United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to
Comission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes X No ______
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,613,852 shares as of October 31, 1997
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
<TABLE>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1997 1996
--------------------- --------------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 82,208 $ 73,382
Receivables, net of allowance for doubtful accounts
(1997 - $1,403; 1996 - $1,182) 21,065 20,239
Inventories, net 14,175 13,888
Assets held for sale 8,842 14,112
Prepaid expenses and other current assets 20,594 14,672
--------------------- --------------------
Total current assets 146,884 136,293
Property and equipment:
Flight equipment 453,805 381,186
Facilities and ground equipment 53,635 51,874
--------------------- --------------------
507,440 433,060
Accumulated depreciation (240,344) (208,520)
--------------------- --------------------
Property and equipment, net 267,096 224,540
Deposits and other assets 8,836 9,454
--------------------- --------------------
Total assets $ 422,816 $ 370,287
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,186 $ 30,271
Accounts payable 6,151 13,671
Air traffic liabilities 63,638 49,899
Accrued expenses 75,091 64,813
--------------------- --------------------
Total current liabilities 149,066 158,654
Long-term debt, less current maturities 174,656 119,786
Deferred income taxes 28,711 20,216
Other deferred items 10,974 16,887
Commitments and contingencies
Shareholders' equity:
Preferred stock: authorized 10,000,000 shares, none issued -- --
Common stock, without par value:
Authorized 30,000,000 shares; issued 11,798,852 - 1997; 11,799,852 - 1996 38,359 38,341
Treasury stock: 185,000 shares - 1997; 185,000 shares - 1996 (1,760) (1,760)
Additional paid-in-capital 15,513 15,618
Deferred compensation - ESOP (1,600) (2,133)
Retained earnings 8,897 4,678
--------------------- --------------------
59,409 54,744
--------------------- --------------------
Total liabilities and shareholders' equity $ 422,816 $ 370,287
===================== ====================
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
<TABLE>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------------------------------- --------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
<S> <C> <C> <C> <C>
Scheduled service $ 102,024 $ 102,669 $ 271,282 $ 318,788
Charter 95,563 84,213 288,928 240,443
Ground package 5,322 4,744 16,347 17,606
Other 7,881 8,072 20,705 25,391
--------------------------------------- --------------------------------------
Total operating revenues 210,790 199,698 597,262 602,228
Operating expenses:
Salaries, wages and benefits 43,574 44,896 127,981 126,802
Fuel and oil 41,820 45,437 118,890 126,108
Handling, landing and navigation fees 19,906 21,006 54,368 57,353
Depreciation and amortization 16,558 16,468 45,994 47,173
Aircraft maintenance, materials and repairs 15,158 14,508 40,083 42,391
Aircraft rentals 13,474 17,506 41,758 51,902
Crew and other employee travel 10,378 10,442 27,684 27,685
Passenger service 9,977 9,450 25,751 26,364
Commissions 6,964 6,724 19,553 21,688
Ground package cost 4,548 4,074 14,042 14,165
Other selling expenses 4,122 4,294 10,916 14,449
Advertising 3,160 2,339 9,818 8,161
Facility and other rentals 2,200 2,786 6,551 7,214
Disposal of assets -- 4,744 -- 4,744
Other operating expenses 13,625 14,102 39,797 42,602
--------------------------------------- --------------------------------------
Total operating expenses 205,464 218,776 583,186 618,801
--------------------------------------- --------------------------------------
Operating income (loss) 5,326 (19,078) 14,076 (16,573)
Other income (expense):
Interest income 585 208 810 476
Interest expense (2,515) (626) (5,835) (2,803)
Other 178 63 361 255
--------------------------------------- --------------------------------------
Other expenses (1,752) (355) (4,664) (2,072)
--------------------------------------- --------------------------------------
Income (loss) before income taxes 3,574 (19,433) 9,412 (18,645)
Income taxes (credits) 1,828 (6,800) 5,192 (6,080)
--------------------------------------- --------------------------------------
Net income (loss) $ 1,746 $ (12,633) $ 4,220 $ (12,565)
======================================= ======================================
Net income (loss) per share $ 0.15 $ (1.09) $ 0.36 $ (1.09)
======================================= ======================================
Average shares outstanding 11,586,330 11,592,583 11,577,706 11,526,398
======================================= ======================================
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
<TABLE>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
<CAPTION>
1997 1996
--------------------------------------------------
(Unaudited) (Unaudited)
Operating activities:
<S> <C> <C>
Net income (loss) $ 4,220 $ (12,565)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 45,994 47,173
Deferred income taxes 8,495 (6,036)
Other non-cash items (1,653) 24,064
Changes in operating assets and liabilities:
Receivables (826) (3,182)
Inventories (1,103) (1,134)
Assets held for sale 5,206 (13,883)
Prepaid expenses (6,024) 5,745
Accounts payable (7,521) (1,512)
Air traffic liabilities 13,739 (7,339)
Accrued expenses 10,205 (3,988)
----------------------- -----------------------
Net cash provided by operating activities 70,732 27,343
----------------------- -----------------------
Investing activities:
Proceeds from sale of assets 7,959 30,222
Capital expenditures (63,519) (87,597)
Reduction of (additions to) other assets (5,092) 3,664
----------------------- -----------------------
Net cash used in investing activities (60,652) (53,711)
----------------------- -----------------------
Financing activities:
Proceeds from long-term debt 125,000 19,250
Payments on long-term debt (126,254) (12,642)
Repurchase of common stock -- (179)
----------------------- -----------------------
Net cash provided by (used in) financing activities (1,254) 6,429
----------------------- -----------------------
Increase (decrease) in cash and cash equivalents 8,826 (19,939)
Cash and cash equivalents, beginning of period 73,382 92,741
----------------------- -----------------------
Cash and cash equivalents, end of period $ 82,208 $ 72,802
======================= =======================
Supplemental disclosures:
Cash payments (refunds) for:
Interest 5,043 2,679
Income taxes (314) 501
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital expenditures 30,650 14,186
</TABLE>
See accompanying notes.
<PAGE>
Part I - Financial Information
Item I - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of Amtran, Inc. and
subsidiaries (the "Company") have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended September 30,
1997 and 1996 reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows for
such periods. Results for the nine months ended September 30, 1997, are
not necessarily indicative of results to be expected for the full fiscal
year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1996.
2. Accounting Pronouncements Pending Adoption
In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share," which establishes new standards for
the calculation of earnings per share effective for interim and annual
periods ending after December 15, 1997. Subsequent to this effective date,
all prior period earnings per share amounts disclosed in financial
statements are required to be restated to conform to the new standards
under Statement 128. Due to the small number of dilutive common stock
equivalents currently included in earnings per share calculations, the
Company does not currently expect that the impact from restatement of
prior period earnings per share will be material.
3. Debt Transactions
On July 24, 1997, the Company completed two separate financings designed
to lengthen the maturity of the Company's long-term debt and diversify its
credit sources. On that date, the Company (i) sold $100.0 million
principal amount of 10.5% unsecured seven year notes in a private offering
under Rule 144A, and (ii) entered into a new $50.0 million secured
revolving credit facility. The net proceeds of the unsecured notes were
approximately $97.3 million, after application of costs and fees of
issuance. The Company used a portion of the net proceeds to repay, in
full, the Company's prior bank facility and will use the balance of the
proceeds for general corporate purposes, which may include the purchase of
additional aircraft and/or the refinancing of existing leased aircraft.
<PAGE>
Part I -- Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter and Nine Months Ended September 30, 1997, Versus Quarter and Nine Months
Ended September 30, 1996
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "jet" operations includes the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
--------------- --------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Departures Jet 10,567 12,475 (1,908) 29,840 37,809 (7,969)
Departures J31(a) 3,166 - 3,166 6,103 - 6,103
--------------- --------------- --------------- --------------- --------------- ----------------
Total Departures (b) 13,733 12,475 1,258 35,943 37,809 (1,866)
--------------- --------------- --------------- --------------- --------------- ----------------
Block Hours Jet 35,683 38,249 (2,566) 98,226 111,289 (13,063)
Block Hours J31 3,328 - 3,328 6,457 - 6,457
--------------- --------------- --------------- --------------- --------------- ----------------
Total Block Hours (c) 39,011 38,249 762 104,683 111,289 (6,606)
--------------- --------------- --------------- --------------- --------------- ----------------
RPMs Jet (000s) 2,634,314 2,687,088 (52,774) 7,043,685 7,480,380 (436,695)
RPMs J31 (000s) 6,185 - 6,185 12,231 - 12,231
--------------- --------------- --------------- --------------- --------------- ----------------
Total RPMs (000s) (d) 2,640,499 2,687,088 (46,589) 7,055,916 7,480,380 (424,464)
--------------- --------------- --------------- --------------- --------------- ----------------
ASMs Jet (000s) 3,630,553 3,764,278 (133,725) 9,710,839 10,706,622 (995,783)
ASMs J31 (000s) 10,364 - 10,364 20,220 - 20,220
--------------- --------------- --------------- --------------- --------------- ----------------
Total ASMs (000s) (e) 3,640,917 3,764,278 (123,361) 9,731,059 10,706,622 (975,563)
--------------- --------------- --------------- --------------- --------------- ----------------
Load Factor Jet 72.56 71.38 1.18 72.53 69.87 2.66
Load Factor J31 59.68 - N/M 60.49 - N/M
--------------- --------------- --------------- --------------- --------------- ----------------
Total Load Factor (f) 72.52 71.38 1.14 72.51 69.87 2.64
--------------- --------------- --------------- --------------- --------------- ----------------
Pax Enplaned Jet 1,324,282 1,459,897 (135,615) 4,043,535 4,659,399 (615,864)
Pax Enplaned J31 32,985 - 32,985 64,558 - 64,558
--------------- --------------- --------------- --------------- --------------- ----------------
Total Pax Enplaned (g) 1,357,267 1,459,897 (102,630) 4,108,093 4,659,399 (551,306)
--------------- --------------- --------------- --------------- --------------- ----------------
Revenue $(000s) 210,790 199,698 11,092 597,262 602,228 (4,966)
RASM in cents (h) 5.79 5.31 0.48 6.14 5.62 0.52
CASM in cents (i) 5.64 5.81 (0.17) 5.99 5.78 0.21
Yield in cents (j) 7.98 7.43 0.55 8.46 8.05 0.41
</TABLE>
(a) Effective April 1, 1997, the Company began operating 19-seat Jetstream 31
propeller aircraft between Chicago-Midway and the cities of Indianapolis,
Milwaukee, Des Moines, Dayton and Grand Rapids under an agreement with Chicago
Express.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(e) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(f) Passenger load factor is the percentage derived by dividing revenue
passenger miles by available seat miles. Passenger load factor is relevant to
the evaluation of scheduled service because incremental passengers normally
provide incremental revenue and profitability when seats are sold individually.
In the case of tour operator and U.S. military business units, load factor is
less relevant because an entire aircraft is sold by the Company instead of
individual seats. Since both costs and revenues are largely fixed for these
types of flights, changes in load factor have less impact on business unit
profitability. Consolidated load factors for the Company are shown in the
preceding table for industry comparability, but load factors for individual
charter businesses are omitted from subsequent tables.
(g)Revenue passengers enplaned are the number of revenue passengers who occupied
seats on the Company's flights. This measure is also referred to as "passengers
boarded."
(h) Revenue per available seat mile (expressed as cents per ASM) is total
operating revenue divided by total ASMs. This measure is also referred to as
"RASM." RASM measures the Company's ability to maximize revenues from the sale
of total available seat capacity. In the case of scheduled service, RASM is a
measure of the combined impact of load factor and yield (see (j) below for the
definition of yield). In the case of tour operator and U.S. military, RASM is a
measure of the Company's ability to maximize revenues from the sale of an entire
aircraft. In all cases, RASM adjusts for the differing seat capacities on the
Company's three fleet types.
(i) Cost per available seat mile (expressed as cents per ASM) is total operating
expense divided by total ASMs. This measure is also referred to as "CASM". CASM
measures the Company's effectiveness in minimizing the operating cost of
producing total seat capacity.
(j) Revenue per revenue passenger mile (expressed as cents per RPM) is total
operating revenue divided by total RPMs. This measure is also referred to as
"yield." Yield is relevant to the evaluation of scheduled service because yield
is a measure of the Company's ability to optimize the price paid by customers
purchasing individual seats. Yield is less relevant to the tour operator and
U.S. military business units because the entire aircraft is sold at one time for
one price. Consolidated yields are shown in the preceding table for industry
comparability, but yields for individual charter businesses are omitted from
subsequent tables.
N/M - Not meaningful.
Overview
Amtran is a leading provider of charter airline services and, on a targeted
basis, scheduled airline services to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, American Trans Air, Inc. ("ATA"), has
been operating for 24 years and is the eleventh largest U.S. airline in terms of
1996 revenue passenger miles. ATA provides charter service throughout the world
to independent tour operators, specialty charter customers and the U.S.
military. Scheduled services are provided through nonstop and connecting flights
from the gateway cities of Chicago-Midway, Indianapolis and Milwaukee to popular
vacation destinations such as Hawaii, Las Vegas, Florida, California, Mexico and
the Caribbean.
