UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number: 0-20360
RENO AIR, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0259913
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
220 Edison Way
Reno, Nevada 89502
(Address of principal executive offices)
(702) 954-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $.01 par value, of registrant outstanding at
July 31, 1998: 10,753,175.
<PAGE>
RENO AIR, INC.
- --------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 1998 and
December 31, 1997 3
Statements of Operations -
Three Month and Six Month Periods Ended June 30, 1998 and 1997 4
Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
SIGNATURES 16
<PAGE>
Reno Air, Inc.
Condensed Balance Sheets
at June 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,811 $ 29,058
Short-term investments 968 129
Accounts receivable 32,741 24,808
Inventories and operating supplies 3,288 2,983
Prepaid expenses and other 23,265 29,700
------------ ------------
Total current assets 81,073 86,678
PROPERTY AND EQUIPMENT:
Flight equipment 91,263 85,993
Ground property and equipment 17,333 15,870
------------ ------------
108,596 101,863
Less-Accumulated depreciation (25,112) (21,399)
------------ ------------
Property and equipment, net 83,484 80,464
RESTRICTED CASH AND INVESTMENT 4,454 5,122
DEPOSITS AND OTHER NONCURRENT ASSETS 22,920 21,145
------------ ------------
$ 191,931 $ 193,409
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,741 $ 19,611
Accrued liabilities 21,921 25,894
Air traffic liability 36,310 27,025
Current maturities of long-term debt 7,864 7,867
------------ ------------
Total current liabilities 85,836 80,397
LONG-TERM DEBT 58,622 62,584
OTHER NONCURRENT LIABILITIES 19,178 15,704
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, ($25.00 per share liquidation preference);
Series A Cumulative Convertible Exchangeable; $.001 par
value: 10,000,000 shares authorized; issued and outstanding
1,436,000 shares at June 30, 1998 and December 31, 1997 1 1
Common stock, $.01 par value: 30,000,000 shares authorized;
issued and outstanding 10,749,575 shares at June 30, 1998
and 10,542,075 shares at December 31, 1997 107 105
Additional paid-in capital 66,330 66,825
Accumulated deficit (38,143) (32,207)
------------ ------------
Total shareholder's equity 28,295 34,724
------------ ------------
$ 191,931 $ 193,409
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
Reno Air, Inc.
Statements of Operations
For the Six Month and Three Month Periods
Ended June 30, 1998 and 1997
(in thousands, except for share data)
(unaudited)
<TABLE>
<CAPTION>
Six-Months Ended Three-Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger revenues $ 183,091 $ 175,762 $ 94,172 $ 91,468
Other 9,519 11,344 4,612 5,954
------------ ------------ ------------ ------------
Total operating revenues 192,610 187,106 98,784 97,422
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 35,131 32,185 17,050 16,863
Aircraft fuel and oil 28,163 34,241 13,325 16,163
Aircraft leases 34,886 34,116 17,258 17,513
Aircraft maintenance 21,563 15,648 10,280 8,068
Handling, landing and airport fees 20,490 19,167 9,848 9,789
Advertising, marketing and sales 13,556 15,075 6,963 7,609
Commissions 9,007 9,963 4,963 5,063
Facility leases 7,679 6,590 3,679 3,500
Insurance 2,861 3,223 1,452 1,390
Communications 3,031 2,741 1,335 1,443
Depreciation 3,839 4,701 1,971 2,484
Restructuring charges 2,212 -- 725 --
Other 13,966 12,684 6,875 6,593
------------ ------------ ------------ ------------
Total operating expenses 196,384 190,334 95,724 96,478
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (3,774) (3,228) 3,060 944
NONOPERATING INCOME (EXPENSE):
Interest expense (2,976) (2,435) (1,468) (1,167)
Interest income 1,540 1,026 702 538
Other, net (726) (136) (445) (91)
------------ ------------ ------------ ------------
Nonoperating income (expense), net (2,162) (1,545) (1,211) (720)
------------ ------------ ------------ ------------
NET INCOME (LOSS) (5,936) (4,773) 1,849 224
PREFERRED STOCK DIVIDENDS 1,614 -- 807 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (7,550) $ (4,773) $ 1,042 $ 224
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE AND POTENTIAL
COMMON SHARE:
Basic $ (0.71) $ (0.46) $ 0.10 $ 0.02
============ ============ ============ ============
Diluted $ (0.71) $ (0.46) $ 0.10 $ 0.02
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
COMMON SHARES OUTSTANDING:
Basic 10,611,431 10,409,315 10,662,191 10,447,698
============ ============ ============ ============
Diluted 10,611,431 10,409,315 10,963,673 10,767,081
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
Reno Air, Inc.
