S-1 1 d761206ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 28, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

VIRGIN AMERICA INC.

(Exact name of registrant as specified in its charter)

 

Delaware   4512   20-1585173
(State or other jurisdiction
of incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

 

555 Airport Boulevard

Burlingame, California 94010

(650) 762-7000

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

area code, of registrant’s principal executive offices)

 

 

C. David Cush

President and Chief Executive Officer

Virgin America Inc.

555 Airport Boulevard, Burlingame, California 94010

(650) 762-7000

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

 

 

Copies To:

 

Tad J. Freese

Robert W. Phillips

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

(650) 328-4600

 

John J. Varley

Senior Vice President and General Counsel

Virgin America Inc.

555 Airport Boulevard

Burlingame, California 94010

(650) 762-7000

 

Alan F. Denenberg

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

 

 

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   (Do not check if a smaller reporting company)    Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate Offering Price (1)
 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  $ 115,000,000   $ 14,812

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

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 July 28, 2014.

PROSPECTUS

 

 

                 Shares

 

LOGO

Virgin America Inc.

Common Stock

 

 

This is our initial public offering of shares of our common stock. We are offering                  shares. No public market currently exists for our shares of common stock.

We intend to apply to list our shares of common stock on              under the symbol “    .”

We anticipate that the initial public offering price per share will be between $         and $        .

Investing in our common stock involves risks. See “Risk Factors” beginning on page 20 of this prospectus.

 

     Per Share      Total  

Price to the Public

   $                    $                

Underwriting discounts and commissions (1)

   $         $     

Proceeds to us (before expenses)

   $         $     

 

(1) We refer you to “Underwriting” beginning on page 139 of this prospectus for additional information regarding underwriting compensation.

Our principal stockholders, funds affiliated with or related to Cyrus Capital Partners, L.P. (which we refer to in this prospectus collectively as “Cyrus Capital”) and affiliates of Virgin Group Holdings Limited (which we refer to in this prospectus collectively as the “Virgin Group”), as selling stockholders, have granted the underwriters an option to purchase up to                  additional shares of common stock at the initial public offering price less the underwriting discount solely to cover overallotments. We will receive no proceeds from the sale of any shares sold by these selling stockholders if the overallotment option is exercised.

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.

The underwriters expect to deliver the shares to purchasers on or about                     , 2014.

 

 

 

Barclays   Deutsche Bank Securities

                    , 2014.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

GLOSSARY OF AIRLINE TERMS

     17   

RISK FACTORS

     20   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     34   

2014 RECAPITALIZATION

     35   

USE OF PROCEEDS

     38   

DIVIDEND POLICY

     39   

CAPITALIZATION

     40   

DILUTION

     44   

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     47   

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

     51   

INDUSTRY BACKGROUND

     76   

BUSINESS

     78   

MANAGEMENT

     93   

EXECUTIVE COMPENSATION

     101   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     121   

PRINCIPAL AND SELLING STOCKHOLDERS

     125   

DESCRIPTION OF CAPITAL STOCK

     128   

SHARES ELIGIBLE FOR FUTURE SALE

     133   

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

     135   

UNDERWRITING

     139   

LEGAL MATTERS

     145   

EXPERTS

     145   

WHERE YOU CAN FIND MORE INFORMATION

     145   

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 to which we have referred you. Neither we, the selling stockholders 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 and the selling stockholders 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, results of operations or financial condition may have changed since such date.

Until                     , 2014 (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, the selling stockholders 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 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

Virgin America is a premium-branded, low-cost airline based in California that provides scheduled air travel in the continental United States and Mexico. We operate primarily from our focus cities of Los Angeles and San Francisco to other major business and leisure destinations in North America. We provide a distinctive offering for our passengers, whom we call guests, that is centered around our brand and our premium travel experience, while at the same time maintaining a low-cost structure through our point-to-point network and high utilization of our efficient, single fleet type. Our distinctive business model allows us to offer a product that is attractive to guests who historically favored legacy airlines but at a lower cost than that of legacy airlines. This business model also enables us to compete effectively with other low-cost carriers, or LCCs, by generating higher revenue per available seat mile, or RASM, but at a cost per available seat mile, or CASM, comparable to that of other LCCs. As of March 31, 2014, we provided service to 22 airports in the United States and Mexico with a fleet of 53 narrow-body aircraft.

Leveraging the reputation of the Virgin brand, a global brand founded by Sir Richard Branson, we target guests who value the experience associated with the Virgin brand and the high-quality product and service that we offer. Our employees, whom we call teammates, provide a personalized level of service to our guests that is a key component of our product. Other elements of our premium product available fleetwide include power outlets adjacent to every seat, inflight wireless internet access, distinctive on-board mood lighting, leather seats, high-quality food and beverage offerings and our industry-leading Red® inflight entertainment system featuring a nine-inch personal touch-screen interface with a variety of features available on-demand, including live television, movies, seat-to-seat text chat, games, interactive maps and music. We have won numerous awards for our product, including Best Domestic Airline in Travel + Leisure Magazine’s World’s Best Awards for the past seven consecutive years as well as each of Best Domestic Airline in Condé Nast Traveler Magazine’s Readers’ Choice Awards and Best U.S. Business/First Class Airline in Condé Nast Traveler Magazine’s Business Travel Poll for the past six consecutive years.

While we have many of the characteristics associated with other LCCs in the United States, we differentiate ourselves with additional attributes that business and high-end leisure travelers value. In contrast to most LCCs, we have three classes of service onboard our aircraft. In addition to our Main Cabin economy product, we offer our guests a First Class product and a premium economy class product called Main Cabin Select. We also provide a number of other amenities that are important to frequent travelers, including our Elevate® loyalty program with tiered benefits for our most loyal guests, lounge access in certain airports, including our own Virgin America Loft at Los Angeles International Airport (LAX), interline and codeshare partnerships with other airlines and a wide range of distribution channels and contractual travel discounts for over 175 major corporate customers. We believe that these amenities, along with our premium on-board features, enabled us to realize the highest average passenger revenue per available seat mile, or PRASM, in 2013 among U.S. LCCs within most of our markets.

Our disciplined cost control is also core to our strategy, and we maintain the cost simplicity of other LCCs. We operate one of the youngest fleets among U.S. airlines, comprised entirely of fuel-efficient Airbus A320-family aircraft. Our single fleet type allows us to avoid the operational complexities and cost disadvantages of

 

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carriers with multiple and older fleet types. In addition, our long-haul, point-to-point network results in high aircraft utilization and efficient scheduling of our aircraft and crews. We believe that our teammates are productive and attentive to our guests, contributing to our cost advantage while maintaining our high-quality travel experience. We also outsource many non-core functions, such as certain ground handling activities, major airframe and engine maintenance and call center functions, leading to efficient, cost-competitive services and flexibility in these areas.

Executing our strategy of providing a premium travel experience within a disciplined, competitive cost structure has led to improved financial results. For 2013, we recorded operating revenues of $1.4 billion, operating income of $80.9 million and net income of $10.1 million. We increased our RASM in 2013 by 9.3% compared to 2012, the largest increase of any major U.S. airline. Furthermore, our CASM of 10.98 cents increased by only 0.7% and remained one of the lowest of all U.S. airlines in 2013. We completed a recapitalization of a majority of our operating lease and debt obligations in May 2013, leading to a $34.7 million decline in aircraft rent expense and a $44.8 million decline in interest expense for 2013 compared to 2012. As a result of our RASM increase and the reduction in rent and interest expense, our financial performance improved from a net loss of $145.4 million in 2012 to net income of $10.1 million in 2013. In 2014, we had a net loss of $22.4 million in the first quarter, which is typically our seasonally weakest quarter, compared to a net loss of $46.4 million in the first quarter of 2013. Our RASM in the first quarter of 2014 increased by 0.9% from the prior year period, while our CASM in the first quarter of 2014 increased by only 0.2% from the prior year period.

Our Competitive Strengths

We believe the following strengths allow us to compete successfully in the U.S. airline industry:

Premium Travel Experience. We believe our premium guest experience, attractive amenities, customer-focused teammates and wide array of inflight entertainment options differentiate us from other airlines in the United States. A key component of our product strength is the consistency across our entire fleet. In contrast to airlines with multiple aircraft types, our product offering is identical on every Airbus 320-family aircraft, allowing for the same enhanced travel experience on every flight. We also differentiate ourselves from other LCCs by providing both First Class and Main Cabin Select products in addition to our Main Cabin economy product. With just eight seats on every aircraft—fewer than most first class cabins offered on competing airlines, our First Class cabin has an exclusive feel with a dedicated attendant providing a personal level of service. Unlike many other airlines, we do not provide complimentary upgrades to First Class, enhancing the exclusivity of this product. In addition to more leg room, which is a standard feature of most premium economy products, we offer additional features within Main Cabin Select, such as complimentary on-demand current-run movies, premium television programs, premium beverages and Main Cabin meals and snacks. We have differentiated our product in all three classes of service as compared to other domestic airlines, leading to a travel experience that can only be found on Virgin America.

World-Class Virgin Brand. The Virgin brand is widely recognized in the United States and is known for being innovative, stylish, entrepreneurial and hip. The brand is recognized worldwide from the Virgin Group’s offerings in music, air travel, wireless service and a wide variety of other products. We capitalize on the strength of the Virgin brand to target guests who value an enhanced travel experience and association with the Virgin brand. The Virgin brand has helped us to establish ourselves as a premium airline in the domestic market in a short period of time. When we enter a new market, awareness of the Virgin brand generates interest from new guests. The power of the Virgin brand provides an opportunity for low-cost public relations events that generate extensive media coverage in new markets and has led to other cooperative marketing relationships for us with major companies. In addition to capitalizing on the Virgin brand strength, we are rapidly establishing Virgin America as a distinct and premium brand for air travel in the United States in its own right. We believe our guests associate the Virgin and Virgin America brands with a distinctive high-quality and high-value travel experience.

 

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Low-Cost, Disciplined Operating Structure. A core component of our business model is our disciplined cost structure. In 2013, our CASM was 10.98 cents, one of the lowest in the United States and 23.6% lower than the average mainline CASM of the legacy airlines on a stage-length adjusted basis. Key components of this low cost structure include our modern, fuel-efficient single-aircraft fleet, our high aircraft utilization, our point-to-point operations, our productive and engaged workforce, our outsourcing of non-core activities and our lean, scalable overhead structure. We are committed to maintaining this disciplined cost structure and believe we will continue to improve our competitive cost position as we grow and further leverage our existing infrastructure.

Established Presence in Los Angeles and San Francisco. We have built our network around the Los Angeles and San Francisco metropolitan areas, the second- and third-largest domestic air travel markets in the United States in 2013. We believe that these two markets, with a combined population of approximately 27 million people and strong economic bases in the technology, media and entertainment industries, serve as an excellent platform for long-term growth. Los Angeles and San Francisco both have large populations of technologically savvy, entrepreneurial and innovative individuals who we believe value our brand and premium guest experience. We have made significant investments in these key markets since 2010 and as of March 31, 2014 provide service to 18 destinations from Los Angeles and 20 destinations from San Francisco. These destinations include eight of the top ten domestic destinations served from LAX and nine of the top ten domestic destinations served from San Francisco International Airport (SFO), based on passenger volume. This investment provides greater network coverage across North America for travelers from these two focus markets, and we expect that this investment will allow us to continue to grow by leveraging the loyal guest base that we have established in each market.

Our Team and Entrepreneurial Culture. Our teammates and culture are essential elements of our success because they contribute significantly to our premium travel experience. We start by hiring the right teammates through a rigorous process that includes numerous interviews, as well as pre-employment testing for our frontline teammates and our pilots. Key characteristics of Virgin America teammates include a friendly, personable nature, a willingness to think differently, a passionate approach to his or her work and intense pride in Virgin America and our product. We empower our teammates with a high level of authority to resolve guest issues throughout the travel experience, from making flight reservations to interactions at the airport and in flight. We strive to create an environment for our teammates where open communication is both encouraged and expected and where we celebrate our successes together. We believe our positive work environment has contributed to our having one of the highest customer satisfaction rankings in the airline industry.

Our Growth Strategy

Our goal is to generate above-average RASM in each market we serve by providing the leading domestic air travel product through our brand and our premium guest experience, while at the same time maintaining our competitive cost structure through the efficient operations we have established. Key elements of our growth strategy include:

Leverage Our Recent Expansion. We have significantly expanded our fleet size and route network since 2010. We increased our operating fleet from 28 aircraft as of June 30, 2010 to 53 aircraft as of April 30, 2013, and we introduced service to 11 new airports during that period, doubling the number of destinations served. Airline routes tend to become more profitable as they mature because of increased demand as travelers become aware of the service and through repeat business. Our RASM in markets that we entered in 2011 and 2012 increased from 2012 to 2013 by 20.5% as compared to our overall RASM increase of 9.3%. In addition, as we continue to expand our network by increasing the number of markets served from Los Angeles and San Francisco, we expect our network to become more attractive to frequent travelers who prefer to concentrate their travel with one airline, increasing demand for service on our existing routes. We intend to leverage our recent expansion to drive higher RASM.

 

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Expand Our Route Network. We currently serve only 15 of the 50 largest metropolitan areas in the United States and three leisure destinations in Mexico. We believe there are significant opportunities to expand our service from our focus cities of Los Angeles and San Francisco to other large markets throughout the United States, Canada and Mexico. We have firm commitments to take delivery of ten Airbus A320-family aircraft from July 2015 through June 2016, and we expect to continue to grow at a measured, disciplined pace beyond 2016. While we expect most of our expansion in the next several years will focus on the opportunities we have at Los Angeles and San Francisco, we also plan to grow our presence in Dallas, Texas. Through the use of recently acquired slots at New York LaGuardia Airport (LGA) and Ronald Reagan Washington National Airport (DCA), we will add service at Dallas Love Field (DAL) to these markets in October 2014. We will also move our existing service at Dallas/Fort Worth International Airport (DFW) to DAL. DAL is located in a growing, affluent section of the Dallas/Fort Worth metropolitan area and is the closest airport to downtown Dallas. In addition, the airline facilities at DAL are limited by federal law to only 20 gates, providing a structural barrier to entry. We believe this opportunity to provide service at DAL will further diversify our route network and allow us to provide service to LGA and DCA. In addition, we intend to expand our codeshare and interline relationships with other airlines that are complementary to our network, expanding travel destination options for our guests while adding new sources of revenue and more guests.

Maintain Competitive Unit Operating Costs. We are highly focused on maintaining competitive unit operating costs. We expect to realize economies of scale as we continue to grow by leveraging our distribution, marketing and technology costs across our platform and by better utilizing our facilities and ground assets across a larger network. Our fleet is 100% financed by operating leases, of which 26 leases will expire between 2015 and 2022. As our leases expire, we expect to have the opportunity to lower our costs by renewing at lower lease rates or by opportunistically replacing these aircraft with new Airbus A320-family aircraft with lower operating costs sourced in the open market. In addition, we expect our cost structure will continue to benefit from our highly productive and flexible workforce as we grow our fleet and network.

Continue to Grow Our Base of Frequent Travelers. We intend to continue to grow our share of business travelers, a focus that is uncommon among U.S. LCCs, because we believe this population of airline travelers allows us to achieve increased RASM. We target the business community by providing a premium travel service between our focus cities and many of the most important business destinations in North America, as well as key leisure destinations that we believe are important to business travelers when flying for leisure travel. We have already attracted a significant base of frequent business and premium leisure travelers who regularly fly with us and who we believe prefer our premium product attributes. We believe that these types of guests also value a larger route network and frequent flights within markets. As we grow our network from California and expand our interline and codeshare partnerships, we believe we will be well positioned to attract additional business and high-end leisure travelers. We consider guests who book within 14 days of departure as business travelers. Using this as a measure, we believe that approximately 30% of our guests in 2013 were business travelers, representing approximately 40% of our revenue in 2013.

Continue to Enhance Our Product and Guest Experience. We believe our guest experience is unique in the industry and revolves around our teammates’ focus on guest service, extensive entertainment options, compelling passenger comfort features and an association with our brand that would be difficult to replicate. We nevertheless are continually developing new enhancements to our product. For example, in early 2014, we further expanded our First Class food service on select flights to include enhanced gourmet food offerings and linen service. In the second quarter of 2014, we launched a redesigned version of the Virgin America website, enhancing the ease of use and functionality as well as providing a more customized experience for our guests. In 2015, we plan to upgrade the monitors within our inflight entertainment system to include a “swipe” touch capability, similar to that found on many modern personal electronic devices. This upgrade will include a redesign of the software behind our industry-leading Red inflight entertainment system, allowing for future software features. Additionally, we continually analyze new technologies for longer-term enhancements to our fleet, inflight product and airport experience.

 

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Route Network

We served 22 airports throughout North America as of March 31, 2014. The majority of our routes operate to and from our focus cities of Los Angeles and San Francisco. Our current network is a mix of long-haul, transcontinental service combined with short-haul West coast service and select Mexico leisure destinations. Below is a route map of our network.

 

LOGO

We use publicly available data related to existing traffic, fares and capacity in domestic markets to identify growth opportunities. To monitor the profitability of each route, we analyze monthly profitability reports as well as near-term forecasting. We routinely make adjustments to capacity and frequency of flights within our network based on the financial performance of our markets, and we discontinue service in markets where we determine that long-term profitability is not likely to meet our expectations.

Our future network plans include growing from our focus cities of Los Angeles and San Francisco to other major markets in North America. By continuing to add destinations in select markets from Los Angeles and San Francisco, we can leverage our existing base of loyal guests and grow our share of revenue within these focus cities while also expanding our customer base as we gain new guests in new markets. We also plan to add service from DAL to LGA and DCA. We believe this DAL opportunity will further diversify our route network and provide growth into strategic airports that are limited by regulation.

Fleet

We fly only Airbus A320-family aircraft and operate only CFM engines, which provide us significant operational and cost advantages compared to airlines that operate multiple fleet and engine types. Flight crews are entirely interchangeable across all of our aircraft, and maintenance, spare parts inventories and other operational support are highly simplified relative to more complex fleets. Due to this commonality among Airbus single-aisle

 

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aircraft, we retain the benefits of a fleet consisting of a single family of aircraft while still having flexibility to match the capacity and range of the aircraft to the demands of many routes.

We have a fleet of 53 Airbus single-aisle aircraft, consisting of ten Airbus A319s and 43 Airbus A320s. The average age of the fleet was approximately five years at March 31, 2014. Our Airbus A319 aircraft accommodate 119 guests, and our Airbus A320 aircraft accommodate 146-149 guests. All of the existing aircraft are financed under operating leases.

We plan to grow our fleet with additional Airbus A320-family aircraft, and we currently have an order with Airbus for ten Airbus A320 aircraft to be delivered between July 2015 and June 2016 and 30 Airbus A320 new engine option, or A320neo, aircraft to be delivered between 2020 and 2022. We have an option to cancel our Airbus A320neo positions up to two years in advance of delivery in groups of five aircraft, but we could incur a loss of deposits and credits as a cancellation fee. We may elect to supplement these deliveries by additional acquisitions from Airbus or in the open market if demand conditions merit. Twenty-six of our existing operating leases will expire between 2015 and 2022, and we believe there will be an opportunity to extend these leases at a reduced lease rate or to replace them with new or used Airbus A320-family aircraft. Although we expect to grow our fleet as we increase our flights on our existing route network and expand our route network to new markets, we are only committed to grow to 63 aircraft. As a result, our fleet plan provides significant flexibility.

Our Airbus A320 aircraft deliveries in 2015 and 2016 will be equipped with sharklets, a new wingtip device that we believe will create up to 3.0% additional fuel efficiency in our network. In addition to lowering our average fuel cost per flight, the sharklets provide increased range. This will reduce technical stops on our transcontinental flights that occasionally occur during specific weather patterns as well as allow for the possibility of operations to the state of Hawaii. Operating to Hawaii will require additional Federal Aviation Authority, or FAA, certification for extended twin-engine over-water operations, and we are currently evaluating these markets and the additional operational requirements.

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 potential 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 results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance. Such factors include:

 

   

the price and availability of aircraft fuel;

 

   

our ability to compete in an extremely competitive industry;

 

   

the successful execution and implementation of our strategy;

 

   

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

 

   

our reliance upon technology and automated systems to operate our business;

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar incident;

 

   

changes in economic conditions;

 

   

our limited profitable operating history;

 

   

changes in governmental regulation; and

 

   

our ability to obtain financing or access capital markets.

 

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Corporate Information

We were incorporated in the state of Delaware in 2004 as Best Air Holdings, Inc. We changed our name to Virgin America Inc. in November 2005. Our principal executive offices are located at 555 Airport Boulevard, Burlingame, California 94010. Our general telephone number is (650) 762-7000, and our website address is www.virginamerica.com. We have not incorporated by reference into this prospectus any of the information on, or accessible through, 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.

Virgin America®, the Virgin America logo and the Virgin signature are trademarks of Virgin America Inc. in the United States and other countries by license from certain entities affiliated with the Virgin Group. This prospectus also contains trademarks and trade names of other companies.

2014 Recapitalization

As of March 31, 2014, we had a total of $654.4 million of principal and accrued interest outstanding under certain secured related-party notes, which we refer to in this prospectus as the “Related-Party Notes.” As of March 31, 2014, the Virgin Group held approximately $404.4 million aggregate principal amount and accrued interest of the Related-Party Notes, and Cyrus Capital held approximately $250.0 million aggregate principal amount and accrued interest of the Related-Party Notes. The Virgin Group and Cyrus Capital also hold the majority of our outstanding warrants to purchase shares of our common stock, which we refer to in this prospectus as the “Related-Party Warrants.”

