate reduction of unrestricted cash. As of June 30, 2017 and December 31, 2016 , the Company was in compliance with such liquidity and other financial covenants in its credit card processing agreements 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, 2017 and December 31, 2016 , was $364.7 million and $234.6 million , respectively.

11

Notes to Condensed Financial Statements—(Continued)

Employees
The Company has four union-represented employee groups that together represented approximately 74% of all employees at June 30, 2017 . The table below sets forth the Company's employee groups and status of the collective bargaining agreements as of June 30, 2017 .
Employee Groups
 
Representative
 
Amendable Date
 
Percentage of Workforce
Pilots
 
Air Line Pilots Association, International (ALPA)
 
August 2015
 
26%
Flight Attendants
 
Association of Flight Attendants (AFA-CWA)
 
May 2021
 
43%
Dispatchers
 
Transport Workers Union (TWU)
 
August 2018
 
1%
Ramp Service Agents
 
International Association of Machinists and Aerospace Workers (IAMAW)
 
June 2020
 
4%
In August 2015 , the Company's collective bargaining agreement with its pilots, represented by ALPA, became amendable. In June 2016 , ALPA requested the services of the National Mediation Board (NMB) to facilitate negotiations for an amended agreement and the Company joined ALPA in the request. The NMB has assigned mediators and the parties continue to meet and work toward an amended agreement with the guidance of the mediator. Under the Railway Labor Act (RLA), the parties' current agreement remains in effect until an amended agreement is reached.
In March 2016 , under the supervision of the NMB, the Company and AFA-CWA reached a tentative agreement for a five -year contract with the Company's flight attendants. In May 2016 , the flight attendants voted to approve the new five -year contract with the Company. In connection with this agreement, the Company paid a $9.6 million ratification incentive of which $8.4 million was recorded within salaries, wages and benefits in the condensed statement of operations for the six months ended June 30, 2016 .
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 $5.6 million and $5.7 million in health care claims as of June 30, 2017 and December 31, 2016 , respectively.
9.
Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosures , disclosures relating to how fair value is determined for assets and liabilities are required, 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
From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. 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, if any. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

12

Notes to Condensed Financial Statements—(Continued)


The Company does not elect hedge accounting on its 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 condensed balance sheets within prepaid expenses and 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. 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 is 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. 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. As of June 30, 2017 and December 31, 2016 , the Company had no outstanding jet fuel derivatives.
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 the Level 3 long-term debt. The estimated fair value of the Company's publicly held debt agreements has been determined to be Level 2, as the Company utilizes quoted market prices to estimate the fair value of its public long-term debt.
The carrying amounts and estimated fair values of the Company's long-term debt at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
 
Fair Value Level Hierarchy
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
(in millions)
 
 
Senior term loans
$
435.0

 
$
453.8

 
$
451.9

 
$
463.9

 
Level 3
Junior term loans
43.2

 
44.7

 
47.1

 
48.1

 
Level 3
Fixed-rate loans
216.3

 
221.5

 

 

 
Level 3
Class A enhanced equipment trust certificates
423.6

 
436.3

 
409.8

 
416.0

 
Level 2
Class B enhanced equipment trust certificates
100.0

 
102.3

 
103.6

 
105.7

 
Level 2
Total long-term debt
$
1,218.1

 
$
1,258.6

 
$
1,012.4

 
$
1,033.7

 
 
Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2017 and December 31, 2016 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.

Short-term Investment Securities


13

Notes to Condensed Financial Statements—(Continued)

Short-term investment securities at June 30, 2017 and December 31, 2016 are comprised of available-for-sale asset-backed securities with contractual maturities of twelve months or less and are categorized as Level 1 instruments, as the Company uses quoted market prices in active markets when determining the fair value of these securities.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
 
Fair Value Measurements as of June 30, 2017
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
869.2


$
869.2


$


$

Short-term investment securities
100.5


100.5





Total assets
$
969.7


$
969.7


$


$












Total liabilities
$


$


$


$

 
Fair Value Measurements as of December 31, 2016
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
700.9


$
700.9


$


$

Short-term investment securities
100.2


100.2





Total assets
$
801.1


$
801.1


$


$













Total liabilities
$


$


$


$


The Company had no transfers of assets or liabilities between any of the above levels during the periods ended June 30, 2017 and December 31, 2016 .