Statements of Cash Flows
Six Months ended June 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six-month Periods Ended
June 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,936) $ (4,773)
Adjustments to reconcile net loss to net cash provided by
(used) in operating activities:
Depreciation and amortization 3,839 4,701
Common stock issued under the 401(k) plan 162 261
Amortization of deferred lease credits (570) (1,324)
Other 753 225
Changes in operating assets and liabilities:
Accounts receivable (8,184) (15,658)
Inventories and operating supplies (305) (586)
Prepaid expenses and other current assets 6,435 (4,113)
Restricted cash 650 455
Deposits and other noncurrent assets (1,971) (2,147)
Accounts payable 130 3,652
Accrued liabilities (4,135) (2,327)
Air traffic liability 9,285 11,695
Noncurrent liabilities 4,044 5,356
-------- --------
Net cash provided by (used) in operating activities 4,197 (4,583)
INVESTING ACTIVITIES:
Sales (purchases) of short-term investments (839) 939
Purchases of property and equipment (7,039) (4,257)
-------- --------
Net cash used in investing activities (7,878) (3,318)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 1,013 517
Proceeds from issuance of notes payable -- 3,003
Payments of preferred stock dividends (1,614) --
Repayments of long-term debt (3,965) (2,365)
-------- --------
Net cash provided by (used) in financing activities (4,566) 1,155
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (8,247) (6,746)
CASH AND CASH EQUIVALENTS at beginning of period 29,058 16,221
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 20,811 $ 9,475
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
RENO AIR, INC.
NOTES TO FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring and other
adjustments as discussed below) considered necessary for a fair presentation
have been included. The results of operations for the three and six-month
periods ended June 30, 1998, are not necessarily indicative of the results that
will be realized for all of 1998. For further information, refer to the
financial statements and notes thereto contained in the Company's Annual report
on Form 10-K for the year ended December 31, 1997.
Note B - Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
Note C - Per Share Data
In 1997, the Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("SFAS 128"). The earnings (loss) per common share for the
three-month and six-month periods ended June 30, 1997, have been restated to
conform to the reporting requirements of SFAS 128.
For the three-month and six-month periods ended June 30, 1998 and 1997, other
common shares of 8,285,982 and 4,049,248 shares, and 9,892,662 and 4,932,279
shares, respectively, issuable under potentially dilutive securities are not
included in the computation of diluted earnings (loss) per share because their
exercise prices were greater than the average market prices for the Company's
common stock during those periods (with respect to outstanding stock options and
warrants), or were otherwise anti-dilutive.
Note D - Change in Estimate
In the first quarter of 1998, the Company changed its estimate of the
depreciable lives of its owned and Stage III compliant aircraft to approximately
25 years from their original dates of manufacture, and further applied this
change to its owned spare engines and aircraft components. This change in
depreciable lives is considered to be more representative of the estimated
useful lives for this type of flight equipment than the shorter depreciable
lives used previously by the Company. The result of this change was to decrease
depreciation expense in the first and second quarters of 1998 by approximately
$1.2 million per quarter. It is estimated that the change will subsequently
reduce depreciation expense by approximately $1.2 million in each of the
remaining quarters of 1998.
6
<PAGE>
Note E - Restructuring Charges
Restructuring charges consist of the following amounts (in thousands):
<TABLE>
<CAPTION>
Three-month Three-month
period ended period ended
June 30, 1998 March 31, 1998 Total
------------- -------------- -----
<S> <C> <C> <C>
Provision for employee severance $ 336 $1,055 $1,391
Write-off of assets and other expenses
related to station and facility closures 170 288 458
Other 219 144 363
------ ------ ------
$ 725 $1,487 $2,212
====== ====== ======
</TABLE>
The restructuring charges arose from schedule changes related to
under-performing routes, a decrease in the Company's workforce, reduction of the
size of its operating fleet and the implementation of other cost saving
measures.
Note F - Commitments, Contingencies and Subsequent Events
In May 1998, the Company entered into an agreement for the sale of two McDonnell
Douglas MD-80 aircraft with a US based air carrier. These aircraft were acquired
by the Company in the first quarter of 1998 pursuant to a conditional sale
contract arrangement with an affiliate of the aircraft manufacturer. Neither of
these aircraft were operated by the Company in revenue service. In July 1998,
one of these aircraft was simultaneously purchased by the Company pursuant to
the conditional sale and resold to the third party. The second aircraft is
expected to be sold to the third party on or about September 30, 1998.