We intend to enter into a recapitalization agreement with the Virgin Group and Cyrus Capital, which we refer to in this prospectus as the “2014 Recapitalization Agreement.” The 2014 Recapitalization Agreement would provide that we would retain net proceeds in connection with this offering of $         million (after we pay underwriting discounts on the shares sold by us and the expenses in this offering payable by us) and that remaining net proceeds (excluding net proceeds to be distributed to our eligible teammates (see “Use of Proceeds”)), which we estimate to be $         million (based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus), would be used to repay a portion of the Related-Party Notes. Remaining principal and accrued interest under the Related-Party Notes would either be (1) exchanged for a new $50.0 million note bearing interest at a rate of 5.0% per annum, compounded annually, which we refer to as the “Post-IPO Note”; (2) repaid after the release to us of cash collateral held by our credit card processors in connection with a letter of credit facility arranged by the Virgin Group, which we refer to as the “Letter of Credit Facility”; or (3) exchanged for shares of our common stock, as described more fully in “2014 Recapitalization” elsewhere in this prospectus. In addition, Related-Party Warrants would either be exchanged for shares of our common stock, exercised immediately prior to this offering, expire upon the closing of this offering or cancelled in their entirety, as described more fully in “2014 Recapitalization” elsewhere in this prospectus.

We anticipate that, after consummation of the transactions contemplated by the 2014 Recapitalization Agreement, which we refer to in this prospectus as the “2014 Recapitalization,” and upon the closing of this offering, only the Post-IPO Note, and none of the Related-Party Notes or the Related-Party Warrants, would remain outstanding, and all of our issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock. Further, all of our remaining currently outstanding warrants that are not Related-Party Warrants will expire by their existing terms upon the closing of this offering unless the initial public offering price exceeds the applicable exercise price. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), we do not anticipate that any of our existing warrants to purchase common stock would remain outstanding upon the closing of this offering.

For more information, see “2014 Recapitalization” beginning on page 35 of this prospectus. The transactions contemplated by the 2014 Recapitalization Agreement, which we refer to in this prospectus as the “2014 Recapitalization,” would be contingent upon the consummation of this offering.

 

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THE OFFERING

 

Common stock offered by us

                shares.

 

Shares outstanding after the offering

                shares.(1)

 

Underwriters’ overallotment option to purchase additional shares

Our principal stockholders, Cyrus Capital and the Virgin Group, as selling stockholders, have granted the underwriters an option to purchase up to                  additional shares of common stock solely to cover overallotments.

 

Use of proceeds

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

 

  Of the                  shares we are selling in this offering, 1,745,395 issued and outstanding shares will be sold by VX Employee Holdings, LLC, a Virgin America employee ownership vehicle that we consolidate for financial reporting purposes. We intend to distribute all of the net proceeds from the sale of these shares, which we estimate will be $            , based on an assumed initial public offering price of $         (the midpoint of the price range set forth on the cover of this prospectus), to eligible teammates, which do not include our officers.

Of the remaining              shares of common stock we are selling in this offering, we will retain net proceeds of $         million for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures, including future flight equipment acquisitions, as well as for certain aircraft operating lease obligations.

 

  In connection with the 2014 Recapitalization, we intend to use the remaining net proceeds received by us from this offering, which we estimate will be $             million, based on an assumed initial offering price of $         per share (the midpoint of the price range on the cover of this prospectus), to repay principal and accrued interest on certain Related-Party Notes held by Cyrus Capital and the Virgin Group. For more information, see “2014 Recapitalization” and “Use of Proceeds” elsewhere in this prospectus.

 

  If the overallotment option is exercised, Cyrus Capital and the Virgin Group, as selling stockholders, will sell the shares of our common stock deliverable upon such exercise, and we will not receive any proceeds from the sale of such shares. See “Principal and Selling Stockholders” elsewhere in this prospectus.

 

Risk factors

See “Risk Factors” and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed              symbol

“    ”

 

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(1) The number of shares outstanding after the offering is based on the 14,719,626 shares of our common stock outstanding (on an as converted to common stock basis) as of March 31, 2014, and excludes:

 

   

an aggregate of 3,216,498 shares of common stock reserved for issuance under our 2005 Stock Incentive Plan;

 

   

8,025,384 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2014 at a weighted-average exercise price of $2.09 per share, of which 789,443 are vested;

 

   

2,061,650 shares of common stock issuable upon the vesting of restricted stock units, or RSUs, outstanding as of March 31, 2014 under our 2005 Stock Incentive Plan;

 

   

4,951,417 shares of common stock issuable upon the vesting of additional RSUs outstanding as of March 31, 2014;

 

   

warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $5.00 per share and an aggregate of 3,883,333 shares of common stock at an exercise price of $10.00 per share, all of which will expire, if unexercised, upon completion of this offering;

 

   

rights to purchase 1,150,709 shares of common stock at an exercise price of $3.61 per share outstanding as of March 31, 2014, which will expire, if unexercised, upon completion of this offering;

 

   

an aggregate of                  shares of common stock reserved for issuance under our 2014 Equity Incentive Award Plan; and

 

   

an aggregate of                  shares of common reserved for issuance under our 2014 Employee Stock Purchase Plan.

Except as otherwise indicated, information in this prospectus (including the number of shares outstanding after this offering) reflects or assumes that the following will have taken place, which we refer to in this prospectus as the “Transactions”:

 

   

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

 

   

that the 2014 Recapitalization has been completed, including that we have issued                  shares of common stock in connection therewith, based on an assumed initial offering price of $             per share (the midpoint of the price range on the cover of this prospectus);

 

   

that the holders of all issued and outstanding shares of convertible preferred stock and common stock of various classes have caused such shares to be converted into shares of common stock in connection with the 2014 Recapitalization; and

 

   

that there has been no exercise of the underwriters’ overallotment option to purchase up to                  additional shares of our common stock from the selling stockholders.

The information we present in this prospectus does not reflect a reverse split of our common stock that we may effect prior to the consummation of this offering.

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 2014 Recapitalization:

 

   

the principal and accrued interest outstanding pursuant to our Related-Party Notes either (i) would be repaid with a portion of the net proceeds from this offering and the proceeds from the Letter of Credit Facility, (ii) would be exchanged for the Post-IPO Note or (iii) would be exchanged for shares of our common stock based on the initial public offering price of this offering;

 

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our currently outstanding warrants to purchase shares of our common stock, including our Related-Party Warrants, either (i) would be exchanged for shares of our common stock depending in part on the initial public offering price of this offering, (ii) would be exercised to the extent the exercise price per share provided for therein is less than the initial public offering price of this offering or (iii) would expire or otherwise be cancelled; and

 

   

all issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock.

In this prospectus, in calculating the number of shares of common stock to be issued pursuant to the 2014 Recapitalization, we have assumed the application of the net proceeds to us as set forth in “Use of Proceeds” elsewhere in this prospectus an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and an assumed initial public offering date of March 31, 2014 for purposes of calculating accrued interest on the Related-Party Notes. For more information, see “Use of Proceeds” and “2014 Recapitalization” elsewhere in this prospectus.

A change in the offering price and, accordingly, the amount of net proceeds received by us, would result in changes to the application of the net proceeds as set forth in “Use of Proceeds” elsewhere in this prospectus and in the following variables: (1) the amount of principal and accrued interest outstanding pursuant to our Related-Party Notes that are not repaid with net proceeds from this offering; (2) the number of shares of common stock that would be issued upon exchange of such Related-Party Notes; and (3) the number of shares of common stock that would be issued upon exchange of our Related-Party Warrants. The following table shows (in thousands, except per share data) the effects of various initial public offering prices on these variables based on the assumptions described above. The initial public offering prices shown below are hypothetical and illustrative only.

 

Assumed Initial
  Offering Price  

  Repayment of Related-
Party Notes
    Shares of Common Stock Issued Upon
Exchange for Related-Party Notes
  Shares of Common
Stock Issued Upon
Exchange for Related-
Party Warrants
  Total Shares of Common
Stock Outstanding after
this Offering

$            

  $                      
       
       
       

In each case, the total number of shares of common stock outstanding after this offering above is based on 14,719,626 shares of our common stock outstanding (on an as converted to common basis) as of March 31, 2014, subject to the same exclusions described above.

Because the share amounts set forth above are based on the accrued interest outstanding pursuant to our Related-Party Notes as of March 31, 2014, such amounts do not take into account shares of common stock to be issued in the 2014 Recapitalization in exchange for unpaid interest on the Related-Party Notes accrued from March 31, 2014 through the closing date of this offering. Such interest contractually accrues at a rate of approximately $3.9 million per month in the aggregate.

For more information, see “2014 Recapitalization” elsewhere in this prospectus.

 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

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

We derived the summary consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included in this prospectus. We derived the summary consolidated statement of operations data for the three months ended March 31, 2013 and 2014 and the consolidated balance sheet data as of March 31, 2014 from our unaudited consolidated financial statements included in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist of only normal recurring adjustments, necessary for the fair presentation of the financial information set forth in those statements. 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, 2014 are not indicative of the results expected for the full year.

 

     Year Ended December 31,     Three Months Ended March 31,  
     2011     2012     2013             2013                     2014          
     (in thousands, except per share data)  
                       (unaudited)  

Consolidated Statements of Operations Data:

          

Operating revenues

   $ 1,037,108      $ 1,332,837      $ 1,424,678      $ 301,332      $ 313,390   

Operating expenses

     1,064,504        1,364,570        1,343,797        316,308        326,521   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (27,396     (31,733     80,881        (14,976     (13,131

Other expense

     (72,993     (113,640     (70,420     (31,412     (9,174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax

     (100,389     (145,373     10,461        (46,388     (22,305

Income tax expense

     14        15        317        —          49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (100,403   $ (145,388   $ 10,144      $ (46,388   $ (22,354
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

          

Basic (1)

       $ 0.74        $ (4.22
      

 

 

     

 

 

 

Diluted (1)

       $ 0.56        $ (4.22
      

 

 

     

 

 

 

Shares used in per share calculation:

          

Basic (1)

         5,296,895          5,296,895   

Diluted (1)

         9,689,719          5,296,895   

Pro forma net income per share (unaudited):

          

Basic (2)

       $                     $                
      

 

 

     

 

 

 

Diluted (2)

       $          $     
      

 

 

     

 

 

 

Pro forma shares used in computing net income per share (unaudited):

          

Basic (2)

          

Diluted (2)

          

Non-GAAP Financial Data (unaudited):

          

EBITDA (3)

   $ (17,241   $ (20,473   $ 94,844      $ (11,817   $ (9,862

EBITDAR (3) 

     170,635        216,327        296,915        47,201        36,634   

 

(1) See Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.

 

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(2) Unaudited pro forma basic and diluted net income (loss) per share for 2013 and the three months ended March 31, 2014 give effect to the issuance of our common stock as well as the conversion of our convertible preferred stock and common stock of various classes into common stock as a result of the 2014 Recapitalization assuming it occurs as of the beginning of the periods. In addition, the pro forma amounts reflect the addback to net income (loss) of the interest expense recorded in our consolidated statement of operations related to the Related-Party Notes. See Note 15 to our consolidated financial statements included elsewhere in this prospectus.
(3) EBITDA is earnings before interest, income taxes, and depreciation and amortization. EBITDAR is earnings before interest, income taxes, depreciation and amortization and aircraft rent. EBITDA and EBITDAR are included as supplemental disclosure 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 companies, investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. We also believe EBITDA is useful for evaluating performance of our senior management team. 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. However, because derivations of EBITDA and 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 and EBITDAR as presented may not be directly comparable to similarly titled measures presented by other companies.

These non-GAAP financial measures have limitations as an analytical tool. Some of these limitations are: they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements; and other companies in our industry may calculate EBITDA and EBITDAR differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and 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 net income (loss) to EBITDA and EBITDAR for the periods presented below:

 

     Year Ended December 31,     Three Months Ended March 31,  
     2011     2012     2013             2013                     2014          
     (in thousands)  
                       (unaudited)  

Reconciliation:

          

Net income (loss)

   $ (100,403   $ (145,388   $ 10,144      $ (46,388   $ (22,354

Interest expense

     75,577        116,110        71,293        31,520        9,915   

Capitalized interest

     (2,320     (2,176     (534     —          (481

Interest income

     (264     (294     (339     (108     (260

Income tax expense

     14        15        317        —          49   

Depreciation and amortization

     10,155        11,260        13,963        3,159        3,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (17,241     (20,473     94,844        (11,817     (9,862

Aircraft rent

     187,876        236,800        202,071        59,018        46,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR

   $ 170,635      $ 216,327      $ 296,915      $ 47,201      $ 36,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents our historical consolidated balance sheet data as of March 31, 2014, on a pro forma basis to give effect to the Transactions, including the 2014 Recapitalization, and on a pro forma as adjusted basis to give effect to the receipt by us of the estimated net proceeds from the sale by us of                  shares at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) after deducting underwriting discounts and estimated expenses payable by us and the application of such net proceeds as described in “Use of Proceeds” elsewhere in this prospectus.

 

     As of March 31, 2014
     Actual     Pro Forma (1)    Pro Forma as
Adjusted (2)
           (in thousands)     

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 132,886        

Total assets

     789,153        

Long-term debt, including current portion

     753,075        

Convertible preferred stock

     21,406        

Total stockholders’ equity (deficit)

     (409,003     

 

(1) Unaudited pro forma gives effect to the following transactions as a result of the 2014 Recapitalization as if it occurred as of March 31, 2014: (a) the repayment of $100.0 million of Related-Party Notes with $100.0 million of cash released from cash collateral held by our credit card processors in connection with the establishment of the Letter of Credit Facility arranged by the Virgin Group; (b) issuance of the Post-IPO Note in exchange for cancellation of $50.0 million of certain Related-Party Notes held by the Virgin Group; (c) exchange of approximately $             of principal plus accrued interest of the Related-Party Notes for              shares of our common stock at an assumed initial public offering price of $             (the midpoint of the price range on the cover of this prospectus); (d) issuance of              shares of common stock upon the exercise of “in-the-money” warrants, assuming an initial public offering price of $             (the midpoint of the price range on the cover of this prospectus) and in exchange for cancellation of certain other Related-Party Warrants; (e) conversion of our convertible preferred stock and common stock of various classes into our common stock; and (f) presentation of the excess of the recorded amount of debt and preferred stock above the cash and other consideration to be received of $             as additional paid in capital.
(2) Unaudited pro forma as adjusted gives further effect to receipt of the estimated net proceeds from the sale of shares of common stock in this offering based on an assumed initial public offering price of $         per share (the midpoint of the price range on the cover of this prospectus) after deducting underwriting discounts and the estimated offering expenses payable by us and the application of such net proceeds as described in “Use of Proceeds” elsewhere in this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the amount of total stockholders’ equity (deficit) by approximately $         million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and estimated expenses of this offering payable by us.

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 2014 Recapitalization:

 

   

principal and accrued interest outstanding pursuant to our Related-Party Notes would be either (i) repaid with a portion of the net proceeds from this offering and the proceeds from the Letter of Credit Facility, (ii) exchanged for the Post-IPO Note or (iii) exchanged for shares of our common stock based on the initial public offering price of this offering;

 

   

outstanding warrants to purchase shares of our common stock, including our Related-Party Warrants, either (i) would be exchanged for shares of our common stock depending in part on the initial public offering price of this offering, (ii) would be exercised to the extent the exercise price per share provided for therein is less than the initial public offering price of this offering or (iii) would expire or otherwise be cancelled; and

 

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all issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock.

In this prospectus, in calculating the number of shares of common stock to be issued pursuant to the 2014 Recapitalization, we have assumed the application of the net proceeds to us as set forth in “Use of Proceeds” elsewhere in this prospectus, an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and an assumed initial public offering date of March 31, 2014 for purposes of calculating accrued interest on the Related-Party Notes. For more information, see “Use of Proceeds” and “2014 Recapitalization” elsewhere in this prospectus.

A change in the offering price and, accordingly, the amount of net proceeds received by us, would result in changes to the application of the net proceeds as set forth in “Use of Proceeds” elsewhere in this prospectus and in the following variables: (1) the amount of principal and accrued interest outstanding pursuant to our Related-Party Notes that are not repaid with net proceeds from this offering; (2) the number of shares of common stock that would be issued upon exchange of such Related-Party Notes; and (3) the number of shares of common stock that would be issued upon exchange of our Related-Party Warrants. The following table shows (in thousands, except per share data) the effects of various initial public offering prices on these variables based on the assumptions described above. The initial public offering prices shown below are hypothetical and illustrative only.

 

Assumed Initial Offering

Price

  Repayment of Related-
Party Notes
    Shares of Common Stock
Issued Upon Exchange
for Related-Party Notes
  Shares of Common
Stock Issued Upon
Exchange for Related-
Party Warrants
  Total Shares of Common
Stock Outstanding after
this Offering

$            

  $                      
       
       
       
       

The above discussion is based on the 14,719,626 shares of our common stock outstanding (on an as converted to common stock basis) as of March 31, 2014, and excludes:

 

   

an aggregate of 3,216,498 shares of common stock reserved for issuance under our 2005 Stock Incentive Plan;

 

   

8,025,384 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2014 at a weighted-average exercise price of $2.09 per share, of which 789,443 are vested;

 

   

2,061,650 shares of common stock issuable upon the vesting of RSUs outstanding as of March 31, 2014 under our 2005 Stock Incentive Plan;

 

   

4,951,417 shares of common stock issuable upon the vesting of additional RSUs outstanding as of March 31, 2014;

 

   

rights to purchase 1,150,709 shares of common stock at an exercise price of $3.61 per share outstanding as of March 31, 2014 which will expire, if unexercised, upon completion of this offering;

 

   

warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $5.00 per share and an aggregate of 3,883,333 shares of common stock at an exercise price of $10.00 per share, all of which will expire, if unexercised, upon the completion of this offering;

 

   

an aggregate of                  shares of common stock reserved for issuance under our 2014 Equity Incentive Award Plan; and

 

   

an aggregate of                  shares of common reserved for issuance under our 2014 Employee Stock Purchase Plan.

 

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Because the share amounts set forth above are based on the accrued interest outstanding pursuant to our Related-Party Notes as of March 31, 2014, such amounts do not take into account shares of common stock to be issued in the 2014 Recapitalization in exchange for unpaid interest on the Related-Party Notes accrued from March 31, 2014 through the closing date of this offering. Such interest contractually accrues at a rate of approximately $3.9 million per month in the aggregate.

For more information, see “2014 Recapitalization” elsewhere in this prospectus.

 

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OPERATING STATISTICS

 

     Year Ended December 31,     Three Months Ended March 31,  
             2011                     2012                     2013                     2013                     2014          

Operating Statistics: (1)

          

Available seat miles—ASMs (millions)

     9,853        12,514        12,243        2,695        2,777   

Departures

     44,696        56,362        58,215        12,582        13,825   

Average stage length (statute miles)

     1,571        1,567        1,474        1,511        1,406   

Aircraft in service—end of period

     44        52        53        52        53   

Fleet utilization

     12.1        11.6        10.8        9.8        10.0   

Passengers (thousands)

     5,030        6,219        6,329        1,337        1,479   

Average fare

   $ 189.05      $ 195.38      $ 203.70      $ 201.18      $ 186.73   

Yield per passenger mile (cents)

     11.82        12.26        13.14        12.92        12.56   

Revenue passenger miles—RPMs (millions)

     8,034        9,912        9,814        2,082        2,199   

Load factor

     81.5     79.2     80.2     77.3     79.2

Passenger revenue per available seat mile—PRASM (cents)

     9.64        9.71        10.53        9.98        9.95   

Total revenue per available seat mile—RASM (cents)

     10.53        10.65        11.64        11.18        11.28   

Cost per available seat mile—CASM (cents)

     10.80        10.90        10.98        11.74        11.76   

CASM, excluding fuel (cents)

     6.56        6.61        6.83        7.41        7.59   

Fuel cost per gallon

   $ 3.24      $ 3.32      $ 3.16      $ 3.32      $ 3.16   

Fuel gallons consumed (thousands)

     128,852        161,404        159,326          34,724          36,547   

Teammates (FTE)

     2,002        2,395        2,482        2,255        2,426   

 

(1) See “Glossary of Airline Terms” beginning on the next page of this prospectus for definitions of terms used in this table.

 

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GLOSSARY OF AIRLINE TERMS

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

Airbus A320-family includes A318, A319, A320 and A321 aircraft manufactured by the Airbus Group. The Airbus A320-family have common engine, airframe and cockpit design, leading to shared maintenance and flight operations procedures. We currently operate A319 and A320 aircraft.

Ancillary revenue means the amount of non-ticket revenue received from passengers, including baggage fees, change fees, seat selection fees and on-board sales.

Ancillary revenue per passenger means the total ancillary revenue divided by passengers.

ASMs, or “available seat miles,” refer to the number of seats available for passengers multiplied by the number of miles the seats are flown.

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

Average fare means total passenger revenue divided by passengers.

Banks means the discrete periods during the day at a hub airport during which a large number of flights arrive and depart, allowing for connections.

Block hours means the 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 “cost per available seat mile,” means the airline’s total operating costs divided by available seat miles.

CASM, excluding fuel, or “CASM ex-fuel,” means operating costs less aircraft fuel expense divided by ASMs.

Codeshare refers to a type of arrangement where two or more airlines share the same flight and where a seat can be purchased through one airline but actually operated by a cooperating airline under a different flight number or code.

DOT means the U.S. Department of Transportation, a federal Cabinet department of the U.S. government overseeing interstate and international transportation.

EPA means the U.S. Environmental Protection Agency, an agency of the federal government of the United States charged with protecting human health and the environment.

FAA means the U.S. Federal Aviation Administration, an agency of the U.S. Department of Transportation that has the authority to regulate and oversee civil aviation in the United States.

Fleet utilization, or “aircraft utilization,” means block hours in the period divided by average number of aircraft in our fleet divided by number of days in the period.

Flight equipment means all types of property and equipment used in the inflight operation of aircraft.

Flight hours means the total time an aircraft is in the air between an origin-destination airport pair, i.e. from wheels-up at the origin airport to wheels-down at the destination airport.

GDS means a Global Distribution System such as Amadeus, Sabre and Travelport, used by travel agencies and corporations to purchase tickets on participating airlines.

 

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Hub-and-spoke network refers to a method of organizing an airline network in which one major airport is used as a connecting point for passengers traveling to other destinations, including smaller local airports and international destinations.

Interline refers to a type of agreement among airline partners that allow guests to create itineraries connecting from one airline to another.

Load factor means the proportion of airline capacity (ASMs) that is actually consumed, calculated by dividing RPMs by ASMs.