The Company's Valuation Group, which reports to the Chief Financial Officer, is made up of individuals from the Company's Treasury and Corporate Accounting departments. The Valuation Group is responsible for the execution of the Company's valuation policies and procedures. The Valuation Group compares the results of the Company's internally developed valuation methods with counterparty reports at each balance sheet date, assesses the Company's valuation methods for accurateness and identifies any needs for modification.


10.
Debt and Other Obligations

As of June 30, 2017 , the Company held non-public and public debt instruments.     Long-term debt is comprised of the following:

14

Notes to Condensed Financial Statements—(Continued)

 
 
As of
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
June 30, 2017
 
December 31, 2016
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
 
(weighted-average interest rates)
Fixed-rate senior term loans due through 2027
 
$
435.0

 
$
451.9

 
4.10
%
 
4.10
%
 
4.10
%
 
4.10
%
Fixed-rate junior term loans due through 2022
 
43.2

 
47.1

 
6.90
%
 
6.90
%
 
6.90
%
 
6.90
%
Fixed-rate loans due through 2029
 
216.3

 

 
3.82
%
 
N/A

 
3.82
%
 
N/A

Fixed-rate class A enhanced equipment trust certificates due through 2028
 
423.6

 
409.8

 
4.10
%
 
4.03
%
 
4.10
%
 
4.03
%
Fixed-rate class B enhanced equipment trust certificates due through 2024
 
100.0

 
103.6

 
4.45
%
 
4.38
%
 
4.45
%
 
4.38
%
Long-term debt
 
$
1,218.1

 
$
1,012.4

 
 
 
 
 
 
 
 
Less current maturities
 
95.4

 
84.4

 
 
 
 
 
 
 
 
Less unamortized discounts

 
33.5

 
30.6

 
 
 
 
 
 
 
 
Total
 
$
1,089.2

 
$
897.4

 
 
 
 
 
 
 
 
During the three and six months ended June 30, 2017 , the Company made scheduled principal payments of $39.8 million and $50.0 million on its outstanding debt obligations, respectively. During the three and six months ended June 30, 2016 , the Company made scheduled principal payments of $9.9 million and $19.6 million , on its outstanding debt obligations, respectively.
At June 30, 2017 , long-term debt principal payments for the next five years and thereafter are as follows:
 
 
June 30, 2017
 
 
(in millions)
Remainder of 2017
 
$
49.8

2018
 
97.9

2019
 
96.9

2020
 
96.1

2021
 
95.5

2022 and beyond
 
781.9

Total debt principal payments
 
$
1,218.1



Interest Expense

Interest expense related to long-term debt consisted of the following:

15

Notes to Condensed Financial Statements—(Continued)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
2017
 
2016
 
2017
 
2016
 
(in thousands)
Senior term loans
$
4,619

 
$
4,964

 
$
9,290

 
$
10,012

Junior term loans
775

 
905

 
1,578

 
1,842

Fixed-rate loans
1,586

 

 
1,744

 

Class A enhanced equipment trust certificates
4,321

 
2,698

 
8,629

 
3,881

Class B enhanced equipment trust certificates
1,108

 
773

 
2,292

 
1,109

Commitment fees
28

 
30

 
58

 
65

Amortization of debt discounts
1,290

 
794

 
2,521

 
1,310

Total
$
13,727

 
$
10,164

 
$
26,112

 
$
18,219


16



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,” “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, 2016 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 , the youngest fleet of any major U.S. airline, currently operates more than 470 daily flights to 60 destinations in the United States, Caribbean and Latin America. Our stock trades under the symbol "SAVE" on the NASDAQ Global Select Stock Market.