An analysis by the Company in 1996 of the profitability of its scheduled service
and charter service business units disclosed that a significant number of
scheduled service markets then being served by the Company had become
increasingly unprofitable. The Company believes that several key factors had
contributed to the deterioration of profitability of scheduled service
operations in late 1995 and the first half of 1996, including (i) a significant
increase in competition from larger carriers in the Company's scheduled service
markets; (ii) the negative impact on low-fare carriers, such as the Company,
from unfavorable media coverage of the ValuJet accident in Florida in May 1996,
and, to a lesser extent, the Company's own decompression incident on the
following day; (iii) a significant increase in fuel costs; and (iv) a federal
excise tax on fuel beginning in the fourth quarter of 1995.
In August 1996, the Company announced a significant restructuring of scheduled
service operations. More than one-third of scheduled service capacity operated
during the summer of 1996 was eliminated. The Company completely eliminated its
Boston and intra-Florida scheduled service operations and also exited
completely, or reduced in frequency, certain markets served from Chicago-Midway,
Indianapolis and Milwaukee. In conjunction with this restructuring, the Company
completed a 15% reduction in its employee and contract work forces by the end of
1996.
In addition, the Company re-evaluated the relative economic performance of its
three aircraft fleet types in the context of the restructured markets to be
served by the Company and optimized the type and number of aircraft through a
fleet restructuring which was completed by the end of 1996. The Company reduced
the number of Boeing 757-200 aircraft from 11 units at the end of 1995 to seven
units at the end of 1996. The remaining seven Boeing 757-200 aircraft are all
powered by Rolls-Royce engines, with all Pratt-&-Whitney-powered aircraft having
been eliminated from the fleet. The Company committed four Boeing 757-200s to
the U.S. military business unit and placed the remaining three Boeing 757-200s
in mission-specific uses in scheduled service.
As a result of the 1996 restructuring, the Company believes that it has
established a better economic platform from which to pursue its long-term
strategies of: (i) maintaining its low-cost advantage versus competitors; (ii)
strengthening its leading position in the charter business; (iii) selectively
participating in scheduled service; and (iv) capitalizing on selected growth
opportunities in areas of the Company's core competency.
In the first nine months of 1997, the results of operations for the Company
showed significant improvement as compared to the first nine months of 1996. For
the three months ended September 30, 1997, the Company earned $5.3 million in
operating income, as compared to an operating loss of $19.1 million in the same
quarter of 1996, and recognized net income of $1.7 million in the 1997 third
quarter, as compared to a net loss of $12.6 million in the third quarter of
1996. The third quarter 1997 net income per share was 15 cents, as compared to a
net loss per share of $1.09 in the same period of 1996. For the nine months
ended September 30, 1997, the Company earned $14.1 million in operating income,
as compared to an operating loss of $16.6 million in the nine months ended
September 30, 1996; and the Company earned $4.2 million in net income, or 36
cents per share, in the nine months ended September 30, 1997, as compared to a
net loss of $12.6 million, or $1.09 per share, in the comparable period of 1996.
Operating results for 1997 were significantly impacted by the accelerated
recognition in the second quarter of $2.0 million in prepaid compensation
expense (17 cents per share) due to the resignation of its former President and
Chief Executive Officer in May 1997, for which the Company received no tax
benefit.
The Company's operating revenues increased 5.6% to $210.8 million in the third
quarter of 1997 as compared to $199.7 million in the third quarter of 1996.
Third quarter 1997 operating revenues were 5.79 cents per ASM, an increase of
9.0% from the third quarter 1996 of 5.31 cents per ASM. Between these same
periods, ASMs decreased 3.3% to 3.641 billion from 3.764 billion, RPMs decreased
1.7% to 2.640 billion from 2.687 billion, and passenger load factor increased
1.1 points to 72.5% as compared to 71.4%. Yield in the third quarter of 1997
increased 7.4% to 7.98 cents per RPM, as compared to 7.43 cents per RPM in the
third quarter of 1996. Total passengers boarded decreased 7.0% to 1,357,267 in
the third quarter of 1997 as compared to 1,459,897 in the third quarter of 1996,
and total departures increased 10.1% to 13,733 from 12,475 in the same
comparable periods.
The Company's operating revenues decreased 0.8% to $597.3 million in the nine
months ended September 30, 1997, as compared to $602.2 million in the nine
months ended September 30, 1996. Operating revenues per ASM increased 9.3% to
6.14 cents in the nine months ended September 30, 1997, as compared to 5.62
cents in the same period of 1996. ASMs decreased 9.1% to 9.731 billion from
10.707 billion, RPMs decreased 5.7% to 7.056 billion from 7.480 billion, and
passenger load factor increased 2.6 points to 72.5% as compared to 69.9%. Yield
in the nine months ended September 30, 1997, increased 5.1% to 8.46 cents per
RPM, as compared to 8.05 cents per RPM in the same period of 1996. Total
passengers boarded decreased 11.8% to 4,108,093 in the nine months ended
September 30, 1997, as compared to 4,659,399 in the same period of 1996, while
total departures decreased 4.9% to 35,943 from 37,809 in the same comparable
periods.
Operating expenses decreased 6.1% to $205.5 million in the third quarter of 1997
as compared to $218.8 million in the third quarter of 1996, and operating
expenses decreased 5.8% to $583.2 million in the nine months ended September 30,
1997, as compared to $618.8 million in the same period of 1996. Cost per ASM
decreased 2.9% to 5.64 cents in the third quarter of 1997 as compared to 5.81
cents in the third quarter of 1996, while cost per ASM increased 3.6% to 5.99
cents in the nine months ended September 30, 1997, as compared to 5.78 cents in
the same period of 1996.
Results of Operations in Cents per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents Per ASM Cents Per ASM
Three Months Ended Sept 30, Nine Months Ended Sept 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Total operating revenues 5.79 5.31 6.14 5.62
Operating expenses:
Salaries, wages and benefits 1.20 1.19 1.32 1.18
Fuel and oil 1.15 1.21 1.22 1.18
Handling, landing and navigation fees 0.55 0.56 0.56 0.54
Depreciation and amortization 0.45 0.44 0.47 0.44
Aircraft maintenance, materials and repairs 0.42 0.39 0.41 0.40
Aircraft rentals 0.37 0.46 0.43 0.48
Crew and other employee travel 0.29 0.28 0.29 0.26
Passenger service 0.27 0.25 0.26 0.25
Commissions 0.19 0.18 0.20 0.20
Ground package cost 0.12 0.11 0.14 0.13
Other selling expenses 0.11 0.11 0.11 0.13
Advertising 0.09 0.06 0.10 0.08
Facility and other rentals 0.06 0.07 0.07 0.07
Disposal of assets 0.00 0.13 0.00 0.04
Other operating expenses 0.37 0.37 0.41 0.40
Total operating expenses 5.64 5.81 5.99 5.78
Operating income (loss) 0.15 (0.50) 0.15 (0.16)
ASMs (in thousands) 3,640,917 3,764,278 9,731,059 10,706,622
</TABLE>
Operating Revenues
Total operating revenues for the third quarter of 1997 increased 5.6% to $210.8
million from $199.7 million in the third quarter of 1996. This increase was due
to an $11.4 million increase in charter revenues and a $0.6 million increase in
ground package revenues, partially offset by a $0.7 million decrease in
scheduled service revenues and a $0.2 million decrease in other revenues.
Total operating revenues for the nine months ended September 30, 1997 decreased
0.8% to $597.3 million from $602.2 million in the nine months ended September
30, 1996. This decrease was due to a $47.5 million decrease in scheduled service
revenues, a $1.2 million decrease in ground package revenues and a $4.7 million
decrease in other revenues, partially offset by a $48.5 million increase in
charter revenues.
Operating revenues for the third quarter of 1997 were 5.79 cents per ASM, an
increase of 9.0% from the third quarter of 1996 of 5.31 cents per ASM. Operating
revenues for the nine months ended September 30, 1997, were 6.14 cents per ASM,
an increase of 9.3% from the nine months ended September 30, 1996, of 5.62 cents
per ASM.
Charter Revenues. The Company's charter revenues are derived principally from
independent tour operators, specialty charter customers and from the United
States military. The Company's charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Total charter revenues increased 13.5% to $95.6 million in the third
quarter of 1997, as compared to $84.2 million in the third quarter of 1996, and
total charter revenues increased 20.2% to $288.9 million in the first nine
months of 1997, as compared to $240.4 million in the same period of 1996.
Charter revenue growth, prior to scheduled service restructuring in late 1996,
had been constrained by the dedication of a significant portion of the Company's
fleet to scheduled service expansion, including the utilization of two Lockheed
L-1011 aircraft for scheduled services to Ireland and Northern Ireland between
May and September 1996. The Company's restructuring strategy, as reflected in
the Company's results of operations during the first nine months of 1997,
included a renewed emphasis on charter revenue sources. The Company believes
that tour operator, specialty charter and military operations are businesses
where the Company's experience and size provide meaningful competitive
advantage. Charter revenues produced 45.3% of total operating revenues in the
third quarter of 1997, as compared to 42.2% in the same quarter of 1996, while
charter revenues represented 48.4% of total operating revenues in the first nine
months of 1997, as compared to 39.9% in the comparable period of 1996.
Tour Operator Programs. The following table sets forth, for the periods
indicated, certain key operating and financial data for the tour operator flying
operations of the Company.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
<S> <C> <C> <C> <C> <C> <C>
Departures (b) 2,710 2,726 (16) 8,712 8,970 (258)
Block Hours (c) 10,425 10,817 (392) 30,268 31,589 (1,321)
RPMs (000s) (d) 1,063,118 1,091,555 (28,437) 2,803,584 2,887,817 (84,233)
ASMs (000s) (e) 1,271,372 1,321,559 (50,187) 3,390,689 3,573,421 (182,732)
Pax Enplaned (g) 416,964 434,506 (17,542) 1,535,560 1,517,405 18,155
Revenue $(000s) 64,107 65,690 (1,583) 184,913 185,026 (115)
RASM in cents (h) 5.04 4.97 0.07 5.45 5.18 0.27
</TABLE>
See footnotes (b) through (h) on pages 6-7.
Charter revenues derived from independent tour operators decreased 2.4% to $64.1
million in the third quarter of 1997, as compared to $65.7 million in the third
quarter of 1996. Tour operator RPMs decreased 2.7% to 1.063 billion in the third
quarter of 1997 from 1.092 billion in the comparable 1996 period, while ASMs
decreased 3.9% to 1.271 billion from 1.322 billion. Tour operator RASM increased
1.4% to 5.04 cents from 4.97 cents between the same periods. Tour operator
passengers boarded decreased 4.0% to 416,964 in the third quarter of 1997 as
compared to 434,506 in the comparable quarter of 1996; tour operator departures
decreased 0.6% to 2,710 in the third quarter of 1997 as compared to 2,726 in the
third quarter of 1996; and tour operator block hours decreased 3.6% to 10,425 in
the third quarter of 1997 as compared to 10,817 in the third quarter of 1996.
Charter revenues derived from independent tour operators decreased 0.1% to
$184.9 million in the nine months ended September 30, 1997, as compared to
$185.0 million in the nine months ended September 30, 1996. Tour operator RPMs
decreased 2.9% to 2.804 billion in the nine months ended September 30, 1997,
from 2.888 billion in the comparable 1996 period, while ASMs decreased 5.1% to
3.391 billion from 3.573 billion. Tour operator RASM increased 5.2% to 5.45
cents from 5.18 cents between the same periods. Tour operator passengers boarded
increased 1.2% to 1,535,560 in the nine months ended September 30, 1997, as
compared to 1,517,405 in the comparable period of 1996; tour operator departures
decreased 2.9% to 8,712 in the nine months ended September 30, 1997, as compared
to 8,970 in the nine months ended September 30, 1996; and tour operator block
hours decreased 4.2% to 30,268 in the nine months ended September 30, 1997, as
compared to 31,589 in the nine months ended September 30, 1996.
The Company operates in two principal components of the tour operator business,
known as "track charter" and "specialty charter." The larger track charter
business component is generally comprised of low frequency but repetitive
domestic and international flights between city pairs, which support high
passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts.
The Company believes that although price is the principal competitive criterion
for its tour operator programs, product quality, reputation for reliability and
delivery of services which are customized to specific needs have become
increasingly important to the buyer of this product. Accordingly, as the Company
continues to emphasize the growth and profitability of this business unit, it
will seek to maintain its low-cost pricing advantage, while differentiating
itself from competitors through the delivery of customized services and the
maintenance of consistent and dependable operations. In this manner, the Company
believes that it will produce significant value for its tour operator partners
by delivering an attractively priced product which exceeds the leisure
traveler's expectations.
Specialty charter is a product which is especially designed to meet the unique
requirements of the customer and is a business characterized by lower frequency
of operation and by greater variation in city pairs served than the track
charter business. Specialty charter includes such diverse contracts as flying
university alumni to football games, transporting political candidates on
campaign trips and moving NASA space shuttle ground crews to alternate landing
sites. The Company also operates an increasing number of trips in
all-first-class configuration for certain corporate and high-end leisure
clients. Although lower utilization of crews and aircraft and infrequent service
to specialty destinations often result in higher average operating costs, the
Company has determined that the revenue premium earned by meeting special
customer requirements usually more than compensates for these increased costs.