Mainline CASM means CASM as reported by each major airline for their direct operation of aircraft in scheduled airline service but excluding certain incurred costs that they have determined to be unrelated to their direct operations. Examples of costs that major airlines have excluded in calculating their mainline CASM include the costs of regional airline operations provided by their partners or regional operating subsidiaries, costs of ancillary businesses such as aircraft maintenance and third-party staffing services provided to other airlines and certain restructuring or nonrecurring items.

Major airline, as defined by the U.S. Department of Transportation, means a U.S.-based air carrier with annual operating revenues in excess of one billion dollars during a fiscal year.

Passenger revenue means revenue received by the airline from the carriage of passengers in scheduled operations.

Passengers means the total number of passengers flown on all flight segments.

PDP means pre-delivery payments, which are payments required by aircraft manufacturers in advance of delivery of the aircraft; typically aircraft-specific payments begin 24 months prior to aircraft delivery.

Pitch, or “seat pitch,” means the measure of distance between seat rows on an aircraft, measured in inches from the middle of one seat to the middle of the seat directly in front of or behind it.

Point-to-point network means a method of organizing an airline network in which flights travel directly to a destination rather than going through a central hub.

PRASM, or “passenger revenue per available seat mile,” refers to a measure of passenger unit revenue calculated by dividing passenger revenue by available seat miles, or ASMs.

RASM, “revenue per available seat mile” or “unit revenue” refers to a measure of unit revenue calculated by dividing the airline’s total revenue by available seat miles, or ASMs.

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

Stage length means the average distance flown, measured in statute miles, per aircraft departure, calculated by dividing total aircraft miles flown by the number of total aircraft departures performed.

Stage-length adjustment refers to an adjustment to enable comparison of CASM, RASM and yield across airlines. All other things being equal, the same airline will have lower CASM, RASM and yield as stage length increases since fixed and departure related costs are spread over increasingly larger average flight lengths. Therefore, to properly compare these quantities across airlines (or even across the same airline for two different periods if the airline’s average stage length has changed significantly) requires settling on a common assumed stage length and then adjusting CASM, RASM and yield appropriately. This requires some judgment and different observers may use different stage-length adjustment techniques.

 

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TSA means the U.S. Transportation Security Administration, an agency of the U.S. Department of Homeland Security that exercises authority over the security of the traveling public in the United States.

U.S. citizen means a “citizen of the United States” as that term is defined in 49 U.S.C. §40102(a)(15).

Yield refers to a measure of average fare paid per mile per passenger, calculated by dividing passenger revenue by revenue passenger miles.

Virgin America Destinations:

AUS—Austin-Bergstrom International Airport (Austin, Texas).

BOS—General Edward Lawrence Logan International Airport (Boston, Massachusetts).

CUN—Cancún International Airport (Cancún, Mexico).

DAL—Dallas Love Field (Dallas, Texas).

DCA—Ronald Reagan Washington National Airport (Washington, D.C.).

DFW—Dallas/Fort Worth International Airport (Dallas, Texas).

EWR—Newark Liberty International Airport (Newark, New Jersey).

FLL—Fort Lauderdale-Hollywood International Airport (Fort Lauderdale, Florida).

IAD—Washington Dulles International Airport (Dulles, Virginia).

JFK—John F. Kennedy International Airport (Jamaica, New York).

LAS—McCarran International Airport (Las Vegas, Nevada).

LAX—Los Angeles International Airport (Los Angeles, California).

LGA—LaGuardia Airport (New York, New York).

MCO—Orlando International Airport (Orlando, Florida).

ORD—Chicago O’Hare International Airport (Chicago, Illinois).

PDX—Portland International Airport (Portland, Oregon).

PHL—Philadelphia International Airport (Philadelphia, Pennsylvania).

PSP—Palm Springs International Airport (Palm Springs, California).

PVR—Licenciado Gustavo Díaz Ordaz International Airport (Puerto Vallarta, Mexico).

SAN—San Diego International Airport (San Diego, California).

SEA—Seattle–Tacoma International Airport (Seattle, Washington).

SFO—San Francisco International Airport (San Francisco, California).

SJD—Los Cabos International Airport (Los Cabos, Mexico).

 

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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, results of operations, financial condition or growth prospects could be materially adversely affected. In those cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

Our business has been and in the future may be materially adversely affected by the price and availability of aircraft fuel. High fuel costs and increases in fuel prices or a shortage or disruption in the supply of aircraft fuel would have a material adverse effect on our business.

The price of aircraft fuel may be high or volatile. The cost of aircraft fuel is highly volatile and is our largest individual operating expense, accounting for 39.2%, 39.4%, 37.7% and 35.5% of our operating expenses for 2011, 2012 and 2013 and the three months ended March 31, 2014. High fuel costs or increases in fuel costs (or in the price of crude oil) could materially adversely affect our business. We may be more susceptible to fuel-price volatility than most of our competitors since fuel represents a larger proportion of our total costs due to the longer average stage length of our flights.

Availability of aircraft fuel may be low. Our business is also dependent on the availability of aircraft fuel (or crude oil), which is not predictable. Weather-related events, natural disasters, terrorism, wars, political disruption or instability involving oil-producing countries, changes in governmental or cartel policy concerning crude oil or aircraft fuel production, transportation, taxes or marketing, environmental concerns, market manipulation, price speculation and other unpredictable events may drive actual or perceived fuel supply shortages. Shortages in the availability of, or increases in demand for, crude oil in general, other crude-oil-based fuel derivatives and aircraft fuel in particular could result in increased fuel prices and could materially adversely affect our business.

Fare increases may not cover increased fuel costs. We may not be able to increase ticket prices sufficiently to cover increased fuel costs, particularly when fuel prices rise quickly. We sell a significant number of tickets to passengers well in advance of travel, and, as a result, fares sold for future travel may not reflect increased fuel costs. In addition, our ability to increase ticket prices to offset an increase in fuel costs is limited by the competitive nature of the airline industry and the price sensitivity associated with air travel, particularly leisure travel, and any increases in fares may reduce the general demand for air travel.

Our fuel hedging program may not be effective. We cannot assure you our fuel hedging program, including our forward fixed price contracts, or FFPs, which we use as part of our hedging strategy, will be effective or that we will maintain a fuel hedging program. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide an adequate level of protection against increased fuel costs or that the counterparties to our hedge contracts will be able to perform. Certain of our fuel hedge contracts may contain margin funding requirements that could require us to post collateral to counterparties in the event of a significant drop in fuel prices. A failure of our fuel hedging strategy, significant margin funding requirements, overpaying for fuel through the use of FFPs or our failure to maintain a fuel hedging program could prevent us from adequately mitigating the risk of fuel price increases and could materially adversely affect our business.

The airline industry is exceedingly competitive, and we compete against both legacy airlines and low-cost carriers; if we are not able to compete successfully in the domestic airline industry, our business will be materially adversely affected.

The domestic airline industry is characterized by significant competition from both large legacy airlines and low-cost carriers, or LCCs. Airlines compete for passengers with a variety of fares, discounts, route networks, flight schedules, flight frequencies, frequent flyer programs and other products and services, including seating, food, entertainment and other on-board amenities. Airlines also compete on the basis of customer-service

 

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performance statistics, such as on-time arrivals, customer complaints and mishandled baggage reports. We face significant competition from both large legacy airlines and LCCs on the routes we operate, and if we are unable to compete effectively, our business will be materially adversely affected.

Large legacy airlines have numerous competitive advantages in competing for airline passengers, particularly following the consolidation in the domestic airline industry that occurred between 2008 and 2014, which resulted in the creation of four dominant domestic airlines with significant breadth of network coverage and financial resources. We face competition from one or more of these legacy carriers with respect to nearly all of the routes we serve. The legacy carriers have a number of competitive advantages relative to us that may enable them to attain higher average fares, more passenger traffic and a greater percentage of business passengers than we attain. These advantages include a much larger route network with domestic and international connections, more flights and convenient flight schedules in routes that overlap with ours. These carriers also offer frequent flyer programs and lounge access benefits that reward and create loyalty with travelers, particularly business travelers. Moreover, several legacy carriers have corporate travel contracts that direct employees to fly with a preferred carrier. The enormous route networks operated by these airlines, combined with their marketing and partnership relationships with regional airlines and international alliance partner carriers, allow them to generate increased passenger traffic from domestic and international cities. Our smaller point-to-point route network and lack of connecting traffic and marketing alliances puts us at a competitive disadvantage to legacy carriers, particularly with respect to our appeal to higher-fare business travelers.

Each of the legacy carriers operates a much larger fleet of aircraft and has greater financial resources than we do, which permits it to add service in response to our entry into new markets. For example, United Airlines operates a hub at San Francisco International Airport (SFO) and has engaged in aggressive competitive practices, such as increasing seat capacity by introducing larger-gauge aircraft or adding incremental flights in response to our entry into new markets served from SFO. Due to our relatively small size, we are more susceptible to a fare war or other competitive activities in one or more of the markets we serve, which could prevent us from attaining the level of passenger traffic or maintaining the level of ticket sales required to sustain profitable operations in new or existing markets.

LCCs also have numerous competitive advantages in competing for airline passengers. LCCs generally offer a more basic service to travelers and therefore have lower cost structures than other airlines. The lower cost structure of LCCs permits them to offer flights to and from many of the same markets as most major airlines but at lower prices. LCCs also typically fly direct, point-to-point flights, which tends to improve aircraft and crew scheduling efficiency. Many LCCs also provide only a single class of service, thereby avoiding the incremental cost of offering premium-class services like those that we offer.

In addition, some LCCs have a relentless focus on lowering costs and provide only a very basic level of service to passengers. These carriers configure their aircraft with high-density seating configurations and offer minimal amenities during the flight, and as a result, they incur lower unit costs than we do. Some LCCs also charge ancillary fees for basic services that we provide free of charge, such as making a reservation, printing boarding passes at the airport and carrying bags onboard the cabin for stowage in the overhead bins. In general, LCCs have lower unit costs and therefore are able to offer lower base fares.

If we fail to implement our business strategy successfully, our business will be materially adversely affected.

Our business strategy is to target business and leisure travelers who are willing to pay a premium for our newer aircraft, more comfortable seating, better customer service and the latest on-board amenities while maintaining a cost structure that is lower than that of the legacy airlines that these business and premium travelers have historically favored. We may not be successful in attracting enough passengers willing to pay a premium over the fares offered by the LCCs, which we require to offset the additional costs embedded within our premium service model. In addition, American Airlines, Delta Air Lines, United Airlines and JetBlue Airways are increasing the quality of their seating and on-board amenities in some of the routes where they compete with

 

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us, making it more challenging to attract passengers who are loyal to those airlines. Continuing to grow our business profitably is also critical to our business strategy. Growth poses various operational and financial challenges, including securing additional financing for aircraft acquisition, obtaining airport gates and facilities at congested airports that serve business and premium travelers and hiring qualified personnel while maintaining our culture, which we believe is vital to the continued success of our airline. We cannot assure you that we will be able to successfully and profitably expand our fleet, enter new markets or grow existing markets in order to achieve additional economies of scale and maintain or increase our profitability. If we are unsuccessful in deploying our strategy, or if our strategy is unsustainable, our business will be materially adversely affected.

Threatened or actual terrorist attacks or security concerns involving airlines could materially adversely affect our business.

Past terrorist attacks against airlines have caused substantial revenue losses and increased security costs. As a result, any actual or threatened terrorist attack or security breach, even if not directly against an airline, could materially adversely affect our business by weakening the demand for air travel and resulting in increased safety and security costs for us and the airline industry generally. Terrorist attacks made directly on a domestic airline, 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 have a negative impact on the airline industry and materially adversely affect our business.

We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could materially adversely affect our business.

We are highly dependent on technology and computer systems and networks to operate our business. These technologies and systems include our computerized airline reservation system, flight operations systems, telecommunications systems, airline 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. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to issue, track and accept electronic tickets, conduct check-in, board and manage our passengers through the airports we serve and provide us with access to global distribution systems, which enlarge our pool of potential passengers. In May 2011, we experienced significant reservations system outages, which resulted in lost ticket sales on our website which materially adversely affected our business and goodwill. If our reservation system fails or experiences interruptions again, 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 other airlines, and our reputation could be harmed.

We also rely on third-party service providers to maintain our flight operations systems, and if those systems are not functioning, we could experience service disruptions, which could result in the loss of important data, increase our expenses, decrease our operational performance and temporarily stall our operations. 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 the event that one or more of our primary technology or systems vendors fails to perform and a replacement system is not available, our business could be materially adversely affected.

Our business could be materially adversely affected from an accident or safety incident involving our aircraft.

An accident or safety incident involving one of our aircraft could expose us to significant liability and a public perception that our airline is unsafe or unreliable. In the event of a major accident, we could be subject to significant personal injury and property claims. While we maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate to cover fully all claims, and we may be forced to bear substantial losses from an accident. In addition, any accident or incident

 

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involving one of our aircraft (or an accident involving another Virgin-branded airline), even if fully insured, could harm our reputation and result in a loss of future passenger demand if it creates a public perception that our operation is unsafe or unreliable as compared to other airlines or means of transportation. As a result, any accident or safety incident involving our aircraft could materially adversely affect our business.

The demand for airline services is sensitive to changes in economic conditions, and another recession would weaken demand for our services and materially adversely affect our business.

The demand for business and leisure travel is affected by U.S. and global economic conditions. Unfavorable economic conditions have historically reduced airline travel spending. For most leisure consumers, travel is a discretionary expense, and during unfavorable economic conditions, travelers have often replaced air travel with car travel or other forms of ground transportation or have opted not to travel at all. Likewise, during unfavorable economic conditions, businesses have foregone or deferred air travel. Travelers have also reduced spending by purchasing less expensive tickets, which can result in a decrease in average revenue per seat. Because we have relatively high fixed costs, much of which cannot be mitigated during periods of lower demand for air travel, our business is particularly sensitive to changes in U.S. economic conditions. A reduction in the demand for air travel due to unfavorable economic conditions also limits our ability to raise fares to counteract increased fuel, labor and other costs. If U.S. or global economic conditions are unfavorable or uncertain for an extended period of time, it would materially adversely affect our business.

We have a limited operating history and have only recorded one year of profit, and we may not sustain or increase profitability in the future.

We have a history of losses and only a limited operating history upon which you can evaluate our business and prospects. While we first recorded an annual profit in 2013, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or an annual basis. In turn, this may cause the trading price of our common stock to decline and may materially adversely affect our business.

Airlines are subject to extensive regulation and taxation by governmental authorities, and compliance with new regulations and any new or higher taxes will increase our operating costs and may materially adversely affect our business.

We are subject to extensive regulatory and legal compliance requirements. Congress regularly passes laws that affect the airline industry, and the U.S. Department of Transportation, or DOT, the Federal Aviation Administration, or FAA, and the Transportation Security Administration, or TSA, continually issue regulations, orders, rulings and guidance relating to the operation, safety and security of airlines that require significant expenditures and investment by us. For example, the DOT has broad authority over airlines to prevent unfair and deceptive practices and has used this authority to impose numerous airline regulations, including rules and fines relating to airline advertising, pricing, baggage compensation, denied boarding compensation and tarmac delayed flights. The DOT frequently considers the adoption of new regulations, such as rules relating to congestion-based landing fees at airports and limits or disclosures concerning ancillary passenger fees. For example, in June 2014, the DOT issued a notice of proposed rulemaking to further enhance passenger protections that addresses several areas of regulation, including post-purchase ticket increases, ancillary fee disclosures and code-share data reporting and disclosure. Compliance with existing requirements drives administrative, legal and operational costs and subjects us to potential fines, and any new regulatory requirements issued by the DOT may increase our compliance costs, reduce our revenues and materially adversely affect our business.

The FAA has broad authority to address airline safety issues, including inspection authority over our flight, technical and safety operations, and has the ability to issue mandatory orders relating to, among other things, the grounding of aircraft, installation of mandatory equipment and removal and replacement of aircraft parts that have failed or may fail in the future. Any decision by the FAA to require aircraft inspections, complete aircraft maintenance or ground aircraft types operated by us could materially adversely affect our business. For example,

 

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on January 4, 2014, the FAA’s new and more stringent pilot flight and duty time requirements under Part 117 of the Federal Aviation Regulations took effect, which has increased costs and could further increase our costs in the future.

The FAA also has extensive authority to address airspace/airport congestion issues and has imposed limitations on take-off and landing slots at four airports: Ronald Reagan Washington National Airport (DCA), LaGuardia Airport (LGA), John F. Kennedy International Airport (JFK) and Newark Liberty International Airport (EWR). The FAA could reduce the number of slots allocated at these airports or impose new slot restrictions at other airports.

We are also subject to restrictions imposed by federal law that 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. For more information on these requirements, see “—Our corporate charter and bylaws include provisions limiting voting by non-U.S. citizens and specifying an exclusive forum for stockholder disputes.” We are currently in compliance with these ownership restrictions. Our high level of foreign ownership may limit our opportunity to participate in U.S. government travel contracts and the Civilian Reserve Air Fleet program, however, if we are unable to satisfy policies and procedures of the U.S. Department of Defense for the mitigation of foreign ownership, control or influence required of cleared U.S. contractors.

Domestic airlines are also subject to significant taxation, including taxes on passenger tickets and security fees to compensate the federal government for its role in regulating airlines, providing air traffic controls and implementing security measures related to airlines and airports. In July 2014, the TSA implemented an increased passenger security fee at a flat rate of $5.60 per passenger. Any significant increase in ticket taxes or security fees could weaken the demand for air travel, increase our costs and materially adversely affect our business.

Many aspects of airlines’ operations are also subject to increasingly stringent environmental regulations, and growing concerns about climate change may result in the imposition of additional regulation. Since the domestic airline industry is highly price sensitive, we may not be able to recover from our passengers the cost of compliance with new or more stringent environmental laws and regulations, which could materially adversely affect our business. Although we do not expect the costs of complying with current environmental regulations will have a material adverse effect on our business, we cannot assure you that the costs of complying with environmental regulations would not materially adversely affect us in the future.

Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers because of higher security costs, increased costs related to updated infrastructures and other costs. 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. Although lawmakers may impose these additional fees and consider them “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which could materially adversely affect our business.

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

We have significant obligations to purchase aircraft and spare engines that we have on order from Airbus and CFM International, or CFM, and we have historically relied solely on lessors to provide financing for our aircraft acquisition needs. Because we may not have sufficient liquidity or creditworthiness to fund the purchase of aircraft and engines, including payment of pre-delivery payments, we expect to seek external financing for these expenses. There are a number of factors that may affect our ability to raise financing or access the capital markets, including our liquidity and credit status, our operating cash flows, market conditions in the airline industry, U.S. and global economic conditions, the general state of the capital markets and the financial position

 

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of the major providers of commercial aircraft financing. We cannot assure you that we will be able to source external financing for our planned aircraft acquisitions or for other significant capital needs, and if we are unable to source financing on acceptable terms, or unable to source financing at all, our business could be materially adversely affected. To the extent we finance our activities with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our strategy or otherwise constrain our growth and operations.

In addition, we may be unable to fully finance future aircraft acquisitions if the aircraft are perceived to be less valuable for any reason. We presently have ten Airbus A320-family, current technology aircraft on order for delivery between July 2015 and June 2016. If Airbus’s newer A320neo-family aircraft provide expected improvements in the fuel consumption and an increase in nautical mile range, the Airbus A320-family current-technology aircraft may be perceived to be less valuable. If we are unable to fully finance our acquisition of these aircraft, our business may be materially adversely affected.

The “Virgin” brand is not under our control, and negative publicity related to the Virgin brand name could materially adversely affect our business.

We believe the “Virgin” brand, which is integral to our corporate identity, represents quality, innovation, creativity, fun, a sense of competitive challenge and employee-friendliness. We license rights to the Virgin brand from certain entities affiliated with the Virgin Group on a non-exclusive basis. The Virgin brand is also licensed to and used by a number of other companies, including two airlines operating in other geographies. We rely on the general goodwill of consumers and our employees, whom we call teammates, towards the Virgin brand as part of our internal corporate culture and external marketing strategy. Consequently, any adverse publicity in relation to the Virgin brand name or its principals, particularly Sir Richard Branson who is closely associated with the brand, or in relation to another Virgin-branded company over which we have no control or influence, could have a material adverse effect on our business.

We obtain our rights to use the Virgin brand under agreements with certain entities affiliated with the Virgin Group, and we would lose those rights if these agreements are terminated or not renewed.

We are party to license agreements with certain entities affiliated with the Virgin Group pursuant to which we obtain rights to use the Virgin brand. The licensor may terminate the agreements upon the occurrence of a number of specified events including if we commit a material breach of our obligations under the agreements that is uncured for more than 10 business days or if we materially damage the Virgin brand. If we lose our rights to use the Virgin brand, we would lose the goodwill associated with our brand name and be forced to develop a new brand name, which would likely require substantial expenditures, and our business would likely be materially adversely affected.

We are subject to unionization, which could lead to labor-related disruptions that materially adversely affect our business.

We currently have a direct relationship with our teammates. However, airline workers are one of the most heavily unionized private-sector employee groups, and any of our non-management teammates could seek to unionize. If one or more of our teammate groups elects a union to represent them, it could create a risk of work stoppages which could materially adversely affect our business.

We depend on the Los Angeles and San Francisco markets to be successful.

Most of our current flights operate from our two focus cities of Los Angeles and San Francisco. In 2013, passengers to and from Los Angeles International Airport (LAX) and to and from SFO accounted for 44.9% and 53.6% of our total passengers. We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities and to leverage sales and marketing efforts in those regions. As a result, we are highly dependent on the LAX and SFO markets. However, both LAX and SFO are high-traffic airports with limited excess facilities and capacity, which may restrict our growth at these

 

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two bases. If we are unable to increase flights in these and other key markets, or if any events cause a reduction in demand for air transportation in these key markets or if increases in competition cause us to reduce fares in these key markets, our business may be materially adversely affected.

Our quarterly results of operations fluctuate due to a number of factors, including seasonality.