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 in the price of an airline ticket. 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, advance seat assignments and refreshments. We record revenue related to these options 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. High 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 maintain higher 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. Through branded campaigns, we educate the public on how our unbundled pricing model works, showing them how it gives them choice on how they spend their money and saves them money compared to other airlines.


17




Comparative Operating Statistics:
The following tables set forth our operating statistics for the three and six -month periods ended June 30, 2017 and 2016 :
 
 
Three Months Ended June 30,
 
Percent Change
 
2017
 
2016
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
102.8

 
85.2

 
20.7
 %
Aircraft at end of period
104

 
87

 
19.5
 %
Average daily aircraft utilization (hours)
11.7

 
12.7

 
(7.9
)%
Average stage length (miles)
982

 
971

 
1.1
 %
Block hours
109,296

 
98,399

 
11.1
 %
Departures
41,563

 
38,025

 
9.3
 %
Passenger flight segments (PFSs) (thousands)
6,206

 
5,606

 
10.7
 %
Revenue passenger miles (RPMs) (thousands)
6,219,638

 
5,549,411

 
12.1
 %
Available seat miles (ASMs) (thousands)
7,294,578

 
6,419,419

 
13.6
 %
Load factor (%)
85.3
%
 
86.4
%
 
(1.1) pts

Average ticket revenue per passenger flight segment ($)
59.93

 
52.87

 
13.4
 %
Average non-ticket revenue per passenger flight segment ($)
53.14

 
51.32

 
3.5
 %
Total revenue per passenger flight segment ($)
113.07

 
104.19

 
8.5
 %
Average yield (cents)
11.28

 
10.53

 
7.1
 %
TRASM (cents)
9.62

 
9.10

 
5.7
 %
CASM (cents)
7.80

 
7.20

 
8.3
 %
Adjusted CASM (cents)
7.78

 
7.07

 
10.0
 %
Adjusted CASM ex-fuel (cents)
5.83

 
5.30

 
10.0
 %
Fuel gallons consumed (thousands)
85,533

 
77,013

 
11.1
 %
Average economic fuel cost per gallon ($)
1.66

 
1.47

 
12.9
 %

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


18



 
Six Months Ended June 30,
 
Percent Change
 
2017
 
2016
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
100.0

 
82.4

 
21.4
 %
Aircraft at end of period
104

 
87

 
19.5
 %
Average daily aircraft utilization (hours)
11.8

 
12.8

 
(7.8
)%
Average stage length (miles)
983

 
983

 
 %
Block hours
213,332

 
191,943

 
11.1
 %
Departures
80,893

 
73,185

 
10.5
 %
Passenger flight segments (PFSs) (thousands)
11,775

 
10,594

 
11.1
 %
Revenue passenger miles (RPMs) (thousands)
11,833,060

 
10,619,724

 
11.4
 %
Available seat miles (ASMs) (thousands)
14,170,478

 
12,402,423

 
14.3
 %
Load factor (%)
83.5
%
 
85.6
%
 
(2.1) pts

Average ticket revenue per passenger flight segment ($)
57.04

 
53.71

 
6.2
 %
Average non-ticket revenue per passenger flight segment ($)
52.80

 
52.22

 
1.1
 %
Total revenue per passenger flight segment ($)
109.84

 
105.93

 
3.7
 %
Average yield (cents)
10.93

 
10.57

 
3.4
 %
TRASM (cents)
9.13

 
9.05

 
0.9
 %
CASM (cents)
7.77

 
7.25

 
7.2
 %
Adjusted CASM (cents)
7.72

 
7.05

 
9.5
 %
Adjusted CASM ex-fuel (cents)
5.73

 
5.44

 
5.3
 %
Fuel gallons consumed (thousands)
164,597

 
147,563

 
11.5
 %
Average economic fuel cost per gallon ($)
1.71

 
1.35

 
26.7
 %

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



Executive Summary
For the second quarter of 2017 , we achieved an 18.9% operating margin, a decrease of 2.0 points compared to the prior year period. We generated pre-tax income of $124.1 million and net income of $78.1 million on operating revenues of $701.7 million . For the second quarter of 2016 , we generated pre-tax income of $115.7 million and net income of $73.1 million on operating revenues of $584.1 million .
Our adjusted CASM ex-fuel for the second quarter of 2017 was 5.83 cent s, a 10.0% increase year over year. The increase on a per-ASM basis was primarily due to increases in other operating expense, depreciation and amortization expense and maintenance, materials and repairs expense, partially offset by a decrease in special charges expense and aircraft rent expense.
