United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996.
[ ] 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
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(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 - 11,614,852 shares as of February 28, 1997.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran Inc. and Subsidiaries' Proxy Statement dated
April 1, 1997, are incorporated by reference into Part III.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
FORM 10-K/A ANNUAL REPORT - 1996
AMTRAN INC. AND SUBSIDIARIES
Page #
PART I
<S> <C> <C>
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 17
Item 3. Legal Proceedings.................................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders................................................ 20
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters...................... 20
Item 6. Selected Financial Data............................................................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 22
Item 8 Financial Statements and Supplementary Data........................................................ 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 62
PART III
Item 10. Directors and Officers of the Registrant........................................................... 63
Item 11. Executive Compensation............................................................................. 63
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 63
Item 13. Certain Relationships and Related Transactions..................................................... 63
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K..................................... 64
</TABLE>
<PAGE>
PART I
Item 1. Business
General
Amtran, Inc. (the "Company") is a leading provider of charter,
and on a selective basis scheduled, airline services to leisure
and other value-oriented travelers. Through its principal
subsidiary, American Trans Air, Inc. ("ATA"), Amtran operates
the eleventh largest airline in the United States in terms of
1996 revenue passenger miles. ATA provides charter services
throughout the world to independent tour operators and the U.S.
military. In addition, ATA provides scheduled nonstop service
primarily to vacation destinations such as Hawaii, Las Vegas,
Florida and the Caribbean from selected gateway cities. ATA
commenced operations in 1973 as a provider of aircraft services
to the Ambassadair Travel Club, was certified as a public
charter carrier in 1981 and commenced scheduled service in 1986.
Overview of the Charter Airline Industry
The charter airline industry is comprised of (i) passenger
charter airlines, which provide passenger service primarily to
tour operators, the military and others who contract for
specific services, (ii) air freight carriers, which provide
cargo service on either a scheduled or charter basis and (iii)
scheduled airlines, which provide charter service on a limited
basis.
Charter airlines have been in existence in the United States and
Europe since the earliest days of commercial aviation.
Historically, charter airlines have supplemented the service
provided by scheduled airlines by providing specialized service
at times of peak demand. U.S. charter airlines have also
traditionally provided service to the military both in times of
peak demand, such as during the Persian Gulf War, and on a
longer-term basis to supplement the military's own transport
capacity. Based on Department of Transportation ("DOT")
statistics, total charter flights by all U.S. airlines
represented less than 3% of all available seat miles ("ASMs")
flown within the United States during the twelve months ended
July 31, 1996.
As a result of the increase in airline capacity since the late
1980s, the opportunity for charter airlines to provide
supplemental service in times of peak demand has been reduced.
In addition, several scheduled airlines have increased the
number of discounted seats on regularly scheduled flights that
they have made available to tour operators and thereby increased
the amount of competition faced by charter airlines on routes
served by both types of carriers.
Competition for charter carriers has further increased due to
the growth of discounted scheduled airline capacity serving
point to point markets, which have been the traditional source
of seasonal opportunity for charter operations within the United
States. The success of some carriers in developing their point
to point markets has posed a competitive threat to some
established large carriers, who have responded by developing
their own versions of highly discounted services using smaller
jet aircraft, and sometimes bypassing their own hubs.
<PAGE>
Part I - Continued
In the United States, the charter airline industry has consisted
of a large number of relatively small airlines, many of which
operate a few older aircraft. In Mexico, the charter airline
industry consists of a few, relatively small airlines which
generally operate only narrow-body aircraft. In Europe, by
contrast, the charter airline industry has for a number of years
included both large and small airlines. In Europe, such charter
airlines traditionally have been significant competitors to the
scheduled airlines for passenger traffic to leisure destinations
such as the Mediterranean, the United States and the Caribbean.
Historically, this has been due in part to the fact that charter
carriers were subject to fewer price and route regulations than
the scheduled airlines. In addition, this regulatory advantage
has led some European scheduled airlines to form or acquire
charter airline affiliates, and to devote significant resources
toward the marketing of charter services. It also has
contributed to the formation of companies which own both a
charter airline and a significant tour operator business and, in
some cases, retail travel agencies.
In general, charter airlines have a lower cost structure than
scheduled airlines. Unlike most scheduled airlines, charter
airlines do not invest heavily in advertising and marketing, nor
do they maintain a sizeable and complex reservations system or
maintain extensive airport support facilities. Charter airlines
also generally operate with lower overall employment costs and
higher average load factors than scheduled airlines.
The Company's Airline Operations
Background
ATA flew its maiden flight on a Boeing 720 between Indianapolis
and Orlando in 1973 for Ambassadair. It was certificated as a
public charter carrier in 1981 and as a scheduled air carrier in
1985. ATA grew from flying approximately 355 million revenue
passenger miles ("RPMs") in 1982, its first full year as a
public charter carrier, to approximately 9.2 billion RPMs in
1996. In 1973, the Company's fleet consisted of a single leased
Boeing 720. As of December 31, 1996, the Company operated a
fleet of 45 aircraft. The following table illustrates the growth
of the Company over the most recent ten years:
<TABLE>
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Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(Dollars in millions)
Operating revenues $254.4 $253.9 $279.1 $371.4 $414.0 $421.8 $467.9 $580.5 $715.0 $ 750.9
Net income (loss) $ 3.2 $ 7.0 $ 4.4 $ (2.0) $ 5.6 $ (2.1) $ 3.0 $ 3.5 $ 8.5 $ (26.7)
Total assets $183.0 $193.4 $238.4 $251.8 $237.4 $239.0 $269.8 $346.3 $413.1 $ 370.3
Block hours 48,870 42,642 49,222 57,847 60,177 65,583 76,542 103,657 126,295 138,114
ASMs (in millions) 5,287 4,857 5,374 6,755 7,111 7,521 8,232 10,443 12,522 13,296
Employees (at period end) 1,675 1,789 2,134 2,310 2,205 2,412 3,418 4,136 4,830 4,435
</TABLE>
<PAGE>
Services Offered
The Company generally provides its airline services to its
customers in the form of charter and scheduled service sales.
The following table provides a summary of the Company's total
revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------ ------------ -----------
(Dollars in millions)
Charter
<S> <C> <C> <C> <C> <C>
Tour operator $271.5 $207.4 $196.1 $222.2 $218.2
Ambassadair (air only) 5.4 6.3 7.9 7.3 8.2
Military 47.1 78.4 91.8 77.5 84.2
----------- ----------- ------------ ------------ -----------
Total charter 324.0 292.1 295.8 307.0 310.6
Scheduled service 61.1 138.0 240.7 362.0 386.5
Other 36.7 37.8 44.0 46.0 53.8
----------- ----------- ------------ ------------ -----------
Total $421.8 $467.9 $580.5 $715.0 $750.9
=========== =========== ============ ============ ===========
</TABLE>
Charter Sales
As illustrated in the above table, charter sales represented
41.4% of the Company's total revenues for 1996. The Company's
principal customers for charter sales are tour operators,
military and government agencies, sponsors of incentive travel
packages and specialty charter customers.
Tour Operator Programs. Demand from tour operators for the
Company's low-cost, leisure services declined by 1.4% in 1996
over 1995. This component accounted for approximately 30.2% of
the Company's total revenues and 32.8% of ASMs for 1996. These
leisure-market programs are generally contracted for repetitive,
round-trip patterns, operating over extended periods of time. In
such an arrangement, the tour operator pays a fixed price for
use of the aircraft (which includes the services of the cockpit
crew and flight attendants, together with check-in, baggage
handling and maintenance services, catering and all necessary
aircraft handling services) and assumes responsibility and risk
for the actual sale of the available aircraft seats. Because the
Company operates primarily on a contract basis, it can, subject
to competitive constraints, structure the terms of each contract
to reflect the costs of providing the specific service, together
with an acceptable return.
In general, tour operators either package the Company's flights
with traditional ground components (e.g., hotels, rental cars,
attractions) or sell only the airline passage ("airfare only").
Tickets on the Company's flights contracted to tour operators
are issued by the tour operator either directly to passengers or
through retail travel agencies. 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 the costs of land arrangements) must be
placed into escrow by the tour operator or protected by a surety
bond satisfying certain prescribed standards. Funds paid by tour
operators to the Company for charter transportation must be
escrowed or protected by a similar bonding arrangement.
Currently, the Company provides a third-party bond, which is
unlimited in amount in order to satisfy its obligations under
these regulations. Under the terms of its bonding arrangements,
the issuer of the bond has the right to terminate the bond at
any time on 30 days notice and the current premium is subject to
review and adjustment on June 30, 1997. The Company provides a
letter of credit to secure $2 million of its potential
obligations to the issuer of the bond. If the bond were to be
materially limited or canceled, the Company, like all other U.S.
charter airlines, would be required to escrow funds to comply
with the DOT requirements summarized above. Compliance with such
requirements would reduce the Company's liquidity and require it
to fund higher levels of working capital ranging up to
approximately $10 million based on 1996 peak travel periods. See
"Business -- Regulation".
Although the Company serves tour operator programs on a
worldwide basis, its primary customers are U.S.-based and
European-based tour operators. For 1996, the Company's five
largest tour operator customers represented approximately 22.4%
of the Company's consolidated revenues, and the ten largest tour
operator customers represented approximately 29.8% of the
Company's consolidated revenues.
In general, the Company enters into contracts with tour
operators four to six months in advance of the commencement of
the service to be provided. Pursuant to these contracts, tour
operators, who are often thinly capitalized, are required
generally to pay to the Company at the time the contract is
executed a deposit ranging from one week's revenue due under the
contract (in the case of recurring pattern contracts) to 10%-30%
of the total charter payment (in the case of nonrecurring
pattern contracts). Tour operators are required to pay the
remaining balance of the charter payment to the Company at least
two weeks prior to the flight date. In the event the tour
operator fails to make the remaining payment when due, the
Company must either cancel such flight at least ten days prior
to the flight date or, pursuant to DOT regulations, perform
under the contract notwithstanding the breach by the tour
operator. In the event the tour operator cancels or defaults
under the contract with the Company or otherwise notifies the
Company that such tour operator no longer needs charter service,
the Company is entitled under the contract to keep the
contractually established cancellation fees, which may be more
or less than the deposit. Whether the Company elects to exercise
this right in a particular case will depend upon a number of
factors, including the Company's ability to redeploy the
aircraft, the amount of money on deposit or secured by a letter
of credit, the relationship the Company has with the tour
operator and the general market conditions existing at the time.
The Company may choose to renegotiate a contract with a tour
operator from time to time based on market conditions. As part
of any such renegotiations a tour operator may seek to reduce
the per-seat price or the number of flights or seats per flight
which the tour operator is obligated to purchase.
In connection with its sales to tour operators, the Company
seeks to minimize its exposure to unexpected changes in
operating costs. The Company, under its contracts with tour
operators, is able to pass through most increases in average
fuel costs. Under these contracts, if the fuel increase causes
the total contract price to rise in excess of 10%, the tour
operator has the option of canceling the contract. These
contracts provide that the final fuel price is to be determined
based on a blended average of the Company's fuel costs two weeks
prior to the flight date. The Company is exposed to increases in
fuel costs that occur within 14 days of flight time, to all
increases associated with its scheduled service and to increases
affecting any charter contracts that do not include fuel cost
escalation provisions.
The Company believes that although price is the principal
competitive criterion, product quality and the ability to
deliver a charter service that is customized to the customer's
particular needs have become increasingly important to
independent tour operators. Accordingly, the Company seeks to
differentiate itself through increased emphasis on its ability
to deliver customized in-flight service (such as food service,
foreign language flight attendants and movie selections),
consistency of product delivery, customer handling, delivery
support and operational reliability for the tour operator. The
ability to deliver a tour product meeting the leisure traveler's
quality and price expectations provides a significant marketing
advantage to the tour operator.
Military/Government. In 1996 military/government sales were
11.2% of the Company's total revenues and 10.8% of total ASMs.
Traditionally, the Company's focus has been on short-term
"contract expansion" business which is routinely awarded by the
U.S. Government based on price and availability of appropriate
aircraft. The government prenegotiates contract prices for each
type of aircraft a carrier makes available to the military, with
the airline responsible for virtually all costs other than fuel.
The government pays for the entire cost of fuel. The short-term
expansion business is awarded pro rata to the carriers with
aircraft availability who have been awarded the most fixed-award
business, and then to any additional carrier that has aircraft
available. As discussed below, the Company's anticipated
fixed-award business should also assist the Company in obtaining
additional expansion business.
Pursuant to the military's fixed-award system, each
participating airline is given certain "mobilization value
points" based on the number and type of aircraft then available
from such airline. A participant may increase the number of its
mobilization value points by teaming up with one or more other
airlines to increase the total number of mobilization value
points of the team. Generally, a charter passenger airline will
seek to team up with one or more charter cargo airlines and vice
versa, as there is generally not enough cargo fixed-award
business available for these types of carriers to utilize all of
their mobilization value points. When the military determines
its carrier needs for a particular period, it determines how
much of each particular type of service it will need (e.g.,
narrow-body, passenger service). It will then award each type of
business to those carriers or teams that have committed to make
available that type of aircraft and service with the carriers or
teams with the highest amount of mobilization value points given
a preference. When an award is presented to a team, the charter
passenger airline will generally perform the passenger part of
the award and the charter cargo airline will perform the cargo
part of the award.
In 1992, the Company entered into a "contractor teaming
arrangement" with four other cargo and passenger airlines
serving the military. If the Company used only its own
mobilization value points, it would be entitled to a fixed-award
of approximately 1% of total awards under the system; however,
when all of the Company's team members are taken into account,
their portion of the fixed-award is approximately 34% of total
awards under the system. As a result, the contractor teaming
arrangement significantly increases the likelihood that the team
will receive a fixed-award contract, and, to the extent the
award includes passenger transport, increases the Company's
opportunity to provide such service because the Company
represents a significant portion of the team's passenger
transport capacity. In addition, since the expansion business is
also awarded as a function of the fixed-award system, the
Company, through its contractor teaming arrangement, should also
receive a greater percentage of the short-term expansion
business. As part of its participation in this contract teaming
arrangement, the Company pays certain utilization fees to other
team members.
<PAGE>
The Company is subject to biennial inspections by the military
as a condition of retaining its eligibility to perform military
charter flights. The last such inspection was undertaken in 1995
and the next is scheduled for the third or fourth quarter of
1997. As a result of such inspections, the Company has been
required to implement measures beyond those required by the DOT,
Federal Aviation Administration ("FAA") and other government
agencies.
Military and other government flight activity has recently been,
and is expected to remain, a significant factor in the Company's
business mix. Because this business is generally less seasonal
than leisure travel, it should tend to have a stabilizing impact
on the Company's operations and earnings. The Company believes
its fleet of aircraft is well suited for the changing
requirements of military passenger service. Although the
military is reducing its troop size at foreign bases, the
military still desires to maintain its schedule frequency to
these bases. Therefore, the military has a need for smaller
capacity aircraft possessing long-range capability, such as the
Company's Boeing 757-200ER aircraft. 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"). This certification permits specially
equipped Boeing 757-200 aircraft to participate in long-range
missions over water in which the aircraft may be up to three
hours from the nearest alternate airport. All of the Company's
Boeing 757-200s are so equipped and certified. The Company
believes that this 180-minute ETOPS capability has enhanced the
Company's ability to obtain awards for certain long-range
missions.
Incentive Travel Programs. Many corporations offer travel to
leisure destinations or special events as incentive awards for
employees. The Company has historically provided air travel for
many corporate incentive programs. Incentive travel customers
range from national incentive marketing companies to large
corporations that handle their incentive travel programs on an
in-house basis.
The Company believes that its flexibility, versatility and
attention to detail have helped to establish it as one of the
leaders in providing incentive travel airline charter service.
Incentive travel services are generally customized to the
customer or sponsor, vacation destination or special event.
Generally, incentive travel operations are a demanding and
sophisticated part of the charter airline business. Incentive
travel operations can vary from a single round trip to an
extensive overseas pattern involving thousands of employees and
their families.
Specialty Charters. The Company operates a significant number of
specialty charter flights. These programs are normally
contracted on a single round-trip basis and vary extensively in
nature, from flying university alumni to a football game, to
transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site.
Traditionally, these flights are arranged on very short notice
on a bid basis and, if the Company has aircraft available, allow
the Company to increase aircraft utilization during off-peak
periods.
The Company believes it is able to attract this business due to
its fleet size and diversity of aircraft. The size and location
of the Company's fleet reduces nonproductive ferry flight
activity, resulting in more competitive pricing. The diversity
of aircraft types in its fleet also allows the Company to better
match a customer's particular charter requirements with the type
of aircraft best suited to satisfy those requirements.
<PAGE>
Scheduled Service Sales
In addition to its charter sales, the Company markets air
travel, as well as packaged leisure travel products, directly to
retail consumers in selected markets. In scheduled service, the
Company focuses primarily on serving selected leisure
destinations with low-cost, nonstop or direct flights from
cities which do not have such service or where there is only
limited competition. The Company believes that it may be able,
on a selective basis, to expand this business as the major
scheduled airlines increasingly consolidate their hub-and-spoke
route systems.
The Company's scheduled service operations link the
Indianapolis, Chicago-Midway and Milwaukee markets with several
popular leisure destinations. The Company seeks to maintain
operational flexibility in its scheduled service. If the Company
is unsatisfied with its return on a specific scheduled service
route, it will reduce or cancel the service and reallocate the
assets based on alternative market opportunities.
