Spirit Airlines, Inc.
Spirit Airlines, Inc. (Form: 10-Q, Received: 10/26/2017 16:05:32)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________________
Form 10-Q
_______________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 19, 2017:
Class
 
Number of Shares
Common Stock, $0.0001 par value
 
69,373,154




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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Operating revenues:
 
 
 
 
 
 
 
Passenger
$
356,207

 
$
331,004

 
$
1,027,891

 
$
900,031

Non-ticket
331,024

 
290,325

 
952,768

 
843,574

Total operating revenues
687,231

 
621,329

 
1,980,659

 
1,743,605

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
134,114

 
120,190

 
391,144

 
349,530

Aircraft fuel
158,300

 
121,844

 
440,376

 
321,018

Aircraft rent
53,396

 
49,367

 
163,032

 
151,433

Landing fees and other rents
48,498

 
39,345

 
134,538

 
114,096

Depreciation and amortization
36,840

 
25,304

 
103,680

 
73,370

Maintenance, materials and repairs
26,176

 
30,443

 
81,473

 
72,010

Distribution
29,469

 
25,565

 
85,875

 
73,190

Special charges
7,853

 
7,355

 
12,629

 
31,609

Loss on disposal of assets
516

 
423

 
3,114

 
1,166

Other operating
87,965

 
66,277

 
268,553

 
197,833

Total operating expenses
583,127

 
486,113

 
1,684,414

 
1,385,255

 
 
 
 
 
 
 
 
Operating income
104,104

 
135,216

 
296,245

 
358,350

 
 
 
 
 
 
 
 
Other (income) expense:
 
 
 
 
 
 
 
Interest expense
15,018

 
11,362

 
41,237

 
29,588

Capitalized interest
(3,203
)
 
(3,067
)
 
(10,125
)
 
(9,163
)
Interest income
(2,605
)
 
(1,222
)
 
(5,746
)
 
(4,235
)
Other expense
114

 
180

 
221

 
407

Total other (income) expense
9,324

 
7,253

 
25,587

 
16,597

 
 
 
 
 
 
 
 
Income before income taxes
94,780

 
127,963

 
270,658

 
341,753

Provision for income taxes
34,590

 
46,581

 
100,390

 
125,367

 
 
 
 
 
 
 
 
Net income
$
60,190

 
$
81,382

 
$
170,268

 
$
216,386

Basic earnings per share
$
0.87

 
$
1.17

 
$
2.45

 
$
3.06

Diluted earnings per share
$
0.87

 
$
1.17

 
$
2.45

 
$
3.05

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
60,190

 
$
81,382

 
$
170,268

 
$
216,386

Unrealized gain (loss) on short-term investment securities, net of deferred taxes of $7, $3, ($6) and $3
13

 
4

 
(11
)
 
4

Interest rate derivative losses reclassified into earnings, net of taxes of $31, $32, $92 and $97
53

 
56

 
160

 
170

Other comprehensive income (loss)
$
66

 
$
60

 
$
149

 
$
174

Comprehensive income
$
60,256

 
$
81,442

 
$
170,417

 
$
216,560


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


2



Spirit Airlines, Inc.
Condensed Balance Sheets
(unaudited, in thousands)
 
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
863,680

 
$
700,900

Short-term investment securities
100,732


100,155

Accounts receivable, net
46,235

 
41,136

Aircraft maintenance deposits, net
166,386


87,035

Prepaid expenses and other current assets
67,707

 
46,619

Total current assets
1,244,740

 
975,845

 
 
 
 
Property and equipment:
 
 
 
Flight equipment
2,017,888

 
1,461,525

Ground property and equipment
148,324

 
126,206

Less accumulated depreciation
(183,065
)
 
(122,509
)
 
1,983,147

 
1,465,222

Deposits on flight equipment purchase contracts
304,732

 
325,688

Long-term aircraft maintenance deposits
138,672

 
199,415

Deferred heavy maintenance, net
87,566

 
75,534

Other long-term assets
112,085

 
110,223

Total assets
$
3,870,942

 
$
3,151,927

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,961

 
$
15,193

Air traffic liability
276,933

 
206,392

Current maturities of long-term debt
105,958

 
84,354

Other current liabilities
249,132

 
226,011

Total current liabilities
662,984

 
531,950

 
 
 
 
Long-term debt, less current maturities
1,214,138

 
897,359

Deferred income taxes
406,080

 
308,143

Deferred gains and other long-term liabilities
17,204

 
19,868

Shareholders’ equity:
 
 
 
Common stock
7

 
7

Additional paid-in-capital
557,772

 
551,004

Treasury stock, at cost
(219,930
)
 