In addition, specialty charter programs sometimes permit the Company to increase
overall aircraft utilization by providing filler traffic during periods of low
demand from other programs such as track charter. The Company believes that it
is competitively advantaged to attract this type of business due to the size and
geographic dispersion of its fleet, which reduces costly ferry time for aircraft
and crews and thus permits more competitive pricing. The diversity of the
Company's three fleet types also permits the Company to meet a customer's
particular needs by choosing the aircraft type which provides the most
economical solution for those requirements.
Military Programs. The following table sets forth, for the periods indicated,
certain key operating and financial data for the military flight operations of
the Company.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
<S> <C> <C> <C> <C> <C> <C>
Departures (b) 1,190 840 350 3,917 2,218 1,699
Block Hours (c) 4,475 2,831 1,644 15,071 7,989 7,082
RPMs (000s) (d) 252,031 147,712 104,319 848,575 440,521 408,054
ASMs (000s) (e) 520,180 322,306 197,874 1,750,832 988,499 762,333
Pax Enplaned (g) 62,102 46,609 15,493 218,945 129,121 89,824
Revenue $(000s) 31,456 18,523 12,933 104,016 55,416 48,600
RASM in cents (h) 6.05 5.75 0.30 5.94 5.61 0.33
</TABLE>
See footnotes (b) through (h) on pages 6-7.
Charter revenues derived from the U.S. military increased 70.3% to $31.5 million
in the third quarter of 1997 as compared to $18.5 million in the third quarter
of 1996. U.S. military RPMs increased 70.6% to 252.0 million in the third
quarter of 1997 from 147.7 million in the comparable 1996 period, while ASMs
increased 61.4% to 520.2 million from 322.3 million. Military RASM increased
5.2% to 6.05 cents from 5.75 cents between the same time periods. U.S. military
passengers boarded increased 33.2% to 62,102 in the third quarter of 1997 as
compared to 46,609 in the comparable quarter of 1996; U.S. military departures
increased 41.7% to 1,190 in the third quarter of 1997 as compared to 840 in the
third quarter of 1996; and U.S. military block hours increased 58.1% to 4,475
in the third quarter of 1997 as compared to 2,831 in the third quarter of 1996.
Charter revenues derived from the U.S. military increased 87.7% to $104.0
million in the nine months ended September 30, 1997, as compared to $55.4
million in the nine months ended September 30, 1996. U.S. military RPMs
increased 92.6% to 848.6 million in the nine months ended September 30, 1997,
from 440.5 million in the comparable 1996 period, while ASMs increased 77.1% to
1.751 billion from 988.5 million. Military RASM increased 5.9% to 5.94 cents
from 5.61 cents between the same time periods. U.S. military passengers boarded
increased 69.6% to 218,945 in the nine months ended September 30, 1997, as
compared to 129,121 in the comparable period of 1996; U.S. military departures
increased 76.6% to 3,917 in the nine months ended September 30, 1997, as
compared to 2,218 in the nine months ended September 30, 1996; and U.S. military
block hours increased 88.6% to 15,071 in the first nine months of 1997 as
compared to 7,989 in the first nine months of 1996.
The Company participates in two related military programs known as "fixed award"
and "short-term expansion." Pursuant to the U.S. military's fixed award system,
each participating airline is awarded certain "mobilization value points" based
upon the number and type of aircraft made available by that airline for military
flying. In order to increase the number of points awarded, in 1992 the Company
entered into a contractor teaming arrangement with four other cargo and
passenger airlines serving the U.S. military. Under this arrangement, the team
has a greater likelihood of receiving fixed award business and, to the extent
that the award includes passenger transport, the opportunity for the Company to
operate this flying is enhanced, since the Company represents a significant
portion of the total passenger transport capacity of the team. As part of its
participation in this teaming arrangement, the Company pays a commission to the
team, which passes that revenue on to all team members based upon their
mobilization points. All airlines participating in the fixed award business
contract annually with the U.S. military from October 1 to the following
September 30. For each contract year, reimbursement rates are determined for
aircraft types and mission categories based upon operating cost data submitted
by the participating airlines. These contracts generally are not subject to
renegotiation once they become effective.
Short-term expansion business is awarded by the U.S. military first on a pro
rata basis to those carriers who have been awarded fixed contract business, and
then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The U.S. military business grew at a faster year-over-year rate than any other
business unit of the Company during the first nine months of 1997. In the third
quarter of 1997, the Company's U.S. military revenues represented 14.9% of total
operating revenues, as compared to 9.3% in the third quarter of 1996. In the
first nine months of 1997, the Company's U.S. military revenues represented
17.4% of total operating revenues, as compared to 9.2% in the same period of
1996. As a result of the restructuring of scheduled service and the
rationalization of the Company's fleet in 1996, the Company committed four of
its seven remaining Boeing 757-200 aircraft to the U.S. military for the year
ending September 30, 1997. As a result of an analysis undertaken during 1996,
the Company was also successful in more accurately documenting the actual costs
associated with military flying and was therefore able to obtain rate increases
for the contract year ending September 30, 1997. The Company has obtained
additional rate increases for the contract year ending September 30, 1998.
Because military flying is generally less seasonal than leisure travel programs,
the Company believes that a larger U.S. military business operation will tend to
have a stabilizing impact on seasonal earnings fluctuations. The Company is also
contractually protected from changes in fuel prices. The Company further
believes that its fleet of aircraft is competitively advantaged to serving the
transportation needs of the U.S. military. Although foreign bases have been
reduced in troop size, the U.S. military still desires to maintain its service
frequency to those bases and therefore often has a preference for smaller-
capacity, long-range aircraft such as the Company's Boeing 757-200. Furthermore,
in 1993, the Company became the first North American carrier to receive FAA
certification to operate Boeing 757-200 aircraft with 180-minute Extended Twin
Engine Operation (ETOPS), which permits these aircraft to operate missions over
water which can be up to three hours from the nearest alternate airport. The
Company believes that this certification, which applies to all of the Company's
Boeing 757-200 fleet, provides a competitive advantage in receiving awards of
certain military flying. Despite these advantages, the Company believes that
increases in U.S. military flying will moderate in future periods.
Scheduled Service Revenues. The following table sets forth, for the periods in-
dicated, certain key operating and financial data for the scheduled service
flying operations of the Company. Data shown for "jet" operations includes the
combined operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200
aircraft in scheduled service.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
--------------- --------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Departures Jet 6,581 8,779 (2,198) 17,035 26,052 (9,017)
Departures J31(a) 3,166 - 3,166 6,103 - 6,103
--------------- --------------- --------------- --------------- --------------- ----------------
Total Departures (b) 9,747 8,779 968 23,138 26,052 (2,914)
--------------- --------------- --------------- --------------- --------------- ----------------
Block Hours Jet 20,571 24,220 (3,649) 52,443 70,011 (17,568)
Block Hours J31 3,328 - 3,328 6,457 - 6,457
--------------- --------------- --------------- --------------- --------------- ----------------
Total Block Hours (c) 23,899 24,220 (321) 58,900 70,011 (11,111)
--------------- --------------- --------------- --------------- --------------- ----------------
RPMs Jet (000s) 1,310,890 1,422,075 (111,185) 3,375,501 4,037,517 (662,016)
RPMs J31 (000s) 6,185 - 6,185 12,231 - 12,231
--------------- --------------- --------------- --------------- --------------- ----------------
Total RPMs (000s) (d) 1,317,075 1,422,075 (105,000) 3,387,732 4,037,517 (649,785)
--------------- --------------- --------------- --------------- --------------- ----------------
ASMs Jet (000s) 1,821,904 2,085,409 (263,505) 4,535,656 5,968,282 (1,432,626)
ASMs J31 (000s) 10,364 - 10,364 20,220 - 20,220
--------------- --------------- --------------- --------------- --------------- ----------------
Total ASMs (000s) (e) 1,832,268 2,085,409 (253,141) 4,555,876 5,968,282 (1,412,406)
--------------- --------------- --------------- --------------- --------------- ----------------
Load Factor Jet 71.95 68.19 3.76 74.42 67.65 6.77
Load Factor J31 59.68 - N/M 60.49 - N/M
--------------- --------------- --------------- --------------- --------------- ----------------
Total Load Factor (f) 71.88 68.19 3.69 74.36 67.65 6.71
--------------- --------------- --------------- --------------- --------------- ----------------
Pax Enplaned Jet 838,623 958,127 (119,504) 2,276,910 2,926,260 (649,350)
Pax Enplaned J31 32,985 - 32,985 64,558 - 64,558
--------------- --------------- --------------- --------------- --------------- ----------------
Total Pax Enplaned (g) 871,608 958,127 (86,519) 2,341,468 2,926,260 (584,792)
--------------- --------------- --------------- --------------- --------------- ----------------
Revenues $(000s) 102,024 102,669 (645) 271,282 318,788 (47,506)
RASM in cents (h) 5.57 4.92 0.65 5.95 5.34 0.61
Yield in cents (j) 7.75 7.22 0.53 8.01 7.90 0.11
Rev per segment $ (k) 117.05 107.16 9.89 115.86 108.94 6.92
</TABLE>
See footnotes (a) through (j) on pages 6-7. N/M - Not Meaningful.
(k) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
Scheduled service revenues in the third quarter of 1997 decreased 0.7% to $102.0
million from $102.7 million in the third quarter of 1996. Scheduled service
revenues comprised 48.4% of total operating revenues in the third quarter of
1997, as compared to 51.4% of operating revenues in the same period of the prior
year. Scheduled service RPMs decreased 7.4% to 1.317 billion from 1.422 billion,
while ASMs decreased 12.1% to 1.832 billion from 2.085 billion, resulting in an
increase of 3.7 points in passenger load factor to 71.9% in the third quarter of
1997 from 68.2% in the third quarter of 1996. Scheduled service yield in the
third quarter of 1997 increased 7.3% to 7.75 cents from 7.22 cents in the same
period of 1996, while RASM increased 13.2% to 5.57 cents from 4.92 cents between
the same comparable periods. Scheduled service departures in the third quarter
of 1997 increased 11.0% to 9,747 from 8,779 in the third quarter of 1996; block
hours decreased 1.3% to 23,899 in the third quarter of 1997 from 24,220 in the
same period of 1996; and passengers boarded decreased 9.0% over such period to
871,608, as compared to 958,127.
Scheduled service revenues in the nine months ended September 30, 1997,
decreased 14.9% to $271.3 million from $318.8 million in the nine months ended
September 30, 1996. Scheduled service revenues comprised 45.4% of total
operating revenues in the nine months ended September 30, 1997, as compared to
52.9% of operating revenues in the same period of the prior year. Scheduled
service RPMs decreased 16.1% to 3.388 billion from 4.038 billion, while ASMs
decreased 23.7% to 4.556 billion from 5.968 billion, resulting in an increase of
6.7 points in passenger load factor to 74.4% in the nine months ended September
30, 1997, from 67.7% in the nine months ended September 30, 1996. Scheduled
service yield in the nine months ended September 30, 1997, increased 1.4% to
8.01 cents from 7.90 cents in the same period of 1996, while RASM increased
11.4% to 5.95 cents from 5.34 cents between the same comparable periods.
Scheduled service departures in the nine months ended September 30, 1997,
decreased 11.2% to 23,138 from 26,052 in the nine months ended September 30,
1996; block hours decreased 15.9% to 58,900 in the nine months ended September
30, 1997, from 70,011 in the same period of 1996; and passengers boarded
decreased 20.0% between periods to 2,341,468, as compared to 2,926,260.
The Company added scheduled service capacity during the second and third
quarters of 1996 which primarily included expanded direct and connecting
frequencies through the Company's four major gateway cities of Chicago-Midway,
Indianapolis, Milwaukee and Boston to west coast and Florida markets already
being served. New seasonal scheduled service was also introduced in the second
and third quarters of 1996 from New York to Shannon and Dublin, Ireland, and
Belfast, Northern Ireland, and from the midwest to Seattle. New year-round
service also commenced to San Diego, California, in the second quarter of 1996.
The introduction of this new capacity coincided closely, however, with the May
11, 1996 ValuJet accident in Florida and the resulting persistent negative media
attention directed toward airline safety, and especially toward low-fare
airlines. On May 12, the Company experienced a cabin decompression incident on
one of its own flights which, although it resulted in no serious injury to crew
or passengers, nevertheless attracted additional negative media attention,
occurring as it did one day after the ValuJet tragedy. As a consequence, during
the second and third quarters of 1996, the Company estimates that it lost
significant scheduled service revenues from both canceled reservations and
reservations which were never received.
In association with the 1996 restructuring of the Company's scheduled service
operations, a significant reduction in scheduled service was announced on August
26, 1996. Between September 4 and December 2, 1996, more than one-third of the
scheduled service capacity operating during the 1996 summer months was
eliminated. All scheduled service flights to and from Boston were eliminated by
December 2, 1996, including service to West Palm Beach, San Juan, Montego Bay,
St. Petersburg, Las Vegas, Orlando and Ft. Lauderdale. Intra-Florida services
connecting the cities of Ft. Lauderdale, Orlando, Miami, Sarasota, St.