In December 1997 and January 1998, the Company entered into agreements to
purchase 14 million gallons of jet fuel, of which approximately 5.8 million
gallons were remaining for delivery at June 30, 1998 at an average cost of 56.1
cents per gallon, including shipping charges and federal taxes. In the second
quarter of 1998, the Company entered into other similar agreements to purchase
10.3 million gallons of jet fuel at an average cost of 43.1 cents per gallon,
inclusive of shipping charges and federal taxes. Management believes these
advance purchase agreements will provide approximately 33 percent of the
Company's estimated fuel requirements for the remainder of 1998. The Company is
currently under contract for most of its remaining fuel requirements for the
balance of the 1998 fiscal year at formula based market rates. Management is
presently evaluating the possibility of fixing current formula based contract
rates for its remaining 1998 fuel requirements and purchasing a portion of its
1999 fuel requirements.
In July 1998, the Company and PRA Solutions, L.L.C., an affiliate of Andersen
Worldwide Consulting, entered into a three-year agreement pursuant to which PRA
Solutions will provide systems for substantially all of the Company's revenue
accounting function.
In August 1998, the Company and Express Vacations L.L.C. of Reno, Nevada,
entered into a three-year agreement pursuant to which Express Vacations will
manage QQuick Escapes(R), the Company's in-house tour product.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's business is characterized, as is true for the airline industry
generally, by high fixed costs relative to revenues and low profit margins.
Slight changes in fare levels or load factors can have a substantial impact on
the Company's revenues. Approximately one-half of the Company's passengers
purchase tickets within the two-week period preceding the date of travel.
Accordingly, changes in the Company's competitive environment (for instance,
changes in fares and/or services offered by its competitors, many of which are
much larger and have substantially greater resources than the Company), can have
an immediate and significant financial impact on the Company. The Company's
business is also highly sensitive to general economic conditions and any
reduction in airline passenger traffic (whether general or specific to the
Company) may materially and adversely affect the Company's financial position.
This quarterly and six-month report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Generally, such statements are
indicated by words or phrases such as "anticipate," "expect," "intend,"
"management believes" and similar words or phrases. Such statements are based on
current expectations and are subject to risks, uncertainties and assumptions.
Certain of these risks are described in Item 1, "Cautionary Statements," in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected, intended or believed results.
During the first six months of 1998, the Company's senior management team was
entirely reorganized resulting in eleven former officers of the Company being
replaced with six new executive officers, each of whom has significant airline
industry experience. In February 1998 Joseph R. O'Gorman, a seasoned executive
with 32 years of airline industry experience at airlines including United
Airlines, USAir, Air Cal, Frontier Airlines, and Aloha Airlines, was appointed
Chairman, Chief Executive Officer and President of the Company. Under the
direction of Mr. O'Gorman's management team, the Company commenced a
restructuring program which refocused the Company's operations in its primary
and core markets in the western portion of the United States. The strategic
initiatives included the closure of six stations, reallocation of the Company's
aircraft capacity to more profitable markets, an approximate 15 percent
reduction in the Company's workforce, reduction of the operating fleet to 28
aircraft (at June 30, 1998), and the outsourcing of the revenue accounting and
tour operator functions. As a result of these initiatives, the Company incurred
restructuring charges of $2.2 million in the six-month period ended June 30,
1998.
In the second quarter of 1998, the Company renewed its marketing agreement with
American Airlines, Inc. relating to Reno Air's distribution of the American
AAdvantage(R) frequent flyer miles on certain flights. Under the revised terms
of the agreement, the agreement shall continue indefinitely, but may be
terminated by either party upon seven months notice to the other. The Company
believes that it is highly beneficial for it to enter into new or to continue
and expand the scope of existing strategic alliances or code-sharing agreements
with domestic and international airlines. There can be no assurance that the
Company will be successful in the implementation of additional code-sharing and
alliance agreements.
The Company has begun a comprehensive year 2000 compliance program designed to
ensure that its computer systems and applications will properly manage calendar
dates beyond the year 1999. The Company believes that it has allocated adequate
resources for this purpose and expects that its own year 2000 conversion program
will be completed on a timely basis. While there can be no assurance that the
systems of outside parties upon which the Company relies will be successfully
converted on a timely basis, the Company is working with its vendors to identify
potential problems. Accordingly, a failure by either the Company or one or more
of such outside parties to convert their systems may have a material adverse
impact on the Company's operations and financial position.
