United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
From to
Commission file number 000-21642
AMTRAN,INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months(or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,613,852 shares outstanding as of
April 30, 1997
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
<S> <C> <C>
1997 1996
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 65,953 $ 73,382
Receivables, net of allowance for doubtful accounts
(1997 - $1,342; 1996 - $1,274) 21,591 20,239
Inventories, net 14,350 13,888
Assets held for sale 13,703 14,112
Prepaid expenses and other current assets 16,897 14,672
------------------- -------------------
Total current assets 132,494 136,293
Property and equipment:
Flight equipment 399,126 381,186
Facilities and ground equipment 52,257 51,874
------------------- -------------------
451,383 433,060
Accumulated depreciation (220,217) (208,520)
------------------- -------------------
231,166 224,540
Deposits and other assets 11,417 9,454
------------------- -------------------
Total assets $ 375,077 $ 370,287
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 33,851 $ 30,271
Accounts payable 9,775 13,671
Air traffic liabilities 57,942 49,899
Accrued expenses 64,554 64,813
------------------- -------------------
Total current liabilities 166,122 158,654
Long-term debt, less current maturities 114,140 119,786
Deferred income taxes 23,001 20,216
Other deferred items 13,386 16,887
Commitments and contingencies
Shareholders' equity:
Preferred stock; authorized 10,000,000 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 11,798,852 - 1997; 11,799,852 - 1996 38,348 38,341
Additional paid-in-capital 15,541 15,618
Deferred compensation - ESOP (1,600) (2,133)
Treasury stock: 185,000 shares - 1997; 185,000 shares - 1996 (1,760) (1,760)
Retained earnings 7,899 4,678
------------------- -------------------
58,428 54,744
------------------- -------------------
Total liabilities and shareholders' equity $ 375,077 $ 370,287
=================== ===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months ended March 31,
1997 1996
-----------------------------------------
(Unaudited) (Unaudited)
Operating revenues:
<S> <C> <C>
Charter $ 100,346 $ 83,205
Scheduled service 82,004 110,453
Ground package 5,854 7,248
Other 6,080 6,229
------------------- -------------------
Total operating revenues 194,284 207,135
------------------- -------------------
Operating expenses:
Fuel and oil 40,671 40,346
Salaries, wages and benefits 40,490 41,149
Handling, landing and navigation fees 17,248 19,771
Aircraft rentals 14,147 17,125
Depreciation and amortization 14,140 15,561
Aircraft maintenance, materials and repairs 11,085 13,624
Passenger service 8,186 9,215
Crew and other employee travel 7,920 7,788
Commissions 5,934 7,378
Ground package cost 5,215 5,428
Advertising 3,514 2,527
Other selling expenses 3,199 5,578
Facilities and other rentals 2,119 2,045
Other 12,688 14,169
------------------- -------------------
Total operating expenses 186,556 201,704
------------------- -------------------
Operating income 7,728 5,431
Other income (expense):
Interest income 146 203
Interest (expense) (1,612) (1,358)
Other 55 86
------------------- -------------------
Other expenses (1,411) (1,069)
------------------- -------------------
Income before income taxes 6,317 4,362
Income taxes 3,095 2,009
------------------- -------------------
Net income $ 3,222 $ 2,353
=================== ===================
Net income per share $ 0.28 $ 0.21
=================== ===================
Average shares outstanding 11,571,847 11,492,125
=================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months ended March 31,
1997 1996
----------------------------------------------
(Unaudited) (Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 3,222 $ 2,353
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 14,140 15,561
Deferred income taxes (credits) 2,785 (164)
Other non-cash items 43 2,237
Changes in operating assets and liabilities:
Receivables (1,352) (1,505)
Inventories (364) (909)
Assets held for sale 409 -
Prepaid expenses (2,225) (124)
Accounts payable (3,896) (4,267)
Air traffic liabilities 8,043 7,910
Accrued expenses (217) 928
-------------------- --------------------
Net cash provided by operating activities 20,588 22,020
-------------------- --------------------
Investing activities:
Proceeds from sales of property and equipment 268 7,334
Capital expenditures (20,356) (40,027)
Reductions of (additions to) other assets (5,863) 697
-------------------- --------------------
Net cash used in investing activities (25,951) (31,996)
-------------------- --------------------
Financing activities:
Proceeds from long-term debt - 15,000
Payments on long-term debt (2,066) (3,629)
Purchase of treasury stock - (76)
-------------------- --------------------
Net cash provided by (used in) financing activities (2,066) 11,295
-------------------- --------------------
Increase (decrease) in cash and cash equivalents (7,429) 1,319
Cash and cash equivalents, beginning of period 73,382 92,741
-------------------- --------------------
Cash and cash equivalents, end of period $ 65,953 $ 94,060
==================== ====================
Supplemental disclosures:
Cash payments for:
Interest $ 2,051 $ 1,265
Income taxes 312 38
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital expenditures $ - $ 10,736
See accompanying notes.
</TABLE>
<PAGE>
PART I - Financial Information
Item I - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of Amtran, Inc. and
subsidiaries (the "Company") have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended March 31,
1997 and 1996 reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows for
such periods. Results for the three months ended March 31, 1997, are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1996.
2. Accounting Pronouncements Pending Adoption
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 128, "Earnings Per Share", which establishes new standards for
the calculation of earnings per share effective for interim and annual
periods ending after December 15, 1997. Subsequent to this effective date,
all prior period earnings per share amounts disclosed in financial
statements are required to be restated to conform to the new standards
under Statement 128. Due to the small number of dilutive common stock
equivalents currently included in earnings per share calculations, the
Company does not expect that the impact from restatement of prior period
earnings per share will be material.
In February 1997, the FASB issued Statement 129, "Disclosure of
Information About Capital Structure", which consolidates existing
standards relating to disclosure about a company's capital structure,
effective for fiscal periods beginning after December 15, 1997. The
Company does not currently expect this new statement to result in
significant changes to disclosures about the Company's capital structure.
<PAGE>
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Overview
In the first quarter of 1997, the Company earned income before income taxes and
net income of $6.3 million and $3.2 million, respectively, as compared to income
before income taxes and net income of $4.4 million and $2.4 million in the first
quarter of 1996. Pre-tax income for the 1997 quarter was 44.8% higher than for
the first quarter of 1996, and net income increased by 36.9% between periods.
Earnings per share in the first quarter of 1997 increased 33.3% to 28 cents, as
compared to 21 cents in the same quarter of 1996.
