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 June 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
Commission 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 requirements 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 July 31, 1997
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------------- ---------------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 65,396 $ 73,382
Receivables, net of allowance for doubtful accounts
(1997 - $1,430; 1996 - $1,274) 23,246 20,239
Inventories, net 14,863 13,888
Assets held for sale 13,838 14,112
Prepaid expenses and other current assets 18,367 14,672
---------------------- ---------------------
Total current assets 135,710 136,293
Property and equipment:
Flight equipment 408,779 381,186
Facilities and ground equipment 52,725 51,874
---------------------- ---------------------
461,504 433,060
Accumulated depreciation (230,206) (208,520)
---------------------- ---------------------
Property and equipment, net 231,298 224,540
Deposits and other assets 9,724 9,454
---------------------- ---------------------
Total assets $ 376,732 $ 370,287
====================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 35,226 $ 30,271
Accounts payable 8,015 13,671
Air traffic liabilities 57,788 49,899
Accrued expenses 69,156 64,813
---------------------- ---------------------
Total current liabilities 170,185 158,654
Long-term debt, less current maturities 109,493 119,786
Deferred income taxes 25,539 20,216
Other deferred items 13,703 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 38,353 38,341
Additional paid-in capital 15,667 15,618
Deferred compensation - ESOP (1,600) (2,133)
Treasury stock: 185,000 shares - 1997; 185,000 shares - 1996 (1,760) (1,760)
Retained earnings 7,152 4,678
---------------------- ---------------------
57,812 54,744
---------------------- ---------------------
Total liabilities and shareholders' equity $ 376,732 $ 370,287
====================== =====================
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------------------------------------- -------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Charter $ 93,019 $ 73,025 $ 193,365 $ 156,230
Scheduled service 87,253 105,666 169,257 216,119
Ground package 5,171 5,614 11,025 12,862
Other 6,744 11,090 12,824 17,319
----------------- ----------------- ----------------- ----------------
Total operating revenues 192,187 195,395 386,471 402,530
----------------- ----------------- ----------------- ----------------
Operating expenses:
Salaries, wages and benefits 43,917 41,560 84,407 81,906
Fuel and oil 36,399 39,522 77,070 80,671
Handling, landing and navigation fees 17,214 16,576 34,462 36,347
Depreciation and amortization 15,296 15,144 29,436 30,705
Aircraft rentals 14,137 17,271 28,284 34,396
Aircraft maintenance, materials and repairs 13,840 14,259 24,925 27,883
Crew and other employee travel 9,386 9,455 17,306 17,243
Passenger service 7,588 7,699 15,774 16,914
Commissions 6,655 7,586 12,589 14,964
Ground package cost 4,279 4,663 9,494 10,091
Other selling expenses 3,595 4,577 6,794 10,155
Advertising 3,144 3,295 6,658 5,822
Facility and other rentals 2,232 2,383 4,351 4,428
Other operating expenses 13,484 14,331 26,172 28,500
----------------- ----------------- ----------------- ----------------
Total operating expenses 191,166 198,321 377,722 400,025
----------------- ----------------- ----------------- ----------------
Operating income (loss) 1,021 (2,926) 8,749 2,505
Other income (expense):
Interest income 79 65 225 268
Interest (expense) (1,708) (819) (3,320) (2,177)
Other 128 106 183 192
----------------- ----------------- ----------------- ----------------
Other expenses (1,501) (648) (2,912) (1,717)
----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes (480) (3,574) 5,837 788
Income taxes (credits) 269 (1,289) 3,364 720
----------------- ----------------- ----------------- ----------------
Net income (loss) $ (749) $ (2,285) $ 2,473 $ 68
================= ================= ================= ================
Net income (loss) per share $ (0.06) $ (0.20) $ 0.21 $ 0.01
================= ================= ================= ================
Average shares outstanding 11,575,653 11,493,757 11,573,761 11,492,941
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
1997 1996
-----------------------------------------------
(Unaudited) (Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 2,473 $ 68
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 29,436 30,705
Deferred income taxes 5,323 712
Other non-cash items 2,312 2,153
Changes in operating assets and liabilities:
Receivables (3,007) (176)
Inventories (1,627) (1,251)
Assets held for sale 273 -
Prepaid expenses (3,695) 1,457
Accounts payable (5,656) (579)
Air traffic liabilities 7,889 499
Accrued expenses 4,328 2,022
---------------------- ----------------------
Net cash provided by operating activities 38,049 35,610
---------------------- ----------------------
Investing activities:
Proceeds from sales of property and equipment 391 14,957
Capital expenditures (36,720) (60,294)
Reductions of (additions to) other assets (4,369) 2,478
---------------------- ----------------------
Net cash used in investing activities (40,698) (42,859)
---------------------- ----------------------
Financing activities:
Proceeds from long-term debt - 11,786
Payments on long-term debt (5,337) (10,478)
Purchase of treasury stock - (179)
---------------------- ----------------------
Net cash provided by (used in) financing activities (5,337) 1,129
---------------------- ----------------------
Decrease in cash and cash equivalents (7,986) (6,120)
Cash and cash equivalents, beginning of period 73,382 92,741
---------------------- ----------------------
Cash and cash equivalents, end of period $ 65,396 $ 86,621
====================== ======================
Supplemental disclosures:
Cash payments (refunds) for:
Interest $ 3,656 $ 1,907
Income taxes (320) 384
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital expenditures $ - $ 18,400
See accompanying notes.
</TABLE>
<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 June 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 six months ended June 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 ("FASB") 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. Subsequent 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 approxi-
mately $97.0 million, after application of costs and fees 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 Six Months Ended June 30, 1997, Versus Quarter and Six Months Ended
June 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
--------------- --------------- --------------- --------------- --------------- ----------------
Departures Jet 9,644 12,724 (3,080) 19,273 25,334 (6,061)
Departures J31(a) 2,937 - 2,937 2,937 - 2,937
--------------- --------------- --------------- --------------- --------------- ----------------
Total Departures (b) 12,581 12,724 (143) 22,210 25,334 (3,124)
--------------- --------------- --------------- --------------- --------------- ----------------
Block Hours Jet 31,574 36,672 (5,098) 62,543 73,040 (10,497)
Block Hours J31 3,129 - 3,129 3,129 - 3,129
--------------- --------------- --------------- --------------- --------------- ----------------
Total Block Hours (c) 34,703 36,672 (1,969) 65,672 73,040 (7,368)
--------------- --------------- --------------- --------------- --------------- ----------------
RPMs Jet (000s) 2,199,310 2,292,650 (93,340) 4,409,371 4,793,292 (383,921)
RPMs J31 (000s) 6,046 - 6,046 6,046 - 6,046
--------------- --------------- --------------- --------------- --------------- ----------------
Total RPMs (000s) (d) 2,205,356 2,292,650 (87,294) 4,415,417 4,793,292 (377,875)
--------------- --------------- --------------- --------------- --------------- ----------------
ASMs Jet (000s) 3,095,292 3,496,497 (401,205) 6,080,286 6,942,344 (862,108)
ASMs J31 (000s) 9,856 - 9,856 9,856 - 9,856
--------------- --------------- --------------- --------------- --------------- ----------------
Total ASMs (000s) (e) 3,105,148 3,496,497 (391,349) 6,090,142 6,942,344 (852,252)
--------------- --------------- --------------- --------------- --------------- ----------------
Load Factor Jet 71.05 65.57 5.48 72.52 69.04 3.48
Load Factor J31 61.34 - N/M 61.34 - N/M
--------------- --------------- --------------- --------------- --------------- ----------------
Total Load Factor (f) 71.02 65.57 5.45 72.50 69.04 3.46
--------------- --------------- --------------- --------------- --------------- ----------------
Pax Enplaned Jet 1,312,125 1,496,897 (184,772) 2,719,253 3,199,502 (480,249)
Pax Enplaned J31 31,573 - 31,573 31,573 - 31,573
--------------- --------------- --------------- --------------- --------------- ----------------
Total Pax Enplaned (g) 1,343,698 1,496,897 (153,199) 2,750,826 3,199,502 (448,676)
--------------- --------------- --------------- --------------- --------------- ----------------
Revenue $(000s) 192,187 195,395 (3,208) 386,471 402,530 (16,059)
Revenue per ASM $ (h) 6.19 5.59 0.60 6.35 5.80 0.55
Cost Per ASM $ (i) 6.16 5.68 0.48 6.21 5.77 0.44
Revenue per RPM $ (j) 8.71 8.52 0.19 8.75 8.40 0.35
</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
not relevant because an entire aircraft is sold by the Company without regard to
the number of actual passengers boarded. Since both costs and revenues are
largely fixed for these types of flights, changes in load factor have little
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.