The Company's strategy for its scheduled service is to offer
routine, low-frequency service which stresses nonstop
convenience and a simplified pricing structure oriented to the
buyer of leisure travel services. During 1996, scheduled service
provided 51.5% of the Company's consolidated revenues and 54.9%
of ASMs.
Included in the Company's scheduled service sales are bulk sales
agreements with tour operators. Under these arrangements, which
are very similar to charter sales, the tour operator may take a
significant portion of an aircraft with a bulk-seat purchase.
The Company retains only a minor portion, which it sells through
its own scheduled service distribution. The advantage for the
tour operators is that their product appears in the Computer
Reservation System ("CRS") and through other scheduled service
distribution channels. Under this arrangement, the Company is
ultimately responsible for the passenger's travel similar to any
other scheduled service, regardless of its ability to collect
from the tour operator. Bulk seat sales amounted to $67.3
million in 1996, which represented 9.0% of the Company's 1996
total consolidated revenue.
Other Revenues
Through its industry sales operations, the Company offers a
variety of aviation services, including the "wet leasing" of
aircraft (or "subservice") and maintenance services, management
and technical consulting and various training services. The
Company's customers for these services include established as
well as start-up airlines that lease equipment and subcontract
for aircraft services. During 1996, subservice sales provided
0.9% of the Company's total consolidated revenues. Other
industry sales revenues included in total operating revenues for
1996 were not significant.
The Company's aircraft leasing activities consist exclusively of
"wet leases" in which the lessor supplies, in addition to the
aircraft, the cockpit crew, insurance and maintenance, and the
lessee is responsible for all other matters in connection with
the aircraft, including handling, fuel and catering. Ad hoc
subservices for scheduled carriers are typically conducted as
"public charters" pursuant to waivers granted by the DOT from
its public charter regulations. In conducting subservice, the
Company also complies with all applicable FAA requirements,
including those pertaining to security arrangements for flight
operations conducted by U.S. carriers. The Company does not, and
is generally not permitted under its financing and leasing
arrangements, to enter into "dry leases" in which the lessee
leases only the aircraft itself and the lessee is responsible
for cockpit crew, insurance, maintenance and all other matters
in connection with the aircraft.
The aircraft subservice market has experienced a significant
decline over the past few years. This decline has been primarily
the result of (i) slower growth in traffic levels, which has
reduced the number of occasions when airlines have required
additional aircraft to cover peak capacity periods, and (ii) an
oversupply of available aircraft as a result of the deliveries
of new aircraft and a consolidation of the airline industry.
ATA Vacations. The Company's wholly-owned ATA Vacations
subsidiary markets complete vacation packages (i.e., hotel,
rental car, air) at destinations served by the Company both on a
charter and scheduled service basis. These packages target
customers seeking the added value associated with "one-call"'
vacation planning. Higher margins associated with the sale of
all-inclusive packages enhance the earnings performance for the
Company's single seat business.
Travel Club. The Company owns Ambassadair Travel Club, based in
Indianapolis. The travel club is dues-based, so that for an
initiation fee and annual dues, club members, who together
currently total approximately 39,000 individuals and families,
gain access to a broad variety of all-inclusive travel and
vacation packages. During 1996, the Company operated
approximately 400 trip options exclusively for club members.
During 1996, travel club members provided $21.9 million of
revenues from dues, air travel and ground packages.
Aircraft Fleet
As of December 31, 1996, the Company operated a fleet of 14
Lockheed L-1011s, 24 Boeing 727-200ADVs and 7 Boeing 757-200s.
Lockheed L-1011 Aircraft. The Company's Lockheed L-1011 aircraft
are wide-body aircraft, 12 of which have a range of 2,971
nautical miles and 2 of which have a range of 3,425 nautical
miles. These aircraft conform to the FAA's Stage 3 noise
requirements and have a low ownership cost relative to most
other wide-body aircraft types. (For information regarding Stage
3 noise requirements, see "Business -- Environmental Matters".)
As a result, the Company believes these aircraft offer a
competitive advantage when operated on long-range routes, such
as on transatlantic, Caribbean and West Coast-Hawaii routes. As
of December 31, 1996, twelve of these aircraft are owned by the
Company and two are under operating leases that expire in June
2000 and March 2001.
Boeing 727-200ADV Aircraft. The Company's Boeing 727-200ADV
aircraft are narrow-body aircraft equipped with high thrust,
JT8D-15/-15A/-17/-17A engines and have a range of 2,050 nautical
miles. These aircraft, 23 of which have been leased, have an
average age of approximately 16 years, of which 16 conform to
Stage 2 and eight conform to Stage 3 noise requirements as of
December 31, 1996. The leases for these aircraft have initial
terms that expire between December 1997 and November 2002,
subject to the Company's right to extend each lease for varying
terms. The Company may be required prior to December 31, 1998,
and will be required prior to December 31, 1999, to make
expenditures for engine "hushkits" or to acquire replacement
aircraft so that its entire fleet conforms to Stage 3 noise
requirements in accordance with FAA regulations. In general, the
lessors of the Company's Boeing 727-200ADVs have agreed to
finance hushkits for these aircraft which, if accepted by the
Company, will result in an automatic extension of the lease term
for each aircraft. Although Boeing 727-200ADV aircraft are
subject to the FAA's Aging Aircraft program, the Company does
not expect that its cost of compliance for these aircraft over
the next two years will be material. See "Business --
Regulation".
Boeing 757-200 Aircraft. The Company's Boeing 757-200 aircraft
are modern, narrow-body aircraft, all of which have a range of
3,679 nautical miles. These aircraft, all of which are leased,
have an average age of approximately 3 years and meet Stage 3
noise requirements. The Company's Boeing 757-200s have higher
ownership costs than the Company's Lockheed L-1011 and Boeing
727-200ADV aircraft, but relatively low operational costs. In
addition, unlike most other aircraft of similar size, the Boeing
757-200 has the capacity to operate on extended flights over
water. The leases for the Company's Boeing 757-200 aircraft have
initial terms that expire on various dates between March 1997
and March 2015, subject to the Company's right to extend each
lease for varying terms.
All of the aircraft and most of the engines owned by the
Company, together with the Company's related inventory of spare
parts, are subject to mortgages and other security interests
granted in favor of the Company's lenders under its credit
agreement and certain loan agreements. The terms of such
security arrangements prohibit any sale or lease of such
aircraft, engines or other assets without the consent of the
secured party, subject, however, to certain exceptions,
including in most cases leases not in excess of six months where
the Company maintains operational control of the property. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources --
Credit Facilities".
Flight Operations
Worldwide flight operations are planned and controlled by the
Company's Flight Operations Group operating out of its
facilities located in Indianapolis, Indiana, which are staffed
on a 24-hour basis seven days a week. Logistical support
necessary for extended operations away from the Company's fixed
bases are coordinated through its global communications network.
ATA's complex operating environment demands a high degree of
skill and flexibility from its Flight Operations Group.
In order to enhance the reliability of its service, the Company
seeks to maintain at least two spare Lockheed L-1011 aircraft
and two spare Boeing 727-200 aircraft at all times. The spare
aircraft can be dispatched on short notice to most locations in
the world where a substitute aircraft is needed for mechanical
or other reasons. The spare aircraft allows the Company to
provide to its customers a dispatch reliability that is hard for
an airline of comparable or smaller size to match.
Maintenance and Support
The Company's Maintenance and Engineering Center is located at
Indianapolis International Airport. The 120,000 square-foot
facility was designed to meet the maintenance needs of the
Company's operations as well as provide contract control of
purchased services. The Company performs approximately 75% of
its maintenance work, excluding engine overhauls and Lockheed
L-1011 and Boeing 727-200 heavy airframe checks.
The Company currently maintains ten permanent maintenance
facilities, including its Indianapolis facility. In addition,
the Company utilizes "Road Teams", which are dispatched as
flight operations require to arrange for and supervise
maintenance services at temporary locations. The Company sends
Road Teams to oversee the 25% of its airframe maintenance not
performed in house.
<PAGE>
The Indianapolis Maintenance and Engineering Center is an
FAA-certificated repair station and has the expertise to perform
routine, as well as nonroutine, maintenance on Lockheed L-1011,
Boeing 727-200, and Boeing 757-200 aircraft. Capabilities of the
Maintenance and Engineering Center include: (i) airworthiness
directive and service bulletin compliance; (ii) modular teardown
and buildup of Rolls Royce RB211-22B and -535E4 engines; (iii)
nondestructive testing, including radiographics, x-ray,
ultrasound, magnetic particle and eddy current; (iv) avionics
component repair; (v) on-wing engine testing; (vi) interior
modification; (vii) repair and overhaul of accessories and
components, including hydraulic units and wheel and brake
assemblies; and (viii) sheet metal repair with hot bonding and
composite material capabilities. The Company contracts with
third parties for certain engine and airframe overhaul and other
services when the Company does not have the technical
capability, facility capacity, or if the services can be
obtained on a more cost-effective basis from outside sources.
In order to perform maintenance on its fleet, the Company has
established three different types of maintenance stations,
depending upon the frequency of aircraft visits and the level of
maintenance services available:
Class I: Stations with assigned Company mechanics, adequate
facilities, equipment and parts to perform both scheduled and
unscheduled maintenance on all aircraft normally operating into
that station.
Class II: Stations with assigned Company mechanics, but limited
facilities, equipment and parts that are capable of performing
certain scheduled and unscheduled maintenance.
Class III: Stations with on-call maintenance arranged by the
Company with other certificated operators or maintenance
facilities to perform both scheduled and unscheduled maintenance
on the Company's aircraft operating into the station. All work
is scheduled and controlled by the Company's Maintenance Control
division.
As of December 31, 1996, the Company had maintenance
capabilities in ten locations. The Off-Line Maintenance group is
responsible for aircraft maintenance at all Class III stations.
This group provides Road Teams and coordinates contract labor at
stations all around the world where maintenance is needed to
support short-term operations. The technical representatives of
the Company supervise the quality and completion of the work
performed on the Company's aircraft. During the last two years,
the Company has operated Class III stations at five locations in
the United States and one foreign location.
Other Activities
In addition to its airline and travel businesses, the Company
owns and operates or participates in several smaller businesses
that complement its airline service, including American Trans
Air Training Corporation, which provides professional training
schools for pilots, mechanics and flight attendants, ExecuJet,
an executive air charter service, and Amber Air Freight, a
freight forwarder. In 1996, revenues from these businesses
accounted for less than 1% of the Company's total operating
revenues.
<PAGE>
American Trans Air Training Corporation. American Trans Air
Training Corporation (the "Training Corporation") was organized
in 1988 to service the training needs of airlines and airline
suppliers as well as individuals desiring to pursue a career in
aviation. The Training Corporation has two distinct areas of
training: Pilot and Contract Training and Airframe and Power
Plant Training.
The Training Corporation provides training to airline personnel,
including cockpit crews, flight attendants, ground security
coordinators, dispatchers and other support personnel. These
services are arranged on a contractual basis with an airline and
are generally completed in Indianapolis where the Training
Corporation has its educational facilities, including
classrooms, cabin trainers and other training aides. The
Training Corporation is a partner with a subsidiary of LTU
International Airlines, a German charter airline, in a joint
venture owning a Lockheed L-1011 simulator located in Miami,
Florida. The Training Corporation is the managing partner for
the venture operating the simulator and markets training time to
other Lockheed L-1011 operators. The flight school is FAR
('Federal Air Regulation') Part 141 certified; accordingly,
graduates receive an FAA approved pilot's license.
In July 1992, The Training Corporation opened its Airplane and
Power Plant School in Indianapolis providing training necessary
for licensing graduates as airplane and power plant mechanics
("A&Ps"). A&P licenses are required for all maintenance on
U.S.-registered aircraft (private and commercial) including all
scheduled and charter airlines. ATA, Federal Express and United
Airlines have maintenance facilities at Indianapolis
International Airport. These airlines should provide substantial
demand for future graduates of the Airframe and Power Plant
School.
ExecuJet. ExecuJet provides executive air charter services using
a Citation jet aircraft, as well as Bell 206B JetRanger III and
Aerospatiale 355F2 helicopters. ExecuJet's customers include
corporations and individuals requiring high-quality, private air
transportation.
The Company acquired the aircraft used by ExecuJet to provide
ATA with a prompt means to deliver crews, mechanics and spare
parts to its aircraft when reasonable alternatives do not
otherwise exist. The Company formed ExecuJet in order to utilize
more fully these aircraft. ExecuJet has expanded its client base
to include the entertainment field and Fortune 500 companies as
well as local corporate users.
Amber Air Freight, Inc. Amber Air Freight, Inc., is a general
partner in Amber Air Freight, an Indiana general partnership,
with a third party that is the manager of the venture. Amber Air
Freight markets the unused cargo capacity in ATA's scheduled and
charter operations. Amber Air Freight's customers include
freight transporters, such as freight forwarders and
consolidators, some of whom do not require year-round scheduled
service but that can rely on the seasonal patterns which charter
airlines develop. Amber Air Freight also markets this service to
other charter airlines.
<PAGE>
Insurance
The Company carries types and amounts of insurance customary in
the charter airline industry, including coverage for public
liability, passenger liability, property damage, aircraft loss
or damage, baggage and cargo liability and workers'
compensation. Under the Company's current insurance policies, it
will not be covered by such insurance when it flies, without the
consent of its insurance provider, to the following countries:
Afghanistan, Angola, Chad, Columbia, Iraq, Liberia, Libya, Peru,
Somalia, Sudan, the area comprising the former Republic of
Yugoslavia and Zaire. The Company does not consider the
inability to operate into or out of any of these countries to be
a significant limitation on its business. The Company will
support certain U.S. government operations in areas where its
insurance policy does not provide coverage for losses when the
U.S. government provides sufficient replacement insurance
coverage.
Employees
As of December 31, 1996, the Company had approximately 4,435
employees. In June of 1991, the Company's flight attendants
elected the Association of Flight Attendants ("AFA"') as their
representative. In December 1994, the flight attendants ratified
a four-year collective agreement. In June of 1993, the Company's
cockpit crews elected the International Brotherhood of Teamsters
("IBT") as their representative. In September of 1996, following
three years of negotiation, a four-year collective agreement was
ratified by the cockpit crews.
The Company believes that its relations with its employees are
good. However, the existence of a significant dispute with any
sizable number of its employees could have a material adverse
effect on the Company's operations.
Competition
The Company competes in a number of different markets because it
offers different products and services, and the nature and
intensity of such competition varies from market to market. In
marketing its charter and scheduled airline services, the
Company emphasizes its ability to provide a simplified product
designed to meet the primary needs of leisure travelers. This
includes offering low fares, nonstop or direct flights from the
customer's city of origin and in-flight services that are
comparable to standard coach service on scheduled airlines. By
offering air travel products that can be tailored to meet the
particular needs of its customers, particularly independent tour
operators, the Company believes it is able to differentiate
itself from most major scheduled airlines, whose principal focus
is on frequent scheduled service on established routes, as well
as from smaller charter airlines, which often do not have
comparably diverse fleets or the ability to provide similar
support or customization.
In the United States, there are few barriers to entry into the
airline business, apart from the need for certain government
licenses and the need for and availability of financing,
particularly for those seeking to operate on a small scale with
limited infrastructure and other support systems. As a result,
the Company may face increased competition from start-up
airlines in selected markets from time to time. In the leisure
travel market, the Company's principal business, the competition
for airline passengers is significant. The Company competes with
both scheduled and charter airlines, both in the U.S. and
internationally. The Company generally competes on the basis of
price, distribution effectiveness, availability of equipment,
quality of service and convenience.
<PAGE>
Competition from Scheduled Airlines
The Company competes against U.S., European and Mexican
scheduled airlines, most of which are significantly larger than
the Company and many of which have greater access to capital
than the Company. These airlines compete for leisure travel
customers in a variety of ways, including wholesaling to tour
operators discounted seats on scheduled flights, promoting
prepackaged tours to travel agents for sale to retail customers
and selling discounted, excursion airfare-only products to the
public. As a result, all charter airlines, including the
Company, generally are required to compete for customers against
the lowest revenue-generating seats of the scheduled airlines.
Charter airlines generally have a lower cost structure than most
scheduled airlines. The major scheduled airlines typically incur
higher costs related to labor, marketing, reservation systems
and airport facilities, among other items. Because of their cost
structures, the scheduled airlines generally do not compete
directly with charter airlines on a price basis. However, during
periods of dramatic fare cuts by the scheduled airlines, the
Company is forced to compete against these deeply discounted
seats. The scheduled airlines do compete with charter airlines
by selling excess capacity to tour operators and consolidators
at bulk rates and also selling charter services on a limited
basis.
The Company's charter service also competes against the
scheduled airlines on the basis of convenience and quality of
service. As the U.S. scheduled airline industry has
consolidated, the traffic patterns have evolved into what is
commonly referred to as the 'hub-and-spoke' system. Partially as
a result of the creation of numerous hub-and-spoke route
systems, many smaller cities are not served by direct or nonstop
flights to leisure destinations, and many secondary leisure
destinations do not receive direct or nonstop service from more
than a few major U.S. cities. The Company, through tour
operators, targets these markets by offering nonstop service to
leisure destinations on a limited-frequency basis designed to
appeal to the leisure traveler and to provide relatively high
load factors. The Company believes that a significant amount of
its charter flights provide nonstop convenience to destinations
not available to passengers through scheduled airlines.