In July 1998, the Company and PRA Solutions, L.L.C., an affiliate of Andersen
Worldwide Consulting, entered into a three-year agreement pursuant to which PRA
Solutions will provide systems for much of the Company's revenue accounting
function, commencing in the fourth quarter of 1998.
In August 1998, the Company and Express Vacations L.L.C. of Reno, Nevada entered
into a three-year agreement pursuant to which Express Vacations will manage
QQuick Escapes(R), the Company's in-house tour product.
By outsourcing of the revenue accounting and tour operation functions presently
managed by the Company, and as described in the two immediately preceeding
paragraphs, the Company expects to achieve revenue enhancement and permit
management to refocus its efforts on its core competencies in operating the
airline.
In May 1998, the Company entered into an agreement for the sale of two McDonnell
Douglas MD-80 aircraft with a US based air carrier. These aircraft were acquired
by the Company in the first quarter of 1998 pursuant to a conditional sale
contract arrangement with an affiliate of the aircraft manufacturer. Neither of
these aircraft were operated by the Company in revenue service. In July 1998,
one of these aircraft was simultaneously purchased by the Company pursuant to
the conditional sale agreement and resold to the third party. The second
aircraft is expected to be sold on or about September 30, 1998.
8
<PAGE>
In the first six months of 1998, the Company returned three leased aircraft to
the lessor thereof, and returned a fourth leased aircraft in July 1998. The
Company expects to return two additional leased aircraft to the lessor in late
1998. All aircraft returns were effected or are to be effected upon expiration
of the related leases.
The management team is jointly focused on increasing unit revenue and reducing
unit costs by among other things, working more effectively with fewer workers,
technological enhancements of Company systems, more efficient utilization of
aircraft and crews and by operating in more profitable markets. The Company is
also seeking to increase its percentage of business travelers, who typically pay
higher fares, by enhancing on-time performance, aircraft cleanliness, improving
reservations service and by providing a convenient schedule into markets served.
In April 1997, the Company's flight attendants became represented by the
International Brotherhood of Teamsters ("IBT") and in September 1997, the
Company's pilots became represented by the Airline Pilots Association ("ALPA").
The Company is negotiating a contract with the IBT and anticipates commencing
contract talks with ALPA in the near future. Management cannot predict when any
contracts might be entered into, or the extent to which such contracts will
contain terms different from the Company's current work and pay rules.
Unionization of the Company's employees will restrict the Company's flexibility
in dealing with such employees, and could result in a material increase in its
labor costs. None of the Company's other employees are represented by a union.
Selected Operating Statistics
<TABLE>
<CAPTION>
Six-month period Percent Three-month period Percent
ended June 30, change ended June 30, change
-------------- ------ -------------- ------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers (1) 2,677,992 2,677,818 -- 1,340,100 1,404,943 (4.6)
Revenue passenger miles (RPMs - thousands) (2) 1,555,520 1,525,126 2.0 784,660 802,508 (2.2)
Available seat miles (ASMs - thousands) (3) 2,366,294 2,278,595 3.8 1,174,028 1,161,784 1.1
Passenger load factor (percent) (4) 65.74 66.93 (1.8) 66.83 69.08 (3.3)
Breakeven load factor (percent) (5) 68.45 68.75 (0.4) 66.09 68.91 (4.1)
Revenue per revenue passenger mile ("yield" - cents) (6) 11.77 11.52 2.2 12.00 11.40 5.3
Passenger revenue per ASM (cents) 7.74 7.71 0.4 8.02 7.87 1.9
Total operating unit revenue per ASM (cents) 8.14 8.21 (0.9) 8.41 8.39 0.2
Unit operating cost per ASM (cents) 8.30 8.35 (0.6) 8.15 8.30 (1.8)
Aircraft in service at end of period 28 30 (6.7) 28 30 (6.7)
Average passenger journey (miles) 581 570 1.9 586 571 2.6
Average aircraft stage length (miles) 522 515 1.4 524 513 2.1
Average cost of fuel per gallon (cents) (7) 64.4 82.0 (21.5) 61.3 71.2 (13.9)
Full time equivalent employees at end of period 1,942 2,223 (8.5) 1,942 2,223 (8.5)
Average daily aircraft utilization (revenue block hours) 10.14 9.79 3.6 9.90 9.57 3.4
Block hours (revenue) 52,310 51,042 2.5 25,503 26,111 (2.3)
</TABLE>
(1) The number of trip segments flown by fare-paying passengers.