Petersburg and Ft. Myers were eliminated as of October 27, 1996. Other selected
services from Indianapolis, Chicago-Midway and Milwaukee to Florida and to
west-coast destinations were also reduced or eliminated by October 27, 1996. The
Company's scheduled service between Chicago-Midway and the cities of
Indianapolis and Milwaukee was replaced with a code share agreement with Chicago
Express on October 27, 1996 as discussed further below. In association with this
service reduction, all scheduled service ceased at Seattle, Grand Cayman, West
Palm Beach, Montego Bay, Miami and San Diego.
On October 27, 1996 the Company also implemented a commuter code share
partnership with Chicago Express to provide incremental connecting traffic
between Indianapolis, Milwaukee and other smaller midwestern cities into the
Company's Chicago-Midway connections with certain Florida and west-coast
destinations. This partnership was replaced with a contractual agreement with
Chicago Express effective April 1, 1997, under which the Company now operates
19-seat Jetstream 31 propeller aircraft between its Chicago-Midway hub and the
cities of Indianapolis, Milwaukee, Des Moines, Dayton and Grand Rapids. The
Company has subsequently announced the expansion of this agreement to include
the cities of Lansing, Michigan and Madison, Wisconsin effective in the fourth
quarter of 1997.
After this scheduled service reduction, the Company's early 1997 core scheduled
service flying included flights between Chicago-Midway and five Florida cities,
Las Vegas, Phoenix, Los Angeles and San Francisco; Indianapolis to four Florida
cities, Las Vegas and Cancun; Milwaukee to three Florida cities; Hawaii service
to San Francisco, Los Angeles and Phoenix; and service between Orlando and San
Juan and Nassau.
As a result of the restructuring of scheduled service operations in the manner
described above, the scheduled service component of the Company's operations was
profitable in the first three quarters of 1997. Profitability was achieved
through a combination of significantly higher load factors and RASM between
periods, even though total revenues in scheduled service declined between years.
The Company believes that profitability was enhanced in this business unit
through the selective elimination of flights which had previously produced
below-average load factors and yield, and that the elimination of intra-Florida
flying in particular was a prominent factor in this improvement. Profitability
was further enhanced in certain scheduled service markets through the
reassignment of aircraft fleet types to provide better balance within markets
between revenues, costs, and aircraft operational capabilities. Yield in the
third quarter of 1997 increased 7.3% to 7.75 cents as compared to 7.22 cents in
the same period of 1996, and yield in the first nine months of 1997 increased
1.4% to 8.01 cents from 7.90 cents in the same period of 1996. Load factor
growth was 5.4% in the third quarter of 1997 as compared to the third quarter of
1996, and 9.9% between the nine months ended September 30, 1997 and the
comparable period of 1996. Due to the high proportion of fixed versus variable
costs associated with operating a scheduled flight, the positive profit
contribution of increased load factor was more significant than the effect of
higher average yields between periods.
Scheduled service profitability improvement in 1997 was accomplished in spite of
what would normally have been a demand-dampening effect from the reintroduction
of the U.S. departure and 10% federal excise taxes on tickets on March 7, 1997,
which had expired on January 1, 1997. In August 1997, federal legislation was
enacted which indefinitely extends these taxes. The U.S. departure tax for
international destinations was increased from $6 to $12 per passenger, and a new
U.S. arrivals tax of $12 per passenger was added for passengers arriving into
the United States from international cities. Effective October 1, 1997, the new
tax law also changes the method of computation of the federal excise tax from a
simple 10% of ticket sale value to a declining percentage of ticket sale value
(ranging from 9.0% to 7.5%), plus an increasing inflation-indexed charge per
passenger segment flown (ranging from $1 to $3). The Company does not currently
believe that the change in federal excise tax computation has placed it at
either a significant pricing advantage or disadvantage as compared to the
previous computation method. The Company does believe that certain of its
low-fare competitors may be disadvantaged by the new computation method,
however, due to their lower average segment fares and higher average number of
intermediate stops as compared to the Company in similar markets.
The Company continues to evaluate the profit and loss performance of its
scheduled service business, and the Company may change the level of scheduled
service operations from time to time. The Company began new service in June
1997, between New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis and St. Petersburg, and also added several
frequencies between the midwest and the west coast for the summer season.
New York service to Chicago-Midway and St. Petersburg has been retained for the
1997-98 winter season.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair Travel Club subsidiary exclusively to club members and
through its ATA Vacations subsidiary to the general public. Ground package
revenues increased 12.8% to $5.3 million in the third quarter of 1997 as
compared to $4.7 million in the third quarter of 1996. For the nine months ended
September 30, 1997, ground package revenues decreased 6.8% to $16.4 million from
$17.6 million in the similar 1996 period.
The Company's Ambassadair Travel Club offers hundreds of tour-guide-accompanied
vacation packages to its approximately 34,000 individual and family members
annually. In the third quarter of 1997, total packages sold decreased 4.1% over
the third quarter of 1996, and for the nine months ended September 30, 1997, the
Club recorded a 1.5% increase in packages sold over the same 1996 period. During
the third quarter of 1997, the average revenue earned for each ground package
sold increased 35.6% as compared to the third quarter of 1996, while for the
nine months ended September 30, 1997, average package revenue increased 10.1% as
compared to the same period in 1996.
ATA Vacations offers numerous ground package combinations to the general public
for use on the Company's scheduled service flights throughout the United States.
These packages are marketed through travel agents as well as directly by the
Company's own reservations centers. During the third quarter of 1997, the number
of ground packages sold increased 1.7% as compared to the third quarter of 1996,
while for the nine months ended September 30, 1997, the number of ground
packages sold decreased 2.6% as compared to the same 1996 period. Reductions in
the number of ground packages sold between the nine month periods was mainly due
to the reduction of the Company's scheduled service operations between years.
During the third quarter of 1997, the average revenue earned for each ground
package sold decreased 5.2% as compared to the third quarter of 1996, and for
the nine months ended September 30, 1997, the average package price decreased by
19.0% as compared to the same 1996 period.
The average revenue earned by the Company for a ground package sale is a
function of the mix of vacation destinations served, the quality and types of
ground accommodations offered and general competitive conditions with other air
carriers offering similar products in the Company's markets, all of which
factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues of
affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of ATA. Other revenues
decreased 2.5% to $7.9 million in the third quarter of 1997 as compared to $8.1
million in the third quarter of 1996, primarily due to a reduction in revenues
earned between periods by providing substitute service to other airlines,
partially offset by increases in other miscellaneous revenue categories. A
substitute service agreement typically provides for the Company to operate
aircraft with its crews on routes designated by the customer airline to carry
the passengers of that airline for a limited period of time. Other revenues
decreased 18.5% to $20.7 million in the nine months ended September 30, 1997, as
compared to $25.4 million in the comparable 1996 period, for primarily the same
reasons.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related state and federal taxes. Salaries,
wages and benefits expense for the third quarter of 1997 decreased 2.9% to $43.6
million from $44.9 million in the third quarter of 1996. Salaries, wages and
benefits expense for the nine months ended September 30, 1997, increased 0.9% to
$128.0 million from $126.8 million for the nine months ended September 30, 1996.
Approximately $2.2 million of the increase between the nine month periods ending
September 30, 1997 and 1996, was attributable to changes made in the third
quarter of 1996 in senior executive positions and associated senior executive
compensation plans. Special compensation totaling $3.0 million was prepaid to
the Company's former President and Chief Executive Officer during the fourth
quarter of 1996 and the first quarter of 1997, which was being amortized to
expense over the anticipated two year term of his employment ending August 1998.
Due to his resignation in late May 1997, a one-time charge to expense for the
unamortized $2.0 million prepaid balance was made in the second quarter of 1997
to salaries, wages and benefits, whereas no such charge to expense was incurred
in the prior year.
The cost of salaries and wages earned by cockpit crew members and related flight
operations support staff in the third quarter of 1997 was approximately $1.1
million higher than in the third quarter of 1996; for the nine months ended
September 30, 1997, cockpit crew salaries and wages were approximately $4.1
million higher than for the same period in 1996. These cost increases were
incurred even though jet block hours flown by cockpit crew members declined by
6.7% between the third quarter of 1997 and the third quarter of 1996, and
declined by 11.7% in the nine months ended September 30, 1997, as compared to
the same period in 1996. This increase in the unit cost of cockpit crews was
attributable to the following significant factors: (i) the implementation of the
cockpit crew collective bargaining agreement in August 1996, under which a 7.5%
rate increase and more restrictive work rules became effective; (ii) crew
utilization for U.S. military flying is significantly lower than for scheduled
service and tour operator flying, and U.S. military block hours increased as a
percentage of total block hours to 15.3% in the first nine months of 1997, as
compared to 7.2% in the first nine months of 1996; (iii) cockpit crew shortages
during the first three quarters of 1997 resulted in the need to increase premium
pay to cockpit crew members in order to adequately staff the spring and summer
flying schedule; and (iv) cockpit crew productivity was further reduced by the
fleet restructuring completed during 1996, which increased the percentage of jet
block hours flown by three-crew-member aircraft (Lockheed L-1011 and Boeing
727-200) to 78.8% in the first nine months of 1997, as compared to 69.6% in the
comparable period of 1996. The Company estimates that, as a result of these
factors, a cockpit crew cost per ASM increase equivalent to approximately $1.5
million was incurred in the third quarter of 1997 as compared to the third
quarter of 1996, and approximately $7.1 million was incurred for the nine months
ended September 30, 1997, as compared to the same period of 1996.
The salaries, wages and benefits cost for other employee groups declined by $1.9
million in the third quarter of 1997 as compared to the third quarter of 1996,
and by $5.2 million in the nine months ended September 30, 1997, as compared to
the same period in 1996. These costs declined partially as a result of the
decline in equivalent full-time employment between periods, as well as due to
the restructuring of certain employee benefit plans effective January 1, 1997.
Total equivalent full-time employment declined by 11.4% in the third quarter of
1997 as compared to the third quarter of 1996, and declined by 12.7% for the
nine months ended September 30, 1997, as compared to the same period in 1996.
In addition to planned staff reductions completed during the fourth quarter of
1996, the change in salaries, wages and benefits expense for other employee
groups was significantly affected by reduced employment in Maintenance and
Engineering, which accounted for a $0.8 million reduction in expense between the
third quarters of 1997 and 1996, and a $1.9 million reduction in expense in the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996. Employment of Maintenance and Engineering staff, such as
airframe and powerplant mechanics and engineers, was constrained in 1997 by
broad shortages in related labor markets attributable to very strong current
demand for these skills within the airline industry. The Company compensated for
some of these shortages in 1997 by acquiring these skills through third party
contract labor vendors. The cost of maintenance contract labor (which is a
component of Aircraft Maintenance, Materials and Repairs) increased by $1.2
million in the third quarter of 1997 as compared to the third quarter of 1996,
and increased by $2.4 million in the nine months ended September 30, 1997
as compared to the same period in 1996.
Salaries, wages and benefits expense for the third quarter of 1997 was 1.20
cents per ASM, an increase of 0.8% from the third quarter of 1996 of 1.19 cents
per ASM. Salaries, wages and benefits expense for the nine months ended
September 30, 1997, was 1.32 cents per ASM, an increase of 11.9% from the nine
months ended September 30, 1996, of 1.18 cents per ASM.
Fuel and Oil. Fuel and oil expense for the third quarter of 1997 decreased 7.9%
to $41.8 million from $45.4 million in the third quarter of 1996. During the
third quarter of 1997, as compared to the same quarter in 1996, the Company
consumed 3.5% fewer gallons of jet fuel for flying operations, which resulted in
a reduction in fuel expense of approximately $1.8 million between periods. The
reduction in jet fuel consumed was due to the reduced number of jet block hours
of flying operations between periods. The Company flew 35,683 jet block hours in
the third quarter of 1997, as compared to 38,249 jet block hours in the third
quarter of 1996, a decrease of 6.7% between quarters. The relatively lower
reduction in gallons consumed between periods, as compared to the relatively
higher reduction in block hours, is due to the change in mix of fleet block
hours between periods since each fleet type has a different rate of fuel burn
per block hour. During the third quarter of 1997, the Company's average cost per
gallon of fuel consumed decreased by 5.7% as compared to the same quarter in
1996, which resulted in a reduction in fuel and oil expense of approximately
$2.3 million. Also during the third quarter of 1997, the Company incurred
approximately $0.3 million in fuel and oil expense to operate its Jetstream 31
aircraft under its agreement with Chicago Express, which agreement was not in
effect in the third quarter of 1996.
Fuel and oil expense for the nine months ended September 30, 1997, decreased
5.7% to $118.9 million from $126.1 million in the nine months ended September
30, 1996. During the nine months ended September 30, 1997, as compared to the
same period in 1996, the Company consumed 7.4% fewer gallons of jet fuel for
flying operations, which resulted in a reduction in fuel expense of
approximately $12.1 million between periods. The reduction in jet fuel consumed
was due to the reduced number of block hours of flying operations between
periods. The Company flew 98,226 jet block hours in the nine months ended
September 30, 1997, as compared to 111,289 jet block hours in the nine months
ended September 30, 1996, a decrease of 11.7% between periods. During the nine
months ended September 30, 1997, the Company's average cost per gallon of fuel
consumed increased by 2.1% as compared to the same period in 1996, which
resulted in an increase in fuel and oil expense of approximately $2.6 million
between years. Virtually all of this jet fuel price increase was experienced
during the first quarter of 1997, as compared to the first quarter of 1996. Also
during the nine months ended September 30, 1997, the Company incurred
approximately $0.6 million in fuel and oil expense to operate the Jetstream 31
aircraft under its agreement with Chicago Express, which agreement was not in
effect in the nine months ended September 30, 1996.