(218,692
)
Retained earnings
1,233,901

 
1,063,633

Accumulated other comprehensive loss
(1,214
)
 
(1,345
)
Total shareholders’ equity
1,570,536

 
1,394,607

Total liabilities and shareholders’ equity
$
3,870,942

 
$
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)  
 
Nine Months Ended September 30,
 
2017
 
2016
Operating activities:

 

Net income
$
170,268

 
$
216,386

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

 

Losses reclassified from other comprehensive income
252


267

Equity-based compensation
6,723

 
5,503

Allowance for doubtful accounts (recoveries)
(53
)
 
213

Amortization of deferred gains and losses and debt issuance costs
6,415

 
3,837

Depreciation and amortization
103,680

 
73,370

Deferred income tax expense
97,834

 
77,627

Loss on disposal of assets
3,114

 
1,166

Lease termination costs
12,629


31,609




 


Changes in operating assets and liabilities:


 


Accounts receivable
(5,046
)
 
(7,840
)
Aircraft maintenance deposits, net
(28,422
)
 
(38,299
)
Prepaid income taxes
(160
)

66,218

Long-term deposits and other assets
(81,622
)
 
(43,252
)
Accounts payable
13,829

 
(7,044
)
Air traffic liability
70,540

 
21,963

Other liabilities
16,152

 
38,317

Other
339

 

Net cash provided by operating activities
386,472

 
440,041

Investing activities:
 
 
 
Purchase of available-for-sale investment securities
(96,851
)

(100,076
)
Proceeds from the maturity of available-for-sale investment securities
95,881



Proceeds from sale of property and equipment

 
50

Pre-delivery deposits for flight equipment, net of refunds
(121,702
)
 
(109,260
)
Capitalized interest
(8,054
)

(7,032
)
Purchase of property and equipment
(428,061
)
 
(447,455
)
Net cash used in investing activities
(558,787
)
 
(663,773
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
405,827


378,569

Proceeds from stock options exercised
45

 
92

Payments on debt and capital lease obligations
(63,643
)
 
(29,663
)
Excess tax (deficiency) benefit from equity-based compensation

 
(497
)
Repurchase of common stock
(1,238
)
 
(102,390
)
Debt issuance costs
(5,896
)

(107
)
Net cash provided by financing activities
335,095

 
246,004

Net (decrease) increase in cash and cash equivalents
162,780

 
22,272

Cash and cash equivalents at beginning of period
700,900

 
803,632

Cash and cash equivalents at end of period
$
863,680

 
$
825,904

Supplemental disclosures
 
 
 
Cash payments for:
 
 
 
Interest, net of capitalized interest
$
22,541

 
$
26,025

Income taxes paid, net of refunds
$
4,352

 
$
(18,169
)
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.
Certain prior period amounts have been reclassified to conform to the current year's presentation.
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. While our evaluation is ongoing, the Company currently estimates that applying a relative fair value would increase its air traffic liability by approximately $10 million at the date of adoption. The Company also expects the classification and timing of recognition of certain ancillary fees to be impacted by the 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


5

Notes to Condensed Financial Statements—(Continued)

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 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 nine months ended September 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 three months ended September 30, 2017 , the Company purchased one aircraft which was previously financed under an operating lease agreement. The purchase price of the aircraft was $20.0 million , comprised of a cash payment of $12.6 million and the non-cash application of maintenance and security deposits held by the previous lessor of $7.4 million . The Company estimated the fair value of the aircraft to be $11.9 million and has recorded the 1 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 the aircraft (a Level 3 measurement). The Company recognized $7.9 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 aircraft, less other non-cash items of $0.2 million .

During the three months ended September 30, 2016 , the Company purchased three A319 aircraft which were formerly financed under operating lease agreements. The purchase price for the 3 aircraft was $58.8 million , comprised of a cash payment of $58.1 million and the application of security deposits held by the previous lessor of $0.7 million . The Company estimated the fair value of the aircraft to be $38.2 million and has recorded the 3 purchased aircraft 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 $7.4 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 previously expensed supplemental rent and other non-cash items of $13.2 million .


6

Notes to Condensed Financial Statements—(Continued)

During the nine months ended September 30, 2017 , the Company purchased one engine and one aircraft which were previously financed under operating lease agreements. The purchase price of the 1 engine and 1 aircraft was $8.1 million and $20.0 million , respectively, comprised of a cash payment of $3.8 million and $12.6 million , respectively, and the non-cash application of maintenance and security deposits held by the previous lessor of $4.3 million and $7.4 million , respectively. The Company estimated the fair value of the engine and aircraft to be $3.1 million and $11.9 million , respectively, and has recorded the 1 purchased engine and 1 aircraft at fair value within flight equipment on the condensed balance sheets. The Company determined the valuation of the engine and aircraft based on a third-party appraisal considering the condition of the engine and aircraft (a Level 3 measurement). The Company recognized $4.8 million and $7.9 million as a cost of terminating the lease within special charges on the condensed statement of operations, respectively, made up of the excess of the purchase price paid over the fair value of the engine and the aircraft, less other non-cash items of $0.2 million and $0.2 million , respectively.
    