During the second quarter 2017, we had over 850 pilot-related flight cancellations. We estimate that these pilot-related cancellations adversely impacted our second quarter 2017 results by approximately $45 million (approximately $25 million of revenue loss and $20 million of additional operating costs, primarily related to higher passenger re-accommodation expense). In early May, we obtained a temporary restraining order to enjoin further illegal labor action, while contract negotiations continue under the supervision of the National Mediation Board.    
As of June 30, 2017 , we had 104 Airbus A320-family aircraft in our fleet comprised of 31 A319s, 53 A320s, and 20 A321s. With the scheduled delivery of 10 aircraft during the remainder of 2017 and 2 retirements, we expect to end 2017 with 112 aircraft in our fleet.
Since the delivery of our initial five A320neo aircraft in the fourth quarter of 2016, we have experienced introductory issues with the new-generation PW1100G-JM engines, which has resulted in diminished service availability of such aircraft. As a result of the reliability problems associated with introduction of the new engine, during the second quarter of 2017, we executed a support agreement with manufacturer Pratt & Whitney in order to obtain support and relief related to these

19


operational disruptions. The support agreement provides for compensation to the Company for grounded aircraft and for back-up spare engines, and sets milestone dates for remediation of the introductory into-service issues.

Comparison of three months ended June 30, 2017 to three months ended June 30, 2016
Operating Revenues
Operating revenues increase d $117.5 million , or 20.1% , to $701.7 million for the second quarter of 2017 , as compared to the second quarter of 2016 , due primarily to an increase in traffic of 12.1% and an increase in passenger yields of 7.1% .
Total revenue per available seat mile (TRASM) for the second quarter of 2017 was 9.62 cent s, an increase of 5.7% , compared to the second quarter of 2016 . This increase was primarily driven by the calendar shift of the Easter holiday as compared to prior year. Company-driven revenue initiatives and a strong underlying pricing environment also contributed to the increase year over year. These positive influences were offset in part by revenue decreases due to an elevated level of pilot-related flight cancellations in the second quarter of 2017.
Total revenue per passenger flight segment increase d 8.5% , year over year, driven by an increase of 13.4% in ticket revenue per passenger flight segment and an increase of 3.5% in non-ticket revenue per passenger flight segment. The increase in ticket revenue per passenger flight segment was primarily driven by a 7.1% increase in average yield, period over period, due to a stronger pricing environment as compared to the prior year. The increase in non-ticket revenue per passenger flight segment was mostly driven by higher passenger usage fees year over year.
Operating Expenses
Operating expenses increase d $106.6 million , or 23.1% , to $568.9 million for the second quarter of 2017 compared to $462.3 million for the second quarter of 2016 , primarily due to an increase in operations as reflected by a 13.6% capacity growth and a 12.1% increase in traffic. Operating expenses also increased as a result of an increase in average economic fuel price per gallon of 12.9% which drove higher aircraft fuel expense year over year.
Aircraft fuel expense includes into-plane fuel expense (defined below) and realized and unrealized gains and losses associated with our fuel derivative contracts, if any. 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. From time to time, 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. We had no activity related to fuel derivative instruments during the six months ended June 30, 2017 and 2016 . Historically, management has chosen not to elect hedge accounting on any fuel derivative instruments and, as a result, changes in the fair value of fuel derivative contracts have been recorded each period in aircraft fuel expense.
Aircraft fuel expense increase d in the second quarter of 2017 by $29.1 million , or 25.7% , compared to $113.2 million in the second quarter of 2016, due to an 11.1% increase in fuel gallons consumed and a 12.9% increase in average economic fuel cost per gallon.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Three Months Ended June 30,