(2) The number of miles flown by fare-paying passengers.
(3) The aircraft miles flown on each flight segment multiplied by the number of
seats available for revenue on those segments.
(4) RPMs divided by ASMs.
(5) The passenger load factor that would have resulted in the Company breaking
even on a net income basis during the period, assuming yield and operating
costs remain constant. The breakeven load factors for the three and
six-month periods ended June 30, 1998 include dividends declared and paid
on the Company's Series A Preferred Stock and restructuring charges of $.73
million and $2.2 million, respectively. Not including the preferred stock
dividends and restructuring charges, the respective breakeven load factors
for the three and six-month periods ended June 30, 1998 are 65.0 percent
and 67.1 percent.
(6) Passenger revenues divided by RPMs.
(7) Jet fuel price per gallon, excluding into-plane and similar service
charges.
9
<PAGE>
The following table sets forth the components of the Company's operating
expenses expressed as unit cost per available seat mile for the three-month and
six-month periods ended June 30, 1998 and 1997.
Unit Cost per Available Seat Mile
(cents)
Six-month period Three-month period
ended June 30, ended June 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Salaries, wages and benefits 1.48 1.41 1.45 1.45
Aircraft fuel and oil 1.19 1.50 1.13 1.39
Aircraft leases 1.47 1.50 1.47 1.51
Aircraft maintenance 0.91 0.69 0.88 0.69
Handling, landing and airport fees 0.87 0.84 0.84 0.84
Advertising, marketing and sales 0.57 0.66 0.59 0.65
Commissions 0.38 0.44 0.42 0.44
Facility leases 0.32 0.29 0.31 0.30
Insurance 0.12 0.14 0.12 0.12
Communications 0.13 0.12 0.12 0.12
Depreciation 0.16 0.21 0.17 0.21
Restructuring charges 0.09 -- 0.06 --
Other 0.61 0.55 0.59 0.58
---- ---- ---- ----
Total unit cost per available seat mile 8.30 8.35 8.15 8.30
==== ==== ==== ====
10
<PAGE>
Results of Operations
Reno Air realized net income of $1.8 million before preferred stock dividends
but including restructuring charges of $725 thousand for the three-month period
ended June 30, 1998. Net income applicable to common stock for the quarter ended
June 30, 1998 was $1.04 million, or $0.10 per common share (on both a basic and
diluted basis). The Company incurred a net loss applicable to common stock of
$7.6 million for the six-month period ended June 30, 1998, after restructuring
charges of $2.2 million and preferred stock dividends of $1.6 million. For the
same three-month and six-month periods of 1997, the Company realized net income
(loss) applicable to common stock of $224 thousand and ($4.8) million,
respectively. There was no preferred stock outstanding during the comparable
six-month period of 1997.
The improvement in results of operations for the second quarter of 1998 compared
to the 1997 quarter is attributable to a $1.4 million increase in 1998 operating
revenues to $98.8 million and a $.8 million decrease in operating expenses to
$95.7 million.
The results of operations for the six-month periods ended June 30, 1998 and 1997
were adversely affected by poor operating results in the respective first
quarters of 1998 and 1997, caused in part by unusually harsh weather conditions
in 1998 resulting in higher than normal flight cancellations and delays in many
of the Company's key west coast markets.
Operating revenues
Operating revenues for the three and six-month periods of 1998 increased by $1.4
million and $5.5 million, respectively, from the comparable 1997 periods. These
increases were due in part to higher yields on passenger revenues of 12.0 cents
for the 1998 quarter compared to 11.4 cents in the 1997 quarter, and 11.8 cents
for the six-month period ended June 30, 1998 compared to 11.5 cents for the
comparable 1997 period. For the quarter ended June 30, 1998, RPMs decreased by
2.2 percent to 785 million compared to 803 million RPMs in the second quarter of
1997 as a result of the increase in yield and unit revenue.
Unit revenues per available seat mile ("unit revenue") increased in the second
quarter of 1998 to 8.41 cents from 8.39 cents in the second quarter of 1997 due
primarily to an increase in yield as a result of reallocation of the Company's
aircraft to more profitable markets. The second quarter of 1998 includes a $1.9
million benefit resulting from adjustments to estimated ticket breakage on
earned passenger revenues.