(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 scheduled service, because yield is a measure of
the Company's ability to optimize the price paid by customers purchasing
individual seats. Yield is not 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
unprofitable 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 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 niche 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 six months of 1997, the results of operations for the Company
showed significant improvement as compared to the first six months of 1996. For
the three months ended June 30, 1997, the Company earned $1.0 million in
operating income, as compared to an operating loss of $2.9 million in the same
quarter of 1996, and recognized a net loss of $749,000 in the 1997 second
quarter, as compared to a net loss of $2.3 million in the second quarter of
1996. The 1997 second quarter was significantly impacted by the accelerated
recognition 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 second quarter 1997
net loss per share was 6 cents, as compared to a net loss per share of 20 cents
in the same period of 1996. For the six months ended June 30, 1997, the Company
earned $8.7 million in operating income, as compared to $2.5 million in
operating income in the six months ended June 30, 1996; and the Company earned
$2.5 million in net income, or 21 cents per share, in the six months ended June
30, 1997, as compared to net income of $68,000, or 1 cent per share, in the
comparable period of 1996.
The Company's operating revenues decreased 1.6% to $192.2 million in the second
quarter of 1997 as compared to $195.4 million in the second quarter of 1996.
Second quarter 1997 operating revenues were 6.19 cents per ASM, an increase of
10.7% from the second quarter 1996 of 5.59 cents per ASM. Between these same
periods, ASMs decreased 11.2% to 3.105 billion from 3.496 billion, RPMs
decreased 3.8% to 2.205 billion from 2.293 billion, and passenger load factor
increased 5.4 points to 71.0% as compared to 65.6%. Yield in the second quarter
of 1997 increased 2.2% to 8.71 cents per RPM, as compared to 8.52 cents per RPM
in the second quarter of 1996. Total passengers boarded decreased 10.2% to
1,343,698 in the second quarter of 1997 as compared to 1,496,897 in the second
quarter of 1996, and total departures decreased 1.1% to 12,581 from 12,724
in the same comparable periods.
The Company's operating revenues decreased 4.0% to $386.5 million in the six
months ended June 30, 1997, as compared to $402.5 million in the six months
ended June 30, 1996. Operating revenues per ASM increased 9.5% to 6.35 cents in
the six months ended June 30, 1997, as compared to 5.80 cents in the same period
of 1996. ASMs decreased 12.3% to 6.090 billion from 6.942 billion, RPMs
decreased 7.9% to 4.415 billion from 4.793 billion, and passenger load factor
increased 3.5 points to 72.5% as compared to 69.0%. Yield in the six months
ended June 30, 1997, increased 4.2% to 8.75 cents per RPM, as compared to 8.40
cents per RPM in the same period of 1996. Total passengers boarded decreased
14.0% to 2,750,826 in the six months ended June 30, 1997, as compared to
3,199,502 in the same period of 1996, while total departures decreased 12.3% to
22,210 from 25,334 in the same comparable periods.
Operating expenses decreased 3.6% to $191.2 million in the second quarter of
1997 as compared to $198.3 million in the second quarter of 1996, and operating
expenses decreased 5.6% to $377.7 million in the six months ended June 30, 1997,
as compared to $400.0 million in the same period of 1996. Operating expense per
ASM increased 8.5% to 6.16 cents in the second quarter of 1997 as compared to
5.68 cents in the second quarter of 1996, while operating expense per ASM
increased 7.6% to 6.21 cents in the six months ended June 30, 1997, as compared
to 5.77 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 June 30, Six Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Total operating revenues 6.19 5.59 6.35 5.80
Operating expenses:
Salaries, wages and benefits 1.41 1.19 1.39 1.18
Fuel and oil 1.17 1.13 1.27 1.16
Handling, landing and navigation fees 0.56 0.48 0.57 0.52
Depreciation and amortization 0.49 0.43 0.48 0.44
Aircraft rentals 0.46 0.49 0.46 0.50
Aircraft maintenance, materials and repairs 0.45 0.41 0.41 0.40
Crew and other employee travel 0.30 0.27 0.28 0.25
Passenger service 0.25 0.22 0.26 0.24
Commissions 0.21 0.22 0.21 0.22
Ground package cost 0.14 0.13 0.16 0.15
Other selling expenses 0.12 0.13 0.11 0.15
Advertising 0.10 0.09 0.11 0.08
Facility and other rentals 0.07 0.07 0.07 0.06
Other operating expenses 0.43 0.42 0.43 0.42
---- ---- ---- ----
Total operating expenses 6.16 5.68 6.21 5.77
---- ---- ---- ----
Operating income (loss) 0.03 (0.09) 0.14 0.03
==== ====== ==== ====
ASMs (in thousands) 3,105,148 3,496,497 6,090,142 6,942,394
</TABLE>
Operating Revenues
Total operating revenues for the second quarter of 1997 decreased 1.6% to $192.2
million from $195.4 million in the second quarter of 1996. This decrease was due
to an $18.4 million decrease in scheduled service revenues, a $0.4 million
decrease in ground package revenues and a $4.4 million decrease in other
revenues, partially offset by a $20.0 million increase in charter revenues.
Total operating revenues for the six months ended June 30, 1997 decreased 4.0%
to $386.5 million from $402.5 million in the six months ended June 30, 1996.
This decrease was due to a $46.8 million decrease in scheduled service revenues,
a $1.8 million decrease in ground package revenues and a $4.5 million decrease
in other revenues, partially offset by a $37.1 million increase in charter
revenues.
Operating revenues for the second quarter of 1997 were 6.19 cents per ASM, an
increase of 10.7% from the second quarter of 1996 of 5.59 cents per ASM.