During the second half of 1996, the Company implemented a restructuring plan for
its fleet and for its scheduled service business component, as is more fully
described below under "Restructuring of Scheduled Service Operations and Fleet
Types." The Company's restructuring plan was made necessary by the deteriorating
profitability of the scheduled service business component during late 1995 and
the first half 1996. The Company substantially completed the restructuring plan
by the end of 1996, and the first quarter of 1997 was the first full quarter of
restructured operations. Both charter and scheduled service business units were
profitable in the first quarter of 1997.
As a result of the reduction of the Company's fleet of Boeing 757-200 aircraft,
and a significant reduction in scheduled service seat capacity, the Company
offered for sale 13.4% fewer available seat miles (ASMs) in the first quarter of
1997, as compared to the same quarter of 1996. However, the revenues generated
from first quarter 1997 ASMs declined by only 6.2%, resulting in an improvement
of 8.3% in revenue per ASM (RASM) between quarters. The Company believes that it
was able to achieve this significant RASM improvement through (i) the
elimination of poorly performing markets from the Company's scheduled service
business unit, such as intra-Florida and Boston; (ii) the strengthening of
remaining scheduled service flying through fleet and schedule realignments,
supported by marketing and yield management initiatives; (iii) the expansion of
profitable military flying, under which military gross revenues more than
doubled between quarters; and (iv) the replacement of some low-margin domestic
charter flying with higher-margin specialty charter flying.
Partly as a result of the reduction of 13.4% in ASMs between the first quarters
of 1997 and 1996, the Company's cost per ASM (CASM) increased 6.7% between
years. Approximately one-fourth of this CASM increase resulted from an average
price increase of 10.9 cents per gallon for jet fuel in the 1997 quarter as
compared to the prior year. Higher fuel prices caused an estimated $3.0 million
in fuel-related cost increases in the 1997 quarter, after adjusting for fuel
escalation revenues received from the U.S. military and tour operators under
contractual reimbursement clauses which were triggered by the higher fuel prices
paid. Other significant quarter-to-quarter changes in the Company's cost
structure included (i) a 16.2% increase in the cost per ASM of salaries, wages
and benefits, as a result of the new cockpit crew collective agreement, and
reduced cockpit crew productivity attributable to both the contract and the
changing business mix from scheduled service to charter; (ii) a reduction of
6.0% in the cost per ASM of aircraft rentals, primarily due to the reduction of
four Boeing 757-200 aircraft from the Company's fleet; (iii) a reduction of 7.5%
in the cost per ASM of aircraft maintenance, materials and repairs associated
with the Company's fleet restructuring; (iv) an increase of 17.4% in the cost
per ASM of crew travel resulting from the renewed emphasis on charter
operations, which drive higher average crew travel costs; (v) an increase of
71.4% in the cost per ASM of advertising to provide more aggressive support for
the scheduled service business unit and the Ambassadair Travel Club; and (vi) a
reduction of 31.3% in other variable single-seat selling expenses associated
with a smaller scheduled service business.
Since the Company was able to reduce costs in the first quarter of 1997 by a
greater percentage than revenues were reduced through the restructuring of
scheduled service, the Company produced 42.3% more operating income, or $7.7
million, as compared to $5.4 million in operating income in the first quarter
1996. The operating margin in the first quarter of 1997 was 4.0%, as compared to
2.6% in the first quarter of 1996.
<PAGE>
PART I - Financial Information
Item II - Continued
Restructuring of Scheduled Service Operations and Fleet Types
Beginning in May 1996 and continuing into the third quarter of 1996, 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 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
12.8% 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 intensified in certain respects in the fourth quarter of
1996. Moreover, the Company believes that competitive pressures from larger
carriers will continue for the foreseeable future on many of the routes served
by the Company's scheduled service operations.
On August 26, 1996, 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, 1996.
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 $183,000 in severance expense in the third and
fourth quarters 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 fleet types as
they were being used in scheduled service, tour operator 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 four units, and in the fourth
quarter of 1996, the Company entered into another transaction with a major
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.
Results of Operations
The Company's operating revenues decreased 6.2% to $194.3 million in the first
quarter of 1997, as compared to $207.1 million in the first quarter of 1996.
Operating revenues for the 1997 quarter were 6.51 cents per ASM, an increase of
8.3% from 6.01 cents per ASM in the 1996 quarter. Between these same periods,
ASMs decreased 13.4% to 2.985 billion from 3.446 billion, revenue passenger
miles (RPMs) decreased 11.6% to 2.210 billion from 2.501 billion, and passenger
load factor increased to 74.0% as compared to 72.6%. The yield on revenues in
the first quarter of 1997 increased 6.2% to 8.79 cents per RPM, as compared to
8.28 cents per RPM in the first quarter of 1996. Total passengers boarded
decreased between periods by 17.4% to 1,407,128, as compared to 1,702,605, and
total departures decreased by 23.6% to 9,629 from 12,610.
Operating expenses decreased 7.5% to $186.6 million in the first quarter of 1997
as compared to $201.7 million in the first quarter of 1996. Operating expenses
per ASM increased 6.7% to 6.25 cents in the 1997 first quarter, as compared to
5.86 cents in the same period of the prior year.
Results of Operations in Cents per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents Per ASM
Quarter Ended March 31,
<S> <C> <C>
1997 1996
Operating revenues 6.51 6.01
Operating expenses:
Fuel and oil 1.36 1.19
Salaries, wages and benefits 1.36 1.17
Handling, landing and navigation fees 0.58 0.57
Aircraft rentals 0.47 0.50
Depreciation and amortization 0.47 0.45
Aircraft maintenance, materials and repairs 0.37 0.40
Passenger service 0.27 0.27
Crew and other employee travel 0.27 0.23
Commissions 0.20 0.21
Ground package cost 0.18 0.16
Advertising 0.12 0.07
Other selling expense 0.11 0.16
Facilities and other rentals 0.07 0.06
Other 0.42 0.42
Total operating expenses 6.25 5.86
Operating income 0.26 0.15
ASMs (in thousands) 2,984,994 3,445,847
</TABLE>
Quarter Ended March 31, 1997, Versus Quarter Ended March 31, 1996
Operating Revenues
Total operating revenues for the first quarter of 1997 decreased $12.8 million,
or 6.2%, to $194.3 million, as compared to $207.1 million in the same quarter of
1996. This decrease was due to a $28.5 million decrease in scheduled service
revenues, a $1.3 million decrease in ground package revenues, and a $0.1 million
decrease in other revenues, partially offset by a $17.1 million increase in
charter revenues.