During the nine months ended September 30, 2016 , the Company purchased six A319 aircraft which were previously financed under operating lease agreements. The purchase price of the 6 aircraft was $124.7 million , comprised of a cash payment of $91.9 million and the non-cash application of maintenance and security deposits held by the previous lessor of $32.8 million . The Company estimated the fair value of the aircraft to be $79.4 million and has recorded the 6 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 $31.6 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 $13.7 million .

4.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per common share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share amounts)
Numerator
 
 
 
 
 
 
 
Net income
$
60,190

 
$
81,382

 
$
170,268

 
$
216,386

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic
69,370

 
69,727

 
69,363

 
70,689

Effect of dilutive stock awards
88

 
81

 
174

 
143

Adjusted weighted-average shares outstanding, diluted
69,458

 
69,808

 
69,537

 
70,832

Net income per share
 
 
 
 
 
 
 
Basic earnings per common share
$
0.87

 
$
1.17

 
$
2.45

 
$
3.06

Diluted earnings per common share
$
0.87

 
$
1.17

 
$
2.45

 
$
3.05

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares
124


122

 
76

 
87




7

Notes to Condensed Financial Statements—(Continued)

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 September 30, 2017 and December 31, 2016 , the Company had $100.7 million and $100.2 million in short-term available-for-sale investment securities, respectively. During the nine months ended September 30, 2017 , these investments earned interest income at a weighted-average fixed rate of approximately 1.5% . For the three and nine months ended September 30, 2017 , an unrealized gain of $13 thousand and an unrealized loss of $11 thousand , net of deferred taxes of $7 thousand and $6 thousand , respectively, was recorded within AOCI related to these investment securities. For the three and nine months ended September 30, 2016 , an unrealized gain of $4 thousand , net of deferred taxes of $3 thousand , was recorded within AOCI related to these investment securities. 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 September 30, 2017 and December 31, 2016 , $34 thousand and $23 thousand , net of tax, respectively, remained in AOCI, related to these instruments.

6.
Accrued Liabilities
Other current liabilities as of September 30, 2017 and December 31, 2016 consist of the following:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Salaries and wages
$
50,635

 
$
54,578

Airport obligations
47,289

 
43,989

Federal excise and other passenger taxes and fees payable
43,860

 
42,064

Aircraft maintenance
41,781

 
30,233

Interest payable
15,168

 
8,499

Fuel
14,940

 
14,828

Aircraft and facility lease obligations
11,678

 
10,378

Other
23,781

 
21,442

Other current liabilities
$
249,132

 
$
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 September 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 nine months ended September 30, 2017 and 2016 and did not have any outstanding fuel derivatives as of September 30, 2017 and December 31, 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.
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 September 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 nine months ended September 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 nine months ended September 30, 2017 , the Company reclassified interest rate swap losses of $53 thousand and $160 thousand , net of tax of $31 thousand and $92 thousand , respectively, into earnings. For the three and nine months ended September 30, 2016 , the Company reclassified interest rate swap losses of $56 thousand and $170 thousand , net of tax of $32 thousand and $97 thousand , respectively, into earnings. As of September 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 September 30, 2017 , the Company's aircraft orders consisted of the following:
 
 
Airbus
 
 
 