The Company competes directly with several scheduled airlines on
certain leisure routes, particularly in the Indianapolis,
Chicago-Midway and Milwaukee markets. Although several airlines
serve these markets, historically, the Company has been able to
compete successfully for the leisure customer. The Company is
continually evaluating these markets for their future potential.
Competition from Charter Airlines
In addition to competing with the major domestic, European and
Mexican scheduled airlines, the Company also faces competition
in the U.S. from two smaller U.S. charter airlines. This is the
lowest number of charter carriers competing for business in many
years, a situation that could promote additional entries into
the charter market. In Europe, the Company competes with several
large European charter airlines, many of which are part of
entities which also own tour operators and travel agencies or
scheduled airlines. To date, the Company has been able to
compete successfully against both the U.S. and European charter
airlines. In the case of the European charter airlines, the
Company believes that its success has been primarily due to the
higher operating costs of such European airlines. In Mexico, the
Company competes against several Mexican charter airlines
operating charters between the U.S. and Mexico.
Based upon bilateral aviation agreements between the U.S. and
other nations, and, in the absence of such agreements, comity
and reciprocity principles, the Company, as a charter carrier,
is generally not restricted as to the number or frequency of its
flights to and from most destinations in Europe. However, these
agreements generally restrict the Company to the carriage of
passengers and cargo on flights which either originate in the
U.S. and terminate in a single European nation, or which
originate in a single European nation and terminate in the U.S.
Proposals for any additional charter service must generally be
specifically approved by the civil aeronautics authorities in
the relevant countries. Approval of such a proposal is typically
based on considerations of comity and reciprocity and cannot be
guaranteed.
Regulation
The Company is an air carrier subject to the jurisdiction of and
regulation by the DOT and the FAA. The DOT is primarily
responsible for regulating consumer protection and other
economic issues affecting air services and determining a
carrier's fitness to engage in air transportation. 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 Company is
also subject to the jurisdiction of the FAA with respect to its
aircraft maintenance and operations. The FAA requires each
carrier to obtain an operating certificate and operations
specifications authorizing the carrier to operate to specific
airports using specified equipment. All of the Company's
aircraft must have and maintain certificates of airworthiness
issued by the FAA. The Company holds an FAA air carrier
operating certificate under Part 121 of the Federal Aviation
Regulations.
The Company believes 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 upon the Company.
The FAA has issued a series of Airworthiness Directives under
its "Aging Aircraft" program which are applicable to the
Company's Lockheed L-1011 and Boeing 727-200 aircraft. The
Company does not currently expect the future cost of these
directives to be material.
Several aspects of airline operations are subject to regulation
or oversight by Federal agencies other than the DOT and FAA. The
United States Postal Service has jurisdiction over certain
aspects of the transportation of mail and related services
provided by the Company through its cargo affiliate. Labor
relations in the air transportation industry are generally
regulated under the Railway Labor Act, which vests in the
National Mediation Board certain regulatory powers with respect
to disputes between airlines and labor unions arising under
collective bargaining agreements. The Company is subject to the
jurisdiction of the Federal Communications Commission regarding
the utilization of its radio facilities. In addition, the
Immigration and Naturalization Service, the U.S. Customs
Service, and the Animal and Plant Health Inspection Service of
the Department of Agriculture have jurisdiction over inspection
of the Company's aircraft, passengers and cargo to ensure the
Company's compliance with U.S. immigration, customs and import
laws. The Commerce Department also regulates the export and
reexport of the Company's U.S.-manufactured aircraft and
equipment.
<PAGE>
In addition to various Federal regulations, local governments
and authorities in certain markets have adopted regulations
governing various aspects of aircraft operations, including
noise abatement, curfews and use of airport facilities. Many
U.S. airports have adopted or are considering adopting a
"Passenger Facility Charge" of up to $3.00 generally payable by
each passenger departing from the airport. This charge must be
collected from passengers by transporting air carriers, such as
ATA, and must be remitted to the applicable airport authority.
Airport operators must obtain approval of the FAA before they
may implement a Passenger Facility Charge.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, the Company's aircraft fleet must comply with
certain Stage 3 noise restrictions by certain specified
deadlines. These regulations require that the Company achieve a
55% Stage 3 fleet by December 31, 1994, a 65% Stage 3 fleet by
December 31, 1996, and a 75% Stage 3 fleet by December 31, 1998.
In general, the Company would be prohibited from operating any
Stage 2 aircraft after December 31, 1999. As of December 31,
1996, 65% of the Company's fleet met Stage 3 requirements.
In addition to the aircraft noise regulations administered by
the FAA, the Environmental Protection Agency ("EPA") regulates
operations, including air carrier operations, which affect the
quality of air in the United States. The Company has made all
necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke-emissions standards.
The Company maintains on its property in Indiana two underground
storage tanks which certain quantities of deicing fluid and
emergency generator fuel. These tanks are subject to various EPA
and State of Indiana regulations. The Company believes it is in
substantial compliance with applicable regulatory requirements
with respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses
materials which are regulated as hazardous under Federal, state
and local law. The Company maintains programs to protect the
safety of its employees who use these materials and to manage
and dispose of any waste generated by the use of these
materials, and believes that it is in substantial compliance
with all applicable laws and regulations.
Item 2. Properties
The Company leases three adjacent office buildings in
Indianapolis, consisting of approximately 136,000 square feet.
These buildings are located approximately one mile from the
Indianapolis International Airport and are used for headquarters
staff and for the operation of the Indianapolis reservations
center.
The Company's Maintenance and Engineering Center is located at
Indianapolis International Airport. This 120,000 square foot
facility was designed to meet the base maintenance needs of the
Company's operations, as well as to provide support services for
other maintenance locations. The Indianapolis Maintenance and
Engineering Center is an FAA-certificated repair station and has
the capability to perform routine, as well as non-routine,
maintenance on the Company's aircraft.
In 1995, the Company completed the lease of Hangar No. 2 at
Chicago's Midway Airport for an initial lease term of ten years,
subject to two five-year renewal options. With the reduction in
scheduled service in 1996, the Company is reconsidering the
option for the use of this hangar.
Also in 1995, the Company relocated and expanded its Chicago
area reservations unit to an 18,700 square foot facility located
near Chicago's O'Hare Airport. This new property is expected to
accommodate the Company's scheduled service into the foreseeable
future.
<PAGE>
At December 31, 1996, the Company operated a fleet of 45
aircraft. Two additional Lockheed L-1011 aircraft, not currently
on the Company's operating certificate, were also subject to
operating leases at the end of 1996. The following table
summarizes the ownership,lease term (where applicable), standard
seating configuration, and Stage 2/Stage 3 noise characteristics
of each aircraft operated by the Company as of the end of 1996.
<TABLE>
<CAPTION>
Aircraft Owned/Leased Lease Expiration Seats Stage
(month/year)
---------------------------------- -------------------- -------------------- --------------- ------------
<S> <C> <C> <C> <C>
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-100 Leased 06/2000 362 3
Lockheed L-1011-100 Leased 03/2001 362 3
Boeing 727-200ADV Owned n/a 173 3
Boeing 727-200ADV Leased 09/2002 173 3
Boeing 727-200ADV Leased 12/1997 173 2
Boeing 727-200ADV Leased 12/1997 173 2
Boeing 727-200ADV Leased 03/1998 173 2
Boeing 727-200ADV Leased 11/1998 173 2
Boeing 727-200ADV Leased 11/1998 173 2
Boeing 727-200ADV Leased 11/1998 173 2
Boeing 727-200ADV Leased 01/1999 173 2
Boeing 727-200ADV Leased 12/1999 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 12/2001 173 3
Boeing 727-200ADV Leased 03/2002 173 3
Boeing 727-200ADV Leased 05/2002 173 3
Boeing 727-200ADV Leased 08/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 757-2Q8 Leased 03/1997 216 3
Boeing 757-23N Leased 10/1997 216 3
Boeing 757-2Q8 Leased 05/2002 216 3
Boeing 757-23N Leased 04/2008 216 3
Boeing 757-23N Leased 12/2010 216 3
Boeing 757-23N Leased 06/2014 216 3
Boeing 757-28AER Leased 03/2015 216 3
</TABLE>
<PAGE>
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company
arise periodically involving complaints which are normal and
reasonably foreseeable in light of the nature of the Company's
business. The majority of these suits are covered by insurance. In the
opinion of management, the resolution of these claims will not have a
material adverse effect on the business, operating results or
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1996.
Part II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "AMTR." The Company had
371 registered shareholders at December 31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Market Prices of Common Stock High Low Close
-------------- ------------------- -----------------
<S> <C> <C> <C>
First quarter 13-1/4 11-5/8 11-3/4
Second quarter 12-3/8 8-1/4 8-1/4
Third quarter 9-1/4 6-3/4 8-3/4
Fourth quarter 8-3/4 6-5/8 7
</TABLE>
No dividends have been paid on the Company's common stock since
becoming publicly held.
<PAGE>
PART II - Continued
- (Unaudited)cted Financial Data
The financial data in this table have been derived from the
consolidated financial statements of the Company for the respective
periods presented. The data should be read in conjunction with the
consolidated financial statements and related notes.
<TABLE>
<CAPTION>
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
(In thousands, except per share data and ratios)
---------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 750,851 $ 715,009 $ 580,522 $ 467,909 $ 421,790
Operating expenses 786,907 697,073 572,107 461,289 419,198
Operating income (loss) (36,056) 17,936 8,415 6,620 2,592
Income (loss) before taxes (39,581) 14,653 5,879 3,866 (2,643)
Net income (loss) (26,674) 8,524 3,486 3,035 (2,140)
Net income (loss) per share (1) (2.31) 0.74 0.30 0.28 (0.24)
Balance Sheet Data:
Property and equipment, net $ 224,540 $ 240,768 $ 223,104 $ 172,244 $ 166,882
Total assets 370,287 413,137 346,288 269,830 239,029
Total debt 150,057 138,247 118,106 79,332 87,949
Shareholders' equity 54,744 81,185 72,753 69,941 32,469
Ratio of total debt to shareholders'
equity 1.62 1.13 2.71
Ratio of total liabilities to 2.74 1.70
shareholders' 3.76 2.86 6.36
equity 5.76 4.09
Selected Operating Statistics for
Consolidated Passenger Services:
Revenue passengers carried (thousands) 5,680.5 5,368.2 4,237.9 2,971.8 2,658.0
Revenue passenger miles (millions) 9,172.4 8,907.7 7,158.8 5,593.5 5,547.1
Available seat miles (millions) 13,295.5 12,521.4 10,443.1 8,232.5 7,521.2
Passenger load factor 69.0% 71.1% 68.6% 67.9% 73.8%
</TABLE>
(1) Net income (loss) per share is based on the weighted number of
common shares outstanding during the period. Amounts have been
restated to reflect a 1-for-8 stock dividend in March 1993.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
During 1996, the Company incurred operating and net losses of $(36.1) million
and $(26.7) million, respectively, as compared to operating and net income of
$17.9 million and $8.5 million in 1995. As discussed in more detail below, the
losses in 1996 reflected a number of factors, including (i) a significant
increase in competition from larger carriers in the scheduled service markets
served by the Company, (ii) the effects of the ValuJet accident in Florida that
occurred at the same time as a decompression incident on one of the Company's
flights, (iii) a significant increase in fuel prices, (iv) a Federal excise tax
on jet fuel that became effective on October 1, 1995, and (v) certain charges in
the third and fourth quarters of 1996 relating to fleet restructuring. The
Company believes that competition will remain intense for the foreseeable future
on many of the routes where the Company has provided scheduled service. As a
result, and as described further below, beginning in August 1996, the Company
significantly reduced its scheduled service operations and completed a reduction
in its overall fleet size in order to concentrate on its charter operations,
which may produce as much as two-thirds of the Company's operating revenues in
1997.
Restructuring of Scheduled Service Operations and Fleet Types
Beginning in May 1996, and continuing into the third quarter, the Company
undertook a detailed study of the profitability of its scheduled service,
military and tour operator business units. This analysis initially covered the
six quarters ended June 30, 1996, and disclosed that a significant number of
scheduled service markets being served by the Company had become increasingly
unprofitable. Although some markets had been unprofitable during 1995, a more
significant deterioration in profitability in Boston, intra-Florida and certain
other markets occurred during late 1995 and the first half of 1996. This
analysis also showed that the Company's charter and military operations were
generally profitable during the same periods, although results from these
operations in 1996 were also adversely affected by some of the factors that
affected scheduled service.
The Company believes that several key factors had contributed to the
deteriorating profitability of scheduled service over these time periods.
Beginning in January 1996, a growing amount of low-fare competition entered
Boston-Florida and midwest-Florida markets, which increased total capacity in
these markets and decreased the average fares earned by the Company. Operating
revenues in all scheduled service markets were further adversely affected by the
ValuJet accident in Florida on May 11, which was followed on May 12 by a
decompression incident on one of the Company's own flights. These events focused
significant negative media attention on airline safety and on low-fare carriers
in particular. In spite of the Company's excellent safety record over almost a
quarter century of operation, during which no serious injuries or fatalities had
ever occurred, the Company estimates that it lost significant scheduled service
revenues in the second and third quarters of 1996 from canceled reservations,
and reservations which were never received. Additionally, effective October 1,
1995, the Company became subject to a Federal excise tax on jet fuel consumed in
domestic use which added approximately 3.5 cents to the average cost of each
gallon of jet fuel. During 1996, the market price (excluding tax) of jet fuel
also increased significantly as compared to prices paid in comparable 1995
periods, largely due to tight jet fuel inventories relative to demand throughout
this period. These trends continued and, as discussed below, intensified in
certain respects in the fourth quarter of 1996. Moreover, the Company believes
that intense competitive pressures from larger carriers will continue for the
foreseeable future on many of the routes served by the Company's scheduled
service operations.
<PAGE>
On August 26, the Company announced a significant reduction in scheduled service
business. More than one-third of scheduled service departures and ASMs were
included in this schedule reduction. Boston operations and intra-Florida flights
were completely eliminated. Other selected markets from Indianapolis,
Chicago-Midway and Milwaukee were also exited completely or were reduced in
frequency. Exited operations ended between September 4 and December 2. The
Company continues to evaluate its scheduled service operations and may further
reduce or potentially restore some of its scheduled operations.
In association with its schedule reduction, the Company announced a reduction in
force of 15%. A significant portion of this reduction in force was accomplished
through furloughs of cockpit and cabin crews, with the remainder consisting of
reductions in base station and administrative staff. Maintenance staff
reductions were accomplished primarily through the reduction of base and line
maintenance contract labor. This reduction commenced during September and
resulted in the recognition of $135,000 in severance expense for the third
quarter of 1996, and $48,000 in additional severance expense for the fourth
quarter of 1996.
A separate aspect of the Company's 1996 study of business unit profitability was
directed toward the relative economics of the Company's three aircraft fleet
types as they were being used in scheduled service, charter and military flying.
Although all fleet types were being used profitably in some operations, the
Company determined that in many scheduled service markets the Boeing 727-200 was
a more profitable alternative aircraft than the Boeing 757-200. As a result, on
July 29, 1996, the Company entered into a Letter of Intent with a major lessor
to reduce the Company's Boeing 757-200 fleet by five units, and in the fourth
quarter of 1996 the Company entered into an additional transaction with the same
lessor to further reduce the number of Boeing 757-200 aircraft by two units.
These transactions were completed by December 16, 1996, and reduced the
Company's fleet of Boeing 757-200 aircraft as of the end of 1996 from a
previously planned 13 units to seven actual units. In addition, these
transactions eliminated all Pratt-&-Whitney-powered Boeing 757-200 aircraft from
the Company's fleet, which became solely Rolls-Royce-powered by the end of 1996.
In addition to the adjustments to the Company's Boeing 757-200 fleet, the
reduction in existing scheduled service operations resulted in the reallocation
of five Boeing 727-200 aircraft to alternative uses in the fourth quarter of
1996. These aircraft were used to meet additional charter demand and to increase
scheduled service flights in several markets which the Company continues to
serve. Two Lockheed L-1011 aircraft which were used for seasonal scheduled
service to Ireland during the summer of 1996 were returned to charter operations
in the fourth quarter of 1996.
In 1996, the Company recorded a $4.5 million loss on disposal of assets
associated with Boeing 757-200 aircraft (see "Disposal of Assets").
Results of Operations
The Company's operating revenues increased 5.0% to $750.9 million in 1996, as
compared to $715.0 million in 1995. Operating revenues for 1996 were 5.65 cents
per ASM, a reduction of 1.1% from 5.71 cents per ASM in 1995. Between these same
periods, ASMs increased 6.2% to 13.30 billion from 12.52 billion, RPMs increased
2.9% to 9.17 billion from 8.91 billion, and passenger load factor declined to
69.0% as compared to 71.1%. The yield on revenues in 1996 increased 2.1% to 8.19
cents per RPM, as compared to 8.02 cents per RPM in 1995. Total passengers
boarded increased 5.8% to 5.68 million in 1996, as compared to 5.37 million in
1995, and total departures increased 8.4% to 46,400 from 42,800 in the same
comparable periods.