Charter Revenues. The Company's charter revenues are derived principally from
independent tour operators and from the United States military. Total charter
revenues increased 20.6% to $100.3 million in the first quarter of 1997, as
compared to $83.2 million in the first quarter of 1996. Charter revenue growth,
prior to scheduled service restructuring in late 1996, had been constrained by
the dedication of a significant portion of the Company's fleet to scheduled
service expansion, including the utilization of two Lockheed L-1011 aircraft for
scheduled services to Ireland and Northern Ireland between May and September
1996. The Company's restructuring strategy, as reflected in first quarter 1997
results of operations, included a renewed emphasis on charter revenue sources
since the Company believes that tour operator and military operations are
businesses where the Company's experience and size provide a meaningful
competitive advantage. Charter revenues produced 51.6% of total operating
revenues in the first quarter of 1997, as compared to 40.2% of total operating
revenues in the same period of 1996.
Charter revenues derived from tour operators (including the Ambassadair Travel
Club) increased 1.5% to $69.6 million in the first quarter of 1997, as compared
to $68.6 million in the first quarter of 1996. Tour operator revenues comprised
35.8% of operating revenues in the first quarter of 1997, as compared to 33.1%
of operating revenues in the same period of the prior year. Tour operator ASMs
decreased 6.1% to 1.207 billion from 1.286 billion; RPMs decreased 6.3% to 1.009
billion from 1.077 billion; and tour operator load factor declined from 83.7% to
83.6%. Tour operator RASM in the first quarter of 1997 increased 8.3% to 5.77
cents, as compared to 5.33 cents in the first quarter of 1996. Tour operator
passengers boarded decreased 0.7% to 651,901 in the first quarter of 1997, as
compared to 656,324 in the first quarter of 1996, and tour operator departures
decreased 7.9% between years to 3,378, as compared to 3,669.
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 nonstop service to
these vacation destinations. The track charter business component allows the
Company to attain reasonable levels of aircraft and crew utilization and
provides meaningful protection to the Company from fuel price increases through
the use of fuel escalation reimbursement clauses in the contracts. During the
late 1996 restructuring of scheduled service operations the Company also sought
to negotiate changes in existing track charter contracts to provide improved
profit performance for this business unit. Although some tour operators were
unable to meet the Company's required economics, other tour operators have
agreed to new contracts which generally become effective during the spring and
summer of 1997. No significant RASM improvement from these agreements was
experienced in the first quarter 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
trips in all-first-class configuration for certain corporate clients. 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.
The Company believes that improved track charter economics, combined with
expanded higher-margin specialty charter programs, offer an opportunity for the
Company to improve the overall financial performance of this business unit.
Charter revenues derived from the U.S. military increased 110.3% to $30.7
million in the first quarter of 1997, as compared to $14.6 million in the first
quarter of 1996. Military revenues comprised 15.8% of total operating revenues
in the 1997 period, as compared to 7.0% of total operating revenues in 1996.
U.S. military ASMs increased 92.2% to 514.2 million from 267.6 million, and RPMs
increased 115.4% to 247.7 million from 115.0 million. The RASM on U.S. military
revenues in the first quarter of 1997 increased 9.1% to 5.97 cents, as compared
to 5.47 cents in the same period of 1996. U.S. military passengers boarded
increased 106.5% to 66,303 in 1997, as compared to 32,113 in 1996, and U.S.
military departures increased 128.9% to 1,220, as compared to 533.
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 Extended Twin
Engine Operation (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 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.
Scheduled Service Revenues. Scheduled service revenues in the first quarter of
1997 decreased 25.8% to $82.0 million from $110.5 million in the first quarter
of 1996. Scheduled service revenues comprised 42.2% of total operating revenues
in the first quarter of 1997, as compared to 53.3% of operating revenues in the
same period of the prior year. Scheduled service RPMs decreased 27.3% to 0.950
billion from 1.306 billion, while ASMs decreased 33.5% to 1.256 billion from
1.888 billion, resulting in an increase of 6.4 points in passenger load factor
to 75.6% in the first quarter of 1997 from 69.2% in the first quarter of 1996.
Scheduled service departures in the first quarter of 1997 decreased 40.5% to
4,991 from 8,394 in the first quarter of 1996, while passengers boarded
decreased 32.2% over such period to 686,496, as compared to 1,012,378. Scheduled
service yield per RPM in the first quarter of 1997 increased 2.0% to 8.63 cents
from 8.46 cents in the same period of 1996, while RASM increased 11.6% to 6.53
cents from 5.85 cents between the same comparable periods.
In association with the 1996 restructuring of the Company's scheduled service
operations, a significant reduction in scheduled service was announced on August
26, 1996. Between September 4 and December 2, 1996, more than one-third of the
scheduled service capacity operating during the 1996 summer months was
eliminated. All scheduled service flights to and from Boston were eliminated by
December 2, 1996, including service to West Palm Beach, San Juan, Montego Bay,
St. Petersburg, Las Vegas, Orlando and Ft. Lauderdale. Intra-Florida services
connecting the cities of Ft. Lauderdale, Orlando, Miami, Sarasota, St.
Petersburg and Ft. Myers were eliminated as of October 27, 1996. Other selected
services from Indianapolis, Chicago-Midway and Milwaukee to Florida and to
west-coast destinations were also reduced or eliminated by October 27, 1996. In
association with this service reduction, all scheduled service ceased at
Seattle, Grand Cayman, West Palm Beach, Montego Bay, Miami and San Diego.
After this scheduled service reduction, the Company's core scheduled service
flying included flights between Chicago-Midway and five Florida cities, Las
Vegas, Phoenix, Los Angeles and San Francisco; Indianapolis to four Florida
cities, Las Vegas and Cancun; Milwaukee to three Florida cities; Hawaii service
to San Francisco, Los Angeles and Phoenix; and service between Orlando and San
Juan and Nassau.
As a result of the restructuring of scheduled service operations in the manner
described above, the scheduled service component of the Company's operations was
profitable in the first quarter of 1997. Profitability was achieved through a
combination of a significantly higher load factor and some yield and RASM
improvement between periods, even though total revenues in scheduled service
declined between years. The Company believes that profitability was enhanced in
this business unit through the selective elimination of flights which had
previously produced below-average load factors and yields. Profitability was
further enhanced in certain scheduled service markets through the reallocation
of Boeing 727-200s and Boeing 757-200s to provide better balance between
revenues, costs, and aircraft operational capabilities. The Company also
implemented a commuter code share partnership with Chicago Express to feed
incremental connecting traffic between Indianapolis, Milwaukee and other smaller
midwestern cities into the Company's Chicago-Midway connections with certain
Florida and west-coast destinations.
In addition to the rationalization of markets, schedules and gauge of aircraft,
the Company was able to aggressively utilize its yield management system in all
scheduled service markets in the first quarter of 1997, consistent with
competitive conditions in those markets. The average revenue produced per
passenger segment flown in the first quarter of 1997 increased 9.5% to $119.45,
from $109.10 in the same period of 1996. This unit revenue improvement was
accomplished despite the demand-dampening effect from the reintroduction of the
10% Federal excise tax on tickets on March 7, 1997. The Federal excise tax on
air transportation is scheduled to remain in effect at least until September 30,
1997, at which time this tax may be extended by legislative action.
