S-1/A 1 ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment No. 7 to Form S-1
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As filed with the Securities and Exchange Commission on May 12, 2011

Registration No. 333-169474

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 7 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SPIRIT AIRLINES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware    4512    38-1747023

(State or other jurisdiction

of incorporation or organization)

   (Primary Standard Industrial
Classification Code Number)
  

(I.R.S. Employer

Identification Number)

 

 

2800 Executive Way

Miramar, Florida 33025

(954) 447-7920

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

B. Ben Baldanza

President and Chief Executive Officer

Spirit Airlines, Inc.

2800 Executive Way

Miramar, Florida 33025

(954) 447-7920

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies To:

 

Anthony J. Richmond

Robert W. Phillips

Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025
(650) 328-4600

 

Thomas C. Canfield

Senior Vice President and General Counsel

Spirit Airlines, Inc.

2800 Executive Way

Miramar, Florida 33025

(954) 447-7920

 

Leslie N. Silverman

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006

(212) 225-2000

 

 

Approximate date of commencement of the proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

  

Accelerated filer  ¨

Non-accelerated filer    x

  

Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to Be Registered

 

Amount

to be

Registered(1)

  Proposed Maximum
Aggregate Offering
Price per Share(2)
 

Proposed Maximum

Aggregate

Offering Price(2)

 

Amount of

Registration Fee(3)

Common Stock, par value $0.0001 per share

  23,000,000   $368,000,000.00   $16.00   $7,895
 
(1) Includes 3,000,000 shares of common stock that the underwriters have the option to purchase from selling stockholders to cover overallotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).
(3) In connection with the initial filing of this Registration Statement on September 17, 2010, a filing fee of $21,390 (calculated at the registration fee rate then in effect) for $300,000,000 of securities was previously paid. The registration fee in the table above reflects the registration at the current fee rate for an incremental $68,000,000 of securities being registered.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 12, 2011.

LOGO

20,000,000 Shares

Spirit Airlines, Inc.

Common Stock

 

 

This is our initial public offering of shares of common stock. We are offering 20,000,000 shares.

It is currently estimated that the public offering price per share will be between $14.00 and $16.00. Currently, no public market exists for our shares. We have applied to have our common stock listed on the NASDAQ Global Select Market under the symbol “SAVE .”

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 19.

 

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discount

     

Proceeds to our company (before expenses)

     

Certain selling stockholders named herein have granted the underwriters an option to purchase up to 3,000,000 additional shares of common stock at the initial public offering price less the underwriting discount to cover over-allotments. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

The underwriters expect to deliver the shares to purchasers on or about             , 2011.

 

 

 

Citi    Morgan Stanley

 

 

 

Barclays Capital      

Raymond James

   Dahlman Rose & Company

May     , 2011.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

GLOSSARY OF AIRLINE TERMS

     17   

RISK FACTORS

     19   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     41   

USE OF PROCEEDS

     43   

DIVIDEND POLICY

     45   

CAPITALIZATION

     46   

DILUTION

     49   

SELECTED FINANCIAL AND OPERATING DATA

     52   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      57   

INDUSTRY BACKGROUND

     87   

BUSINESS

     90   

MANAGEMENT

     107   

EXECUTIVE COMPENSATION

     117   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     134   

PRINCIPAL AND SELLING STOCKHOLDERS

     140   

DESCRIPTION OF PRINCIPAL INDEBTEDNESS

     143   

DESCRIPTION OF CAPITAL STOCK

     144   

SHARES ELIGIBLE FOR FUTURE SALE

     150   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     153   

UNDERWRITING

     157   

LEGAL MATTERS

     162   

EXPERTS

     162   

WHERE YOU CAN FIND MORE INFORMATION

     162   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

We are responsible for the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us that we have referred to you. Neither we, nor the underwriters, have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission and we take no responsibility for any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, operating results or financial condition may have changed since such date.

Until                     , 2011 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.


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SUMMARY

This summary highlights selected information about us and the common stock being offered by us and, if the over-allotment option is exercised, the selling stockholders. It may not contain all of the information that is important to you. Before investing in our common stock, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our financial statements and the accompanying notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

Spirit Airlines® is an ultra low-cost, low-fare airline based in Fort Lauderdale, Florida that provides affordable travel opportunities principally to and from South Florida, the Caribbean and Latin America. Our targeted growth markets have historically been underserved by low-cost carriers, which we believe provides us sustainable expansion opportunities. Our ultra low-cost carrier, or ULCC, business model allows us to offer a low-priced basic service combined with a range of optional services for additional fees, targeting price-sensitive leisure travelers and travelers visiting friends and relatives, or VFR. Notwithstanding the recent volatility in the cost of jet fuel and the severe economic recession, we have been able to maintain relatively stable unit revenue while maintaining a low-cost structure, and we have been profitable in each of the last four years and in the first quarter of 2011. For 2010, we had total operating revenues of $781.3 million, operating income of $68.9 million and net income of $72.5 million ($19.7 million excluding the release of the valuation allowance on our deferred tax assets and related tax benefit). For the three months ended March 31, 2011, we had total operating revenues of $232.7 million, operating income of $26.8 million and net income of $7.9 million. We currently serve 46 airports.

We have reduced our unit operating costs significantly since redefining Spirit as a ULCC in 2006. As a result, our operating cost structure is among the lowest in the Americas, enabling us to offer very low fares in the markets we serve while delivering operating profitability. Key elements of our low-cost structure include our efficient asset utilization, operation of an all Airbus single-aisle aircraft fleet with high-density seating configurations, employee productivity, rigorous cost control and use of scalable outsourced services. Furthermore, our modern fleet and aircraft seat configuration enable us to operate as one of the most fuel-efficient U.S. jet airline operators on a per available seat mile, or ASM, basis. We have demonstrated the ability to implement our ULCC business model and to adjust our capacity and routes in response to changing market conditions as part of our focus on achieving consistent route profitability.

Our ULCC business model allows us to compete principally through offering low base fares. During 2010 and the first quarter of 2011, our average base fare was approximately $77 and $82, respectively, and we regularly offer promotional base fares of $9 or less. Since 2007, we have unbundled components of our air travel service that have traditionally been included in base fares, such as baggage and advance seat selection, and offer them as optional, ancillary services for additional fees (which we record in our financial statements as non-ticket revenue) as part of a strategy to enable our passengers to identify, select and pay for the services they want to use. While many domestic airlines have also adopted some aspects of our unbundled pricing strategy, unlike us, they generally have not made a corresponding reduction in base fares.

We have lowered our base fares by up to 40% since initiating our unbundling strategy, with the goal of stimulating additional passenger demand in the markets we serve. We plan to continue to use low fares to stimulate demand, a strategy that generates additional non-ticket revenue opportunities and, in turn, allows us to further lower base fares and stimulate demand even further. This unbundling and low base fare strategy is designed to support profitable growth. In 2009, our operating income margin of 15.9% was among the highest in the U.S. airline industry. For 2010, our operating income margin was 8.8%, reflecting the effects of increased

 

 

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fuel prices and our pilot strike in June 2010. On July 23, 2010, our pilots ratified a new five-year collective bargaining agreement, which became effective on August 1, 2010. For the three months ended March 31, 2011, our operating income margin was 11.5%, reflecting the effects of increased fuel prices.

Our principal target growth markets are the Caribbean and Latin America. These markets are large, and we believe they have significant growth potential for leisure and VFR travel. In 2009, air travel between the United States and the Caribbean and Latin American markets within non-stop reach of our aircraft from the United States generated approximately $12.3 billion in revenues, with only limited market stimulation by low fares. These markets have historically been characterized by untapped travel demand from leisure and VFR customers because they are primarily served by full-service, higher-fare airlines, and because several countries in this targeted growth region have historically restricted air travel competition. We believe our presence in the Caribbean and Latin America, combined with our ULCC model, will allow us to compete successfully and grow profitably in these markets. We also target attractive domestic markets currently underserved by low-cost carriers by increasing frequencies and aircraft capacity on our existing routes, as well as starting new routes to cities we currently do not serve.

With our base of operations strategically located in South Florida, our overwater international route operating experience and our ULCC model, we believe we are well positioned to grow. With less than 1% of U.S. airline capacity and less than 3% of the capacity in Caribbean and Latin American markets as of September 30, 2010, we believe we can grow significantly using our aircraft on order to increase route frequencies and aircraft capacity on existing routes and by establishing new routes both domestically and abroad. By deploying additional Airbus A320-family aircraft and leveraging our existing infrastructure to drive economies of scale, we can lower some of our unit operating costs even further, allowing us to continue to lower base fares, stimulate market demand and increase non-ticket revenue opportunities.

Our Strengths

We believe we compete successfully in the airline industry by exploiting the following demonstrated business strengths:

Ultra Low-Cost Structure. Our unit operating costs are among the lowest of all airlines operating in the Americas. We believe this cost advantage helps protect our market position and enables us to offer some of the lowest base fares in our markets, sustain operating margins and support continued growth. Our operating costs per available seat mile, or CASM, was 7.86 cents in 2009, 8.77 cents in 2010, and 9.35 cents in the three months ended March 31, 2011. The increase from 2009 to 2010 was due primarily to the effects of the increased cost of fuel in 2010 and our pilot strike in June 2010. The increase in the first quarter of 2011 was due primarily to continued increases in fuel cost. Our CASM for these periods was significantly lower than that of the major domestic network carriers, American Airlines, Delta Air Lines, United Air Lines and US Airways, and among the lowest of the domestic low-cost carriers, including AirTran Airways, JetBlue Airways and Southwest Airlines. We achieve these low operating costs in large part due to:

 

   

high aircraft utilization, which during 2010 and the three months ended March 31, 2011 averaged 12.8 and 12.6 hours per day, respectively;

 

   

high-density seating configurations on our aircraft;

 

   

our low-cost Fort Lauderdale base of operations;

 

   

our productive workforce;

 

   

opportunistic outsourcing of operating functions;

 

   

operating a modern single fleet type of Airbus A320-family aircraft, with associated lower maintenance costs and common flight crews across the fleet;

 

 

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minimizing sales, marketing and distribution costs through direct-to-consumer marketing, high utilization of web-based sales and increasing website traffic;

 

   

efficient flight scheduling, including minimal ground times between flights; and

 

   

creating a company-wide business culture that is keenly focused on driving costs lower.

Innovative Revenue Generation. We execute our innovative, unbundled pricing strategy to produce significant non-ticket revenue generation, which allows us to stimulate passenger demand for our product through low base fares and enables passengers to identify, select and pay for the products and services they want to use. We have grown average non-ticket revenue per passenger flight segment from approximately $5 in 2006 to $25 in 2009, to $35 in 2010 and to $43 in the three months ended March 31, 2011, by:

 

   

charging for baggage;

 

   

passing through all distribution-related expenses;

 

   

charging for premium seats and advance seat selection;

 

   

consistently enforcing ticketing policies, including change fees;

 

   

generating subscription fees from our $9 Fare Club™ ultra low-fare subscription service;

 

   

deriving brand-based fees from proprietary services, such as our FREE SPIRIT® affinity credit card program;

 

   

selling itinerary attachments, such as hotel and car rental reservations and airport parking, through our website; and

 

   

selling in-flight products and onboard advertising.

Resilient Business Model and Customer Base. By focusing on leisure and VFR travelers, we have maintained relatively stable unit revenue and profitability during volatile economic periods because we are not highly dependent on premium-fare business traffic, which typically demands a higher cost structure. For example, in 2009, when premium-fare business traffic declined due to the economic recession, our operating revenue per available seat mile, or RASM, declined 1.8% compared to an average U.S. airline industry decline of over 9%. During this same period of volatile fuel prices and global economic recession, we also were able to achieve the highest operating income margin in our history. Based on this performance, we believe our growing customer base is more resilient than the customer bases of most other airlines because our low fares and unbundled service offering appeal to price-sensitive passengers.

Well Positioned for Growth. We are the largest operator of international flights flying out of Fort Lauderdale–Hollywood International Airport and are well positioned in the airport’s international terminal. From this base in South Florida, we have developed a substantial network of destinations in our targeted Caribbean and Latin American growth markets, profitable U.S. domestic niche markets and high-volume routes flown by leisure and VFR travelers. In the United States, we provide service in the markets from which a significant majority of passengers traveling to the Caribbean and Latin America (including Mexico) originate. From these U.S. markets, our passengers have access to 25 Caribbean and Latin American destinations. With a South Florida base of operations and with our planned fleet growth, we believe we are well positioned to grow profitably as we expand further into these target markets.

Experienced Operator in the Region. We believe we have substantial experience in local aviation, security and customs regulations, local ground operations and flight crew training required for successful international and overwater flight operations. All of our aircraft are certified for overwater operations. We believe we compete favorably against other low-cost carriers because we have been conducting international flight operations since late 2003 and we have developed substantial experience in complying with the various regulations and business practices in our targeted growth regions.

 

 

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Financial Strength Achieved by Cost Discipline Focus. We believe our ULCC business model has delivered strong financial results in difficult economic times. Our operating income has increased from $32.0 million in 2007 to $111.4 million in 2009. In 2010, our operating income was $68.9 million, reflecting the negative impact of increased fuel prices and our June 2010 pilot strike. In the three months ended March 31, 2011, our operating income was $26.8 million. We have generated these results by:

 

   

keeping a consistent focus on maintaining the lowest unit operating costs possible;

 

   

attempting to maintain profitability across our network by selecting viable new routes and quickly reducing or discontinuing routes that do not deliver acceptable margins;

 

   

maintaining disciplined capacity control and fleet size;

 

   

ensuring our sourcing arrangements with key third parties are continually benchmarked against the best industry standards; and

 

   

building upon the established global relationships of our private equity sponsors and management with our key vendors.

Our Strategy

Our goal is to offer compelling value to our customers by utilizing our low-cost structure and unbundled pricing strategy and, in so doing, grow profitably and enhance our position among the leading low-cost carriers in the Americas. Through the following key elements of our business strategy, we seek to:

Maintain Low Unit Operating Costs. We will support our low-fare strategy by seeking to reduce unit operating costs and improve efficiency by, among other things:

 

   

deploying additional cost-efficient Airbus A320-family aircraft for high utilization flying;

 

   

spreading our low fixed-cost infrastructure over a larger-scale operation;

 

   

continuing to leverage our low-cost Fort Lauderdale base of operations;

 

   

opportunistically outsourcing operating functions;

 

   

using technology to create further operating efficiencies;

 

   

leveraging the labor productivity and scale benefits of our new five-year pilot contract; and

 

   

continuing our aggressive procurement strategy.

Couple Low Fares with Expanded Ancillary Services to Stimulate Traffic and Generate More Stable Revenues. Our low unit costs enable us to operate profitably at low-fare levels, and we intend to continue reducing base fares to stimulate demand from price-sensitive customers. By stimulating traffic, our goal is to maximize non-ticket revenues by increasing passenger volume and load factor, which is the percentage of seats actually occupied on a flight. We plan to continue expanding our portfolio of ancillary products and services, through new programs and enhancements to existing offerings. We also seek to maximize revenue opportunities through multiple interactions with customers at different stages of their travel, from pre-purchase through travel and post-trip. As we broaden the ancillary products and services we sell to our customers and increase non-ticket revenues, we believe we will be able to further lower base fares while maintaining profitability, thereby further stimulating demand while adding stability to our revenue stream. Additionally, our innovative fuel pass-through separately shows the fuel cost component of the base fare, providing fare transparency to consumers while encouraging a fare strategy with disciplined cost coverage.

 

 

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Profitably Expand Our Network in Attractive Caribbean, Latin American and U.S. Domestic Markets. We anticipate further penetrating attractive international and domestic markets currently underserved by low-cost carriers by increasing frequency and aircraft capacity on our existing routes, as well as by starting new routes to cities we do not yet serve. We believe we can accomplish this by:

 

   

using our knowledge of local Caribbean and Latin American markets and expertise in local regulatory and business practices to optimize our route structure and schedule;

 

   

pursuing attractive new route opportunities in markets that limit air carrier competition through frequency or carrier designation restrictions; and

 

   

selectively expanding our presence in large U.S. markets that feed traffic to and through our South Florida base as well as in underserved U.S. cities where we can develop or maintain a significant share of the local market.

Leverage Our Brand to Grow Revenue. We will seek to continue generating customer loyalty as the low-fare brand of choice in the markets we serve in order to drive future ticket sales, support further network expansion and increase load factors. In addition, we intend to leverage our customer base in order to increase non-ticket revenues by broadening our brand, product and service offerings. These plans include a focus on increasing sales of itinerary attachments on a commission basis and generating additional fees from proprietary, brand-based services, such as our FREE SPIRIT miles affinity program and our $9 Fare Club ultra low-fare subscription service.

Maintain Disciplined Fleet and Network Growth. We employ a disciplined route and fleet expansion strategy that helps us maintain profitability across our network. Our goal is to react quickly to changes in the economic environment and market conditions so each route and each aircraft we operate delivers incremental operating profitability. For example, we modified our growth plan in late 2008 in response to record high fuel prices and rapidly deteriorating economic conditions by terminating leases for seven aircraft. We have committed aircraft deliveries through 2015 that will add 33 new A320-family aircraft to our present fleet of 26 A319, seven A320 and two A321 aircraft. Consistent with our ULCC model, the new A320s introduced by us are configured with 178 passenger seats as compared to 150 passenger seats per plane utilized by some of our competitors, including JetBlue Airways. Our current fleet plan calls for growth from 35 aircraft at March 31, 2011 to 68 aircraft by the end of 2015. We intend to continue monitoring closely our scheduled ramp-up in aircraft while we expand our network in order to reduce the risk of overextension and undue exposure in market downturns. We expect to use our additional aircraft to add capacity on existing routes in both our targeted growth markets and our higher demand domestic routes, as well as to expand our network footprint. The introduction of higher-capacity A320 aircraft to supplement our current fleet supports reductions in unit costs relative to smaller A319 aircraft and allows us to deploy the right-sized aircraft according to route length, passenger volume and seasonality.

Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary, that represent challenges we face in connection with the successful implementation of our strategy and the growth of our business. We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance. Such factors include:

 

   

the ability to operate in an extremely competitive industry;

 

   

the ability to control our costs;

 

   

the price and availability of aircraft fuel;

 

   

changes in economic conditions;

 

 

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security concerns resulting from any threatened or actual terrorist attacks or other hostilities;

 

   

any restrictions on or increased taxes applicable to fees or other charges for ancillary products and services;

 

   

any increased governmental regulation;

 

   

any increased labor costs, union disputes, employee strikes, and other labor-related disruptions, including in connection with our current negotiations with the union representing our flight attendants;

 

   

aircraft-related fixed obligations that could impair our liquidity;

 

   

our ability to obtain financing or access capital markets;

 

   

our ability to hedge our fuel requirements;

 

   

any flight delays or cancellations;

 

   

our ability to implement our growth strategy, including growth of our ancillary products and services;

 

   

our ability to expand or operate reliably or efficiently out of Fort Lauderdale–Hollywood International Airport;

 

   

our reliance on third-party service providers to perform functions integral to our operations, such as our reservation system and a single service provider for our jet fuel; or

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar incident involving our aircraft or by negative publicity regarding our business model.

Our History

We were founded in 1964 as Clippert Trucking Company, a Michigan corporation. In 1974, we changed our name to Ground Air Transfer, Inc. and, beginning in 1983, started doing business as Charter One, a charter tour operator providing travel packages to entertainment destinations such as Atlantic City, Las Vegas and the Bahamas. In 1990, we received our Air Carrier Certificate from the Federal Aviation Administration and began air charter operations. In 1992, we renamed ourselves Spirit Airlines, Inc. and thereafter began adding scheduled passenger service to destinations such as Fort Lauderdale, Detroit, Myrtle Beach, Los Angeles and New York. In 1994, we reincorporated in Delaware, and in 1999 we relocated our corporate headquarters to Miramar, Florida.

Investment funds managed by Oaktree Capital Management, L.P., or Oaktree, gained control of Spirit after making investments in 2004 and 2005. With the change in ownership, we began to reconstitute our executive management team, changed our business strategy and positioned ourselves as a low-cost carrier with a focus on expanding our Caribbean and Latin American routes. We closed several unprofitable domestic routes and established Fort Lauderdale–Hollywood International Airport as our main base of operations. We began to transition to an all Airbus fleet in 2004 and completed the transition in 2006.

In July 2006, we underwent a corporate recapitalization in which investment funds managed by Indigo Partners LLC, or Indigo, acquired a majority stake in us. After this recapitalization, we began implementing our ULCC business model and further expanding our Caribbean and Latin American routes, and we completed the transition to a new executive management team. Indigo is a private equity fund focused on investing in air transportation companies, with investments in five other ULCC model airlines, including Avianova based in Russia, Mandala Airlines based in Indonesia, Tiger Airways based in Singapore and Australia, Volaris based in Mexico and Wizz Air based in Central and Eastern Europe.

Our principal executive offices are located at 2800 Executive Way, Miramar, Florida 33025. Our general telephone number is (954) 447-7920 and our website address is www.spirit.com. We have not incorporated by reference into this prospectus any of the information on our website and you should not consider our website to be a part of this document. Our website address is included in this document for reference only.

 

 

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Spirit Airlines®, the Spirit logo, Big Front Seat®, $9 Fare Club™ and FREE SPIRIT® are trademarks of Spirit Airlines, Inc. in the United States and other countries. This prospectus also contains trademarks and tradenames of other companies.

2011 Recapitalization

On September 17, 2010, we entered into a recapitalization agreement, which we refer to as the Recapitalization Agreement, with the holders of all of our outstanding debt, shares of Class A Preferred Stock and shares of Class B Preferred Stock, including our controlling stockholders, investment funds managed by Oaktree and investment funds managed by Indigo. The Recapitalization Agreement provides, among other things, that upon the closing of this offering all outstanding debt and all outstanding Preferred Stock will either be repaid or redeemed, or exchanged for our common stock.