Fuel and oil expense for the third quarter of 1997 was 1.15 cents per ASM, a
decrease of 5.0% from the third quarter of 1996 of 1.21 cents per ASM. Fuel and
oil expense for the nine months ended September 30, 1997, was 1.22 cents per
ASM, an increase of 3.4% from the nine months ended September 30, 1996, of 1.18
cents per ASM. The change in the cost per ASM of fuel and oil expense for both
sets of comparative periods was partly due to the change in mix of jet block
hours flown from the more-fuel-efficient twin-engine Boeing 757-200 aircraft to
the less-fuel-efficient three-engine Boeing 727-200 and Lockheed L-1011
aircraft. In the third quarter of 1997, 20.6% of total jet block hours were
flown by the Boeing 757-200 fleet, as compared to 28.5% in the third quarter of
1996. In the nine months ended September 30, 1997, 21.2% of total jet block
hours were flown by the Boeing 757-200 fleet, as compared to 30.4% in the
comparable period of 1996. Jet fuel prices were also a significant factor
between periods in cost per ASM changes. First quarter 1997 jet fuel price
increases as compared to the same quarter of 1996 contributed to the increase in
cost per ASM for fuel and oil for the nine months ended September 30, 1997,
whereas jet fuel price decreases in the third quarter of 1997 as compared to the
same period of 1996 were significant enough to overcome fleet block hour mix
changes and to result in a cost per ASM reduction between periods.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees decreased by 5.2% to $19.9 million in the
third quarter of 1997, as compared to $21.0 million in the third quarter of
1996. During the 1997 third quarter, the average cost per system jet departure
for third-party aircraft handling increased 9.6% as compared to the third
quarter of 1996, and the average cost of landing fees per system jet departure
increased 7.4% between the same periods. Due to the restructuring of scheduled
service in the fourth quarter of 1996, the absolute number of system-wide jet
departures between the third quarters of 1997 and 1996 declined by 15.3% to
10,567 from 12,475, which resulted in approximately $2.9 million in
volume-related handling and landing expense reductions between periods. This
volume-related decline was partially offset, however, by an approximately $1.5
million price-related handling and landing expense increase between periods
attributable to a change in jet departure mix. Because each airport served by
the Company has a different schedule of fees, including variable prices for
different aircraft types, average handling and landing fee costs are a function
of the mix of airports served and the fleet composition of departing aircraft.
On average, handling and landing fee costs for Lockheed L-1011 wide-body
aircraft are higher than for narrow-body aircraft, and average costs at foreign
airports are higher than at many U.S. domestic airports. As a result of the
reduction in the Company's narrow-body Boeing 757-200 fleet and the shift of
revenue production towards charter operations, the Company's jet departures in
the third quarter of 1997 included proportionately more international and
wide-body operations than in the third quarter of 1996. In the 1997 third
quarter, 22.0% of the Company's jet departures were operated with wide-body
aircraft, as compared to 18.3% in the 1996 third quarter, and 25.3% of the
Company's third quarter 1997 jet departures were from international locations,
as compared to 21.5% in the same period of the prior year.
Handling, landing and navigation fees decreased by 5.2% to $54.4 million in the
nine months ended September 30, 1997, as compared to $57.4 million in the same
period of 1996. During the nine months ended September 30, 1997, the average
cost per system jet departure for third-party aircraft handling increased 8.3%
as compared to the same period of 1996, and the average cost of landing fees per
system jet departure increased 6.0% between the same periods. The absolute
number of system-wide jet departures between the nine months ended September 30,
1997 and 1996, declined by 21.1% to 29,840 from 37,809, which resulted in
approximately $8.6 million in volume-related handling and landing expense
reductions between periods. This volume-related decline was partially offset,
however, by an approximately $3.3 million price-related handling and landing
expense increase between periods attributable to a change in jet departure mix.
In the nine months ended September 30, 1997, 22.3% of the Company's jet
departures were operated with wide-body aircraft, as compared to 19.3% in the
comparable period of 1996, and 24.4% of the Company's jet departures in the nine
months ended September 30, 1997, were from international locations, as compared
to 18.4% in the same period of the prior year. During the nine months ended
September 30, 1997, an increase of approximately $1.3 million in air navigation
fees and de-icing costs was also incurred as compared to the same period in
1996.
The cost per ASM for handling, landing and navigation fees decreased 1.8% to
0.55 cents in the third quarter of 1997, from 0.56 cents in the third quarter of
1996. The cost per ASM for handling, landing and navigation fees increased 3.7%
to 0.56 cents in the nine months ended September 30, 1997, as compared to 0.54
cents in the comparable period of 1996.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned Lockheed L-1011 airframes and engines, and rotable
parts for all fleet types, together with other property and equipment owned by
the Company. Amortization is the periodic expensing of capitalized airframe and
engine overhauls for all fleet types on a units-of-production basis using
aircraft flight hours and cycles (landings)as the units of measure.
Depreciation and amortization expense was unchanged at $16.5 million for the
third quarters of 1997 and 1996, and decreased 2.5% to $46.0 million in the nine
months ended September 30, 1997, as compared to $47.2 million in the comparable
period of 1996.
Depreciation expense attributable to owned airframes and engines decreased $0.3
million in the third quarter of 1997 as compared to the 1996 third quarter, and
decreased $0.8 million in the nine months ended September 30, 1997, as compared
to the nine months ended September 30, 1996. The Company reduced its
year-over-year investment in engines and airframe improvements due to the
restructuring of the Boeing 757-200 fleet in the fourth quarter of 1996. As a
result of the net reduction of four Boeing 757-200 aircraft at the end of 1996
as compared to the end of 1995, and the complete elimination of
Pratt-&-Whitney-powered Boeing 757-200s from the fleet, some airframe and
leasehold improvements were disposed of, and all spare Pratt & Whitney engines
and rotable parts were reclassified as Assets Held for Sale in the accompanying
balance sheet. None of these assets therefore gave rise to depreciation expense
in the first three quarters of 1997. The Company did increase its investment in
computer equipment and furniture and fixtures between years; placed the west bay
of the renovated Midway Hangar No. 2 into service in mid-1996; and incurred
increased debt issue costs between years relating to debt facility and aircraft
lease negotiations completed primarily in the fourth quarter of 1996. These
changes, together with increased costs pertaining to remaining rotable
components and the provision for obsolescence of aircraft parts inventories,
resulted in an increase in depreciation expense of $0.4 million in the nine
months ended September 30, 1997 as compared to the same period of 1996.
Amortization of capitalized engine and airframe overhauls increased $0.8 million
in the third quarter of 1997 as compared to the same period of the prior year
after including the offsetting amortization associated with manufacturers'
credits, and decreased by $0.4 million for the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996. Changes to the
cost of overhaul amortization were partly due to the reduction of total block
hours and cycles flown between comparable periods. This expense was also
favorably impacted by the late-1996 restructuring of the Boeing 757-200 fleet
and, in particular, the disposal of all Pratt-&-Whitney-powered Boeing 757-200
aircraft. All unamortized net book values of engine and airframe overhauls
pertaining to the Pratt-&-Whitney-powered aircraft were charged to the cost of
the disposal of these assets in the third quarter of 1996. The Company's seven
remaining Rolls-Royce-powered Boeing 757-200 aircraft, four of which were
delivered new from the manufacturer in late 1995 and late 1996, are not
presently generating any engine and airframe overhaul expense since the initial
post-delivery overhauls for the Rolls-Royce-powered Boeing 757-200s are not yet
due under the Company's maintenance programs. The net reduction in engine and
airframe amortization expense in the third quarter of 1997 pertaining to changes
in the Company's Boeing 757-200 fleet was approximately $1.5 million as compared
to the third quarter of 1996, while the reduction in expense pertaining to the
nine months ended September 30, 1997, as compared to the same period of 1996 was
approximately $4.2 million. Engine and airframe amortization for the Company's
fleet of Boeing 727-200 aircraft increased by approximately $0.7 million between
the third quarters of 1997 and 1996, and by approximately $1.9 million between
the nine month periods ended September 30, 1997 and 1996, due to the ongoing
expansion of this fleet type and due to the completion of new overhauls for
Boeing 727-200 aircraft. The increase between years in engine and airframe
amortization expense for the Company's Lockheed L-1011 fleet was approximately
$1.1 million and $1.2 million, respectively, for the third quarters of 1997 and
1996, and the nine months ended September 30, 1997 and 1996.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs decreased by $0.4 million
between the third quarters of 1997 and 1996, and between the nine months ended
September 30, 1997 and 1996. When these engine failures can be economically
repaired, the related repairs are charged to aircraft maintenance, materials and
repairs expense.
Depreciation and amortization cost per ASM increased 2.3% to 0.45 cents in the
third quarter of 1997, as compared to 0.44 cents in the third quarter of 1996.
Depreciation and amortization expense per ASM increased 6.8% to 0.47 cents in
the nine months ended September 30, 1997, as compared to 0.44 cents in the nine
months ended September 30, 1996.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for base and line maintenance activities, and other
non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense increased 4.8% to $15.2
million in the third quarter of 1997, as compared to $14.5 million in the third
quarter of 1996, while it decreased 5.4% to $40.1 million in the nine months
ended September 30, 1997, from $42.4 million in the same period of 1996. The
cost per ASM increased by 7.7% to 0.42 cents in the third quarter of 1997 as
compared to 0.39 cents in the third quarter of the prior year, while the cost
per ASM increased 2.5% to 0.41 cents in the nine months ended September 30,
1997, from 0.40 cents in the same period of 1996.
Repair costs were $1.7 million lower in the third quarter of 1997 as compared to
the same quarter of the prior year, and $4.0 million lower for the nine months
ended September 30, 1997, as compared to the same period of 1996. This was due
to a reduction in both the total number of repairs performed and the average
unit cost of repairs between periods. Negotiations were completed in early 1997
with several repair vendors which resulted in reduced unit charges for some
repair activity. Additionally, the Company established a maintenance disposition
board in late 1996 which carefully reviews significant repair decisions in light
of anticipated fleet requirements and the available quantity of serviceable
components in stock.
The cost of expendable parts consumed increased $1.1 million in the third
quarter of 1997 as compared to the third quarter of 1996, but increased only
$0.5 million between the nine-month periods ended September 30, 1997 and 1996.
The quarterly variations in the cost of expendable parts consumed are closely
related to seasonal differences in the Company's heavy maintenance check
programs for its fleet, which were scheduled more effectively into lower periods
of aircraft utilization in 1997 than they were in 1996, when aircraft
availability was more constrained due to several late deliveries of Boeing
727-200 aircraft.
The cost of maintenance contract labor increased by $1.2 million in the third
quarter of 1997 as compared to the third quarter of 1996, and increased by $2.4
million for the nine months ended September 30, 1997, as compared to the same
period in 1996. As explained above under "Salaries, Wages and Benefits", the
Company increased its utilization of maintenance contract labor in 1997 to
compensate for some shortages of experienced airframe and powerplant mechanics
and engineers.
The cost of parts loans and exchanges was unchanged between the third quarters
of 1997 and 1996, but declined by $1.3 million in the nine months ended
September 30, 1997, as compared to the same period of 1996, due to improved
internal procedures to limit the need for such loans and exchanges.
All of the Company's aircraft under operating leases have certain return
conditions applicable to the maintenance status of airframes and engines as of
the termination of the lease. The Company accrues estimated return condition
costs as a component of maintenance, materials and repairs expense based upon
the actual condition of the aircraft as each lease termination date approaches,
and based upon the Company's ability to estimate the expected cost of conforming
to these conditions. Return condition expenses accrued in the third quarter of
1997 were $0.3 million more than in the same quarter of 1996, and in the nine
months ended September 30, 1997, were $0.8 million higher than for the nine
months ended September 30, 1996. This increase was primarily due to changes in
the mix of aircraft leases and associated return conditions which became
effective between years.
Aircraft Rentals. Aircraft rentals expense for the third quarter of 1997
decreased 22.9% to $13.5 million from $17.5 million in the third quarter of
1996, and aircraft rentals expense in the nine months ended September 30, 1997,
decreased 19.5% to $41.8 million from $51.9 million in the same period of 1996.
These decreases were primarily attributable to the restructuring of the
Company's Boeing 757-200 fleet in the fourth quarter of 1996, as a result of
which the number of Boeing 757-200 aircraft operated by the Company was reduced
by four units. The reduction in the size of the Boeing 757-200 fleet was an
integral component of the Company's 1996 restructuring of scheduled service,
based upon profitability analysis which disclosed that, for some uses of the
Boeing 757-200 in the Company's markets, it was more profitable to substitute
other aircraft with lower ownership costs. Aircraft rentals expense declined by
$4.4 million between the third quarters of 1997 and 1996, and declined by $12.8
million between the nine month periods ended September 30, 1997 and 1996, as a
result of the Boeing 757-200 fleet restructuring.