Operating revenues for the six months ended June 30, 1997, were 6.35 cents per
ASM, an increase of 9.5% from the six months ended June 30, 1996, of 5.80 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 27.4% to $93.0 million in the second
quarter of 1997, as compared to $73.0 million in the second quarter of 1996, and
total charter revenues increased 23.8% to $193.4 million in the first six months
of 1997, as compared to $156.2 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 six 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 48.4% of total operating revenues in the second quarter of
1997, as compared to 37.4% in the same quarter of 1996, while charter revenues
represented 50.0% of total operating revenues in the first six months of 1997,
as compared to 38.8% 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
Departures (b) 2,624 2,575 49 6,002 6,244 (242)
Block Hours (c) 8,602 8,643 (41) 19,843 20,772 (929)
RPMs (000s) (d) 731,755 718,955 12,800 1,740,466 1,796,262 (55,796)
ASMs (000s) (e) 912,404 965,839 (53,435) 2,119,317 2,251,862 (132,545)
Pax Enplaned (g) 466,695 426,575 40,120 1,118,596 1,082,899 35,697
Revenue $(000s) 51,164 50,774 390 120,805 119,336 1,469
Revenue per ASM $ (h) 5.61 5.26 0.35 5.70 5.30 0.40
</TABLE>
See footnotes (b) through (h) on pages 7-8.
Charter revenues derived from independent tour operators increased 0.8% to $51.2
million in the second quarter of 1997, as compared to $50.8 million in the
second quarter of 1996. Tour operator RPMs increased 1.8% to 731.8 million in
the second quarter of 1997 from 719.0 million in the comparable 1996 period,
while ASMs decreased 5.5% to 912.4 million from 965.8 million. Tour operator
RASM increased 6.7% to 5.61 cents from 5.26 cents between the same periods. Tour
operator passengers boarded increased 9.4% to 466,695 in the second quarter of
1997 as compared to 426,575 in the comparable quarter of 1996; tour operator
departures increased 1.9% to 2,624 in the second quarter of 1997 as compared to
2,575 in the second quarter of 1996; and tour operator block hours decreased
0.5% to 8,602 in the second quarter of 1997 as compared to 8,643 in the second
quarter of 1996.
Charter revenues derived from independent tour operators increased 1.3% to
$120.8 million in the six months ended June 30, 1997, as compared to $119.3
million in the six months ended June 30, 1996. Tour operator RPMs decreased 3.1%
to 1.740 billion in the six months ended June 30, 1997, from 1.796 billion in
the comparable 1996 period, while ASMs decreased 5.9% to 2.119 billion from
2.252 billion. Tour operator RASM increased 7.5% to 5.70 cents from 5.30 cents
between the same periods. Tour operator passengers boarded increased 3.3% to
1,118,596 in the six months ended June 30, 1997, as compared to 1,082,899 in the
comparable period of 1996; tour operator departures decreased 3.9% to 6,002 in
the six months ended June 30, 1997, as compared to 6,244 in the six months ended
June 30, 1996; and tour operator block hours decreased 4.5% to 19,843 in the six
months ended June 30, 1997, as compared to 20,772 in the six months ended June
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.
During the late 1996 restructuring of scheduled service operations, the Company
also sought to implement changes in track charter programs to provide improved
profit performance for this business unit. Although some tour programs were
unable to meet required economics and were therefore eliminated, other programs
have been improved, and new programs have been added, which are anticipated to
produce improved profit performance for this business unit during the summer
months of 1997. Some of the revenue per block hour and RASM improvement noted in
the second quarter of 1997 for tour operator programs was attributable to
changes in these programs which had become effective during that quarter.
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 might include 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 tour-operator-generated 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
Departures (b) 1,507 845 662 2,727 1,378 1,349
Block Hours (c) 5,907 3,066 2,841 10,596 5,158 5,438
RPMs (000s) (d) 348,813 177,785 171,028 596,544 292,809 303,735
ASMs (000s) (e) 716,404 398,603 317,801 1,230,652 666,193 564,459
Pax Enplaned (g) 90,540 50,399 40,141 156,843 82,512 74,331
Revenue $(000s) 41,855 22,251 19,604 72,560 36,894 35,666
Revenue per ASM $ (h) 5.84 5.58 0.26 5.90 5.54 0.36
See footnotes (b) through (h) on pages 7-8.
</TABLE>
Charter revenues derived from the U.S. military increased 87.9% to $41.9 million
in the second quarter of 1997 as compared to $22.3 million in the second quarter
of 1996. U.S. military RPMs increased 96.2% to 348.8 million in the second
quarter of 1997 from 177.8 million in the comparable 1996 period, while ASMs
increased 79.7% to 716.4 million from 398.6 million. Military RASM increased
4.7% to 5.84 cents from 5.58 cents between the same time periods. U.S. military
passengers boarded increased 79.7% to 90,540 in the second quarter of 1997 as
compared to 50,399 in the comparable quarter of 1996; U.S. military departures
increased 78.3% to 1,507 in the second quarter of 1997 as compared to 845 in the
second quarter of 1996; and U.S. military block hours increased 92.7% to 5,907
in the second quarter of 1997 as compared to 3,066 in the first quarter of 1996.
Charter revenues derived from the U.S. military increased 96.7% to $72.6 million
in the six months ended June 30, 1997, as compared to $36.9 million in the six
months ended June 30, 1996. U.S. military RPMs increased 103.7% to 596.5 million
in the six months ended June 30, 1997, from 292.8 million in the comparable 1996
period, while ASMs increased 84.8% to 1.231 billion from 666.2 million. Military
RASM increased 6.5% to 5.90 cents from 5.54 cents between the same time periods.
U.S. military passengers boarded increased 90.1% to 156,843 in the six months
ended June 30, 1997, as compared to 82,512 in the comparable period of 1996;
U.S. military departures increased 97.9% to 2,727 in the six months ended June
30, 1997, as compared to 1,378 in the six months ended June 30, 1996; and U.S.
military block hours increased 105.4% to 10,596 in the first six months of 1997
as compared to 5,158 in the first six 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
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.