<PAGE>
The Company's operating revenues increased 23.2% to $715.0 million in 1995, as
compared to $580.5 million in 1994. Operating revenues for 1995 were 5.71 cents
per ASM, an increase of 2.7% from 5.56 cents per ASM in 1994. Between these same
periods, ASMs increased 19.9% to 12.52 billion from 10.44 billion, RPMs
increased 24.4% to 8.91 billion from 7.16 billion, and passenger load factor
increased to 71.1% as compared to 68.6%. The yield on revenues in 1995 declined
1.1% to 8.02 cents per RPM, as compared to 8.11 cents per RPM in 1994. Total
passengers boarded increased 26.7% to 5.37 million in 1995, as compared to 4.24
million in 1994, and total departures increased 23.3% to 42,800 from 34,700 in
the same comparable periods.
Operating expenses increased 12.9% to $786.9 million in 1996, as compared to
$697.1 million in 1995, and operating expenses increased 21.8% to $697.1 million
in 1995, as compared to $572.1 million in 1994. Operating expenses per ASM
increased 6.5% to 5.92 cents in 1996, as compared to 5.56 cents in 1995, while
operating expenses per ASM increased 1.5% to 5.56 cents in 1995, as compared to
5.48 cents in 1994.
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents Per ASM
Year Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
Operating revenues: 5.65 5.71 5.56
Operating expenses:
Salaries, wages and benefits 1.23 1.13 1.09
Fuel and oil 1.21 1.03 1.02
Handling, landing and navigation fees 0.53 0.59 0.58
Aircraft rentals 0.49 0.44 0.46
Depreciation and amortization 0.47 0.45 0.44
Aircraft maintenance, materials and repairs 0.42 0.44 0.44
Crew and other employee travel 0.27 0.25 0.25
Passenger service 0.25 0.28 0.29
Commissions 0.20 0.20 0.17
Ground package cost 0.14 0.13 0.14
Other selling expenses 0.13 0.12 0.08
Advertising 0.08 0.07 0.07
Facility and other rents 0.07 0.06 0.05
Disposal of assets 0.03 - -
Other operating expenses 0.40 0.37 0.40
Total operating expenses 5.92 5.56 5.48
Operating income (loss) (0.27) 0.15 0.08
ASMs (in thousands) 13,295,505 12,521,405 10,443,123
</TABLE>
<PAGE>
Year Ended December 31, 1996, Versus Year Ended December 31, 1995
Operating Revenues
Total operating revenues in 1996 increased 5.0% to $750.9 million from $715.0
million in 1995. This increase was due to a $24.5 million increase in scheduled
service revenues, a $3.5 million increase in charter revenues, a $1.9 million
increase in ground package revenues, and a $6.0 million increase in other
revenues.
Scheduled Service Revenues. Scheduled service revenues in 1996 increased 6.8% to
$386.5 million from $362.0 million in 1995. Scheduled service revenues comprised
51.5% of total operating revenues in 1996, as compared to 50.6% of operating
revenues in 1995. Scheduled service RPMs increased 5.2% to 4.918 billion from
4.673 billion, while ASMs increased 10.6% to 7.305 billion from 6.605 billion,
resulting in a reduction in passenger load factor to 67.3% in 1996 from 70.9% in
1995. Yield on scheduled service in 1996 increased 1.4% to 7.86 cents per RPM
from 7.75 cents per RPM in 1995. Scheduled service departures in 1996 increased
14.1% to 31,467 from 27,573 in 1995, while passengers boarded increased 7.5%
over such period to 3,551,141, as compared to 3,304,369.
During the second and third quarters of 1996, and prior to the restructuring of
scheduled service operations as further described below, the Company added
direct or connecting flights through the Company's four major domestic cities of
Indianapolis, Chicago-Midway, Milwaukee and Boston to west-coast and Florida
markets already being served. New seasonal scheduled service was also operated
during the summer months 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.
Second and third quarter 1995 scheduled service in St. Louis was discontinued in
August 1995.
In association with the restructuring of the Company's scheduled service
operations, a significant reduction in scheduled service was announced on August
26. 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. 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.
The Company's strategy for restructuring scheduled service operations in the
manner described above is to eliminate service in unprofitable scheduled service
markets, to enhance the profit potential of remaining scheduled service markets,
to reallocate aircraft to alternative operations and to dispose of surplus
aircraft. Through this process, the Company intends to strengthen its
competitive position and to improve both passenger load factors and yields in
remaining scheduled service operations. Based upon the Company's analysis of
scheduled service profitability through the final months of 1996, it has
determined that the performance of this operation improved in December as
compared to August, which was the last full month of scheduled service
operations conducted prior to the implementation of the restructuring plan. In
addition, the Company has noted early in the first quarter of 1997 that
scheduled service bookings, passenger load factors and yields are all performing
better than they did early in the first quarter of 1996. The Company will
continue to evaluate the profit and loss performance of scheduled service during
1997, and the Company may take further steps to restructure this operation.
Charter Revenues. The Company's charter revenues are derived principally from
independent tour operators and from the United States military. Total charter
revenues increased 1.1% to $310.6 million in 1996, as compared to $307.1 million
in 1995. Charter revenue growth, prior to scheduled service restructuring in
late 1996, was 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 analysis of profitability by business unit which was performed by the
Company for the six quarters ended June 30, 1996, disclosed that both military
and tour operator components had produced consistent profits over the period
studied. The Company's Lockheed L-1011 fleet performed well in a charter
environment based upon relatively low frequency of operation and high passenger
load factors, and the Boeing 757-200 performed well in the military business
unit while the Boeing 727-200 worked well with certain tour operators. The
Company began to implement strategies to improve the financial performance of
charter operations in the third and fourth quarters of 1996, and both tour
operator and military flying are expected to play a role of growing significance
in the Company's future business operations.
Charter revenues derived from independent tour operators (including the
Ambassadair Travel Club) decreased 1.4% to $226.4 million in 1996, as compared
to $229.5 million in 1995. Tour operator revenues comprised 30.2% of operating
revenues in 1996, as compared to 32.1% of operating revenues in 1995. Tour
operator ASMs decreased 2.0% to 4.363 billion from 4.450 billion and the revenue
per ASM (RASM) on tour operator revenues in 1996 increased 0.6% to 5.19 cents,
as compared to 5.16 cents in 1995. Tour operator passengers boarded increased
0.8% to 1,854,262 in 1996, as compared to 1,839,386 in 1995, and tour operator
departures decreased 3.6% to 10,920 in 1996, as compared to 11,324 in 1995.
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 repetitive domestic and
international flights between designated city pairs, which support high
passenger load factor and low frequency rotations marketed through tour
operators, and which provide value-priced and convenient non stop service to
these vacation destinations. The track charter business component allows the
Company to attain reasonable levels of aircraft and crew utilization and often
provides significant protection to the Company from fuel price increases through
the use of fuel escalation reimbursement clauses. The Company's analysis of
profitability for track charter operations in 1996 and 1995, however, disclosed
only modest average profit margins for those periods. During the late 1996
restructuring of scheduled service operations, therefore, the Company also
sought to negotiate changes in existing track charter contracts to provide
better profit performance for this business unit. Although some tour operators
were not able to maintain existing programs with the Company under required
economics, other tour operators, and new tour operators, have agreed to new
contracts under which the Company expects to improve track charter profit
performance in future periods. These new agreements generally become effective
for the spring and summer of 1997.
Specialty charter flying is a product which is highly customized to the
requirements of the buyer, but is generally operated with much lower frequency
than track charter. For example, the Company operates an increasing number of
"around the world" trips in all-first-class configuration for certain corporate
clients. The Company's profitability analysis for 1996 and 1995 disclosed that
specialty charter contracts provided a superior profit margin when compared to
track charter, even though these operations were cost-disadvantaged by a lower
achievable utilization rate for aircraft and crews. In order to leverage these
attractive margins, the Company has increased the number of specialty charter
contracts in its business mix for 1997 and continues to aggressively seek these
relationships with potential clients by marketing the Company's unique ability
to package and deliver highly specialized products to customers with particular
requirements.
The Company believes that improved track charter economics, combined with
expanded high-margin specialty charter programs, offer a unique opportunity to
the Company to improve the overall financial performance of this business unit
in 1997 and future years.
Charter revenues derived from the U.S. military increased 8.6% to $84.2 million
in 1996, as compared to $77.5 million in 1995. Military revenues comprised
11.2% of total operating revenues in 1996, as compared to 10.8% of total
operating revenues in 1995. U.S. military ASMs increased 4.3% to 1.442
billion from 1.382 billion. The RASM on U.S. military revenues in 1996 increased
4.1% to 5.84 cents as compared to 5.61 cents in 1995. U.S. military passengers
boarded decreased 6.6% to 185,575 in 1996, as compared to 198,711 in 1995, and
U.S. military departures decreased 8.1% to 3,414 in 1996, as compared to 3,713
in 1995.
The Company's 1996 and 1995 profitability analysis of the military business
disclosed that although this operation was generally profitable, more attractive
margins were available from the use of the Boeing 757-200 aircraft in certain
military rotations, principally as a result of the lower operating cost of this
aircraft type as compared to alternative aircraft types in similar applications.
The Company believes that the U.S. military often prefers the Boeing 757-200
aircraft for its smaller capacity and longer range when used to maintain
existing frequencies to foreign military bases with reduced troop deployments.
The Company also believes that its Boeing 757-200 fleet is competitively
advantaged by its FAA certification to operate with 180-minute ETOPS, which
enhances opportunities for the Company to obtain awards of certain long-range
military missions over water.
As a result of these factors, for the military contract year ending September
30, 1997, the Company has committed four of its seven remaining Boeing 757-200
aircraft to the military business, while the other three Boeing 757-200 aircraft
are deployed to mission-specific uses within scheduled service.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair Travel Club subsidiary exclusively to club members and
through its ATA Vacations subsidiary to the general public. Ground package
revenues increased 9.3% to $22.3 million in 1996, as compared to $20.4 million
in 1995.
The Company's 24-year-old Ambassadair Travel Club offers hundreds of choices of
tour-guide-accompanied vacation packages to its approximately 39,000 individual
and family members annually. In 1996, total packages sold increased 2.4% as
compared to 1995, and the average price of each ground package sold increased
18.0% as compared to the prior year.
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 Mexico and Caribbean destinations. These packages are marketed
through travel agents, as well as directly by the Company's own reservation
centers. During 1996, the number of ground packages sold increased 21.8% as
compared to 1995, but the average price of each ground package sold decreased
16.9% as compared to the prior year.
The average price paid to 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. Some ATA Vacations
markets have experienced price reductions in 1996 due to intense price
competition. The average gross margin on ATA Vacations ground packages sold in
1996 declined to 21.6% as compared to 26.6% in 1995, while the average gross
margin on Ambassadair Travel Club ground package sales declined to 14.5% in
1996, as compared to 15.9% in the prior year.
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 the Company. Other
revenues increased 23.5% to $31.5 million in 1996, as compared to $25.5 million
in 1995. Approximately $3.8 million of the revenue increase between years was
attributable to an increase in the number of block hours of substitute service
provided by the Company 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. The remaining increase in other revenues
between periods was primarily due to revenue growth in several of the Company's
affiliated businesses.
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 1996 increased 16.2% to $164.0 million from
$141.1 million in 1995. Approximately $15.9 million of the increase in 1996 was
attributable to the addition of cockpit and cabin crews, reservations agents,
base station staff and maintenance staff to support the Company's growth in
capacity between periods, and approximately $3.6 million of the increase was
attributable to the related growth in employee benefits costs. Average Company
full-time-equivalent employees increased by 11.7% in 1996 as compared to the
prior year, although the reduction-in-force implemented in late 1996 resulted in
approximately 6.1% fewer full-time-equivalent employees in the fourth quarter of
1996 as compared to the fourth quarter of 1995. The Company substantially
completed this reduction in force in the fourth quarter of 1996, and recorded
$183,000 in related severance costs in 1996.
Salaries, wages and benefits expense in 1996 was 1.23 cents per ASM, an increase
of 8.8% from a cost of 1.13 cents per ASM in 1995. The cost per ASM increased
partially as a result of a 3.4% increase in the average rate of pay for the
Company's employees as compared to the prior year. In addition, the Company has
increased employment in several maintenance and base station locations in lieu
of continuing the use of third-party contractors, as it believes it can provide
more reliable operations and better customer service at a lower total cost by
using its own employees in these selected locations. The Company has experienced
related savings in the expense lines of handling, landing and navigation fees,
and in aircraft maintenance, materials and repairs, as further described in
those following sections.
In December 1994, the Company implemented a four-year collective bargaining
agreement with its flight attendants, which was the first of the Company's labor
groups to elect union representation. An additional four-year collective
bargaining agreement was ratified by the Company's cockpit crews on September
23, 1996. The pay-related terms of the new cockpit crew agreement were
implemented retroactively to August 6, 1996, including, among other things, a
rate increase of approximately 7.5% to cockpit crew pay scales for the first
year of the new contract.
Fuel and Oil. Fuel and oil expense for 1996 increased 24.4% to $161.2 million
from $129.6 million in 1995, due to an increase in fuel consumed to operate the
Company's expanded block hours of flying, an increase in the average price paid
per gallon of fuel consumed and the imposition of a 4.3-cent-per-gallon excise
tax on jet fuel consumed for domestic use effective October 1, 1995.
During 1996, the Company consumed 7.4% more gallons of jet fuel for flying
operations and flew 9.4% more block hours than in 1995, which accounted for
approximately $9.1 million in additional fuel and oil expense between years
(excluding price and tax changes). The growth in gallons of fuel consumed was
lower than the growth in block hours flown between years due to a change in the
mix of block hours flown by fleet type. Of greatest significance was the 4.1%
reduction of total block hours flown by the Lockheed L-1011 fleet between
periods, since the fuel burn per block hour for this wide-body aircraft is
approximately twice as high as the burn rates for the Company's other fleet
types.
During 1996, the Company's average price paid per gallon of fuel consumed
(excluding the excise tax described in the following paragraph) increased by
12.8% as compared to 1995. Fuel price increases paid by the Company reflected
generally tighter supply conditions for aviation fuel, which persisted
throughout most of 1996 as compared to the prior year. The Company estimates
that the year-over-year increase in average price paid for jet fuel resulted in
approximately $16.1 million in additional fuel and oil expense between periods.
On October 1, 1995, the Company became subject to a 4.3-cent-per-gallon excise
tax on jet fuel consumed for domestic use by commercial air carriers. The effect
of this tax in the first three quarters of 1996, as compared to the first three
quarters of 1995, was to increase the Company's cost of jet fuel by
approximately $6.4 million.
Fuel and oil expense for 1996 was 1.21 cents per ASM, an increase of 17.5% as
compared to 1.03 cents per ASM in 1995. The increase in the cost per ASM of fuel
and oil expense was primarily a result of higher prices and the new excise tax,
partially offset by the expanded use of the more fuel efficient twin-engine
Boeing 757-200 aircraft in the Company's fleet. During 1996, the Company's
Boeing 757-200 aircraft accounted for 29.4% of total block hours flown, as
compared to 27.8% of total block hours flown in 1995. Due to the reduction of
the Company's Boeing 757-200 fleet in late 1996, the Company's mix of block
hours flown in future years is expected to reflect a lower proportion of
fuel-efficient Boeing 757-200 block hours, and a higher proportion of the
less-fuel-efficient Boeing 727-200 and Lockheed L-1011 fleet types.
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. Air navigation
fees are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees decreased by 6.1% to $70.1 million in
1996, as compared to $74.4 million in 1995. During 1996, the average cost per
system departure for third-party aircraft handling declined 15.0% as compared to
the prior year, and the average cost of landing fees per system departure
decreased 12.2% between the same periods.
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 as well as the
fleet composition of departing aircraft. On average, these costs for narrow-body
aircraft are less than for wide-body aircraft, and the average costs at domestic
U.S. airports are less than the average costs at most foreign airports. In 1996,
80.6% of the Company's departures were operated with narrow-body aircraft, as
compared to 77.6% in 1995, and 81.1% of the Company's departures were from U.S.
domestic locations, as compared to 79.6% in 1995.
Handling costs also vary from period to period according to decisions made by
the Company to use third-party handling services at some airports in lieu of
using the Company's own employees. During 1996, the Company implemented a policy
of "self-handling" at four domestic U.S. airports with significant operations,
which had been substantially handled using third-party contractors in the prior
year. This change resulted in lower absolute third-party handling costs for
these locations and contributed to lower system average contract handling costs
per departure for 1996, as compared to 1995. The Company incurred higher
salaries, wages and benefits expense as a result of this policy change, as noted
in "Salaries, Wages and Benefits".
The cost per ASM for handling, landing and navigation fees decreased 11.3% to
0.53 cents in 1996 from 0.59 cents in 1995.
Aircraft Rentals. Aircraft rentals expense for 1996 increased 17.4% to $65.4
million from $55.7 million in 1995. This increase was attributable to continued
growth in the size of the Company's leased aircraft fleet, although the Company
significantly reduced the size of its Boeing 757-200 fleet in the fourth quarter
of 1996, as is more fully described in "Disposal of Assets".
The addition of three leased Boeing 757-200 aircraft in the first three quarters
of 1996 resulted in approximately $10.6 million of increased aircraft rentals
for that time period, as compared to the prior year. The subsequent reduction of
this fleet type by a net four units (after including two new deliveries from the
manufacturer in December 1996) resulted in a year-over-year fourth quarter
reduction of aircraft rent expense of approximately $3.6 million. The reduction
in the size of the Boeing 757-200 fleet was an integral component of the
Company's restructuring of scheduled service, based upon profitability analysis
which disclosed that for some uses of the Boeing 757-200 in the Company's
markets prior to restructuring, it was more profitable to substitute other
aircraft with lower ownership costs.