Four additional Boeing 727-200 aircraft were acquired and financed by
sale/leasebacks at various times during the first three quarters of 1996, while
one Boeing 727-200 aircraft previously on an operating lease was purchased
during the second quarter of 1996. The net increase in leased Boeing 727-200
aircraft between years added approximately $0.7 million in aircraft rentals
expense in the third quarter of 1997, as compared to the third quarter of 1996,
and added approximately $2.7 million in aircraft rentals expense during the nine
months ended September 30, 1997, as compared to the same period of 1996.
Aircraft rentals expense for the third quarter of 1997 was 0.37 cents per ASM, a
decrease of 19.6% from 0.46 cents per ASM in the third quarter of 1996. Aircraft
rentals expense for the nine months ended September 30, 1997, was 0.43 cents, a
decrease of 10.4% from 0.48 cents for the same period of 1996. The
period-to-period decrease in the size of the Boeing 757-200 fleet was a
significant factor in these changes since the rental cost of ASMs produced by
this fleet type is significantly higher than for the Company's other aircraft.
With the reduction in the higher-ownership-cost Boeing 757-200 aircraft in late
1996, the Company anticipates that the cost per ASM produced by its leased
aircraft fleet will continue to be lower in future quarters.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crew members that is incurred to position crews away from their bases to
operate all Company flights throughout the world. The cost of air transportation
is generally more significant for the charter business unit since these flights
often operate between cities in which Company crews are not normally based and
may involve extensive international positioning of crews. Hotel and per diem
expenses are incurred for both scheduled and charter services, although higher
per diem and hotel rates generally apply to international assignments.
The cost of crew and other employee travel was unchanged at $10.4 million for
the third quarters of 1997 and 1996, and was also unchanged at $27.7 million for
the nine months ended September 30, 1997 and 1996. During the first nine months
of 1997, the Company's average full-time-equivalent cockpit and cabin crew
employment was 13.5% lower as compared to the prior year, even though jet block
hours decreased by only 11.7% between periods. Although the Company did
experience some crew shortages in the first quarter of 1996 associated with
severe winter weather, shortages of both cockpit and cabin crews were more
chronic in the first nine months of 1997, and per-crew-member travel costs were
consequently higher since crews spent greater amounts of time away from their
bases to operate the Company's schedule. In addition, average crew travel costs
for the U.S. military and specialty charter businesses are much higher than for
track charter and scheduled service since these flights more often operate away
from crew bases.
The cost per ASM for crew and other employee travel increased 3.6% to 0.29 cents
in the third quarter of 1997, as compared to 0.28 cents in the third quarter of
1996, and increased 11.5% to 0.29 cents in the nine months ended September 30,
1997, from 0.26 cents in the same period of 1996.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For the third quarters of
1997 and 1996, catering represented 83.5% and 83.8%, respectively, of total
passenger service expense, while for the nine-month periods ended September 30,
1997 and 1996, catering represented 82.8% and 80.3%, respectively, of total
passenger service expense.
The cost of passenger service increased 5.3% in the third quarter of 1997 to
$10.0 million, as compared to $9.5 million in the third quarter of 1996. This
increase between quarters was primarily due to an increase of approximately 6.7%
in the average cost to cater each passenger. Catering unit cost increased due to
a change in the mix of passengers boarded from fewer scheduled service toward
more charter and military passengers; the latter passengers, particularly
military, are the most expensive passengers to cater in the Company's business
mix. Although the number of jet passengers boarded decreased by 9.3% to
1,324,282 in the third quarter of 1997 as compared to 1,459,897 in the third
quarter of 1996, military and charter passengers accounted for 36.2% of
passengers boarded in the third quarter of 1997, as compared to 33.0% of
passengers boarded in the third quarter of 1996.
The cost of passenger service decreased 2.3% to $25.8 million in the nine months
ended September 30, 1997, from $26.4 million in the same period of 1996. This
reduction was partly caused by fewer system-wide jet passengers boarded, which
declined by 13.2% to 4,043,535 in the nine months ended September 30, 1997, as
compared to 4,659,399 in the same period of 1996. However, the average cost to
cater each passenger boarded increased 10.7% between the nine-month periods
ended September 30, 1997 and 1996, due to the change in the mix of passengers
boarded. For the nine months ended September 30, 1997 military and charter
passengers accounted for 43.4% of passengers boarded, as compared to 35.3% of
passengers boarded in the nine months ended September 30, 1996.
The cost per ASM of passenger service increased 8.0% to 0.27 cents in the third
quarter of 1997, as compared to 0.25 cents in the third quarter of 1996, and
increased 4.0% to 0.26 cents in the nine months ended September 30, 1997, from
0.25 cents in the same period of 1996.
Commissions. The Company incurs significant commissions expense in association
with the sale by travel agents of single seats on scheduled service. In
addition, the Company pays commissions to secure some tour operator and military
business. Commissions expense increased 4.5% to $7.0 million in the third
quarter of 1997, as compared to $6.7 million in the third quarter of 1996, and
decreased 9.7% to $19.6 million in the nine months ended September 30, 1997 from
$21.7 million in the same period of 1996. Scheduled service commissions expense
declined by $0.4 million and $3.6 million, respectively, between the third
quarters and the nine-month periods ended September 30, 1997 and 1996, both as a
result of the decline in scheduled service revenues earned between periods, and
as a result of non-recurring commission charges in the third quarter of 1996
(associated with scheduled service restructuring and resulting flight
cancellations) for involuntary refunds of tickets issued by travel agencies for
which related commissions were not refunded to the Company. Military and tour
operator commissions expense increased by $0.7 million and $1.8 million,
respectively, between the same sets of comparative periods, due to the increased
level of commissionable revenues earned in those business units in 1997 as
compared to 1996.
The cost per ASM of commissions expense increased by 5.6% to 0.19 cents in the
third quarter of 1997 as compared to 0.18 cents in the third quarter of 1996,
whereas the cost per ASM was unchanged at 0.20 cents for the nine month periods
ended September 30, 1997 and 1996.
Ground Package Cost. Ground package cost includes the expenses incurred by the
Company for hotels, car rental companies, cruise lines and similar vendors to
provide ground and cruise accommodations to Ambassadair and ATA Vacations
customers. Ground package cost increased 9.8% to $4.5 million in the third
quarter of 1997, as compared to $4.1 million in the third quarter of 1996, and
ground package cost decreased 1.4% to $14.0 million in the nine months ended
September 30, 1997, as compared to $14.2 million in the same period of 1996. The
increase in cost between the third quarters of 1997 and 1996 was due to an
increase in the average cost of ground packages sold, since the number of ground
packages sold was essentially unchanged between periods. The decrease in expense
between the nine months ended September 30, 1997 and 1996 was attributable to
nominal changes in both the average unit cost and number of ground packages
sold.
Ground package cost per ASM increased by 9.1% to 0.12 cents in the third quarter
of 1997, as compared to 0.11 cents in the third quarter of 1996, and increased
by 7.7% to 0.14 cents in the nine months ended September 30, 1997, from 0.13
cents in the same period of 1996. The higher cost per ASM in 1997 resulted from
a greater decline in total ASMs as compared to the decline in ground package
sales volumes between periods.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems (CRSs) to reserve single-seat sales for
scheduled service; (ii) credit card discount expenses incurred when selling
single seats and ground packages to customers using credit cards for payment;
(iii) costs of providing toll-free telephone services, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses that are primarily
associated with single-seat sales. Other selling expenses decreased 4.7% to $4.1
million in the third quarter of 1997, as compared to $4.3 million in the third
quarter of 1996, and other selling expenses decreased 24.3% to $10.9 million in
the nine months ended September 30, 1997, as compared to $14.4 million in the
same period of 1996.
Credit card discount expense decreased $0.1 million and $0.7 million,
respectively, in the third quarter of 1997 and the nine months ended September
30, 1997, as compared to the same periods in 1996, as a result of the reduction
in size of the scheduled service business unit of the Company and the consequent
reduction in total credit card sales, and due to a reduction in the blended
credit card discount rate between years. CRS fees decreased $0.2 million and
$1.8 million, respectively, in the third quarter of 1997 and the nine months
ended September 30, 1997, as compared to the same periods in 1996, due to less
bookings made for the smaller scheduled service business unit between periods.
Toll-free telephone usage increased $0.1 million in the third quarter of 1997 as
compared to the third quarter of 1996, but declined by $0.9 million between the
nine months ended September 30, 1997 and 1996 due to less usage and lower rates.
The reductions in other selling expenses noted above for the third quarter of
1997 as compared to the third quarter of 1996 were less pronounced than for the
comparative nine month periods ended September 30, 1997 and 1996 partly because
the difference in scheduled service capacity between the comparative third
quarters was less significant than between the nine month periods, since the
1996 reduction in scheduled service capacity began in late August of that year.
Additionally, scheduled service business unit reservations activity in September
1997 was significantly above expectations, which increased costs for both toll
free telephone charges and CRS fees.
Other selling cost per ASM was unchanged at 0.11 cents in the third quarters of
1997 and 1996, while other selling cost per ASM declined 15.4% to 0.11 cents in
the nine months ended September 30, 1997, as compared to 0.13 cents in the same
period of 1996.
Advertising. Advertising expense increased 39.1% to $3.2 million in the third
quarter of 1997, as compared to $2.3 million in the same period of 1996, and
increased 19.5% to $9.8 million in the nine months ended September 30, 1997, as
compared to $8.2 million in the nine months ended September 30, 1996. The
Company incurs advertising costs primarily to support single-seat scheduled
service sales and the sale of air-and-ground packages. Advertising support for
these lines of business was increased in 1997 consistent with the Company's
overall strategy to enhance RASM in these businesses through increases in load
factor and yield. Additionally, advertising was comparatively low in the third
quarter of 1996 due to the restructuring of numerous scheduled service markets
which was initiated in the latter part of that quarter.
The cost per ASM of advertising increased 50.0% to 0.09 cents in the third
quarter of 1997, as compared to 0.06 cents in the third quarter of 1996, and the
cost per ASM increased 25.0% to 0.10 cents in the nine months ended September
30, 1997, as compared to 0.08 cents in the same period of 1996. These increases
in cost per ASM resulted from higher absolute advertising dollars being spent in
a period of declining ASMs, but was nevertheless an integral part of the
Company's successful strategy in 1997 to enhance profitability in the scheduled
service business.
Facility and Other Rentals. Facility and other rentals includes the cost of all
ground facilities that are leased by the Company such as airport space, regional
sales offices and general offices. The cost of facility and other rentals
decreased 21.4% to $2.2 million in the third quarter of 1997, as compared to
$2.8 million in the third quarter of 1996, and decreased 8.3% to $6.6 million
for the nine months ended September 30, 1997 as compared to $7.2 million in the
nine months ended September 30, 1996. There were some changes in specific
facilities utilized by the Company between periods, such as the addition of
hangar space at Chicago-Midway and the elimination of airport facilities at
Boston. The Company reduced total facility expense between years through the
sublease of excess airport facilities to third parties. The cost per ASM for
facility and other rentals decreased 14.3% to 0.06 cents in the third quarter of
1997 as compared to 0.07 cents in the third quarter of 1996, while the cost per
ASM was unchanged at 0.07 cents for the nine months ended September 30, 1997 and
1996.
Other Operating Expenses. Other operating expenses decreased 3.5% to $13.6
million in the third quarter of 1997, as compared to $14.1 million in the third
quarter of 1996, and other operating expenses decreased 6.6% to $39.8 million in
the nine months ended September 30, 1997, as compared to $42.6 million in the
same period in 1996. Other operating expenses which experienced significant
increases between both sets of comparative periods included the cost of the
Chicago Express commuter agreement effective April 1, 1997 and the cost of
property and sales taxes. Other operating expenses which experienced significant
decreases between both sets of comparative periods included the cost of
insurance and the cost of professional consulting fees. Many other categories of
other operating expenses were lower in 1997 than in 1996 primarily due to the
smaller size of the airline between periods.
Other operating cost per ASM was unchanged at 0.37 cents for the third quarters
of 1997 and 1996, and increased 2.5% to 0.41 cents in the nine months ended
September 30, 1997, as compared to 0.40 cents in the same period of 1996.
Interest Income and Expense. Interest expense in the third quarter of 1997
increased 316.7% to $2.5 million, as compared to $0.6 million in the third
quarter of 1996, and interest expense increased 107.1% to $5.8 million in the
nine months ended September 30, 1997, as compared to $2.8 million in the same
period of 1996. The increase in interest expense between both sets of
comparative periods was primarily due to the change in the Company's capital
structure which resulted from the two financings completed on July 24, 1997, at
which time the Company (i) sold $100.0 million principal amount of 10.5%
unsecured seven year notes, and (ii) entered into a new $50.0 million secured
revolving credit facility, thereby replacing the former secured revolving credit
facility of $122.0 million.
The capital structure of the Company prior to completing these new financings
provided for outstanding borrowings under the former credit facility of $122.0
million to be routinely adjusted to meet the expected cash flow requirements of
the Company, thereby minimizing the level of borrowings on which interest would
be paid. Under the new capital structure of the Company, the level of borrowings
outstanding under the 10.5% notes will remain fixed at $100.0 million without
regard to actual cash requirements at any point in time. During the third
quarter of 1997, the weighted average borrowings outstanding were approximately
$119.4 million, as compared to $79.9 million in the third quarter of 1996.
During the nine months ended September 30, 1997, the weighted average borrowings
outstanding were approximately $99.4 million, as compared to $75.1 million in
the same period of 1996.