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 the fastest year-over-year rate of any
business unit of the Company during the first half of 1997. In the second
quarter of 1997, the Company's U.S. military revenues represented 21.8% of total
operating revenues, as compared to 11.4% in the second quarter of 1996. In the
first six months of 1997, the Company's U.S. military revenues represented 18.8%
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
indicated, 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 air-
craft in scheduled service.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) 1997 1996 Inc (Dec)
--------------- --------------- --------------- --------------- --------------- ----------------
Departures Jet 5,463 8,879 (3,416) 10,454 17,273 (6,819)
Departures J31(a) 2,937 - 2,937 2,937 - 2,937
--------------- --------------- --------------- --------------- --------------- ----------------
Total Departures (b) 8,400 8,879 (479) 13,391 17,273 (3,882)
--------------- --------------- --------------- --------------- --------------- ----------------
Block Hours Jet 16,946 23,692 (6,746) 31,872 45,791 (13,919)
Block Hours J31 3,129 - 3,129 3,129 - 3,129
--------------- --------------- --------------- --------------- --------------- ----------------
Total Block Hours (c) 20,075 23,692 (3,617) 35,001 45,791 (10,790)
--------------- --------------- --------------- --------------- --------------- ----------------
RPMs Jet (000s) 1,114,453 1,309,855 (192,402) 2,064,611 2,615,442 (550,831)
RPMs J31 (000s) 6,046 - 6,046 6,046 - 6,046
--------------- --------------- --------------- --------------- --------------- ----------------
Total RPMs (000s) (d) 1,120,499 1,309,855 (189,356) 2,070,657 2,615,442 (544,785)
--------------- --------------- --------------- --------------- --------------- ----------------
ASMs Jet (000s) 1,457,433 1,995,120 (537,687) 2,713,752 3,882,873 (1,169,121)
ASMs J31 (000s) 9,856 - 9,856 9,856 - 9,856
--------------- --------------- --------------- --------------- --------------- ----------------
Total ASMs (000s) (e) 1,467,289 1,995,120 (527,831) 2,723,608 3,882,873 (1,159,265)
--------------- --------------- --------------- --------------- --------------- ----------------
Load Factor Jet 76.47 65.65 10.82 76.08 67.36 8.72
Load Factor J31 61.34 - N/M 61.34 - N/M
--------------- --------------- --------------- --------------- --------------- ----------------
Total Load Factor (f) 76.37 65.65 10.72 76.03 67.36 8.67
--------------- --------------- --------------- --------------- --------------- ----------------
Pax Enplaned Jet 751,791 955,755 (203,964) 1,438,287 1,968,133 (529,846)
Pax Enplaned J31 31,573 - 31,573 31,573 - 31,573
--------------- --------------- --------------- --------------- --------------- ----------------
Total Pax Enplaned (g) 783,364 955,755 (172,391) 1,469,860 1,968,133 (498,273)
--------------- --------------- --------------- --------------- --------------- ----------------
Revenues $(000s) 87,253 105,666 (18,413) 169,257 216,119 (46,862)
Revenue per ASM $ (h) 5.95 5.30 0.65 6.21 5.57 0.64
Revenue per RPM $ (j) 7.79 8.07 (0.28) 8.17 8.26 (0.09)
Rev per segment $ (k) 111.38 110.56 0.82 115.15 109.81 5.34
</TABLE>
See footnotes (a) through (j) on pages 7-8. 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 second quarter of 1997 decreased 17.4% to
$87.3 million from $105.7 million in the second quarter of 1996. Scheduled
service revenues comprised 45.4% of total operating revenues in the second
quarter of 1997, as compared to 54.1% of operating revenues in the same period
of the prior year. Scheduled service RPMs decreased 14.5% to 1.120 billion from
1.310 billion, while ASMs decreased 26.5% to 1.467 billion from 1.995 billion,
resulting in an increase of 10.7 points in passenger load factor to 76.4% in the
second quarter of 1997 from 65.7% in the second quarter of 1996. Scheduled
service yield in the second quarter of 1997 decreased 3.5% to 7.79 cents from
8.07 cents in the same period of 1996, while RASM increased 12.3% to 5.95 cents
from 5.30 cents between the same comparable periods. Scheduled service
departures in the second quarter of 1997 decreased 5.4% to 8,400 from 8,879 in
the second quarter of 1996; block hours decreased 15.3% to 20,075 in the second
quarter of 1997 from 23,692 in the same period of 1996; and passengers boarded
decreased 18.0% over such period to 783,364, as compared to 955,755.
Scheduled service revenues in the six months ended June 30, 1997, decreased
21.7% to $169.3 million from $216.1 million in the six months ended June 30,
1996. Scheduled service revenues comprised 43.8% of total operating revenues in
the six months ended June 30, 1997, as compared to 53.7% of operating revenues
in the same period of the prior year. Scheduled service RPMs decreased 20.8% to
2.071 billion from 2.615 billion, while ASMs decreased 29.8% to 2.724 billion
from 3.883 billion, resulting in an increase of 8.6 points in passenger load
factor to 76.0% in the six months ended June 30, 1997, from 67.4% in the six
months ended June 30, 1996. Scheduled service yield in the six months ended June
30, 1997, decreased 1.1% to 8.17 cents from 8.26 cents in the same period of
1996, while RASM increased 11.5% to 6.21 cents from 5.57 cents between the same
comparable periods. Scheduled service departures in the six months ended June
30, 1997, decreased 22.5% to 13,391 from 17,273 in the six months ended June 30,
1996; block hours decreased 23.6% to 35,001 in the six months ended June 30,
1997, from 45,791 in the same period of 1996; and passengers boarded decreased
25.3% between periods to 1,469,860, as compared to 1,968,133.
The Company added scheduled service capacity during the second quarter 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 quarter of 1996 from New
York to Shannon and Dublin, Ireland, and Belfast, Northern Ireland, and from the
midwest to Seattle. New year-round service was also added 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 half of May and the month of June 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.
After this scheduled service reduction, the Company's 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 and second quarters of 1997. Profitability was achieved
through a combination of significantly higher load factors between periods,
generating improved RASM, 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.
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 an agreement 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.
In addition to the rationalization of markets, schedules and aircraft, during
the first half of 1997, the Company also achieved a more profitable balance
between scheduled service seat inventory and price-driven customer demand for
those seats, consistent with competitive conditions in those markets. A decline
in yield between periods was more than offset by the positive impact of load
factor growth for scheduled service. Yield in the second quarter of 1997
decreased 3.5% to 7.79 cents as compared to 8.07 cents in the same period of
1996, and yield in the first six months of 1997 decreased 1.0% to 8.17 cents
from 8.26 cents in the same period of 1996. Load factor growth was 16.3% in the
second quarter of 1997 as compared to the second quarter of 1996, and 12.9%
between the six months ended June 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 much more significant than the offsetting loss in average yield which
resulted from more aggressive pricing of certain seat inventory.
Scheduled service profitability improvement in the second quarter of 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 per-
centage 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 expect that the change in federal excise tax
computation will place it at either a significant pricing advantage or dis-
advantage as compared to the previous computation method.
The Company continues to evaluate the profit and loss performance of its
scheduled service business, and the Company may further reduce or potentially
restore some scheduled service operations. 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 has 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 decreased 7.1% to $5.2 million in the second quarter of 1997 as
compared to $5.6 million in the second quarter of 1996. For the six months ended
June 30, 1997, ground package revenues decreased 14.7% to $11.0 million from
$12.9 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 second quarter of 1997, total packages sold increased 8.9% over
the second quarter of 1996, and for the six months ended June 30, 1997, the Club
recorded a 3.9% increase in packages sold over the same 1996 period. During the
second quarter of 1997, the average revenue earned for each ground package sold
decreased 7.2% as compared to the second quarter of 1996, while for the six
months ended June 30, 1997, average package price was unchanged 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
and to selected Florida, Mexico and Caribbean destinations. These packages are
marketed through travel agents as well as directly by the Company's own
reservations centers. During the second quarter of 1997, the number of ground
packages sold decreased 6.5% as compared to the second quarter of 1996, while
for the six months ended June 30, 1997, the number of ground packages sold
decreased 4.8% as compared to the same 1996 period. Reductions in the number of
ground packages sold was mainly due to the reduction of the Company's
scheduled service operations between years. During the second quarter of 1997,
the average revenue earned for each ground package sold decreased 8.3% as
compared to the second quarter of 1996, and for the six months ended June 30,
1997, the average package price decreased by 22.9% 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 39.6% to $6.7 million in the second quarter of 1997 as compared to
$11.1 million in the second quarter of 1996, primarily due to a reduction of
$4.2 million in revenues earned between periods through providing substitute
service to other airlines. A substitute service agreement typically provides for
the Company to operate an aircraft with its own crews on routes designated by
the customer airline to carry the passengers of that airline for a limited
period of time. Other revenues decreased 26.0% to $12.8 million in the six
months ended June 30, 1997, as compared to $17.3 million in the comparable 1996
period, for primarily the same reason.