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
85,533


77,013


11.1
%
Into-plane fuel cost per gallon
1.66


1.47


12.9
%
Into-plane fuel expense
$
142,294


$
113,192


25.7
%
Realized losses (gains) related to fuel derivative contracts, net




NM

Unrealized losses (gains) related to fuel derivative contracts, net




NM

Aircraft fuel expense (per statement of operations)
$
142,294


$
113,192


25.7
%
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 12.9% was primarily a result of an increase in jet fuel prices.


20



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


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Into-plane fuel expense
$
142,294


$
113,192


25.7
%
Realized losses (gains) related to fuel derivative contracts, net




NM

Economic fuel expense
$
142,294


$
113,192


25.7
%
Fuel gallons consumed
85,533


77,013


11.1
%
Economic fuel cost per gallon
$
1.66


$
1.47


12.9
%

During the three months ended June 30, 2017 and 2016 , we had no activity related to fuel derivatives and thus had no realized or unrealized losses (gains) related to fuel derivative contracts, as we have historically.
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, 2017 and 2016 , followed by explanations of the material changes on a dollar basis and/or unit cost basis:

 
Three Months Ended June 30,
 
Dollar Change
 
Percent Change
 
Cost per ASM
 
Per-ASM Change
 
Percent Change
 
2017
 
2016
 
 
2017
 
2016
 
 
(in thousands)
 
 
 
(in cents)
 
 
Salaries, wages, and benefits
$
129,892

 
$
112,930

 
$
16,962

 
15.0
%
 
1.78

 
1.76

 
0.02

 
1.1
 %
Aircraft fuel
142,294

 
113,192

 
29,102

 
25.7
%
 
1.95

 
1.76

 
0.19

 
10.8
 %
Aircraft rent
52,566

 
49,864

 
2,702

 
5.4
%
 
0.72

 
0.78

 
(0.06
)
 
(7.7
)%
Landing fees and other rents
45,592

 
39,944

 
5,648

 
14.1
%
 
0.63

 
0.62

 
0.01

 
1.6
 %
Depreciation and amortization
35,331

 
24,957

 
10,374

 
41.6
%
 
0.48

 
0.39

 
0.09

 
23.1
 %
Maintenance, materials and repairs
28,985

 
20,627

 
8,358

 
40.5
%
 
0.40

 
0.32

 
0.08

 
25.0
 %
Distribution
29,908

 
24,692

 
5,216

 
21.1
%
 
0.41

 
0.38

 
0.03

 
7.9
 %
Special charges

 
8,052

 
(8,052
)
 
NM

 

 
0.13

 
(0.13
)
 
NM

Loss on disposal of assets
1,493

 
529

 
964

 
NM

 
0.02

 
0.01

 
0.01

 
NM

Other operating
102,885

 
67,511

 
35,374

 
52.4
%
 
1.41

 
1.05

 
0.36

 
34.3
 %
Total operating expenses
$
568,946

 
$
462,298

 
$
106,648

 
23.1
%
 
7.80

 
7.20

 
0.60

 
8.3
 %
Adjusted CASM (1)
 
 
 
 
 
 
 
 
7.78

 
7.07

 
0.71

 
10.0
 %
Adjusted CASM ex-fuel (2)
 
 
 
 
 
 
 
 
5.83

 
5.30

 
0.53

 
10.0
 %
 
(1)
Reconciliation of CASM to Adjusted CASM:

21



 
Three Months Ended June 30,
 
2017
 
2016
 
(in millions)
 
Per ASM
 
(in millions)
 
Per ASM
CASM (cents)
 