The Company continues to evaluate the profit and loss performance of its
scheduled service business and has recently announced new service beginning in
June, 1997, between New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis, and St. Petersburg, and plans to add several
frequencies between midwest and west-coast markets beginning in June, 1997.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair Travel Club subsidiary exclusively to club members and
through its ATA Vacations subsidiary to the general public. Ground package
revenues decreased 18.0% to $5.9 million in the first quarter of 1997, as
compared to $7.2 million in the first quarter of 1996.
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 the first quarter of 1997 total package revenues
did not change significantly from 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 the first quarter of 1997, the Company generated less revenue
from ground package sales than in the previous year due to both fewer package
sales and lower prices in some markets.
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 decreased 1.6% to $6.1 million in the first quarter of 1997, as
compared to $6.2 million in the first quarter of 1996. Some revenue reduction
between years was attributable to decreases in scheduled service capacity, such
as liquor and headset sales, excess baggage revenue, administrative ticketing
fees, PFC compensation revenue, and cargo revenue. Most of these revenue
decreases were offset by revenue increases in affiliated companies, subservice
sales to other airlines, and similar activities.
Operating Expenses
Fuel and Oil. Fuel and oil expense for the first quarter of 1997 increased 1.0%
to $40.7 million from $40.3 million in the first quarter of 1996. Although the
Company consumed significantly less jet fuel for flying operations between
periods, the price of jet fuel was significantly higher in the first quarter of
1997 than in the first quarter of the prior year.
During the first quarter of 1997, the Company consumed 13.7% fewer gallons of
jet fuel for flying operations and flew 14.8% fewer block hours than in the
first quarter of 1996, which accounted for approximately $5.7 million in reduced
fuel and oil expense between periods. The decline in gallons of fuel consumed
was lower than the decline 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
increase in the percentage of total block hours flown by the Lockheed L-1011
fleet between periods, from 25.1% in the first quarter of 1996 to 25.8% in the
first quarter of 1997, 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 the first quarter of 1997, the Company's average price paid per gallon of
fuel consumed increased by 15.0% as compared to the first quarter of 1996. The
Company estimates that the year-over-year increase in average price paid for jet
fuel resulted in approximately $5.3 million in additional fuel and oil expense
between quarters. Approximately $2.4 million in offsetting revenues were
recorded during the 1997 quarter, however, as a result of military and tour
operator fuel escalation reimbursement clauses which were triggered by the
higher fuel prices paid.
Fuel and oil expense for the first quarter of 1997 was 1.36 cents per ASM, an
increase of 14.3% as compared to 1.19 cents per ASM in 1996. The increase in the
cost per ASM of fuel and oil expense was primarily a result of higher prices
paid between periods.
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related state and Federal taxes. Salaries,
wages and benefits expense for the first quarter of 1997 increased 0.5% to $40.5
million from $40.3 million in the first quarter of 1996.
Average Company full-time-equivalent employees decreased by 8.1% in the 1997
quarter as compared to the same quarter of the prior year. The period-to-period
reduction in average full-time-equivalent employees was lower than the 15%
reduction in force accomplished in the fourth quarter of 1996, partly due to the
fact that Company crew member employment in the first quarter of 1996 was lower
than was required to adequately fly the schedule in that time period. In
addition, in the first quarter of 1997 the Company recalled all available
full-time crew members who had been furloughed in the fourth quarter of 1996, in
order to provide adequate coverage to fly the first quarter 1997 schedule.
With respect to cockpit crew members, the cost of salaries, wages and benefits
paid in the first quarter of 1997 was approximately $1.1 million higher than in
the first quarter of 1996, even though the Company flew 14.8% fewer block hours
between periods. The increase in the unit cost of cockpit crews between periods
is primarily attributable to the implementation of the cockpit crew collective
bargaining agreement effective August 1996. Under this new agreement, a 7.5%
rate increase was implemented upon ratification, and more restrictive work rules
limiting productivity became effective. Additionally, the restructuring of the
Company's fleet in late 1996 resulted in a shift of block hours flown using
two-cockpit-crew-member Boeing 757-200 aircraft to the Company's
three-cockpit-crew-member Boeing 727-200 and Lockheed L-1011 fleet types. In the
first quarter of 1997, only 21.0% of block hours were produced using the
two-cockpit-crew-member Boeing 757-200 aircraft, as compared to the first
quarter of 1996 when 31.2% of block hours were produced using the Boeing 757-200
aircraft. The Company estimates that, as a result of the collective agreement
and fleet restructuring, a cockpit crew unit cost increase of approximately $2.5
million was incurred in the first quarter of 1997, as compared to the same
period of 1996. The Company anticipates that similar unit cost penalties for
cockpit crews will be experienced in future quarters for the same reasons.
In the first quarter of 1997, executive compensation was approximately $0.8
million higher than in the prior year. This increase was attributable to the
changes made in senior executives during the third quarter of 1996 and to senior
executive compensation plans. Salaries, wages and benefits costs for all other
categories of employees combined (excluding cockpit crews and executives)
decreased by approximately $1.5 million in the first quarter of 1997, as
compared to the first quarter of 1996, due to the reduction in the size of the
Company between periods.
Salaries, wages and benefits expense in the first quarter of 1997 was 1.36 cents
per ASM, an increase of 16.2% from a cost of 1.17 cents per ASM in the same
period of 1996. This increased cost per ASM was partly due to an average
increase in compensation cost per full-time equivalent employee of 10.6% between
quarters. This rate increase was driven by such factors as the cockpit crew
collective agreement and executive compensation changes discussed above; the
implementation of a Company-wide merit plan of 3-4% in 1997 for most
non-crew-member employees; and the impact of the 15% reduction in force in late
1996, which on average impacted less senior employees and therefore tended to
increase average rates of pay for remaining employee groups. In addition to
these rate effects, the average full-time-equivalent employment for the Company
declined by 8.1%, which was less than the 13.4% decline in ASMs between periods.
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.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees decreased by 13.1% to $17.2 million in the
first quarter of 1997, as compared to $19.8 million in the first quarter of
1996. During the 1997 quarter, the average cost per system departure for
third-party aircraft handling declined 4.2% as compared to the first quarter of
1996, and the average cost of landing fees per system departure decreased 0.9%
between the same periods.