As of March 31, 2011, we had outstanding the following debt, substantially all of which is held by our controlling stockholders:

 

   

secured Tranche A Notes held by investment funds managed by Oaktree bearing interest at 17% per annum due April 30, 2012, except for $20.0 million due December 30, 2011, in the principal amount of approximately $137.3 million, which we refer to as the Tranche A Notes;

 

   

secured Tranche B Notes held by investment funds managed by Oaktree and investment funds managed by Indigo bearing interest at 17% per annum due April 30, 2012 in the principal amount of $128.3 million, which we refer to as the Tranche B Notes; and

 

   

certain other secured and unsecured notes held by individual investors (bearing interest at rates varying from prime plus 0.95% to a fixed rate of 19%) in the amount of approximately $15.2 million, which we refer to as the Subordinated Notes, and, together with the Tranche A Notes and Tranche B Notes, the Notes.

As of March 31, 2011, the aggregate principal amount and accrued and unpaid interest on the Notes was $292.1 million. Please see “Description of Principal Indebtedness.”

Also as of March 31, 2011, there were 100,000 shares of our Class A Preferred Stock and 2,850 shares of our Class B Preferred Stock outstanding. As of March 31, 2011, the par value plus accreted and unpaid dividends, which we refer to as Liquidation Preference, on shares of our Class A Preferred Stock and Class B Preferred Stock was, in the aggregate, $80.9 million. Please see “Description of Capital Stock—Preferred Stock.”

The Recapitalization Agreement provides that, in connection with this offering, after we pay underwriting discounts on the shares sold by us and the expenses of this offering payable by us (which will include those incurred by the selling stockholders, other than underwriting discounts on the shares offered by them):

 

   

we will pay Indigo $1.6 million to terminate their professional services agreement with us;

 

   

we will pay three individual, unaffiliated holders of our Subordinated Notes a fee equal to $450,000 in the aggregate;

 

   

we will retain net proceeds from the sale of shares of common stock by us in this offering equal to $150.0 million; and

 

   

the remaining net proceeds of this offering, which we estimate to be $124.2 million, will be used to pay a portion of the outstanding principal amounts of the Tranche A Notes and Tranche B Notes and all accrued and unpaid interest thereon, to redeem a portion of the outstanding shares of Class B Preferred

 

 

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Stock and, to the extent funds are available, to redeem a portion of the outstanding shares of Class A Preferred Stock. Of such net proceeds, 25% will be used to pay principal and interest on certain of the Tranche B Notes owned by investment funds managed by Indigo and 75% will be used to pay principal and interest on certain of the Tranche A Notes and Tranche B Notes owned by investment funds managed by Oaktree, to redeem (at a redemption price per share equal to the Liquidation Preference) certain of the outstanding shares of Class B Preferred Stock owned by an unaffiliated individual stockholder and, to the extent funds are available, to redeem (at a redemption price per share equal to the Liquidation Preference) certain of the outstanding shares of Class A Preferred Stock owned by investment funds managed by Oaktree.

Also in connection with the closing of this offering:

 

   

all of the principal amount and accrued and unpaid interest on all of our outstanding Notes either will be repaid with a portion of the net proceeds from this offering or, to the extent not repaid, exchanged for a number of shares of common stock equal to the principal amount and accrued and unpaid interest of such unpaid Notes divided by a price per share equal to the initial public offering price set forth on the cover page of this prospectus;

 

   

all shares of Class A Preferred Stock and Class B Preferred Stock outstanding immediately prior to this offering either will be redeemed and all accrued and unpaid dividends related to such shares will be paid with a portion of the net proceeds from this offering or, to the extent such shares are not redeemed, such shares will be exchanged for a number of shares of common stock equal to the Liquidation Preference of such shares divided by a price per share of common stock equal to the initial public offering price set forth on the cover page of this prospectus; and

 

   

each share of Class B Common Stock will be exchanged for one share of common stock, provided an investment fund managed by Indigo may cause all or a portion of the shares of Class B Common Stock owned by it to be exchanged for the same number of shares of a newly-established class of non-voting common stock, which will have the same rights as the common stock, except it will be non-voting and will have the right to convert on a share-for-share basis into common stock at the election of the holder.

As a result of this recapitalization, which we refer to as the 2011 Recapitalization, upon the closing of this offering there will be no Notes and no shares of Preferred Stock outstanding.

The Recapitalization Agreement also contemplates that we will enter into the Tax Receivable Agreement and thereby distribute immediately prior to the completion of this offering to each holder of our common stock as of such time, or the Pre-IPO Stockholders, the right to receive certain future payments related to our net operating loss, deferred interest deductions and certain tax credits for federal income tax purposes that are attributable to periods ended on or before March 31, 2011, which payments, as of March 31, 2011, we estimate will be approximately $35.9 million. Please see “Certain Relationships and Related Transactions—Tax Receivable Agreement.”

 

 

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THE OFFERING

 

Common stock offered by us:

20,000,000 shares.

 

Shares outstanding after the offering

63,441,258 shares (1).

 

Underwriters’ over-allotment option to purchase additional shares

Certain selling stockholders may sell up to 3,000,000 additional shares if the underwriters exercise their over-allotment option.

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $276.3 million based on an assumed initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting underwriting discounts and expenses of this offering payable by us.

 

  We will retain net proceeds from the sale of shares of common stock by us in this offering equal to $150.0 million. The remaining net proceeds will be used for the following purposes and in the following amounts:

 

   

we will pay $1.6 million to Indigo in connection with the termination of their professional services agreement with us;

 

   

we will pay three individual, unaffiliated holders of our Subordinated Notes a fee equal to $450,000 in the aggregate; and

 

   

we will use the remaining net proceeds, which we estimate to be approximately $124.2 million, to repay Tranche A Notes and Tranche B Notes held by investment funds managed by Indigo and Oaktree, our controlling stockholders, to redeem (at a redemption price per share equal to the Liquidation Preference) certain of the outstanding shares of Class B Preferred Stock owned by an unaffiliated individual stockholder and, to the extent funds are available, to redeem certain of the shares of Class A Preferred Stock owned by investment funds managed by Oaktree.

 

  We intend to use the $150.0 million of net proceeds from this offering that we retain for general corporate purposes, including cash reserves, working capital (including termination of our letter of credit facility), sales and marketing activities, general and administrative matters and capital expenditures, including future flight equipment acquisitions. Please see “Use of Proceeds.”

 

  If the over-allotment option is exercised, we will not receive any proceeds from the sale of shares offered by the selling stockholders.

Affiliates of Indigo and Oaktree are our controlling stockholders and are the selling stockholders in this offering. Please see “Principal and Selling Stockholders.”

 

 

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Risk factors

Please see “Risk Factors” beginning on page 19 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed NASDAQ Global Select Market symbol

“SAVE”

(1) The number of shares of our common stock outstanding after this offering is based on 26,852,950 shares outstanding as of March 31, 2011, and excludes:

 

   

an aggregate of 178,000 shares of common stock reserved for issuance under our Amended and Restated 2005 Incentive Stock Plan;

 

   

an aggregate of 3,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan; and

 

   

469,000 shares of common stock issuable upon the exercise of stock options outstanding under our Amended and Restated 2005 Incentive Stock Plan, of which 83,875 are vested.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

   

that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

   

no exercise of the underwriters’ over-allotment option to purchase up to 3,000,000 additional shares of our common stock from the selling stockholders;

 

   

that we have issued 16.6 million shares of common stock in connection with the 2011 Recapitalization; and

 

   

all shares of Class B Common Stock have been exchanged for shares of common stock on a share-for-share basis.

The number of shares outstanding after the offering will depend primarily on the price per share at which our common stock is sold in this offering and the total size of this offering. In connection with this offering and pursuant to the Recapitalization Agreement:

 

   

all of the principal amount and accrued and unpaid interest on all of our outstanding Notes either will be repaid with a portion of the net proceeds from this offering or, to the extent not repaid, exchanged for a number of shares of common stock equal to the principal amount and accrued and unpaid interest of such unpaid Notes divided by a price per share equal to the initial public offering price set forth on the cover page of this prospectus;

 

   

all shares of Class A Preferred Stock and Class B Preferred Stock outstanding immediately prior to this offering either will be redeemed and all accrued and unpaid dividends related to such shares will be paid with a portion of the net proceeds from this offering or, to the extent such shares are not redeemed, such shares will be exchanged for a number of shares of common stock equal to the Liquidation Preference of such shares divided by a price per share of common stock equal to the initial public offering price set forth on the cover page of this prospectus; and

 

   

each share of Class B Common Stock will be exchanged for one share of common stock, provided an investment fund managed by Indigo may cause all or a portion of the shares of Class B Common Stock owned by it to be exchanged for the same number of shares of another class of capital stock, which will have the same rights as the common stock, except it will be non-voting and will have the right to convert on a share-for-share basis into common stock at the election of the holder.

 

 

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In this prospectus, we have calculated the number of shares of common stock to be issued pursuant to the 2011 Recapitalization using an assumed offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), an assumed offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock, and the application of the net proceeds to us. For more information, please see “Use of Proceeds” and “Certain Relationships and Related Transactions—Recapitalization Agreement” elsewhere in this prospectus.

A change in the offering price and, accordingly, the amount of net proceeds received by us, would result in a change in (1) after application of the net proceeds as set forth in “Use of Proceeds,” the amount of outstanding Notes and the number of outstanding shares of Preferred Stock to be exchanged for shares of common stock (instead of being repaid or redeemed, as the case may be) immediately prior to the consummation of this offering and (2) the number of shares of common stock that would be issued upon exchange for such securities. The following table, based on the assumptions described above, shows the effect of various initial public offering prices on the amount of Notes repaid, the number of shares of Preferred Stock redeemed, and the number of shares of common stock that would be issued in exchange for the Notes and shares of Preferred Stock remaining outstanding. The initial public offering prices shown below are hypothetical and illustrative only (in thousands except share and per share data).

 

Assumed
Initial Offering Price
  Note Repayment    Preferred
Stock
Redemption
   Shares of Common
Stock Issued upon
Exchange for
Notes and
Preferred Stock
   Total Shares of
Common Stock
Outstanding after this
Offering (A)
$14.00   $104,782    $      668    19,112,473    65,965,423
  14.50     114,051            774    17,806,870    64,659,820
  15.00 (mid-point)     123,319            881    16,588,308    63,441,258
  15.50     132,588            987    15,448,363    62,301,313
  16.00     141,857        1,093    14,379,664    61,232,614

 

(A) Based on the number of shares of our common stock outstanding as of March 31, 2011 and includes the conversion of 6,004,103 shares of Class B Common Stock into common stock on a share-for-share basis, but excludes the following:

 

   

an aggregate of 178,000 shares of common stock reserved for issuance under our Amended and Restated 2005 Incentive Stock Plan;

 

   

an aggregate of 3,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan; and

 

   

469,000 shares of common stock issuable upon the exercise of stock options outstanding under our Amended and Restated 2005 Incentive Stock Plan, of which 83,875 are vested.

Because the share amounts set forth above are based on shares of Preferred Stock and Notes outstanding as of March 31, 2011, such amounts do not take into account shares of common stock to be issued in the 2011 Recapitalization in satisfaction of accrued and unpaid interest on Notes and dividends on Preferred Stock accrued after March 31, 2011 and through the closing date of this offering. Such interest and dividends accrue at a rate of approximately $4.2 million per month in the aggregate.

 

 

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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

The following tables summarize the financial and operating data for our business for the periods presented. You should read this summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, all included elsewhere in this prospectus.

We derived the summary statements of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited financial statements included in this prospectus. We derived the statements of operations data for the years ended December 31, 2006 and 2007 from our audited financial statements not included in this prospectus. We derived the summary statements of operations data for the three months ended March 31, 2010 and 2011 and the balance sheet data as of March 31, 2011 from our unaudited condensed financial statements included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the three months ended March 31, 2011 are not necessarily indicative of results to be expected for the full year.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2006     2007     2008     2009     2010(1)     2010     2011  
    (in thousands except share and per share data)  

Operating revenues:

             

Passenger

  $ 519,351      $ 686,447      $ 657,448      $ 536,181      $ 537,969      $ 136,909      $ 153,280   

Non-ticket

    23,836        76,432        129,809        163,856        243,296        47,142        79,382   
                                                       

Total operating revenues

    543,187        762,879        787,257        700,037        781,265        184,051        232,662   

Operating expenses:

             

Aircraft fuel (2)

    176,692        251,230        299,094        181,107        248,206        53,826        80,912   

Salaries, wages and benefits

    133,537        146,626        147,015        135,420        156,443        36,064        43,193   

Aircraft rent

    93,136        119,686        105,605        89,974        101,345        22,576        27,708   

Landing fees and other rents

    30,646        42,441        43,331        42,061        48,118        10,744        11,655   

Distribution

    29,234        36,315        37,816        34,067        41,179        9,288        11,932   

Maintenance, materials and repairs

    22,784        23,448        24,237        27,536        28,189        6,692        8,058   

Depreciation and amortization

    9,552        5,401        4,236        4,924        5,620        1,370        1,546   

Other operating

    76,269        105,503        85,608        72,921        82,594        19,338        20,733   

Loss on disposal of assets

    3,853        94        4,122        1,010        77        49        —     

Restructuring (3)

    32,499        142        17,902        (392     621        (20     81   
                                                       

Total operating expenses

    608,202        730,886        768,966        588,628        712,392        159,927        205,818   

Operating (loss) income

    (65,015     31,993        18,291        111,409        68,873        24,124        26,844   

Other expense (income):

             

Interest expense (4)

    20,985        38,163        40,245        46,892        50,313        12,772        14,286   

Capitalized interest (5)

    (2,299     (1,755     (166     (951     (1,491     (237     (1,037

Interest income

    (3,183     (5,951     (1,976     (345     (328     (60     (86

Gain on extinguishment of debt (6)

    —          —          (53,673     (19,711     —          —          —     

Other expense (income)

    134        130        214        298        194        34        48   
                                                       

Total other expense (income)

    15,637        30,587        (15,356     26,183        48,688        12,509        13,211   

Income (loss) before income taxes

    (80,652     1,406        33,647        85,226        20,185        11,615        13,633   

Provision (benefit) for income taxes (7)

    —          44        388        1,533        (52,296     339        5,750   
                                                       

Net (loss) income

  $ (80,652   $ 1,362      $ 33,259      $ 83,693      $ 72,481      $ 11,276      $ 7,883   
                                                       

Earnings Per Share:

             

Basic

  $ (4.57   $ 0.05      $ 1.29      $ 3.23      $ 2.77      $ 0.43      $ 0.30   

Diluted

  $ (4.57   $ 0.05      $ 1.29      $ 3.18      $ 2.72      $ 0.42      $ 0.30   

Weighted average shares outstanding:

             

Basic

    17,639,596        25,746,445        25,780,070        25,910,766        26,183,772        26,056,908       
26,347,875
  

Diluted

    17,639,596        25,861,095        25,879,860        26,315,121        26,689,855        26,760,781        26,689,151   

Other financial data (unaudited):

             

EBITDA (8):

  $ (55,597   $ 37,264      $ 75,986      $ 135,746      $ 74,299      $ 25,460      $ 28,342   

Adjusted EBITDA (8):

  $ (17,484   $ 28,022      $ 55,016      $ 116,837      $ 74,301      $ 25,103      $ 28,249   

Adjusted EBITDAR (8):

  $ 75,652      $ 147,708      $ 160,621      $ 206,811      $ 175,646      $ 47,679      $ 55,957   

 

 

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    Year Ended
December 31, 2010
       Three Months Ended
March 31, 2011
 

Pro forma earnings per share (9):

      

Basic

  $ 1.69         $ 0.28   

Diluted

    1.68           0.27   

Pro forma weighted average shares outstanding (9):

      

Basic

    62,722,080           62,936,183   

Diluted

    63,278,163           63,277,459   

 

(1) We estimate that the 2010 pilot strike had a net negative impact on our operating income for 2010 of approximately $24 million consisting of an estimated $28 million in lost revenues and approximately $4 million of incremental costs resulting from the strike, offset in part by a reduction of variable expenses during the strike of approximately $8 million for flights not flown. Additionally, under the terms of the new pilot contract, we also paid $2.3 million in return-to-work payments during the second quarter, which are not included in the strike impact costs described above.
(2) Aircraft fuel expense is the sum of (i) “into-plane fuel cost,” which includes the cost of jet fuel and certain other charges such as fuel taxes and oil, (ii) settlement gains and losses and (iii) unrealized mark-to-market gains and losses associated with fuel hedge contracts. The following table summarizes the components of aircraft fuel expense for the periods presented:

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2006     2007     2008 (*)     2009     2010         2010             2011      
    (in thousands)              

Into-plane fuel cost

  $ 175,975      $ 265,226      $ 359,097      $ 181,806      $ 251,754      $ 54,670      $ 85,568   

Settlement (gains) losses

    (339     (3,714     (69,876     750        (1,483     (216     (4,110

Unrealized mark-to-market (gains) losses

    1,056        (10,282     9,873        (1,449     (2,065     (628     (546
                                                       

Aircraft fuel

  $ 176,692      $ 251,230      $ 299,094      $ 181,107      $ 248,206      $ 53,826      $ 80,912   
                                                       

 

  (*) In July 2008, we monetized all of our fuel hedge contracts, which included hedges that had scheduled settlement dates during the remainder of 2008 and in 2009. We recognized a gain of $37.8 million representing cash received upon monetization of these contracts, of which a gain of $14.2 million related to 2009 fuel hedge positions.

 

(3) Restructuring charges include: (i) for 2006 and 2007, amounts relating to the accelerated retirement of our MD-80 fleet; (ii) for 2008 and 2009, amounts relating to the early termination in mid-2008 of leases for seven Airbus A319 aircraft, a related reduction in workforce and the exit facility costs associated with returning planes to lessors in 2008; (iii) for 2009, amounts relating to the sale of previously expensed MD-80 parts; and (iv) for 2010 and for the three months ended March 31, 2011, amounts relating to exit facility costs associated with moving our Detroit, Michigan maintenance operations to Fort Lauderdale, Florida. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.”
(4) Substantially all of the interest expense recorded in 2007, 2008, 2009, 2010 and the three months ended March 31, 2010 and 2011 relates to Notes and Preferred Stock held by our principal stockholders that will be repaid or redeemed, or exchanged for shares of common stock, in connection with the 2011 Recapitalization that will occur at the closing of the offering contemplated by this prospectus. Accordingly, those amounts are not indicative of amounts to be reported in our statement of operations after the closing of this offering. Please see “Use of Proceeds” and “Capitalization.”
(5) Interest attributable to funds used to finance the acquisition of new aircraft, including pre-delivery deposit payments, or PDPs, is capitalized as an additional cost of the related asset. Interest is capitalized at the weighted average implicit lease rate of our aircraft.
(6) Gain on extinguishment of debt represents the recognition of contingencies provided for in our 2006 recapitalization agreements, which provided for the cancellation of shares of Class A Preferred Stock and reduction of the liquidation preference of the remaining Class A Preferred Stock and associated accrued but unpaid dividends based on the outcome of the contingencies. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other (income) expense, net—2009 compared to 2008.”
(7) Net income for 2010 includes a $52.3 million net tax benefit primarily due to the release of a valuation allowance resulting in a deferred tax benefit of $52.8 million in 2010. Absent the release of the valuation allowance and corresponding tax benefit, our net income would have been $19.7 million for 2010. Immediately prior to the completion of this offering, we intend to enter into the Tax Receivable Agreement and thereby distribute to the Pre-IPO Stockholders the right to receive a pro rata share of the future payments to be made under such agreement. These future payments to the Pre-IPO Stockholders (estimated as of March 31, 2011 to be approximately $35.9 million) will be in an amount equal to 90% of the cash savings in federal income tax realized by us by virtue of our future use of the federal net operating loss, deferred interest deductions and certain tax credits held by us as of March 31, 2011. Please see “Certain Relationships and Related Transactions—Tax Receivable Agreement.”
(8)

EBITDA, Adjusted EBITDA and Adjusted EBITDAR are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of EBITDA and EBITDAR are well recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. Adjusted EBITDA eliminates several significant items historically reflected in our statement of operations, but which will not be relevant after the closing of the offering contemplated by this prospectus, including interest expense on indebtedness and gain on extinguishment of Notes and Preferred Stock to be repaid or redeemed, or exchanged for common stock, in connection with this offering, management fees we will cease paying after the completion of this offering and expenses of this offering unrelated to our continuing operations. We have also adjusted for stock-based compensation expenses, the amount of which is dependent on market comparables, and other non-operating matters that are outside of our control and thus not indicators of our ongoing operating

 

 

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performance. Adjusted EBITDA also eliminates charges from two significant restructuring programs involving the accelerated conversion of our entire fleet from MD-80 family aircraft to Airbus A320 family aircraft and a reduction in the fleet in mid-2008 in response to record high fuel prices and rapidly deteriorating economic conditions, both of which we believe are unique events unrelated to our ongoing operating activities. Further, we believe Adjusted EBITDAR is useful in evaluating our operating performance compared to our competitors because its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different companies for reasons unrelated to overall operating performance. We also use Adjusted EBITDA and Adjusted EBITDAR to establish performance measures for executive compensation purposes. However, because derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of EBITDA as presented may not be directly comparable to similarly titled measures presented by other companies.