 
7.80

 
 
 
7.20

Unrealized losses (gains) related to fuel derivative contracts, net
$

 

 
$

 

Loss on disposal of assets
1.5

 
0.02

 
0.5

 
0.01

Special charges

 

 
8.1

 
0.13

Adjusted CASM (cents)
 
 
7.78

 
 
 
7.07


(2)
Excludes aircraft fuel expense, loss on disposal of assets and special charges.
Our adjusted CASM ex-fuel for the second quarter of 2017 was up 10.0% as compared to the second quarter of 2016 . The increase on a per-ASM basis was primarily due to increases in other operating, depreciation and amortization and maintenance, materials and repairs expense, partially offset by a decrease in special charges and aircraft rent expense.
Labor costs for the second quarter of 2017 increase d $17.0 million , or 15.0% , compared to the second quarter of 2016 , primarily driven by an 18.7% increase in our pilot and flight attendant workforce resulting from the introduction of 17 new aircraft since the second quarter of 2016 . On a per-ASM basis, labor costs increase d slightly primarily due to higher flight attendant wages, year over year, resulting from the collective bargaining agreement negotiated in the second quarter of 2016. This increase was partially offset by a decrease in bonus and group health care costs on a per-ASM basis, year over year.
Aircraft rent expense for the second quarter of 2017 increase d by $2.7 million , or 5.4% , compared to the second quarter of 2016 . This increase in aircraft rent expense was primarily driven by the delivery of seven new aircraft, financed under operating leases, subsequent to the end of the second quarter of 2016 . This increase was partially offset by the purchase of four aircraft made since the end of the second quarter of 2016 , which were formerly financed under operating lease agreements. On a per-ASM basis, aircraft rent expense decrease d primarily 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, we have purchased 14 aircraft, of which 4 were previously financed under operating lease agreements. In addition, we negotiated several lease extensions over the last twelve months that have also contributed to a decrease in aircraft rent expense on both a dollar and per-ASM basis.
Landing fees and other rents for the second quarter of 2017 increase d $5.6 million , or 14.1% , as compared to the second quarter of 2016 , primarily due to a 9.3% increase in departures as well as increased volume at higher cost airports, year over year. On a per-ASM basis, landing fees and other rents remained relatively stable period over period.
Depreciation and amortization increase d by $10.4 million compared to the prior year period. The increase on both a dollar and per-ASM basis was primarily due to increased depreciation expense resulting from the purchase of 14 aircraft made since the second quarter of 2016 .
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 $14.6 million and $11.1 million for the second quarters of 2017 and 2016 , respectively. As our fleet continues to grow and 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. 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 $43.6 million and $31.7 million for the second quarters of 2017 and 2016 , respectively.
Maintenance, materials and repairs expense for the second quarter of 2017 increase d by $8.4 million , or 40.5% , compared to the second quarter of 2016 . 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, the increase in maintenance costs was primarily due to an increased number of scheduled maintenance events in the current period as compared to the prior year period. 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.
Distribution costs increase d by $5.2 million , or 21.1% , in the second quarter of 2017 as compared to the second quarter of 2016 . The increase on a dollar basis was primarily due to increased sales volume. On a per-ASM basis, distribution costs increased slightly primarily due to higher average fare resulting in an increase in credit card fees year over year.

22



Other operating expense for the second quarter of 2017 increase d by $35.4 million , or 52.4% , compared to the second quarter of 2016 primarily due to an increase in overall operations and higher passenger re-accommodation expense year over year. As compared to the prior year period, we increased departures by 9.3% and had 10.7% more passenger flight segments, which drove increases in variable operating expenses. Other operating expense per ASM increased primarily due to operational disruptions during the second quarter of 2017 resulting from pilot-related cancellations which contributed to higher passenger re-accommodation expense, as compared to the prior year period.