A primary reason for the decline in handling and landing fees was the
restructuring of scheduled service in the fourth quarter of 1996, which reduced
the absolute number of system-wide departures between the first quarters of 1997
and 1996. Total system-wide departures declined by 23.6% from 12,610 in the 1996
first quarter to 9,629 in the first quarter of 1997. This volume-related decline
was partially offset, however, by a change in departure mix. Because each
airport served by the Company has a different schedule of fees, including
variable prices for different aircraft types, average handling and landing fee
costs are also a function of the mix of airports served and the fleet
composition of departing aircraft. On average, handling and landing fee costs
for Lockheed L-1011 wide-body aircraft are higher than for narrow-body aircraft,
and average costs at foreign airports are higher than at many U.S. domestic
airports. As a result of the downsizing of the Company's narrow-body Boeing
757-200 fleet and the shift of revenue production emphasis towards charter
operations, the Company's departures in the first quarter of 1997 included
proportionately more international and wide-body operations than in the first
quarter of 1996. In the 1997 quarter 22.7% of the Company's departures were
operated with wide-body aircraft, as compared to 21.1% in the 1996 quarter, and
24.8% of the Company's first quarter 1997 departures were from international
locations, as compared to 16.2% in the prior year.
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, therefore, in lower system average contract handling costs
per departure in the first quarter of 1997. The Company incurred some additional
salaries, wages and benefits expense as a result of this policy change.
Air navigation fees incurred in the first quarter of 1997 increased by $0.4
million as compared to the first quarter of 1996. Since these fees are generated
exclusively by operating in certain foreign air space, this increase is directly
attributable to the increase in international departures between years. The
Company operated 2,389 departures from international locations in the 1997 first
quarter, as compared to 2,044 departures in the first quarter of 1996.
The Company also incurred approximately $0.6 million in higher deicing costs in
the first quarter of 1997 as compared to the prior year, due to higher deicing
prices and to relatively more inclement weather conditions prevailing at
airports served in the 1997 quarter as compared to 1996.
The cost per ASM for handling, landing and navigation fees increased 1.8% to
0.58 cents in the first quarter of 1997, from 0.57 cents in the first quarter of
1996.
Aircraft Rentals. Aircraft rentals expense for the first quarter of 1997
decreased 17.5% to $14.1 million from $17.1 million in the first quarter of
1996. This decrease was primarily attributable to the restructuring of the
Company's Boeing 757-200 fleet in the fourth quarter of 1996, as a result of
which the number of Boeing 757-200 aircraft operated by the company was reduced
by four units between quarters. The reduction in the size of the Boeing 757-200
fleet was an integral component of the Company's 1996 restructuring of scheduled
service, based upon profitability analysis which disclosed that for some uses of
the Boeing 757-200 in the Company's markets prior to restructuring, it was more
profitable to substitute other aircraft with lower ownership costs. Aircraft
rentals expense declined by $4.2 million between quarters as a result of the
Boeing 757-200 fleet restructuring.
Five additional Boeing 727-200 aircraft were acquired and financed by
sale/leasebacks in the first two quarters of 1996. All of these Boeing 727-200
aircraft were operated during the entire first quarter of 1997, although several
of these aircraft were not operated at all in the first quarter of 1996, or were
operated during only a portion of the 1996 first quarter. These fleet additions
added approximately $1.1 million in aircraft rentals expense in the first
quarter of 1997, as compared to the prior year.
Aircraft rentals expense for the first quarter of 1997 was 0.47 cents per ASM, a
decrease of 6.0% from 0.50 cents per ASM in the first quarter of 1996. The
period-to-period decrease 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 continue to be lower in future quarters.
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 the first quarter of 1997 decreased
9.6% to $14.1 million from $15.6 million in the first quarter of 1996.
Depreciation expense attributable to owned airframes and engines, and other
property and equipment owned by the Company, increased $0.1 million in the 1997
quarter as compared to the 1996 quarter. The Company reduced its year-over-year
investment in engines and airframe improvements due to the restructuring of the
Boeing 757-200 fleet in the fourth quarter of 1996. As a result of the net
reduction of four Boeing 757-200 aircraft and the complete elimination of
Pratt-&-Whitney-powered Boeing 757-200s from the fleet, some airframe and
leasehold improvements were disposed of and all spare Pratt & Whitney engines
and rotable parts were reclassified as Assets Held for Sale in the accompanying
balance sheet. None of these assets gave rise to depreciation expense in the
first quarter of 1997, which resulted in a reduction of $0.2 million from the
first quarter of 1996. The Company did increase its investment in computer
equipment and furniture and fixtures between years; placed the west bay of the
renovated Midway Hangar No. 2 into service in mid-1996; and incurred increased
debt issue costs between years relating to debt facility and aircraft lease
negotiations completed primarily in the fourth quarter of 1996. These latter
changes between quarters, together with increased costs pertaining to remaining
rotable components and the provision for obsolescence of aircraft parts
inventories, contributed an additional $0.3 million in depreciation expense in
the 1997 quarter as compared to the prior year.
Amortization of capitalized engine and airframe overhauls decreased $1.0 million
in the first quarter of 1997 as compared to the prior year after including the
offsetting amortization of associated manufacturers' credits. The reduced cost
of overhaul amortization is partly due to the reduction of total block hours and
cycles flown between quarters. This expense was also favorably impacted by the
late-1996 restructuring of the Boeing 757-200 fleet and, in particular, the
disposal of all Pratt-&-Whitney-powered Boeing 757-200 aircraft. All unamortized
net book value of engine and airframe overhauls pertaining to the
Pratt-&-Whitney-powered aircraft were charged to the cost of the disposal of
these assets in the fourth quarter of 1996. The Company's seven remaining
Rolls-Royce-powered Boeing 757-200 aircraft, four of which were delivered new
from the manufacturer in late 1995 and late 1996, are not presently generating
any engine and airframe overhaul expense, since the initial post-delivery
overhauls for the Rolls-Royce-powered Boeing 757-200s are not yet due under the
Company's maintenance programs. The net reduction in engine and airframe
amortization expense in the first quarter of 1997 pertaining to changes in the
Company's Boeing 757-200 fleet was approximately $1.5 million, as compared to
the prior year. Engine and airframe amortization for the Company's fleet of
Boeing 727-200 aircraft, however, increased in the 1997 quarter by approximately
$0.6 million due to the ongoing expansion of this fleet type and due to the
addition of new overhauls for Boeing 727-200 aircraft on which engine and
airframe overhauls have become due under the Company's maintenance programs.
There was no significant difference between years in engine and airframe
amortization expense for the Company's Lockheed L-1011 fleet, which has remained
relatively stable in size between periods, and is more mature from an engine and
airframe overhaul standpoint than the Company's other two fleet types.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs decreased by $0.4 million
between quarters. 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 the
first quarter of 1997, as compared to 0.45 cents in the first quarter of 1996.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for base and line maintenance activities, and other
non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense decreased 18.4% to $11.1
million in the first quarter of 1997, as compared to $13.6 million in the first
quarter of 1996. The cost per ASM decreased by 7.5% to 0.37 cents in the 1997
period, as compared to 0.40 cents in the prior year.