A320ceo
 
A320neo
 
A321ceo
 
Total
remainder of 2017
 
2
 

 
4
 
6
2018
 
5
 

 
5
 
10
2019
 
1
 
14
 

 
15
2020
 

 
16
 

 
16
2021
 

 
18
 

 
18
 
 
8
 
48
 
9
 
65


The Company also has four 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 2018 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 $227.8 million for the remainder of 2017 , $528.4 million in 2018 , $773.7 million in 2019 $820.5 million in 2020 , $784.8 million in 2021 , and $24.6 million in 2022 and beyond . As of September 30, 2017 , the Company had secured debt financing commitments of $160.0 million for 4 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 40 delivered aircraft as of September 30, 2017 are $19.5 million for the remainder of 2017, $52.9 million in 2018 , $48.2 million in 2019 , $43.6 million in 2020 , $39.0 million in 2021 , and $141.5 million in 2022 and beyond . For principal commitments related to these financed aircraft, refer to Note 10, Debt and Other Obligations. As of September 30, 2017 , principal and interest commitments related to the Company's future secured debt financing of 4 undelivered aircraft under bank debt are zero for the remainder of 2017 , $16.5 million in 2018 , $16.4 million in 2019 , $17.3 million in 2020 , $16.2 million in 2021 , and $137.2 million in 2022 and beyond .
As of September 30, 2017 , the Company had a fleet consisting of 107 A320 family aircraft. During the nine months ended September 30, 2017 , the Company took delivery of eleven aircraft financed under secured debt arrangements, two aircraft financed under operating leases, purchased one previously leased aircraft and returned one aircraft to its lessor. In addition, the Company took delivery of two purchased engines and one engine financed under an operating lease, and purchased one previously leased engine. For further discussion on the previously leased aircraft and engine, refer to Note 3, Special Charges. New purchased aircraft are capitalized within flight equipment with depreciable lives of 25 years and estimated residual values of 10% . As of September 30, 2017 , the Company had 59 aircraft and 11 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

9

Notes to Condensed Financial Statements—(Continued)

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 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 $0.6 million , as of September 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 has no remaining commitments related to this project as of September 30, 2017 .

Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at September 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
 
$
134

 
$
53,017

 
$
12,409

 
$
65,560

2018
 
537

 
204,292

 
43,726

 
248,555

2019
 
504

 
189,106

 
36,512

 
226,122

2020
 
188

 
180,842

 
25,604

 
206,634

2021
 
28

 
170,643

 
12,740

 
183,411

2022 and thereafter
 

 
570,120

 
73,142

 
643,262

Total minimum lease payments
 
$
1,391

 
$
1,368,020

 
$
204,133

 
$
1,573,544

Less amount representing interest
 
114

 
 
 
 
 
 
Present value of minimum lease payments
 
$
1,277

 
 
 
 
 
 
Less current portion
 
468

 
 
 
 
 
 
Long-term portion
 
$
809

 
 
 
 
 
 

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

10

Notes to Condensed Financial Statements—(Continued)

performance of major maintenance activities that are not probable of being reimbursed, and probable return condition 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 $1.9 million for the remainder of 2017 , $6.9 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 September 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, new airport kiosks and other miscellaneous subscriptions and services as of September 30, 2017 : $1.8 million for the remainder of 2017 , $5.7 million in 2018 , $1.6 million in 2019 , $1.0 million in 2020 , $0.5 million in 2021 , and $0.2 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 September 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 September 30, 2017 and December 31, 2016 , was $322.3 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 75% of all employees at September 30, 2017 . The table below sets forth the Company's employee groups and status of the collective bargaining agreements as of September 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
 
44%
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 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 nine months ended September 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 $5.5 million and $5.7 million in health care claims as of September 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 September 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 September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
 
Fair Value Level Hierarchy
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
(in millions)
 
 
Senior term loans
$
426.4

 
$
446.2

 
$
451.9

 
$
463.9

 
Level 3
Junior term loans
41.3

 
42.7

 
47.1

 
48.1

 
Level 3
Fixed-rate loans
363.4

 
370.1

 

 

 
Level 3
Class A enhanced equipment trust certificates
423.6

 
440.6

 
409.8

 
416.0

 
Level 2
Class B enhanced equipment trust certificates
100.0

 
103.3

 
103.6

 
105.7

 
Level 2
Total long-term debt
$
1,354.7

 
$
1,402.9

 
$
1,012.4

 
$
1,033.7

 
 

Cash and Cash Equivalents

Cash and cash equivalents at September 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 September 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 September 30, 2017
 
Total

Level
1

Level
2

Level
3

(in millions)
Cash and cash equivalents
$
863.7


$
863.7


$


$

Short-term investment securities
100.7


100.7





Total assets
$
964.4


$
964.4


$


$












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 nine months ended September 30, 2017 .

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 September 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 September 30,
 
Nine Months Ended September 30,
 
September 30, 2017
 
December 31, 2016
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
 
(weighted-average interest rates)
Fixed-rate senior term loans due through 2027
 
$
426.4

 
$
451.9

 
4.10
%
 
4.10
%
 
4.10
%
 
4.10
%
Fixed-rate junior term loans due through 2022
 
41.3

 
47.1

 
6.90
%
 
6.90
%
 
6.90
%
 
6.90
%
Fixed-rate loans due through 2029
 
363.4

 

 
3.76
%
 
N/A

 
3.76
%
 
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
 
$
1,354.7

 
$
1,012.4

 
 
 
 
 
 
 
 
Less current maturities
 
106.0

 
84.4

 
 