Despite the $5.5 million increase in operating revenues for the six-month period
ended June 30, 1998, unit revenue for the 1998 period decreased to 8.14 cents
from 8.21 cents for the comparable 1997 period. This decrease in unit revenue is
attributable to a significant increase in track charter operations at lower
yields. The Company is in the process of eliminating track charter operations
and expects to cease all track charter operations by the fall of 1998.
Operating expenses
Operating expenses for the three-month period ended June 30, 1998 decreased by
0.8 percent to $95.7 million from the comparable 1997 quarter which produced a
unit cost per available seat mile of 8.15 cents including restructuring charges
of $725,000 incurred in the 1998 quarter. Unit cost for the quarter ended June
30, 1998 was 8.09 cents excluding the restructuring charges and represents a 2.5
percent improvement over unit cost for the second quarter of 1997.
Operating expenses for the six-month period ended June 30, 1998 increased by 3.2
percent to $196.4 million over the comparable 1997 period. The increase in
operating expenses included $2.2 million attributable to restructuring charges
incurred in the period and resulted in a unit cost of 8.30 cents compared to
8.35 cents for the six-month period ended June 30, 1997. The improvement in 1998
unit cost is attributable to a 3.8 percent increase in ASM's to 2.4 billion for
the 1998 period and management's efforts to control costs. Before restructuring
charges, the unit cost for the six-month period ended June 30, 1998 is 8.21
cents, or 1.7 percent less than the comparable unit cost for the 1997 period.
Salaries, wages and benefits expense increased by 1.1 percent and 9.2 percent,
respectively, for the three and six-month periods ended June 30, 1998, from the
comparable 1997 periods. These increases are attributable primarily to a greater
average number of employees for the 1998 periods. A restructuring program
initiated by the Company in the first quarter of 1998 is expected to result in a
reduction of the total number of employees.
11
<PAGE>
Aircraft fuel and oil expense decreased by 17.6 percent and 17.8, respectively,
for the three and six-month periods ended June 30, 1998, from the comparable
1997 periods. The improvements were due primarily to a 9.9 cents per gallon
decrease in the average costs per gallon of fuel to 61.3 cents for the second
quarter of 1998 compared to the 1997 quarter and a 17.6 cent decrease to
64.4cents for the first six months of 1998 as compared to the 1997 period.
Aircraft lease expense remained essentially unchanged for the three and
six-month periods ended June 30, 1998, compared to the respective 1997 periods.
In the first quarter of 1998, the Company added two MD-90 aircraft at higher
monthly lease rates than other leased aircraft, but such increased rents were
offset by the return of three leased MD-80 aircraft during the first six months
of 1998. The Company also leased spare aircraft engines on a short-term basis in
the second quarter of 1997.
Aircraft maintenance expense increased by 27.4 percent and 37.8 percent,
respectively, for the three and six-month periods ended June 30, 1998, from the
comparable 1997 periods, despite the fact that in the second quarter of 1997 the
Company incurred an unusually high number of unscheduled engine removals. The
1998 increases are primarily attributable to a significant increase in the
accrual rates for scheduled engine overhauls and increased fleet utilization.
Handling, landing and airport fees expense increased by 0.6 percent and 6.9
percent, respectively, for the three and six-month periods ended June 30, 1998,
compared to the respective 1997 periods. The 1998 increases in expense were
caused by higher associated costs for outside services and the operation of
substantially more track charter flights in the six-month 1998 period than in
the 1997 period.
Advertising, marketing and sales expense decreased by 8.5 percent and 10.1
percent, respectively, for the three and six-month periods ended June 30, 1998,
from the comparable 1997 periods, and were due primarily to decreases in the
Company's expenditures for advertising and promotional items.
Commissions expense decreased by 2.0 percent and 9.6 percent, respectively, for
the three and six-month periods ended June 30, 1998, from the comparable 1997
periods. The decrease was due to reduced scheduled passenger revenues for the
1998 periods, and the October 1997 reduction in the Company's standard travel
agency commission rate to eight percent from ten percent.
Facility leases expense increased by 5.1 percent and 16.5 percent, respectively,
for the three and six-month periods ended June 30, 1998, over the comparable
1997 periods. These increases were attributable primarily to significant rent
increases for airport space in Reno and Las Vegas, Nevada, and Los Angeles,
California.