Although the cost of repairs for repairable and rotable components did not
change significantly between quarters, the cost of expendable parts consumed
decreased $1.5 million, and the cost of parts loans and exchanges decreased $1.0
million between periods. The reduced cost of expendable parts consumed is
related to seasonal differences in the Company's light check programs for its
fleet, which were scheduled more effectively in 1997 outside of heavy aircraft
utilization periods in the first quarter than they were in 1996. As a result,
the Company expects to incur relatively higher light check maintenance costs in
the second quarter of 1997. The lower cost of parts loans and exchanges reflects
better internal procedures to limit the need for such loans and exchanges, which
can drive significant costs in short periods of time.
The cost of the Company's aircraft maintenance, materials and repairs declined
18.4% in the first quarter of 1997 as compared to the first quarter of 1996, as
contrasted with the 13.4% decrease in ASMs and the 14.8% decrease in block hours
between years. This favorable comparison is partly due to the significant
expansion of the Company's new and used aircraft 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 is 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.
All of the Company's aircraft under operating leases have certain return
conditions applicable to the maintenance status of airframes and engines as of
the termination of the lease. The Company accrues estimated return condition
costs as a component of maintenance, materials and repairs expense based upon
the actual condition of the aircraft as each lease termination date approaches
and based upon the Company's ability to estimate the expected cost of conforming
to these conditions. Return condition expenses accrued in the first quarter of
1997 were $0.1 million more than in the same quarter of 1996. This increase was
primarily due to changes in the mix of aircraft leases and associated return
conditions which became effective during 1996, due to both the extensive
restructuring of the leased Boeing 757-200 fleet, and due to the sale/leaseback
of six hushkitted Boeing 727-200 aircraft during 1996 under modified lease terms
and conditions.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
headsets sold, and the cost of onboard entertainment programs, together with
certain costs incurred for mishandled baggage and passengers inconvenienced due
to flight delays or cancellations. For the first quarters of 1997 and 1996,
catering represented 77.8% and 77.0%, respectively, of total passenger service
expense.
The cost of passenger service decreased 10.9% in the first quarter of 1997 to
$8.2 million, as compared to $9.2 million in the first quarter of 1996. This
reduction was primarily driven by fewer system-wide passengers boarded, which
declined by 17.4% to 1,407,128 in the first quarter of 1997, as compared to
1,702,605 in the first quarter of 1996. The average cost to cater each passenger
boarded, however, increased 11.1% between quarters, due to the shift in the
Company's business mix away from scheduled service, which is lower cost with
respect to catering, and toward tour operator and military programs which
provide a more expensive catering product.
The cost per ASM of passenger service was unchanged at 0.27 cents for the first
quarters of 1997 and 1996.
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 1.3% to $7.9 million in the
first quarter of 1997, as compared to $7.8 million in the first quarter of 1996.
During the first quarter of 1997, the Company's average full-time-equivalent
crew employment was 17.8% lower as compared to the prior year, even though block
hours decreased by only 14.8% between periods. In the first quarter of 1996, the
Company experienced crew shortages, which were exacerbated by severe winter
weather and resulted in significant flight delays, diversions and cancellations.
The Company's crew complement in the first quarter of 1997 was again lower than
needed to efficiently operate the flying schedule, which resulted in more crew
time being spent away from base during that quarter.
The cost per ASM for crew and other employee travel increased 17.4% to 0.27
cents in the first quarter of 1997, as compared to 0.23 cents in the first
quarter of 1996. The average cost per full-time-equivalent crew member for hotel
rooms, positioning and per diem increased by 24.8% between quarters. The
restructuring of the Company's scheduled service business, and the increased
emphasis on charter sources of revenue in 1997, were significant factors in this
change in cost per ASM.
Commissions. The Company incurs significant commissions expense in association
with the sale by travel agents of single seats on scheduled service. In
addition, the Company pays commissions to secure some tour operator and military
business. Commissions expense decreased 20.3% to $5.9 million in the first
quarter of 1997, as compared to $7.4 million in the first quarter of 1996.
Scheduled service commissions expense declined by $2.1 million between periods
as a result of a comparable decline in scheduled service revenues earned.
Military commissions expense increased by $0.6 million between periods, due to
the increased level of commissionable revenues earned in that business unit in
the 1997 quarter as compared to the prior year.
The cost per ASM of commissions expense declined by 4.8% to 0.20 cents in the
first quarter of 1997, as compared to 0.21cents in the comparable period of
1996.
Ground Package Cost. Ground package cost includes the expenses incurred by the
Company for hotels, car rental companies, cruise lines and similar vendors to
provide ground and cruise accommodations to Ambassadair and ATA Vacations
customers. Ground package cost decreased 3.7% to $5.2 million in the first
quarter of 1997, as compared to $5.4 million in the first quarter of 1996. This
decrease in cost was partly due to a 1.6% decrease in the total number of ground
packages sold between periods for both Ambassadair and ATA Vacations. The
average price of each ground package sold by Ambassadair increased 6.2% between
quarters, while the average price of each ground package sold by ATA Vacations
decreased by 28.2% between the same periods.
Ground package cost per ASM increased by 12.5% to 0.18 cents in the first
quarter of 1997, as compared to 0.16 cents in the first quarter of 1996. The
higher cost per ASM in the 1997 quarter resulted from the faster decline in
total ASMs as compared to the decline in ground package revenues between
periods.
Advertising. Advertising expense increased 40.0% to $3.5 million in the first
quarter of 1997, as compared to $2.5 million in the same period of 1996. The
Company incurs advertising costs primarily to support single-seat scheduled
service sales and the sale of ground packages. Advertising support for these
lines of business was increased in the 1997 quarter consistent with the
Company's overall strategy to enhance RASM in these business units and to meet
competitive actions in specific markets.
The cost per system-wide ASM of advertising increased 71.4% to 0.12 cents in the
first quarter of 1997, as compared to 0.07 cents in the first quarter of 1996. A
more meaningful comparison of advertising cost per ASM is based upon only
scheduled service ASMs; this cost increased 115.4% to 0.28 cents in the first
quarter of 1997, as compared to 0.13 cents in the first quarter of 1996. These
increases in cost per ASM resulted from higher absolute advertising dollars
being spent in a period of declining ASMs, but was nevertheless an integral part
of the Company's successful strategy in the first quarter of 1997 to build both
load factor and yields in single-seat sales.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems (CRSs) to reserve single-seat sales for
scheduled service; (ii) credit card discount expenses incurred when selling
single seats and ground packages to customers using credit cards for payment;
(iii) costs of providing toll-free telephone services, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses that are primarily
associated with single-seat sales. Other selling expenses decreased 42.9% to
$3.2 million in the first quarter of 1997, as compared to $5.6 million in the
first quarter of 1996. Approximately $0.5 million and $1.0 million,
respectively, of this decrease was attributable to fewer credit card sales and
CRS booking fees incurred to support a smaller scheduled service business unit
in the 1997 quarter. Another $0.7 million of the decrease was due to lower usage
of toll-free telephone service between periods to support scheduled service
reservations activity.