The weighted average effective interest rate applicable to the Company's
outstanding borrowings in the third quarter of 1997 was 9.16%, as compared to
8.11% in the third quarter of 1996, and was 8.42% for the nine months ended
September 30, 1997 as compared to 8.13% in the same period of 1996. The increase
in the weighted average effective interest rates between both sets of compar-
ative periods was primarily due to the 10.5% effective interest rate applicable
to the $100.0 million in unsecured notes issued on July 24, 1997, which was
higher than the average effective interest rates of 7.84% and 8.92%, respect-
ively, applicable to borrowings under the former credit facility during the
third quarter and nine months ended September 30, 1996.
In order to minimize the interest expense impact of the $100.0 million 10.5%
unsecured notes, the Company invested excess cash balances and thereby earned
$0.6 million in interest income in the third quarter of 1997, an increase of
200.0% over interest income of $0.2 million earned in the third quarter of 1996.
The Company earned $0.8 million in interest income in the nine months ended
September 30, 1997, an increase of 60.0% over $0.5 million earned in the same
period of 1996.
Income Tax Expense
In the third quarter of 1997, the Company recorded $1.8 million in income tax
expense applicable to the income before income taxes for that period, while
income tax credits of $6.8 million were recognized pertaining to the loss before
taxes for the third quarter of 1996. For the nine months ended September 30,
1997, income tax expense of $5.2 million was recorded, as compared to a tax
credit of $6.1 million in the same period of 1996. The effective tax rate
applicable to the third quarter of 1997 was 51.1%, while the effective tax rate
applicable to the third quarter of 1996 was 35.0%. The effective tax rates for
the nine months ended September 30, 1997 and 1996 were 55.2% and 32.6%,
respectively.
Income tax expense and credits in both sets of comparative periods were
significantly affected by the non-deductibility for federal income tax purposes
of 50% of amounts paid for crew per diem. The effect of this permanent
difference on the effective income tax rate for financial accounting purposes
becomes more pronounced in cases where before-tax income or loss approaches
zero, which was one reason for the higher effective tax rates applicable to the
three month and nine month periods ended September 30, 1997 as compared to the
comparable periods of 1996.
Income tax expense and the effective tax rate for the nine months ended
September 30, 1997 were also significantly affected by the one-time $2.0 million
charge to salaries, wages and benefits in the second quarter of 1997 for the
prepaid executive compensation package provided to the Company's former
President and Chief Executive Officer. Of the total compensation paid to this
former executive of the Company in 1997, approximately $1.7 million is
non-deductible against the Company's federal income taxes, and thus constitutes
an additional significant permanent difference between income for federal income
tax purposes and financial accounting income which did not exist in 1996.
Liquidity and Capital Resources
Cash Flows. The Company has historically financed its working capital and
capital expenditure requirements from cash flow from operations and long-term
borrowings from banks and other lenders. As described further below, in the
third quarter of 1997 the Company completed two separate financings designed to
lengthen the maturity of its long-term debt and diversify its credit sources,
including the issuance of unsecured notes and the replacement of the former
credit facility with one of lesser borrowing availability.
For the nine months ended September 30, 1997 and 1996, net cash provided by
operating activities was $70.7 million and $27.3 million, respectively. The
increase in cash provided by operating activities between years was attributable
to such factors as increased earnings, growth in scheduled service air traffic
liability associated with advanced ticket sales, the liquidation of certain
assets held for sale, and other factors.
Net cash used in investing activities was $60.7 million and $53.7 million,
respectively, for the nine months ended September 30, 1997 and 1996. Such
amounts included cash capital expenditures totaling $63.5 million in the nine
months ended September 30, 1997, and $87.6 million in the same period of 1996,
for engine overhauls, airframe improvements and the purchase of rotable parts.
Proceeds from the sale of assets totaled $8.0 million for the nine months ended
September 30, 1997, and $30.2 million for the comparable period of 1996. Such
proceeds were primarily attributable to sale/leaseback transactions completed in
both years for Boeing 727-200 aircraft, although four such transactions were
completed in the 1996 period as compared to one such transaction in 1997. Cash
capital expenditures for the nine month periods ended September 30, 1997 and
1996 were supplemented with other capital expenditures, financed directly with
debt, totaling $30.7 million and $14.2 million, respectively. The $30.7 million
in new debt issued in 1997 was to directly finance the purchase of a Boeing
757-200 aircraft which had previously been subject to a month-to-month operating
lease.
The Company's capital spending program in the first nine months of 1997 was
reduced as compared to the prior year due to (i) the reduction of the fleet by
four units between years, and the absence of any aircraft deliveries during the
first nine months of 1997; and (ii) the accomplishment of statutory requirements
for a 65% Stage 3 fleet as of December 31, 1996, which resulted in the
hushkitting of six Boeing 727-200 aircraft during calendar year 1996. Although
the Company elected to hushkit an additional Boeing 727-200 aircraft during the
third quarter of 1997, the Company is not required to increase its Stage 3 fleet
composition until December 31, 1998, at which time 75% of the Company's fleet
must meet Stage 3 requirements. The Company currently expects to meet Stage 3
fleet requirements through additional hushkitting of Boeing 727-200 aircraft and
through future deliveries of other Stage-3-compliant aircraft.
Net cash used in financing activities was $1.3 million in the nine months ended
September 30, 1997, and net cash provided by financing activities was $6.4
million in the nine months ended September 30, 1996. Debt proceeds in the 1996
period included the addition of $15.0 million in credit facility availability
for financing the installation of hushkits on Boeing 727-200 aircraft. Debt
proceeds in the 1997 period included both the proceeds from the issuance of the
unsecured notes and the proceeds from borrowing against the new credit facility
as of September 30, 1997. Payments on long-term debt in the 1997 period included
the repayment of the former credit facility.
Aircraft and Fleet Transactions. In November 1994, the Company signed a purchase
agreement for six new Boeing 757-200s which, as subsequently amended, now
provides for seven total aircraft to be delivered between late 1995 and late
1998. In conjunction with the Boeing purchase agreement, the Company entered
into a separate agreement with Rolls-Royce Commercial Aero Engines Limited for
15 RB211-535E4 engines to power the seven Boeing 757-200 aircraft and to provide
one spare engine. Under the Rolls-Royce agreement, which became effective
January 1, 1995, Rolls-Royce has provided the Company various spare parts
credits and engine overhaul cost guarantees. If the Company does not take
delivery of the engines, a prorated amount of the credits that have been used
are required to be refunded to Rolls-Royce. The aggregate purchase price under
these two agreements is approximately $50.0 million per aircraft, subject to
escalation. The Company accepted delivery of the first four aircraft under these
agreements in September and December 1995, and November and December 1996, all
of which were financed under leases accounted for as operating leases. The final
three deliveries under this agreement are scheduled for November 1997, July 1998
and December 1998. Advanced payments and interest totaling approximately $24.0
million ($8.0 million per aircraft) are required prior to delivery of the three
remaining aircraft, with the remaining purchase price payable at delivery. As of
September 30, 1997 and 1996, the Company had recorded $12.8 million and $23.4
million, respectively, in advanced payments and interest applicable to aircraft
scheduled for future delivery. The Company intends to finance future deliveries
under this agreement through sale/leaseback transactions accounted for as
operating leases.
In the first quarter of 1996, the Company purchased four Boeing 727-200
aircraft, financing all of these through sale/leasebacks accounted for as
operating leases by the end of the third quarter of 1996. In the second quarter
of 1996, the Company purchased a fifth Boeing 727-200 aircraft which had been
previously financed by the Company through a lease accounted for as an operating
lease. This aircraft was financed through a separate bridge debt facility until
the completion of a sale/leaseback transaction during the third quarter of 1997.
On July 29, 1996, the Company entered into a letter of intent with a major
lessor to cancel several Boeing 757-200 and Lockheed L-1011 operating aircraft
leases then in effect. Under the terms of the letter of intent, the Company
canceled leases on five Boeing 757-200 aircraft powered by Pratt & Whitney
engines and returned these aircraft to the lessor by the end of 1996. The
Company was required to meet certain return conditions associated with several
aircraft, such as providing maintenance checks to airframes. The lessor
reimbursed the Company for certain leasehold improvements made to some aircraft
and credited the Company for certain prepayments made in earlier years to
satisfy qualified maintenance expenditures for several aircraft over their
original lease terms. The cancellation of these leases reduced the Company's
fleet of Pratt-&-Whitney-powered Boeing 757-200 aircraft from seven to two
units. The Company also agreed to terminate existing operating leases on three
Lockheed L-1011 aircraft and to purchase the airframes pertaining to these
aircraft for $1.5 million, while signing a new operating lease covering only the
nine related engines. The Lockheed L-1011 airframe and engine portion of this
transaction was not completed until the second quarter of 1997. The lessor also
provided the Company with approximately $6.9 million in additional unsecured
financing for a term of seven years. This transaction resulted in the
recognition of a $2.3 million loss on disposal of assets in the third quarter of
1996.
The Company also agreed to purchase one Rolls-Royce-powered Boeing 757-200
aircraft from the same lessor in the fourth quarter of 1996. This purchase was
not completed in 1996, and the aircraft was acquired from the lessor on a
short-term rental agreement pending the completion of the purchase in September
1997. The Company financed this purchase through the issuance of a $30.7 million
note maturing on October 15, 1998. The note requires monthly payments of
$400,000 in principal and interest from October 15, 1997 through September 15,
1998, with the balance due at maturity. Interest of 7.08% applies to the twelve
monthly payments, while interest of 8.08% applies to the balance due at
maturity. The Company currently intends to sell this aircraft and repay this
note, subject to a short-term rental agreement under which the aircraft would
continue to be operated by the Company until the July 1998 delivery of a
replacement Boeing 757-200 from the manufacturer. The temporary acquisition of
this aircraft in late 1996, together with the delivery of two new
Rolls-Royce-powered Boeing 757-200 aircraft from the manufacturer in the fourth
quarter of 1996, and the return of the last two Pratt-&-Whitney-powered Boeing
757-200 aircraft discussed in the next paragraph, resulted in an
all-Rolls-Royce-powered Boeing 757-200 fleet of seven units by the end of 1996.
In September 1996, the Company began negotiations with a major lessor to cancel
existing operating leases on the Company's remaining two Pratt-&-Whitney-powered
Boeing 757-200 aircraft. These aircraft were returned to the lessor by the end
of 1996. This transaction resulted in the recognition of a $2.4 million loss on
disposal of assets in the third quarter of 1996.
Issuance of Unsecured Notes. On July 24, 1997, the Company completed two
separate financings designed to lengthen the maturity of the Company's long-term
debt and diversify its credit sources. On that date, the Company (i) sold $100.0
million principal amount of unsecured seven year notes in a private offering
under Rule 144A, and (ii) entered into a new secured revolving credit facility.
The unsecured senior notes mature on August 1, 2004. Each note bears interest at
the effective annual rate of 10.5%, payable on February 1 and August 1 of each
year beginning February 1, 1998. The Company is obligated to consummate a
registered exchange offer for the notes, or cause a registration statement with
respect to the resale of the notes to be declared effective, on or prior to
January 24, 1998, or the effective interest rate applicable to the notes will
increase to 11.0% per annum until such registration becomes effective. The notes
rank pari passu with all unsecured, unsubordinated indebtedness of the Company
existing now or created in the future, are effectively subordinated to the
Company's obligations under secured indebtedness to the extent of such security,
and will be senior to any subordinated indebtedness of the Company created in
the future. All payments of interest and principal are unconditionally guar-
anteed on an unsecured, unsubordinated basis, jointly and severally, by each of
the active subsidiaries of the Company. The Company may redeem the notes, in
whole or in part, at any time on or after August 1, 2002, initially at 105.25%
of their principal amount plus accrued interest, declining ratably to 100.0%
of their principal amount plus accrued interest at maturity. At any time prior
to August 1, 2000, the Company may redeem up to 35.0% of the original aggregate
principal amount of the notes with the proceeds of sales of common stock, at a
redemption price of 110.5% of their principal amount (plus accrued interest),
provided that at least $65.0 million in aggregate principal amount of the notes
remains outstanding after such redemption. The notes are subject to covenants
for the benefit of the note holders, including, among other things, limitations
on: (i) the incurrence of additional indebtedness; (ii) the making of certain
restricted payments; (iii) the creation of consensual restrictions on the
payment of dividends and other payments by certain subsidiaries; (iv) the
issuance and sale of capital stock by certain subsidiaries; (v) the issuance
of guarantees by certain subsidiaries; (vi) certain transactions with
shareholders and affiliates; (vii) the creation of liens on certain assets or
properties; (viii) certain types of sale/leaseback transactions; and (ix)
certain sales, transfers or other dispositions of assets.
The net proceeds of the unsecured notes were approximately $97.3 million, after
application of costs and fees of issuance. The Company used a portion of the net
proceeds to repay in full the Company's prior bank facility and will use the
balance of the proceeds for general corporate purposes, which may include the
purchase of additional aircraft and/or the refinancing of existing leased
aircraft.