We expect our quarterly results of operations to continue to fluctuate due to a number of factors, including actions by our competitors, price changes in aircraft fuel and the timing and amount of maintenance expenses. As a result of these and other factors, quarter-to-quarter comparisons of our results of operations may not be reliable indicators of our future performance. In addition, seasonality may cause our quarterly results of operations to fluctuate since passengers tend to fly more during the summer months and less in the winter months. We cannot assure you that we will find profitable markets in which to operate during the winter season. Lower demand for air travel during the winter months may materially adversely affect our business.

We have a significant amount of fixed obligations.

The airline business is capital intensive, and many airlines, including us, are highly leveraged. We currently lease all of our aircraft, and these leases contain provisions requiring the payment of monthly rent regardless of usage. As of December 31, 2013, we had future operating lease obligations of approximately $1.7 billion. In addition, we have ordered aircraft and spare engines from Airbus and CFM for delivery over the next eight years. Under those agreements, we are obligated to make pre-delivery payments to Airbus and CFM on regular intervals in advance of the delivery of our ordered aircraft and spare engines. Moreover, we expect to incur additional fixed expenses as we take delivery of new aircraft, with ten aircraft scheduled for delivery between July 2015 and June 2016 and 30 aircraft scheduled for delivery in 2020 through 2022.

The amount of our current and expected future fixed obligations could strain our cash flows from operations, reducing the availability of our cash flows to fund working capital, capital expenditures and other general corporate purposes and limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete. Our substantial fixed obligations could reduce our credit, which would negatively impact our ability to obtain additional financing and could place us at a competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources or more favorable terms. We cannot assure you that we will be able to generate sufficient cash flows from our operations or from capital market activities to pay our debt and other fixed obligations as they become due or that we will be able to finance these obligations on favorable terms, or at all. If we are unable to generate sufficient cash flows for any reason, we may be unable to meet our fixed obligations, and our business may be materially adversely affected. In particular, if we are unable to make our required aircraft lease rental payments, we could lose access to one or more aircraft and forfeit our rent deposits, and our lessors could exercise their remedies under the lease agreements. Also, an event of default under any of our leases and our debt financing agreements could trigger cross-default provisions under other agreements.

Our credit card processors have the right to impose larger holdbacks which could have a material adverse effect on our business.

Most of our tickets are sold to customers using credit cards as the form of payment. Our credit card processors have rights in their agreements to hold back receivable monies related to tickets sold for future travel services (i.e., a “holdback”). Any related holdback is remitted to us shortly after the customer travels. Holdbacks are commonly imposed on newer or less creditworthy airlines, and we currently have significant holdback requirements with our two primary credit card processors, Elavon Inc. for Visa/MasterCard and American Express. If a credit card processor determines there is a material risk with respect to our business or liquidity, it has the right to increase the amount or duration of the holdback. Any increase in the amount or duration of our holdbacks may negatively impact our liquidity and materially adversely affect our business.

 

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Significant flight delays, cancellations or aircraft unavailability may materially adversely affect our business.

Various factors, many of which are beyond our control, such as air traffic congestion at airports, other air traffic control problems, security requirements, unscheduled maintenance and adverse weather conditions, can cause flight delays or cancellations or cause certain of our aircraft to be unavailable for a period of time. SFO, one of our two primary focus airports, is particularly vulnerable to air traffic constraints and other delays due to fog and inclement weather. Factors that cause flight delays frustrate passengers, and reduced aircraft availability could lead to customer dissatisfaction that harms our reputation. Additionally, if we are forced to cancel a flight due to an event within our control, we will be liable to re-accommodate our guests, including by purchasing tickets for them on other airlines. If one or more of our aircraft is unavailable to fly revenue service for any amount of time, our capacity will be reduced. Significant flight delays, cancellations or aircraft unavailability for any reason could have a material adverse effect on our business.

Our maintenance costs will increase as our fleet ages.

As of March 31, 2014, the average age of aircraft in our fleet of Airbus A320-family aircraft was approximately five years. Our aircraft will require more scheduled and unscheduled maintenance as they age. We are beginning to incur substantial costs for major maintenance visits for our aircraft, and because of the pattern of our historical fleet growth, we expect to have several aircraft undergoing major maintenance at roughly the same time. These more significant maintenance activities result in out-of-service periods during which certain of our aircraft are unavailable to fly passengers. Any significant increase in maintenance and repair expenses, as well as resulting out-of-service periods, could have a material adverse effect on our business.

We expect that costs associated with the final qualifying major engine maintenance events for our aircraft will be amortized over the remaining lease term rather than until the next estimated major maintenance event, because we account for major maintenance under the deferral method. This could result in significantly higher depreciation and amortization expense related to major maintenance in the last few years of the leases as compared to the expenses in earlier periods.

In addition, the terms of some of our lease agreements require us to pay supplemental rent, also known as maintenance reserves, to our lessor in advance of the performance of major maintenance, resulting in our recording significant aircraft maintenance deposits on our consolidated balance sheet. However, the payments made after the final qualifying major engine maintenance event during the lease term are fully expensed, as these amounts are not reimbursable from the lessor. As such, it will result in both additional rent expense and depreciation and amortization expense for previously capitalized maintenance being recorded in the period after the final qualifying major engine maintenance event and just prior to the termination of the lease.

We depend on sole-source suppliers for our aircraft and engines.

A critical cost-saving element of our business strategy is to operate a single-family aircraft fleet; however, our dependence on the Airbus A320-family aircraft and CFM engines for all of our flights makes us more vulnerable to any design defects or mechanical problems associated with this aircraft type or these engines. In the event of any actual or suspected design defects or mechanical problems with the Airbus A320-family aircraft or CFM engines, whether involving our aircraft or that of another airline, we may choose or be required to suspend or restrict the use of our aircraft. Our business could also be materially adversely affected if the public avoids flying on our aircraft due to an adverse perception of the Airbus A320-family aircraft or CFM engines, whether because of safety concerns or other problems, real or perceived, or in the event of an accident involving such aircraft or engines. Separately, if Airbus or CFM becomes unable to perform its contractual obligations and we must lease or purchase aircraft from another supplier, we would incur substantial transition costs, including expenses related to acquiring new aircraft, engines, spare parts, maintenance facilities and training activities, and we would lose the cost benefits from our current single-fleet composition, any of which could have a material adverse effect on our business.

 

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

We depend on third-party service providers to provide the majority of the services required for our operations, including fueling, maintenance, catering, passenger handling, reservations and airport ground handling, as well as certain administrative and support services. We are likely to enter into similar service agreements for new markets we enter, and we cannot assure you that we will be able to obtain the necessary services at acceptable rates. Moreover, although we do enter into agreements with many of our third-party service providers that define expected service performance, we do not directly control these third-party service providers. Any of these third-party service providers may fail to meet their service performance commitments to us, suffer disruptions to their systems that could negatively impact their services or fail to perform their services reliably, professionally or at the high standard of quality that we expect. Any such failure of our third-party service providers may prevent us from operating one or more flights or providing other services to our customers and may materially adversely affect our business. In addition, our business could be materially adversely affected if our customers believe that our services are unreliable or unsatisfactory.

Our business could be affected by severe weather conditions, natural disasters or the outbreak of contagious disease, any of which could materially adversely affect our business.

Our operations may be materially adversely affected by factors beyond our control, including severe weather conditions, natural disasters and the outbreak of disease. Severe weather conditions, such as winter snowstorms, hurricanes or other weather events, can cause flight cancellations, turbulence or significant delays that may result in increased costs and reduced revenue. Also, our two focus cities, Los Angeles and San Francisco, and our headquarters in Burlingame, California, are located on or near active seismic faults, and an earthquake could occur at any time, which could disrupt our operations at those locations. Similarly, outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine) flu, could significantly reduce demand for passenger traffic and result in travel restrictions. Any interruption in our ability to operate flights or reduction in airline passenger demand because of such events could have a material adverse effect on our business.

Increases in insurance costs or reductions in insurance coverage may materially adversely affect our business.

We have obtained third-party war risk (terrorism) insurance through a special program administered by the FAA. The FAA’s statutory authority to provide war risk insurance to air carriers expires on September 30, 2014. An extension of such authority will require legislation by the U.S. Congress. Should the government discontinue this coverage, obtaining comparable coverage from commercial underwriters could result in substantially higher premiums and more restrictive terms. If we are unable to obtain adequate third-party war risk (terrorism) insurance, our business could be materially adversely affected.

If any of our aircraft were to be involved in an accident or if our property or operations were to be affected by a significant natural catastrophe or other event, we could be exposed to significant liability or loss. If we are unable to obtain sufficient insurance (including aviation hull and liability insurance and property and business interruption coverage) to cover such liabilities or losses, whether due to insurance market conditions or otherwise, our business could be materially adversely affected.

Security breaches involving a compromise of customer information or personal data could expose us to liability, damage our reputation and materially adversely affect our business.

We are subject to laws relating to privacy of personal data. In the processing of our customer transactions and as part of our ordinary business operations, we and certain of our third-party service providers collect, process, transmit and store a large volume of personally identifiable information, including financial data such as credit card information. The security of the systems and network where we and our service providers store this data is a critical element of our business. Any security breach in which employee or customer data is improperly

 

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released or disclosed could result in the loss, disclosure or improper use of this data and subject us to regulatory penalties and litigation, disrupt our operation, damage our reputation and materially adversely affect our business. Additionally, any material failure by us or our service providers to maintain compliance with the Payment Card Industry security requirements or rectify a data security issue may result in fines and restrictions on our ability to accept credit cards as a form of payment.

Our business 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 officers, senior management team and key operating personnel. Competition for highly qualified personnel is intense, and a substantial turnover in key employees without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business.

Concentrated ownership by our principal stockholders could materially adversely affect our other stockholders.

Immediately after this offering of                  shares of our common stock at an assumed initial public offering price of $         per share, the midpoint of the price range listed on the cover of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us and the application of such net proceeds as described under “Use of Proceeds” elsewhere in this prospectus, Cyrus Capital and the Virgin Group will beneficially own approximately     % and     % of our outstanding voting common stock. This concentrated ownership may limit the ability of other stockholders to influence corporate matters, and, as a result, these stockholders may cause us to take actions that our other stockholders do not view as beneficial. For example, this concentration of ownership could delay or prevent a change in control or otherwise discourage a potential acquirer from attempting to obtain control of us, which in turn could cause the trading price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

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 or executive officers.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur 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, related rules implemented or to be implemented by the Securities and Exchange Commission, or the SEC, and the listing rules of the             . 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 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 or 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, our common stock could be delisted, and we could be subject to 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, result in significant expenses to remediate any internal control deficiencies and have a material adverse effect on our business.

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, 2015, our management will be required to report on, and

 

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our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing management’s assessment of 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 implementing 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 conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. 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. 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             , regulatory investigations, civil or criminal sanctions and litigation, any of which would materially adversely affect our business.

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

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, 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 sales by our principal stockholders;

 

   

trading strategies related to changes in fuel or oil prices; and

 

   

general market, political and other economic conditions.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. Broad market fluctuations may materially 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 materially adversely affect our business.

 

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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 stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities and industry analysts may 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, the trading price of our common stock would likely decline. If one or more of these analysts ceases to cover our company or fails to publish reports on us regularly, demand for our stock could decrease, which may cause the trading price of our common stock and our trading volume to decline.

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

Our amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon completion of this offering 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 materially adversely affect the price of our common stock. These provisions include, among others:

 

   

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.

Purchasers of our common stock in this offering will experience immediate and substantial dilution in the tangible net book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $         in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus). In addition, new investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering but will only own approximately     % of the outstanding share capital after the offering. In addition, as of March 31, 2014, we had outstanding options to purchase 8,025,384 shares of our capital stock and 7,013,067 unvested restricted stock units. Following the 2014 Recapitalization, we may have additional outstanding warrants to purchase shares of our common stock. The exercise of these outstanding options or warrants or the vesting of these restricted stock units will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution” elsewhere in this prospectus.

The value of our common stock may be materially 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 anticipate that, after consummation of the transactions contemplated by the 2014 Recapitalization and the closing of this offering, Cyrus Capital and the Virgin Group (or their respective

 

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designees) collectively will hold approximately                  million shares of our voting common stock, or     % of our voting common stock outstanding, and     % of the total outstanding equity interests in our company as of March 31, 2014 (based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus), and Cyrus Capital and the Virgin Group are entitled to rights with respect to registration of such shares under the Securities Act. Cyrus Capital and the Virgin Group could also hold warrants to purchase shares of our common stock immediately following this offering depending upon the initial public offering price. See “2014 Recapitalization” elsewhere in this prospectus for a discussion of the circumstances under which warrants may be outstanding following this offering. 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 or exercise of securities exercisable or convertible into our common stock, including warrants to purchase our common stock, could materially adversely affect the prevailing price of our common stock.

Our corporate charter and bylaws include provisions limiting voting by non-U.S. citizens and specifying an exclusive forum for stockholder disputes.

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.

As of March 31, 2014, based on the shares registered on the foreign stock record, non-U.S. citizens own, in the aggregate, 3,250,251 million shares of voting common stock (representing approximately 18% of the total voting rights and approximately 22% of the total outstanding equity interests in our company). As of March 31, 2014, non-U.S. citizens also hold warrants to purchase 217,840,303 shares of our common stock. For information on the number of shares of our common stock and warrants to purchase our common stock outstanding after the 2014 Recapitalization, see “Capitalization” elsewhere in this prospectus.

Our amended and restated certificate of incorporation in effect at the time of the closing of the offering will also provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by, or otherwise wrongdoing by, any of our directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or the bylaws; or (v) any action asserting a claim against us or any of our directors, officers or employees governed by the internal affairs doctrine. Accordingly, you may be limited in your ability to pursue legal actions.

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

 

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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.

We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. In particular, in recent years, there has been significant litigation in the United States and abroad involving patents and other intellectual property rights. We have in the past faced, and may face in the future, claims by third parties that we infringe upon their intellectual property rights. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business.

Risks associated with our presence in international emerging markets, including political or economic instability, and failure to adequately comply with existing legal requirements, may materially adversely affect us.

Countries with less developed economies, legal systems, financial markets and business and political environments are vulnerable to economic and political problems, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us now or in the future and the resulting instability may materially adversely affect our business.

We emphasize legal compliance and have implemented and continue to implement and refresh policies, procedures and certain ongoing training of our teammates with regard to business ethics and many key legal requirements; however, we cannot assure you that our teammates will adhere to our code of business ethics, other policies or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate record-keeping and internal accounting practices to record our transactions accurately, we may be subject to sanctions. In the event we believe or have reason to believe our teammates have or may have violated applicable laws or regulations, we may incur investigation costs, potential penalties and other related costs which in turn may materially adversely affect our reputation and business.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

We incurred net losses through 2012. Our unused losses generally carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. In addition, if a corporation undergoes an “ownership change” (generally defined as a greater than 50-percentage-point cumulative change in the equity ownership of certain stockholders over a rolling three-year period) under Section 382 of the Internal Revenue Code of 1986, as amended, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset future taxable income or taxes may be limited. We have experienced ownership changes in the past and may experience ownership changes in connection with this offering or as a result of future changes in our stock ownership (some of which changes may not be within our control), including due to sales of our common stock by Cyrus Capital or the Virgin Group. This, in turn, could materially reduce or eliminate our ability to use our losses or tax attributes to offset future taxable income or tax and have an adverse effect on our future cash flows.

 

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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 which 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 price and availability of aircraft fuel;

 

   

our ability to compete in an extremely competitive industry;

 

   

the successful execution and implementation of our strategy;

 

   

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

 

   

our reliance upon technology and automated systems to operate our business;

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar incident;

 

   

changes in economic conditions;

 

   

our limited profitable operating history;

 

   

changes in governmental regulation; and

 

   

our ability to obtain financing or access capital markets.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

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2014 RECAPITALIZATION

As of March 31, 2014, we had a total of $654.4 million of principal and accrued interest outstanding under certain secured related-party notes described below, which we refer to in this prospectus as the “Related-Party Notes”:

 

   

$385.6 million aggregate principal amount and accrued interest of secured notes, issued between May 2008 and November 2011, as of March 31, 2014, which we refer to in this prospectus as the “5% Notes”;

 

   

$181.2 million aggregate principal amount and accrued interest of secured notes issued in December 2011 as of March 31, 2014, which we refer to in this prospectus as the “FNPA Notes”; and

 

   

$87.6 million aggregate principal amount and accrued interest of secured notes issued in May 2013, as of March 31, 2014, which we refer to in this prospectus as the “FNPA II Notes.”

All of the Related-Party Notes are secured by substantially all of our assets. The 5% Notes bear interest at a rate of 5.0% per annum, compounded annually. The FNPA Notes bear interest at a rate of 17.0% per annum, of which 8.5% is payable quarterly in arrears, and 8.5% is compounded annually. The FNPA II Notes bear interest at a rate of 17.0% per annum, compounded annually. All of the Related-Party Notes become due on June 9, 2016 if not earlier redeemed. The Related-Party Notes are redeemable at any time by us and must be redeemed in the event that we incur certain senior indebtedness or upon certain change-of-control transactions. Because the 5% Notes and the FNPA II Notes were issued or restructured as part of the 2013 Recapitalization, they are presented in our consolidated financial statements (i) in the aggregate at the creditor level, (ii) at amounts that are in excess of the current stated obligations on these notes and (iii) with lower effective interest rates. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—2013 Recapitalization,” as well as our consolidated financial statements included elsewhere in this prospectus.

As of March 31, 2014, the Virgin Group held approximately $404.4 million aggregate principal amount and accrued interest of the Related-Party Notes, and Cyrus Capital held approximately $250.0 million aggregate principal amount and accrued interest of the Related-Party Notes. The Virgin Group and Cyrus Capital also hold the majority of our outstanding warrants to purchase shares of our common stock, which we refer to in this prospectus as the “Related-Party Warrants.”

We intend to enter into a recapitalization agreement with the Virgin Group and Cyrus Capital, which we refer to in this prospectus as the “2014 Recapitalization Agreement,” that would provide for the disposition of all of the principal and accrued interest outstanding pursuant to the Related-Party Notes and all outstanding Related-Party Warrants. The transactions contemplated by the 2014 Recapitalization Agreement, which we refer to in this prospectus as the “2014 Recapitalization,” would be contingent upon the consummation of this offering.

The 2014 Recapitalization Agreement would provide that we would retain net proceeds in connection with this offering of $         million (after we pay underwriting discounts on the shares sold by us and the expenses in this offering payable by us and distribute net proceeds to our eligible teammates from the 1,745,395 shares being sold on behalf of VX Employee Holdings, LLC, a Virgin America employee ownership vehicle). Remaining proceeds (excluding net proceeds to be distributed to our eligible teammates (see “Use of Proceeds” elsewhere in this prospectus)), which we estimate to be $         million, based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), would be applied as follows: approximately 50% would be used to repay a portion of the principal and accrued interest due under certain of the FNPA Notes held by Cyrus Capital, and as much as 50% would be used to repay the principal and accrued interest due under certain of the FNPA II Notes held by the Virgin Group. To the extent that repayment of the principal and accrued interest due under all of the FNPA II Notes held by the Virgin Group would require less than 50% of such remaining net proceeds, the balance would be used to repay a portion of the principal and accrued interest due under certain of the 5% Notes held by the Virgin Group.

In connection with the 2014 Recapitalization, we anticipate that the Virgin Group will arrange for a $100.0 million letter of credit facility, which we refer to in this prospectus as the “Letter of Credit Facility,” to be issued

 

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on our behalf to certain companies that process substantially all of our credit card transactions which will allow these companies to release approximately $100.0 million of cash collateral to us. In turn, we intend to use the released cash to repay $100.0 million of the principal and accrued interest due under certain of the 5% Notes held by the Virgin Group. We anticipate that the Letter of Credit Facility will contain an annual commitment fee of 5.0% payable by us to the Virgin Group and that the Virgin Group will cause this Letter of Credit Facility to be provided for a period of five years from the date of this offering. In addition, we would also be responsible for annual fees associated with the issuance and maintenance of the Letter of Credit Facility. The Letter of Credit Facility would only become an obligation of ours if one or both of our credit card processors were to draw on the Letter of Credit Facility. In addition, we will be restricted from incurring any future secured indebtedness related to our assets that would be unencumbered after the consummation of the transactions contemplated by the 2014 Recapitalization Agreement, unless our guaranty obligations to the Virgin Group are secured on a pari passu basis with such secured debt. The Letter of Credit Facility will be reduced or terminated to the extent that collateral requirements are decreased or eliminated by our credit card transaction processors.

In addition to the repayments described above, the 2014 Recapitalization Agreement would also provide that we would issue a new note with a principal amount of $50.0 million, which we refer to in this prospectus as the “Post-IPO Note,” to the Virgin Group in exchange for the cancellation of $50.0 million of outstanding principal of 5% Notes held by the Virgin Group. The Post-IPO Note would be our senior unsecured obligation, would bear interest at a rate of 5.0% per annum, compounded annually, and would become due eight years after the date of this offering, or six years after the date of this offering if we are no longer required to provide collateral to our credit card transaction processors and can therefore terminate the Letter of Credit Facility. In addition, we will be restricted from incurring any future secured indebtedness related to our assets that would be unencumbered after the consummation of the transactions contemplated by the 2014 Recapitalization Agreement unless the Post-IPO Note is secured on a pari passu basis with such debt.

The 2014 Recapitalization Agreement would also provide that all remaining Related-Party Notes (after taking into consideration the anticipated repayments as described above) would be exchanged for that number of shares of our common stock calculated by dividing the aggregate value equal to the principal and accrued interest due under such notes by the initial public offering price at which shares are sold in this offering, or in the case of any remaining FNPA Notes or FNPA II Notes, by dividing 117.0% of the principal and accrued interest due under such notes by the initial public offering price at which shares are sold in this offering. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), we estimate that we would issue an aggregate of              shares of our common stock in exchange for the remaining Related-Party Notes.

In addition, the 2014 Recapitalization Agreement would provide that certain Related-Party Warrants would be exchanged for a number of shares of our common stock depending in part on the initial public offering price of this offering. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), we estimate that we would issue an aggregate of                  shares of our common stock in exchange for Related-Party Warrants to purchase                  shares of common stock. The 2014 Recapitalization Agreement would also provide that the remaining Related-Party Warrants to purchase an aggregate of 62,105,000 shares of our common stock would be cancelled in their entirety.