Other selling cost per ASM decreased 31.3% to 0.11 cents in the first quarter
of 1997, as compared to 0.16 cents in the same period of 1996.
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 5.0% to $2.1 million in the first quarter of 1997, as compared
to $2.0 million in the first quarter of 1996.
The increase in expense noted for the 1997 period was partly attributable to
higher facility costs resulting from the Company becoming a signatory carrier at
Orlando International Airport, which were partially offset by the elimination of
facility rentals for Boston services which did not operate in the 1997 quarter.
The Company also incurred facility rental expense in the first quarter of 1997
for both the east and west bays of Chicago-Midway Hangar No. 2, neither of which
generated rental expense in the first quarter of 1996.
The cost per ASM for facility and other rents increased 16.7% to 0.07 cents in
the first quarter of 1997, as compared to 0.06 cents in the same period of 1996.
Other Expenses. Other operating expenses decreased 10.6% to $12.7 million in the
first quarter of 1997, as compared to $14.2 million in the first quarter of
1996. Approximately $0.5 million of this decline was realized in lower hull and
liability insurance premiums resulting from the fleet restructuring in the
fourth quarter of 1996 and due to the fewer RPMs flown by the Company in the
1997 quarter. The Company also reduced substitute service costs by approximately
$0.8 million between quarters due to better operational reliability in the first
quarter of 1997 as compared to the first quarter of 1996, which was
operationally impacted by later-than-expected deliveries of aircraft and severe
winter weather.
Other operating cost per ASM was unchanged at 0.42 cents for the first quarters
of 1997 and 1996.
Income Tax Expense
In the first quarter of 1997, the Company recorded $3.1 million in tax expense
applicable to pre-tax income for that period, while income tax expense of $2.0
million was recognized pertaining to pre-tax income for the first quarter of
1996. The effective tax rate applicable to the 1997 quarter was 49.0%, while the
effective tax rate for income earned in the 1996 quarter was 46.1%. The
Company's effective income tax rates in both periods are unfavorably affected by
the permanent non-deductibility from taxable income of 50% of crew per diem
expenses incurred. In addition, the 1997 effective tax rate was increased by the
estimated effect of non-deductible executive compensation, which was not present
in 1996.
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 the first quarters of 1997 and 1996, net cash
provided by operating activities was $20.6 million and $22.0 million,
respectively.
Net cash used in investing activities was $26.0 million and $32.0 million,
respectively, for the first quarters of 1997 and 1996. Such amounts primarily
reflected cash capital expenditures totaling $20.4 million in the first quarter
of 1997, and $40.0 million in the first quarter of 1996, for engine overhauls,
airframe improvements and the purchase of rotable parts. The 1996 cash capital
expenditures were supplemented with other capital expenditures, financed
directly with debt, totaling $10.7 million in the first quarter of 1996. The
Company's capital spending program in the first quarter of 1997 was
significantly curtailed due to (i) the downsizing of the Boeing 757-200 fleet in
the fourth quarter of 1996 and the absence of any aircraft deliveries during the
1997 first quarter; and (ii) the accomplishment of statutory requirements for a
65% Stage 3 fleet as of December 31, 1996, which resulted in the hushkitting of
six Boeing 727-200 aircraft during calendar year 1996. The Company is not
required to increase its Stage 3 fleet composition until December 31, 1998, at
which time 75% of the Company's fleet must meet Stage 3 requirements.
Net cash provided by (used in) financing activities was ($2.1) million and $11.3
million, respectively, for the first quarters of 1997 and 1996. The primary
difference between years was the additional $15.0 million in bank facility
availability for installation of hushkits on Boeing 727-200 aircraft during
1996.
Aircraft and Fleet Adjustments. 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, a prorated
amount of the credits that have been used are required to be refunded to
Rolls-Royce. The aggregate purchase price under these two agreements is
approximately $50.0 million per aircraft, subject to escalation. The Company
accepted delivery of the first four aircraft under these agreements in September
and December 1995, and November and December 1996, all of which were financed
under leases accounted for as operating leases. The final two deliveries under
this agreement are scheduled for the fourth quarters of 1997 and 1998. Advanced
payments and interest totaling approximately $18.0 million ($9.0 million per
aircraft) are required prior to delivery of the two remaining aircraft, with the
remaining purchase price payable at delivery. As of March 31, 1997 and 1996, the
Company had made $7.3 million and $14.7 million, respectively, in advanced
payments and interest applicable to aircraft scheduled for future delivery. The
Company intends to finance future deliveries under this agreement through
sale/leaseback transactions accounted for as operating leases.
In the first quarter of 1996, the Company purchased four Boeing 727-200
aircraft, financing all of these through sale/leasebacks accounted for as
operating leases by the end of the third quarter of 1996. In the second quarter
of 1996, the Company purchased a fifth Boeing 727-200 aircraft which had been
previously financed by the Company through a lease accounted for as an operating
lease. This aircraft was financed through a separate bridge debt facility as of
March 31, 1997, but is expected to be financed long term through a
sale/leaseback transaction during 1997.
On July 29, 1996, the Company entered into a letter of intent with a major
lessor to cancel several Boeing 757-200 and Lockheed L-1011 operating aircraft
leases then in effect. Under the terms of the letter of intent, the Company
canceled leases on five Boeing 757-200 aircraft powered by Pratt & Whitney
engines and returned these aircraft to the lessor by the end of 1996. The
Company was required to meet certain return conditions associated with several
aircraft, such as providing maintenance checks to airframes. The lessor
reimbursed the Company for certain leasehold improvements made to some aircraft
and credited the Company for certain prepayments made in earlier years to
satisfy qualified maintenance expenditures for several aircraft over their
original lease terms. The cancellation of these leases reduced the Company's
fleet of Pratt-&-Whitney-powered Boeing 757-200 aircraft from seven to two
units. The Company also agreed to terminate existing operating leases on three
Lockheed L-1011 aircraft and to purchase the airframes pertaining to these
aircraft, while signing a new lease covering only the nine related engines. The
Lockheed L-1011 airframe and engine portion of this transaction was not
completed by the end of the first quarter of 1997, although the Company intends
to complete it later in 1997. The lessor also provided the Company with
approximately $6.4 million in additional unsecured financing for a term of seven
years. This transaction resulted in the recognition of a $2.3 million loss on
disposal of assets in the third quarter of 1996.