Several additional Boeing 727-200 and Lockheed L-1011 aircraft leased in 1996
contributed $2.8 million and $0.5 million, respectively, in incremental aircraft
rentals between years. Aircraft rentals expense was reduced by $0.7 million for
the first four months of 1996, as compared to the prior year, due to the
purchase of four Pratt & Whitney spare engines in May 1995, which had been
previously leased. Due to the elimination of all Pratt-&-Whitney- powered Boeing
757-200 aircraft from the Company's fleet, the Company has reclassified these
owned spare engines as "Assets Held for Sale" in the accompanying balance sheet,
and is actively marketing these assets to users of Pratt-&-Whitney-powered
aircraft.
Aircraft rentals expense for 1996 was 0.49 cents per ASM, an increase of 11.4%
from 0.44 cents per ASM in 1995. The period-over-period increase in the size of
the Boeing 757-200 fleet was a significant factor in this change, 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 be lower in future years than it
was in 1996.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned Lockheed L-1011 airframes, 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 1996 increased 10.6% to $61.7 million
from $55.8 million in 1995.
Depreciation expense attributable to owned airframes and engines, and other
property and equipment owned by the Company, increased $2.9 million in 1996 as
compared to the prior year. The Company increased its year-over-year ownership
of engines and rotable aircraft components to support the expanding fleet, and
increased its investment in computer equipment and furniture and fixtures. The
Company also placed the West bay of the renovated Midway Hangar No. 2 into
service in mid-1996 and incurred increased debt issue costs between years
related to debt facility and aircraft lease negotiations completed in 1996.
Amortization of capitalized engine and airframe overhauls increased $1.9 million
in 1996 as compared to the prior year, after including the offsetting
amortization of approximately $1.0 million in associated manufacturers' credits.
The increasing cost of overhaul amortization reflects the increase in the number
of aircraft added to the Company's fleet and the increase in cycles and block
hours flown between years. New aircraft introduced into the Company's fleet
generally do not require airframe or engine overhauls until one or more years
after first entering service. Therefore, the resulting amortization of these
overhauls generally occurs on a delayed basis from the date the aircraft is
placed into service. Accordingly, the Company anticipates that the average cost
of engine and airframe amortization per block hour and cycle will increase in
future years for all fleet types, as all aircraft receive their initial engine
and airframe overhauls after being placed into service.
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 $1.1 million
between years. 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 4.4% to 0.47 cents in 1996,
as compared to 0.45 cents in 1995.
Aircraft Maintenance, Materials and Repairs. This expense line 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 0.4% to $55.2
million in 1996, as compared to $55.4 million in 1995. The cost per ASM
decreased by 4.8% to 0.42 cents in 1996, as compared to 0.44 cents in the prior
year.
Although the cost of repairs for repairable and rotable components increased
$3.8 million between periods, the cost of expendable parts consumed decreased
$2.0 million, and the cost of parts loans and exchanges decreased $0.6 million.
Aircraft maintenance, materials and repairs cost was also reduced by $0.8
million in 1996, as compared to 1995, due to a planned reduction in the use of
third-party maintenance staff in favor of using more Company maintenance
employees for both base and line maintenance activities. The Company incurred
higher salaries, wages and benefits expense as a result of this policy change,
as noted in a preceding section.
The cost of the Company's maintenance, materials and repairs remained
essentially unchanged in 1996, as contrasted to the 6.2% increase in ASMs
between years, and the 9.4% increase in block hours. This favorable comparison
is partly due to the significant expansion of the Company's fleet during 1996.
When used aircraft are initially brought into the Company's fleet, the cost of
maintenance, materials and repairs required to bridge that aircraft into the
Company's maintenance program are capitalized. Such expenditures normally extend
the available flying hours for that aircraft before routine heavy maintenance,
materials and repairs expenses begin to be incurred, although those aircraft
begin producing both ASMs and block hours immediately upon acquisition. The more
favorable comparison to block hours between years is also indicative of the
faster growth in the Company's twin-engine Boeing 757-200 fleet, which is
composed of newer and more technologically advanced aircraft which require
relatively less routine maintenance than the Company's older three-engine
Lockheed L-1011 and Boeing 727-200 fleets. The Boeing 757-200 fleet accounted
for 29.4% of block hours in 1996, as compared to 27.8% in 1995. Nevertheless,
due to the reduction of the Company's Boeing 757-200 fleet in late 1996, the
Company's mix of block hours flown in future years is expected to reflect a
lower proportion of Boeing 757-200 block hours, and a higher proportion of block
hours flown by the older three-engine Lockheed L-1011 and Boeing 727-200 fleets.
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 1996 were $1.1 million
more than in 1995. This increase was primarily due to changes in the mix of
aircraft leases and associated return conditions which became effective during
1996, offset by both the extensive restructuring of the Boeing 757-200 fleet and
the sale/leaseback of six hushkitted Boeing 727-200 aircraft during 1996 under
new lease terms and conditions.
<PAGE>
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 increased 14.0% to $35.9 million in
1996, as compared to $31.5 million in 1995. During 1996, the Company increased
its average full-time-equivalent crew head count by 4.1% as compared to the
prior year, even though departures increased by 8.4% and block hours increased
by 9.4% between periods. In the first quarter of 1996, the Company experienced
crew shortages, which were exacerbated by severe winter weather, which caused
significant flight delays, diversions and cancellations. The Company's crew
complement in the third quarter of 1996 was again insufficient to effectively
operate the flying schedule and resulted in more crew time being spent away from
base during that quarter.
The cost per ASM for crew and other employee travel increased 8.0% to 0.27 cents
in 1996, as compared to 0.25 cents in the prior year. This increase in unit cost
was approximately equivalent to a 9.0% average increase in the cost per crew
member of hotel, positioning and per diem expenses between years.
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 1996 and 1995, catering represented 80.4%
and 84.9%, respectively, of total passenger service expense.
The cost of passenger service decreased 6.0% in 1996 to $32.7 million, as
compared to $34.8 million in 1995. Although total passengers boarded increased
by 5.8% to 5.68 million in 1996, as compared to 5.37 million in 1995, the
average cost to cater each passenger declined 19.1% between years due to a
planned reduction in catering service levels in select charter and scheduled
service markets beginning in the second quarter of 1995. This cost reduction was
partially offset by a 6.6% increase in military passengers boarded between
years, who are the most expensive passengers to cater in the Company's business
mix.
The cost of servicing passengers who were inconvenienced by trip interruptions
increased by $1.4 million between years. Approximately $0.7 million of this
increase was incurred in association with the severe winter weather and
consequent flight schedule disruptions which occurred in the first quarter of
1996.
The cost per ASM of passenger service decreased 12.0% to 0.25 cents in 1996, as
compared to 0.28 cents in the prior year. The lower cost per ASM was primarily
due to the lower cost of catering per passenger boarded, partially offset by the
higher cost per ASM of servicing inconvenienced passengers.
Commissions. The Company incurs significant commissions expense in association
with the sale by travel agents of single seats on scheduled service. In
addition, the Company pays commissions to secure some tour operator and military
business. Commissions expense increased 7.7% to $26.7 million in 1996, as
compared to $24.8 million in 1995. The primary reason for the increase between
years was the corresponding increase in scheduled service revenues earned,
approximately two-thirds of which was generated through travel agencies who
received a commission on such sales. The cost per ASM of commissions expense was
unchanged at 0.20 cents for both 1996 and 1995.
<PAGE>
Ground Package Cost. Ground package cost includes the expenses incurred by the
Company for hotels, car rental companies, cruise lines and similar vendors to
provide ground and cruise accommodations to Ambassadair and ATA Vacations
customers. Ground package cost increased 14.5% to $18.2 million in 1996, as
compared to $15.9 million in 1995. This increase in cost is primarily due to the
increase in the number of ground packages sold between periods. In 1996,
Ambassadair sold 2.4% more ground packages, and ATA Vacations sold 21.8% more
ground packages, than in 1995. The average cost of each ground package sold by
Ambassadair increased 19.9% between years, while the average price of each
ground package sold by ATA Vacations decreased by 12.6% between periods.
Ground package cost per ASM increased by 7.7% to 0.14 cents in 1996, as compared
to 0.13 cents in 1995, which reflects the comparatively faster growth in ground
package sales produced by Ambassadair and ATA Vacations as compared to the
overall ASM growth of the Company between years.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to the 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 increased 18.1% to $17.6 million in 1996, as compared to $14.9
million in 1995. Approximately $1.1 million and $0.3 million, respectively, of
this increase was attributable to more credit card discounts and CRS fees
incurred to support the growth in scheduled service between years. Another $1.2
million of the increase was due to higher usage of toll-free telephone service
between periods, some of which was associated with the accommodation of
passengers onto other carriers' flights due to the Company's reduction of
scheduled service in the third and fourth quarters of 1996.
Other selling cost per ASM increased 8.3% to 0.13 cents in 1996, as compared to
0.12 cents in 1995.
Advertising. Advertising expense increased 15.7% to $10.3 million in 1996, as
compared to $8.9 million in 1995. The Company incurs advertising costs primarily
to support single-seat scheduled service sales and the sale of ground packages.
Advertising support for this line of business increased consistent with the
growth in associated revenues and the need to meet competitive actions in the
Company's markets.
The cost per ASM of advertising increased 14.3% to 0.08 cents in 1996, as
compared to 0.07 cents in 1995.
Facilities and Other Rentals. Facilities 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 facilities and other
rentals increased 29.7% to $9.6 million in 1996, as compared to $7.4 million in
1995.
The increase in expense noted for 1996 was partly attributable to higher
facility costs resulting from the Company becoming a signatory carrier at
Orlando International Airport, together with a year-over-year increase in
facility costs for Boston operations prior to the elimination of scheduled
service at Boston in the fourth quarter of 1996. The increased facility costs at
Orlando International Airport have associated savings in lower handling and
landing fees for the Company's flights at Orlando International Airport.
Also in 1996, the Company incurred facility rental expense in association with
the late 1995 sale/leaseback of the Indianapolis hangar to the City of
Indianapolis, for the Chicago-Midway Hangar No. 2 and for the new Chicago
Reservations facility, which was first occupied in September 1995.
The cost per ASM for facility and other rents increased 16.7% to 0.07 cents in
1996, as compared to 0.06 cents in 1995.
Disposal of Assets. During the third quarter of 1996, the Company committed to a
plan to dispose of up to seven Boeing 757-200 aircraft. A Letter of Intent was
signed with a major lessor on July 29, which included the cancellation of
operating leases on five aircraft and the return of those aircraft to the lessor
before the end of 1996. Negotiations also commenced with a major lessor during
the third quarter for the cancellation of operating leases on two additional
aircraft in 1996.
During the third quarter, the Company recorded a loss on disposal of the initial
five aircraft according to the terms and conditions negotiated and agreed in the
Letter of Intent. An estimate of the expected loss on disposal of the additional
two aircraft was also recorded in the third quarter, although a specific Letter
of Intent had not yet been signed. The total loss on disposal recorded in the
third quarter was $4.7 million for all aircraft. These aircraft transactions
were all completed during the fourth quarter of 1996, at which time the
estimated loss on disposal was reduced by $0.2 million to an actual loss of $4.5
million.
The source of the loss on the termination of these aircraft leases was primarily
from the write-off of the unused net book value of the associated airframe and
engine overhauls. For several aircraft, the Company was required to meet
additional maintenance return conditions associated with airframes and engines,
the cost of which was charged to the loss on disposal. These costs were
partially offset by cash proceeds received from the lessor and by the
application of associated deferred aircraft rent credits and manufacturers'
credits.
The Company also owns four spare Pratt & Whitney engines, together with
consumable, repairable and rotable components that are specific to the
Pratt-&-Whitney-powered Boeing 757-200s. The net book value of these engines and
parts approximates $14.1 million as of December 31, 1996. The Company is
actively seeking to sell these assets and has therefore reclassified their net
book value as Assets Held For Sale under current assets in the accompanying
balance sheet.
Other Expenses. Other operating expenses increased 15.2% to $53.8 million in
1996, as compared to $46.7 million in 1995. Significant components of the
year-over-year variances include increases in substitute service and passenger
reprotection costs, professional fees, data communications costs, insurance
costs and consulting fees in connection with the detailed route profitability
study.
Other operating cost per ASM increased 8.1% to 0.40 cents in 1996, as compared
to 0.37 cents in 1995.
Income Tax Expense
In 1996, the Company recorded ($12.9) million in tax credits applicable to the
loss before income taxes for that year, while income tax expense of $6.1 million
was recognized pertaining to income before taxes for 1995. The effective tax
rate applicable to tax credits in 1996 was 32.6%, and the effective tax rate for
income earned in 1995 was 41.8%. The Company's effective income tax rates are
unfavorably affected by the permanent non-deductibility from taxable income of
50% of crew per diem expenses incurred in both years. The impact of these
permanent differences on effective tax rates becomes more pronounced as taxable
income declines or losses increase.
<PAGE>
Year Ended December 31, 1995, Versus Year Ended December 31, 1994
Operating Revenues
Total operating revenues for 1995 increased $134.5 million, or 23.2%, to $715.0
million. This increase from 1994 was due to a $121.3 million increase in
scheduled service revenues, a $11.2 million increase in charter revenues, a $0.2
million increase in ground package sales and a $1.8 million increase in other
revenues.
Operating revenues for 1995 were 5.71 cents per ASM, an increase of 2.7% from
1994 revenues of 5.56 cents per ASM.
Scheduled Service Revenues. Scheduled service revenues increased 50.4% from
$240.7 million in 1994 to $362.0 million in 1995. The majority of this increase
was due to strong scheduled service traffic growth between periods, together
with an improvement in scheduled service yield.
Scheduled service RPMs increased 46.9% in 1995 compared to 1994 on a capacity
increase of 39.5% in ASMs between years, resulting in an improved passenger load
factor of 70.8% in 1995 as compared to 67.2% in 1994. Passengers boarded
increased 47.3% from 2.24 million in 1994 to 3.30 million in 1995. Scheduled
service departures increased 39.4% from 19,800 in 1994 to 27,600 in 1995. The
Company increased scheduled service traffic from Indianapolis, Chicago-Midway,
Milwaukee and Boston to Florida, Las Vegas, Hawaii and selected Caribbean
destinations. Scheduled service flown in 1995 from St. Louis and Boston had no
comparable service in 1994. The Company ceased scheduled service operations in
St.Louis in August 1995, but continues to serve important charter markets from
St. Louis.
Scheduled service yield in 1995 was 7.75 cents per RPM, an increase of 2.4% over
the 1994 scheduled service yield of 7.57 cents per RPM. This yield improvement
was achieved gradually throughout 1995 as the result of several revenue
enhancement initiatives. During the first quarter of 1995, the Company installed
a yield management system which allowed for the introduction of multiple fare
levels for various classes of the Company's inventory of scheduled service
seats. These yield management procedures were applied with increasing
effectiveness through the final three quarters of 1995. Whereas first quarter
1995 yields were 15.2% lower than the first quarter of 1994, second quarter 1995
yields were 4.8% higher than the second quarter of 1994; third quarter 1995
yields were 10.0% higher than the third quarter of 1994; and fourth quarter 1995
yields were 9.7% higher than the fourth quarter of 1994.
In the third quarter of 1994, the Company increased its level of participation
and effectiveness of schedule display in several important CRSs used by travel
agencies. In May 1995, the Company also introduced connecting fares which
offered new displays of multiple-city pairs for sale in CRS systems which had
previously not been offered against competing carriers serving those connecting
markets.
Charter Revenues. Charter revenues increased 3.8% from $295.9 million in 1994 to
$307.1 million in 1995. The Company's charter revenues are derived primarily
from independent tour operators 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.
Charter revenues derived from independent tour operators increased 13.3% from
$196.1 million in 1994 to $222.2 million in 1995. Most of this revenue increase
was derived from stronger tour operator traffic between years, while tour
operator yield improved 0.8% from 6.21 cents per RPM in 1994 to 6.26 cents per
RPM in 1995. Tour operator RPMs increased 12.0% from 3.17 billion in 1994 to
3.55 billion in 1995, while ASMs increased 11.0% from 4.01 billion in 1994 to
4.45 billion in 1995, resulting in an improved passenger load factor of 79.8% in
1995 as compared to 79.1% in the prior year. Passengers boarded increased 7.0%
from 1.72 million in 1994 to 1.84 million in 1995, while departures increased
9.7% from 10,300 in 1994 to 11,300 in 1995. Tour operator departures for both
1994 and 1995 served numerous U.S. leisure destinations, together with cities in
Europe, Mexico, South America and Asia.
Charter revenues derived from the U.S. military decreased 15.6% from $91.8
million in 1994 to $77.5 million in 1995. Military revenues were unfavorably
impacted by declines in both traffic and yield between periods. Military RPMs
declined 9.9% from 0.71 billion in 1994 to 0.64 billion in 1995, while ASMs
decreased 12.1% from 1.57 billion in 1994 to 1.38 billion in 1995, resulting in
an improved passenger load factor of 46.4% in 1995 as compared to 45.2% in the
prior year. Passengers boarded decreased 13.0% from 0.23 million in 1994 to 0.20
million in 1995, while departures declined 14.0% from 4,300 in 1994 to 3,700 in
1995.