The 2014 Recapitalization Agreement would also provide that under certain circumstances we may be required to issue new warrants to purchase shares of our common stock at an exercise price per share of $0.01 rather than issue shares of our common stock, in exchange for certain of the Related-Party Notes and Related-Party Warrants.

We anticipate that, after consummation of the transactions contemplated by the 2014 Recapitalization and upon the closing of this offering, only the Post-IPO Note, and none of the Related-Party Notes or the Related-Party Warrants, would remain outstanding, and all of our issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock. Further, all of our

 

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remaining currently outstanding warrants that are not Related-Party Warrants will expire by their existing terms upon the closing of this offering unless the initial public offering price exceeds the applicable exercise price per share, in which case we would anticipate those warrants to be exercised in connection with this offering. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), we do not anticipate that any of our existing warrants to purchase common stock would remain outstanding upon the closing of this offering.

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. In light of these restrictions, the 2014 Recapitalization Agreement would place limitations on the number of shares of voting common stock that may be held by parties to the agreement who are not U.S. citizens as a result of the 2014 Recapitalization. After giving effect to the 2014 Recapitalization, our ownership structure and capital structure will remain in full compliance with all related federal regulations.

In connection with the 2014 Recapitalization and the closing of this offering, we and certain entities affiliated with the Virgin Group intend to enter into amended and restated license agreements related to our use of the Virgin name and brand, which would provide for, among other things:

 

   

an extension of our right to use the Virgin name and brand until 25 years after the date of this offering;

 

   

commencing in the first quarter of 2016, an increase in the annual license fee that we pay to the Virgin Group from 0.5% to 0.7% of our total revenue, until our total annual revenue exceeds $4.5 billion, at which point our annual license fee would be 0.5%; and

 

   

the right to appoint a director to our board of directors, but only to the extent the Virgin Group does not otherwise have a representative sitting on our board of directors.

For more information, see “Certain Relationships and Related Transactions—Virgin License Agreements” elsewhere in this prospectus.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of                  shares of common stock by us of approximately $         million based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting underwriting discounts and the expenses of this offering payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the aggregate net proceeds of this offering by $         million.

Of the                  shares we are selling in this offering, 1,745,395 shares will be sold by us on behalf of VX Employee Holdings, LLC, a Virgin America employee ownership vehicle that we consolidate for financial reporting purposes. We intend to distribute the net proceeds of $         from the sale of these shares, based on an assumed initial public offering price of $         (the midpoint of the price range set forth on the cover of this prospectus), to eligible teammates, which do not include our officers.

After distribution of a portion the net proceeds to teammates as described above, we will retain net proceeds of $         million. We will use these net proceeds for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures, including future flight equipment acquisitions, as well as for certain aircraft operating lease obligations. Pending these uses, we intend to invest the net proceeds in high-quality, short-term obligations. 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.

We will use the remaining net proceeds to repay the principal and accrued interest due under certain of the Related-Party Notes held by Cyrus Capital and the Virgin Group in conjunction with the 2014 Recapitalization as follows:

 

     Due      Interest Rate     Principal and Accrued
Interest Balance at
March 31, 2014 (1)(2)
     Amount
Estimated to be
Repaid with Net
Proceeds (2)
                  (in thousands)      (in thousands)

FNPA Notes held by Cyrus Capital

     June 9, 2016         17.0   $ 181,231      

FNPA II Notes held by the Virgin Group

     June 9, 2016         17.0     43,753      

5% Notes held by the Virgin Group

     June 9, 2016         5.0     360,671      

 

(1) Because the 5% Notes and the FNPA II Notes were issued or restructured as part of the 2013 Recapitalization, they are presented in our consolidated financial statements (i) in the aggregate at the creditor level, (ii) at amounts that are in excess of the current stated obligations on these notes and (iii) with lower effective interest rates.
(2) The amount of the Related-Party Notes to be repaid with a portion of the net proceeds from this offering, as well as 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. See “Capitalization” elsewhere in this prospectus for a sensitivity analysis of the Related-Party Notes to be repaid based on various assumed initial public offering prices.

For more information, see “2014 Recapitalization” elsewhere in this prospectus.

If the overallotment option is exercised, Cyrus Capital and the Virgin Group, as selling stockholders, will sell the shares of our common stock deliverable upon such exercise, and we will not receive any proceeds from the sale of such shares. See “Principal and Selling Stockholders” elsewhere in this prospectus.

 

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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 in the foreseeable future. In addition, certain of our current debt instruments currently, and debt instruments we may enter into in the future may, contain covenants that restrict our ability to declare or pay dividends. 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, results of operations, 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 cash and cash equivalents and capitalization as of March 31, 2014:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the following transactions as a result of the 2014 Recapitalization as if it occurred as of March 31, 2014: (a) the repayment of $100.0 million of Related-Party Notes with $100.0 million of cash released from cash collateral held by our credit card processors in connection with the establishment of the Letter of Credit Facility arranged by the Virgin Group; (b) issuance of the Post-IPO Note in exchange for cancellation of $50.0 million of certain Related-Party Notes held by the Virgin Group; (c) exchange of approximately $                 of principal plus accrued interest of the Related-Party Notes for              shares of our common stock at an assumed initial public offering price of $         (the midpoint of the price range on the cover of this prospectus); (d) issuance of              shares of common stock upon the exercise of “in-the-money” warrants, assuming an initial public offering price of $         (the midpoint of the price range on the cover of this prospectus) and in exchange for cancellation of certain other Related-Party Warrants; (e) conversion of our convertible preferred stock and common stock of various classes into our common stock; and (f) presentation of the excess of the recorded amount of debt and preferred stock above the cash and other consideration to be received of $                 as additional paid in capital; and

 

   

on a pro forma as adjusted basis to give further effect to receipt of the estimated net proceeds in this offering based on an assumed initial public offering price of $         per share (the midpoint of the price range on the cover of this prospectus) after deducting underwriting discounts and the estimated offering expenses payable by us and the application of such net proceeds as described in “Use of Proceeds” elsewhere in this prospectus.

You should read this table together with our financial statements and the related notes appearing at the end of this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this prospectus, other financial information included in this prospectus and “2014 Recapitalization” elsewhere in this prospectus.

 

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     As of March 31, 2014
       Actual         Pro Forma        Pro Forma  
As  Adjusted
     (in thousands, except share and per share data)

Cash and cash equivalents

   $ 132,886        
  

 

 

      

Credit card holdbacks

   $ 160,074        
  

 

 

      

Long-term debt—current portion

     —          

Long-term debt—related parties

   $ 713,613        

Long-term debt

     39,462        
  

 

 

      

Total long-term debt

     753,075        
  

 

 

      

Convertible preferred stock, $0.01 par value per share. 16,755,790 shares authorized, 8,377,895 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     21,406        
  

 

 

      

Stockholders’ equity (deficit):

       

Preferred Stock, $0.01 par value per share. No shares authorized, no shares issued and outstanding, actual;                  shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —          

Common stock $0.01 par value per share. 809,702,062 shares authorized, 6,341,731 shares issued and outstanding, actual;                 shares authorized,                 issued and outstanding, pro forma; and                 shares authorized,                  issued and outstanding, pro forma as adjusted

     63        

Additional paid-in capital

     427,485        

Accumulated deficit

     (835,479     

Accumulated other comprehensive income

     (1,072     
  

 

 

      

Total stockholders’ equity (deficit)

     (409,003     
  

 

 

      

Total capitalization

   $ 365,478        
  

 

 

      

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the amount of additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $         million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and estimated expenses of this offering payable by us.

The above discussion is based on the 14,719,626 shares of our common stock outstanding (on an as converted to common stock basis) as of March 31, 2014, and excludes:

 

   

an aggregate of 3,216,498 shares of common stock reserved for issuance under our 2005 Stock Incentive Plan;

 

   

8,025,384 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2014 at a weighted-average exercise price of $2.09 per share, of which 789,443 are vested;

 

   

2,061,650 shares of common stock issuable upon the vesting of RSUs outstanding as of March 31, 2014 under our 2005 Stock Incentive Plan;

 

   

4,951,417 shares of common stock issuable upon the vesting of additional RSUs outstanding as of March 31, 2014;

 

   

warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $5.00 per share and an aggregate of 3,883,333 shares of common stock at an exercise price of $10.00 per share, all of which will expire, if unexercised, upon the completion of this offering;

 

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rights to purchase 1,150,709 shares of common stock at an exercise price of $3.61 per share outstanding as of March 31, 2014, which expire, if unexercised, upon completion of this offering;

 

   

an aggregate of                  shares of common stock reserved for issuance under our 2014 Equity Incentive Award Plan; and

 

   

an aggregate of                  shares of common reserved for issuance under our 2014 Employee Stock Purchase Plan.

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 2014 Recapitalization:

 

   

principal and accrued interest outstanding pursuant to our Related-Party Notes would be either (i) repaid with a portion of the net proceeds from this offering and the proceeds from the Letter of Credit Facility, (ii) exchanged for the Post-IPO Note or (iii) exchanged for shares of our common stock based on the initial public offering price of this offering;

 

   

outstanding warrants to purchase shares of our common stock, including our Related-Party Warrants, either (i) would be exchanged for shares of our common stock depending in part on the initial public offering price of this offering, (ii) would be exercised to the extent the exercise price per share provided for therein is less than the initial public offering price of this offering or (iii) would expire or otherwise be cancelled; and

 

   

all issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock.

In this prospectus, in calculating the number of shares of common stock to be issued pursuant to the 2014 Recapitalization, we have assumed the application of the net proceeds to us as set forth in “Use of Proceeds” elsewhere in this prospectus, an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and an assumed initial public offering date of March 31, 2014 for purposes of calculating accrued interest on the Related-Party Notes. For more information, see “Use of Proceeds” and “2014 Recapitalization” elsewhere in this prospectus.

A change in the offering price and, accordingly, the amount of net proceeds received by us, would result in changes to the application of the net proceeds as set forth in “Use of Proceeds” elsewhere in this prospectus and in the following variables: (1) the amount of principal and accrued interest outstanding pursuant to our Related-Party Notes that are not repaid with net proceeds from this offering; (2) the number of shares of common stock that would be issued upon exchange of such Related-Party Notes; and (3) the number of shares of common stock that would be issued upon exchange of our Related-Party Warrants. The following table shows (in thousands, except per share data) the effects of various initial public offering prices on these variables based on the assumptions described above. The initial public offering prices shown below are hypothetical and illustrative only.

 

Assumed Initial Offering

Price

  Repayment of Related-
Party Notes
    Shares of Common Stock
Issued Upon Exchange
for Related-Party Notes
  Shares of Common
Stock Issued Upon
Exchange for Related-
Party Warrants
  Total Shares of Common
Stock Outstanding after
this Offering

$            

  $                      
       
       
       
       

In each case, the total number of shares of common stock outstanding after this offering above is based on 14,719,626 shares of our common stock outstanding (on an as converted to common basis) as of March 31, 2014, subject to the same exclusions described above.

 

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Because the share amounts set forth above are based on the accrued interest outstanding pursuant to our Related-Party Notes as of March 31, 2014, such amounts do not take into account shares of common stock to be issued in the 2014 Recapitalization in exchange for unpaid interest on the Related-Party Notes accrued from March 31, 2014 through the closing date of this offering. Such interest contractually accrues at a rate of approximately $3.9 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, 2014 was $(436.6) million, or $(68.85) 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) the receipt of net proceeds from the issuance of                 shares of common stock at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and estimated offering expenses payable by us, (ii) the exchange of any Related-Party Notes and Related-Party Warrants pursuant to the 2014 Recapitalization, and (iii) the conversion of any shares of the various classes of our common stock and our convertible preferred stock into shares of common stock, our pro forma net tangible book value as adjusted as of March 31, 2014 would have been approximately $         million, or approximately $         per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to new investors in this offering.

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

 

Assumed initial public offering price

     $                

Net tangible book value (deficit) per share as of March 31, 2014

   $ (68.85  

Net increase per share attributable to 2014 Recapitalization

    
  

 

 

   

Pro forma net tangible book value per share before this offering

    

Increase per share attributable to this offering

    
  

 

 

   

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

    
    

 

 

 

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

     $     
    

 

 

 

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

 

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The table below summarizes as of March 31, 2014 (in thousands except share, per share and percentage data), 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 securityholders upon the exchange or conversion of our Related-Party Notes, Related-Party Warrants, and the conversion of the various outstanding classes of our common stock and our convertible preferred stock and (iii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus).

 

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

Existing Stockholders

            $               $                

2014 Recapitalization-converted securityholders

             $     

New investors

             $     
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $                      100  
  

 

  

 

 

   

 

 

    

 

 

   

The above discussion and tables are based on the 14,719,626 shares of our common stock outstanding (on an as converted to common stock basis) as of March 31, 2014, and exclude:

 

   

an aggregate of 3,216,498 shares of common stock reserved for issuance under our 2005 Stock Incentive Plan;

 

   

8,025,384 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2014 at a weighted-average exercise price of $2.09 per share, of which 789,443 are vested;

 

   

2,061,650 shares of common stock issuable upon the vesting of RSUs outstanding as of March 31, 2014 under our 2005 Stock Incentive Plan;

 

   

4,951,417 shares of common stock issuable upon the vesting of additional RSUs outstanding as of March 31, 2014;

 

   

warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $5.00 per share and an aggregate of 3,883,333 shares of common stock at an exercise price of $10.00 per share, all of which will expire, if unexercised, upon the completion of the offering;

 

   

rights to purchase 1,150,709 shares of common stock at an exercise price of $3.61 per share outstanding as of March 31, 2014, which expire, if unexercised, upon completion of this offering;

 

   

an aggregate of                 shares of common stock reserved for issuance under our 2014 Equity Incentive Award Plan; and

 

   

an aggregate of                 shares of common reserved for issuance under our 2014 Employee Stock Purchase Plan.

Because the share amounts set forth above are based on the accrued interest outstanding pursuant to our Related-Party Notes as of March 31, 2014, such amounts do not take into account shares of common stock to be issued in the 2014 Recapitalization in exchange for unpaid interest on the Related-Party Notes accrued from March 31, 2014 through the closing date of this offering. Such interest contractually accrues at a rate of approximately $3.9 million per month in the aggregate.

The information we present in this prospectus does not reflect a reverse split of our common stock that we may effect prior to the consummation of this offering.

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 2014 Recapitalization:

 

   

the principal and accrued interest outstanding pursuant to our Related-Party Notes would be either (i) repaid with a portion of the net proceeds from this offering and the proceeds from the Letter of Credit

 

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Facility, (ii) exchanged for the Post-IPO Note or (iii) exchanged for shares of our common stock based on the initial public offering price of this offering;

 

   

outstanding warrants to purchase shares of our common stock, including our Related-Party Warrants, either (i) would be exchanged for shares of our common stock depending in part on the initial public offering price of this offering, (ii) would be exercised to the extent the exercise price per share provided for therein is less than the initial public offering price of this offering or (iii) would expire or otherwise be cancelled; and

 

   

all issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock.

In this prospectus, in calculating the number of shares of common stock to be issued pursuant to the 2014 Recapitalization, we have assumed the application of the net proceeds to us as set forth in “Use of Proceeds” elsewhere in this prospectus, an assumed initial public offering price of $     per share (the midpoint of the price range set forth on the cover of this prospectus) and an assumed initial public offering date of March 31, 2014 for purposes of calculating accrued interest on the Related-Party Notes. For more information, see “Use of Proceeds” and “2014 Recapitalization” elsewhere in this prospectus.

A change in the offering price and, accordingly, the amount of net proceeds received by us, would result in changes to the application of the net proceeds as set forth in “Use of Proceeds” elsewhere in this prospectus and in the following variables: (1) the amount of principal and accrued interest outstanding pursuant to our Related-Party Notes that are not repaid with net proceeds from this offering; (2) the number of shares of common stock that would be issued upon exchange of such Related-Party Notes; and (3) the number of shares of common stock that would be issued upon exchange of our Related-Party Warrants.

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.

 

Assumed Initial Offering

Price

 

Repayment of Related-
Party Notes

 

Shares of Common Stock
Issued Upon Exchange
for Related-Party Notes

 

Shares of Common
Stock Issued Upon
Exchange for Related-

Party Warrants

 

Total Shares of Common
Stock Outstanding after
this Offering

$            

  $                  
       
       
       

In each case, the total number of shares of common stock outstanding after this offering above is based on 14,719,626 shares of our common stock outstanding (on an as converted to common basis) as of March 31, 2014, subject to the same exclusions described above.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

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

We derived the selected consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included in this prospectus. We derived the selected consolidated statements of operations data for the years ended December 31, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009, 2010 and 2011 from our audited consolidated financial statements not included in this prospectus. We derived the selected consolidated statement of operations data for the three months ended March 31, 2013 and 2014 and the consolidated balance sheet data as of March 31, 2014 from our unaudited consolidated financial statements included in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the financial information set forth in those statements. 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, 2014 are not indicative of the results expected for the full year.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands, except per share data)  
                                  (unaudited)  

Consolidated Statement of Operations Data:

             

Operating revenues

  $ 547,645      $ 724,046      $ 1,037,108      $ 1,332,837      $ 1,424,678      $ 301,332      $ 313,390   

Operating expenses:

             

Aircraft fuel (1)

    149,277        246,699        417,815        537,501        507,035        116,596        115,760   

Aircraft rent

    117,318        138,422        187,876        236,800        202,071        59,018        46,496   

Salaries, wages and benefits

    87,934        108,901        138,276        176,216        196,477        45,315        53,824   

Landing fees and other rents

    61,723        69,036        87,133        110,165        122,621        27,568        32,221   

Sales and marketing

    51,684        59,990        81,901        107,136        106,599        18,232        24,562   

Aircraft maintenance

    23,502        23,017        34,596        58,934        61,854        17,460        19,044   

Depreciation and amortization

    16,220        10,530        10,155        11,260        13,963        3,159        3,269   

Other operating expenses

    78,969        79,888        106,752        126,558        133,177        28,960        31,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    586,627        736,483        1,064,504        1,364,570        1,343,797        316,308        326,521   

Operating income (loss)

    (38,982     (12,437     (27,396     (31,733     80,881        (14,976     (13,131

Other income (expense):

             

Interest expense (2)

    (42,526     (60,143     (75,577     (116,110     (71,293     (31,520     (9,915

Capitalized interest (3)

    435        3,541        2,320        2,176        534        —          481   

Interest income and other

    295        227        264        294        339        108        260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax

    (80,778     (68,812     (100,389     (145,373     10,461        (46,388     (22,305

Income tax expense

    —          (137     14        15        317        —          49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (80,778   $ (68,675   $ (100,403   $ (145,388   $ 10,144      $ (46,388   $ (22,354
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

             

Basic (4)

  $ (15.25   $ (12.97   $ (18.96   $ (27.45   $ 0.74      $ (8.76   $ (4.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (4)

  $ (15.25   $ (12.97   $ (18.96   $ (27.45   $ 0.56      $ (8.76   $ (4.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per share calculation:

             

Basic (4)

    5,296,895        5,296,895        5,296,895        5,296,895        5,296,895        5,296,895        5,296,895   

Diluted (4)

    5,296,895        5,296,895        5,296,895        5,296,895        9,689,719        5,296,895        5,296,895   

Pro forma net income per share (unaudited):

             

Basic (5)

          $          $     
         

 

 

     

 

 

 

Diluted (5)

          $          $     
         

 

 

     

 

 

 

Pro forma shares used in computing net income per share (unaudited):

             

Basic (5)

             

Diluted (5)

             

Non-GAAP Financial Data (unaudited):

             

EBITDA (6)

  $ (22,762   $ (1,907   $ (17,241   $ (20,473   $ 94,844      $ (11,817   $ (9,862

EBITDAR (6)

    94,556        136,515        170,635        216,327        296,915        47,201        36,634   

 

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(1) Aircraft fuel expense is the sum of (i) the cost of jet fuel and certain other charges such as fuel taxes and certain transportation and distribution costs; (ii) settlement gains and losses arising from any fuel price hedging activity; and (iii) unrealized mark-to-market gains and losses associated with fuel hedge contracts.
(2) Substantially all of the interest expense recorded in 2011, 2012 and 2013 and the three months ended March 31, 2013 and 2014 relates to long-term debt held by our principal stockholders that is expected to be substantially repaid or redeemed or exchanged for shares of our common stock in connection with the 2014 Recapitalization. For more information, see “Use of Proceeds” and “2014 Recapitalization” elsewhere in this prospectus.
(3) Interest attributable to funds used to finance the acquisition of new aircraft, including pre-delivery payments, or PDPs, is capitalized as an additional cost of the related asset approximately two years prior to the intended delivery date. Interest is capitalized at our weighted-average interest rate on long-term debt or, where applicable, the interest rate related to specific borrowings.
(4) See Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.
(5) Unaudited pro forma basic and diluted net income (loss) per share for 2013 and the three months ended March 31, 2014 give effect to the issuance of our common stock as well as the conversion of our convertible preferred stock and common stock of various classes into common stock as a result of the 2014 Recapitalization assuming it occurs as of the beginning of the periods. In addition, the pro forma amounts reflect the addback to net income (loss) of the interest expense recorded in our consolidated statement of operations related to the Related-Party Notes. See Note 15 to our consolidated financial statements included elsewhere in this prospectus.
(6) EBITDA is earnings before interest, income taxes, and depreciation and amortization. EBITDAR is earnings before interest, income taxes, depreciation and amortization and aircraft rent. EBITDA and EBITDAR are included as supplemental disclosure 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 companies, investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. We also believe EBITDA is useful for evaluating performance of our senior management team. 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. However, because derivations of EBITDA and 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 and EBITDAR as presented may not be directly comparable to similarly titled measures presented by other companies.