The Company also agreed to purchase one Rolls-Royce-powered Boeing 757-200
aircraft from the same lessor in the fourth quarter of 1996. This purchase was
not completed, and the aircraft was acquired from the lessor on a short-term
rental agreement. The Company expects to purchase this aircraft in 1997 and to
finance it through a sale/leaseback accounted for as an operating lease. The
acquisition of this aircraft, together with the delivery of two new
Rolls-Royce-powered Boeing 757-200 aircraft from the manufacturer in the fourth
quarter of 1996, and the return of the last two Pratt-&-Whitney-powered Boeing
757-200 aircraft discussed in the next paragraph, resulted in an
all-Rolls-Royce-powered Boeing 757-200 fleet of seven units by the end of 1996.
In September 1996, the Company began negotiations with a major lessor to cancel
existing operating leases on the Company's remaining two Pratt-&-Whitney-powered
Boeing 757-200 aircraft. These aircraft were returned to the lessor by the end
of 1996. This transaction resulted in the recognition of a $2.4 million loss on
disposal of assets in the third quarter of 1996.
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 March 31, 1997 and 1996,
the Company had borrowed the maximum amount then available under the bank credit
facility, of which $60.0 million was repaid on April 1, 1997, and $89.0 million
was repaid on April 1, 1996.
As a result of the Company's need to restructure its scheduled service business,
the Company renegotiated certain terms of the bank credit facility effective
September 30, 1996. The new agreement also modified certain loan covenants to
take into account the expected losses in the third and fourth quarters of 1996.
In return for this covenant relief, the Company agreed to implement changes to
the underlying collateral for the facility and to change the interest rates
applicable to borrowings under the facility. The Company 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 March 31, 1997, the Company has reclassified $24.4 million of bank credit
facility borrowings from long-term debt to current maturities of long-term debt.
Of this amount, $15.0 million is attributable to the scheduled reduction of
availability secured by the owned Lockheed L-1011 fleet during the 12 months
ending March 31, 1998. The remaining $9.4 million represents the amount of the
spare Pratt & Whitney engines which are pledged to the bank facility and which
will be repaid from the anticipated sale. The net book value of these spare
engines, which approximates estimated market value, is classified as Assets Held
for Sale in the accompanying balance sheet.
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 March 31, 1997 or 1996; however, the Company did have outstanding letters
of credit secured by this facility aggregating $4.0 million and $2.1 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.
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.
The Company has identified the following important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by the Company:
1. The restructuring of the Company's scheduled service operations resulted in
significant operating and net losses for the third and fourth quarters of 1996
and has imposed higher fixed costs on the traditionally profitable charter
business unit of the Company. Although the Company was profitable in the first
quarter of 1997, future actions of the Company's competitors or unfavorable
future economic conditions, such as high fuel prices or a sustained reduction in
demand for the Company's services, could render such restructuring insufficient
to return the Company to sustained profitability.
2. The Company's capital structure 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.
3. Under the terms of certain financing agreements, the Company is required to
maintain compliance with certain specified covenants, restrictions, financial
ratios and other financial and operating tests. The Company's ability to comply
with any of the foregoing restrictions and with loan repayment provisions will
depend upon its future profit and loss performance and financial position, which
will be subject to prevailing economic conditions and other factors, including
some factors entirely beyond the control of the Company. A failure to comply
with any of these obligations could result in an event of default under one or
more such financing agreements, which could result in the acceleration of the
repayment of certain of the Company's debt, as well as the possible termination
of aircraft operating leases. Such an event could result in a materially adverse
effect on the Company's financial position.
4. As previously disclosed by the Company possible business combinations with
other air carriers have been considered. The Company intends to continue to
evaluate such potential combinations. It is possible that the Company will enter
into a transaction in the future that would result in a merger or other change
in control of the Company. The Company's current credit facility and certain
unsecured term debt may be accelerated upon such a merger or consolidation, in
which case there can be no assurance that the Company would have sufficient
liquidity to complete such a transaction or to secure alternative financing.
5. The Company has significant net operating loss carryforwards and investment
and other tax credit carryforwards which may, depending upon the circumstances,
be available to reduce future Federal income taxes payable. If the Company
undergoes an ownership change within the meaning of Section 382 of the Internal
Revenue Code, the Company's potential future utilization of its net operating
loss carryforwards and investment tax credit carryforwards could be impaired.
The actual effect of this impairment on the Company would depend upon a number
of factors, including the profitability of the Company and the timing of the
sale of certain assets, some of which factors may be beyond the control of the
Company. The impact on the Company of such a limitation could be materially
adverse under certain circumstances.
6. The vast majority of the Company's scheduled service and charter business,
other than U.S. military, is leisure travel. Since leisure travel is often
discretionary spending on the part of the Company's customers, the Company's
results of operations can be adversely affected by economic conditions which
reduce discretionary purchases.
7. The Company is subject to the risk that one or more customers who have
contracted with the Company will cancel or default on such contracts and that
the Company might be unable in such circumstances to obtain other business to
replace the resulting loss in revenues. The Company's largest single customer is
the U.S. military, which accounted for approximately 15.8% of operating revenues
in the first quarter of 1997. No other single customer of the Company accounts
for more than 10% of operating revenues.
8. Approximately two-thirds of the Company's operating revenues are sold by
travel agents and tour operators who generally have a choice of airlines when
booking a customer's travel. Although the Company intends to offer attractive
and competitive products to travel agents and tour operators and further intends
to maintain favorable relationships with them, any significant actions by large
numbers of travel agencies or tour operators to favor other airlines, or to
disfavor the Company, could have a material adverse effect on the Company.
9. The Company faced intense 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 21.8% and 20.4%, respectively, of operating
expenses in the first quarters of 1997 and 1996. Fuel prices are subject to
factors which are beyond the control of the Company, such as market supply and
demand conditions, and political or economic factors. Although the Company is
able to contractually pass through some fuel price increases to the U.S.
military and tour operators, a significant increase in fuel prices could have a
material adverse effect on the Company's operating performance.
11. The Company believes that its relations with employee groups are good.
However, the existence of a significant labor dispute with any sizeable 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. In addition, 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>
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 15, 1997 J. George Mikelsons
Chairman of the Board of Directors
Date: May 15, 1997 Stanley L. Pace
President and Chief Executive Officer
Director
Date: May 15, 1997 James W. Hlavacek
Executive Vice President, Chief Operating Officer,
and President of ATA Training Corporation
Director
Date: May 15, 1997 Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