 
 
 
 
 
 
Less unamortized discounts

 
34.6

 
30.6

 
 
 
 
 
 
 
 
Total
 
$
1,214.1

 
$
897.4

 
 
 
 
 
 
 
 

During the three and nine months ended September 30, 2017 , the Company made scheduled principal payments of $13.4 million and $63.4 million on its outstanding debt obligations, respectively. During the three and nine months ended September 30, 2016 , the Company made scheduled principal payments of $10.0 million and $29.6 million , on its outstanding debt obligations, respectively.
At September 30, 2017 , long-term debt principal payments for the next five years and thereafter are as follows:
 
 
September 30, 2017
 
 
(in millions)
Remainder of 2017
 
$
39.0

2018
 
108.0

2019
 
107.5

2020
 
107.1

2021
 
106.9

2022 and beyond
 
886.2

Total debt principal payments
 
$
1,354.7




Interest Expense

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

15

Notes to Condensed Financial Statements—(Continued)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
 
(in thousands)
Senior term loans
$
4,564

 
$
4,917

 
$
13,854

 
$
14,929

Junior term loans
746

 
879

 
2,323

 
2,721

Fixed-rate loans
2,811

 

 
4,555

 

Class A enhanced equipment trust certificates
4,366

 
3,538

 
12,995

 
7,419

Class B enhanced equipment trust certificates
1,118

 
1,015

 
3,410

 
2,124

Commitment fees
29

 
32

 
87

 
97

Amortization of debt discounts
1,362

 
979

 
3,883

 
2,289

Total
$
14,996

 
$
11,360

 
$
41,107

 
$
29,579



11.
Subsequent Events

On October 25, 2017, the Company's Board of Directors authorized a new repurchase program of up to $100 million in aggregate value of shares of our Common Stock, par value $0.0001 per share, from time to time in open market or privately negotiated transactions. The authorization will expire on October 25, 2018 . The timing and amount of any stock repurchases are subject to prevailing market conditions and other considerations.

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 480 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 nine -month periods ended September 30, 2017 and 2016 :
 
 
Three Months Ended September 30,
 
Percent Change
 
2017
 
2016
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
105.5

 
87.4

 
20.7
 %
Aircraft at end of period
107

 
89

 
20.2
 %
Average daily aircraft utilization (hours)
11.6

 
12.3

 
(5.7
)%
Average stage length (miles)
1,006

 
968

 
3.9
 %
Block hours
112,701

 
98,586

 
14.3
 %
Departures
42,599

 
38,310

 
11.2
 %
Passenger flight segments (PFSs) (thousands)
6,307

 
5,674

 
11.2
 %
Revenue passenger miles (RPMs) (thousands)
6,452,529

 
5,599,370

 
15.2
 %
Available seat miles (ASMs) (thousands)
7,681,312

 
6,507,204

 
18.0
 %
Load factor (%)
84.0
%
 
86.0
%
 
(2.0) pts

Average ticket revenue per passenger flight segment ($)
56.48

 
58.34

 
(3.2
)%
Average non-ticket revenue per passenger flight segment ($)
52.48

 
51.17

 
2.6
 %
Total revenue per passenger flight segment ($)
108.96

 
109.51

 
(0.5
)%
Average yield (cents)
10.65

 
11.10

 
(4.1
)%
TRASM (cents)
8.95

 
9.55

 
(6.3
)%
CASM (cents)
7.59

 
7.47

 
1.6
 %
Adjusted CASM (cents)
7.48

 
7.35

 
1.8
 %
Adjusted CASM ex-fuel (cents)
5.42

 
5.48

 
(1.1
)%
Fuel gallons consumed (thousands)
90,274

 
78,288

 
15.3
 %
Average economic fuel cost per gallon ($)
1.75

 
1.56

 
12.2
 %

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


18



 
Nine Months Ended September 30,
 
Percent Change
 
2017
 
2016
 
Operating Statistics (unaudited) (A):
 
 
 
 
 