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 second quarter of 1997 increased 5.5% to
$43.9 million from $41.6 million in the second quarter of 1996. Salaries, wages
and benefits expense for the six months ended June 30, 1997, increased 3.1% to
$84.4 million from $81.9 million for the six months ended June 30, 1996.
Approximately $2.4 million of the increase between quarters, and approximately
$3.2 million of the increase between the six month periods ending June 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. A
$3.0 million compensation package 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
support staff in the second quarter of 1997 was approximately $1.9 million
higher than in the second quarter of 1996; for the six months ended June 30,
1997, cockpit crew salaries and wages were approximately $3.0 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 13.9% between the
second quarter of 1997 and the second quarter of 1996, and declined by 14.4% in
the six months ended June 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 the increase in U.S. military block hours as a percentage of total
block hours to 16.9% in the first half of 1997, as compared to 7.1% in the first
half of 1996, contributed to lower average productivity; (iii) cockpit crew
shortages during the first and second quarters of 1997 resulted in the need to
increase premium pay to cockpit crew members in order to adequately staff the
spring and early 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 78.5% in the first six months of 1997,
as compared to 68.7% 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 $3.1 million was incurred in the second quarter of
1997 as compared to the second quarter of 1996, and approximately $5.6 million
was incurred for the six months ended June 30, 1997, as compared to the same
period of 1996. With the exception of costs resulting from the temporary crew
shortages, which the Company expects to have resolved by the end of 1997, unit
costs for cockpit crews are expected to remain at current levels.
The salaries, wages and benefits cost for employee groups other than senior
executives and cockpit crews declined by $2.0 million in the second quarter of
1997 as compared to the second quarter of 1996, and by $3.7 million in the six
months ended June 30, 1997, as compared to the same period in 1996. These costs
declined 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 for labor
groups other than cockpit and cabin crews declined by 19.7% in the second
quarter of 1997 as compared to the second quarter of 1996, and declined by 11.0%
for the six months ended June 30, 1997, as compared to the same period in 1996.
Salaries, wages and benefits expense for the second quarter of 1997 was 1.41
cents per ASM, an increase of 18.5% from the second quarter of 1996 of 1.19
cents per ASM. Salaries, wages and benefits expense for the six months ended
June 30, 1997, was 1.39 cents per ASM, an increase of 17.8% from the six months
ended June 30, 1996, of 1.18 cents per ASM.
Fuel and Oil. Fuel and oil expense for the second quarter of 1997 decreased 7.8%
to $36.4 million from $39.5 million in the second quarter of 1996. During the
second quarter of 1997, as compared to the same quarter in 1996, the Company
consumed 6.3% fewer gallons of jet fuel for flying operations, which resulted in
a reduction in fuel expense of approximately $3.0 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 31,574 jet block hours in
the second quarter of 1997, as compared to 36,672 jet block hours in the second
quarter of 1996, a decrease of 13.9% 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 second quarter of 1997, the Company's average cost
per gallon of fuel consumed decreased by 1.1% as compared to the same quarter in
1996, which resulted in a reduction in fuel and oil expense of approximately
$0.4 million. Also during the second 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 second quarter of 1996.
Fuel and oil expense for the six months ended June 30, 1997, decreased 4.5% to
$77.1 million from $80.7 million in the six months ended June 30, 1996. During
the six months ended June 30, 1997, as compared to the same period in 1996, the
Company consumed 9.6% fewer gallons of jet fuel for flying operations, which
resulted in a reduction in fuel expense of approximately $8.8 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 62,543 jet
block hours in the six months ended June 30, 1997, as compared to 73,040 jet
block hours in the six months ended June 30, 1996, a decrease of 14.4% between
quarters. During the six months ended June 30, 1997, the Company's average cost
per gallon of fuel consumed increased by 6.7% as compared to the same period in
1996, which resulted in an increase in fuel and oil expense of approximately
$4.9 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 six months ended June 30, 1997, the Company incurred
approximately $0.3 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 six months ended June 30, 1996.
Fuel and oil expense for the second quarter of 1997 was 1.17 cents per ASM, an
increase of 3.5% from the second quarter of 1996 of 1.13 cents per ASM. Fuel and
oil expense for the six months ended June 30, 1997, was 1.27 cents per ASM, an
increase of 9.5% from the six months ended June 30, 1996, of 1.16 cents per ASM.
The increase 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 second quarter of 1997, 22.0% of total jet block hours were flown by the
Boeing 757-200 fleet, as compared to 31.4% in the second quarter of 1996. In the
six months ended June 30, 1997, 21.5% of total jet block hours were flown by the
Boeing 757-200 fleet, as compared to 31.3% in the comparable period of 1996.
First quarter 1997 jet fuel price increases also contributed to the increase in
cost per ASM for fuel and oil for the six months ended June 30, 1997, as
compared to the same period of the prior year, although jet fuel prices were
essentially unchanged between the second quarters of 1997 and 1996.
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 increased by 3.6% to $17.2 million in the
second quarter of 1997, as compared to $16.6 million in the second quarter of
1996. During the 1997 second quarter, the average cost per system jet departure
for third-party aircraft handling increased 20.6% as compared to the second
quarter of 1996, and the average cost of landing fees per system jet departure
increased 8.5% 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 second quarters of 1997 and 1996 declined by 24.2% to
9,644 from 12,724, which resulted in approximately $2.4 million in
volume-related handling and landing expense reductions between periods. This
volume-related decline was offset, however, by an approximately $2.4 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 downsizing of the
Company's narrow-body Boeing 757-200 fleet and the shift of revenue production
emphasis towards charter operations, the Company's jet departures in the second
quarter of 1997 included proportionately more international and wide-body
operations than in the second quarter of 1996. In the 1997 second quarter, 22.0%
of the Company's jet departures were operated with wide-body aircraft, as
compared to 18.6% in the 1996 second quarter, and 23.0% of the Company's second
quarter 1997 jet departures were from international locations, as compared to
17.6% in the same period of the prior year. During the second quarter of 1997,
an increase of approximately $0.5 million in air navigation fee expense was also
incurred as compared to the prior year in connection with the increase in
international operations where air navigation fees apply.
Handling, landing and navigation fees decreased by 5.0% to $34.5 million in the
six months ended June 30, 1997, as compared to $36.3 million in the same period
of 1996. During the six months ended June 30, 1997, the average cost per system
jet departure for third-party aircraft handling increased 7.4% as compared to
the same period of 1996, and the average cost of landing fees per system jet
departure increased 4.4% between the same periods. The absolute number of
system-wide jet departures between the six months ended June 30, 1997 and 1996,
declined by 23.9% to 19,273 from 25,334, which resulted in approximately $5.9
million in volume-related handling and landing expense reductions between
periods. This volume-related decline was offset, however, by an approximately
$2.2 million price-related handling and landing expense increase between periods
attributable to a change in jet departure mix. In the six months ended June 30,
1997, 22.4% of the Company's jet departures were operated with wide-body
aircraft, as compared to 19.8% in the comparable period of 1996, and 23.9% of
the Company's jet departures in the six months ended June 30, 1997, were from
international locations, as compared to 16.9% in the same period of the prior
year. During the six months ended June 30, 1997, an increase of approximately
$1.4 million in air navigation fees and first quarter 1997 de-icing costs
was also incurred as compared to the same period in 1996.