These non-GAAP financial measures have limitations as an analytical tool. Some of these limitations are: they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements; and other companies in our industry may calculate EBITDA and EBITDAR differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

 

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The following table represents the reconciliation of net income (loss) to EBITDA and EBITDAR for the periods presented:

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands)  
                                  (unaudited)  

Reconciliation:

             

Net income (loss)

  $ (80,778   $ (68,675   $ (100,403   $ (145,388   $ 10,144      $ (46,388   $ (22,354

Interest expense

    42,526        60,143        75,577        116,110        71,293        31,520        9,915   

Capitalized interest

    (435     (3,541     (2,320     (2,176     (534     —          (481

Interest income

    (295     (227     (264     (294     (339     (108     (260

Income tax expense

    —          (137     14        15        317        —          49   

Depreciation and amortization

    16,220        10,530        10,155        11,260        13,963        3,159        3,269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    (22,762     (1,907     (17,241     (20,473     94,844        (11,817     (9,862

Aircraft rent

    117,318        138,422        187,876        236,800        202,071        59,018        46,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR

  $ 94,556      $ 136,515      $ 170,635      $ 216,327      $ 296,915      $ 47,201      $ 36,634   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents our historical selected consolidated balance sheet data for the periods presented:

 

     As of December 31,     As of
March 31,
 
     2009     2010     2011     2012     2013     2014  
     (in thousands)  
                                   (unaudited)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 21,619      $ 29,904      $ 159,815      $ 76,018      $ 155,659      $ 132,886   

Total assets

     292,702        298,250        505,644        511,022        700,996        789,153   

Long-term debt, including current portion

     432,237        489,053        726,954        857,034        747,431        753,075   

Convertible preferred stock

     128,054        21,406        21,406        21,406        21,406        21,406   

Total stockholders’ equity (deficit)

     (432,817     (393,025     (484,473     (630,924     (384,027     (409,003

 

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OPERATING STATISTICS

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2012     2013     2013     2014  

Operating Statistics (unaudited): (1)

             

Available seat miles—ASMs (millions)

    6,546        7,652        9,853        12,514        12,243        2,695        2,777   

Departures

    33,047        35,737        44,696        56,362        58,215        12,582        13,825   

Average stage length (statute miles)

    1,415        1,546        1,571        1,567        1,474        1,511        1,406   

Aircraft in service—end of period

    28        33        44        52        53        52        53   

Fleet utilization

    11.3        12.7        12.1        11.6        10.8        9.8        10.0   

Passengers (thousands)

    3,654        3,909        5,030        6,219        6,329        1,337        1,479   

Average fare

  $ 134.07      $ 167.51      $ 189.05      $ 195.38      $ 203.70      $ 201.18      $ 186.73   

Yield per passenger mile (cents)

    9.04        10.50        11.82        12.26        13.14        12.92        12.56   

Revenue passenger miles—RPMs (millions)

    5,419        6,236        8,034        9,912        9,814        2,082        2,199   

Load factor

    82.8     81.5     81.5     79.2     80.2     77.3     79.2

Passenger revenue per available seat mile—PRASM (cents)

    7.48        8.56        9.64        9.71        10.53        9.98        9.95   

Total revenue per available seat mile—RASM (cents)

    8.37        9.46        10.53        10.65        11.64        11.18        11.28   

Cost per available seat mile—CASM (cents)

    8.96        9.62        10.80        10.90        10.98        11.74        11.76   

CASM, excluding fuel (cents)

    6.68        6.40        6.56        6.61        6.83        7.41        7.59   

Fuel cost per gallon

  $ 1.71      $ 2.43      $ 3.24      $ 3.32      $ 3.16      $ 3.32      $ 3.16   

Fuel gallons consumed (thousands)

    87,383        101,482        128,852        161,404        159,326        34,724        36,547   

Teammates (FTE)

    1,421        1,781        2,002        2,395        2,482        2,255        2,426   

 

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes 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

Virgin America is a premium branded, low-cost airline based in California that provides scheduled air travel in the domestic United States and Mexico. Established in 2005, we operate primarily from our focus cities of Los Angeles and San Francisco to other major business and leisure destinations in North America. We provide a distinctive offering for our passengers, whom we call guests, that is centered around our brand and our premium travel experience, while at the same time maintaining a low-cost structure through our point-to-point network and high utilization of our efficient, single fleet type. Our distinctive business model allows us to offer a product that is attractive to guests who historically favored legacy airlines but at a lower cost than that of legacy airlines. This business model also enables us to compete effectively with other low-cost carriers, or LCCs, by generating higher revenue per available seat mile, or RASM, but at a cost per available seat mile, or CASM, comparable to that of other LCCs. As of March 31, 2014, we provided service to 22 airports in the United States and Mexico with a fleet of 53 narrow-body aircraft.

Executing our strategy of providing a premium travel experience within a disciplined, competitive cost structure has led to improved financial results. For 2013, we recorded operating revenues of $1.4 billion, operating income of $80.9 million and net income of $10.1 million. We increased our RASM in 2013 by 9.3% compared to 2012, the largest increase of any major U.S. airline. Furthermore, our CASM of 10.98 cents increased by only 0.7% and remained one of the lowest of all U.S. airlines in 2013. We completed a recapitalization of a majority of our operating lease and debt obligations in May 2013, leading to a $34.7 million decline in aircraft rent expense and a $44.8 million decline in interest expense for 2013 compared to 2012. As a result of our RASM increase and the reduction in rent and interest expense, our financial performance improved from a net loss of $145.4 million in 2012 to net income of $10.1 million in 2013. In 2014, we had a net loss of $22.4 million in the first quarter, which is typically our seasonally weakest quarter, compared to a net loss of $46.4 million in the first quarter of 2013. Our RASM in the first quarter of 2014 increased by 0.9% from the prior year period, while our CASM in the first quarter of 2014 increased by only 0.2% from the prior year period.

2014 Recapitalization

As of March 31, 2014, we had a total of $654.4 million of principal and accrued interest outstanding under certain secured related-party notes, which we refer to in this prospectus as the “Related-Party Notes.” As of March 31, 2014, the Virgin Group held approximately $404.4 million aggregate principal amount and accrued interest of the Related-Party Notes, and Cyrus Capital held approximately $250.0 million aggregate principal amount and accrued interest of the Related-Party Notes. The Virgin Group and Cyrus Capital also hold the majority of our outstanding warrants to purchase shares of our common stock, which we refer to in this prospectus as the “Related-Party Warrants.”

We intend to enter into the 2014 Recapitalization Agreement with the Virgin Group and Cyrus Capital. The 2014 Recapitalization Agreement would provide that we will retain net proceeds of $         million in connection with this offering (after we pay underwriting discounts on the shares sold by us and the expenses in this offering payable by us), and that remaining net proceeds, which we estimate to be $         million (based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this

 

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prospectus), would be used to repay a portion of the Related-Party Notes. Remaining principal and accrued interest under the Related-Party Notes would either be (1) exchanged for a new $50.0 million note bearing interest at a rate of 5.0% per annum, compounded annually, which we refer to as the “Post-IPO Note”; (2) repaid after the release to us of cash collateral held by our credit card processors in connection with a letter of credit facility arranged by the Virgin Group, which we refer to as the “Letter of Credit Facility”; or (3) exchanged for shares of our common stock. In addition, Related-Party Warrants would either be exchanged for shares of our common stock, exercised immediately prior to this offering, expire upon the closing of this offering, or cancelled in their entirety.

We anticipate that, after consummation of the transactions contemplated by the 2014 Recapitalization Agreement and upon the closing of this offering, only the Post-IPO Note, and none of the Related-Party Notes or the Related-Party Warrants, would remain outstanding, and all of our issued and outstanding shares of convertible preferred stock and common stock of various classes would be converted into shares of common stock. Further, all of our remaining currently outstanding warrants that are not Related-Party Warrants will expire by their existing terms upon the closing of this offering unless the initial public offering price exceeds the applicable exercise price per share. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), we do not anticipate that any of our existing warrants to purchase common stock would remain outstanding upon the closing of this offering.

For more information, see “2014 Recapitalization” elsewhere in this prospectus. The transactions contemplated by the 2014 Recapitalization Agreement, which we refer to in this prospectus as the “2014 Recapitalization,” would be contingent upon the consummation of this offering.

In connection with the 2014 Recapitalization Agreement and the closing of this offering, we and certain entities affiliated with the Virgin Group would enter into amended and restated license agreements related to our use of the Virgin name and brand. For more information, see “Certain Relationships and Related Transactions—Virgin License Agreements” elsewhere in this prospectus.

2013 Recapitalization

In May 2013, we, the Virgin Group and Cyrus Capital agreed to modify and exchange a portion of our then outstanding related-party debt. The Virgin Group and Cyrus Capital reduced $318.4 million of our related-party debt and reduced the interest rates on certain of our remaining related-party debt from 15.0%-20.0% to 5.0% per year in exchange for the issuance of $75.0 million of new debt and certain Related-Party Warrants. We recognized a $150.5 million restructuring gain as a capital contribution with a direct increase in additional paid-in-capital due to the debt being issued to related parties. In addition, we also recorded Related-Party Warrants at fair value of $83.4 million on the date of issuance as a reduction to the carrying amount of the related-party debt and a corresponding increase to stockholders’ equity.

We also amended substantially all of our lease agreements with our existing aircraft lessors to reduce monthly base rent and/or maintenance reserve payments through monthly cash rent rebates. We estimate these amendments will result in annualized expense savings on base aircraft rent of approximately $47.2 million in 2014 as compared to what would have been recorded as aircraft rent expense under the original lease terms. Under some of our leases, we also extended the lease terms by three to five years.

For more information, see Notes 3, 8 and 10 to our consolidated financial statements included elsewhere in this prospectus.

Operating Revenues

Our operating revenues consist of passenger revenue and other revenue.

 

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Passenger Revenue. Passenger revenue consists of base fares for air travel, including upgrades, points redeemed under our loyalty program, unused and expired passenger credits, which we call credit files, and other redeemed or expiring travel credits.

Other Revenue. Other revenue consists primarily of revenue generated from air-travel-related services such as baggage fees, change fees, seat selection fees, passenger-related service fees and inflight meals and entertainment. Other revenue also includes advertising and brand revenues resulting from our co-branded consumer credit card agreement.

Operating Expenses

Our operating expenses consist of the following items:

Aircraft Fuel. Aircraft fuel expense is our single largest operating expense. It includes the cost of jet fuel, related federal and state taxes and certain fuel transportation and distribution costs. It also includes realized and unrealized settlement gains and losses arising from any fuel price hedging activity.

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, which is paid monthly to aircraft lessors for the cost of future major maintenance activities and which is not probable of being reimbursed to us by the lessor during the lease term. Aircraft rent expense is net of the amortization of manufacturer credits and gains on sale and leaseback transactions on our flight equipment. Presently, all of our aircraft and spare engines are financed under operating leases.

Salaries, Wages and Benefits. Salaries, wages and benefits expense includes salaries, hourly wages, cash incentive compensation, teammate profit sharing and equity compensation paid to teammates for their services, as well as related expenses associated with employee benefit plans and employer payroll taxes.

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, fueling into-plane fees and overfly fees paid to other countries.

Sales and Marketing. Sales and marketing expense includes credit card processing fees, costs associated with our loyalty programs, advertising and distribution costs such as the costs of web support, our third-party call center, travel agent commissions and related global distribution systems, or GDS, fees. Sales and marketing also includes the license fee that we pay for use of the Virgin brand.

Aircraft Maintenance. Aircraft maintenance expense includes the cost of all parts, materials 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 in salaries, wages and benefits. It also excludes the amortization of major engine maintenance expenses, which we defer under the deferral method of accounting and amortize on a straight-line basis as a component of depreciation and amortization expense until the next estimated overhaul event or end of the engine lease, whichever is earlier.

Depreciation and Amortization. Depreciation and amortization expense includes depreciation of fixed assets we own and amortization of software licenses, major engine maintenance and leasehold improvements.

Other Operating Expenses. Other operating expenses include guest services and supplies, crew and teammate travel, data and communications, legal and professional fees, facilities, aircraft insurance and all other administrative and operational overhead expenses.

 

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Other Income (Expense)

Interest Expense. Interest expense on related-party long-term debt accounted for 91%, 97% and 96% of our interest expense in 2011, 2012 and 2013 and 99% and 94% of our interest expense in the three months ended March 31, 2013 and 2014. Paid-in-kind interest was 91%, 85% and 68% of total interest expense incurred in 2011, 2012 and 2013 and 86% and 37% in the three months ended March 31, 2013 and 2014.

Capitalized Interest. We capitalize interest attributable to funds used to finance the acquisition of new aircraft as an additional cost of the related asset beginning approximately two years prior to the intended delivery date. We capitalize interest at our weighted-average interest rate on long-term debt or, where applicable, the interest rate related to specific borrowings. Capitalization of interest ceases and expensing begins when the asset is ready for its intended use.

Interest Income and Other. Interest income and other includes interest income on our cash and cash equivalent balances, as well as activity not classified in any other area of the consolidated statements of operations.

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. We record deferred taxes based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry forwards. In assessing our ability to utilize our deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will be realized. We consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis.

Trends and Uncertainties Affecting Our Business

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

Competition. The airline industry is exceedingly competitive. The principal competitive factors in the airline industry are the fare and total price, flight schedules, number of routes served from a city, frequent flier programs, product and passenger amenities, customer service, fleet type, safety record and reputation and code-sharing relationships. The airline industry is particularly susceptible to price discounting because, once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to increase RASM. The prevalence of discount fares can be particularly acute when a competitor has excess capacity 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 and our route network are subject to significant seasonal fluctuations. We believe our operations, as they are focused on Los Angeles International Airport (LAX) and San Francisco International Airport (SFO), are more susceptible to seasonality than some of the other domestic airlines because our discretionary customers in California may be less likely to fly to other regions of the United States during the colder seasons. 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, labor actions, weather and other factors have resulted in significant fluctuations in revenues and results of operations in the past.

 

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Aircraft Fuel. Fuel expense represents 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 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 on the West coast and on the gulf coast of the United States. Jet fuel is subject to price volatility and supply disruptions on a seasonal basis in hurricane season when refinery shutdowns can occur and when cold weather demand for heating oil spikes, resulting in less jet fuel production at refineries, and on a location-specific basis when local refineries can be shut-down for maintenance or emergency purposes.

From time to time, we fix our jet fuel prices using fixed forward price contracts, or FFPs, for jet fuel, and we enter into option contracts for heating oil and crude oil to try and reduce the impact of significant price volatility. We generally manage approximately 35-40% of our forecasted fuel price exposure with FFPs or hedges on the basis of the next nine to twelve months where we layer in coverage over time with a dollar cost average approach to our purchases. The 35-40% is an approximate average of our coverage at any given time with more coverage sought in the near-term months and less coverage sought in the longer dated months.

Our fuel hedging practice considers many factors, including our assessment of market conditions for fuel, our access to the capital necessary to purchase coverage and support margin requirements, the pricing of hedges and other derivative products in the market and applicable regulatory policies. As of March 31, 2014, we had FFPs and hedges in place for approximately 37% of our then projected next twelve months of fuel requirements, with all of our then existing hedge contracts expected to settle by the end of the first quarter of 2015. We purchase our aircraft fuel at all of our stations under a single annual fuel service contract with a third-party fuel procurement administrator who, in turn, arranges fuel supply on our behalf at each station with various fuel suppliers. In some instances, the fuel procurement administrator is also our supplier. The future cost and availability of jet fuel cannot be predicted with any degree of certainty.

Labor. We currently have a direct relationship with our teammates. However, airline industry employees are one of the most heavily unionized private sector employee groups, and any of our non-management teammates could seek unionization at any time, which would require us to collectively bargain with the teammate group’s certified representative.

Aircraft Maintenance. As of March 31, 2014, the average age of our aircraft was approximately five years. Due to the relatively young age of our fleet, our aircraft require less maintenance now than they will in the future. 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 major engine maintenance expense is subject to variables such as estimated usage, government regulations, 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-related expenses for any significant period of time.

We expect that the final qualifying major engine maintenance events will be amortized over the remaining lease term rather than until the next estimated major maintenance event. This would result in significantly higher depreciation and amortization expense related to major maintenance in the last few years of the leases as compared to the expenses in earlier periods. Moreover, because our current aircraft were acquired over a relatively short period, significant maintenance that is scheduled on each of these aircraft occurs at roughly the same time, meaning we will incur our most expensive scheduled maintenance obligations, known as major maintenance, across our present fleet at approximately the same time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable to fly revenue service.

In addition, the terms of some of our lease agreements require us to pay supplemental rent, also known as maintenance reserves, to our lessor in advance of the performance of major maintenance, resulting in our

 

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recording significant aircraft maintenance deposits on our consolidated balance sheet. However, the payments made after the final qualifying major engine maintenance event during the lease term are fully expensed, as these amounts are not reimbursable from the lessor. As such, it will result in both additional rent expense and depreciation and amortization expense for previously capitalized maintenance being recorded in the period after the final qualifying major engine maintenance event and just prior to the termination of the lease. For more information, see “Critical Accounting Estimates—Aircraft and Engine Maintenance and Repair” elsewhere in this prospectus.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss further below.

Revenue Recognition including Loyalty Program

We generate the majority of our revenue from sales of passenger tickets. We initially defer ticket sales as air traffic liability and recognize passenger revenue when the passenger flight occurs. Passenger revenue also includes upgrade fees, which we recognize when the related flights occur.

Tickets expire one year from the date of issuance, if unused by the passenger. We also issue travel credits to passengers for certain changes to flights if a residual value exists after application of any applicable change fee. Travel credits also expire one year from the date of issuance. We estimate and record advanced breakage for tickets and travel credits we expect will expire unused. These estimates are based on our historical experience of expired tickets and travel credits and consider other facts, such as recent aging trends, program changes and modifications that could affect the ultimate expiration patterns of tickets and travel credits.

Other revenue consists of baggage fees, change fees, seat selection fees, passenger-related service fees and inflight meals and entertainment. We recognize revenue for baggage fees, seat selection fees and passenger-related service fees when the associated flight occurs. We recognize change fee revenues as they occur.

Our Elevate® loyalty program provides frequent flyer travel awards to program members based on accumulated points. Points are accumulated as a result of travel, purchases using the co-branded credit card and purchases from other participating partners. The program has an 18-month expiration period for unused points from the month of last account activity. For all points earned under the Elevate program, we have an obligation to provide future travel when these reward points are redeemed.

With respect to points earned as a result of travel, or flown points, we recognize a liability and a corresponding sales and marketing expense, representing the incremental cost associated with the obligation to provide travel in the future, as points are earned by passengers. We offer redemption of points for our Elevate program members through travel on our flights and our partner airlines. Incremental cost for points to be redeemed on our flights is estimated based on historical costs, which include the cost of fuel, passenger fees, complimentary beverages, insurance, miscellaneous passenger supplies and other airline payments. We adjust our liability periodically for changes in our estimate of incremental cost, average points to redeem and breakage estimates.

We account for member points sold to our partners, or sold points, including points related to our participation in other providers’ affinity loyalty programs and member purchases with partner credit card companies as multiple-element arrangements. These arrangements have historically consisted of two elements:

 

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transportation and brand marketing-related activities. The transportation element represents the fair value of the travel that we will ultimately provide when the sold points are redeemed. The brand and marketing element consists of brand marketing related activities that we conduct with participating partners.

For points earned from purchases through our original co-branded credit card agreement, which we refer to as the “Original Co-Brand Agreement,” we recorded deferred revenue using the residual method. The fair value of a point is estimated on an annual basis using the average points redeemed and the estimated value of purchased tickets with the same or similar restrictions as frequent flyer awards. We recognize points redeemed as passenger revenue when the awards are redeemed and the related travel occurs. We recognize the residual portion, if any, upon sale of points as other revenue associated with the other marketing services delivered.

In 2013, we entered into a new co-branded credit card agreement with a new partner, which we refer to as the “New Co-Brand Agreement.” The New Co-Brand Agreement has a seven-year term beginning January 1, 2014, when the new co-branded card was introduced and services to our members began. Services with standalone value provided under this agreement include: (i) the points earned or the travel component; (ii) companion certificates for annual travel discounts up to $150; (iii) unlimited access to the use of our brand and customer list; (iv) advertising; (v) waived bag fees, which are limited to the first checked bag for the cardholder and their companion traveling on the same flight which must be purchased using the card; (vi) unlimited waived change fees provided the ticket is purchased using the premium card; and (vii) unlimited discounts on purchases made through our Red® inflight entertainment system using the co-branded credit card. Under the New Co-Brand Agreement, our partner is required to provide annual guaranteed advance payments over the contract term. Any unearned advance at the end of the calendar year is carried over to the following year until the contract expires. At the end of the contract, we have no obligation to refund any unearned advances to the partner. As of March 31, 2014, excess advances totaled $27.9 million, which we recorded as air traffic liability.

Under the revenue recognition rules for multiple element arrangements, we determine the best estimated selling price, or BESP, of each element and allocate the arrangement consideration using the relative selling price of each element. Based on our valuation of the New Co-Brand Agreement, the majority of the value is attributable to points or the travel component and brand and customer list, for which the BESP is determined using our own and market assumptions as well as other judgments necessary to determine the estimated selling price of each element. When developing the relative selling price allocation attributable to the points or travel component, we primarily considered the total number of points expected to be issued, the BESP for points (specifically the value at which points could be redeemed for free or discounted travel), the number of points expected to be redeemed and the timing of redemptions. The BESP for points is derived based on our estimate of the redemption rate used by our guests to convert points into the equivalent ticket value for travel with us or with one of our airline partners. For brand and customer list, we considered brand power, the size of our customer list and the market royalty rate for equivalent programs. Our estimates of the BESP will not change, but the allocation between elements may change based on changes in the ultimate volume of sales of each element during the term of the contract.

We recognize and record revenue for the majority of the travel-related elements in accordance with our existing policies for such services. Revenue for brand and advertising is recognized in other revenue as such services are provided ratably over the contract term. Revenue from making available unlimited services such as waived bag fees, waived change fees and inflight discounts is recognized in other revenue on a ratable basis over the contract term subject to a contract limitation based on the proportion of cumulative points issued to total contract points expected to be issued.

We estimate breakage for sold points using a regression analysis model supplemented with qualitative considerations, which include the history and success of the program as well as member behavior. In addition, we also consider redemption trends by performing a weighted-average redemption rate calculation to evaluate the reasonableness of our calculated breakage rates. Breakage is recorded for sold points under the redemption method

 

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using points expected to be redeemed and our recorded deferred revenue balance to determine a weighted-average rate, which is then applied to actual points redeemed. A change in assumptions as to the period over which points are expected to be redeemed, the actual redemption patterns or the estimated fair value of points expected to be redeemed could have a material impact on our revenue in the year in which the change occurs as well as in future years. Our estimates could change in the future as our members’ behavior changes and more historical data is collected.