Average aircraft
101.9

 
84.1

 
21.2
 %
Aircraft at end of period
107

 
89

 
20.2
 %
Average daily aircraft utilization (hours)
11.7

 
12.6

 
(7.1
)%
Average stage length (miles)
991

 
978

 
1.3
 %
Block hours
326,033

 
290,529

 
12.2
 %
Departures
123,492

 
111,495

 
10.8
 %
Passenger flight segments (PFSs) (thousands)
18,083

 
16,268

 
11.2
 %
Revenue passenger miles (RPMs) (thousands)
18,285,588

 
16,219,093

 
12.7
 %
Available seat miles (ASMs) (thousands)
21,851,789

 
18,909,627

 
15.6
 %
Load factor (%)
83.7
%
 
85.8
%
 
(2.1) pts

Average ticket revenue per passenger flight segment ($)
56.84

 
55.32

 
2.7
 %
Average non-ticket revenue per passenger flight segment ($)
52.69

 
51.85

 
1.6
 %
Total revenue per passenger flight segment ($)
109.53

 
107.17

 
2.2
 %
Average yield (cents)
10.83

 
10.75

 
0.7
 %
TRASM (cents)
9.06

 
9.22

 
(1.7
)%
CASM (cents)
7.71

 
7.33

 
5.2
 %
Adjusted CASM (cents)
7.64

 
7.15

 
6.9
 %
Adjusted CASM ex-fuel (cents)
5.62

 
5.45

 
3.1
 %
Fuel gallons consumed (thousands)
254,871

 
225,851

 
12.8
 %
Average economic fuel cost per gallon ($)
1.73

 
1.42

 
21.8
 %

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



Executive Summary
For the third quarter of 2017 , we achieved a 15.1% operating margin, a decrease of 6.7 points compared to the prior year period. We generated pre-tax income of $94.8 million and net income of $60.2 million on operating revenues of $687.2 million . For the third quarter of 2016 , we generated pre-tax income of $128.0 million and net income of $81.4 million on operating revenues of $621.3 million .
Our adjusted CASM ex-fuel for the third quarter of 2017 was 5.42 cent s, a 1.1% decrease year over year. The decrease on a per-ASM basis was primarily due to decreases in maintenance, materials and repairs, salaries, wages and benefits and aircraft rent expense, partially offset by increases in other operating and depreciation and amortization expense.
During the third quarter 2017, we had over 1,650 flight cancellations related to Hurricanes Harvey, Irma and Maria. We estimate that this unusually intense hurricane season, together with the overhang of the pilot-related work action earlier in the year, negatively impacted our third quarter operating income by approximately $39 million.
As of September 30, 2017 , we had 107 Airbus A320-family aircraft in our fleet comprised of 31 A319s, 54 A320s, and 22 A321s. With the scheduled delivery of 6 aircraft and the retirement of 1 aircraft during the remainder of 2017 , 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 the 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 operational disruptions. During the fourth quarter of 2017, the support agreement was extended through the end of 2017. The

19


support agreement provides for compensation to the Company for grounded aircraft and for back-up spare engines. We are currently negotiating certain milestone dates for remediation of the introductory into-service issues with Pratt & Whitney.

Comparison of three months ended September 30, 2017 to three months ended September 30, 2016
Operating Revenues
Operating revenues increase d $65.9 million , or 10.6% , to $687.2 million for the third quarter of 2017 , as compared to the third quarter of 2016 , due primarily to an increase in traffic of 15.2% , offset by a decrease in passenger yields of 4.1% .
Total revenue per available seat mile (TRASM) for the third quarter of 2017 was 8.95 cent s, a decrease of 6.3% , as compared to the third quarter of 2016 . This decrease was primarily driven by lower passenger yields, year over year, resulting from aggressive competitive pricing in many of our markets. In addition, load factor decrease d by 2.0 points, year over year.
Total revenue per passenger flight segment decrease d 0.5% , year over year, driven by a decrease of 3.2% in ticket revenue per passenger flight segment offset by an increase of 2.6% in non-ticket revenue per passenger flight segment. The decrease in ticket revenue per passenger flight segment was primarily driven by a 4.1% decrease in average yield, period over period, due to a more aggressive pricing environment as compared to the prior year. The increase in non-ticket revenue per passenger flight segment was primarily attributable to higher passenger usage fee and seat revenue per flight segment, as compared to the prior year.
Operating Expenses
Operating expenses increase d $97.0 million , or 20.0% , to $583.1 million for the third quarter of 2017 compared to $486.1 million for the third quarter of 2016 , primarily due to an increase in operations as reflected by an 18.0% capacity growth and a 15.2% increase in traffic. Operating expenses also increased as a result of a 15.3% increase in fuel gallons consumed and a 12.2% increase in average economic fuel cost per gallon 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 any 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 nine months ended September 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 third quarter of 2017 by $36.5 million , or 29.9% , compared to $121.8 million in the third quarter of 2016, due to a 15.3% increase in fuel gallons consumed and a 12.2% 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 September 30,


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
90,274


78,288


15.3
%
Into-plane fuel cost per gallon
1.75


1.56


12.2
%
Into-plane fuel expense
$
158,300


$
121,844


29.9
%
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)
$
158,300


$
121,844


29.9
%

20



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 12.2% was primarily a result of an increase 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.
The elements of the changes in economic fuel expense are illustrated in the following table:
 