The cost per ASM for handling, landing and navigation fees increased 16.7% to
0.56 cents in the second quarter of 1997, from 0.48 cents in the second quarter
of 1996. The cost per ASM for handling, landing and navigation fees increased
9.6% to 0.57 cents in the six months ended June 30, 1997, as compared to 0.52
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 for the second quarter of 1997 increased
1.3% to $15.3 million from $15.1 million in the second quarter of 1996, and
decreased 4.2% to $29.4 million in the six months ended June 30, 1997, as
compared to $30.7 million in the comparable period of 1996.
Depreciation expense attributable to owned airframes and engines decreased $0.3
million in the second quarter of 1997 as compared to the 1996 second quarter,
and decreased $0.5 million in the six months ended June 30, 1997, as compared to
the six months ended June 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 two 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
$0.2 million in the second quarter of 1997 as compared to the second quarter of
1996, and $0.5 million in the six months ended June 30, 1997 as compared to the
same period of 1996.
Amortization of capitalized engine and airframe overhauls decreased $0.1 million
in the second quarter of 1997 as compared to the same period of the prior year
after including the offsetting amortization of associated manufacturers'
credits, and decreased by $1.1 million for the six months ended June 30, 1997,
as compared to the six months ended June 30, 1996. The reduced cost of overhaul
amortization is 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 fourth 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 second quarter of 1997 pertaining to changes in the
Company's Boeing 757-200 fleet was approximately $1.2 million as compared to the
second quarter of 1996, while the reduction in expense pertaining to the six
months ended June 30, 1997, as compared to the same period of 1996 was
approximately $2.7 million. Engine and airframe amortization for the Company's
fleet of Boeing 727-200 aircraft increased by approximately $0.6 million between
the second quarters of 1997 and 1996, and by approximately $1.2 million between
the six month periods ended June 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 $0.3 million and
$0.1 million, respectively, for the second quarters of 1997 and 1996, and the
six months ended June 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 increased by $0.3 million
between the second quarter of 1997 and the second quarter of 1996, but were
essentially unchanged between the six months ended June 30, 1997, and the
comparable 1996 period. 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 14.0% to 0.49 cents in the
second quarter of 1997, as compared to 0.43 cents in the second quarter of 1996.
Depreciation and amortization expense per ASM increased 9.1% to 0.48 cents in
the six months ended June 30, 1997, as compared to 0.44 cents in the six months
ended June 30, 1996.
Aircraft Rentals. Aircraft rentals expense for the second quarter of 1997
decreased 18.5% to $14.1 million from $17.3 million in the second quarter of
1996, and aircraft rentals expense in the six months ended June 30, 1997,
decreased 17.7% to $28.3 million from $34.4 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
$4.2 million between the second quarters of 1997 and 1996, and declined by $8.4
million between the six month periods ended June 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 two quarters of 1996. All of
these Boeing 727-200 aircraft were operated during the entire first six months
of 1997, although most were operated during only a portion of the first six
months of 1996. These fleet additions added approximately $1.0 million in
aircraft rentals expense in the second quarter of 1997, as compared to the
second quarter of 1996, and added approximately $2.1 million in aircraft rentals
expense during the six months ended June 30, 1997, as compared to the same
period of 1996.
Aircraft rentals expense for the second quarter of 1997 was 0.46 cents per ASM,
a decrease of 6.1% from 0.49 cents per ASM in the second quarter of 1996.
Aircraft rentals expense for the six months ended June 30, 1997, was 0.46 cents,
a decrease of 8.0% from 0.50 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.
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 decreased 3.5% to $13.8
million in the second quarter of 1997, as compared to $14.3 million in the
second quarter of 1996, while it decreased 10.8% to $24.9 million in the six
months ended June 30, 1997, from $27.9 million in the same period of 1996. The
cost per ASM increased by 9.8% to 0.45 cents in the second quarter of 1997 as
compared to 0.41 cents in the second quarter of the prior year, while the cost
per ASM increased 2.5% to 0.41 cents in the six months ended June 30, 1997,
from 0.40 cents in the same period of 1996.
Although the cost of repairs for repairable and rotable components decreased by
only $0.3 million between the first quarters of 1997 and 1996, repair costs were
$2.0 million lower in the second quarter of 1997 as compared to the prior year,
and thus $2.3 million lower for the six months ended June 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 decreased $1.5 million in the first
quarter of 1997 as compared to the first quarter of 1996, but was $0.9 million
higher in the second quarter of 1997 than in the same quarter of the prior year,
and therefore was $0.6 million lower between the six-month periods ended June
30, 1997 and 1996. The quarterly variations in the cost of expendable parts
consumed is 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 occurring in the second quarter of
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 $0.9 million in the second
quarter of 1997 as compared to the second quarter of 1996, and increased by $1.2
million for the six months ended June 30, 1997, as compared to the same period
in 1996. The Company contracts with third-party vendors to perform some of its
heavy maintenance checks on the Boeing 727-200 fleet, and these quarterly cost
increases were consistent with the expendable materials cost increases noted
above to complete these maintenance checks during the second quarter of 1997.
The cost of parts loans and exchanges declined by $0.2 million in the second
quarter of 1997, and declined by $1.3 million in the six months ended June 30,
1997, as compared to the same periods in 1996, due to improved internal
procedures to limit the need for such loans and exchanges, which can create
significant costs in very short periods of time.
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 second quarter of
1997 were $0.4 million more than in the same quarter of 1996, and in the six
months ended June 30, 1997, were $0.5 million higher than for the six months
ended June 30, 1996. This increase was primarily due to changes in the mix of
aircraft leases and associated return conditions which became effective between
years.
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 decreased 1.1% to $9.4 million in the
second quarter of 1997, as compared to $9.5 million in the second quarter of
1996, and increased 0.6% to $17.3 million in the six months ended June 30, 1997,
from $17.2 million in the same period of 1996. During the first six months of
1997, the Company's average full-time-equivalent cockpit and cabin crew employ-
ment was 16.4% lower as compared to the prior year, even though jet block hours
decreased by only 14.4% 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 six 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 11.1% to 0.30
cents in the second quarter of 1997, as compared to 0.27 cents in the second
quarter of 1996, and increased 12.0% to 0.28 cents in the six months ended June
30, 1997, from 0.25 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
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 second quarters of 1997 and 1996,
catering represented 87.4% and 80.0%, respectively, of total passenger service
expense, while for the six-month periods ended June 30, 1997 and 1996, catering
represented 82.4% and 78.4%, respectively, of total passenger service expense.
The cost of passenger service decreased 1.3% in the second quarter of 1997 to
$7.6 million, as compared to $7.7 million in the second quarter of 1996, and
decreased 6.5% to $15.8 million in the six months ended June 30, 1997, from
$16.9 million in the same period of 1996. This reduction was primarily caused by
fewer system-wide jet passengers boarded, which declined by 12.3% to 1,312,125
in the second quarter of 1997, as compared to 1,496,897 in the second quarter
of 1996, and declined by 15.0% to 2,719,253 in the six months ended June 30,
1997, as compared to 3,199,502 in the same period of 1996. However, the average
cost to cater each passenger boarded increased 13.7% between the second quarters
of 1997 and 1996, and increased by 12.7% between the six-month periods ended
June 30, 1997 and 1996, due to the shift in the Company's business mix away
from scheduled service, which is lower cost with respect to catering, and toward
tour operator and military programs which have longer average stage lengths and
also generally provide a more expensive catering service.