EBITDA, Adjusted EBITDA and Adjusted EBITDAR have limitations as an analytical tool. Some of these limitations are: EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements; non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and other companies in our industry may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations EBITDA, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

The following table represents the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net income (loss) for the periods indicated below:

 

    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010 (g)         2010             2011      
    (in thousands)  

Reconciliation:

             

Net (loss) income

  $ (80,652   $ 1,362      $ 33,259      $ 83,693      $ 72,481      $ 11,276      $ 7,883   

Plus (minus):

             

Interest expense

    20,985        38,163        40,245        46,892        50,313        12,772        14,286   

Capitalized interest

    ( 2,299     ( 1,755     ( 166     ( 951     ( 1,491     ( 237     ( 1,037

Interest income

    ( 3,183     ( 5,951     ( 1,976     ( 345     ( 328     ( 60     ( 86

Provision (benefit) for income taxes

    —          44        388        1,533        ( 52,296     339        5,750   

Depreciation and amortization

    9,552        5,401        4,236        4,924        5,620        1,370        1,546   
                                                       

EBITDA

    (55,597 )      37,264        75,986        135,746        74,299        25,460        28,342   

Gain on extinguishment of debt (a)

    —          —          ( 53,673     ( 19,711     —          —          —     

Management fees (b)

    652        800        800        800        800        200        200   

Equity based stock compensation (c)

    53        4        6        113        569        42        172   

Restructuring (d)

    32,499        142        17,902        ( 392     621        ( 20     81   

Transaction expenses (e)

    —          —          —          720        —          —          —     

Unrealized mark-to-market gains (losses) (f)

    1,056        ( 10,282     9,873        ( 1,449     ( 2,065     ( 628     ( 546

Loss on disposal of assets

    3,853        94        4,122        1,010        77        49        —     
                                                       

Adjusted EBITDA

    (17,484 )      28,022        55,016        116,837        74,301        25,103        28,249   
                                                       

Aircraft rentals

    93,136        119,686        105,605        89,974        101,345        22,576        27,708   
                                                       

Adjusted EBITDAR

  $ 75,652      $ 147,708      $ 160,621      $ 206,811      $ 175,646      $ 47,679      $ 55,957   
                                                       

 

  (a) Gain on extinguishment of debt represents the recognition of contingencies provided for in our 2006 recapitalization agreements, which provided for the cancellation of shares of Class A Preferred Stock and reduction of the liquidation preference of the remaining Class A Preferred Stock and associated accrued but unpaid dividends based on the outcome of the contingencies. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other (income) expense, net—2009 compared to 2008.”
  (b) Management fees include annual fees we paid to our sponsors pursuant to professional services agreements, which will be terminated in connection with the closing of this offering, and the reimbursement of certain expenses incurred thereunder. Please see “Use of Proceeds” and “Certain Relationships and Related Transactions.”
  (c) Equity based stock compensation is a non-cash expense relating to our equity based compensation program.
  (d)

Restructuring charges include: (i) for 2006 and 2007, amounts relating to the accelerated retirement of our MD-80 fleet; (ii) for 2008 and 2009, amounts relating to the early termination in mid-2008 of leases for seven Airbus A319 aircraft, a related reduction

 

 

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in workforce and the exit facility costs associated with returning planes to lessors in 2008; (iii) for 2009, amounts relating to the sale of previously expensed MD-80 parts; and (iv) for 2010 and for the three months ended March 31, 2011, amounts relating to exit facility costs associated with moving our Detroit, Michigan maintenance operations to Fort Lauderdale, Florida. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.”

  (e) Transaction expenses include professional fees incurred in connection with an acquisition transaction that was not completed.
  (f) Unrealized mark-to-market gains and losses is comprised of non-cash adjustments to aircraft fuel expense.
  (g) Reflects the effects of the strike of our pilots in June 2010. Please see footnote (1) above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—June 2010 Pilot Strike.”

 

(9) Pro forma earnings per share is presented for the year ended December 31, 2010 and the three months ended March 31, 2011 to give effect to the following transactions as if they occurred as of January 1, 2010: (i) the elimination of all of our outstanding indebtedness and Preferred Stock, and the termination of any outstanding letter of credit facility supporting collateral obligations due to our credit card processors through (x) the application of a portion of the net proceeds from the sale of shares of common stock by us in this offering, (y) the exchange of any Notes not repaid with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement and (z) the exchange of any shares of Preferred Stock not redeemed with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; (ii) adding back to net income the interest expense recorded in our statement of operations related to the indebtedness and Preferred Stock assumed to be retired ($50.3 million for 2010 and $14.3 million for the three months ended March 31, 2011); (iii) the issuance of shares of common stock in this offering and pursuant to the Recapitalization Agreement; and (iv) the estimated tax impact resulting from the above transactions. The number of such shares issued assumes an initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and an offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock. The number of shares outstanding for purposes of this calculation will increase or decrease with the assumed initial offering price by a number of shares approximately as set forth in the table provided in the “Capitalization—2011 Recapitalization” section of this prospectus, under the column captioned “Total Shares of Common Stock Outstanding after this Offering.”

The following table presents our historical balance sheet data as of March 31, 2011, and on a pro forma as adjusted basis to give effect to the 2011 Recapitalization, the Tax Receivable Agreement and this offering.

 

     As of March 31, 2011  
     Actual     Pro Forma As Adjusted (1)(2)  
     (in thousands)  

Cash and cash equivalents

   $ 62,601      $ 199,001   

Total assets

     545,240        694,197   

Long-term debt, including current portion (3)

     280,827        —     

Mandatorily redeemable preferred stock

     80,909        —     

Total stockholders’ (deficit) equity (4)

     (97,022     390,059   

 

  (1) Gives effect to: (i) the receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering, the deduction of underwriting discounts and offering expenses payable by us and the application of such net proceeds as described under “Use of Proceeds;” (ii) the exchange of any Notes not repaid with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; (iii) the exchange of any shares of Preferred Stock not redeemed with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; and (iv) entry into the Tax Receivable Agreement.
  (2) Assumes an initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and an offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock. Please see “Capitalization—2011 Recapitalization” for a sensitivity analysis of the shares of common stock to be outstanding based on various assumed initial public offering prices.
  (3) Includes $23.2 million of current portion of long-term debt and $257.6 million of long-term debt. Excludes $11.0 million of accrued but unpaid interest on the Notes.
  (4) Reflects a reduction in additional paid-in capital on a pro forma as adjusted basis as a result of the recognition of the liability equal to the total estimated payments (approximately $35.9 million as of March 31, 2011) to be made under the Tax Receivable Agreement.

 

 

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OPERATING STATISTICS

 

    Year Ended December 31,     Three Months Ended
March 31,
 
        2006             2007             2008             2009             2010             2010             2011      

Operating Statistics (unaudited) (A)

             

Average aircraft

    31.4        35.9        32.8        28.0        30.5        28.3        33.7   

Aircraft at end of period

    31        36        28        28        32        29        35   

Airports served in the period

    30        40        45        43        39        39        44   

Average daily Aircraft utilization (hours)

    9.1        11.5        12.6        13.0        12.8        12.9        12.6   

Average stage length (miles)

    881        956        925        931        941        942        961   

Block hours

    103,962        150,644        150,827        133,227        141,864        32,898        38,150   

Passenger flight segments (thousands)

    4,967        6,974        6,976        6,325        6,952        1,526        1,863   

Revenue passenger miles (RPMs) (thousands)

    4,554,125        6,850,565        6,599,809        6,039,064        6,664,395        1,464,645        1,847,280   

Available seat miles (ASMs) (thousands)

    5,794,099        8,461,861        8,262,230        7,485,141        8,119,923        1,820,131        2,200,097   

Load factor (%)

    78.6        81.0        79.9        80.7        82.1        80.5        84.0   

Average ticket revenue per passenger flight segment ($)

    104.56        98.44        94.24        84.77        77.39        89.74        82.30   

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

    4.80        10.96        18.61        25.91        35.00        30.90        42.62   

Total revenue per passenger segment ($)

    109.36        109.40        112.85        110.68        112.39        120.64        124.92   

Average yield (cents)

    11.93        11.14        11.93        11.59        11.72        12.57        12.59   

RASM (cents)

    9.37        9.02        9.53        9.35        9.62        10.11        10.58   

CASM (cents)

    10.50        8.64        9.31        7.86        8.77        8.79        9.35   

Adjusted CASM (cents) (B)

    9.92        8.76        8.97        7.89        8.79        8.82        9.38   

Adjusted CASM ex fuel (cents) (B)

    6.89        5.67        5.47        5.45        5.71        5.83        5.67   

Fuel gallons consumed (thousands)

    82,980        113,842        109,562        98,422        106,628        24,200        28,172   

Average economic fuel cost per gallon ($)

    2.11        2.30        2.64        1.85        2.35        2.25        2.89   

 

(A) See “Glossary of Airline Terms” elsewhere in this prospectus for definitions of terms used in this table.

 

(B) Excludes restructuring charges of $32.5 million (0.56 cents per ASM) in 2006, $0.1 million (less than 0.01 cents per ASM) in 2007 and $17.9 million (0.22 cents per ASM) in 2008; and credits of $0.4 million (less than 0.01 cents per ASM) in 2009, $0.6 million (less than 0.01 cents per ASM) in 2010, $0.02 million (less than 0.01 cents per ASM) in the three months ended March 31, 2010 and $0.08 million (less than 0.01 cents per ASM) in the three months ended March 31, 2011. These amounts are excluded from all calculations of Adjusted CASM provided in this prospectus. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.” Also excludes unrealized mark-to-market (gains) and losses of $1.1 million (0.02 cents per ASM) in 2006, $(10.3) million ((0.12) cents per ASM) in 2007, $9.9 million (0.12 cents per ASM) in 2008, $(1.4) million ((0.02) cents per ASM) in 2009, $(2.1) million ((0.03) cents per ASM) in 2010, $(0.6) million ((0.03) cents per ASM) in the three months ended March 31, 2010 and $(0.6) million ((0.02) cents per ASM) in the three months ended March 31, 2011. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

 

 

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GLOSSARY OF AIRLINE TERMS

Set forth below is a glossary of industry terms used in this prospectus:

“Adjusted CASM” means operating expenses, excluding restructuring charges and mark-to-market gains or losses, divided by ASMs.

“Adjusted CASM ex fuel” means operating expenses less aircraft fuel expense and excluding restructuring charges and mark-to-market gains or losses, divided by ASMs.

“AFA-CWA” means the Association of Flight Attendants-CWA.

“Air traffic liability” or “ATL” means the value of tickets sold in advance of travel.

“ALPA” means the Airline Pilots Association, International.

“ASIF” means an Aviation Security Infrastructure Fee assessed by the TSA on each airline.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.

“Average economic fuel cost per gallon” means total aircraft fuel expense, excluding mark-to-market gains and losses, divided by the total number of fuel gallons consumed.

“Average non-ticket revenue per passenger flight segment” means the total non-ticket revenue divided by passengers.

“Average ticket revenue per passenger flight segment” means total passenger revenue divided by passengers.

“Average stage length” means the average number of miles flown per passenger flight segment.

“Average yield” means the average amount one passenger pays to fly one mile, calculated as total revenue divided by RPMs.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by ASMs.

“CBA” means a collective bargaining agreement.

“CBP” means United States Customs and Border Protection.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

 

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“FAA” means the United States Federal Aviation Administration.

“FCC” means the United States Federal Communications Commission.

“FLL Airport” means the Fort Lauderdale-Hollywood International Airport.

“Into-plane fuel cost per gallon” means into-plane fuel expense divided by number of fuel gallons consumed.

“Into-plane fuel expense” represents the cost of jet fuel and certain other charges such as fuel taxes and oil.

“Load factor” means the percentage of aircraft seats actually occupied on a flight (RPMs divided by ASMs).

“NMB” means the National Mediation Board.

“Operating revenue per ASM,” “RASM” or “unit revenue” means operating revenue divided by ASMs.

“Passenger flight segments” means the total number of passengers flown on all flight segments.

“PDP” means pre-delivery deposit payment.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“RLA” means the United States Railway Labor Act.

“TWU” means the Transport Workers Union of America.

“TSA” means the United States Transportation Security Administration.

“ULCC” means “ultra low-cost carrier.”

“VFR” means visiting friends and relatives.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before making a decision to invest in our common stock. If any of these risks should occur, our business, operating results, financial condition or growth prospects could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Industry

We operate in an extremely competitive industry.

We face significant competition with respect to routes, fares and services. Within the airline industry, we compete with traditional network airlines, other low-cost airlines and regional airlines on many of our routes. Competition in most of the 46 destinations we presently serve is intense, due to the large number of carriers in those markets. Furthermore, other airlines may begin service or increase existing service on routes where we currently face no or little competition. Substantially all of our competitors are larger and have significantly greater financial and other resources than we do.

The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price competition could adversely affect our operations. Moreover, many other airlines have begun to unbundle services by charging separate fees for services such as baggage and advance seat selection. This unbundling and other cost reducing measures could enable competitor airlines to reduce fares on routes that we serve.

In addition, airlines increase or decrease capacity in markets based on perceived profitability. Decisions by our competitors that increase overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or route, especially increased capacity in and out of South Florida, could have a material adverse impact on our business. If a traditional network airline were to successfully develop a low-cost structure or if we were to experience increased competition from other low-cost carriers, our business could be materially adversely affected.

Our growth and the success of our ULCC business model could stimulate competition in our markets through our competitors’ development of their own ULCC strategies or new market entrants. Any such competitor may have greater financial resources and access to cheaper sources of capital than we do, which could enable them to operate their business with a lower cost structure than we can. If these competitors adopt and successfully execute a ULCC business model, we could be materially adversely affected.

There have been numerous mergers and acquisitions within the airline industry including, for example, the recent combinations of Delta Air Lines and Northwest Airlines, United Airlines and Continental Airlines, and Southwest Airlines and AirTran Airways. In the future, there may be additional mergers and acquisitions in our industry. Any business combination could significantly alter industry conditions and competition within the airline industry and could cause fares of our competitors to be reduced.

The extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or maintaining the level of fares or revenues related to ancillary services required to sustain profitable operations in new and existing markets and could impede our growth strategy, which could harm our operating results. Due to our relatively small size, we are susceptible to a fare war or other competitive activities in one or more of our key markets, including South Florida, which could have a material adverse effect on our business, results of operations and financial condition.

 

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Our low-cost structure is one of our primary competitive advantages, and many factors could affect our ability to control our costs.

Our low-cost structure is one of our primary competitive advantages. However, we have limited control over many of our costs. For example, we have limited control over the price and availability of aircraft fuel, aviation insurance, airport and related infrastructure taxes, the cost of meeting changing regulatory requirements, and our cost to access capital or financing. In addition, the compensation and benefit costs applicable to a significant portion of our employees are established by the terms of our collective bargaining agreements. We cannot guarantee we will be able to maintain a cost advantage over our competitors. If our cost structure increases and we are no longer able to maintain a cost advantage over our competitors, it could have a material adverse effect on our business, results of operations and financial condition.

The airline industry is heavily impacted by the price and availability of aircraft fuel. Continued volatility in fuel costs or significant disruptions in the supply of fuel, including hurricanes and other events affecting the Gulf Coast in particular, could materially adversely affect our business, results of operations and financial condition.

Aircraft fuel costs represent our single largest operating cost, accounting for 38.9%, 30.8%, 34.8% and 39.3% of our total operating expenses for 2008, 2009, 2010 and the three months ended March 31, 2011, respectively. As such, our operating results are significantly affected by changes in the availability and the cost of aircraft fuel, especially aircraft fuel refined in the U.S. Gulf Coast region, on which we are highly dependent. Both the cost and the availability of aircraft fuel are subject to many meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. For example, a major hurricane making landfall along the Gulf Coast could cause disruption to oil production, refinery operations and pipeline capacity in that region, possibly resulting in significant increases in the price of aircraft fuel and diminished availability of aircraft fuel supplies. Any disruption to oil production, refinery operations or pipeline capacity in the Gulf Coast region could have a disproportionate impact on our operating results compared to other airlines that have more diversified fuel sources.

Aircraft fuel prices have been subject to high volatility, fluctuating substantially over the past several years and very sharply beginning in 2008. Due to the large proportion of aircraft fuel costs in our total operating cost base, even a relatively small increase in the price of aircraft fuel can have a significant negative impact on our operating costs and on our business, results of operations and financial condition.

Our fuel hedging strategy may not reduce our fuel costs.

In order to mitigate the risk to our business from future volatility in fuel prices, as of March 31, 2011 we had entered into fuel derivative contracts for approximately 5% of our forecasted aircraft fuel requirements for the balance of 2011. Additionally, during hurricane season (August through October), we often use basis swaps, priced using West Texas Intermediate or Heating Oil indexes, to protect the refining price risk between the price of crude oil and the price of refined jet fuel. In addition to other fuel derivative contracts, we have historically protected approximately 45% of our forecasted fuel requirements during hurricane season using basis swaps. There can be no assurance that we will be able to enter into fuel hedge contracts in the future. Our liquidity and general level of capital resources impacts our ability to hedge our fuel requirements. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide sufficient protection against increased fuel costs or that our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty’s insolvency. Furthermore, our ability to react to the cost of fuel, absent hedging, is limited since we set the price of tickets in advance of incurring fuel costs. Our ability to pass on any significant increases in aircraft fuel costs through fare increases could also be limited. Finally, it is currently unknown what impact the Dodd-Frank Wall Street Reform and Consumer Protection Act will have on collateral and margin requirements for fuel hedging, which could significantly impair our ability to hedge our fuel costs. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trends and Uncertainties Affecting Our Business—Aircraft Fuel” for a description of our fuel hedging activities.

 

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The airline industry is particularly sensitive to changes in economic conditions. Continued negative economic conditions or a reoccurrence of such conditions would negatively impact our business, results of operations and financial condition.

Our business and the airline industry in general are affected by many changing economic conditions beyond our control, including, among others:

 

   

changes and volatility in general economic conditions, including the severity and duration of any downturn in the United States or global economy and financial markets;

 

   

changes in consumer preferences, perceptions, spending patterns or demographic trends, including any increased preference for higher-fare carriers offering higher amenity levels, and reduced preferences for low-fare carriers offering more basic transportation, during better economic times;

 

   

higher levels of unemployment and varying levels of disposable or discretionary income;

 

   

depressed housing and stock market prices; and

 

   

lower levels of actual or perceived consumer confidence.

These factors can adversely affect, and from time to time have adversely affected, our results of operations, our ability to obtain financing on acceptable terms and our liquidity generally. Current unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures and increased focus on reducing business operating costs can reduce spending for leisure, VFR and business travel. For many travelers, in particular the leisure and VFR travelers we serve, air transportation is a discretionary purchase that they can eliminate from their spending in difficult economic times. The overall decrease in demand for air transportation in the United States in 2008 and 2009 resulting from record high fuel prices and the economic recession required that we take significant steps to reduce our capacity, which reduced our revenues and could continue to have a significant negative impact on our business for an extended period of time. Unfavorable economic conditions could also affect our ability to raise prices to counteract increased fuel, labor or other costs, resulting in a material adverse effect on our business, results of operations and financial condition.

The airline industry faces ongoing security concerns and related cost burdens, further threatened or actual terrorist attacks or other hostilities could significantly harm our industry and our business.

The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry. The primary effects experienced by the airline industry included:

 

   

substantial loss of revenue and flight disruption costs caused by the grounding of all commercial air traffic in or headed to the United States by the Federal Aviation Administration, or FAA, for about three days after the terrorist attacks;

 

   

increased security and insurance costs;

 

   

increased concerns about future terrorist attacks;

 

   

airport shutdowns and flight cancellations and delays due to security breaches and perceived safety threats; and

 

   

significantly reduced passenger traffic and yields due to the subsequent dramatic drop in demand for air travel.

Since September 11, 2001, the Department of Homeland Security and the Transportation Security Administration, or TSA, have implemented numerous security measures that restrict airline operations and increase costs, and are likely to implement additional measures in the future. For example, following the widely publicized attempt of an alleged terrorist to detonate plastic explosives hidden underneath his clothes on a Northwest Airlines flight on Christmas Day in 2009, international passengers became subject to enhanced

 

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random screening, which may include pat-downs, explosive detection testing or body scans. Enhanced passenger screening, increased regulation governing carry-on baggage and other similar restrictions on passenger travel may further increase passenger inconvenience and reduce the demand for air travel. In addition, increased or enhanced security measures have tended to result in higher governmental fees imposed on airlines, resulting in higher operating costs for airlines. Any future terrorist attacks or attempted attacks, even if not made directly on the airline industry, or the fear of such attacks or other hostilities (including elevated national threat warnings or selective cancellation or redirection of flights due to terror threats) would likely have a material adverse effect on our business, results of operations and financial condition, and on the airline industry in general.

Restrictions on or increased taxes applicable to fees or other charges for ancillary products and services paid by airline passengers could harm our business, results of operations and financial condition.

During 2008, 2009, 2010 and the three months ended March 31, 2011, we generated non-ticket revenues of $129.8 million, $163.9, $243.3 million and $79.4 million, respectively. Our non-ticket revenues are generated from fees for, among other things, baggage, bookings through our call center or third-party vendors, advance seat selection, itinerary changes and loyalty programs. In April 2011, the U.S. Department of Transportation, or DOT, published a broad set of final rules relating to, among other things, how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft. The final rules require airlines to publish to customers a full fare for a flight, including mandatory taxes and fees, and to enhance disclosure of the cost of optional products and services, including baggage charges. The rules restrict airlines from increasing ticket prices post-purchase (other than increases resulting from changes in government-imposed fees or taxes) and increase significantly the amount and scope of compensation payable to passengers involuntarily denied boarding due to oversales. The final rules also extend the applicability of tarmac delay reporting and penalties to include international flights and provide that reservations made more than one week prior to flight date may be held at the quoted fare without payment, or cancelled without penalty, for 24 hours. These new rules are expected to become effective in late August 2011. We are evaluating the actions we will be required to take to implement them, and we cannot assure you that such compliance will not have a material adverse effect on our business. In addition, the U.S. Congress has begun investigating the airline industry practice of unbundling, including public hearings held in July 2010. If new taxes are imposed on non-ticket revenues, or laws or regulations are adopted that make unbundling of services impermissible, or more cumbersome or expensive than the new rules described above, our business, results of operations and financial condition could be harmed. Congressional scrutiny may also change industry practice or public willingness to pay for ancillary services. On August 3, 2010, the Airline Baggage Transparency and Accountability Act was introduced in the United States Senate. This legislation, if enacted, would impose federal taxes at a rate of up to 7.5% on charges for carry-on and checked baggage. More recently, the United States Senate passed an amendment to the FAA reauthorization bill that, if enacted, would impose federal taxes at a rate of 7.5% on charges for carry-on baggage. We cannot predict whether the Airline Baggage Transparency and Accountability Act, the Senate amendment to the FAA reauthorization bill or any similar proposal will become law or, if it did, what effect it would have on our results of operations and financial condition.

Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control inefficiencies; weather conditions, such as hurricanes or blizzards; increased security measures; new travel related taxes or the outbreak of disease, any of which could harm our business, operating results and financial condition.

Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, increased security measures, new travel related taxes and the outbreak of disease. Delays frustrate passengers and increase costs, which in turn could adversely affect profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA to operate that airspace in a safe, efficient and affordable manner. The air traffic control system, which is operated by the FAA, faces challenges in managing the growing demand for U.S. air travel. U.S. and foreign air-traffic controllers often rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. Adverse weather conditions and

 

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natural disasters, such as hurricanes affecting southern Florida and the Caribbean, winter snowstorms affecting the Northeast United States, or the January 2010 earthquake in Port-au-Prince, Haiti, can cause flight cancellations or significant delays. Cancellations or delays due to weather conditions or natural disasters, air traffic control problems, breaches in security or other factors could harm our business, results of operations and financial condition. Similarly, outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine) flu, could result in significant decreases in passenger traffic and the imposition of government restrictions in service and could have a material adverse impact on the airline industry. Increased travel taxes, such as the Travel Promotion Act, enacted March 10, 2010, which charges visitors from certain countries a $10 fee every two years to travel into the United States to subsidize certain travel promotion efforts, could also result in decreases in passenger traffic. Any general reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition.

Restrictions on or litigation regarding third-party membership discount programs could harm our business, operating results and financial condition.

We generate a relatively small but growing portion of our revenue from order referral fees, revenue share and other fees paid to us by third-party merchants for customer click-throughs, distribution of third-party promotional materials and referrals arising from products and services of the third-party merchants that we offer to our customers on our website. Some of these third-party referral-based offers are for memberships in discount programs or similar promotions made to customers who have purchased products from us, and for which we receive a payment from the third-party merchants for every customer that accepts the promotion. Certain of these third-party membership discount programs have been the subject of consumer complaints, litigation and regulatory actions alleging that the enrollment and billing practices involved in the programs violate various consumer protection laws or are otherwise deceptive. Any private or governmental claims or actions that may be brought against us in the future relating to these third-party membership programs could result in our being obligated to pay damages or incurring legal fees in defending claims. These damages and fees could be disproportionate to the revenues we generate through these relationships. In addition, customer dissatisfaction or a significant reduction in or termination of the membership discount offers on our website as a result of these claims could have a negative impact on our brand, and have a material adverse effect on our business, results of operations and financial condition.

We face competition from air travel substitutes.

In addition to airline competition from traditional network airlines, other low-cost airlines and regional airlines, we also face competition from air travel substitutes. On our domestic routes, we face competition from some other transportation alternatives, such as bus, train or automobile. In addition, technology advancements may limit the desire for air travel. For example, video teleconferencing and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower-cost substitutes for air travel. If we are unable to adjust rapidly in the event the basis of competition in our markets changes, it could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to Our Business

Increased labor costs, union disputes, employee strikes and other labor-related disruption may adversely affect our operations.

Our business is labor intensive, with labor costs representing approximately 19.1%, 23.0%, 22.0% and 21.0% of our total operating costs for 2008, 2009, 2010 and for the three months ended March 31, 2011, respectively. As of March 31, 2011, approximately 50% of our workforce was represented by labor unions and thereby covered by collective bargaining agreements. We cannot assure you that our labor costs going forward will remain competitive because in the future our labor agreements may be amended or become amendable and new agreements could have terms with higher labor costs; one or more of our competitors may significantly reduce their labor costs, thereby reducing or eliminating our comparative advantages as to one or more of such

 

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competitors; or our labor costs may increase in connection with our growth. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize.

Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, or the RLA. Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board, or the NMB. This process continues until either the parties have reached agreement on a new collective bargaining agreement, or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

Our flight operations were shut down due to a strike by our pilots beginning on June 12, 2010 and lasting until we and the union representing our pilots reached a tentative agreement for a new contract. Under a Return to Work Agreement, we began to resume flights on June 17, 2010 and resumed our full flight schedule on June 18, 2010. On August 1, 2010, we and the pilots’ union executed a new five-year collective bargaining agreement. This shutdown had a material adverse effect on our results of operations for 2010. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—June 2010 Pilot Strike.”

Our collective bargaining agreement with our flight attendants became amendable in August 2007, and we are currently engaged in negotiations with the union representing our flight attendants. Our collective bargaining agreement with our dispatchers becomes amendable in July 2012. The outcome of our collective bargaining negotiations cannot presently be determined and the terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. The need for workforce reductions and wage and benefit concessions in the current adverse economic environment may have an adverse effect on our labor relations and employee morale. In addition, if we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any such action or other labor dispute with unionized employees could disrupt our operations, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies. Our business, results of operations and financial condition may be materially adversely affected based on the outcome of our negotiations with the union representing our flight attendants.

We have a significant amount of aircraft-related fixed obligations that could impair our liquidity and thereby harm our business, results of operations and financial condition.

The airline business is capital intensive and, as a result, many airline companies are highly leveraged. All of our aircraft are leased, and in 2010 we paid the lessors rent of $103.4 million and maintenance deposits net of reimbursements of $35.7 million. In the three months ended March 31, 2011, we paid the lessors rent of $28.9 million and maintenance deposits net of reimbursements of $9.9 million. As of March 31, 2011, we had future operating lease obligations of approximately $1.0 billion. In addition, we have significant obligations for aircraft and spare engines that that we have ordered from Airbus and International Aero Engines AG, or IAE, for delivery over the next five years. Our ability to pay the fixed costs associated with our contractual obligations will depend on our operating performance and cash flow, which will in turn depend on, among other things, the success of our current business strategy, whether fuel prices continue at current price levels and/or further increase or decrease, further weakening or improving in the U.S. economy, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our aircraft related fixed obligations could have a material adverse effect on our business, results of operations and financial condition and could:

 

   

require a substantial portion of cash flow from operations for operating lease and maintenance deposit payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

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limit our ability to make required pre-delivery deposit payments, or PDPs, to Airbus or IAE for our aircraft and spare engines on order;

 

   

limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;

 

   

make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments;

 

   

reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with less fixed payment obligations; and

 

   

cause us to lose access to one or more aircraft and forfeit our rent deposits if we are unable to make our required aircraft lease rental payments and our lessors exercise their remedies under the lease agreement including under cross default provisions in certain of our leases.

A failure to pay our operating lease and other fixed cost obligations or a breach of our contractual obligations could result in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our obligations, make required lease payments or otherwise cover our fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.

We are highly dependent upon our cash balances and operating cash flows.

As of March 31, 2011, we had access to lines of credit from two counterparties to our jet fuel derivatives and our purchase credit card issuer aggregating $5.6 million. These credit facilities are not adequate to finance our operations, and we will continue to be dependent on our operating cash flows and cash balances to fund our operations and to make scheduled payments on our aircraft related fixed obligations. Furthermore, our credit card processors hold back certain credit card receipts to cover repayment to customers if we fail to fulfill our flight obligations. As a result of these holdbacks, a significant portion of our cash is recorded as restricted cash and is unavailable to us until after we provide travel service. After the consummation of this offering, we intend to terminate our existing letter of credit facility that we use to satisfy a portion of the required holdback for our principal credit card processor, which could result in an increase in the amount of restricted cash. In addition, we are required by our aircraft lessors to fund reserves in cash in advance for scheduled maintenance, and a portion of our cash is therefore unavailable until after we have completed the scheduled maintenance in accordance with the terms of the operating leases. Based on the age of our fleet and our growth strategy, these maintenance deposits will increase over the next few years before we receive any significant reimbursement for completed maintenance. If we fail to generate sufficient funds from operations to meet our operating cash requirements or do not obtain a line of credit, other borrowing facility or equity financing, we could default on our operating lease and fixed obligations. Our inability to meet our obligations as they become due would have a material adverse effect on our business, results of operations and financial condition.

Our ability to obtain financing or access capital markets may be limited.

We have significant obligations for aircraft and spare engines that we have ordered from Airbus and IAE over the next five years and we will need to finance these purchases. We may not have sufficient liquidity or creditworthiness to fund the purchase of aircraft and engines, including payment of PDPs, or for other working capital. Factors that affect our ability to raise financing or access the capital markets include market conditions in the airline industry, economic conditions, the level and volatility of our earnings, our relative competitive position in the markets in which we operate, our ability to retain key personnel, our operating cash flows, and legal and regulatory developments. Regardless of our creditworthiness, at times the market for aircraft purchase or lease financing has been very constrained due to such factors as the general state of the capital markets and the financial position of the major providers of commercial aircraft financing.

 

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Our liquidity and general level of capital resources impact our ability to hedge our fuel requirements.

As of March 31, 2011, we had entered into fuel derivative contracts for approximately 5% of our forecasted aircraft fuel requirements for 2011. Additionally, during hurricane season (August through October), we often use basis swaps, priced using West Texas Intermediate or Heating Oil indexes, to protect the refining price risk between the price of crude oil and the price of refined jet fuel. In addition to other fuel derivative contracts, we have historically protected approximately 45% of our forecasted fuel requirements during hurricane season using basis swaps. While we intend to hedge a portion of our future fuel requirements, there can be no assurance that, at any given time, we will be able to enter into hedge contracts. In the past we have not had and in the future we may not have sufficient creditworthiness or liquidity to post the collateral necessary to hedge our fuel requirements. We have lines of credit of $1.0 million each with two counterparties to our jet fuel derivatives that require posting of cash collateral to cover margin for any amount in excess of the lines of credit, the amount of which is determined by the prevailing crude oil price and counterparty risk. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide any particular level of protection against increased fuel costs or that our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty’s insolvency. Furthermore, our ability to react to the cost of fuel, absent hedging, is limited, because we set the price of tickets in advance of knowing our fuel costs at the time the tickets are flown. Our ability to pass on any significant increases in aircraft fuel costs through fare increases could also be limited.

We rely on maintaining a high daily aircraft utilization rate to implement our low-cost structure, which makes us especially vulnerable to flight delays or cancellations or aircraft unavailability.

We maintain a high daily aircraft utilization rate. Our average daily aircraft utilization was 12.6 hours, 13.0 hours, 12.8 hours and 12.6 hours for 2008, 2009, 2010 and the three months ended March 31, 2011, respectively. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers. Our revenue per aircraft can be increased by high daily aircraft utilization, which is achieved in part by reducing turnaround times at airports, so we can fly more hours on average in a day. Aircraft utilization is reduced by delays and cancellations from various factors, many of which are beyond our control, including air traffic congestion at airports or other air traffic control problems, adverse weather conditions, increased security measures or breaches in security, international or domestic conflicts, terrorist activity, or other changes in business conditions. The majority of our operations are concentrated in markets such as South Florida, the Caribbean, Latin America and the Northeast United States, which are particularly vulnerable to weather, airport traffic constraints and other delays. In addition, pulling aircraft out of service for unscheduled and scheduled maintenance, which will increase as our fleet ages, may materially reduce our average fleet utilization and require that we seek short-term substitute capacity at increased costs. Due to the relatively small size of our fleet and high daily aircraft utilization rate, the unavailability of one or more aircraft and resulting reduced capacity could have a material adverse effect on our business, results of operations and financial condition.

Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the maintenance schedules of our aircraft fleet.

As of March 31, 2011, the average age of our aircraft was approximately 4.0 years. Our relatively new aircraft require less maintenance now than they will in the future. Our fleet will require more maintenance as it ages and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. Moreover, because our current fleet was acquired over a relatively short period, significant maintenance that is scheduled on each of these planes will occur at roughly the same time, meaning we will incur our most expensive scheduled maintenance obligations, known as heavy maintenance, across our present fleet around the same time. These more significant maintenance activities result in out-of service periods during which our aircraft are dedicated to maintenance activities and unavailable to fly revenue service. In addition, the terms of our lease agreements require us to pay supplemental rent, also known as maintenance reserves, to be paid to the lessor in advance of the performance of major maintenance, resulting in our recording significant prepaid deposits on our balance sheet. We expect scheduled and unscheduled aircraft maintenance expenses to increase

 

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as a percentage of our revenue over the next several years. Any significant increase in maintenance and repair expenses would have a material adverse effect on our business, results of operations and financial condition. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Aircraft Maintenance, Materials and Repair Costs and Related Heavy Maintenance Amortization” and “—Maintenance Reserves.”

Our lack of marketing alliances could harm our business.

Many airlines, including the domestic traditional network airlines (American, Delta, United and US Airways) have marketing alliances with other airlines, under which they market and advertise their status as marketing alliance partners. These alliances, such as OneWorld, SkyTeam and Star Alliance, generally provide for code-sharing, frequent flier program reciprocity, coordinated scheduling of flights to permit convenient connections and other joint marketing activities. Such arrangements permit an airline to market flights operated by other alliance members as its own. This increases the destinations, connections and frequencies offered by the airline, and provides an opportunity to increase traffic on that airline’s segment of flights connecting with alliance partners. We currently do not have any alliances with U.S. or foreign airlines. Our lack of marketing alliances puts us at a competitive disadvantage to traditional network carriers, whose ability to attract passengers through more widespread alliances, particularly on international routes, and may have a material adverse effect on our passenger traffic, business, results of operations and financial condition.

We are subject to extensive regulation by the Federal Aviation Administration, the Department of Transportation, and other U.S. and foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our business and financial results.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, Congress has passed laws, and the DOT, FAA and TSA have issued regulations, relating to the operation of airlines that have required significant expenditures. We expect to continue to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. For example, the DOT finalized rules, effective on April 29, 2010, requiring new procedures for customer handling during long onboard tarmac delays, as well as additional reporting requirements for airlines that could increase the cost of airline operations or reduce revenues. The DOT has been aggressively investigating alleged violations of the new rules. In addition, a second set of DOT final rules, to become effective in late August 2011, address, among other things, concerns about how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft, including requirements for disclosure of base fares plus a set of regulatorily dictated options and limits on cancellations and change fees. On August 3, 2010, the Airline Baggage Transparency and Accountability Act was introduced in the United States Senate. This legislation, if enacted, would increase disclosure regarding fees for airline ticket sales, impose federal taxes on charges for carry-on and checked baggage, authorize the Department of Transportation’s Aviation Consumer Protection Division to oversee lost and stolen baggage claims, and require data collection and the public release of collected data concerning airline handling of lost, damaged and stolen luggage. More recently, the United States Senate passed an amendment to the FAA reauthorization bill that, if enacted, would impose federal taxes at a rate of 7.5% on charges for carry-on baggage. If the Airline Baggage Transparency and Accountability Act, the Senate amendment to the FAA reauthorization bill or similar legislation were to be enacted, it is uncertain what effect it would have on our results of operations and financial condition.

We cannot assure you that these and other laws or regulations enacted in the future will not harm our business. In addition, the TSA mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines. The federal government has on several occasions proposed a significant increase in the per ticket tax. The proposed ticket tax increase, if implemented, could negatively impact our financial results.

 

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Our ability to operate as an airline is dependent on our maintaining certifications issued to us by the DOT and the FAA. The FAA has the authority to issue mandatory orders relating to, among other things, the grounding of aircraft, inspection of aircraft, installation of new safety-related items and removal and replacement of aircraft parts that have failed or may fail in the future. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, our aircraft, for any reason, could negatively affect our business and financial results. Federal law requires that air carriers operating large aircraft be continuously “fit, willing and able” to provide the services for which they are licensed. Our “fitness” is monitored by the DOT, which considers factors such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. While the DOT has seldom revoked a carrier's certification for lack of fitness, such an occurrence would render it impossible for us to continue operating as an airline. The DOT may also institute investigations or administrative proceedings against airlines for violations of regulations. In 2009, we entered into a consent order with the DOT for our procedures for bumping passengers from oversold flights and our handling of lost or damaged baggage. Under the consent order, we were assessed a civil penalty of $375,000, of which we were required to pay only $215,000 based on an agreement with the DOT and our not having similar violations in the year after the date of the consent order.

International routes are regulated by treaties and related agreements between the United States and foreign governments. Our ability to operate international routes is subject to change because the applicable arrangements between the United States and foreign governments may be amended from time to time. Our access to new international markets may be limited by our ability to obtain the necessary certificates to fly the international routes. In addition, our operations in foreign countries are subject to regulation by foreign governments and our business may be affected by changes in law and future actions taken by such governments, including granting or withdrawal of government approvals and restrictions on competitive practices. We are subject to numerous foreign regulations based on the large number of countries outside the United States where we currently provide service. If we are not able to comply with this complex regulatory regime, our business could be significantly harmed. Please see “Business—Government Regulation.”

We may not be able to implement our growth strategy.

Our growth strategy includes acquiring additional aircraft, increasing the frequency of flights and size of aircraft used in markets we currently serve and expanding the number of markets we serve where our low-cost structure would likely be successful. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to sustain or increase our profitability. We face numerous challenges in implementing our growth strategy, including our ability to:

 

   

maintain profitability;

 

   

obtain financing to acquire new aircraft;

 

   

access airports located in our targeted geographic markets where we can operate routes in a manner that is consistent with our cost strategy;

 

   

gain access to international routes; and

 

   

access sufficient gates and other services at airports we currently serve or may seek to serve.

Our growth is dependent upon our ability to maintain a safe and secure operation and requires additional personnel, equipment and facilities. An inability to hire and retain personnel, timely secure the required equipment and facilities in a cost-effective manner, efficiently operate our expanded facilities or obtain the necessary regulatory approvals may adversely affect our ability to achieve our growth strategy, which could harm our business. In addition, expansion to new markets may have other risks due to factors specific to those markets. We may be unable to foresee all of the risks attendant upon entering certain new markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition, our competitors may reduce their fares and/or offer special promotions following our entry into a new market. We cannot assure you that we will be able to profitably expand our existing markets or establish new markets.

 

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Our principal target growth markets in the Caribbean and Latin America include countries with less developed economies that may be vulnerable to unstable economic and political conditions, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us and the resulting instability may adversely affect our ability to implement our growth strategy.

In 2008, in response to record high fuel prices and rapidly deteriorating economic conditions, we modified our growth plans by terminating our leases for seven aircraft. We incurred significant expenses relating to our lease terminations, and have incurred additional expenses to acquire new aircraft in place of those under the terminated leases as we expand our network. We may in the future determine to reduce further our future growth plans from previously announced levels, which may impact our business strategy and future profitability.

We rely heavily on technology and automated systems to operate our business and any failure of these technologies or systems or failure by their operators could harm our business.

We are highly dependent on technology and automated systems to operate our business and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting system, telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our reservation system fails or experiences interruptions, and we are unable to book seats for any period of time, we could lose a significant amount of revenue as customers book seats on competing airlines. We have experienced short duration reservation system outages from time to time and may experience similar outages in the future. For example, in November 2010, we experienced a significant service outage with our third-party reservation service provider on the day before Thanksgiving, one of the industry’s busiest travel days. We also rely on third-party service providers of our other automated systems for technical support, system maintenance and software upgrades. If our automated systems are not functioning or if the current providers were to fail to adequately provide technical support for any one of our key existing systems, we could experience service disruptions, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems’ vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all and any transition time to a new system may be significant.

In addition, our automated systems cannot be completely protected against events that are beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We have implemented security measures and change control procedures and have disaster recovery plans; however, we cannot assure you that these measures are adequate to prevent disruptions. Disruption in, changes to or a breach of, these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse affect on our business, results of operations and financial condition.

Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation.

In the processing of our customer transactions, we receive, process, transmit and store a large volume of identifiable personal data, including financial data such as credit card information. This data is increasingly subject to legislation and regulation, typically intended to protect the privacy of personal data that is collected, processed and transmitted. More generally, we rely on consumer confidence in the security of our system,

 

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including our internet site on which we sell the majority of our tickets. Our business, results of operations and financial condition could be adversely affected if we are unable to comply with existing privacy obligations or legislation or regulations are expanded to require changes in our business practices.

We may not be able to maintain or grow our non-ticket revenues.

Our business strategy includes expanding our portfolio of ancillary products and services. There can be no assurance that passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the ancillary products and services we currently offer. Failure to maintain our non-ticket revenues would have a material adverse effect on our results of operations and financial condition. Furthermore, if we are unable to maintain and grow our non-ticket revenues, we may not be able to execute our strategy to continue to lower base fares in order to stimulate demand for air travel. Please see “—Restrictions on or increased taxes applicable to fees or other charges for ancillary products and services paid by airline passengers could harm our business, results of operations and financial condition.”

Our inability to expand or operate reliably or efficiently out of Fort Lauderdale–Hollywood International Airport, an airport on which we are highly dependent, could harm our business, results of operations and financial condition.

We are highly dependent on markets served from South Florida, where we maintain a large presence with, as of March 31, 2011, approximately 59% of our daily flights either departing from or arriving at Fort LauderdaleHollywood International Airport, or FLL Airport. We operate out of the only international terminal at FLL Airport, Terminal 4. FLL Airport is in the process of a renovation project, which includes the expansion of Terminal 4. The airport expansion would allow us to increase the number of routes we serve from FLL Airport (although the expansion could also increase the number of routes our competitors serve from FLL Airport). If the airport expansion does not occur or is delayed, however, our expansion strategy may be impeded. In addition, FLL Airport presently has relatively low costs and there is no guarantee that the fees and other costs related to operating out of FLL Airport will not increase. Our operating performance and results of operations could be harmed by an increase in fees charged by the airport. If we are unable to operate reliably or efficiently from FLL Airport, we may need to move our South Florida operations to a smaller or more expensive area airport.

Changes in how we or others are permitted to operate at airports, including FLL Airport, could have a material adverse effect on our business, results of operations and financial condition.

Our results of operations may be affected by actions taken by governmental or other agencies or authorities having jurisdiction over our operations at airports, including, but not limited to:

 

   

increases in airport rates and charges;

 

   

limitations on take-off and landing slots, airport gate capacity or other use of airport facilities;

 

   

termination of our airport use agreements, some of which can be terminated by airport authorities with little notice to us;

 

   

increases in airport capacity that could facilitate increased competition, such as the planned expansion of the international terminal at FLL Airport;

 

   

international travel regulations such as customs and immigration;

 

   

increases in taxes;

 

   

changes in the law that affect the services that can be offered by airlines in particular markets and at particular airports;

 

   

restrictions on competitive practices;

 

   

the adoption of statutes or regulations that impact customer service standards, including security standards; and

 

   

the adoption of more restrictive locally-imposed noise regulations or curfews.

 

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In general, any changes in airport operations could have a material adverse effect on our business, results of operations and financial condition.

We rely on third-party service providers to perform functions integral to our operations.

We have entered into agreements with third-party service providers to furnish certain facilities and services required for our operations, including ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new markets we decide to enter, and there can be no assurance that we will be able to obtain the necessary services at acceptable rates.