Three Months Ended September 30,


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Into-plane fuel expense
$
158,300


$
121,844


29.9
%
Realized losses (gains) related to fuel derivative contracts, net




NM

Economic fuel expense
$
158,300


$
121,844


29.9
%
Fuel gallons consumed
90,274


78,288


15.3
%
Economic fuel cost per gallon
$
1.75


$
1.56


12.2
%

During the three months ended September 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.
We measure our operating cost performance on a per-ASM basis, since one ASM is the unit of production of an airline’s capacity. The following table presents our cost per-ASM, or unit cost, for the three months ended September 30, 2017 and 2016 , followed by explanations of the material changes on a dollar basis and/or unit cost basis:

 
Three Months Ended September 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
$
134,114

 
$
120,190

 
$
13,924

 
11.6
 %
 
1.75

 
1.85

 
(0.10
)
 
(5.4
)%
Aircraft fuel
158,300

 
121,844

 
36,456

 
29.9
 %
 
2.06

 
1.87

 
0.19

 
10.2
 %
Aircraft rent
53,396

 
49,367

 
4,029

 
8.2
 %
 
0.70

 
0.76

 
(0.06
)
 
(7.9
)%
Landing fees and other rents
48,498

 
39,345

 
9,153

 
23.3
 %
 
0.63

 
0.60

 
0.03

 
5.0
 %
Depreciation and amortization
36,840

 
25,304

 
11,536

 
45.6
 %
 
0.48

 
0.39

 
0.09

 
23.1
 %
Maintenance, materials and repairs
26,176

 
30,443

 
(4,267
)
 
(14.0
)%
 
0.34

 
0.47

 
(0.13
)
 
(27.7
)%
Distribution
29,469

 
25,565

 
3,904

 
15.3
 %
 
0.38

 
0.39

 
(0.01
)
 
(2.6
)%
Special charges
7,853

 
7,355

 
498

 
NM

 
0.10

 
0.11

 
(0.01
)
 
NM

Loss on disposal of assets
516

 
423

 
93

 
NM

 
0.01

 
0.01

 

 
NM

Other operating
87,965

 
66,277

 
21,688

 
32.7
 %
 
1.15

 
1.02

 
0.13

 
12.7
 %
Total operating expenses
$
583,127

 
$
486,113

 
$
97,014

 
20.0
 %
 
7.59

 
7.47

 
0.12

 
1.6
 %
Adjusted CASM (1)
 
 
 
 
 
 
 
 
7.48

 
7.35

 
0.13

 
1.8
 %
Adjusted CASM ex-fuel (2)
 
 
 
 
 
 
 
 
5.42

 
5.48

 
(0.06
)
 
(1.1
)%
 
(1)
Reconciliation of CASM to Adjusted CASM:

21



 
Three Months Ended September 30,
 
2017
 
2016
 
(in millions)
 
Per ASM
 
(in millions)
 
Per ASM
CASM (cents)
 
 
7.59

 
 
 
7.47

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

 

 
$

 

Loss on disposal of assets
0.5

 
0.01

 
0.4

 
0.01

Special charges
7.9

 
0.10

 
7.4

 
0.11

Adjusted CASM (cents)
 
 
7.48

 
 
 
7.35


(2)
Excludes aircraft fuel expense, loss on disposal of assets and special charges.
Our adjusted CASM ex-fuel for the third quarter of 2017 was down 1.1% as compared to the third quarter of 2016 . The decrease on a per-ASM basis was primarily due to decreases in maintenance, materials and repairs, salaries, wages and benefits and aircraft rent expense, partially offset by increases in other operating and depreciation and amortization expense.
Labor costs for the third quarter of 2017 increase d $13.9 million , or 11.6% , as compared to the third quarter of 2016 , primarily driven by a 22.2% increase in our pilot and flight attendant workforce resulting from an increase to our aircraft fleet of 18 additional aircraft since the third quarter of 2016 , offset by a decrease in incentive compensation and sick-time expense. On a per-ASM basis, labor costs decrease d due to lower incentive compensation expense resulting from lower metric performance, year over year, as well as a decrease in our sick-time expense.
Aircraft rent expense for the third quarter of 2017 increase d by $4.0 million , or 8.2% , as compared to the third 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 third quarter of 2016 . This increase was partially offset by the purchase of two aircraft since the end of the third 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 2 were previously financed under operating lease agreements.
Landing fees and other rents for the third quarter of 2017 increase d $9.2 million , or 23.3% , as compared to the third quarter of 2016 , primarily due to an 11.2% increase in departures. In addition, on both a dollar and per-ASM basis, landing fees and other rents increased due to increased volume at higher cost airports, year over year, as well as an increase in facility rent resulting from the addition of new stations and rate increases at some of our existing stations.
Depreciation and amortization increase d by $11.5 million , or 45.6% , as 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 third 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 $14.2 million and $10.1 million for the third 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 $40.4 million and $40.5 million for the third quarters of 2017 and 2016 , respectively.
Maintenance, materials and repairs expense for the third quarter of 2017 decrease d by $4.3 million , or 14.0% , as compared to the third quarter of 2016 . The decrease in maintenance costs on a dollar and per-unit basis was primarily due to a decreased number of scheduled maintenance events in the current period as compared to the prior year period as well as lower aircraft repair expense year over year. 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 $3.9 million , or 15.3% , in the third quarter of 2017 as compared to the third quarter of 2016 . The increase on a dollar basis was primarily due to increased sales volume. On a per-ASM basis, distribution costs remained relatively stable.