Insurance expense increased by 4.5 percent for the second quarter of 1998 and
decreased by 11.2 percent for the six-month period ended June 30, 1998, compared
to the respective 1997 periods. Such changes were caused by varying premium
rates for aircraft hull damage and passenger liability insurance, the insured
hull values of the Company's aircraft and the number of revenue passenger miles
flown.
Communications expense decreased by 7.5 percent for the second quarter of 1998,
and increased by 10.6 percent for the six-month period ended June 30, 1998 from
the comparable 1997 periods. The increase for the six-month period of 1998 is
attributable to communications problems the Company encountered upon conversion
to a new computer reservations system which resulted in longer customer service
calls and hold times.
Depreciation expense decreased by 20.7 percent and 18.3 percent, respectively,
for the three and six-month periods ended June 30, 1998, from the comparable
1997 periods. The overall net decrease in depreciation expense is due to the
change in estimate of depreciable lives of flight equipment.
Other operating expense increased by 4.3 percent and 10.1 percent, respectively,
for the three and six-month periods ended June 30, 1998, from the comparable
1997 periods. Such 1998 period-over-period increases are attributable primarily
to significant increases for professional and technical services, property and
sales taxes and costs incurred by the Company for lost and damaged passenger
baggage.
12
<PAGE>
Nonoperating income and expense
Nonoperating income and expense increased for both the three and six-month
periods ended June 30, 1998, compared to the comparable 1997 periods and is
primarily attributable to increases in interest expense related to higher levels
of debt outstanding during the 1998 periods.
Liquidity and capital resources
At June 30, 1998, Reno Air had available cash and cash equivalents and
short-term investments of $21.8 million compared to $29.2 million at December
31, 1997. For the six-month period ended June 30, 1998, net cash provided by
operating activities was $4.2 million, compared to cash used in operating
activities of $4.6 million for the same period in 1997. For the 1998 period, net
cash used by financing and investing activities was $4.6 million and $7.9
million, respectively, principally for the purchases of property and equipment,
repayment of long-term debt and dividends on preferred stock.
At June 30, 1998, the Company's fleet consisted of 32 McDonnell Douglas MD-80
and 90 series aircraft, 27 of which were leased. Three MD-80 aircraft were
available for sale and were not being used in Company operations. One of the
three aircraft held for sale is leased to a third party under a month-to-month
operating lease. Remaining lease terms for the Company's leased aircraft range
from less than one year to approximately 17.5 years. In the first six months of
1998, the Company acquired two MD-90 aircraft under long-term leases and two
MD-80 aircraft under a conditional sale agreement. During that same period the
Company returned three leased MD-80 series aircraft and returned a fourth MD-80
aircraft in July 1998. The Company also plans to return two additional MD-80
series aircraft in 1998 upon expiration of the subject leases. In May 1998, the
Company entered into an agreement with a third party involving the sale of two
MD-80 aircraft. One of these aircraft was sold in July 1998, and the other
aircraft is expected to be sold in September 1998. The Company also leases three
spare aircraft engines.
The Company is in discussions regarding the potential acquisition by the Company
of a spare aircraft engine for its fleet of MD-90 aircraft.
In February 1998, the Company's line of credit with a bank was terminated by the
mutual agreement of the bank and the Company. Currently the Company has no
existing lines of credit but is evaluating replacement facilities with other
financial institutions. Management believes that the Company's current cash
position, together with expected cash flows generated from improved operational
results and the anticipated proceeds from the sales of certain of its aircraft,
will be sufficient to meet the Company's recurring financial obligations and
capital requirements for the next twelve months. Nevertheless, being capital
intensive and highly leveraged, the Company's financial results are very
sensitive to many factors, including the price of fuel, the actions of competing
airlines and overall general and regional economic conditions, any of which can
materially and adversely affect the Company's liquidity and cash flows. The
Company may also seek to raise additional capital through the sale of equity or
debt securities and possibly from the sale of property and equipment. There are
no assurances, however, that the Company will be able to raise additional
capital under commercially effective terms.
The Company has not previously been required to pay maintenance reserves on
eight aircraft leased from an affiliate of Boeing. Unless waivers of certain
financial covenants are obtained or an alternate commercial arrangement is
reached with Boeing, the Company will be required to commence paying maintenance
reserves or pledging collateral on these eight leased aircraft in an amount
aggregating approximately $800,000 per month, retroactive to April 1, 1998. The
Company is maintaining ongoing negotiations with Boeing and believes there is a
substantial likelihood that the Company will obtain a waiver of the requirement
to pay maintenance reserves.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEDURES
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
11 Statement Re: Computation of Income (Loss) Per Share for the three-month
and six-month periods ended June 30, 1998 and 1997
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Reno Air, Inc.