The cost per ASM of passenger service increased 13.6% to 0.25 cents in the
second quarter of 1997, as compared to 0.22 cents in the second quarter of 1996,
and increased 8.3% to 0.26 cents in the six months ended June 30, 1997, from
0.24 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 decreased 11.8% to $6.7 million in the second
quarter of 1997, as compared to $7.6 million in the second quarter of 1996, and
decreased 16.0% to $12.6 million in the six months ended June 30, 1997 from
$15.0 million in the same period of 1996. Scheduled service commissions expense
declined by $1.4 million and $3.5 million, respectively, between the second
quarters and the six-month periods ended June 30, 1997 and 1996, as a result of
the decline in scheduled service revenues earned. Military and tour operator
commissions expense increased by $0.4 million and $1.1 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 declined by 4.5% to 0.21 cents from 0.22
cents in both the second quarter of 1997 as compared to the second quarter of
1996, and for the six months ended June 30, 1997, as compared to the same period
of 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 decreased 8.5% to $4.3 million in the second
quarter of 1997, as compared to $4.7 million in the second quarter of 1996, and
ground package cost decreased 5.9% to $9.5 million in the six months ended June
30, 1997, as compared to $10.1 million in the same period of 1996. This decrease
in cost was partly due to a 1.5% decrease in the total number of ground packages
sold between the six months ended June 30, 1997 and 1996 for both Ambassadair
and ATA Vacations, as well as a 10.2% decline in the average cost of ground
packages sold between periods.
Ground package cost per ASM increased by 7.7% to 0.14 cents in the second
quarter of 1997, as compared to 0.13 cents in the second quarter of 1996, and
increased by 6.7% to 0.16 cents in the six months ended June 30, 1997, from 0.15
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 21.7% to
$3.6 million in the second quarter of 1997, as compared to $4.6 million in the
second quarter of 1996, and other selling expenses decreased 33.3% to $6.8
million in the six months ended June 30, 1997, as compared to $10.2 million in
the same period of 1996.
Credit card discount expense decreased $0.4 million and $0.7 million,
respectively, in the second quarter of 1997 and the six months ended June 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 $0.4 million and
$1.6 million, respectively, in the second quarter of 1997 and the six months
ended June 30, 1997, as compared to the same periods in 1996, due to the smaller
number of bookings made for the downsized scheduled service business unit
between periods. Toll-free telephone usage also declined $0.4 million and $1.0
million, respectively, for the same periods between years due to less usage and
lower rates.
Other selling cost per ASM decreased 7.7% to 0.12 cents in the second quarter of
1997, as compared to 0.13 cents in the same period of 1996, and other selling
cost per ASM declined 26.7% to 0.11 cents in the six months ended June 30, 1997,
as compared to 0.15 cents in the same period of 1996.
Advertising. Advertising expense decreased 6.1% to $3.1 million in the second
quarter of 1997, as compared to $3.3 million in the same period of 1996, and
increased 15.5% to $6.7 million in the six months ended June 30, 1997, as
compared to $5.8 million in the six months ended June 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.
The cost per ASM of advertising increased 11.1% to 0.10 cents in the second
quarter of 1997, as compared to 0.09 cents in the second quarter of 1996, and
the cost per ASM increased 37.5% to 0.11 cents in the six months ended June 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 the half of 1997 to build load factor and profitability
in the scheduled service business.
Facility and Other Rentals. Facility and other rentals includes the costs 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 8.3% to $2.2 million in the second quarter of 1997, as compared to
$2.4 million in the second quarter of 1996, and was unchanged at $4.4 million
for the six months ended June 30, 1997 and 1996. Although 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), there was no significant total change in facility
commitments between periods. The cost per ASM for facility and other rentals was
unchanged at 0.07 cents in the second quarters of 1997 and 1996, and increased
by 16.7% to 0.07 cents for the six months ended June 30, 1997, as compared to
0.06 cents in the six months ended June 30, 1996.
Other Operating Expenses. Other operating expenses decreased 5.6% to $13.5
million in the second quarter of 1997, as compared to $14.3 million in the
second quarter of 1996, and other operating expenses decreased 8.1% to $26.2
million in the six months ended June 30, 1997, as compared to $28.5 million in
the same period in 1996. These reductions in other operating expenses generally
resulted from the smaller size of the airline between periods as reflected in
expense items such as insurance, professional fees and general supplies. Other
operating cost per ASM increased 2.4% to 0.43 cents as compared to 0.42 cents,
for both the second quarter of 1997 compared to the second quarter of 1996, and
for the six months ended June 30, 1997, as compared to the same period of 1996.
Income Tax Expense
In the second quarter of 1997, the Company recorded $269,000 in income tax
expense applicable to the loss before income taxes for that period, while income
tax credits of $1.3 million were recognized pertaining to the loss before taxes
for the second quarter of 1996. For the six months ended June 30, 1997, income
tax expense of $3.4 million was recorded, as compared to $0.7 million in the
same period of 1996. The effective tax rate applicable to the second quarter of
1997 was 156.0%, while the effective tax rate applicable to the second quarter
of 1996 was 36.1%. The effective tax rates for the six months ended June 30,
1997 and 1996 were 57.6% and 91.4%, respectively.
Income tax expense in both sets of comparative periods is 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 expense rate for financial accounting purposes becomes more
pronounced in cases where before-tax income or loss approaches zero, which was
the reason for the high effective tax rate of 91.4% applicable to the six months
ended June 30, 1996.
Income tax expense for the second quarter of 1997 was also significantly
affected by the one-time $2.0 million charge to salaries, wages and benefits
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 a
permanent difference between income for federal income tax purposes and fin-
ancial accounting income. This additional permanent difference contributed to
the effective tax rate increase to 57.6% for the six months ended June 30, 1997.
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. For the six months ended June 30, 1997
and 1996, net cash provided by operating activities was $38.0 million and $35.6
million, respectively.
Net cash used in investing activities was $40.7 million and $42.9 million,
respectively, for the six months ended June 30, 1997 and 1996. Such amounts
primarily reflected cash capital expenditures totaling $36.7 million in the six
months ended June 30, 1997, and $60.3 million in the same period of 1996, for
engine overhauls, airframe improvements and the purchase of rotable parts. Cash
capital expenditures for the six months ended June 30, 1996, were supplemented
with other capital expenditures, financed directly with debt, totaling $18.4
million; there were no capital expenditures financed directly with debt in the
six months ended June 30, 1997. The Company's capital spending program in the
first six months of 1997 was significantly curtailed as compared to the prior
year due to (i) the downsizing of the Boeing 757-200 fleet in the fourth quarter
of 1996, and the absence of any aircraft deliveries during the first six 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. 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.
Net cash used in financing activities was $5.3 million for the six months ended
June 30, 1997, while net cash provided by financing activities was $1.1 million
for the six months ended June 30, 1996. The primary difference between years was
the addition of $15.0 million in bank facility availability for financing the
installation of hushkits on Boeing 727-200 aircraft during the 1996 period.
For the six months ended June 30, 1997 and 1996, cash and cash equivalents
declined by $8.0 million and $6.1 million, respectively.