The Company and other competing air carriers are compensated for U.S. military
flying based upon reimbursement rates set by the United States government. These
reimbursement rates have generally declined over the last several contract
years, resulting in lower yields for this business unit. Military yield in 1995
declined 6.1% to 12.11 cents per RPM as compared to 12.89 cents per RPM in 1994.
Although the Company's military yields are comparatively higher than for tour
operators and scheduled service business units, military passenger load factors
are comparatively much lower, and the Company can incur substantial
non-recurring costs to accommodate military flying which often becomes available
on short notice. The Company's reduction of military ASMs in 1995 was largely
the result of decisions to deploy the Company's aircraft into selected scheduled
service and tour operator markets, where the Company believes that more
repetitive frequencies and more predictable revenues and costs can be achieved
in the long term.
Ground Package Revenues. Ground package revenues increased 1.0% from $20.2
million in 1994 to $20.4 million in 1995. Ground packages, such as hotel and car
rentals, are sold in conjunction with the Company's air transportation product
to Ambassadair Travel Club members and to the general public through ATA
Vacations, Inc., its tour operator subsidiary.
Other Revenues. Other revenues increased 7.6% from $23.7 million in 1994 to
$25.5 million in 1995. Significant components of the change in other revenue
between 1994 and 1995 include a $2.1 million reduction in revenues derived from
subcontracting the Company's aircraft to fly short-term substitute service for
other airlines; a $1.0 million increase in administrative ticketing fees charged
to scheduled service passengers; a $0.7 million increase from the onboard sale
of liquor and headsets; a $0.6 million increase in cargo revenues; a $0.5
million increase from the sale of trip protection insurance to passengers
purchasing tour packages; a $0.5 million increase in commissions earned for the
sale of car rentals; and a $0.4 million increase in excess baggage fees.
Operating Expenses
Total operating expenses increased 21.8% from $572.1 million in 1994 to $697.1
million in 1995. Operating expense increases were principally due to increases
in scheduled service capacity, traffic and passengers boarded between years
which affected most expense categories.
Operating cost per ASM increased 1.5% from 5.48 cents in 1994 to 5.56 cents in
1995. This increase in cost per ASM generally reflects growth in the
distribution costs of single-seat sales (such as travel agency commissions and
CRS fees), salaries and benefits, fuel and oil, aircraft handling and facility
rents, partially offset by reductions in the cost per ASM of aircraft rentals,
passenger service, ground package cost, and other operating expenses. There was
no change in cost per ASM between years for aircraft maintenance materials and
repairs, crew and other employee travel, and advertising.
<PAGE>
Salaries, Wages and Benefits. This expense increased 24.0% from $113.8 million
in 1994 to $141.1 million in 1995. The majority of the increase was due to the
addition of new employees (primarily cockpit and cabin crew, base station,
maintenance and reservations staff) to support the growth in scheduled service
and the addition of new aircraft to the Company's fleet. The Company recorded
additional vacation accrual costs of $1.4 million in 1995 to recognize the
phased implementation of a new vacation policy which became applicable to most
employees during 1995. The Company also recorded variable compensation costs in
association with higher 1995 profits which were not incurred in 1994. These
additional 1995 benefit and compensation costs contributed to a 3.7% increase in
the cost per ASM from 1.09 cents in 1994 to 1.13 cents in 1995.
The Company implemented a collective bargaining agreement with flight attendants
in December 1994, at which time this employee group received a base pay rate
increase of approximately 5%, together with some adjustments to variable pay
factors. In December 1995, the Company reached a tentative agreement with
cockpit crews on a collective bargaining agreement covering that group of
employees. In February of 1996, the Company was notified that the cockpit crews
had failed to ratify the tentative agreement. A new tentative four-year
collective bargaining agreement was reached with cockpit crews on August 6,
1996, which was subsequently ratified by the International Brotherhood of
Teamsters membership on September 23, 1996.
Fuel and Oil. The cost of fuel and oil increased 22.1% from $106.1 million in
1994 to $129.6 million in 1995. Although the average price paid for fuel was
slightly higher in 1995, this unfavorable price effect was partially offset by
the fact that a larger proportion of the block hours in 1995 were flown by the
more fuel-efficient Boeing 757-200 fleet.
Total block hours flown increased 21.8% from 103,700 hours in 1994 to 126,300
hours in 1995. The Company's Boeing 757-200 fleet accounted for 27.8% of block
hours in 1995, as compared to 24.0% in 1994. The less fuel- efficient Lockheed
L-1011 fleet accounted for 28.1% of 1995 block hours, as compared to 30.8% in
1994. Block hours for the Boeing 727-200 fleet were also lower in 1995,
accounting for 44.1% of block hours as compared to 45.2% in 1994.
Effective October 1, 1995, the Company became subject to a 4.3 cent-per-gallon
excise tax on jet fuel consumed for domestic use by commercial air carriers. The
effect of this tax in the fourth quarter of 1995 was to increase the Company's
cost of fuel subject to this tax by approximately 6%, which added $1.6 million
to total fuel and oil expense in the fourth quarter of 1995. The fuel tax caused
the Company's 1995 cost per ASM for fuel and oil to increase by 1.0% to 1.03
cents from 1.02 cents in 1994.
Handling, Landing and Navigation Fees. Handling, landing and navigation fees
increased 22.2% from $60.9 million in 1994 to $74.4 million in 1995. Most of
this increase was attributable to a 23.3% increase in the total number of
departures between years, from 34,700 in 1994 to 42,800 in 1995.
The average cost per departure declined 1.0% in 1995 as compared to 1994.
Because each airport served by the Company has a different schedule of fees
(including variable prices for different aircraft types), average departure
costs are a function of the mix of airports served and the fleet composition of
departing aircraft. On average, operations to international airports are more
expensive per departure than for U.S. domestic airports. In 1995, the share of
the Company's departures which operated from international airports declined
from 22.5% to 20.4% because the Company's growth in 1995 was concentrated mostly
in domestic scheduled service markets.
The cost per ASM for handling, landing and air navigation fees increased 1.7%
from 0.58 cents in 1994 to 0.59 cents in 1995. This increase resulted from a
small decline in the average number of ASMs per departure between years and is
indicative of the growing proportion of departures which employ the Company's
smaller-capacity Boeing 727-200 and Boeing 757-200 aircraft rather than the
larger Lockheed L-1011 wide-body. In 1995, the percentage of departures made
with narrow-body aircraft increased to 77.6%, as compared to 75.0% in 1994.
Aircraft Rentals. Aircraft rental expense increased 15.6% from $48.2 million in
1994 to $55.7 million in 1995. This increase in expense was due to the addition
of leased Lockheed L-1011, Boeing 757-200 and Boeing 727-200 aircraft into the
Company's fleet during 1995, offset partially by reduced lease costs on certain
Boeing 757-200 aircraft under terms of operating leases renegotiated in late
1994, and by the purchase of four previously leased Pratt & Whitney engines.
Aircraft rental cost per ASM decreased 4.3% from 0.46 cents in 1994 to 0.44
cents in 1995. The year-over-year benefit realized from Boeing 757-200 operating
lease renegotiations in late 1994 was a significant factor in this change since
the ownership costs of each Boeing 757-200 aircraft are comparatively higher
than for the Company's other fleet types.
Depreciation and Amortization. Depreciation and amortization expense increased
20.8% from $46.2 million in 1994 to $55.8 million in 1995. The cost per ASM
increased 2.3% from 0.44 cents in 1994 to 0.45 cents in 1995.
Depreciation expense increased approximately $5.0 million in 1995 as compared to
1994 due to the addition of one Lockheed L-1011 and four Pratt & Whitney
engines, together with the purchase of other property, furniture and equipment
to support the Company's growth in operations.
Amortization of airframe and engine overhauls increased $4.6 million in 1995 as
compared to 1994, net of $3.3 million in overhaul credits earned by the Company
under an engine purchase agreement with Rolls-Royce Commercial Aero Engines
Limited. The increasing cost of amortization expense reflects the recent
increase in the number of aircraft added to the Company's fleet. New aircraft
introduced into the fleet generally do not require airframe or engine overhauls
until as many as 12 or more months after first entering service. Therefore,
resulting amortization of these overhauls generally occurs on a delayed basis
from the date the aircraft is placed into service.
Aircraft Maintenance, Materials and Repairs. The cost of maintenance, materials
and repairs increased 20.2% from $46.1 million in 1994 to $55.4 million in 1995.
The cost per ASM remained unchanged at 0.44 cents for both 1995 and 1994.
The cost of the Company's maintenance, materials and repairs increased in 1995
at approximately the same rate as the 19.9% increase in ASMs between years and
slightly slower than the 21.8% increase in block hours. The more favorable
comparison to block hours between years is indicative of the faster growth in
the twin-engine Boeing 757-200 fleet, which is also composed of newer and more
technologically advanced aircraft which require relatively less routine
maintenance than the Company's older three-engine Lockheed L-1011 and Boeing
727-200 fleets. The Boeing 757-200 fleet accounted for 27.8% of block hours in
1995, as compared to 24.0% in 1994.
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.
Return condition expenses accrued in 1995 were $1.0 million less than in 1994,
primarily due to a change in return conditions negotiated on certain Boeing
757-200 aircraft leases in late 1994.
Crew and Other Employee Travel. The cost of crew and other employee travel
increased 20.2% from $26.2 million in 1994 to $31.5 million in 1995. The cost
per ASM remained unchanged at 0.25 cents for both years.
Passenger Service. The most significant portion of this cost is catering, which
represented 84.9% and 85.8%, respectively, of total passenger service expense in
1995 and 1994.
The cost of passenger service increased 16.8% from $29.8 million in 1994 to
$34.8 million in 1995. This increase was primarily due to the 26.7% increase in
the total number of passengers boarded from 4.24 million in 1994 to 5.37 million
in 1995. The cost of passenger service increased less rapidly than the increase
in passengers boarded due to a reduction in catering service levels in select
charter and scheduled service markets beginning late in the second quarter of
1995. In addition to this planned reduction in catering, the 13.0% reduction in
military passengers boarded between years also reduced the average cost of
catering since military catering is one of the most expensive per passenger in
the Company's business mix.
The cost per ASM of passenger service declined 3.6% from 0.29 cents in 1994 to
0.28 cents in 1995. This reduction was primarily due to reduced catering costs,
as the cost per ASM of the total of other components of passenger service did
not change materially between years.
Commissions. Commissions expense increased 41.7% from $17.5 million in 1994 to
$24.8 million in 1995. The cost of commissions per ASM increased 17.6% from 0.17
cents in 1994 to 0.20 cents in 1995.
Scheduled service commissions expense accounted for all of the increase in this
cost in 1995, which was consistent with the significant growth in commissionable
scheduled service sold by travel agencies. The average rate of commission paid
to travel agencies declined slightly between years due to the elimination of
selected sales incentives. The average percentage of revenues sold by travel
agencies increased between years due to the Company's implementation of full
participation in several CRSs in the third quarter of 1994 and because of the
introduction of connecting fares in the second quarter of 1995 which offered
significantly expanded ATA schedule choices to travel agencies.
Commissions paid for military flying were reduced in 1995 due to the reduction
in military departures between years. Commissions paid for tour operator
departures also declined slightly between years.
Ground Package Cost. Ground package cost for 1995 increased 7.4% from $14.8
million in 1994 to $15.9 million in 1995. The cost per ASM declined 7.1% from
0.14 cents in 1994 to 0.13 cents in 1995. The cost per ASM declined between
years due to the slower growth in ground package sales as compared to overall
growth in the Company's capacity as measured by ASMs. The cost of ground
accommodations sold to Ambassadair and ATA Vacations customers increased in some
markets in 1995, resulting in slightly lower gross margins in 1995 as compared
to 1994.
Other Selling Expenses. Other selling expenses are comprised primarily of fees
paid to CRS and the cost of inbound reservations lines provided for the use of
the Company's customers. These costs increased 86.3% from $8.0 million in 1994
to $14.9 million in 1995 and were generally incurred to support the sale of
scheduled services. Other selling cost per ASM increased 50.0% from 0.08 cents
in 1994 to 0.12 cents in 1995. Scheduled service passengers boarded increased
47.3% from 2.24 million to 3.30 million over the same comparative period, while
scheduled service ASMs increased 39.5% from 4.73 billion to 6.60 billion between
years.
The Company participates in SABRE as a multi-host user and is also displayed in
Galileo, Worldspan and System One. These CRSs, which display competitive
schedules and fares for all participating airlines, offer different levels of
services at different transaction costs. In order to expand the Company's
visibility of schedules and fares with travel agencies, the Company's CRS
service levels were increased in all of these systems effective in July 1994,
resulting in a significant increase in billable transactions and higher
transaction rates. Although the Company believes that CRS participation has been
essential to rapid development of name recognition and sales in the Company's
new markets, more economic scheduled service distribution alternatives to CRSs
are now being evaluated.
Advertising. Advertising expense for 1995 increased 14.1% from $7.8 million in
1994 to $8.9 million in 1995. The cost per ASM remained unchanged between years
at 0.07 cents. The Company incurs advertising costs primarily to support
scheduled service sales. Scheduled service ASMs increased 39.5% in 1995 compared
to 1994, and the cost of advertising per scheduled service ASM declined 18.8%
from 0.16 cents in 1994 to 0.13 cents in 1995.
Facilities and Other Rentals. The cost of facilities and other rents increased
34.5% from $5.5 million in 1994 to $7.4 million in 1995. The cost per ASM
increased 20.0% from 0.05 cents in 1994 to 0.06 cents in 1995. The significant
portion of growth in facilities leasing has originated from the expansion of
scheduled services, which has required the Company to add new leased facilities
at airport locations to accommodate the space needs of airport passenger service
and maintenance staff. The rate of increase in facilities costs between years
(34.5%) has been slightly lower than the 39.5% rate of increase in scheduled
service ASMs since the utilization of the Company's facilities has improved with
expanded scheduled service frequencies at certain airports.
Other Expenses. Other expenses increased 12.5% from $41.5 million in 1994 to
$46.7 million in 1995. The cost per ASM for other expenses declined 8.1% from
0.40 cents in 1994 to 0.37 cents in 1995. Significant components of the increase
of $6.6 million in other expenses between years include: $2.0 million in
additional general, hull and liability insurance expense associated with the
Company's expanded size and flying activity; $1.5 million in additional property
and sales taxes assessed on the Company's expanding asset base and purchasing
activity; and $1.5 million in additional communications costs related to the
Company's data network infrastructure for worldwide airport operations. In 1995,
the Company recognized a gain of $1.3 million on a transaction with the City of
Indianapolis involving the Company's headquarters facility. There was no
comparable gain recognized in 1994.
Income Tax Expense
Income tax expense increased 154.2% from $2.4 million in 1994 to $6.1 million in
1995. The effective income tax rates were 41.8% and 40.7% for 1995 and 1994,
respectively. Income tax expense increased in close proportion to the 149.2%
increase in taxable income between years. The effective tax rate for 1994
included a more significant negative impact from non-deductible crew per diem
expense than did 1995. However, this effect was more than offset by the 1994 tax
benefit of adjustments in state tax rates and other tax reserve adjustments
recognized in that year.
Liquidity and Capital Resources
Cash Flow. 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 1996, 1995 and 1994, net cash provided by
operating activities was $32.2 million, $87.1 million, and $75.3 million,
respectively.
Net cash used in investing activities was $63.2 million, $44.0 million, and
$80.4 million, respectively, for 1996, 1995 and 1994. Such amounts primarily
reflected cash capital expenditures totaling $69.9 million in 1996, $57.8
million in 1995, and $81.0 million in 1994 for engine overhauls, airframe
improvements and the purchase of airframes, engines and rotable parts. These
capital expenditures were supplemented with other capital expenditures, financed
directly with debt, totaling $31.7 million and $15.9 million, respectively, in
1995 and 1994.
Net cash provided by (used in) financing activities was $11.6 million,($12.1)
million, and $21.8 million, respectively, for 1996, 1995 and 1994.
Aircraft and Fleet Adjustments. In September 1994, the Company entered into an
agreement to lease four additional Lockheed L-1011 aircraft and two new Boeing
757-200 aircraft. One Lockheed L-1011 was delivered in November 1994, and the
remaining Lockheed L-1011 aircraft were delivered during the second quarter of
1995. The Company purchased one of the three Lockheed L-1011s it was obligated
to lease during the second quarter of 1995. The Company completed delivery of
one Boeing 757-200 in the fourth quarter of 1994, and the remaining Boeing
757-200 was delivered in October, 1995.
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 thirteen 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, the credits and cost guarantees 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 aircraft under these
agreements in September 1995, and the second aircraft in December 1995. The
Company accepted delivery of the third and fourth aircraft under these
agreements in November and December 1996. All four deliveries in 1995 and 1996
were financed under leases accounted for as operating leases. The final two
deliveries under this agreement are scheduled for the fourth quarters of 1997
and 1998. Advance payments and interest totaling approximately $22.0 million
($11.0 million per aircraft) are required prior to delivery of the two remaining
aircraft, with the remaining purchase price payable at delivery. As of December
31, 1996, 1995 and 1994, the Company had made $2.7 million, $5.0 million, and
$10.8 million, respectively, in advance 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 fourth quarter of 1995, the Company purchased one Boeing 727-200 and
financed that aircraft through a sale/leaseback accounted for as an operating
lease. In the first quarter of 1996, the Company purchased four additional
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 sixth 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 December 31, 1996, but is expected to be
financed long term through a sale/leaseback transaction.