Date: August 14, 1998 By: /s/ W. Stephen Jackson
--------------- ------------------------------------------
W. Stephen Jackson
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
14
Exhibit 11
Statement re: Computation of Income (Loss) per Share
(in thousands, except for share data)
<TABLE>
<CAPTION>
For the six months ended For the three months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) before preferred stock dividends $ (5,936) $ (4,773) $ 1,849 $ 224
Preferred stock dividends (1,614) -- (807) --
----------- ----------- ----------- -----------
Numerator for basic EPS - income (loss) applicable
to common shareholders (7,550) (4,773) 1,042 224
Effect of diluted securities -- -- -- --
----------- ----------- ----------- -----------
Numerator for diluted EPS - income (loss) applicable
to common shareholders $ (7,550) (4,773) 1,042 224
=========== =========== =========== ===========
Denominator:
Denominator for basics EPS - weighted average shares 10,611,431 10,409,315 10,662,191 10,447,698
Effect of dilutive securities -- -- 301,482 319,383
----------- ----------- ----------- -----------
Denominator for diluted EPS - adjusted
weighted average shares 10,611,431 10,409,315 10,963,673 10,767,081
=========== =========== =========== ===========
Basic income (loss) per share $ (0.71) $ (0.46) $ 0.10 $ 0.02
=========== =========== =========== ===========
Diluted income (loss) per share $ (0.71) $ (0.46) $ 0.10 $ 0.02
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 20,811
<SECURITIES> 968
<RECEIVABLES> 32,741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,073
<PP&E> 108,596
<DEPRECIATION> 25,112
<TOTAL-ASSETS> 191,931
<CURRENT-LIABILITIES> 85,836
<BONDS> 58,622
0
1
<COMMON> 107
<OTHER-SE> 28,187
<TOTAL-LIABILITY-AND-EQUITY> 191,931
<SALES> 0
<TOTAL-REVENUES> 98,784
<CGS> 0
<TOTAL-COSTS> 95,724
<OTHER-EXPENSES> (257)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,468
<INCOME-PRETAX> 1,849
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,849
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 1,849
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 20,811
<SECURITIES> 968
<RECEIVABLES> 32,741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,073
<PP&E> 108,596
<DEPRECIATION> 25,112
<TOTAL-ASSETS> 191,931
<CURRENT-LIABILITIES> 85,836
<BONDS> 58,622
0
1
<COMMON> 107
<OTHER-SE> 28,187
<TOTAL-LIABILITY-AND-EQUITY> 191,931
<SALES> 0
<TOTAL-REVENUES> 192,610
<CGS> 0
<TOTAL-COSTS> 196,384
<OTHER-EXPENSES> (814)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,976
<INCOME-PRETAX> (5,936)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,936)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,475
<SECURITIES> 1,379
<RECEIVABLES> 34,385
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,081
<PP&E> 79,426
<DEPRECIATION> 15,955
<TOTAL-ASSETS> 160,218
<CURRENT-LIABILITIES> 85,788
<BONDS> 48,400
0
0
<COMMON> 105
<OTHER-SE> 8,030
<TOTAL-LIABILITY-AND-EQUITY> 160,218
<SALES> 0
<TOTAL-REVENUES> 97,422
<CGS> 0
<TOTAL-COSTS> 96,478
<OTHER-EXPENSES> (447)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,167
<INCOME-PRETAX> 224
<INCOME-TAX> 0
<INCOME-CONTINUING> 224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,475
<SECURITIES> 1,379
<RECEIVABLES> 34,385
<ALLOWANCES> 0
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<PP&E> 79,426
<DEPRECIATION> 15,955
<TOTAL-ASSETS> 160,218
<CURRENT-LIABILITIES> 85,788
<BONDS> 48,400
0
0
<COMMON> 105
<OTHER-SE> 8,030
<TOTAL-LIABILITY-AND-EQUITY> 160,218
<SALES> 0
<TOTAL-REVENUES> 187,106
<CGS> 0
<TOTAL-COSTS> 190,334
<OTHER-EXPENSES> (890)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,435
<INCOME-PRETAX> (4,773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,773)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (4,773)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