Aircraft and Fleet Transactions. In November 1994, the Company signed a purchase
agreement for six new Boeing 757-200s which, as subsequently amended, provides
for aircraft to be delivered between 1995 and 1998. In conjunction with the
Boeing purchase agreement, the Company entered into a separate agreement with
Rolls-Royce Commercial Aero Engines Limited for 13 RB211-535E4 engines to power
the six 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 two deliveries under
this agreement are scheduled for November 1997 and December 1998. Advanced
payments and interest totaling approximately $18.0 million ($9.0 million per
aircraft) are required prior to delivery of the two remaining aircraft, with the
remaining purchase price payable at delivery. As of June 30, 1997 and 1996, the
Company had recorded $9.3 million and $19.7 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 as of
June 30, 1997, but is expected to be financed long-term through 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, and the aircraft was acquired from the lessor on a short-term
rental agreement. The Company expects to purchase this aircraft in the second
half of 1997, and intends to finance it through a sale/leaseback accounted for
as an operating lease. The acquisition of this aircraft, 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 at
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.
Credit Facilities. The Company's existing bank credit facility initially
provided a maximum of $125.0 million, including a $25.0 million letter of credit
facility, subject to the maintenance of certain collateral value. The total
availability under this facility had declined to $122.0 million as of June 30,
1997 for the reasons discussed in the next paragraph. The collateral for the
facility consists of certain owned Lockheed L-1011 aircraft, certain
receivables, and certain rotables and spare parts. At June 30, 1997 and 1996,
the Company had borrowed the maximum amount then available under the bank credit
facility, of which $57.0 million was repaid on July 1, 1997, and $75.0 million
was repaid on July 1, 1996.
As a result of the Company's need to restructure its scheduled service business,
the Company renegotiated certain terms of the bank credit facility effective
September 30, 1996. The new agreement also modified 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 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 available credit 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. As of June 30, 1997 the
Company had borrowed the maximum amount of $122.0 million then available, less
$10.0 million in certain letters of credit outstanding. Loans under the
renegotiated facility bear 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
facility matures on April 1, 1999, and contains 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 June 30, 1997, the Company has classified $25.9 million of bank credit
facility borrowings to current maturities of long-term debt. Of this amount,
$16.5 million is attributable to the scheduled reduction of availability secured
by the owned Lockheed L-1011 fleet during the 12 months ending June 30, 1998.
The remaining $9.4 million represents the amount of the spare Pratt & Whitney
engines which are pledged to the bank facility and which will 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 subsequently sold two of
the four spare Pratt & Whitney engines and received a letter of intent on the
third spare engine, which is expected to be sold during the third quarter.
On July 24, 1997, the Company completed two new debt transactions which
materially changed the capital structure of the Company. On that date the
Company issued $100.0 million in unsecured senior notes and negotiated a new
secured revolving credit facility of $50.0 million. A complete description of
these transactions may be found in the section entitled "Subsequent Events -
Debt Transactions."
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 June 30, 1997 or 1996; however, the Company did have outstanding letters
of credit secured by this facility aggregating $3.6 million and $4.3 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 six months of 1997. The Company does not currently expect to
complete this stock repurchase program.
New Executive Officer
On June 19, 1997, the Company announced the election of John P.Tague as Presi-
dent and Chief Executive Officer of the Company. Mr. Tague originally joined the
Company in 1991 as Vice President of Marketing and was elected President and
Chief Operating Officer in September 1993, a position he held until his
resignation in 1995. Mr. Tague subsequently served as Co-Chairman and Chief
Executive Officer of The Pointe Group, an aviation consulting firm, and as Chief
Executive Officer for both Vanguard Airlines, Inc. and Air South Airlines,
Inc. Mr. Tague brings over 12 years of management experience in the airline
industry to the Company.
Subsequent Events - 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
soures. 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 guaran-
teed 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 ag-
gregate 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 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 is-
suance 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 Company concurrently 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; (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 net proceeds of the unsecured notes were approximately $97.0 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.
The following table sets forth the unaudited consolidated capitalization of the
Company as of June 30, 1997, and the unaudited pro forma consolidated capital-
ization of the Company as of June 30, 1997, assuming that both subsequent debt
transactions had been consummated on June 30, 1997, and after giving effect to
(i) the repayment of $112.0 million in former bank facility indebtedness, which
had been outstanding at June 30, 1997; (ii) the sale of $100.0 million in
senior notes, for net proceeds of $97.0 million; and (iii) the borrowing of the
maximum availability of $40.0 million under the new revolving credit facility,
with the proceeds therefrom held in cash.
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
Actual Pro Forma
Unaudited
Dollars in Thousands
<S> <C> <C>
Cash (a) $65,396 $90,396
======= =======
Short-term debt (consisting of current maturities of
long-term debt) $35,226 $9,356
------- ------
Long-term debt
Secured bank debt, due 1999(a) 86,130 0
Secured bank debt, due 2001 (a) 0 40,000
Tax-exempt mortgage bonds, due 2020 6,000 6,000
Tax-exempt mortgage bonds, due 2025 10,000 10,000
10.5% Senior Notes, due 2004 0 100,000
Unsecured debt 7,342 7,342
Other notes 21 21
Total long-term debt $109,493 $163,363
-------- --------
Total debt $144,719 $172,719
Total stockholders' equity $57,812 $57,812
-------- --------
Total capitalization $202,531 $230,531
======== ========
</TABLE>
(a) At June 30, 1997, the Company had borrowed $112.0 million under the existing
credit facility (less $10.0 million to secure outstanding letters of credit),
the proceeds of which were held in cash. On July 1, 1997, $57.0 million was
repaid. Under the pro forma assumptions, the Company at June 30 had borrowed
$40.0 million under the new credit facility (less $10.0 million to secure
outstanding letters of credit), the proceeds of which were also held in cash.
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 six 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 air carriers 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 often
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 21.8% of total operating
revenues in the second quarter of 1997, and 18.8% of total operating revenues in
the six months ended June 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 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 19.0% and 19.9%, respectively, of operating
expenses in the second quarter of 1997 and the six months ended June 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
On May 13, 1997, the Company held its Annual Meeting of Shareholders, during
which the following matters were submitted to a vote of shareholders.
(1) The following individuals were elected as Directors of the Company.
Director Name Votes For Votes Withheld
J. George Mikelsons 11,009,636 649,832
Kenneth K. Wolff 11,008,344 651,124
James W. Hlavacek 11,007,012 652,456
William P. Rogers, Jr. 11,009,837 649,631
Robert A. Abel 11,009,737 649,731
Andrejs P. Stipnieks 11,009,737 649,731
Stanley L. Pace 11,009,166 650,302
Dalen D. Thomas 11,008,611 650,857
(2) The Company's 1996 Incentive Stock Plan for Key Employees was approved;
9,343,440 votes were cast for; 1,629,018 were cast against; 29,878 votes were
withheld; and 657,132 votes were not cast.
(3) The Company's 1996 Annual Incentive Bonus Plan was approved; 11,229,062
votes were cast for; 255,215 votes were cast against; 25,215 votes were
withheld; and 149,976 votes were not cast.
(4) The accounting firm of Ernst & Young was retained as independent auditors of
the Company for the 1997 fiscal year; 11,618,538 votes were cast for; 18,585
votes were cast against; and 22,345 votes were withheld.
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: __________________ ________________________________________
John P. Tague
President and Chief Executive Officer
Director
Date: __________________ ________________________________________
James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date: __________________ ________________________________________
Kenneth K. Wolff
Executive Vice President and
Chief Financial Officer
Director
Date: __________________ ________________________________________
Dalen D. Thomas
Senior Vice President-Sales, Marketing
and Strategic Planning
Director