In October 1995, the Company entered into an agreement with a supplier to
provide for the purchase of hushkits for installation on Boeing 727-200
aircraft. All six Boeing 727-200 aircraft acquired during the fourth quarter of
1995 and the first two quarters of 1996 had hushkits installed, and the Company
installed hushkits on two other existing Boeing 727-200 aircraft in the
Company's fleet by the end of 1996. These narrow-body hushkitted aircraft
maintain the Company's compliance with Federal Stage 3 noise requirements for
the fleet as of December 31, 1996. The cost of these hushkits was included in
the basis of each modified Boeing 727-200 as these aircraft were financed long
term through sale/leaseback transactions.
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 while signing a new lease covering only the nine related engines; the
Lockheed L-1011 transaction was not completed before the end of 1996. In
association with this letter of intent, the lessor provided the Company with
approximately $6.4 million in additional unsecured financing for a term of seven
years. This transaction accounted for $2.3 million of the $4.7 million loss on
disposal of assets recorded in the third quarter of 1996 (see "Disposal of
Assets").
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 was not
completed and the aircraft was acquired through the lessor on a short-term
rental agreement. 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,
reduced the Company's Rolls-Royce-powered Boeing 757-200 fleet to seven units as
of 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 accounted for $2.4 million of the $4.7 million loss on
disposal of assets provided for in the third quarter of 1996.
Credit Facilities. The Company's existing bank credit facility provides a
maximum of $125.0 million, including a $25.0 million letter of credit facility,
subject to the maintenance of certain collateral value. The collateral for the
facility consists of certain owned Lockheed L-1011 aircraft, certain
receivables, and certain rotables and spare parts. At December 31, 1996, 1995
and 1994, the Company had borrowed the maximum amount then available under the
bank credit facility, of which $46.0 million was repaid on January 2, 1997,
$68.0 million was repaid on January 2, 1996, and $56.0 million was repaid on
January 3, 1995.
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 has pledged additional
owned engines and equipment as collateral for the facility as of the
implementation date of the new agreement. The Company has 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. Loans
outstanding 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 December 31, 1996, the Company has reclassified $19.9 million of bank credit
facility borrowings from long-term debt to current maturities of long-term debt.
Of this amount, $10.5 million is attributable to the scheduled reduction of
availability secured by the owned Lockheed L-1011 fleet during the 12 months
ending December 31, 1997. The remaining $9.4 million 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.
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 December 31, 1996 or 1995; however, the Company did have outstanding
letters of credit secured by this facility aggregating $4.1 million and $2.9
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. The Company does not
currently expect to complete this stock repurchase program.
Other Significant Matters
In August 1995, the City of Indianapolis and the State of Indiana agreed upon a
package of economic incentives to be provided to the Company in exchange for the
Company's commitment to maintain existing operations in Indiana and to increase
overall employment within the Company's Indiana operations. The Company
presently maintains in Indiana its corporate headquarters, a significant
maintenance and engineering operation, and a reservations center, together with
other smaller operational units of the Company.
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 there can be no assurance
that the statement of expectation or belief will result or will be achieved or
accomplished.
Taking into account the foregoing, 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 has 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. 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. At various times during 1996, the Company has actively considered possible
business combinations with other air carriers. The Company intends to continue
to evaluate such potential combinations, and it is possible that the Company
will enter into a transaction in 1997 that would result in a merger or other
change in control of the Company. The Company's current credit facility 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.
3. The Company's capital structure remains subject to significant financial
leverage, which could impair the Company's ability to obtain new or additional
financing for working capital and capital expenditures, and could increase the
Company's vulnerability to a sustained economic downturn.
4. 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.
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 are 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 11.2% of operating revenues
in 1996. No other single customer of the Company accounts for more than 10% of
operating revenues.
8. Over 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 has faced intensified competition in 1996 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
business units, including changes in prices and seat capacity offered in
individual markets, could have a material effect on the profit performance of
those business units of the Company.
10. Jet fuel comprises a significant percentage of the total operating expenses
of the Company, accounting for 20.5% and 18.6%, respectively, of operating
expenses in 1996 and 1995. 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 to tour
operators, a significant increase in fuel prices could have a material adverse
effect on the Company's operating performance.
11. 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.
12. 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. These agencies propose and issue
regulations from time to time which can significantly increase the cost of
airline operations. For example, the FAA has issued regulations imposing
standards on airlines for the limitation of engine noise and standards to
address aging aircraft maintenance procedures. The Company could become subject
to future regulations which could impose new and significant operating costs on
the Company. A modification, suspension or revocation of the Company's DOT or
FAA authorizations or certificates could have a material adverse affect on the
Company.
<PAGE>
PART II - Continued
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors
Amtran, Inc.
We have audited the accompanying consolidated balance sheets of Amtran, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, as listed in Item
14(a). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amtran, Inc. and
subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Indianapolis, Indiana
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
<S> <C> <C>
1996 1995
---------------- --------------------
------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,382 $ 92,741
Receivables, net of allowance for doubtful accounts
(1996 - $1,274; 1995 - $1,303) 20,239 24,158
Inventories, net 13,888 13,959
Assets held for sale 14,112 -
Prepaid expenses and other current assets 14,672 25,239
-------------------- -----------------------
Total current assets 136,293 156,097
Property and equipment:
Flight equipment 381,186 384,476
Facilities and ground equipment 51,874 40,290
-------------------- -----------------------
433,060 424,766
Accumulated depreciation (208,520) (183,998)
-------------------- -----------------------
224,540 240,768
Deposits and other assets 9,454 16,272
-------------------- -----------------------
Total assets $ 370,287 $ 413,137
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 30,271 $ 3,606
Accounts payable 13,671 11,152
Air traffic liabilities 49,899 56,531
Accrued expenses 64,813 76,312
-------------------- -----------------------
Total current liabilities 158,654 147,601
Long-term debt, less current maturities 119,786 134,641
Deferred income taxes 20,216 37,949
Other deferred items 16,887 11,761
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 11,799,852 - 1996; 11,790,752 - 1995 38,341 38,259
Treasury stock: 185,000 shares - 1996; 169,000 shares - 1995 (1,760) (1,581)
Additional paid-in-capital 15,618 15,821
Retained earnings 4,678 31,352
Deferred compensation - ESOP (2,133) (2,666)
-------------------- -----------------------
54,744 81,185
-------------------- -----------------------
Total liabilities and shareholders' equity $ 370,287 $ 413,137
==================== =======================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year ended December 31,
1996 1995 1994
------------------------------------------------------
Operating revenues:
<S> <C> <C> <C>
Scheduled service $ 386,488 $ 361,967 $ 240,675
Charter 310,569 307,091 295,890
Ground package 22,302 20,421 20,248
Other 31,492 25,530 23,709
---------------- ---------------- ----------------
Total operating revenues 750,851 715,009 580,522
---------------- ---------------- ----------------
Operating expenses:
Salaries, wages and benefits 163,990 141,072 113,789
Fuel and oil 161,226 129,636 106,057
Handling, landing and navigation fees 70,122 74,400 60,872
Aircraft rentals 65,427 55,738 48,155
Depreciation and amortization 61,661 55,827 46,178
Aircraft maintenance, materials and repairs 55,175 55,423 46,092
Crew and other employee travel 35,855 31,466 26,171
Passenger service 32,745 34,831 29,804
Commissions 26,677 24,837 17,469
Ground package cost 18,246 15,926 14,767
Other selling expenses 17,563 14,934 8,008
Advertising 10,320 8,852 7,759
Facilities and other rentals 9,625 7,414 5,500
Disposal of assets 4,475 - -
Other 53,800 46,717 41,486
---------------- ---------------- ----------------
Total operating expenses 786,907 697,073 572,107
---------------- ---------------- ----------------
Operating income (loss) (36,056) 17,936 8,415
Other income (expense):
Interest income 617 410 191
Interest (expense) (4,465) (4,163) (3,656)
Other 323 470 929
---------------- ---------------- ----------------
Other expenses (3,525) (3,283) (2,536)
---------------- ---------------- ----------------
Income (loss) before income taxes (39,581) 14,653 5,879
Income taxes (credits) (12,907) 6,129 2,393
---------------- ---------------- ----------------
Net income (loss) $ (26,674) $ 8,524 $ 3,486
================ ================ ================
Net income (loss) per share $ (2.31) $ 0.74 $ 0.30
================ ================ ================
Average shares outstanding 11,535,425 11,481,861 11,616,196
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Additional Deferred
Common Treasury Paid-in Retained Compensation
Stock Stock Capital Earnings ESOP
---------------------------- ------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 37,667 $ - $ 16,132 $ 19,342 $ (3,200)
Net income - - - 3,486 -
Issuance of common stock for ESOP - - (46) - 267
Restricted stock grants 274 - (78) - -
Purchase of 115,000 shares of treasury - (1,091) - - -
stock
------------ -------------- ------------ -------------- ------------------
Balance, December 31, 1994 37,941 (1,091) 16,008 22,828 (2,933)
Net income - - - 8,524 -
Issuance of common stock for ESOP - - (111) - 267
Restricted stock grants 152 - (19) - -
Stock options exercised 166 - (57) - -
Purchase of 54,000 shares of treasury - (490) - - -
stock
------------ -------------- ------------ -------------- ------------------
Balance, December 31, 1995 38,259 (1,581) 15,821 31,352 (2,666)
Net loss - - - (26,674) -
Issuance of common stock for ESOP - - (173) - 533
Restricted stock grants 32 - (7) - -
Stock options exercised 50 - (23) - -
Purchase of 16,000 shares of treasury - (179) - - -
stock
------------ -------------- ------------ -------------- ------------------
Balance, December 31, 1996 $ 38,341 $ (1,760) $ 15,618 $ 4,678 $ (2,133)
============ ============== ============ ============== ==================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
--------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ (26,674) $ 8,524 $ 3,486
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 61,661 55,827 46,178
Deferred income taxes (credits) (13,246) 4,025 2,226
Other non-cash items 28,185 9,699 2,131
Changes in operating assets and liabilities:
Receivables 3,919 (6,768) (1,728)
Inventories (948) 2,739 (3,027)
Assets held for sale (14,112) - -
Prepaid expenses 6,081 (4,061) (3,572)
Accounts payable 2,519 (166) (4,243)
Air traffic liabilities (6,632) 10,466 1,293
Accrued expenses (8,582) 6,793 32,553
---------------- --------------- ---------------
Net cash provided by operating activities 32,171 87,078 75,297
---------------- --------------- ---------------
Investing activities:
Proceeds from sales of property and equipment 529 21,564 358
Capital expenditures (69,884) (57,835) (81,015)
Reductions of (additions to) other assets 6,194 (7,761) 257
---------------- --------------- ---------------
Net cash used in investing activities (63,161) (44,032) (80,400)
---------------- --------------- ---------------
Financing activities:
Proceeds from long-term debt 21,390 6,000 45,000
Payments on long-term debt (9,580) (17,567) (22,078)
Purchase of treasury stock (179) (490) (1,091)
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 11,631 (12,057) 21,831
---------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (19,359) 30,989 16,728
Cash and cash equivalents, beginning of period 92,741 61,752 45,024
---------------- --------------- ---------------
Cash and cash equivalents, end of period $ 73,382 $ 92,741 $ 61,752
================ =============== ===============
Supplemental disclosures:
Cash payments for:
Interest $ 3,823 $ 4,515 $ 3,376
Income taxes 515 1,069 835
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital $ - $ 31,708 $ 15,851
expenditures
</TABLE>
See accompanying notes.
<PAGE>
================================================================================
Part II - Continued
================================================================================
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Business Description
The consolidated financial statements include the accounts of Amtran, Inc.
(the "Company") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The Company operates principally in one business segment through American
Trans Air, Inc. ("ATA"), its principal subsidiary, which accounts for
approximately 95% of the Company's operating revenues. ATA is a
U.S.-certificated air carrier providing domestic and international charter
and scheduled passenger services. Approximately 51.5% of the Company's
1996 operating revenues were generated through scheduled services to such
destinations as Hawaii, Las Vegas, Florida and the Caribbean, while
approximately 41.4% of 1996 operating revenues were derived from charter
operations with independent tour operators and U.S.
military services to numerous destinations throughout the world.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are carried at cost and are primarily comprised of
investments in U.S. Treasury bills and time deposits which are purchased
with original maturities of three months or less (see Note 2).
Assets Held For Sale
Assets held for sale are carried at the lower of net book value or
estimated net realizable value.
Inventories
Inventories consist primarily of expendable aircraft spare parts, fuel and
other supplies. Aircraft parts inventories are stated at cost and reduced
by an allowance for obsolescence. The obsolescence allowance is provided
by amortizing the cost of the aircraft parts inventory, net of an
estimated residual value, over its estimated useful service life. The
obsolescence allowance at December 31, 1996 and 1995, was $6.6 million and
$5.6 million, respectively. Inventories are charged to expense when
consumed.
Revenue Recognition
Revenues are recognized when the transportation is provided. Customer
flight deposits and unused passenger tickets sold are included in air
traffic liability. As is customary within the industry, the Company
performs periodic evaluations of this estimated liability, and any
adjustments resulting therefrom, which can be significant, are included in
the results of operations for the periods in which the evaluations are
completed.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is recognized. The
amount of passenger traffic commissions paid but not yet recognized as
expense is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
<PAGE>
Property and Equipment
Property and equipment is recorded at cost and is depreciated to residual
value over its estimated useful service life using the straight-line
method. Advanced payments for future aircraft purchases are recorded at
cost. As of December 31, 1996 and 1995, the Company had made advanced
payments for future aircraft deliveries totaling $2.7 million and $4.9
million, respectively. The estimated useful service lives for the
principal depreciable asset classifications are as follows:
<TABLE>
<CAPTION>
Asset Estimated Useful Service Life
--------------------------------------------------- -----------------------------------------------
Aircraft and related equipment:
<S> <C> <C>
Lockheed L-1011 16 years
Major rotable parts, avionics and assemblies Life of equipment to which applicable
(Generally ranging from 10-16 years)
Improvements to leased flight equipment Period of benefit or term of lease
Other property and equipment 3 - 7 years
</TABLE>
The costs of major airframe and engine overhauls are capitalized and
amortized over their estimated useful lives based upon usage (or to
earlier fleet common retirement dates) for both owned and leased aircraft.
Financial Instruments
The carrying amounts of cash equivalents, receivables and both
variable-rate and fixed-rate debt (see Note 5) approximate fair value. The
fair value of fixed-rate debt, including current maturities, is estimated
using discounted cash flow analysis based on the Company's current
incremental rates for similar types of borrowing arrangements.
Income (Loss) Per Share
Income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding plus common share
equivalents arising from restricted shares issued during the period. No
effect has been given to options outstanding under the Company's incentive
stock plans, as no material dilutive effect would result from their
exercise (see Note 9).
2. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------ ---- -------------------
-------------------------------------------
(In thousands)
<S> <C> <C>
U.S. Treasury bill repurchase agreements 54,859 71,027
------------------ -------------------
$73,382 $92,741
================== ===================
</TABLE>
<PAGE>
Cash equivalents of $6.3 million and $6.0 million at December 31, 1996 and
1995, respectively, are pledged to collateralize amounts which could
become due under letters of credit. At December 31, 1996 and 1995, there
were no amounts drawn against letters of credit (see Note 4).
3. Property and Equipment
The Company's property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------ ---- -------------------
(In thousands)
<S> <C> <C>
Flight equipment, including airframes, engines and $381,186 $384,476
other
Less accumulated depreciation 182,392 163,846
------------------ -------------------
198,794 220,630
------------------ -------------------
Facilities and ground equipment 51,874 40,290
Less accumulated depreciation 26,128 20,152
------------------ -------------------
25,746 20,138
------------------ -------------------
$224,540 $240,768
================== ===================
</TABLE>
4. Short-Term Borrowings
The Company maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for issuance of letters of credit.
The credit facility is available until June 1997 and is collateralized by
certain aircraft engines. Borrowings against the facility bear interest at
the bank's prime rate plus .25%. There were no borrowings against this
credit facility at December 31, 1996 or 1995. At December 31, 1996 and
1995, the Company had outstanding letters of credit aggregating $4.1
million and $2.9 million, respectively, under such facility.
<PAGE>
5. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ---- -------------
(In thousands)
<S> <C> <C>
Notes payable to banks; prime to prime plus .75% (8.25% and 9% at $123,246 $112,337
December 31, 1996), payable in varying installments through April
1999
Note payable to institutional lender; fixed rate of 7.8% payable in
varying installments through September 2003 9,106 2,860
City of Indianapolis Economic Development Revenue Bond;
9.88%, payable in quarterly installments through July 1997 875 1,375
City of Chicago variable rate special facility revenue bonds (4.75%
at December 31, 1996), payable in December 2020 6,000 6,000
Notes payable to banks and institutional lenders - 4,205
Capitalized lease obligations and other 10,830 11,470
-------------- -------------
150,057 138,247
Less current maturities 30,271 3,606
-------------- -------------
$119,786 $134,641
============== =============
</TABLE>
The Company's 1996 credit facility provides a maximum of $125.0 million,
including a $25.0 million letter of credit facility. The collateral for
the facility consists of certain owned Lockheed L-1011 aircraft, certain
receivables and certain rotables and spare parts. Effective September 30,
1996, the Company renegotiated certain terms of the bank credit facility
along with the modification of certain loan covenants. In return for this
covenant relief, the Company has agreed to implement changes to the
underlying collateral for the facility and to change the interest rate
applicable to borrowings under the facility. The Company has pledged
additional owned engines and equipment as collateral for the facility as
of the implementation date of the new agreement. The Company has further
agreed to begin reducing the maximum borrowing availability of $63.0
million collateralized by the owned Lockheed L-1011 fleet by $1.0 million
per month from April 1997 through September 1997, and by $1.5 million per
month from October 1997 through April 1999. Loans outstanding 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 defaults, 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.