Changes in Credit Facilities. Concurrently with the issuance of the unsecured
notes, on July 24, 1997 the Company entered into a new $50.0 million revolving
credit facility that includes up to $25.0 million for stand-by letters of
credit. ATA is the borrower under the new credit facility, which is guaranteed
by the Company and each of the Company's other active subsidiaries. The
principal amount of the new facility matures on April 1, 2001, and borrowings
are secured by certain Lockheed L-1011 aircraft and engines. The loan-to-value
ratio for collateral securing the new facility may not exceed 75% at any time.
Borrowings under the new facility bear interest, at the option of ATA, at either
(i) LIBOR plus 1.50% to 2.50% (depending upon certain financial ratios); or (ii)
the agent bank's prime rate plus 0.0% to 0.5% (depending upon certain financial
ratios). The facility contains various covenants including, among other things:
(i) limitations on incurrence of debt and liens on assets; (ii) limitations on
capital expenditures; (iii) restrictions on payment of dividends and other
distributions to stockholders; (iv) limitations on mergers and the sale of
assets; (v) restrictions on the prepayment or redemption of certain indebtedness
including the 10.5% notes; and (vi) maintenance of certain financial ratios such
as minimum tangible net worth, cash flow to interest expense and aircraft
rentals and total adjusted liabilities to tangible net worth.
The Company's former credit facility had initially provided a maximum of $125.0
million, including $25.0 million for stand-by letters of credit, subject to the
maintenance of certain collateral value including certain owned Lockheed L-1011
aircraft, certain receivables, and certain rotables and spare parts. As a result
of the Company's need to restructure its scheduled service business, the Company
renegotiated certain terms of the former credit facility effective September 30,
1996, including the modification of certain loan covenants to take into account
the expected losses in the third and fourth quarters of 1996. In return for this
covenant relief, the Company agreed to implement changes to the underlying
collateral for the former facility and to change the interest rates applicable
to borrowings under the facility. The Company pledged additional owned engines
and equipment as collateral for the facility as of the implementation date of
the new agreement. The Company further agreed to reduce the $63.0 million of
borrowing availability secured by the owned Lockheed L-1011 fleet by $1.0
million per month from April 1997 through September 1997, and by $1.5 million
per month from October 1997 through April 1999. Loans under the renegotiated
facility were subject to interest, at the Company's option, at either (i) prime
to prime plus 0.75%, or (ii) the Eurodollar rate plus 1.50% to 2.75%. The former
facility was scheduled to mature on April 1, 1999, and contained various
covenants and events of default, including: maintenance of a specified
debt-to-equity ratio and a minimum level of net worth; achievement of a minimum
level of cash flow; and restrictions on aircraft acquisitions, liens, loans
to officers, change of control, indebtedness, lease commitments and payment of
dividends.
At December 31, 1996, the Company had classified $19.9 million of former credit
facility borrowings to current maturities of long-term debt. Of this amount,
$10.5 million was attributable to the scheduled reduction of availability
secured by the owned Lockheed L-1011 fleet during the 12 months ending December
31, 1997. The remaining $9.4 million represented the amount of the spare Pratt &
Whitney engines which were pledged to the credit facility and which were to be
repaid from the anticipated sale. The net book value of these spare engines,
which approximates estimated market value, is classified as Assets Held for Sale
in the accompanying balance sheet. In July 1997, the Company sold two of the
four spare Pratt & Whitney engines, and the Company continues to market the
remaining two spare engines and parts to users of Pratt & Whitney powerplants.
As of September 30, 1997, the Company had borrowed $25.0 million against the new
credit facility, all of which borrowings were repaid on October 1, 1997. As of
December 31, 1996, the Company had borrowed the maximum amount then available
against the former credit facility, of which $46.0 million was repaid on January
2, 1997.
The Company also maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for securing the issuance of letters of
credit. Borrowings against this credit facility bear interest at the lender's
prime rate plus 0.25% per annum. There were no borrowings against this facility
as of September 30, 1997 or 1996; however, the Company did have outstanding
letters of credit secured by this facility aggregating $3.6 million and $4.0
million, respectively.
Stock Repurchase Program. In February 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. During 1996,
the Company repurchased 16,000 shares, bringing the total number of shares it
has repurchased under the program to 185,000 shares. No shares were repurchased
during the first nine months of 1997.
The Company does not currently expect to complete this stock repurchase program.
Forward-Looking Information
Information contained within this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
information which can be identified by forward-looking terminology such as
"believes," "expects," "may," "will," "should," "anticipates," or the negative
thereof, or other variations in comparable terminology. Such forward-looking
information is based upon management's current knowledge of factors affecting
the Company's business. The differences between expected outcomes and actual
results can be material, depending upon the circumstances. Therefore, where the
Company expresses an expectation or belief as to future results in any
forward-looking information, such expectation or belief is expressed in good
faith and is believed to have a reasonable basis, but the Company can provide no
assurance that the statement of expectation or belief will result or will be
achieved or accomplished.
The Company has identified the following important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by the Company:
1. The restructuring of the Company's scheduled service operations resulted in
significant operating and net losses for the third and fourth quarters of 1996
and has imposed higher fixed costs on the traditionally profitable charter
business unit of the Company. Although the Company was profitable during the
first nine months of 1997, future actions of the Company's competitors or
unfavorable future economic conditions, such as high fuel prices or a sustained
reduction in demand for the Company's services, could render such restructuring
insufficient to return the Company to sustained profitability.
2. The Company's capital structure is subject to significant financial leverage,
which could impair the Company's ability to obtain new or additional financing
for working capital and capital expenditures, could increase the Company's
vulnerability to a sustained economic downturn and could restrict the Company's
ability to exploit new business opportunities or limit the Company's flexibility
to respond to changing business conditions.
3. Under the terms of certain financing agreements, the Company is required to
maintain compliance with certain specified covenants, restrictions, financial
ratios and other financial and operating tests. The Company's ability to comply
with any of the foregoing restrictions and with loan repayment provisions will
depend upon its future profit and loss performance and financial position, which
will be subject to prevailing economic conditions and other factors, including
some factors entirely beyond the control of the Company. A failure to comply
with any of these obligations could result in an event of default under one or
more such financing agreements, which could result in the acceleration of the
repayment of certain of the Company's debt, as well as the possible termination
of aircraft operating leases. Such an event could result in a materially adverse
effect on the Company's financial position.
4. As previously disclosed by the Company, possible business combinations with
other entities have been considered. The Company intends to continue to evaluate
such potential combinations. It is possible that the Company will enter into a
transaction in the future that would result in a merger or other change in
control of the Company. The Company's current credit facility and certain
unsecured term debt may be accelerated upon such a merger or consolidation, in
which case there can be no assurance that the Company would have sufficient
liquidity to complete such a transaction or to secure alternative financing.
5. The Company has significant net operating loss carryforwards and investment
and other tax credit carryforwards which may, depending upon the circumstances,
be available to reduce future Federal income taxes payable. If the Company
undergoes an ownership change within the meaning of Section 382 of the Internal
Revenue Code, the Company's potential future utilization of its net operating
loss carryforwards and investment tax credit carryforwards could be impaired.
The actual effect of this impairment on the Company would depend upon a number
of factors, including the profitability of the Company and the timing of the
sale of certain assets, some of which factors may be beyond the control of the
Company. The impact on the Company of such a limitation could be materially
adverse under certain circumstances.
6. The vast majority of the Company's scheduled service and charter business,
other than U.S. military, is leisure travel. Since leisure travel is largely
discretionary spending on the part of the Company's customers, the Company's
results of operations can be adversely affected by economic conditions which
reduce discretionary purchases.
7. The Company is subject to the risk that one or more customers who have
contracted with the Company will cancel or default on such contracts and that
the Company might be unable in such circumstances to obtain other business to
replace the resulting loss in revenues. The Company's largest single customer is
the U.S. military, which accounted for approximately 14.9% of total operating
revenues in the third quarter of 1997, and 17.4% of total operating revenues in
the nine months ended September 30, 1997. No other single customer of the
Company accounts for more than 10% of operating revenues.
8. Approximately two-thirds of the Company's operating revenues are sold by
travel agents and tour operators who generally have a choice of airlines when
booking a customer's travel. Although the Company intends to offer attractive
and competitive products to travel agents and tour operators and further intends
to maintain favorable relationships with them, any significant actions by large
numbers of travel agencies or tour operators to favor other airlines, or to
disfavor the Company, could have a material adverse effect on the Company.
9. The Company's airline businesses are significantly affected by seasonal
factors. Typically, the Company experiences reduced demand for leisure travel
during the second and fourth quarters of each year. In recent years, the Company
has experienced its most robust demand in the first and third quarters. As a
result, the Company's results of operations for any single quarter are not
necessarily indicative of the Company's annual results of operations.
10. The airline industry as a whole, and scheduled service in particular, is
characterized by low gross margins and high fixed costs of operation. The high
fixed cost of operating a flight does not vary significantly with the number of
passengers carried, and therefore the revenue impact of a small increase or
decrease in average passenger load factor could, in the aggregate, have a
significant effect on the profitability of those flights. Accordingly, a
relatively minor shortfall in scheduled service load factor and associated
revenue could have a material adverse effect on the Company.
11. The Company faces intense competition from other airlines in many of its
scheduled service markets, including other low-fare airlines. The future actions
of existing and potential competitors in all of the Company's scheduled service
markets, including changes in prices and seat capacity offered, could have a
material effect on the profit performance of this business unit.
12. Jet fuel comprises a significant percentage of the total operating expenses
of the Company, accounting for 20.4% of operating expenses in both the third
quarter of 1997 and the nine months ended September 30, 1997. Fuel prices are
subject to factors which are beyond the control of the Company, such as market
supply and demand conditions, and political or economic factors. Although the
Company is able to contractually pass through some fuel price increases to the
U.S. military and tour operators, a significant increase in fuel prices could
have a material adverse effect on the Company's operating performance and
financial condition.
13. In June 1991, the Company's flight attendants elected the Association of
Flight Attendants as their representative and ratified a four-year collective
bargaining agreement in December 1994. In June 1993, the Company's cockpit crews
elected the International Brotherhood of Teamsters as their representative and
ratified a four-year collective bargaining agreement in September 1996. The
Company believes that its relations with employee groups are good. However, the
existence of a significant labor dispute with any sizable group of employees
could have a material adverse effect on the Company's operations.
14. The Company is subject to regulation under the jurisdictions of the
Department of Transportation and the Federal Aviation Administration and by
certain other governmental agencies, such as the Federal Communications
Commission, the Commerce Department, the Customs Service, the Immigration and
Naturalization Service, the Animal and Plant Inspection Service of the
Department of Agriculture, and the Environmental Protection Agency. These
agencies propose and issue regulations from time to time which can significantly
increase the cost of airline operations. For example, the FAA in recent years
has issued a number of aircraft maintenance directives and other regulations
requiring action by the Company on such matters as collision avoidance systems,
airborne wind shear avoidance systems, noise abatement, airworthiness of aging
aircraft and increased inspection requirements. Other laws and regulations have
been considered from time to time that would prohibit or restrict the ownership
and/or transfer of airline routes and takeoff or landing slots at certain
airports. The Company cannot predict the nature of future changes in laws or
regulations to which it may become subject, and such laws and regulations could
have a material adverse effect on the financial condition of the Company.
15. In 1981, the Company was granted a Certificate of Public Convenience and
Necessity pursuant to section 401 of the Federal Aviation Act authorizing it to
engage in air transportation. The FAA further requires the Company to obtain an
operating certificate and operations specifications authorizing the Company to
operate to specific airports using specific equipment. All of the Company's
aircraft must also maintain certificates of airworthiness issued by the FAA.
The Company holds an FAA air operating certificate under Part 121 of the Federal
Aviation Regulations. The Company believes that it is in compliance with all
requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of the Company's DOT or FAA
authorizations or certificates could have a material adverse effect on the
Company.
16. Under current DOT regulations with respect to charter transportation
originating in the United States, all charter airline tickets must generally be
paid for in cash, and all funds received from the sale of charter seats (and in
some cases ground arrangements) must be placed into escrow by the tour operator
or be protected by a surety bond meeting prescribed standards. The Company
currently provides an unlimited third-party bond in order to meet these
regulations. The issuer of the bond has the right to terminate the bond on 30
days' notice. If this bond were to be materially limited or canceled, the
Company would be required to escrow funds to comply with DOT regulations, which
could materially reduce the Company's liquidity and require it to fund higher
levels of working capital.
17. The Company is subject to potential financial losses which may be incurred
in the event of an aircraft accident, including the repair or replacement of a
damaged aircraft and its subsequent loss from service, and the potential claims
of injured passengers and others. Under DOT regulations, the Company maintains
liability insurance on all aircraft. Although the Company currently believes
that its insurance coverage is adequate, there can be no assurance that the
amount of such coverage will not be changed or that the Company will not be
required to bear substantial financial losses from an accident. Substantial
claims from such an accident could result in a material adverse change in the
Company's financial position and could seriously inhibit customer acceptance of
the Company's services.
<PAGE>
PART II - Other Information
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports of Form 8-K
(a) None.
(b) None.
<PAGE>
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 thereunto duly authorized.
Amtran, Inc.
(Registrant)
Date November 14, 1997
John P. Tague
President and Chief Executive Officer
Director
Date November 14, 1997
James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date November 14, 1997
Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
Date November 14, 1997
Dalen D. Thomas
Senior Vice President Sales, Marketing and
Strategic Planning
Director