Although we seek to monitor the performance of third parties that provide us with our reservation system, ground handling, catering, passenger handling, engineering, maintenance services, refueling and airport facilities, the efficiency, timeliness and quality of contract performance by third-party service providers are often beyond our control, and any failure by our service providers to perform their contracts may have an adverse impact on our business and operations. For example, in 2008, our call center provider went bankrupt. Though we were able to quickly switch to an alternative vendor, we experienced a significant business disruption during the transition period and a similar disruption could occur in the future. We expect to be dependent on such third-party arrangements for the foreseeable future.

We rely on third-party distribution channels to distribute a portion of our airline tickets.

We rely on third-party distribution channels, including those provided by or through global distribution systems, or GDSs (e.g., Amadeus, Galileo, Sabre and Worldspan), conventional travel agents and online travel agents, or OTAs (e.g., Orbitz and Travelocity), to distribute a portion of our airline tickets, and we expect in the future to rely on these channels to an increasing extent to collect ancillary revenues, such as seat selection fees. These distribution channels are more expensive and at present have less functionality in respect of ancillary revenues than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to manage successfully our distribution costs and rights, and improve the functionality of third party distribution channels, while maintaining an industry-competitive cost structure. Negotiations with key GDSs and OTAs designed to manage our costs, increase our distribution flexibility and improve functionality could be contentious, could result in diminished or less favorable distribution of our tickets, and may not provide the functionality we require to maximize ancillary revenues. Any inability to manage our third-party distribution costs, rights and functionality at a competitive level or any material diminishment in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations.

We rely on a single service provider for our fuel.

As of March 31, 2011, we purchased all of our aircraft fuel under a single fuel service contract with World Fuel Services Corporation. A failure by this provider to fulfill its obligations could have a material adverse effect on our business, results of operations and financial condition.

Our reputation and business could be adversely affected in the event of an emergency, accident or similar incident involving our aircraft.

We are exposed to potential significant losses in the event that any of our aircraft is subject to an emergency, accident, terrorist incident or other similar incident, and significant costs related to passenger claims, repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. There can be no assurance that we will not be affected by such events or that the amount of our insurance coverage will be adequate in the event such circumstances arise and any such event could cause a substantial increase in our insurance premiums. Please see “—Increases in insurance costs or significant reductions in coverage could have a material adverse effect on our business, financial condition and results of operations.” In addition, any future aircraft emergency, accident or similar incident, even if fully covered by insurance or even if it does not involve

 

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our airline, may create a public perception that our airline or the equipment we fly is less safe or reliable than other transportation alternatives, which could have an adverse impact on our reputation and could have a material adverse effect on our business, results of operations and financial condition.

Negative publicity regarding our customer service could have a material adverse effect on our business.

In the past we have experienced a relatively high number of customer complaints related to, among other things, our customer service, reservations and ticketing systems and baggage handling. In particular, we generally experience a higher volume of complaints when we make changes to our unbundling policies, such as charging for baggage. In addition, in 2009, we entered into a consent order with the DOT for our procedures for bumping passengers from oversold flights and our handling of lost or damaged baggage. Under the consent order, we were assessed a civil penalty of $375,000, of which we were required to pay only $215,000 based on an agreement with the DOT and our not having similar violations in the year after the date of the consent order. Our reputation and business could be materially adversely affected if we fail to meet customers’ expectations with respect to customer service or if we are perceived by our customers to provide poor customer service. Our business and reputation could have been harmed by the business shut down during the June 2010 pilot strike and any perceived failure to meet customer expectations during the strike and related negative publicity from the strike.

We depend on a limited number of suppliers for our aircraft and engines.

One of the elements of our business strategy is to save costs by operating an aircraft fleet consisting solely of Airbus A320-family, single-aisle aircraft, powered by engines manufactured by IAE. We currently intend to continue to rely exclusively on these aircraft and engine manufacturers for the foreseeable future. If Airbus or IAE becomes unable to perform its contractual obligations, or if we are unable to acquire or lease aircraft or engines from other owners, operators or lessors on acceptable terms, we would have to find other suppliers for a similar type of aircraft or engine. If we have to lease or purchase aircraft from another supplier, we would lose the significant benefits we derive from our current single fleet composition. We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities and maintenance programs. Our operations could also be harmed by the failure or inability of aircraft, engine and parts suppliers to provide sufficient spare parts or related support services on a timely basis. Our business would be significantly harmed if a design defect or mechanical problem with any of the types of aircraft or components that we operate were discovered that would ground any of our aircraft while the defect or problem was corrected, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by regulatory authorities in the event of any actual or perceived mechanical or design problems. Our business would also be significantly harmed if the public began to avoid flying with us due to an adverse perception of the types of aircraft that we operate stemming from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft or components. Carriers that operate a more diversified fleet are better positioned than we are to manage such events.

Reduction in demand for air transportation, or governmental reduction or limitation of operating capacity, in the South Florida, Caribbean or Latin American markets could harm our business, results of operations and financial condition.

A significant portion of our operations are conducted to and from the South Florida, Caribbean or Latin American markets. Our business, results of operations and financial condition could be harmed if we lost our authority to fly to these markets, by any circumstances causing a reduction in demand for air transportation, or by governmental reduction or limitation of operating capacity, in these markets, such as adverse changes in local economic or political conditions, negative public perception of these destinations, unfavorable weather conditions, or terrorist related activities. Furthermore, our business could be harmed if jurisdictions that currently limit competition allow additional airlines to compete on routes we serve. Many of the countries we serve are experiencing either economic slowdowns or recessions, which may translate into a weakening of demand and could harm our business, results of operations and financial condition.

 

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Increases in insurance costs or significant reductions in coverage could have a material adverse effect on our business, financial condition and results of operations.

We carry insurance for public liability, passenger liability, property damage and all-risk coverage for damage to our aircraft. As a result of the September 11, 2001 terrorist attacks, aviation insurers significantly reduced the amount of insurance coverage available to commercial air carriers for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events (war risk insurance). Accordingly, our insurance costs increased significantly and our ability to continue to obtain certain types of insurance remains uncertain. While the price of commercial insurance has declined since the period immediately after the terrorist attacks, in the event commercial insurance carriers further reduce the amount of insurance coverage available to us, or significantly increase its cost, we would be adversely affected. We currently maintain commercial airline insurance with several underwriters. However, there can be no assurance that the amount of such coverage will not be changed, or that we will not bear substantial losses from accidents. We could incur substantial claims resulting from an accident in excess of related insurance coverage that could have a material adverse effect on our results of operations and financial condition.

We have obtained third-party war risk insurance, which insures against some risks of terrorism, through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. If the special program administered by the FAA is not re-authorized, or if the government discontinues this coverage for any reason, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms, if it is available at all. Our business, results of operations and financial condition could be materially adversely affected if we are unable to obtain adequate war risk insurance.

Failure to comply with applicable environmental regulations could have a material adverse effect on our business, results of operations and financial condition.

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws and regulations can require significant expenditures and any future regulatory developments in the United States and abroad could adversely affect operations and increase operating costs in the airline industry. For example, climate change legislation was previously introduced in Congress and such legislation could be re-introduced in the future by Congress and state legislatures, and could contain provisions affecting the aviation industry, compliance with which could result in the creation of substantial additional costs to us. Similarly, the Environmental Protection Agency issued a rule that regulates larger emitters of greenhouse gases. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and could have a material adverse effect on our business, results of operations and financial condition.

Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.

If we are unable to attract and retain qualified personnel or fail to maintain our company culture, our business, results of operations and financial condition could be harmed.

Our business is labor intensive. We require large numbers of pilots, flight attendants, maintenance technicians and other personnel. The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and maintenance technicians. In addition, as is common with most of our competitors, we have faced considerable turnover of our employees. We may be required to increase wages and/or benefits in order to attract and retain qualified personnel. If we are unable to hire, train and retain qualified employees, our business could be harmed and we may be unable to complete our growth plans.

 

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In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture. Our company culture, which is one of our competitive strengths, is important to providing high-quality customer service and having a productive, accountable workforce that helps keep our costs low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions. Our company culture could otherwise be adversely affected by our growing operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our business, results of operations and financial condition could be harmed.

Our business, results of operations and financial condition could be materially adversely affected if we lose the services of our key personnel.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. In particular, we depend on the services of our senior management team, including Ben Baldanza, our President and Chief Executive Officer. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-man life insurance on our management team.

We will be required to pay our Pre-IPO Stockholders for 90% of certain tax benefits related to federal net operating losses, deferred interest deductions and tax credits incurred prior to this offering, and could be required to make substantial cash payments in which the stockholders purchasing shares in this offering will not participate.

Immediately prior to the completion of this offering, we intend to enter into the Tax Receivable Agreement and thereby distribute to each holder of our common stock as of such time, or the Pre-IPO Stockholders, the right to receive such stockholders’ pro rata share of the future payments to be made by us under the Tax Receivable Agreement. Each such pro rata share will be a fraction equal to the number of shares of our common stock beneficially owned by each Pre-IPO Stockholder divided by the number of shares of common stock outstanding immediately prior to the completion of this offering. Under the Tax Receivable Agreement, we will be obligated to pay to the Pre-IPO Stockholders an amount equal to 90% of the cash savings in federal income tax realized by us by virtue of our future use of the federal net operating loss, deferred interest deductions and alternative minimum tax credits held by us as of March 31, 2011, which we refer to as the Pre-IPO NOL. “Deferred interest deductions” means interest deductions that have accrued as of March 31, 2011, but have been deferred under rules applicable to related party debt. Cash tax savings generally will be computed by comparing our actual federal income tax liability to the amount of such taxes that we would have been required to pay had such Pre-IPO NOLs not been available to us. While payments made under the Tax Receivable Agreement will depend upon a number of factors, including the amount and timing of taxable income we generate in the future and any future limitations that may be imposed on our ability to use the Pre-IPO NOLs, the payments could be substantial. Assuming the federal corporate income tax rates presently in effect and no material change in federal tax law, the cash benefit of the full use of these Pre-IPO NOLs would be approximately $39.9 million, of which 90%, or $35.9 million, is potentially payable to our Pre-IPO Stockholders under the terms of the Tax Receivable Agreement. The Tax Receivable Agreement accordingly could require us to make substantial cash payments in which the stockholders purchasing shares in this offering will not participate. Upon a change in control, we will be obligated to make a final payment under the Tax Receivable Agreement equal to 90% of the present value of the tax savings represented by any portion of the Pre-IPO NOLs for which payment under the Tax Receivable Agreement has not already been made. Payments resulting from a change in control could be substantial and could exceed our actual cash savings from the Pre-IPO NOLs.

The Pre-IPO Stockholders will not reimburse us for any payments previously made if we incur a net operating loss for federal income tax purposes in a future tax year, although the Tax Receivable Agreement does provide a mechanism by which the tax benefit attributable to such future net operating loss will be deemed to be recognized by

 

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us before any further payments are made under the Tax Receivable Agreement. Similarly, the Pre-IPO Stockholders will not reimburse us for any payments previously made if any tax benefits relating to such payments are subsequently disallowed, although the amount of any such tax benefits subsequently disallowed will reduce future payments (if any) otherwise owed to the Pre-IPO Stockholders. For example, if our determinations regarding the applicability (or lack thereof) and amount of any limitations on the Pre-IPO NOLs under Section 382 of the Internal Revenue Code of 1986, as amended, were to be successfully challenged by the IRS after payments relating to such Pre-IPO NOLs had been made to the Pre-IPO Stockholders, we would not be reimbursed by the Pre-IPO Stockholders and our recovery would be limited to the extent of future payments (if any) otherwise remaining under the Tax Receivable Agreement. As a result, we could make payments to the Pre-IPO Stockholders under the Tax Receivable Agreement in excess of our actual cash tax savings. Furthermore, while we will only make payments under the Tax Receivable Agreement after we have recognized a cash flow benefit from the utilization of the Pre-IPO NOLs, or upon a change of control or other acceleration event, the payments required under the agreement could require us to use a substantial portion of our cash from operations for those purposes. Depending on the amount and timing of our future earnings (if any) and on other factors, including the effect of any limitations imposed on our ability to use the Pre-IPO NOLs, it is possible that all payments required under the Tax Receivable Agreement could become due within a relatively short period of time following this offering.

At the effective date of the Tax Receivable Agreement, we will recognize a liability equal to the estimated total payments (estimated as of March 31, 2011 to be approximately $35.9 million) to be made under the Tax Receivable Agreement, which will be accounted for as a reduction of additional paid-in capital. Subsequent changes in the estimated liability under the Tax Receivable Agreement will be recorded through earnings in operating expenses. If and when the Pre-IPO NOLs are available to us, the Tax Receivable Agreement will operate to transfer significantly all of the benefit to the Pre-IPO Stockholders. Additionally, the payments we make to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to us, such as deductions or an adjustment to the basis of our assets.

If we did not enter into the Tax Receivable Agreement, we would be entitled to realize the full economic benefit of the Pre-IPO NOLs, to the extent allowed by Section 382 of the Internal Revenue Code of 1986, as amended. The Tax Receivable Agreement is designed with the objective of causing our annual cash costs attributable to federal income taxes (without regard to our continuing 10% interest in the Pre-IPO NOLs) to be the same as we would have paid had we not had the Pre-IPO NOLs available to offset our federal taxable income. As a result, stockholders purchasing shares in this offering will not be entitled to the economic benefit of the Pre-IPO NOLs that would have been available if the Tax Receivable Agreement were not in effect (except to the extent of our continuing 10% interest in the Pre-IPO NOLs).

We rely on our private equity sponsors.

We have in recent years depended on our relationships with Indigo and Oaktree, our private equity sponsors, to help guide our business plan. These two private equity firms have significant expertise in financial matters generally and, in the case of Indigo, the low-cost airline industry in particular. This expertise has been available to us through the representatives these firms have had on our board of directors and through a Professional Services Agreement with Indigo that was in place prior to the completion of this offering. Following the completion of this offering, investment funds managed by our private equity sponsors, Indigo and Oaktree, will, in the aggregate, own approximately 61.8% of our common stock, assuming no exercise of the underwriters’ option to purchase additional shares, all of which would be sold by our selling stockholders, and assuming an offering at the mid-point of the range set forth on the cover page of this prospectus such that an additional number of shares of common stock are issued in the 2011 Recapitalization as discussed in “Certain Relationships and Related Transactions—Recapitalization Agreement.” After the offering, our private equity sponsors may elect to reduce their ownership in our company or reduce their involvement on our board of directors, which could reduce or eliminate the benefits we have historically achieved through our relationships with them.

Risks Related to Owning Our Common Stock

Control by our principal stockholders could adversely affect our other stockholders.

When this offering is completed, Indigo and Oaktree will beneficially own approximately 61.8% of our common stock, assuming no exercise of the underwriters’ option to purchase additional shares and assuming an

 

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offering at the mid-point of the range set forth on the cover page of this prospectus such that an additional 16.6 million shares of common stock are issued in the 2011 Recapitalization as discussed in “Certain Relationships and Related Transactions—Recapitalization Agreement.” As a result, Oaktree and Indigo will be able to exert a significant degree of influence or actual control over our management and affairs and over matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and other significant business or corporate transactions. In addition, under the “controlled company” exception to the independence requirements of the NASDAQ Stock Market, we will be exempt from the rules of the NASDAQ Stock Market that require that our board of directors be comprised of a majority of independent directors, that our compensation committee be comprised solely of independent directors and that our nominating and governance committee be comprised solely of independent directors. This concentrated control will limit the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our other stockholders do not view as beneficial. For example, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock. Investment funds managed by Oaktree and Indigo have entered into a Stockholders Voting Agreement in which they have agreed to vote their shares of our common stock to vote for directors as described more fully in “Certain Relationships and Related Transactions—Stockholders Voting Agreement.”

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the Securities and Exchange Commission and the NASDAQ Stock Market. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

We will be required to assess our internal control over financial reporting on an annual basis and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, significant expenses to remediate any internal control deficiencies and ultimately have an adverse effect on the market price of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and beginning with our Annual Report on Form 10-K for the year ending December 31, 2012, our management will be required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting we will not be able to

 

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conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. A material weakness was noted in our past internal controls related to our accounting for manufacturers’ credits, primarily in 2006 before our current management team was in place. During our 2010 year-end close, a separate material weakness was noted in our internal controls related to the accounting for our travel voucher liability. This material weakness had no impact on our financial statements for periods prior to the second quarter of 2010. However, we have restated our results of operations for the affected periods presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Financial Data” in this prospectus. We believe we have remediated these weaknesses and have taken steps to improve our internal controls and procedures. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could harm our operating results and lead to a decline in our stock price. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the NASDAQ Stock Market, regulatory investigations, civil or criminal sanctions and class action litigation.

The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

   

announcements concerning our competitors, the airline industry or the economy in general;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

media reports and publications about the safety of our aircraft or the aircraft type we operate;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

   

changes in the price of aircraft fuel;

 

   

announcements concerning the availability of the type of aircraft we use;

 

   

general and industry-specific economic conditions;

 

   

changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations;

 

   

sales of our common stock or other actions by investors with significant shareholdings, including trading strategies related to changes in fuel or oil prices; and

 

   

general market, political and economic conditions.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our common stock.

In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business or results of operations.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

Before this offering, there has been no public market for our common stock. An active, liquid trading market for our common stock may not develop or be sustained following this offering. We have applied to have our common stock listed on the NASDAQ Stock Market, but we cannot assure you that our application will be approved. In addition, we cannot assure you as to the liquidity of any such market that may develop or the price that our stockholders may obtain for their shares of our common stock.

 

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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock outstanding prior to this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate substantial dilution of $8.85 in net tangible book value per share from the price you paid, assuming an offering at the mid-point of the range set forth on the cover page of this prospectus such that an additional 16.6 million shares of common stock are issued in the 2011 Recapitalization as discussed in “Certain Relationships and Related Transactions—Recapitalization Agreement.” For a further description of the dilution that you will experience immediately after this offering, please see “Dilution.”

Our anti-takeover provisions may delay or prevent a change of control, which could adversely affect the price of our common stock.

Upon the consummation of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make it difficult to remove our board of directors and management and may discourage or delay “change of control” transactions, which could adversely affect the price of our common stock. These provisions include, among others:

 

   

our board of directors is divided into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at an annual meeting;

 

   

actions to be taken by our stockholders may only be effected at an annual or special meeting of our stockholders and not by written consent;

 

   

special meetings of our stockholders can be called only by the Chairman of the Board or by our corporate secretary at the direction of our board of directors;

 

   

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and

 

   

our board of directors may, without stockholder approval, issue series of Preferred Stock, or rights to acquire Preferred Stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control.

The value of our common stock may be adversely affected by additional issuances of common stock or Preferred Stock by us or sales by our principal stockholders.

Any future issuances or sales of our common stock by us will be dilutive to our existing common stockholders. We had 26.9 million shares of common stock outstanding as of March 31, 2011. All of the shares of common stock sold in this offering will be freely tradeable without restrictions or further registration under the Securities Act. Assuming an offering at the mid-point of the range set forth on the cover page of this prospectus

 

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such that an additional 16.6 million shares of common stock are issued in the 2011 Recapitalization as discussed in “Certain Relationships and Related Transactions—Recapitalization Agreement,” the holders of approximately 41.1 million shares, or 94.6% of outstanding shares of our common stock, have signed lock-up agreements with the underwriters of this offering, under which they have agreed not to sell, transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of the underwriters for a period of 180 days, subject to a possible extension under certain circumstances, after the date of this prospectus. In addition, the holders of approximately 2.4 million shares, or 5.4% of outstanding shares of our common stock (based on the foregoing assumptions), have agreed not to sell, transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of the selling stockholders for a period of 120 days, subject to a possible extension under certain circumstances, after the date of this prospectus. After this offering, the holders of approximately 43.4 million shares of our common stock, including shares outstanding as of March 31, 2011 and shares estimated to be issuable in connection with the 2011 Recapitalization (assuming its consummation on March 31, 2011) will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement. Please see “Certain Relationships and Related Transactions—Registration Rights” elsewhere in this prospectus. Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could adversely affect the prevailing price of our common stock.

Our corporate charter and bylaws include provisions limiting voting by non-U.S. citizens.

To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our amended and restated certificate of incorporation and amended and restated bylaws restrict voting of shares of our common stock by non-U.S. citizens. The restrictions imposed by federal law currently require that no more than 25% of our stock be voted, directly or indirectly, by persons who are not U.S. citizens, and that our president and at least two-thirds of the members of our board of directors and senior management be U.S. citizens. Our amended and restated bylaws provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record” would result in a suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law. Our amended and restated bylaws further provide that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. We are currently in compliance with these ownership restrictions. See “Business—Foreign Ownership” and “Description of Capital Stock—Anti-Takeover Provisions of Our Certificate of Incorporation and Bylaws to be in Effect Upon the Completion of this Offering—Limited Voting by Foreign Owners.” One of the funds managed by Oaktree and one of the funds managed by Indigo, which owned Class B Common Stock prior to this offering, are non-U.S. citizens. In connection with the 2011 Recapitalization, each share of Class B Common Stock will be exchanged for one share of common stock, provided that the non-U.S. citizen fund managed by Indigo may cause all or a portion of the shares to be exchanged for newly-established non-voting common stock and the right to convert on a share-for-share basis into common stock will be at the election of the holder for as long as they hold such non-voting common stock. If these shares are exchanged into common stock (in connection with the closing of this offering), all of our non-citizen funds will in the aggregate own approximately 19.5% of our common stock after the offering (assuming an offering price at the mid-point of the price range set forth on the cover page of this prospectus). The number of shares outstanding for purposes of this calculation will increase or decrease with the assumed initial offering price by a number of shares approximately as set forth in the table provided in the “Capitalization—2011 Recapitalization” section of this prospectus, under the column captioned “Total Shares of Common Stock Outstanding after this Offering.”

 

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We do not intend to pay cash dividends for the foreseeable future.