Other Income (Expenses)

Our interest expense and corresponding capitalized interest for the three months ended June 30, 2017 and 2016 primarily represents interest related to the financing of purchased aircraft. As of June 30, 2017 and 2016 , the Company had 36 and 26 purchased aircraft financed through secured long-term debt arrangements, respectively. Please see "Notes to Condensed Financial Statements—10. Debt and Other Obligations" for further discussion.

Our interest income for the three months ended June 30, 2017 primarily represents interest income earned on cash, cash equivalents and short-term investments. Interest income for the three months ended June 30, 2016 primarily represents interest income earned on cash, cash equivalents and on funds required to be held in escrow in accordance with the terms of our EETC.

Income Taxes
Our effective tax rate for the second quarter of 2017 was 37.0% compared to 36.8% for the second quarter of 2016 . 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, 2017 to six months ended June 30, 2016
Operating Revenues
Operating revenues increase d $171.2 million , or 15.3% , to $1,293.4 million for the six months ended June 30, 2017 , compared to the prior year period, due primarily to an increase in traffic of 11.4% and an increase in passenger yields of 3.4% .
TRASM for the six months ended June 30, 2017 was 9.13 cent s, an increase of 0.9% compared to the same period of 2016 . This increase was primarily driven by a 3.4% increase in average yield, period over period, due to a stronger pricing environment, as compared to the prior year, offset by a decline in load factor of 2.1 points.
Total revenue per passenger flight segment increase d 3.7% from $105.93 for the six months ended June 30, 2016 to $109.84 for the six months ended June 30, 2017 . Our average ticket fare per passenger flight segment increase d from $53.71 to $57.04 , or 6.2% , compared to the prior year period, and non-ticket revenue per passenger flight segment increase d from $52.22 to $52.80 , or 1.1% , compared to the prior year period. The slight increase in non-ticket revenue per passenger flight segment was primarily attributable to higher passenger usage fees partially offset by lower bag revenue on a per-passenger basis, year over year.
Operating Expenses
Operating expenses increase d for the six months ended June 30, 2017 by $202.1 million , or 22.5% , compared to the same period for 2016 primarily due to our 14.3% capacity growth partially offset by a decrease in special charges of $19.5 million , as compared to the prior year period. Operating expenses also increased as a result of an increase in average economic fuel price per gallon of 26.7% , which drove higher aircraft fuel expense year over year.

23



Aircraft fuel expense for the six months ended June 30, 2017 increase d $82.9 million , or 41.6% , compared to the prior year period as a result of a 26.7% increase in economic fuel price per gallon and an 11.5% increase in fuel gallons consumed.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Six Months Ended June 30,


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
164,597


147,563


11.5
%
Into-plane fuel cost per gallon
$
1.71


$
1.35


26.7
%
Into-plane fuel expense
$
282,076


$
199,174


41.6
%
Realized losses (gains) related to fuel derivative contracts, net




NM

Unrealized losses (gains) related to fuel derivative contracts, net




NM

Aircraft fuel expense (per Statement of Operations)
$
282,076


$
199,174


41.6
%
The elements of the changes in economic fuel expense are illustrated in the following table:
 
Six Months Ended June 30,


 
2017

2016

 
(in thousands, except per gallon amounts)
 
Percent Change
Into-plane fuel expense
$
282,076


$
199,174


41.6
%
Realized losses (gains) related to fuel derivative contracts, net




NM

Economic fuel expense
$
282,076


$
199,174


41.6
%
Fuel gallons consumed
164,597


147,563


11.5
%
Economic fuel cost per gallon
$
1.71


$
1.35


26.7
%
During the six months ended June 30, 2017 and 2016 , we had no activity related to fuel derivatives and thus had no realized or unrealized losses (gains) related to fuel derivative contracts, as we have historically.

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, 2017 and 2016 , followed by explanations of the material changes on a unit cost basis and/or dollar basis:
 
Six Months Ended June 30,
 
Dollar Change
 
Percent Change
 
Cost per ASM
 
Per-ASM Change
 
Percent Change
 
2017
 
2016
 
 
2017
 
2016