Aircraft and Engine Maintenance & Repair

Under our aircraft operating lease agreements and FAA operating regulations, we are obligated to perform all required maintenance activities on our fleet, including component repairs, scheduled air frame checks and major engine restoration events. We estimate the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on third-party estimates, which can be impacted by changes in utilization of our aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events represent six-year and 12-year airframe checks, engine restorations and overhauls to major components. We account for qualifying major engine maintenance under the deferral method wherein restoration costs and replacement of engine life limited parts are capitalized and amortized as a component of depreciation and amortization expense up to the earlier of the lease end or the estimated date for the next engine overhaul. Regular airframe and other routine maintenance costs are expensed as incurred.

In connection with our aircraft operating lease agreements, we are required to make supplemental rent payments to our aircraft lessors, which represent maintenance reserves made to collateralize the lessor. Our lease agreements provide that maintenance reserves are reimbursable to us upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount of the maintenance reserve held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event, although in some instances we expect to receive a credit at the end of the lease for a portion of any excess reserves remaining after each event. We record the supplemental payments or maintenance reserves that we expect to recover as aircraft maintenance deposits in the accompanying consolidated balance sheets. When it is not probable that amounts on deposit with lessors will be recovered, we expense such amounts as a component of aircraft rent expense. When the underlying maintenance event is performed, the cost is either capitalized and amortized as a component of depreciation and amortization expense for qualified major engine maintenance or expensed for all other major maintenance, and the deposit is reclassified to a receivable in our consolidated balance sheet.

The terms of most of our aircraft lease agreements also provide that most maintenance reserves held by the lessor which relate to major maintenance events that fall outside of the lease term are nonrefundable to us at the expiration of the lease and will be retained by the lessor, although in some instances we may receive reimbursement for any maintenance costs we incur to meet return conditions under the related lease. We charge supplemental rent payments to aircraft rent expense in our consolidated statement of operations when it becomes less than probable that these amounts will be recovered.

We make certain assumptions at the inception of the lease and at each balance sheet date to determine the recoverability of maintenance deposits. Our assumptions are based on various factors such as the estimated timing of major maintenance events, including replacement of engine life limited parts, the cost of future maintenance events and the number of flight hours and cycles for which we estimate the aircraft will be utilized before it is returned to the lessor. We account for changes in estimates related to maintenance reserve payments on a prospective basis.

For regular maintenance of our leased aircraft, we have maintenance-cost-per-hour contracts for management and repair of certain rotable parts to support scheduled and unscheduled airframe and engine maintenance and repair. These agreements require us to make monthly payments based on utilization, such as

 

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flight hours, cycles and age of the aircraft, and in turn, the agreements transfer certain risks related to the supply and repair of component parts to the third-party service provider. We recognize expense based on the contractual payments, which substantially match the service being received over the contract period. In addition, we have an engine service agreement under which a third party is required to perform major engine restoration maintenance for substantially all of our aircraft engines. Under this agreement, we have an agreed rate with the maintenance provider based on engine utilization, which applies when the engines are inducted into an overhaul.

Debt Modification

In connection with the 2013 Recapitalization, we entered into a series of agreements with the Virgin Group and Cyrus Capital to modify certain existing debt agreements in exchange for $75.0 million of new debt and certain Related-Party Warrants. We evaluated the debt modification in accordance with the accounting guidance on troubled debt restructurings as the criteria for applying the guidance were met. We also made certain assumptions, judgments and estimates to account for the debt modification, which included: (i) excluding an existing related-party note payable from the analysis as it was completely unmodified in the transaction; (ii) analyzing and applying the accounting guidance at the creditor level; and (iii) determining the fair value of the Related-Party Warrants issued, which required us to make assumptions about the fair value of our common stock.

To account for the debt modification, we compared the carrying value of the modified debt and the new debt less the fair value of the Related-Party Warrants issued to the aggregate undiscounted cash flows at maturity at the creditor level. When the carrying value exceeded the aggregate undiscounted cash flows, we adjusted the carrying amount of the debt and recognized a gain equal to the difference as a capital contribution. When the carrying value did not exceed the undiscounted cash flows, we calculated the effective interest rate that will be used to accrete the debt to its maturity value.

Lease Amendments

In connection with the 2013 Recapitalization, we amended most of our lease agreements with our existing aircraft lessors to provide us with a reduction in monthly base rent and/or maintenance deposits through monthly cash rent rebates, which we refer to as the “Lease Rebates.” In certain cases, we also extended the lease terms by three to five years. Payment of future Lease Rebates are contingent on us maintaining $75.0 million of unrestricted cash and cash equivalents as of the last day of each month.

We concluded that all amended leases were deemed to be new leases, and we re-evaluated these to determine if they qualified as capital or operating leases. We determined that each of our leases, as amended, continued to be an operating lease. Our lease analysis required us to make certain assumptions and estimates including: (i) the interest rate, which represented a blended rate of recent secured borrowing rates of peer companies and our unsecured borrowing rates; (ii) the fair value of the aircraft at the time of the new lease; and (iii) the fair value rental rates during the non-cancelable lease extension period. We estimated the extension rates utilizing fixed lease extension rates negotiated in other modified agreements based on current independent aircraft appraisals and current market lease rates. We also considered future demand for the leased aircraft while giving consideration to newer, more fuel-efficient aircraft expected to be delivered in the marketplace during the extension period.

We recognize rent expense on a straight-line basis over the non-cancelable lease term, using rates specified in the contract and estimated fair value rental rates during the non-cancelable lease extension period if not specified in the contract. We accounted for Lease Rebates received at the start of the amended leases as an incentive to be recorded as a reduction of rent expense on a straight-line basis over the lease term. Future Lease Rebates are considered contingent and are recognized as a reduction in rent expense when the liquidity requirement is met. Under the amended lease agreements, we are obligated to refund 25.0% of substantially all the Lease Rebates from monthly base rent received through December 31, 2016 in the first quarter of 2017 or on

 

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a pro-rata basis with any debt repayment occurring prior to the first quarter of 2017. Therefore, we accrue 25.0% of the Lease Rebates as a component of the deferred rent balance in our consolidated financial statements.

In addition, as certain of our lease terms are now extended, certain major aircraft and engine maintenance events are expected to occur within the extended lease terms. As a result, we recorded lease incentives associated with supplemental rent payments that were previously expensed that are now expected to be recoverable by virtue of the lease term extensions. These lease incentives were recorded as an increase to aircraft maintenance deposits and an increase to other liabilities in our consolidated balance sheets in 2013. For more information, see “—Aircraft and Engine Maintenance & Repair” above.

Intangible Assets

Our intangible assets consist of take-off and landing slots at LaGuardia Airport (LGA) and Ronald Reagan Washington National Airport (DCA) acquired in 2013 and in 2014. Slots are rights to take-off or land at a slot-controlled airport during a specific time period during the day and are a means by which the FAA manages airspace/airport congestion. The FAA controls slots at four airports, including LGA and DCA. The slots at DCA do not have a stated expiration date. Although the slots at LGA have expiration dates coinciding with the expiration date of the FAA’s slot orders, the FAA’s practice has been to renew the FAA slot orders, and we can continue to hold and use the slots as long as we comply with the FAA’s minimum use requirements. Unlike other assets at slot-controlled airports that are generally depreciated over their expected useful lives, slots require no maintenance and do not have an established residual value. As the demands for air travel at these airports have remained very strong, we expect to use these slots in perpetuity and have determined our slots to be indefinite-lived intangible assets. Intangible assets with indefinite lives are not amortized but rather tested for impairment annually, or more frequently when events and circumstances indicate that impairment may exist.

Income Taxes

We account for income taxes using the liability method. We record deferred taxes based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In evaluating our ability to utilize our deferred tax assets, we consider available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. 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. Judgment is required in evaluating our ability to utilize our deferred tax assets, assessing our uncertain tax positions and determining our provision for income taxes. Although we believe our estimates are reasonable, we cannot assure you that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals.

Although we recorded pretax income in 2013, we believe that cumulative losses in recent years continue to support our conclusion that a valuation allowance is still necessary. We will continue to evaluate future financial performance to determine whether such performance provides sufficient evidence to support reversal of the valuation allowance in the future.

Section 382 of the Internal Revenue Code, or Section 382, imposes limitations on a corporation’s ability to utilize net operating losses, or NOLs, if it experiences an “ownership change.” In general terms, an ownership change results from a cumulative change in the equity ownership of certain stockholders by more than 50 percentage points over a rolling three-year period. In the event of an ownership change, utilization of our pre-change NOLs would be subject to annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, increased in the five-year period following such ownership change by “recognized built-in gains” under certain circumstances.

We had NOLs carryforwards of $603.3 million and $421.7 million for federal and state income tax purposes at December 31, 2013. Our federal NOLs expire between 2027 and 2032. We have experienced ownership

 

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changes in the past. Our ability to utilize these assets could be reduced in certain circumstances, including if an ownership change is deemed to have occurred as a result of this offering. For more information, see “Risk Factors—Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited” elsewhere in this prospectus.

Results of Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

For the three months ended March 31, 2014, we had a net loss of $22.4 million compared to a net loss of $46.4 million in the three months ended March 31, 2013. Our operating loss of $13.1 million in the three months ended March 31, 2014 decreased by $1.8 million or 12.3% relative to the three months ended March 31, 2013.

Our operating capacity, as measured by ASMs, increased by 3.0% from the three months ended March 31, 2013 to the three months ended March 31, 2014 as we realized a full quarter of revenue from a new aircraft placed in service in April 2013. Our number of passengers increased by 10.6% from the three months ended March 31, 2013 to the three months ended March 31, 2014, while our yield declined by 2.8%, primarily due to cancellations related to the extreme weather conditions during the first quarter of 2014 and travel related to the Easter and Passover holidays having occurred in the second quarter in 2014 compared to having occurred in the first quarter in 2013. Our average fare for the first quarter of 2014 decreased by 7.2% to $186.73 from the prior year period, primarily due to a 6.9% decrease in our average stage length.

Our CASM increased by 0.2% from 11.7 cents for the three months ended March 31, 2013 to 11.8 cents for the three months ended March 31, 2014. This was primarily a result of a 6.9% reduction in our average stage length, offset in part by lower aircraft fuel expense and our reduced aircraft rent expense resulting from our 2013 Recapitalization.

In addition, interest expense decreased by $21.6 million, primarily as a result of our 2013 Recapitalization.

Operating Revenues

 

     Three Months Ended
March 31,
    Change  
     2013     2014     Amount         %      

Operating revenues (in thousands):

        

Passenger

   $ 269,034      $ 276,219      $ 7,185        2.7   

Other

     32,298        37,171        4,873        15.1   
  

 

 

   

 

 

   

 

 

   

Total operating revenues

   $ 301,332      $ 313,390      $ 12,058        4.0   
  

 

 

   

 

 

   

 

 

   

Operating statistics:

        

Available seat miles (millions)

     2,695        2,777        82        3.0   

Revenue passenger miles (millions)

     2,082        2,199        117        5.6   

Average stage length (statute miles)

     1,511        1,406        (105     (6.9

Load factor

     77.3     79.2     1.9 pts        

Total revenue per available seat mile—RASM (cents)

     11.18        11.28        0.10        0.9   

Yield (cents)

     12.92        12.56        (0.36     (2.8

Average fare

   $ 201.18      $ 186.73      $ (14.45     (7.2

Passengers (thousands)

     1,337        1,479        142        10.6   

Passenger revenue increased 2.7% from the three months ended March 31, 2014 to the three months ended March 31, 2013 on a 3.0% increase in capacity from a new aircraft that we placed in service in April, 2013. RASM increased 0.9% from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to a higher load factor offset in part by travel related to the Easter and Passover holidays occurring in the second quarter in 2014 as compared to having occurred in the first quarter in 2013.

 

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The 15.1% increase in other revenue from the three months ended March 31, 2013 to the three months ended March 31, 2014 was primarily due to increased advertising and brand revenues resulting from our new co-branded consumer credit card agreement that became effective in January 2014.

In addition, seat selection fee revenue and change fee revenue increased, primarily due to a 10.6% increase in passengers as well as higher fees for both ancillary products.

Operating Expenses

 

     Three Months Ended
March 31,
     Change     Cost per ASM      Change  
     2013      2014      Amount     %     2013      2014      %  
                        (in cents)         

Operating expenses (in thousands) :

                  

Aircraft fuel

   $ 116,596       $ 115,760       $ (836     (0.7     4.33         4.17         (3.7

Aircraft rent

     59,018         46,496         (12,522     (21.2     2.19         1.67         (23.5

Salaries, wages and benefits

     45,315         53,824         8,509        18.8        1.68         1.94         15.3   

Landing fees and other rents

     27,568         32,221         4,653        16.9        1.02         1.16         13.4   

Sales and marketing

     18,232         24,562         6,330        34.7        0.68         0.88         30.7   

Aircraft maintenance

     17,460         19,044         1,584        9.1        0.65         0.69         5.9   

Depreciation and amortization

     3,159         3,269         110        3.5        0.12         0.12         0.4   

Other operating expenses

     28,960         31,345         2,385        8.2        1.07         1.13         5.0   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Total operating expenses

   $ 316,308       $ 326,521       $ 10,213        3.2        11.74         11.76         0.2   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Operating statistics:

                  

Available seat miles (millions)

     2,695         2,777         82        3.0           

Average stage length (statute miles)

     1,511         1,406         (105     (6.9        

Departures

     12,582         13,825         1,243        9.9           

CASM (excluding fuel)

     7.41         7.59         0.18        2.4           

Fuel cost per gallon

   $ 3.32       $ 3.16         (0.16     (4.8        

Fuel gallons consumed (thousands)

     34,724         36,547         1,823        5.2           

Teammates (FTE)

     2,255         2,426         171        7.6           

Aircraft fuel

Aircraft fuel expense decreased by $0.8 million, or 0.7%, from the three months ended March 31, 2013 to the three months ended March 31, 2014. The decrease was primarily due to a decrease of $0.16, or 4.8%, in the average cost per gallon offset in part by a 5.2% increase in fuel consumption. The increased fuel consumption was primarily the result of changes in our route network.

We maintain an active FFP and hedging program to reduce the impact of sudden, sharp increases in fuel prices. We enter into a variety of hedging instruments, including options and collar contracts on highly correlated commodities such as heating oil and crude oil. We also use FFPs, which allow us to lock in the price of jet fuel for specified quantities and at specified locations in future periods. At March 31, 2014, we had entered into derivative hedging instruments and FFPs for approximately 37% of our then expected twelve month fuel requirements, with all of our then existing hedge contracts expected to settle by the end of the first quarter of 2015.

Aircraft rent

Aircraft rent expense decreased by $12.5 million, or 21.2%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to the aircraft lease amendments that we entered into in connection with the 2013 Recapitalization, offset in part by the growth in our fleet from 52 to 53 aircraft.

 

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Salaries, wages and benefits

Salaries, wages and benefits expense increased by $8.5 million, or 18.8%, from the three months ended March 31, 2013 to the three months ended March 31, 2014. Salaries and wages for flight crews increased significantly as a result of the competitive marketplace for talent and increasing seniority of our pilots and inflight teammates. In addition, there was a 7.6% increase in full-time equivalent teammates, in part due to new FAA requirements discussed below and, to a lesser extent, our increased number of destinations. In addition, our overall benefit plan costs increased from the three months ended March 31, 2013 as compared to the three months ended March 31, 2014, due to an increase in the amount of the 401(k) match benefits paid to our teammates and an increase in healthcare costs.

In December 2011, the FAA issued a rule to amend flight, duty and rest regulations pertaining to pilots. Among other things, the new rule, which went into effect in January 2014, requires a ten-hour minimum rest period prior to a pilot’s flight duty period, mandates that a pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period and imposes new pilot “flight time” and “duty time” limitations based on report times, the number of scheduled flight segments and other operational factors. We believe the new rule will likely reduce our staffing flexibility. We increased our level of reserve pilots in 2014 to meet our planned operational requirements in compliance with these rules and expect this will continue to contribute to an increase in salaries, wages and benefits in future periods.

In addition, as part of our profit-sharing plan, we pay 15.0% of our pre-profit-sharing and pre-tax income to our teammates and as a result, salaries, wages and benefit expense will increase in the future if our level of pre-tax income increases. We expect salaries, wages and benefit expense to grow at a faster rate than our capacity as market and tenure-related adjustments continue.

Landing fees and other rents

Landing fees and other rents expense increased by $4.7 million, or 16.9%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily as a result of a 9.9% increase in departures and rate increases for facilities at our destination airports.

During 2013 and the three months ended March 31, 2014, we received the benefit of landing fee and rent incentives for our added destinations of Austin and San Jose. With these incentives expiring during the second quarter of 2014, and with additional rate increases at a majority of the airports at which we operate, we expect our landing fees and other rents to increase both in absolute dollars and as a percentage of revenue during the remainder of 2014.

Sales and marketing

Sales and marketing expense increased $6.3 million, or 34.7%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to $5.0 million in one-time credits recognized in the three months ended March 31, 2013. These one-time credits consisted of a contract termination payment from a former software system provider and a contractual marketing incentive. In addition, we experienced increased call center costs as a result of the extreme weather conditions in the first quarter of 2014.

Aircraft maintenance

Aircraft maintenance expense increased by $1.6 million, or 9.1%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to an increase in the number of major airframe checks in the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Depreciation and amortization

Depreciation and amortization expense remained relatively consistent from the three months ended March 31, 2013 to the three months ended March 31, 2014.

 

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Other operating expenses

Other operating expense increased by $2.4 million, or 8.2%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to an increase in crew travel expenses as we increased the number of departures by 9.9% and reduced average stage length.

Other Income (Expense)

Interest expense decreased by $21.6 million, or 68.5%, from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to the 2013 Recapitalization.

Income Taxes

For the three months ended March 31, 2014 and 2013, we had nominal income tax expense due to our full valuation allowance.

2013 Compared to 2012

In 2013, we had net income of $10.1 million compared to a net loss of $145.4 million in 2012. In 2013, we had operating income of $80.9 million, compared to an operating loss of $31.7 million in 2012.

Our 2013 results reflected our strategic decisions to defer and cancel aircraft deliveries, thereby reducing capacity growth in our network, to reduce aircraft utilization across our operations, to eliminate low margin flights and to focus on improving revenue management techniques to increase RASM. We also implemented new ancillary revenue strategies that, when combined with our network and revenue management strategy changes, improved our unit revenue performance. Our RASM increased from 10.65 cents in 2012 to 11.64 cents in 2013, and our average fare increased by 4.3% to $203.70. We also added three new destinations during 2013 by shifting capacity from existing markets.

We continued our disciplined approach to cost control. Our CASM increased by 0.7% to 10.98 cents, primarily due to a 2.2% reduction in ASM and a 5.9% decrease in average stage length from 2012 to 2013. Partially offsetting this increase was a 4.8% reduction in fuel cost per gallon. Our 2013 results also reflect the impact of our debt and lease restructurings described under the 2013 Recapitalization. Through our aircraft lease renegotiations, we reduced aircraft rent expense by $34.7 million in 2013 or 12.8% per available seat mile. We also reduced interest expense by $44.8 million as a result of the 2013 Recapitalization.

Operating Revenue

 

     Year Ended December 31,      Change  
     2012      2013      Amount      %  

Operating revenues (in thousands):

           

Passenger

   $ 1,215,178       $ 1,289,268       $ 74,090         6.1   

Other

     117,659         135,410         17,751         15.1   
  

 

 

    

 

 

    

 

 

    

Total operating revenues

   $ 1,332,837       $ 1,424,678       $ 91,841         6.9   
  

 

 

    

 

 

    

 

 

    

 

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     Year Ended
December 31,
    Change  
     2012     2013     Amount     %  

Operating statistics:

        

Available seat miles (millions)

     12,514        12,243        (271     (2.2

Revenue passenger miles (millions)

     9,912        9,814        (98     (1.0

Average stage length (statute miles)

     1,567        1,474        (93     (5.9

Load factor

     79.2     80.2     1.0  pts        

Total revenue per available seat mile—RASM (cents)

     10.65        11.64        0.99        9.3   

Yield (in cents)

     12.26        13.14        0.88        7.2   

Average fare

   $ 195.38      $ 203.70      $ 8.32        4.3   

Passengers (thousands)

     6,219        6,329        110        1.8   

Passenger revenue increased by $74.1 million, or 6.1%, from 2012 to 2013. Passenger revenue accounted for 90.5% of our total operating revenues for the year ended December 31, 2013. Load factor increased one percentage point year-over-year, and average fare increased 4.3% as we focused on maximizing the value of our network by shifting capacity away from seasonally weaker routes, such as transcontinental flights during the winter. During 2013, we added three new destinations: Newark (from LAX and SFO), San Jose (from LAX) and Austin (from SFO). Our network changes resulted in a 5.9% reduction in our average stage length in 2013 as compared to 2012.

Other revenue increased by $17.8 million, or 15.1%, from 2012 to 2013, primarily due to a full year of fees from our Express program that we launched in September 2012, which allows guests to select a reserved seat assignment near the front of the cabin, purchase priority boarding and receive other premium privileges.