We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, business prospects and such other factors as our board of directors deems relevant.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

   

the competitive environment in our industry;

 

   

our ability to keep cost low;

 

   

changes in our fuel cost;

 

   

the impact of worldwide economic conditions, including the impact of the economic recession on customer travel behavior;

 

   

actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;

 

   

ability to generate non-ticket revenues;

 

   

restriction on third-party membership programs;

 

   

external conditions, including air traffic congestion, weather and outbreak of disease;

 

   

air travel substitutes;

 

   

labor disputes, employee strikes and other labor-related disruptions, including in connection with our current negotiations with the union representing our flight attendants;

 

   

ability to attract and retain qualified personnel;

 

   

loss of key personnel;

 

   

aircraft-related fixed obligations;

 

   

dependence on cash balances and operating cash flows;

 

   

ability to hedge fuel requirements;

 

   

our aircraft utilization rate;

 

   

maintenance costs;

 

   

our reliance on automated systems and the risks associated with changes made to those systems;

 

   

use of personal data;

 

   

lack of marketing alliances;

 

   

government regulation;

 

   

our ability to fulfill growth strategy;

 

   

operational disruptions;

 

   

our indebtedness;

 

   

our liquidity;

 

   

the concentration of our revenue from South Florida;

 

   

our reliance on third-party vendors and partners;

 

   

our reliance on a single fuel provider;

 

   

an aircraft accident or incident;

 

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our aircraft and engine suppliers;

 

   

changes in the Caribbean and Latin America markets;

 

   

insurance costs;

 

   

environmental regulations; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

In addition, in this prospectus, the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of the shares of common stock offered by us of approximately $276.3 million, based on an assumed initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting underwriting discounts and the expenses of this offering payable by us (which will include those incurred by the selling stockholders, other than underwriting discounts on the shares offered by them). A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the aggregate net proceeds of this offering by $18.8 million, which will increase (decrease) the amount of Notes we repay and amount of Preferred Stock that we redeem, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and expenses of this offering payable by us. Only the selling stockholders will sell shares of common stock if the underwriters’ over-allotment option is exercised, and we will not receive any proceeds from the shares of common stock to be offered by the selling stockholders in the over-allotment option.

We will pay underwriting discounts on the shares offered by us and the expenses of this offering payable by us and the selling stockholders.

We will retain net proceeds from the sale of shares of common stock by us in this offering equal to $150.0 million. The remaining net proceeds will be used for the following purposes and in the following amounts:

 

   

we will pay $1.6 million to Indigo in connection with the termination of their professional services agreement with us;

 

   

we will pay three individual, unaffiliated holders of our Subordinated Notes a fee equal to $450,000 in the aggregate; and

 

   

we will use the remaining net proceeds of this offering, which we estimate to be $124.2 million, to pay a portion of the outstanding principal amounts of the Tranche A Notes and Tranche B Notes and all accrued and unpaid interest thereon, to redeem a portion of the outstanding shares of Class B Preferred Stock and, to the extent funds are available, to redeem a portion of the outstanding shares of Class A Preferred Stock. Of such net proceeds, 25% will be used to pay principal and interest on certain of the Tranche B Notes owned by investment funds managed by Indigo and 75% will be used to pay principal and interest on certain of the Tranche A Notes and Tranche B Notes owned by investment funds managed by Oaktree, to redeem (at a redemption price per share equal to the Liquidation Preference) certain of the outstanding shares of Class B Preferred Stock owned by an unaffiliated individual stockholder and, to the extent funds are available, to redeem (at a redemption price per share equal to the Liquidation Preference) certain of the outstanding shares of Class A Preferred Stock owned by investment funds managed by Oaktree. A description of the Notes to be repaid is set forth below.

 

     Due      Contractual
Interest
Rate
    Principal and Accrued
and Unpaid Interest
Balance at March 31,
2011
     Amount Estimated to  be
Repaid with Net
Proceeds (1)(2)
 
                  (in thousands)      (in thousands)  

Tranche A Notes

     April 30, 2012         17   $ 123,198       $ 49,306   

Tranche A Notes

     December 30, 2011         17     20,000         8,004   

Tranche B Notes

     April 30, 2012         17     133,711         66,009   

 

  (1) Any increase or decrease in the total offering size will increase or decrease the amount of Notes we will repay and the number of shares of Preferred Stock that we redeem and therefore will also affect the number of shares of common stock outstanding after the offering.
  (2) Please see “Capitalization—2011 Recapitalization” for a sensitivity analysis of the Notes and shares of Preferred Stock to be repaid or redeemed, as the case may be, based on various assumed initial public offering prices.

 

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We intend to use the $150.0 million of net proceeds we retain from this offering for general corporate purposes, including cash reserves, working capital (including termination of our letter of credit facility described below), sales and marketing activities, general and administrative matters, and capital expenditures, including future flight equipment acquisitions.

We are party to a $30 million letter of credit facility that we use to satisfy a portion of the required holdback for our principal credit card processor. The facility is subject to a commitment fee of 15% per annum, which is payable on a monthly basis. As of March 31, 2011, the amount under the letter of credit was $13.0 million. We intend to terminate this letter of credit facility after the consummation of this offering and use a portion of the net proceeds from this offering retained by us to pay the lender a $0.6 million termination fee and to provide for any increase in restricted cash required by our credit card processor as a result of such termination. For more information, see “Description of Principal Indebtedness—Letter of Credit Facility.”

Pending these uses, we intend to invest the net proceeds in high quality, short-term obligations, and do not intend to invest in auction rate securities. Currently we do not yet know the amounts that we intend to use for each of these general corporate activities. Accordingly, our management will have broad discretion over the uses of the net proceeds in this offering. We cannot predict whether the proceeds invested will yield a favorable return.

 

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DIVIDEND POLICY

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

 

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CAPITALIZATION

The following table sets forth our capitalization and cash and cash equivalents as of as of March 31, 2011:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis after giving effect to (i) the receipt of the estimated net proceeds from the sale of 20,000,000 shares of common stock by us in this offering (based on an assumed initial public offering price of $15.00 per share, the mid-point of the price range set forth on the cover page of this prospectus), the deduction of underwriting discounts and offering expenses payable by us and the application of such net proceeds as described under “Use of Proceeds;” (ii) the exchange of any Notes not repaid with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; (iii) the exchange of any shares of Preferred Stock not redeemed with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; and (iv) entry into the Tax Receivable Agreement.

You should read this capitalization table together with our financial statements and the related notes appearing at the end of this prospectus, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, other financial information included in this prospectus and “Certain Relationships and Related Transactions—Recapitalization Agreement” elsewhere in this prospectus.

 

     As of March 31, 2011  
     Actual     Pro Forma As
Adjusted
 
     (in thousands)  

Cash and cash equivalents

   $ 62,601      $ 199,001   
                

Current maturities of long-term debt (1)

   $ 23,240      $ —     

Long-term debt (including due to related parties), less current maturities (1)

    
257,587
  
    —     

Mandatorily redeemable preferred stock

     80,909        —     

Stockholders’ (deficit) equity:

    

Common stock: Class A common stock, $0.0001 par value, 25,000,000 shares of common stock authorized, 20,848,847 shares issued and outstanding; 240,000,000 shares authorized, 63,441,258 shares issued and outstanding pro forma as adjusted

     2        6   

Common stock: Class B common stock, $0.0001 par value, 6,500,000 shares authorized, 6,004,103 shares outstanding; no shares authorized, no share issued and outstanding pro forma as adjusted

     1        —     

Additional paid-in capital (2)

     848        488,526   

Accumulated deficit

     (97,873     (98,473
                

Total stockholders’ (deficit) equity

     (97,022     390,059   
                

Total capitalization

   $ 264,714      $ 390,059   
                

 

(1) Excludes an aggregate of $11.0 million of accrued but unpaid interest on the Notes.
(2) Additional paid-in capital on a pro forma as adjusted basis is reduced as a result of the recognition of the liability equal to the total estimated payments (approximately $35.9 million as of March 31, 2011) to be made under the Tax Receivable Agreement.

 

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2011 Recapitalization

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

   

that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

   

no exercise of the underwriters’ over-allotment option to purchase up to 3,000,000 additional shares of our common stock from the selling stockholders;

 

   

that we have issued 16.6 million shares of common stock in connection with the 2011 Recapitalization; and

 

   

all shares of Class B Common Stock have been exchanged for shares of common stock on a share-for-share basis.

The number of shares outstanding after the offering will depend primarily on the price per share at which our common stock is sold in this offering and the total size of this offering. In connection with this offering and pursuant to the Recapitalization Agreement:

 

   

all of the principal amount and accrued and unpaid interest on all of our outstanding Notes either will be repaid with a portion of the net proceeds from this offering or, to the extent not repaid, exchanged for a number of shares of common stock equal to the principal amount and accrued and unpaid interest of such unpaid Notes divided by the price per share equal to the initial public offering price set forth on the cover page of this prospectus;

 

   

all shares of Class A Preferred Stock and Class B Preferred Stock outstanding immediately prior to this offering either will be redeemed and all accrued and unpaid dividends related to such shares will be paid with a portion of the net proceeds from this offering or, to the extent such shares are not redeemed, such shares will be exchanged for a number of shares of common stock equal to the Liquidation Preference of such shares divided by the per share equal to the initial public offering price set forth on the cover page of this prospectus; and

 

   

each share of Class B Common Stock will be exchanged for one share of common stock, provided an investment fund managed by Indigo may cause all or a portion of the shares of Class B Common Stock owned by it to be exchanged for the same number of shares of another class of capital stock, which will have the same rights as the common stock, except it will be non-voting and will have the right to convert on a share-for-share basis into common stock at the election of the holder.

For more information, please see “Use of Proceeds” and “Certain Relationships and Related Transactions—Recapitalization Agreement” elsewhere in this prospectus.

In this prospectus, we have calculated the number of shares of common stock to be issued pursuant to the 2011 Recapitalization using an assumed offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), an assumed offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock, and the application of the net proceeds to us from this offering as set forth in “Use of Proceeds.”

A change in the offering price and, accordingly, the amount of net proceeds received by us would result in a change in (1) after application of the net proceeds as set forth in “Use of Proceeds,” the amount of outstanding Notes and the number of outstanding shares of Preferred Stock to be exchanged for shares of common stock (instead of being repaid or redeemed, as the case may be) upon the consummation of this offering and (2) the number of shares of common stock that would be issued upon exchange for such securities. The following table, based on the assumptions described above, shows the effect of various initial public offering prices on the amount of Notes repaid, the number of shares of Preferred Stock redeemed, and the number of shares of common

 

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stock that would be issued in exchange for the Notes and the shares of Preferred Stock remaining outstanding. The initial public offering prices shown below are hypothetical and illustrative only (in thousands except shares and per share data).

 

Assumed

Initial Offering Price

   Note Repayment    Prefered Stock
Redemption
     Shares of Common
Stock Issued Upon
Exchange for Notes
and Preferred Stock
   Total Shares of
Common Stock
Outstanding after this
Offering (1)

$14.00  

   $    104,782      $   668       19,112,473    65,965,423

  14.50

       114,051      774       17,806,870    64,659,820

  15.00 (mid-point)

       123,319      881       16,588,308    63,441,258

  15.50

       132,588      987       15,448,363    62,301,313

  16.00

       141,857      1,093       14,379,664    61,232,614

 

(1) Based on the number of shares of our common stock outstanding as of March 31, 2011 and includes the conversion of 6,004,103 shares of Class B Common Stock into common stock on a share-for-share basis, but excludes the following:

 

   

an aggregate of 178,000 shares of common stock reserved for issuance under our Amended and Restated 2005 Incentive Stock Plan;

 

   

an aggregate of 3,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan; and

 

   

469,000 shares of common stock issuable upon the exercise of stock options outstanding under our Amended and Restated 2005 Incentive Stock Plan, of which 83,875 are vested.

Because the share amounts set forth above are based on shares of Preferred Stock and Notes outstanding as of March 31, 2011, such amounts do not take into account shares of common stock to be issued in the 2011 Recapitalization in satisfaction of accrued and unpaid interest on Notes and dividends on Preferred Stock accrued after March 31, 2011 and through the closing date of this offering. Such interest and dividends accrue at a rate of approximately $4.2 million per month in the aggregate.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the offering.

The historical net tangible book value (deficit) of our common stock as of March 31, 2011 was $(97.6) million, or $(3.63) per share. Historical net tangible book value per share is determined by dividing the net tangible book value by the number of shares of outstanding common stock. If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock.

After giving effect to (i) our issuance of 20,000,000 shares of common stock at an assumed initial public offering price of $15.00 per share, the mid-point of the range of the estimated initial offering price of between $14.00 and $16.00 as set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us, (ii) the exchange of any Notes not repaid with the net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement, (iii) the exchange of any shares of Preferred Stock not redeemed with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; and (iv) entry into the Tax Receivable Agreement, our pro forma net tangible book value as adjusted as of March 31, 2011 would have been approximately $390.1 million, or approximately $6.15 per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $9.78 per share to our existing stockholders and an immediate dilution of $8.85 per share to new investors in this offering. If the initial public offering price is higher or lower than $15.00 per share, the dilution to new stockholders will be higher or lower.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price

     $ 15.00   

Net tangible book value per share as of March 31, 2011

   $ (3.63  

Net increase per share attributable to 2011 Recapitalization and TRA(1)

     0.56     
          

Pro forma net tangible book value per share before this offering

     (3.07  

Increase per share attributable to this offering

     9.22     
          

Pro forma net tangible book value per share, as adjusted to give effect to this offering

       6.15   
          

Dilution in pro forma net tangible book value per share to new investors in this offering

     $ 8.85   
          

 

(1) Reflects the net increase per share attributable to the conversion of Preferred Stock and exchange of outstanding Notes pursuant to the 2011 Recapitalization, net of the decrease per share attributable to the distribution to the Pre-IPO Stockholders of their right to receive a pro rata share of the future payments to be made under the Tax Receivable Agreement.

A $1.00 increase in the assumed initial public offering price of $15.00 per share would increase the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.22 per share and the dilution to new investors by $0.78 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us. A $1.00 (decrease) in the assumed initial public offering price of $15.00 per share would (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $(0.24) per share and the dilution to new investors by $(0.76) per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and estimated

 

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offering expenses payable by us. The number of shares of common stock outstanding after the offering will also vary with changes in the initial public offering price, as shown in the table under “—2011 Recapitalization” below and “Capitalization” elsewhere in this prospectus.

The table below summarizes as of March 31, 2011, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing stockholders, (ii) issued to existing preferred stockholders and Note holders upon conversion of Preferred Stock and exchange of outstanding Notes pursuant to the 2011 Recapitalization and (iii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $15.00 per share (in thousands except per share and percentage data).

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing Stockholders

     26,852,950         42.3 %    $ 1,372         0.3 %    $ 0.05   

2011 Recapitalization preferred stockholders and Note holders

     16,588,308         26.1        124,200         29.2        7.49   

New investors

     20,000,000         31.5        300,000         70.5        15.00   
                                          

Total

     63,441,258         100 %    $ 425,572         100.0 %    $ 6.71   
                                          

The above discussion and tables are based on 26,852,950 shares of common stock issued and outstanding as of March 31, 2011 and excludes:

 

   

an aggregate of 178,000 shares of common stock reserved for issuance under our Amended and Restated 2005 Incentive Stock Plan;

 

   

an aggregate of 3,000,000 shares of common stock reserved for issuance under our 2011 Equity Incentive Award Plan; and

 

   

469,000 shares of common stock issuable upon the exercise of stock options outstanding under our Amended and Restated 2005 Incentive Stock Plan, of which 83,875 are vested.

Because the share amounts set forth above are based on shares of Preferred Stock and Notes outstanding as of March 31, 2011, such amounts do not take into account shares of common stock to be issued in the 2011 Recapitalization in satisfaction of accrued and unpaid interest on Notes and dividends on Preferred Stock accrued after March 31, 2011 and through the closing date of this offering. Such interest and dividends accrue at a rate of approximately $4.2 million per month in the aggregate.

2011 Recapitalization

In connection with this offering and pursuant to the Recapitalization Agreement:

 

   

all of the principal amount and accrued and unpaid interest on all of our outstanding Notes either will be repaid with a portion of the net proceeds from this offering or, to the extent not repaid, exchanged for a number of shares of common stock equal to the principal amount and accrued and unpaid interest of such unpaid Notes divided by the price per share equal to the initial public offering price set forth on the cover page of this prospectus;

 

   

all shares of Class A Preferred Stock and Class B Preferred Stock outstanding immediately prior to this offering either will be redeemed and all accrued and unpaid dividends related to such shares will be paid with a portion of the net proceeds from this offering or, to the extent such shares are not redeemed, such shares will be exchanged for a number of shares of common stock equal to the Liquidation Preference of such shares divided by the per share equal to the initial public offering price set forth on the cover page of this prospectus; and

 

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each share of Class B Common Stock will be exchanged for one share of common stock, provided an investment fund managed by Indigo may cause all or a portion of the shares of Class B Common Stock owned by it to be exchanged for the same number of shares of another class of capital stock, which will have the same rights as the common stock, except it will be non-voting and will have the right to convert on a share-for-share basis into common stock at the election of the holder.

For more information, please see “Use of Proceeds” and “Certain Relationships and Related Transactions—Recapitalization Agreement” elsewhere in this prospectus.

In this prospectus, we have calculated the number of shares of common stock to be issued pursuant to the 2011 Recapitalization using an assumed offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), an assumed offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock, and the application of the net proceeds to us from this offering as set forth in “Use of Proceeds.”

A change in the offering price would result in a change in (1) after application of the net proceeds as set forth in “Use of Proceeds,” the amount of outstanding Notes and the number of outstanding shares of Preferred Stock to be exchanged for shares of common stock (instead of being repaid or redeemed, as the case may be) upon the consummation of this offering, and (2) the number of shares of common stock that would be issued upon exchange for such securities. For more information, please see “Certain Relationships and Related Transactions—Recapitalization Agreement” elsewhere in this prospectus.

The following table, based on the assumptions described above, shows the effect of various initial public offering prices on our pro forma as adjusted tangible book value per share after this offering and the dilution to new investors. The initial public offering prices shown below are hypothetical and illustrative only.

 

   

                                     As of March 31, 2011                                                     

Assumed

Initial Offering Price

 

  Pro Forma As Adjusted

Net Tangible Book Value

Per Share

  

Dilution Per Share of

Common Stock to New Investors

in this Offering

             $14.00

  $ 5.91        $ 8.09

               14.50

     6.03           8.47

               15.00 (mid-point)

     6.15           8.85

               15.50

     6.26           9.24

               16.00

     6.37           9.63

 

 

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SELECTED FINANCIAL AND OPERATING DATA

You should read the following selected historical financial and operating data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other financial information included in this prospectus. The selected financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included in this prospectus.

We derived the summary statements of operations data for the years ended December 31, 2008, 2009, and 2010 and the balance sheet data as of December 31, 2009 and 2010 from our audited financial statements included in this prospectus. We derived the statements of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006, 2007 and 2008 from our audited financial statements not included in this prospectus.We derived the summary statements of operations data for the three months ended March 31, 2010 and 2011 and the balance sheet data as of March 31, 2011 from our unaudited condensed financial statements included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the three months ended March 31, 2011 are not necessarily indicative of results to be expected for the full year.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2006     2007     2008     2009     2010(1)     2010     2011  
    (in thousands except share and per share data)  

Operating revenues:

             

Passenger

  $ 519,351      $ 686,447      $ 657,448      $ 536,181      $ 537,969      $ 136,909      $ 153,280   

Non-ticket

    23,836        76,432        129,809        163,856        243,296        47,142        79,382   
                                                       

Total operating revenues

    543,187        762,879        787,257        700,037        781,265        184,051        232,662   

Operating expenses:

             

Aircraft fuel (2)

    176,692        251,230        299,094        181,107        248,206        53,826        80,912   

Salaries, wages and benefits

    133,537        146,626        147,015        135,420        156,443        36,064        43,193   

Aircraft rent

    93,136        119,686        105,605        89,974        101,345        22,576        27,708   

Landing fees and other rents

    30,646        42,441        43,331        42,061        48,118        10,744        11,655   

Distribution

    29,234        36,315        37,816        34,067        41,179        9,288        11,932   

Maintenance, materials and repairs

    22,784        23,448        24,237        27,536        28,189        6,692        8,058   

Depreciation and amortization

    9,552        5,401        4,236        4,924        5,620        1,370        1,546   

Other operating

    76,269        105,503        85,608        72,921        82,594        19,338        20,733   

Loss on disposal of assets

    3,853        94        4,122        1,010        77        49        —     

Restructuring (3)

    32,499        142        17,902        (392     621        (20     81   
                                                       

Total operating expenses

    608,202        730,886        768,966        588,628        712,392        159,927        205,818   

Operating (loss) income

    (65,015     31,993        18,291        111,409        68,873        24,124        26,844   

Other expense (income):

             

Interest expense (4)

    20,985        38,163        40,245        46,892        50,313        12,772        14,286   

Capitalized interest (5)

    (2,299     (1,755     (166     (951     (1,491     (237     (1,037

Interest income

    (3,183     (5,951     (1,976     (345     (328     (60     (86

Gain on extinguishment of debt (6)

    —          —          (53,673     (19,711     —          —          —     

Other expense (income)

    134        130        214        298        194        34        48   
                                                       

Total other expense (income)

    15,637        30,587        (15,356     26,183        48,688        12,509        13,211   

Income (loss) before income taxes

    (80,652     1,406        33,647        85,226        20,185        11,615        13,633   

Provision (benefit) for income taxes (7)

    —          44        388        1,533        (52,296     339        5,750   
                                                       

Net (loss) income

  $ (80,652   $ 1,362      $ 33,259      $ 83,693      $ 72,481      $ 11,276      $ 7,883   
                                                       

Earnings Per Share:

             

Basic

  $ (4.57   $ 0.05      $ 1.29      $ 3.23      $ 2.77      $ 0.43      $ 0.30   

Diluted

  $ (4.57   $ 0.05      $ 1.29      $ 3.18      $ 2.72      $ 0.42      $ 0.30   

Weighted average shares outstanding:

             

Basic

    17,639,596        25,746,445        25,780,070        25,910,766        26,183,772        26,056,908        26,347,875   

Diluted

    17,639,596        25,861,095        25,879,860        26,315,121        26,689,855        26,760,781        26,689,151   

Other financial data (unaudited):

             

EBITDA (8):

  $ (55,597   $ 37,264      $ 75,986      $ 135,746      $ 74,299      $ 25,460      $ 28,342   

Adjusted EBITDA (8):

  $ (17,484   $ 28,022      $ 55,016      $ 116,837      $ 74,301      $ 25,103      $ 28,249   

Adjusted EBITDAR (8):

  $ 75,652      $ 147,708      $ 160,621      $ 206,811      $ 175,646      $ 47,679      $ 55,957   

 

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    Year Ended
December 31, 2010
    Three Months Ended
March  31, 2011
 

Pro forma earnings per share (9):

   

Basic

  $ 1.69      $ 0.28   

Diluted

    1.68        0.27   

Pro forma weighted average shares outstanding (9):

   

Basic

    62,722,080        62,936,183   

Diluted

    63,278,163        63,277,459   

 

(1) We estimate that the 2010 pilot strike had a net negative impact on our operating income for 2010 of approximately $24 million consisting of an estimated $28 million in lost revenues and approximately $4 million of incremental costs resulting from the strike, offset in part by a reduction of variable expenses during the strike of approximately $8 million for flights not flown. Additionally, under the terms of the new pilot contract, we also paid $2.3 million in return-to-work payments during the second quarter, which are not included in the strike impact costs described above.
(2) Aircraft fuel expense is the sum of (i) “into-plane fuel cost,” which includes the cost of jet fuel and certain other charges such as fuel taxes and oil, (ii) settlement gains and losses and (iii) unrealized mark-to-market gains and losses associated with fuel hedge contracts. The following table summarizes the components of aircraft fuel expense for the periods presented:

 

     Year Ended December 31,     Three Months Ended
March  31,
 
     2006     2007     2008 (*)     2009     2010     2010     2011  
    

(in thousands)

          (unaudited)  

Into-plane fuel cost

   $ 175,975      $ 265,226      $ 359,097      $ 181,806      $ 251,754      $ 54,670      $ 85,568   

Settlement (gains) losses

     (339     (3,714     (69,876     750        (1,483     (216     (4,110

Changes in value of fuel hedge contracts

     1,056        (10,282     9,873        (1,449     (2,065     (628     (546
                                                        

Aircraft Fuel

   $ 176,692      $ 251,230      $ 299,094      $ 181,107      $ 248,206      $ 53,826      $ 80,912   
                                                        

 

  (*) In July 2008, we monetized all of our fuel hedge contracts, which included hedges that had scheduled settlement dates during the remainder of 2008 and in 2009. We recognized a gain of $37.8 million representing cash received upon monetization of these contracts, of which a gain of $14.2 million related to 2009 fuel hedge positions on these contracts.