22



Other operating expense for the third quarter of 2017 increase d by $21.7 million , or 32.7% , as compared to the third 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 11.2% and had 11.2% more passenger flight segments, which drove increases in variable operating expenses. Other operating expense per ASM increased primarily due to higher passenger re-accommodation expense, as compared to the prior year period.
Special charges for the third quarter of 2017 consisted of $7.9 million in lease termination charges recognized in connection with the purchase of 1 aircraft, which was formerly financed under an operating lease agreement. For the third quarter of 2016 , special charges consisted of $7.4 million in lease termination charges recognized in connection with the purchase of 3 aircraft formerly financed under operating lease agreements. The amount recorded as lease termination charges represents the excess of the purchase price paid over the appraised fair value of the asset(s), less previously expensed supplemental rent and other non-cash items. For further discussion on this purchase, please see "Notes to Condensed Financial Statements - 3. Special Charges."


Other Income (Expenses)

Our interest expense and corresponding capitalized interest for the three months ended September 30, 2017 and 2016 primarily represents interest related to the financing of purchased aircraft. As of September 30, 2017 and 2016 , the Company had 40 and 28 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 September 30, 2017 primarily represents interest income earned on cash, cash equivalents and short-term investments. Interest income for the three months ended September 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 third quarter of 2017 was 36.5% compared to 36.4% for the third 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 nine months ended September 30, 2017 to nine months ended September 30, 2016
Operating Revenues
Operating revenues increase d $237.1 million , or 13.6% , to $1,980.7 million for the nine months ended September 30, 2017 , compared to the prior year period, due primarily to an increase in traffic of 12.7% and an increase in passenger yields of 0.7% .
TRASM for the nine months ended September 30, 2017 was 9.06 cent s, a decrease of 1.7% compared to the same period of 2016 . This decrease was driven by a more aggressive competitive pricing environment noted in the third quarter of 2017 which put pressure on our passenger yields for the nine months ended September 30, 2017 . In addition, load factor decrease d by 2.1 points, as compared to the prior year.
Total revenue per passenger flight segment increase d 2.2% from $107.17 for the nine months ended September 30, 2016 to $109.53 for the nine months ended September 30, 2017 . Our average ticket fare per passenger flight segment increase d from $55.32 to $56.84 , or 2.7% , as compared to the prior year period, and non-ticket revenue per passenger flight segment increase d from $51.85 to $52.69 , or 1.6% , as compared to the prior year period. The increase in non-ticket revenue per passenger flight segment was primarily attributable to higher passenger usage fee and seat revenue per flight segment, as compared to the prior year.
Operating Expenses

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Operating expenses increase d for the nine months ended September 30, 2017 by $299.2 million , or 21.6% , as compared to the same period for 2016 primarily due to our 15.6% capacity growth and a 12.7% increase in traffic. Operating expenses also increased as a result of an increase in aircraft fuel expense year over year.
Aircraft fuel expense for the nine months ended September 30, 2017 increase d $119.4 million , or 37.2% , compared to the prior year period as a result of a 21.8% increase in average economic fuel price per gallon and a 12.8% increase in fuel gallons consumed.
The elements of the changes in aircraft fuel expense are illustrated in the following table:
 
Nine Months Ended September 30,


 
2017

2016


(in thousands, except per gallon amounts)

Percent Change
Fuel gallons consumed
254,871


225,851


12.8
%
Into-plane fuel cost per gallon
$
1.73


$
1.42


21.8
%
Into-plane fuel expense
$
440,376


$
321,018


37.2
%
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)
$
440,376


$
321,018


37.2
%
The elements of the changes in economic fuel expense are illustrated in the following table:
 
Nine Months Ended September 30,


 
2017

2016

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