Operating Expenses

 

     Year Ended December 31,      Change     Cost per ASM      Change  
     2012      2013      Amount     %     2012      2013      %  
                        (in cents)         

Operating expenses (in thousands):

                  

Aircraft fuel

   $ 537,501       $ 507,035       $ (30,466     (5.7     4.30         4.14         (3.6

Aircraft rent

     236,800         202,071         (34,729     (14.7     1.89         1.65         (12.8

Salaries, wages and benefits

     176,216         196,477         20,261        11.5        1.40         1.61         14.0   

Landing fees and other rents

     110,165         122,621         12,456        11.3        0.88         1.00         13.8   

Sales and marketing

     107,136         106,599         (537     (0.5     0.86         0.87         1.7   

Aircraft maintenance

     58,934         61,854         2,920        5.0        0.47         0.51         7.3   

Depreciation and amortization

     11,260         13,963         2,703        24.0        0.09         0.11         26.8   

Other operating expenses

     126,558         133,177         6,619        5.2        1.01         1.09         7.6   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Total operating expenses

   $ 1,364,570       $ 1,343,797       $ (20,773     (1.5     10.90         10.98         0.7   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Operating statistics:

                  

Available seat miles (millions)

     12,514         12,243         (271     (2.2        

Average stage length (statute miles)

     1,567         1,474         (93     (5.9        

Departures

     56,362         58,215         1,853        3.3           

CASM (excluding fuel)

     6.61         6.83         0.22        3.3           

Fuel cost per gallon

   $ 3.32       $ 3.16         (0.16     (4.8        

Fuel gallons consumed (thousands)

     161,404         159,326         (2,078     (1.3        

Teammates (FTE)

     2,395         2,482         87        3.6           

 

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Aircraft fuel

Aircraft fuel expense decreased by $30.5 million, or 5.7%, from 2012 to 2013. The decrease was primarily due to the decline in the fuel cost per gallon and in our fuel consumption. Fuel cost declined from $3.33 per gallon in 2012 to $3.17 per gallon in 2013, or 4.8%, and our fuel gallons consumed also declined by 1.3%, primarily due to our reduction in available seat miles.

Aircraft rent

Aircraft rent expense decreased by $34.7 million, or 14.7%, from 2012 to 2013 as a result of our aircraft lease amendments entered into in connection with the 2013 Recapitalization. This decrease was partly offset by a full year of rent in 2013 for eight aircraft added to the fleet during 2012, as well as the delivery of one additional aircraft in March 2013.

Salaries, wages and benefits

Salaries, wages and benefits expense increased by $20.3 million, or 11.5%, from 2012 to 2013, primarily due to market and tenure related adjustments and profit sharing for our teammates. In addition, the average number of full-time equivalent teammates increased by 3.6% during 2013, and the average tenure of our teammate population was 3.5 years as of December 31, 2013 as compared to 3.0 years as of December 31, 2012. Salaries, wages and benefits expense in 2013 includes profit sharing expense under our profit sharing program, whereby 15.0% of our pre-profit sharing pre-tax income is paid to our teammates.

Landing fees and other rents

Landing fees and other rents expense increased by $12.5 million, or 11.3%, from 2012 to 2013, primarily due to the addition of our Newark service and the related airport rent, landing fees and slot rental payments. In addition, we also experienced rent increases at some of our major existing airports while landing fee incentives received in 2012 for Philadelphia International Airport (PHL) expired in the second quarter of 2013.

Sales and marketing

Sales and marketing expense remained relatively consistent from 2012 to 2013. During 2013, we received $5.0 million in one-time credits, which consisted of a contract termination payment from a former software system provider and a contractual marketing incentive. These credits were offset by additional expenses commensurate with our revenue growth from 2012 to 2013.

Aircraft maintenance

Aircraft maintenance costs increased by $2.9 million, or 5.0%, from 2012 to 2013, primarily due to an increase in the number of major airframe checks and engine repairs in 2013 as compared to 2012, as well as an increase in rates, which are correlated to aircraft age, under certain of our maintenance-cost-per-hour agreements.

Depreciation and amortization

Depreciation and amortization expense increased by $2.7 million, or 24.0%, from 2012 to 2013, primarily due to depreciation of our new software licenses and aircraft leasehold improvements.

Other operating expenses

Other operating expenses increased by $6.6 million, or 5.2%, from 2012 to 2013, primarily due to our lower utilization and an increase in our data communication costs associated with new software.

 

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Other Income (Expense)

Other income (expense) decreased by $43.2 million, or 38.0%, from 2012 to 2013, primarily due to the $44.8 million reduction in interest expense under our related-party long-term debt as a result of the 2013 Recapitalization.

Income Taxes

The income tax provision associated with our income in 2013 was largely offset by the release of a valuation allowance against the utilization of prior-year NOLs.

2012 Compared to 2011

In 2012, we had a net loss of $145.4 million compared to a net loss of $100.4 million in 2011. Our operating loss increased by $4.3 million, or 15.8%, from 2011 to 2012.

In 2012, we realized a full year of revenue from the 11 aircraft placed in service in 2011 and placed an additional eight aircraft in service in 2012, primarily in the first half of the year. As a result, our operating capacity, as measured by ASMs, increased by 27.0% from 2011 to 2012. With our increased fleet size, we achieved Department of Transportation major carrier status, and we transitioned from a focus on rapid capacity growth to a focus on maximizing the value of our network with growth at a disciplined, measured pace. We entered three new markets during 2012: Philadelphia, Portland and Washington, D.C., and our average fare increased by 3.3% to $195.38. Our interest expense increased due to additional debt added in late 2011 to finance our capacity expansion.

CASM increased from 10.80 cents in 2011 to 10.90 cents in 2012, a 0.9% increase. This was driven primarily by the increase in the number of major airframe checks in 2012 compared to 2011.

In addition, our interest expense increased by $40.5 million from 2011 to 2012, due to the compounding of accrued interest on the majority of our debt and interest on additional related-party debt incurred in late 2011.

Operating Revenues

 

     Year Ended December 31,     Change  
     2011     2012     Amount     %  

Operating revenues (in thousands):

        

Passenger

   $ 950,933      $ 1,215,178      $ 264,245        27.8   

Other

     86,175        117,659        31,484        36.5   
  

 

 

   

 

 

   

 

 

   

Total operating revenues

   $ 1,037,108      $ 1,332,837      $ 295,729        28.5   
  

 

 

   

 

 

   

 

 

   

Operating statistics:

        

Available seat miles (millions)

     9,853        12,514        2,661        27.0   

Revenue passenger miles (millions)

     8,034        9,912        1,878        23.4   

Average stage length (statute miles)

     1,571        1,567        (4     (0.3

Load factor

     81.5     79.2     (2.3) pts          

Total revenue per available seat mile—RASM (cents)

     10.53        10.65        0.12        1.1   

Yield (in cents)

     11.82        12.26        0.44        3.7   

Average fare

   $ 189.05      $ 195.38      $ 6.33        3.3   

Passengers (thousands)

     5,030        6,219        1,189        23.6   

 

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Passenger revenue increased by $264.2 million, or 27.8%, from 2011 to 2012, primarily due to a 27.0% increase in capacity with the addition of eight new aircraft to the fleet in 2012. RASM increased 1.1% year-over-year as a higher average fare was largely offset by a lower load factor experienced in our new markets in 2012. Airline routes tend to become more profitable as they mature because of increased demand as travelers become aware of the service and repeat business through trial.

Other revenue increased by $31.5 million, or 36.5%, from 2011 to 2012, primarily due to an increase in baggage fees and change fees, both of which increased, due to a higher number of passengers, as well as changes to the fee structure.

Operating Expenses

 

     Year Ended December 31,      Change     Cost per ASM      Change  
     2011      2012      Amount     %     2011      2012      %  
                        (in cents)         

Operating expenses (in thousands):

                  

Aircraft fuel

   $ 417,815       $ 537,501       $ 119,686        28.6        4.24         4.30         1.3   

Aircraft rent

     187,876         236,800         48,924        26.0        1.91         1.89         (0.8

Salaries, wages and benefits

     138,276         176,216         37,940        27.4        1.40         1.40         0.3   

Landing fees and other rents

     87,133         110,165         23,032        26.4        0.89         0.88         (0.4

Sales and marketing

     81,901         107,136         25,235        30.8        0.83         0.86         3.0   

Aircraft maintenance

     34,596         58,934         24,338        70.3        0.35         0.47         34.1   

Depreciation and amortization

     10,155         11,260         1,105        10.9        0.10         0.09         (12.7

Other operating expenses

     106,752         126,558         19,806        18.6        1.08         1.01         (6.7
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Total operating expenses

   $ 1,064,504       $ 1,364,570       $ 300,066        28.2        10.80         10.90         (0.9
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

Operating statistics:

                  

Available seat miles (millions)

     9,853         12,514         2,661        27.0           

Average stage length (statute miles)

     1,571         1,567         (4     (0.3        

Departures

     44,696         56,362         11,666        26.1           

CASM (excluding fuel)

     6.56         6.61         0.05        0.8           

Fuel cost per gallon

   $ 3.24       $ 3.32         0.08        2.5           

Fuel gallons consumed (thousands)

     128,852         161,404         32,552        25.3           

Teammates (FTE)

     2,002         2,395         393        19.6           

Aircraft fuel

Aircraft fuel expense increased by $119.7 million, or 28.6%, from 2011 to 2012. The increase was primarily due to a 25.3% increase in fuel consumption, due to our year-over-year increase in the ASMs and fleet size and, to a lesser extent, an increase of $0.10 in the average cost per gallon in 2012.

Aircraft rent

Aircraft rent expense increased by $48.9 million, or 26.0%, from 2011 to 2012, primarily due to the addition of four leased aircraft in the fourth quarter of 2011 and eight leased aircraft in the first half of 2012. Aircraft rent per ASM remained relatively consistent between 2011 and 2012.

 

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Salaries, wages and benefits

Salaries, wages and benefits expense increased by $37.9 million, or 27.4%, from 2011 to 2012 as we added staff for our increased fleet size and our new markets in Philadelphia, Portland and Washington, D.C. In addition to our 19.6% increase in full-time equivalent teammates, there were also significant increases in salaries and wages for crew members as a result of the competitive marketplace for talent and increasing seniority of our pilots and inflight teammates.

Landing fees and other rents

Landing fees and other rents expense increased by $23.0 million, or 26.4%, from 2011 to 2012, primarily as a result of a 26.1% increase in departures. The increase in departures was driven in part by the addition of three new destinations during 2012 and rate increases under use and lease agreements at the majority of our destination airports.

Sales and marketing

Sales and marketing expense increased by $25.2 million, or 30.8%, from 2011 to 2012, primarily to support our growth in available seat miles and to build awareness in our new markets, as we increased our fleet from 33 aircraft at the end of 2010 to 52 aircraft at the end of 2012.

Aircraft maintenance

Aircraft maintenance costs increased by $24.3 million, or 70.3%, from 2011 to 2012, primarily due to an increase in the number of major airframe checks in 2012 compared to 2011, as well as an increase in maintenance activity commensurate with a growing fleet.

Depreciation and amortization

Depreciation and amortization expense increased by $1.1 million, or 10.9%, from 2011 to 2012, primarily due to the depreciation of aircraft leasehold improvements for the four additional aircraft placed in service in the fourth quarter of 2011 and the eight additional aircraft placed in service in 2012.

Other operating expenses

Other operating expenses increased by $19.8 million, or 18.6%, from 2011 to 2012, primarily due to growth in capacity. The rate of growth in other operating expenses was lower than our ASM growth due to our ability to leverage fixed overhead expenses across our larger network.

Other Income (Expense)

Interest expense increased by $40.5 million, or 53.6%, from 2011 to 2012, due to the compounding of accrued interest on the majority of our debt and interest on additional related-party debt incurred in late 2011.

Income Taxes

As of December 31, 2012, we had incurred operating losses in all prior years and recorded a full valuation allowance against our net deferred tax assets.

Liquidity and Capital Resources

As of March 31, 2014, our principal sources of liquidity were cash and cash equivalents of $132.9 million. In addition, we had restricted cash of $14.0 million as of March 31, 2014. Restricted cash primarily represents cash collateral securing our letters of credit for airport facility leases.

 

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Primary uses of liquidity are for working capital needs, capital expenditures, aircraft pre-delivery payments and maintenance reserve deposits. As of March 31, 2014, we had $753.1 million of long-term debt, of which $713.6 million was related-party debt. In addition, on April 4, 2014, we entered into a five-year term loan credit facility for $40.0 million to finance airport slot purchases. This loan was funded in two tranches in April and May 2014. Principal is repayable in full at the end of five years. We accrue interest on this loan at a variable rate based on LIBOR and pay quarterly in arrears.

Currently our single largest capital expense is the acquisition cost of our aircraft. To conserve our capital, we operate all of our 53 aircraft under operating leases. Pre-delivery payments, or PDPs, relating to future deliveries under our agreement with Airbus, are required at various times prior to each aircraft’s delivery date. As of March 31, 2014, we had $69.1 million of PDPs held by Airbus, $39.5 million of which were financed by a third party. Committed expenditures for ten future aircraft deliveries between July 2015 and June 2016, separately sourced spare engines and related aircraft equipment, including estimated amounts for contractual price escalations and PDPs, will total approximately $470.4 million in 2014 through 2016. We believe that commercially available financing and our cash resources will be sufficient to satisfy these purchase commitments. Our intention is to finance the aircraft on order through a mix of operating lease financing and debt financing. For six out of the next ten aircraft deliveries, we have obtained a manufacturer back-stop debt-financing commitment, which we presently do not expect to utilize. We do not have financing commitments in place for the remaining 30 Airbus aircraft orders scheduled for delivery between 2020 and 2022. If we ultimately exercise our cancellation rights for up to 30 aircraft, we would incur a loss of deposits and credits of up to $26.0 million as a cancellation fee.

In addition to funding the acquisition of our future fleet, we are required to make maintenance reserve payments to our lessors for of our current fleet. Qualifying payments that are expected to be recovered from lessors are recorded as aircraft maintenance deposits in our consolidated balance sheets. Maintenance reserves are paid to aircraft lessors and are held as collateral in advance of our performance of major maintenance activities. In 2013 and in the first three months of 2014, we made $54.1 million and $13.2 million maintenance deposit payments to our lessors. We received $5.3 million in 2013 and $0.8 million in the first three months of 2014 of maintenance reimbursements, due to qualifying maintenance events taking place during the respective periods. In addition, as a result of the lease amendments in 2013, we received $8.4 million and $2.3 million in maintenance deposit rebates from our lessors in 2013 and in the first three months of 2014.

In connection with various lease amendments entered into with our aircraft lessors in 2013, we are entitled to Lease Rebates on a monthly basis. Payment of future Lease Rebates are contingent on us maintaining $75.0 million of unrestricted cash and cash equivalents as of the last day of each month. Under the amended lease agreements, we are obligated to refund 25.0% of substantially all the Lease Rebates from monthly base rent received through December 31, 2016 in the first quarter of 2017 or on a pro-rata basis with any debt repayment occurring prior to the first quarter of 2017. As of March 31, 2014, the aggregate amount of lease rebates earned was $24.7 million, net of $6.0 million recorded as a payable to the lessors.

We expect to meet our obligations as they become due through available cash, internally generated funds from our operating cash flows, supplemented by financing activities as necessary and as they may become available to us. However, we cannot predict what the effect on our business and financial position might be from the extremely competitive environment in which we operate or from events beyond our control, such as volatile fuel prices, economic conditions, weather-related disruptions, the impact of airline bankruptcies, restructurings or consolidations, U.S. military actions or acts of terrorism. We believe the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months.

 

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Cash Flows

The following table presents information regarding our cash flows in 2011, 2012 and 2013 and the three months ended March 31, 2013 and 2014:

 

     Year Ended December 31     Three Months Ended
March 31,
 
     2011     2012     2013     2013     2014  
     (in thousands)  
                       (unaudited)  

Net cash provided by operating activities

   $ (28,971   $ (50,645   $ 50,603      $ (11,966   $ 4,330   

Net cash used in investing activities

     (38,578     (27,184     (41,996     (4,449     (27,111

Net cash provided by (used in) financing activities

     197,460        (5,968     71,034        (1,503     8   

Net increase in cash and cash equivalents

     129,911        (83,797     79,641        (17,918     (22,773

Cash and cash equivalents, end of period

     159,815        76,018        155,659        58,100        132,886   

Net Cash Flow Provided By (Used In) Operating Activities

During the three months ended March 31, 2014, net cash flow provided by operating activities was $4.3 million. We had a net loss of $22.4 million adjusted for the following non-cash items: paid in-kind interest expense of $5.6 million and depreciation and amortization of $3.3 million. Air traffic liability, net of credit card holdbacks, contributed $19.4 million of cash flow, primarily due to a $23.0 million additional advance payment from our new co-branded credit card partner in January 2014, offset in part by the timing of credit card settlements. We increased our maintenance deposits by $8.0 million, primarily due to our reserve payments for future maintenance events. Other current liabilities increased by $12.2 million, primarily because of increased accruals due to the timing of invoicing by some of our major business partners.

During the three months ended March 31, 2013, net cash flow used in operating activities was $12.0 million. We had a net loss of $46.4 million adjusted for the following non-cash items: paid-in kind interest expense of $27.5 million and depreciation and amortization of $3.2 million. Credit card holdbacks, net of air traffic liability, used $6.6 million of cash, primarily due to the timing of settlement of credit card transactions and reconciliation of our holdback. We increased our maintenance deposits by $14.2 million, primarily due to our reserve payments for future maintenance events. Other current liabilities increased by $13.5 million, primarily due to our increased capacity as we prepared to launch service to three new destinations in April and May of 2013.

During 2013, net cash flow provided by operating activities was $50.6 million. We had net income of $10.1 million adjusted for the following non-cash items: paid in-kind interest expense of $54.3 million and depreciation and amortization of $14.0 million. We increased our maintenance deposits by $38.1 million and reduced other non-current liabilities by $8.5 million, primarily due to our aircraft lease amendments entered into in connection with the 2013 Recapitalization. Air traffic liability, net of credit card holdbacks, contributed $17.8 million of cash flow, primarily due to a $10.0 million advance payment received from our new co-branded credit card partner, increased credit card points deferrals and the timing of receipt of credit card settlements. Other current liabilities increased by $10.6 million, primarily due to the growth of our business, including the addition of three new airports, timing of payments and salary and wage increases.

During 2012, net cash flow used in operating activities was $50.6 million. We had a net loss of $145.4 million adjusted for the following non-cash items: paid-in-kind interest expense of $99.1 million and depreciation and amortization of $11.3 million. During 2012, we added eight additional aircraft to our fleet, which, combined with required payments under our existing leases, resulted in increased maintenance deposits of $33.6 million. Our air traffic liability and credit card holdbacks contributed $15.6 million to our cash flow, primarily as a result of a reduction in the holdback percentage by one of our credit card processors, our 18.2% increase in fleet size, a 3.3% increase in average fare and, to a lesser extent, the timing of our credit card settlements.

 

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During 2011, net cash flow used in operating activities was $29.0 million. We had a net loss of $100.4 million adjusted for the following non-cash items: paid-in-kind interest expense of $67.7 million, depreciation and amortization of $10.2 million and unrealized losses on fuel derivative instruments of $7.7 million. Credit card holdbacks, net of air traffic liability used $12.4 million of cash, primarily because we replaced a $30.0 million letter of credit provided by the Virgin Group with additional holdback with our processors, offset in part by a reduction in the holdback percentage by one of our credit card processors. The remaining increase in credit card holdbacks and the increase in air traffic liability were primarily due to the 33.3% increase in our fleet size relative to 2010, a 12.7% increase in average fare and, to a lesser extent, the timing of settlement of credit card transactions and the release of holdbacks by our processors. Aircraft maintenance deposits increased by $21.8 million, primarily due to required maintenance reserve payments under our aircraft leases. Prepaid expenses and other assets decreased by $13.5 million, primarily due to settlement of fuel derivative contracts. Other current liabilities increased by $10.6 million, primarily due to our growth and, to a lesser extent, the timing of our payments.

Net Cash Flows Used In Investing Activities

During the three months ended March 31, 2014, net cash flow used in investing activities was $27.1 million. We invested in domestic airport operating rights, flight equipment and software.

During the three months ended March 31, 2013, net cash flow used in investing activities was $4.4 million, primarily because we invested in equipment and software.

During 2013, net cash flow used in investing activities was $42.0 million. We invested $27.0 million in domestic airport operating rights, and $15.0 million in equipment, software, and aircraft improvements to improve our fleet efficiency and to comply with FAA requirements.

During 2012, net cash flow used in investing activities was $27.2 million. We made pre-delivery payments of $19.2 million in cash for future aircraft deliveries. We also invested $8.0 million for the purchase of equipment for our new leased aircraft placed in service during the year.

During 2011, net cash flow used in investing activities was $38.6 million. We invested primarily in equipment for 11 new leased aircraft we added to our fleet and to a lesser extent in our airport facilities in San Francisco and Chicago. We also implemented the Sabre reservations software system.

Net Cash Flows Provided By (Used In) Financing Activities

Cash flow provided by financing was not material in the three months ended March 31, 2014.

Cash flow used in financing activities was $1.5 million in the three months ended March 31, 2013, due to principal repayments on our third-party debt and capital lease obligations.

During 2013, net cash flow provided by financing activities was $71.0 million, primarily as a result of our related-party debt issuance of $75.0 million in connection with the 2013 Recapitalization.

During 2012, net cash flow used in financing activities was $6.0 million, which represents principal repayments on our third-party debt and capital lease obligations.

During 2011, net cash flow provided by financing activities was $197.5 million, primarily as a result of our related-party debt and warrant issuance of $216.0 million, offset in part by $18.5 million in repayments of debt obligations.

 

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Commitments and Contractual Obligations

The following table presents aggregate information about our contractual payment commitments as of December 31, 2013 and the periods in which payments are due (in thousands):

 

     Total      Less than 1
Year
     1 to 3
Years
     3 to 5
Years
     More than
5 Years
 

Long-term debt including related-party (1)

   $ 747,431       $ —         $ 747,431       $ —         $ —     

Aircraft and engine purchases (2)

     470,437         5,968         464,469         —           —     

Aircraft and engine leases (3)

     1,709,345         228,458         437,726         386,606         656,555   

Maintenance deposits (4)

     107,807         9,686         19,520         20,958         57,643   

Other leases (5)

     105,839         18,542         32,810         25,296         29,191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,140,859       $ 262,654       $ 1,701,956       $ 432,860       $ 743,389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes accrued interest.
(2) Represents non-cancelable contractual payment commitments for aircraft and engines.
(3) Represents future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year, including renewal payments for signed lease extensions and excluding lease rebates.
(4) Represents the fixed portion of supplemental rent under lessor contracts for maintenance reserve payment commitments; excludes variable future amounts that will be based on actual flight hours.
(5) Represents future minimum lease payments under non-cancelable building, airport station and equipment leases.