 

(3) Restructuring charges include: (i) for 2006 and 2007, amounts relating to the accelerated retirement of our MD-80 fleet; (ii) for 2008 and 2009, amounts relating to the early termination in mid-2008 of leases for seven Airbus A319 aircraft, a related reduction in workforce and the exit facility costs associated with returning planes to lessors in 2008; (iii) for 2009, amounts relating to the sale of previously expensed MD-80 parts; and (iv) for 2010 and for the three months ended March 31, 2011 amounts relating to exit facility costs associated with moving our Detroit, Michigan maintenance operations to Fort Lauderdale, Florida. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.”
(4) Substantially all of the interest expense recorded in 2007, 2008, 2009, 2010 and the three months ended March 31, 2010 and 2011 relates to Notes and Preferred Stock held by our principal stockholders that will be repaid or redeemed, or exchanged for shares of common stock, in connection with the 2011 Recapitalization that will occur at the closing of the offering contemplated by this prospectus. Accordingly, those amounts are not indicative of amounts to be reported in our statement of operations after the closing of this offering. Please see “Use of Proceeds” and “Capitalization.”
(5) Interest attributable to funds used to finance the acquisition of new aircraft, including pre-delivery deposit payments, or PDPs, is capitalized as an additional cost of the related asset. Interest is capitalized at the weighted average implicit lease rate of our aircraft.
(6) Gain on extinguishment of debt represents the recognition of contingencies provided for in our 2006 recapitalization agreements, which provided for the cancellation of shares of Class A Preferred Stock and reduction of the liquidation preference of the remaining Class A Preferred Stock and associated accrued but unpaid dividends based on the outcome of the contingencies. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other (income) expense, net—2009 compared to 2008.”
(7) Net income for 2010 includes a $52.3 million net tax benefit primarily due to the release of a valuation allowance resulting in a deferred tax benefit of $52.8 million in 2010. Absent the release of the valuation allowance and corresponding tax benefit, our net income would have been $19.7 million for 2010. Immediately prior to the completion of this offering, we intend to enter into the Tax Receivable Agreement and thereby distribute to each holder of our common stock as of such time, or the Pre-IPO Stockholders, the right to receive a pro rata share of the future payments to be made under such agreement. These future payments to the Pre-IPO Stockholders (estimated as of March 31, 2011 to be approximately $35.9 million) will be in an amount equal to 90% of the cash savings in federal income tax realized by us by virtue of our future use of the federal net operating loss, deferred interest deductions and certain tax credits held by us as of March 31, 2011. Please see “Certain Relationships and Related Transactions—Tax Receivable Agreement.”
(8)

EBITDA, Adjusted EBITDA and Adjusted EBITDAR are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of EBITDA and EBITDAR are well recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. Adjusted EBITDA eliminates several significant items historically reflected in our statement of operations, but which will not be relevant after the closing of the offering contemplated by this prospectus, including interest expense on indebtedness and gain on Notes and Preferred Stock to be repaid or redeemed,

 

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or exchanged for common stock, in connection with this offering, management fees we will cease paying after the completion of this offering and expenses of this offering unrelated to our continuing operations. We have also adjusted for stock-based compensation expenses, the amount of which is dependent on market comparables, and other non-operating matters that are outside of our control and thus not indicators of our ongoing operating performance. Adjusted EBITDA also eliminates charges from two significant restructuring programs involving the accelerated conversion of our entire fleet from MD-80 family aircraft to Airbus A320 family aircraft and a reduction in the fleet in mid-2008 in response to record high fuel prices and rapidly deteriorating economic conditions, both of which we believe are unique events unrelated to our ongoing operating activities. Further, we believe Adjusted EBITDAR is useful in evaluating our operating performance compared to our competitors because its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different companies for reasons unrelated to overall operating performance. We also use Adjusted EBITDA and Adjusted EBITDAR to establish performance measures for executive compensation purposes. However, because derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of EBITDA as presented may not be directly comparable to similarly titled measures presented by other companies.

EBITDA, Adjusted EBITDA and Adjusted EBITDAR have limitations as an analytical tool. Some of these limitations are: EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements; non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and other companies in our industry may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations EBITDA, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

The following table represents the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net (loss) income for the periods indicated below:

 

    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010 (g)         2010         2011  
    (in thousands)  

Reconciliation:

             

Net (loss) income

  $ (80,652   $ 1,362      $ 33,259      $ 83,693      $ 72,481      $ 11,276      $ 7,883   

Plus (minus):

             

Interest expense

    20,985        38,163        40,245        46,892        50,313        12,772        14,286   

Capitalized interest

    (2,299     (1,755     (166     (951     (1,491     (237     (1,037

Interest income

    (3,183     (5,951     (1,976     (345     (328     (60     (86

Provision/(benefit) for income taxes

    —          44        388        1,533        (52,296     339        5,750   

Depreciation and amortization

    9,552        5,401        4,236        4,924        5,620        1,370        1,546   
                                                       

EBITDA

    (55,597 )      37,264        75,986        135,746        74,299        25,460        28,342   

Gain on extinguishment of debt (a)

    —          —          (53,673     (19,711     —          —          —     

Management fees (b)

    652        800        800        800        800        200        200   

Equity based stock compensation (c)

    53        4        6        113        569        42        172   

Restructuring (d)

    32,499        142        17,902        (392     621        (20     81   

Transaction expenses (e)

    —          —          —          720        —          —          —     

Unrealized mark-to-market gains (losses) (f)

    1,056        (10,282     9,873        (1,449     (2,065     (628     (546

Loss on disposal of assets

    3,853        94        4,122        1,010        77        49        —     
                                                       

Adjusted EBITDA

    (17,484 )      28,022        55,016        116,837        74,301        25,103        28,249   
                                                       

Aircraft rentals

    93,136        119,686        105,605        89,974        101,345        22,576        27,708   
                                                       

Adjusted EBITDAR

  $ 75,652      $ 147,708      $ 160,621      $ 206,811      $ 175,646      $ 47,679      $ 55,957   
                                                       

 

  (a) Gain on extinguishment of debt represents the recognition of contingencies provided for in our 2006 recapitalization agreements which provided for the cancellation of shares of Class A Preferred Stock and reduction of the liquidation preference of the remaining Class A Preferred Stock and associated accrued but unpaid dividends based on the outcome of the contingencies. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other (income) expense, net—2009 compared to 2008.”
  (b) Management fees include annual fees we paid to our sponsors pursuant to professional services agreements, which will be terminated in connection with the closing of this offering, and the reimbursement of certain expenses incurred thereunder. Please see “Use of Proceeds” and “Certain Relationships and Related Transactions.”

 

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  (c) Equity based stock compensation is a non-cash expense relating to our equity based compensation program.
  (d) Restructuring charges include: (i) for 2006 and 2007, amounts relating to the accelerated retirement of our MD-80 fleet; (ii) for 2008 and 2009, amounts relating to the early termination in mid-2008 of leases for seven Airbus A319 aircraft, a related reduction in workforce and the exit facility costs associated with returning planes to lessors in 2008; (iii) for 2009, amounts relating to the sale of previously expensed MD-80 parts; and (iv) for 2010 and for the three months ended March 31, 2011, amounts relating to exit facility costs associated with moving our Detroit, Michigan maintenance operations to Fort Lauderdale, Florida . For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.”
  (e) Transaction expenses include professional fees incurred in connection with an acquisition transaction that was not completed.
  (f) Unrealized mark-to-market gains and losses is comprised of non-cash adjustments to aircraft fuel expenses.
  (g) Reflects the effects of the strike of our pilots in June 2010. Please see footnote (1) above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—June 2010 Pilot Strike.”

 

(9) Pro forma earnings per share is presented for the year ended December 31, 2010 and the three months ended March 31, 2011, to give effect to the following transactions as if they occurred as of January 1, 2010: (i) the elimination of all of our outstanding indebtedness and Preferred Stock, and the termination of any outstanding letter of credit facility supporting collateral obligations due to our credit card processors through (x) the application of a portion of the net proceeds from the sale of shares of common stock by us in this offering, (y) the exchange of any Notes not repaid with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement and (z) the exchange of any shares of Preferred Stock not redeemed with net proceeds from this offering for shares of common stock pursuant to the Recapitalization Agreement; (ii) adding back to net income the interest expense recorded in our statement of operations related to the indebtedness and Preferred Stock assumed to be retired ($50.3 million for 2010 and $14.3 million for the three months ended March 31, 2011); (iii) the issuance of shares of common stock in this offering and pursuant to the Recapitalization Agreement; and (iv) the estimated tax impact resulting from the above transactions. The number of such shares issued assumes an initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and an offering date of March 31, 2011 for purposes of calculating accrued and unpaid interest on the Notes and accrued and unpaid dividends on the shares of Preferred Stock. The number of shares outstanding for purposes of this calculation will increase or decrease with the assumed initial offering price by a number of shares approximately as set forth in the table provided in the “Capitalization—2011 Recapitalization” section of this prospectus, under the column captioned “Total Shares of Common Stock Outstanding after this Offering.”

The following table presents balance sheet data for the periods presented.

 

    As of December 31,     As of March 31,  
    2006     2007     2008     2009     2010     2011  
   

(in thousands)

       

Balance Sheet Data:

           

Cash and cash equivalents

  $ 80,622      $ 54,603      $ 16,229      $ 86,147      $ 82,714      $
62,601
  

Total assets

    228,059        257,382        240,009        327,866        475,757        545,240   

Current portion of long-term debt (1)

    —          890        5,099        3,240        23,240       23,240   

Long-term debt, less current maturities (1)

    160,343        179,894        209,381        238,992        257,587        257,587   

Mandatorily redeemable preferred stock

    131,599        138,777        89,685        75,110        79,717        80,909   

Stockholders’ deficit

    (296,508     (295,154     (261,890     (178,127     (105,077     (97,022

 

(1) Excludes an aggregate of $11.0 million of accrued but unpaid interest on the Notes.

 

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OPERATING STATISTICS

 

    Year Ended
December 31,
    Three Months Ended
March 31,
 
        2006             2007             2008             2009             2010             2010             2011      

Operating Statistics (unaudited) (A)

             

Average aircraft

    31.4        35.9        32.8        28.0        30.5        28.3        33.7   

Aircraft at end of period

    31        36        28        28        32        29        35   

Airports served in the period

    30        40        45        43        39        39        44   

Average daily Aircraft utilization (hours)

    9.1        11.5        12.6        13.0        12.8        12.9        12.6   

Average stage length (miles)

    881        956        925        931        941        942        961   

Block hours

    103,962        150,644        150,827        133,227        141,864        32,898        38,150   

Passenger flight segments (thousands)

    4,967        6,974        6,976        6,325        6,952        1,526        1,863   

Revenue passenger miles (RPMs) (thousands)

    4,554,125        6,850,565        6,599,809        6,039,064        6,664,395        1,464,645        1,847,280   

Available seat miles (ASMs) (thousands)

    5,794,099        8,461,861        8,262,230        7,485,141        8,119,923        1,820,131        2,200,097   

Load factor (%)

    78.6        81.0        79.9        80.7        82.1        80.5        84.0   

Average ticket revenue per passenger flight segment ($)

    104.56        98.44        94.24        84.77        77.39        89.74        82.30   

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

    4.80        10.96        18.61        25.91        35.00        30.90        42.62   

Total revenue per passenger segment ($)

    109.36        109.40        112.85        110.68        112.39        120.64        124.92   

Average yield (cents)

    11.93        11.14        11.93        11.59        11.72        12.57        12.59   

RASM (cents)

    9.37        9.02        9.53        9.35        9.62        10.11        10.58   

CASM (cents)

    10.50        8.64        9.31        7.86        8.77        8.79        9.35   

Adjusted CASM (cents) (B)

    9.92        8.76        8.97        7.89        8.79        8.82        9.38   

Adjusted CASM ex fuel (cents) (B)

    6.89        5.67        5.47        5.45        5.71        5.83        5.67   

Fuel gallons consumed (thousands)

    82,980        113,842        109,562        98,422        106,628        24,200        28,172   

Average economic fuel cost per gallon ($)

    2.11        2.30        2.64        1.85        2.35        2.25        2.89   

 

(A) See “Glossary of Airline Terms” elsewhere in this prospectus for definitions of terms used in this table.

 

(B) Excludes restructuring charges of $32.5 million (0.56 cents per ASM) in 2006, $0.1 million (less than 0.01 cents per ASM) in 2007 and $17.9 million (0.22 cents per ASM) in 2008; and credits of $0.4 million (less than 0.01 cents per ASM) in 2009, and $0.6 million (less than 0.01 cents per ASM) in 2010, $0.02 million (less than 0.01 cents per ASM) in the three months ended March 31, 2010 and $0.08 million (less than 0.01 cents per ASM) in the three months ended March 31, 2011. These amounts are excluded from all calculations of Adjusted CASM provided in this prospectus. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Operating Expenses—Restructuring Charges.” Also excludes unrealized mark-to-market (gains) and losses of $1.1 million (0.02 cents per ASM) in 2006, $(10.3) million ((0.12) cents per ASM) in 2007, $9.9 million (0.12 cents per ASM) in 2008, $(1.4) million ((0.02) cents per ASM) in 2009 and $(2.1) million ((0.03) cents per ASM) in 2010, $(0.6) million ((0.03) cents per ASM) in the three months ended March 31, 2010, and $(0.6) million ((0.02) cents per ASM) in the three months ended March 31, 2011. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

Spirit Airlines is an ultra low-cost, low-fare airline based in Fort Lauderdale, Florida that provides affordable travel opportunities principally to and from South Florida, the Caribbean and Latin America. Our targeted growth markets have historically been underserved by low-cost carriers, which we believe provides us sustainable expansion opportunities. Our ULCC business model allows us to offer a low-priced basic service combined with a range of optional services for additional fees, targeting price-sensitive leisure travelers and VFR travelers. Notwithstanding the recent volatility in the cost of jet fuel and the severe economic recession, we have been able to maintain relatively stable unit revenue while maintaining a low-cost structure, and we have been profitable in each of the last four years and in the first quarter of 2011. For 2010, we had total operating revenues of $781.3 million, operating income of $68.9 million and net income of $72.5 million ($19.7 million excluding the release of a valuation allowance on our deferred tax assets and related tax benefit). For the three months ended March 31, 2011, we had total operating revenues of $232.7 million, operating income of $26.8 million and net income of $7.9 million. We currently serve 46 airports.

We have reduced our unit operating costs significantly since redefining Spirit as a ULCC in 2006. As a result, our operating cost structure is among the lowest in the Americas, enabling us to offer very low fares in the markets we serve while delivering operating profitability. Key elements of our low-cost structure include our efficient asset utilization, operation of an all Airbus single-aisle fleet with high-density seating configurations, employee productivity, rigorous cost control and use of scalable outsourced services. Furthermore, our modern fleet and aircraft seat configuration enable us to operate as one of the most fuel-efficient U.S. jet airline operators on a per available seat mile, or ASM, basis. We have demonstrated the ability to implement our ULCC business model and to adjust our capacity and routes in response to changing market conditions as part of our focus on achieving consistent route profitability.

Our ULCC business model allows us to compete principally through offering low base fares. During 2010 and the first three months of 2011, our average base fare was approximately $77 and $82, respectively, and we regularly offer promotional base fares of $9 or less. Since 2007, we have unbundled components of our air travel service that have traditionally been included in base fares, such as baggage and advance seat selection, and offer them as optional, ancillary services for additional fees (which we record in our financial statements as non-ticket revenue) as part of a strategy to enable our passengers to identify, select and pay for the services they want to use. While many domestic airlines have also adopted some aspects of our unbundled pricing strategy, unlike us, they generally have not made a corresponding reduction in base fares.

We have lowered our base fares by up to 40% since initiating our unbundling strategy, with the goal of stimulating additional passenger demand in the markets we serve. We plan to continue to use low fares to stimulate demand, a strategy that generates additional non-ticket revenue opportunities and, in turn, allows us to further lower base fares and stimulate demand even further. This unbundling and low base fare strategy is designed to support profitable growth. In 2009, our operating income margin of 15.9% was among the highest in the U.S. airline industry. For 2010, our operating income margin was 8.8%, reflecting the effects of increased fuel prices and our June 2010 pilot strike. For the three months ended March 31, 2011, our operating income margin was 11.5%, reflecting the effects of increased fuel prices.

 

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June 2010 Pilot Strike

On May 13, 2010, the NMB released us and the pilots’ union from mandatory supervised mediation, which commenced a 30-day “cooling off” period as provided in the RLA. On June 12, 2010, following several negotiation sessions with the pilots’ union during the cooling off period that did not result in an agreement, our pilots declared a strike, and we were forced to suspend all flight operations. The parties reached a tentative agreement on June 16, 2010 under a Return to Work Agreement and a full flight schedule was resumed on June 18, 2010. On July 23, 2010, the pilots ratified a new five-year collective bargaining agreement, which became effective on August 1, 2010.

The results of operations for 2010 were materially adversely affected by the pilot strike. The pilot strike resulted in reduced bookings in the period leading up to the strike as our customers became aware of the impending end of the cooling off period, and lost revenues while flight operations were shut down and while we recovered from the strike. We also experienced additional expenses related to the strike, including costs to reaccommodate passengers, offset by reduced variable expenses, such as reduced fuel consumption and employee costs for flights not operated. We estimate that the strike had a net negative impact on our operating income for 2010 of approximately $24 million, consisting of an estimated $28 million in lost revenues and approximately $4 million of incremental costs resulting from the strike, offset in part by a reduction of variable expenses during the strike of approximately $8 million for flights not flown. The strike resulted in a reduction of approximately 145.8 million ASMs from our scheduled flying that was suspended during the five-day strike period. Additionally, under the terms of the new pilot contract, we also paid $2.3 million in return-to-work payments during the second quarter of 2010, which are not included in the strike impact costs described above.

The new agreement with our pilots will increase our pilot labor costs by approximately 11% in 2011 as compared to the estimated cost of the previous collective bargaining agreement and includes pay rate increases and modified work rules, which will increase the productivity of our pilots. We believe the five-year term is valuable in providing stability to our labor costs, and that the other terms will also provide us with competitive pilot labor costs compared to other U.S.-based low-cost carriers.

Our Operating Revenues

Our operating revenues are comprised of passenger revenues and non-ticket revenues.

Passenger Revenues. Passenger revenues consist of the base fares that customers pay for air travel.

Non-ticket Revenues. Non-ticket revenues are generated from air travel-related fees paid by the ticketed passenger for baggage, bookings through our call center or third-party vendors, advance seat selection, itinerary changes, and loyalty programs such as our FREE SPIRIT affinity credit card program and $9 Fare Club. Non-ticket revenues also include revenues derived from services not directly related to providing transportation such as the sale of advertising to third parties on our website and on board our aircraft.

Substantially all of our revenues are denominated in U.S. dollars. Passenger revenues are recognized once the related flight departs. Accordingly, the value of tickets sold in advance of travel is included under our current liabilities as “air traffic liability,” or ATL, until the related air travel is provided. Non-ticket revenues are generally recognized at the time the ancillary products are purchased or ancillary services are provided. Non-ticket revenues also include revenues from our subscription-based $9 Fare Club, which we recognize on a straight-line basis over 12 months, revenues generated from the acquisition and ongoing use of the FREE SPIRIT credit cards. Revenue is generated from the FREE SPIRIT credit card affinity program through the sale of FREE SPIRIT miles and credit card renewals, which we currently recognize on a straight-line basis over 20 months, as well as from milestone payments in connection with the achievement of specific usage and user volumes, which we recognize when received from the FREE SPIRIT credit card provider.

 

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We recognize revenues net of certain taxes and airport passenger fees, which are collected by us on behalf of airports and governmental agencies and remitted to the applicable governmental entity or airport on a periodic basis. These taxes and fees include U.S. federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in our revenues. We record a liability upon collection from the customer and relieve the liability when payments are remitted to the applicable governmental agency or airport.

Our Operating Expenses

Our operating expenses consist of the following line items.