In December 1995, the Company issued $6.0 million in variable rate special
revenue bonds through the City of Chicago. The Company is obligated to
perform certain mandatory improvements to its Chicago-Midway Airport
Maintenance facility with the bond proceeds.
<PAGE>
In December 1995, the Company entered into a sale/lease transaction with
the City of Indianapolis on its maintenance facility at the Indianapolis
International Airport which resulted in the advance of $10.0 million in
cash to the Company, as secured by the maintenance facility. The Company
is obligated to pay $.6 million per year to the City of Indianapolis for
five years, which represents interest on the City's associated outstanding
debt obligation. As of December 2000, the Company is required to repay the
advance of $10.0 million to the City of Indianapolis, and may elect to
repay the balance using special facility bonds underwritten by the City's
Airport Authority, or by using the Company's own funds.
At December 31, 1996, the Company has reclassified $19.9 million of bank
credit facility borrowings from long-term debt to current maturities of
long-term debt. Of this amount, $10.5 million is attributable to the
scheduled reduction of availability collateralized by the owned Lockheed
L-1011 fleet over the next 12 months. 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 of the engines. The estimated market value of these spare engines is
classified under current assets.
The Company has made voluntary prepayments of long-term debt which has had
the effect of reducing interest expense by approximately $5.9 million and
$5.5 million during 1996 and 1995, respectively. The Company reborrowed
the full amounts available to it as of December 31, 1996 and 1995.
Future maturities of long-term debt are as follows:
December 31, 1996
-----------------------
(In thousands)
1997 $ 30,271
1998 19,486
1999 79,615
2000 1,483
2001 1,476
Thereafter 17,726
-----------------------
$150,057
=======================
Interest capitalized in connection with long-term asset purchase
agreements was $1.4 million and $1.3 million in 1996 and 1995,
respectively.
<PAGE>
6. Lease Commitments
At December 31, 1996, the Company had aircraft leases on four Lockheed
L-1011s, 23 Boeing 727-200s, and seven Boeing 757-200s. The Lockheed
L-1011s have an initial term of 60 months. The Boeing 757-200s have
initial lease terms that expire from 1997 through 2015. The Boeing
727-200s have initial terms of three to seven years.
The Company is responsible for all maintenance costs on these aircraft and
must meet specified airframe and engine return conditions. The Company had
previously been required to make maintenance reserve payments based upon
the usage of certain leased aircraft, but is no longer subject to such
requirements.
As of December 31, 1996, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance
facilities, with original lease terms that vary from 3 to 40 years and
expire at various dates through 2035. The lease agreements relating to the
ground facilities, which are primarily owned by governmental units or
authorities, generally do not provide for transfer of ownership nor do
they contain options to purchase.
In December 1995, the Company sold its option to purchase its headquarters
facility to the City of Indianapolis for $2.9 million, and thereafter
entered into a capital lease agreement with the City relating to the
continued use of the headquarters and maintenance facility. A gain on the
sale of the option equal to $1.3 million was recognized in income in 1995,
with the remainder of the gain to be amortized to income during the
periods the headquarters facilities are used. The headquarters agreement
has an initial term of four years, with two options to extend of three and
five years, respectively, and is cancelable after two years with advance
notice. The maintenance facility lease has a term of 39 years. The Company
is responsible for maintenance, taxes, insurance and other expenses
incidental to the operation of the facilities.
Future minimum lease payments at December 31, 1996, for noncancelable
operating leases with initial terms of more than one year are as follows:
<TABLE>
<CAPTION>
Facilities
Flight And Ground
Equipment Equipment Total
----- --------------- ---- ------------------ ---- --------------
(In thousands)
<S> <C> <C> <C> <C>
1997 $ 55,513 $ 5,572 $ 61,085
1998 46,890 5,229 52,119
1999 45,205 4,662 49,867
2000 32,272 4,505 36,777
2001 31,457 3,143 34,600
Thereafter 200,209 20,377 220,586
--------------- ------------------ --------------
$411,546 $43,488 $455,034
=============== ================== ==============
</TABLE>
Rental expense for all operating leases in 1996, 1995 and 1994 was $65.0
million, $63.0 million and $53.0 million, respectively, including
maintenance reserve payments of $3.4 million in 1994.
<PAGE>
7. Income Taxes
The provision for income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---------------- ----- ---------------- ----- ----------------
(In thousands)
Federal:
<S> <C> <C>
Current $1,280 $ (14)
$ -
Deferred (11,798) 4,399 2,357
---------------- ---------------- ----------------
(11,798) 5,679 2,343
State:
Current 161 107 181
Deferred (1,270) 343 (131)
----------------
---------------- ----------------
450 50
(1,109)
---------------- ----------------
=================
Income tax expense (credit) $(12,907) $6,129 $2,393
================= ================= ================
</TABLE>
The provision for income taxes differed from the amount obtained by
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------ ---- ------------ ---- -----------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate (credit) $(13,457) $4,982 $1,999
State income taxes, net of federal benefit (732) 535 295
Non-deductible expenses 1,282 998 1,155
Benefit of change in estimate of state income tax
rate - (258) (468)
Benefit of tax reserve adjustments - (203) (610)
Other, net - 75 22
------------ ------------ -----------
Income tax expense (credit) $(12,907) $6,129 $2,393
============ ============ ===========
</TABLE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the
financial statements. The principal temporary differences relate to the
use of accelerated methods of depreciation and amortization for tax
purposes. Deferred income tax liability components are as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------------
(In thousands)
Deferred tax liabilities:
<S> <C> <C>
Tax depreciation in excess of book depreciation $56,885 $57,167
Other taxable temporary differences 476 228
-------------- --------------
Deferred tax liabilities $57,361 $57,395
Deferred tax assets:
Amortization of lease credits $ 2,044 $ 2,109
Tax benefit of net operating loss carryforwards 29,852 17,420
Investment and other tax credit carryforwards 4,720 4,506
Other deductible temporary differences 4,928 4,296
-------------- --------------
Deferred tax assets $41,544 $28,331
Deferred taxes classified as:
Current asset $ 4,399 $ 8,885
Non-current liability $20,216 $37,949
============== ===============
</TABLE>
At December 31, 1996, for federal tax reporting purposes, the Company had
approximately $81.7 million of net operating loss carryforwards available
to offset future federal taxable income and $4.7 million of investment and
other tax credit carryforwards available to offset future federal tax
liabilities. The net operating loss carryforwards expire as follows: 2002,
$11.9 million; 2003, $8.1 million; 2004, $9.0 million; 2005, $3.6 million;
2009, $14.8 million; 2011, $34.4 million. Investment tax credit
carryforwards of $.9 million expire principally in 2000 and other tax
credit carryforwards of $3.8 million have no expiration dates.
8. Retirement Plan
The Company has a defined contribution 401(k) savings plan which provides
for participation by substantially all the Company's employees who have
completed one year of service. The Company has elected to contribute an
amount equal to 30% of the amount contributed by each participant up to
the first six percent of eligible compensation. Company matching
contributions expensed in 1996, 1995 and 1994 were $1.3 million, $1.2
million, and $1.0 million, respectively.
In 1993, the Company added an Employee Stock Ownership Plan ("ESOP")
feature to its existing 401(k) savings plan. The ESOP used the proceeds of
a $3.2 million loan from the Company to purchase 200,000 shares of the
Company's common stock. The selling shareholder was the Company's
principal shareholder. The Company recognized $.3 million, $.4 million,
and $.2 million in 1996, 1995 and 1994, respectively, as compensation
expense related to the ESOP. Shares of common stock held by the ESOP will
be allocated to participating employees annually as part of the Company's
401(k) savings plan contribution. The fair value of the shares allocated
during the year is recognized as compensation expense.
<PAGE>
9. Shareholders' Equity
In the first quarter of 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. As of
December 31, 1996, the Company had repurchased 185,000 shares at a total
cost of $1.8 million.
The Company's 1993 Incentive Stock Plan (1993 Plan) authorizes the grant
of options to key employees for up to 900,000 shares of the Company's
common stock. The Company's 1996 Incentive Stock Plan for key employees
(1996 Plan), which has not been approved by the Company's shareholders,
authorizes the grant of options to key employees for up to 3,000,000
shares of the Company's common stock. Options granted have 5 to 10-year
terms and generally vest and become fully exercisable over specified
periods up to three years of continued employment.
A summary of common stock option changes follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
---------------
<S> <C> <C>
Outstanding at December 31, 1994 313,050 $13.73
Granted 190,000 $8.71
Exercised 10,417 $10.56
Canceled 97,333 $11.73
---------------
Outstanding at December 31, 1995 395,300 $11.92
Granted 1,302,400 $7.87
Exercised 3,100 $8.94
Canceled 64,700 $10.87
---------------
Outstanding at December 31, 1996 1,629,900 $8.74
===============
Options exercisable at December 31, 1996 497,015 $9.99
===============
</TABLE>
During 1996, the Company adopted FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) with respect to its stock options. As
permitted by FAS 123, the Company has elected to continue to account for
employee stock options following Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
<PAGE>
The weighted-average fair value of options granted during 1996 and 1995 is
estimated at $4.49 and $5.74 per share, respectively, on the grant date.
These estimates were made using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1996 and 1995,
respectively: risk-free interest rates of 6% and 7.92%; expected market
price volatility of .48 and .40; weighted-average expected option life
equal to the contractual term; estimated forfeitures of 5%; and no
dividends.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models use highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion the existing models do
not necessarily provide a reliable single measure of the fair value of its
employees' stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3
years). Therefore, because FAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1998. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands except per share data)
<S> <C> <C>
Net income (loss) as reported $(26,674) $8,524
Net income (loss) pro forma (28,864) 8,456
Earnings (loss) per share as reported (2.31) .74
Earnings (loss) per share pro forma (2.50) .74
</TABLE>
Options outstanding at December 31, 1996 expire from August 2001 to
February 2006. A total of 2,270,100 shares are reserved for future grants
as of December 31, 1996 under the 1993 and 1996 Plans. The following table
summarizes information concerning outstanding and exercisable options at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Range of Exercise Prices $7 - 11 $12 - 16
Options outstanding:
Weighted-Average Remaining
Contractual Life 3.3 years 8.3 years
Weighted-Average Exercise Price $7.48 $14.28
Number 1,328,700 301,200
Options exercisable:
Weighted-Average Exercise Price $7.67 $16.00
Number 358,315 138,700
</TABLE>
<PAGE>
10. Major Customer
The United States Government is the only customer that accounted for more
than 10% of consolidated revenues. U.S. Government revenues accounted for
11%, 11% and 16% of consolidated revenues for 1996, 1995 and 1994,
respectively.
11. Commitments and Contingencies
In November 1994, the Company signed a purchase agreement for six new
Boeing 757-200s which, as subsequently amended, provides for deliveries of
aircraft between 1995 and 1998. As of December 31, 1996, the Company had
taken delivery of four Boeing 757-200s under this purchase agreement and
financed those aircraft using operating leases. 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 aircraft and to provide one spare
engine. Under the Rolls-Royce agreement, which was effective January 1,
1995, Rolls-Royce provides the Company various credits for spare parts and
maintenance purchases, together with engine overhaul cost guarantees for
certain qualified Rolls-Royce engines currently used by the Company.
If the Company does not take delivery of the purchased engines, the
credits and cost guarantees that have been used are refundable to
Rolls-Royce. These two agreements have an aggregate purchase price of
approximately $50.0 million per aircraft, subject to escalation. Advance
payments totaling approximately $22.0 million ($11.0 million per aircraft)
are required to be made for the undelivered aircraft, with the balance due
upon delivery. As of December 31, 1996 and 1995, the Company had made $2.7
million and $5.0 million in advanced payments, respectively, pertaining to
aircraft deliveries scheduled to take place within one year.
In the first quarter of 1996, the Company purchased four additional Boeing
727-200 aircraft, and had financed 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 sixth Boeing
727-200 aircraft which had been previously financed by the Company through
an operating lease. This aircraft was financed through the separate bridge
debt facility as of September 30, 1996, but is expected to be financed
long-term through a sale/leaseback transaction.
The Company entered into an agreement in October 1995 with a supplier
which provides for the purchase of four engine hushkits and for the option
to purchase three additional hushkits on the same terms, for installation
on newly acquired Boeing 727-200 aircraft.
Various claims, contractual disputes and lawsuits against the Company
arise periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
<PAGE>
<TABLE>
<CAPTION>
Financial Statements and Supplementary Data
Amtran, Inc. and Subsidiaries
1996 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------------- ------------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------------- ------------- -------------- ------------------- ------------------
Operating revenues $207,135 $195,395 $199,698 $148,623
Operating expenses 201,918 198,498 218,776 168,106
Operating income (loss) 5,217 (3,103) (19,078) (19,483)
Other expenses (855) (471) (355) (1,453)
Income (loss) before income taxes 4,362 (3,574) (19,433) (20,936)
Income taxes (credits) 2,009 (1,289) (6,800) (6,827)
Net income (loss) $ 2,353 $ (2,285) $(12,633) $(14,109)
Net income (loss) per share $ .21 $ (.20) $ (1.09) $ (1.23)
Amtran, Inc. and Subsidiaries
1995 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------------- ------------- -------------- ------------------- ------------------
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------------- ------------- -------------- ------------------- ------------------
Operating revenues $182,618 $173,338 $194,427 $164,626
Operating expenses 171,811 167,332 186,783 171,147
Operating income (loss) 10,807 6,006 7,644 (6,521)
Other expenses (825) (597) (758) (1,103)
Income (loss) before income taxes 9,982 5,409 6,886 (7,624)
Income taxes (credits) 4,578 2,085 3,295 (3,829)
Net income (loss) $ 5,404 $ 3,324 $ 3,591 $ (3,795)
Net income (loss) per share $ .46 $ .29 $ .31 $ (.32)
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change of auditors or disagreements on accounting methods have occurred which
would require disclosure hereunder.
<PAGE>
- --------------------------------------------------------------------------------
Part III
- --------------------------------------------------------------------------------
Item 10. Directors and Officers of the Registrant
The information contained on page 12 of Amtran, Inc. and Subsidiaries' Proxy
Statement dated April 1, 1997, with respect to directors and executive officers
of the Company, is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information contained on pages 15 through 17 of Amtran, Inc. and
Subsidiaries' Proxy Statement dated April 1, 1997, with respect to executive
compensation and transactions, is incorporated herein by reference in response
to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained on page 14 of Amtran, Inc. and Subsidiaries' Proxy
Statement dated April 1, 1997, with respect to security ownership of certain
beneficial owners and management, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on pages 13 and 14 of Amtran, Inc. and Subsidiaries'
Proxy Statement dated April 1, 1997, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the
Company and its subsidiaries for the year ended December 31,
1996, are included in Item 8:
o Consolidated Balance Sheets for years ended December 31,
1996 and 1995
o Consolidated Statements of Operations for years ended
December 31, 1996, 1995 and 1994
o Consolidated Statement of Changes in Shareholders' Equity
for years ended December 31, 1996, 1995 and 1994
o Consolidated Statements of Cash Flows for years ended
December 31, 1996, 1995 and 1994
o Notes to Consolidated Financial Statements as of
December 31, 1996
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits
The following exhibits are submitted as a separate section of
this report:
Page
23. Consent of Independent Auditor 66
(b) Reports on Form 8-K
There were no Form 8-Ks filed during the quarter ended
December 31, 1996.
(c) Exhibits
This section is not applicable.
(d) Financial Statement Schedule
This section is not applicable.
<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 May 1, 1997
Stanley L. Pace
President and Chief Executive Officer
Director
Date May 1, 1997
James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date May 1, 1997
Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
Date May 1, 1997
Dalen D. Thomas
Senior Vice President Sales, Marketing and
Strategic Planning
Director
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exhibit 23
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement Form S-8 No. 33-65708 pertaining to the 1993 Incentive
Stock Plan for Key Employees of Amtran, Inc. and its subsidiaries
of our report dated February 7, 1997, with respect to the
consolidated financial statements, as amended, included in the
Annual Report (Form 10-K/A) for the year ended December 31, 1996.
Indianapolis, Indiana
May 1, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000898904
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 73,382
<SECURITIES> 0
<RECEIVABLES> 21,513
<ALLOWANCES> 1,274
<INVENTORY> 13,888
<CURRENT-ASSETS> 136,293
<PP&E> 433,060
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0
0
<COMMON> 38,341
<OTHER-SE> 16,403
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<SALES> 750,851
<TOTAL-REVENUES> 750,851
<CGS> 0
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<INCOME-PRETAX> (39,581)
<INCOME-TAX> (12,907)
<INCOME-CONTINUING> (26,674)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,674)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (2.31)
</TABLE>