Aircraft Fuel. Aircraft fuel expense is our single largest operating expense. It includes the cost of jet fuel, related federal taxes, fueling into-plane fees and transportation fees. It also includes realized and unrealized gains and losses arising from any fuel price hedging activity.

Salaries, Wages and Benefits. Salaries, wages and benefits expense includes the salaries, hourly wages, bonuses and equity compensation paid to employees for their services, as well as the related expenses associated with employee benefit plans and employer payroll taxes.

Aircraft Rent. Aircraft rent expense consists of monthly lease rents for aircraft and spare engines under the terms of the related operating leases and is recognized on a straight line basis. Aircraft rent expense also includes that portion of maintenance reserves, also referred to as supplemental rent, paid to aircraft lessors in advance of the performance of major maintenance activities that is not probable of being reimbursed to us by the lessor. Aircraft rent expense is net of the amortization of gains on sale and leaseback transactions on our flight equipment. Presently, all of our aircraft and spare engines are financed under operating leases.

Landing Fees and Other Rents. Landing fees and other rents include both fixed and variable facilities expenses, such as the fees charged by airports for the use or lease of airport facilities, overfly fees paid to other countries and the monthly rent paid for our headquarters facility.

Distribution. Distribution expense includes all of our direct costs to sell, including the cost of web support, our third-party call center, travel agent commissions and related GDS fees, and credit card discount fees, associated with the sale of our tickets and other products and services.

Maintenance, Materials and Repairs. Maintenance, materials and repairs expense includes all parts, materials, repairs and fees for repairs performed by third-party vendors directly required to maintain our fleet. It excludes direct labor cost related to our own mechanics, which is included under salaries, wages and benefits. It also excludes the amortization of heavy maintenance expenses, which we defer under the deferral method of accounting and amortize on a straight-line basis until the next estimated overhaul event.

Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of all fixed assets we own and leasehold improvements. It also includes the amortization of heavy maintenance expenses we defer under the deferral method of accounting for heavy maintenance events and recognize into expense on a straight line basis until the next overhaul event.

Loss on disposal of assets. Loss on disposal of assets includes the net losses on the disposal of our fixed assets, including losses on sale and leaseback transactions.

Other Operating Expenses. Other operating expenses include airport operations expense and fees charged by third-party vendors for ground handling services and commissary expenses, the cost of passenger liability and aircraft hull insurance, all other insurance policies except for employee health insurance, travel and training

 

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expenses for crews and ground personnel, professional fees, personal property taxes and all other administrative and operational overhead expenses. No individual item included in this category represented more than 5% of our total operating expenses.

Restructuring Charges. From 2004 through 2007, we executed a complete aircraft fleet change, resulting in the accelerated termination and disposal of our MD-80 fleet, which we replaced with new Airbus A320-family aircraft. The fleet change resulted in restructuring charges consisting of the remaining lease term obligations related to the fleet and impairment charges related to writing down owned aircraft to their fair value during the four years ended in 2007.

Beginning in mid-2008, we began to execute a new restructuring plan to lower operating costs and reduce capacity in response to record high fuel prices and rapidly deteriorating economic conditions. Pursuant to this plan, we terminated seven of our A319 aircraft operating leases, thereby incurring charges related to the early return of those aircraft to the lessor. We also carried out a reduction in workforce, which resulted in one-time termination severance costs, and also incurred relocation costs in connection with the relocation of some of our personnel.

In 2010, in an effort to gain efficiencies, we relocated all of our maintenance operations in Detroit, Michigan, to Fort Lauderdale, Florida. The restructuring included the closure of facilities in Detroit, relocation of equipment and tools and the relocation and reduction of workforce. We determined that the relocation of these facilities and the planned relocation and reduction of certain employees met the requirement of an exit activity, and, therefore, we recorded all of the related severance and exit costs in 2010. In the first three months of 2011, we recorded additional restructuring charges that primarily relate to this relocation of our maintenance operations.

Our Other Expense (Income)

Interest Expense. Paid-in-kind interest on Notes due to related parties and Preferred Stock dividends due to related parties account, on average, for over 80% of interest expense incurred for the years 2008, 2009, 2010 and the first three months of 2011. Non-related party interest expense accounted for the remainder. All of the Notes and Preferred Stock will be repaid or redeemed, or exchanged for common stock, in connection with the 2011 Recapitalization.

Capitalized Interest. Capitalized interest represents interest cost to finance purchase deposits for future aircraft and the opportunity cost on PDPs. These amounts are recorded as part of the cost of the aircraft upon delivery. Capitalization of interest ceases when the asset is ready for service.

Our Income Taxes

We account for income taxes using the liability method. We record a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In assessing the realizability of the deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating the ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis.

Immediately prior to the completion of this offering, we intend to enter into the Tax Receivable Agreement and thereby distribute to each of our Pre-IPO Stockholders the right to receive a pro rata share of the future payments to be made under the Tax Receivable Agreement. Each such pro rata share will be a fraction equal to the number of shares of our common stock beneficially owned by each Pre-IPO Stockholder divided by the number of shares of common stock outstanding immediately prior to the completion of this offering. Under the Tax Receivable Agreement, we will be obligated to pay to the Pre-IPO Stockholders an amount equal to 90% of the cash savings in federal income tax realized by us by virtue of our future use of the federal net operating loss, deferred interest deductions and certain tax credits held by us as of March 31, 2011 or Pre-IPO NOL.

 

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“Deferred interest deductions” means interest deductions that have accrued as of March 31, 2011 but have been deferred under rules applicable to related party debt. Cash tax savings generally will be computed by comparing our actual federal income tax liability to the amount of such taxes that we would have been required to pay had such Pre-IPO NOL not been available to us. At the effective date of the Tax Receivable Agreement, we will recognize a liability equal to the estimated total payments to be made under the Tax Receivable Agreement (estimated as of March 31, 2011 to be approximately $35.9 million), which will be accounted for as a reduction of additional paid-in capital. Subsequent changes in the estimated liability under the Tax Receivable Agreement will be recorded through earnings in operating expenses. The payments we make to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to us, such as deductions or an adjustment to the basis of our assets. Please see “Certain Relationships and Related Transactions—Tax Receivable Agreement.”

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that affect airlines and their markets, trends affecting the broader travel industry, and trends affecting the specific markets and customer base that we target. The following key factors may affect our future performance.

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record and reputation, code-sharing relationships, and frequent flier programs and redemption opportunities. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize unit revenue. The prevalence of discount fares can be particularly acute when a competitor has excess capacity that it is under financial pressure to sell.

Seasonality and Volatility. Our results of operations for any interim period are not necessarily indicative of those for the entire year because the air transportation business is subject to significant seasonal fluctuations. We generally expect demand to be greater in the second and third quarters compared to the rest of the year. The air transportation business is also volatile and highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, weather and other factors have resulted in significant fluctuations in revenues and results of operations in the past. In particular, demand for air transportation services was materially adversely affected by the severe economic recession starting in 2008, and record high fuel prices in 2008 materially adversely affected operating results in the industry generally. We believe, however, demand for business travel historically has been more sensitive to economic pressures than demand for low-price leisure and VFR travel.

Aircraft Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours. Fuel costs have been subject to wide price fluctuations in recent years. Fuel availability and pricing are also subject to refining capacity, periods of market surplus and shortage, and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining resources located in the southeast United States, particularly facilities adjacent to the Gulf of Mexico. Gulf Coast jet fuel tends to sell at slightly lower prices than fuel from other regional refining sources due to the size and depth of the market, and we believe this difference gives us an advantage on our largest single operating cost. At the same time, however, Gulf Coast fuel is subject to volatility and supply disruptions, particularly in hurricane season when refinery shutdowns have occurred in recent years, or when the threat of weather-related disruptions has caused Gulf Coast fuel prices to spike above other regional sources. From time to time, we use jet fuel option contracts or swap agreements to attempt to mitigate price volatility. Additionally, during hurricane season (August through October), we often use basis swaps, priced using West Texas Intermediate or Heating Oil indexes, to protect the refining price risk between the price of crude oil and the price of refined jet fuel. Historically, we have protected approximately 45% of our forecasted fuel requirements during

 

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hurricane season using basis swaps. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements, the pricing of hedges and other derivative products in the market and applicable regulatory policies. As of March 31, 2011, we had hedged approximately 5% of our projected 2011 fuel requirements, respectively, with all of our existing fuel hedge contracts expected to settle by the end of September 2011. As of March 31, 2011, we purchased all of our aircraft fuel under a single fuel service contract. The cost and future availability of jet fuel cannot be predicted with any degree of certainty.

Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements, or CBAs. Relations between air carriers and labor unions in the United States are governed by the RLA. Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the NMB. This process continues until either the parties have reached agreement on a new CBA, or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as strikes and lockouts.

We have three union-represented employee groups representing approximately 50% of our employees at March 31, 2011. Our pilots are represented by the Airline Pilots Association, International, or ALPA, our flight attendants are represented by Association of Flight Attendants, or AFA-CWA, and our flight dispatchers are represented by Transport Workers Union of America, or TWU. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. In June 2010, we experienced a five-day strike by our pilots, which caused us to shut down our flight operations. The strike ended as a result of our reaching a tentative agreement under a Return to Work Agreement and a full flight schedule was resumed on June 18, 2010. On August 1, 2010, we entered into a new five-year collective bargaining agreement. In addition, our CBA with our flight attendants is amendable under the RLA. The outcome of our collective bargaining negotiations cannot presently be determined and the terms and conditions of our future CBAs may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability to bear higher costs under their business models. If we are unable to reach agreement with any of our unionized work groups in the negotiations regarding the terms of their CBAs, we may be subject to work interruptions or stoppages, such as the strike by our pilots in June 2010. A strike or other significant labor dispute with our unionized employees is likely to adversely affect our ability to conduct business.

Maintenance Expense. Due to the young age of our fleet (approximately 4.0 years on average at March 31, 2011), maintenance expense in 2009, 2010 and in the first three months of 2011 remained relatively low. As the fleet ages, we expect that maintenance costs will increase in absolute terms and as a percentage of revenue. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance expenses for any significant period of time. However, we believe, based on our scheduled maintenance events, maintenance expense and maintenance-related amortization expense in 2011 will be approximately $40 million.

As a result of a significant portion of our fleet being acquired over a relatively short period of time, significant maintenance scheduled on each of our planes will occur at roughly the same time, meaning we will incur our most expensive scheduled maintenance obligations across our current fleet around the same time. These more significant maintenance activities will result in out-of-service periods during which our aircraft will be dedicated to maintenance activities and unavailable to fly revenue service.

Maintenance Reserve Obligations. The terms of our aircraft lease agreements require us to pay supplemental rent, also known as maintenance reserves, to the lessor in advance of and as collateral for

 

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the performance of major maintenance events, resulting in our recording significant prepaid deposits on our balance sheet. As a result, the cash costs of scheduled major maintenance events are paid well in advance of the recognition of the maintenance event in our results of operations. Please see “—Critical Accounting Policies and Estimates—Aircraft Maintenance, Materials, Repair Costs and Related Heavy Maintenance Amortization” and “—Maintenance Reserves.”

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Note 1 to our financial statements provides a detailed discussion of our significant accounting policies.

Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters that are both inherently uncertain and material to our financial condition or results of operations.

Revenue Recognition. Revenues from tickets sold are initially deferred as air traffic liability. Passenger revenues are recognized when transportation is provided. A non-refundable ticket expires at the date of scheduled travel and is recognized as revenue for the expired ticket value at the date of scheduled travel.

Our most significant non-ticket revenues include revenues generated from air travel-related fees paid by the ticketed passenger for baggage, bookings through our call center or third-party vendors, advance seat selection, itinerary changes and loyalty programs, and are recognized at the time products are purchased or ancillary services are provided. These revenues also include commissions from the sales of hotel rooms, trip insurance and rental cars recognized at the time the service is rendered.

Customers may elect to pay a change fee to exchange a ticket in advance of the date of scheduled travel for a credit for future travel. Unused credits expire one year from the date of purchase of the original ticket, and a percentage of these issued credits expire unused. The amount of credits expected to go unused is estimated based on historical experience. Estimating the amount of credits that will go unused involves some level of subjectivity and judgment.

Non-ticket revenues include revenues from our subscription-based $9 Fare Club, recognized on a straight-line basis over 12 months. Revenues generated from the sale of FREE SPIRIT miles and credit card renewals are currently recognized on a straight-line basis over 20 months based on expected customer usage of miles. We make assumptions on the future use of customer miles based on historical customer behavior. To the extent that customer behavior changes as a result of, among other factors, economic conditions, perception of travel, and the number of miles to earn awards, a corresponding adjustment would be made to the period in which we recognize revenue generated from the FREE SPIRIT miles and credit card renewals, resulting in either a smaller or larger liability. Also included in non-ticket revenues are milestone payments in connection with the achievement of specific usage and user volumes, which we recognize when received from the FREE SPIRIT credit card provider.

Frequent Flier Program. We accrue for mileage credits earned based on the estimated incremental cost of providing free travel. We make certain assumptions to determine the incremental cost, which includes the cost of fuel, incremental fuel burn for an additional passenger, the average weight of passengers, ticketing costs, and certain types of insurance driven by number of passengers, reduced by an estimate of fees required to be paid by the passenger when redeeming the award. Assumptions are based on current fuel prices, average fleet performance, average loads, actual ticketing cost, and insurance rates. Changes in these assumptions, for example increases in fuel and insurance rates, would increase the estimated incremental cost of transporting one additional passenger and thus result in an increase in the related accrual of this expense. We also sell mileage credits to companies participating in the FREE SPIRIT program. Revenues received from the sale of mileage credits are

 

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initially deferred as part of air traffic liability and recognized as passenger revenue over the estimated period the transportation is expected to be provided (currently estimated as 20 months), based on estimates of its fair value, which is determined using the average fare for similar travel. The excess of the total sales proceeds for mileage credits over the estimated fair value of the transportation to be provided is recognized in non-ticket revenues at the time of sale. The total liability for future FREE SPIRIT award redemptions and unrecognized revenue from the sale of mileage credits was $4.8 million, $4.2 million, $7.1 million and $6.4 million at December 31, 2008, 2009, 2010 and March 31, 2011, respectively. New accounting guidance, which became effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, eliminates the residual method of allocation and requires that we allocate all of the mileage costs and revenues at the time the mileage credits are purchased using the relative selling price method. This new guidance will impact our new affinity card program, which became effective April 1, 2011. Management is currently evaluating the impact that the new accounting guidance will have on our financial position, results of operations and cash flows.

Aircraft Maintenance, Materials, Repair Costs and Related Heavy Maintenance Amortization. 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 until the next such heavy maintenance event. Amortization of engine overhaul costs was $0.0 million, $1.0 million and $1.3 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $0.4 million and $0.4 million for the three months ended March 31, 2010 and 2011, respectively. If engine overhaul costs were amortized within maintenance, material and repairs expense in the statement of operations, our maintenance, material and repairs expense would have been $28.5 million and $29.5 million for the years ended December 31, 2009 and 2010, respectively, and $7.1 million and $8.5 million for the three months ended March 31, 2010 and 2011, respectively. During the years ended December 31, 2008, 2009 and 2010, we capitalized $0.0 million, $5.3 million and $5.2 million of costs for heavy maintenance, respectively. During the three months ended March 31, 2011, we capitalized $4.1 million of costs for heavy maintenance. The next heavy maintenance event is estimated based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as suggested by the manufacturer. These assumptions may change based on changes in our utilization of our aircraft, changes in government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe or engine to a level that would require a heavy maintenance event prior to a scheduled maintenance event. To the extent our planned usage increases, the estimated life would decrease before the next maintenance event, resulting in additional expense over a shorter period. Heavy maintenance events are our HMV4 and HMV8 airframe checks and our engine overhauls. Certain maintenance functions are outsourced under contracts that require payment based on a performance measure such as flight hours. Costs incurred for maintenance and repair under flight hour maintenance contracts, where labor and materials price risks have been transferred to the service provider, are accrued based on contractual payment terms. Routine cost for maintaining the airframes and engines and line maintenance are charged to maintenance, materials and repairs expense as performed.

Maintenance Reserves. Our master lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. These lease agreements provide that maintenance reserves are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (1) the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance event. Substantially all of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft. We paid $26.9 million, $35.7 million and $9.9 million in maintenance reserves, net of reimbursement, to our lessors for the years ended December 31, 2009 and 2010, and the three months ended March 31, 2011, respectively.

At lease inception and at each balance sheet date, we assess whether the maintenance reserve payments required by the master lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance reserve payments that are substantively and contractually related to the maintenance of

 

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the leased asset are accounted for as maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as prepaid maintenance deposits in the accompanying balance sheets. When it is not probable we will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. We expensed $0.2 million, $0.2 million, $0.0 million, and $0.2 million as supplemental rent during 2008, 2009, 2010 and the three months ended March 31, 2011.

As of December 31, 2009, 2010 and March 31, 2011, we had prepaid maintenance deposits of $96.3 million, $132.0 million and $141.8 million, respectively, on our balance sheets. We have concluded that these prepaid maintenance deposits are probable of recovery primarily due to the rate differential between the maintenance reserve payments and the expected cost for the related next maintenance event that the reserves serve to collateralize.

Our master lease agreements also provide that most maintenance reserves held by the lessor at the expiration of the lease are nonrefundable to us and will be retained by the lessor. Consequently, any usage-based maintenance reserve payments after the last major maintenance event are not substantively related to the maintenance of the leased asset and therefore are accounted for as contingent rent. We accrue contingent rent beginning when it becomes probable and reasonably estimable we will incur such nonrefundable maintenance reserve payments. We make certain assumptions at the inception of the lease and at each balance sheet date to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor and the number of flight hours the aircraft is estimated to be utilized before it is returned to the lessor. Maintenance reserves held by lessors that are refundable to us at the expiration of the lease are accounted for as prepaid maintenance deposits on the balance sheet when they are paid.

Sale and Leaseback. For aircraft acquired through a sale and leaseback transaction that is determined to be an operating lease, any profit or loss on the sale is deferred and amortized over the term of the lease, unless the fair value of the aircraft at the time of the transaction is less than its acquisition cost, in which case a loss is recognized immediately up to the amount of the difference between acquisition cost and fair value.

Fuel Derivatives. We account for derivative financial instruments at fair value and recognize them in the balance sheet as an asset or liability. At December 31, 2008, 2009, 2010 and March 31, 2011, we did not hold derivative instruments that qualified as cash flow hedges and, accordingly, changes in the fair value of such derivative contracts were recorded as a component of aircraft fuel expense. Theses amounts include both realized gains and losses and mark-to-market adjustments of the fair value of the derivative instruments at the end of each period.

Share-Based Compensation. We have issued restricted non-voting common stock to officers and certain other management-level employees pursuant to our restricted stock program. These shares will automatically be exchanged for restricted voting common stock upon completion of this offering. In the years ended December 31, 2008, 2009 and 2010, we issued 310,000, 503,897 and 65,353 shares of restricted stock, respectively. There were no restricted stock awards granted in the first quarter of 2011. As of March 31, 2011, 444,375 unvested shares remained outstanding.

Our share based compensation program is intended to grant awards priced at the fair market value of our common stock at the date of grant. Prior to this offering, the fair value of our common stock has been estimated based on the market comparables method that uses our estimates of revenue, driven by assumed market growth rates, and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimates that we use to manage our business. Compensation expense is recognized ratably over the period during which an employee is required to provide service in exchange for an award. Granted awards vest 25% per year on each anniversary of issuance. The weighted-average fair value of awards granted during 2008, 2009 and 2010 was $0.04 per share, $1.10 per share and $6.39 per share, respectively. As of March 31, 2011, there was $1.9 million of total unrecognized compensation cost related to non-vested restricted stock and options granted under the plan expected to be recognized over a weighted-average period of 1.9 years. There were no stock option awards granted during the first three months of 2011.

 

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Income Taxes. We account for income taxes using the liability method. We record a valuation allowance against deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In assessing the realizability of the deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis.

RESULTS OF OPERATIONS

Since adopting our ULCC business model in 2006, redeploying aircraft to our principal target growth markets in the Caribbean and Latin America and initiating an unbundling strategy, we have lowered our unit operating costs. In 2007, we had net income of $1.4 million based on operating income of $32.0 million and operating revenues of $762.9 million. Adjusted CASM ex fuel showed a marked improvement as our ULCC initiatives matured and began to take hold, resulting in a 17.7% reduction from 2006 to 2007. Our operating performance continued to improve in 2008 and 2009, and we had profitable years notwithstanding unfavorable industry conditions.

In 2008, we had net income of $33.3 million and operating income of $18.3 million on operating revenues of $787.3 million. The 2008 statement of operations includes $37.8 million of recognized gains from the settlement of fuel derivative contracts that were monetized prior to their stated maturity, of which $14.2 million related to 2009 fuel hedge positions. Also in 2008, we recognized restructuring charges of $17.9 million, primarily related to our early termination of seven of our A319 aircraft operating leases in order to reduce capacity in response to record high fuel prices and rapidly deteriorating economic conditions. During 2008, we also recognized debt extinguishment gains of $53.7 million related to contractual provisions of our recapitalization in mid-2006.

In 2009, we recorded net income of $83.7 million and operating income of $111.4 million on $700.0 million of operating revenues. Our 2009 earnings were driven by increased market maturity on our newer routes, relative stability in RASM, decreased Adjusted CASM ex fuel, and lower fuel prices. During 2009, we also recognized debt extinguishment gains of $19.7 million related to contractual provisions of our recapitalization in mid-2006.

Net income for 2010 of $72.5 million includes a $52.3 million net tax benefit primarily due to the release of a valuation allowance resulting in a deferred tax benefit of $52.8 million in 2010. Absent the release of the valuation allowance and corresponding tax benefit, our net income would have been $19.7 million for 2010. 2010 was our fourth consecutive year of profitability. In 2010, we recorded operating income of $68.9 million on $781.3 million of operating revenues. The results of operations for 2010 were adversely affected by an increase in fuel prices and the effects of our June 2010 pilot strike. Fuel cost increased by $67.1 million from 2009 to 2010, caused principally by a 27% increase in the price per gallon and an 8.3% increase in fuel volume during 2010 as compared to the 2009. We believe the pilot strike had a negative impact during 2010 of approximately $24 million consisting of lost revenues and incremental costs, offset in part by reduced variable expenses.