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, 1998
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 - 11,663,623 shares outstanding as of
April 30, 1998
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997
-------------------- --------------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 108,897 $ 104,196
Receivables, net of allowance for doubtful accounts
(1998 - $2,142; 1997 - $1,682) 23,640 23,266
Inventories, net 15,201 14,488
Prepaid expenses and other current assets 19,869 20,892
-------------------- --------------------
Total current assets 167,607 162,842
Property and equipment:
Flight equipment 482,848 463,576
Facilities and ground equipment 57,115 54,933
-------------------- --------------------
539,963 518,509
Accumulated depreciation (263,708) (250,828)
-------------------- --------------------
276,255 267,681
Assets held for sale 7,176 8,691
Deposits and other assets 15,183 11,643
-------------------- --------------------
Total assets $ 466,221 $ 450,857
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,279 $ 8,975
Accounts payable 8,132 10,511
Air traffic liabilities 79,433 68,554
Accrued expenses 78,467 80,312
-------------------- --------------------
Total current liabilities 170,311 168,352
Long-term debt, less current maturities 177,980 182,829
Deferred income taxes 37,233 31,460
Other deferred items 10,893 11,226
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 11,837,630 - 1998; 11,829,230 - 1997 39,017 38,760
Additional paid-in-capital 14,964 15,340
Deferred compensation - ESOP (1,066) (1,600)
Treasury stock: 185,000 shares (1,760) (1,760)
Retained earnings 18,649 6,250
-------------------- --------------------
69,804 56,990
-------------------- --------------------
Total liabilities and shareholders' equity $ 466,221 $ 450,857
==================== ====================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended March 31,
1998 1997
-----------------------------------------
(Unaudited) (Unaudited)
Operating revenues:
<S> <C> <C>
Scheduled service $ 117,889 $ 82,004
Charter 94,322 100,346
Ground package 6,437 5,854
Other 10,657 6,080
------------------- -------------------
Total operating revenues 229,305 194,284
------------------- -------------------
Operating expenses:
Salaries, wages and benefits 49,746 40,490
Fuel and oil 36,778 40,671
Depreciation and amortization 18,158 14,140
Handling, landing and navigation fees 17,505 17,248
Aircraft rentals 12,926 14,147
Aircraft maintenance, materials and repairs 12,815 11,085
Crew and other employee travel 9,391 7,920
Passenger service 8,203 8,186
Commissions 7,213 5,934
Other selling expenses 5,607 3,199
Ground package cost 5,547 5,215
Advertising 4,214 3,514
Facilities and other rentals 2,371 2,119
Other 15,422 12,688
------------------- -------------------
Total operating expenses 205,896 186,556
------------------- -------------------
Operating income 23,409 7,728
Other income (expense):
Interest income 1,042 146
Interest (expense) (3,254) (1,612)
Other 74 55
------------------- -------------------
Other expense (2,138) (1,411)
------------------- -------------------
Income before income taxes 21,271 6,317
Income tax expense 8,872 3,095
------------------- -------------------
Net income $ 12,399 $ 3,222
=================== ===================
Basic earnings per common share:
Average shares outstanding 11,565,419 11,571,847
Net income per share $ 1.07 $ 0.28
=================== ===================
Diluted earnings per common share:
Average shares outstanding 12,103,580 11,796,911
Net income per share $ 1.02 $ 0.27
=================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
1998 1997
---------------------------------------------------
(Unaudited) (Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 12,399 $ 3,222
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 18,158 14,140
Deferred income taxes 5,773 2,785
Other non-cash items (165) 43
Changes in operating assets and liabilities:
Receivables (374) (1,352)
Inventories 559 (364)
Assets held for sale - 409
Prepaid expenses 1,023 (2,225)
Accounts payable (2,379) (3,896)
Air traffic liabilities 10,879 8,043
Accrued expenses (2,005) (217)
-------------------- --------------------
Net cash provided by operating activities 43,868 20,588
-------------------- --------------------
Investing activities:
Proceeds from sales of property and equipment 1,030 268
Capital expenditures (26,862) (20,356)
Additions to other assets (3,765) (5,863)
-------------------- --------------------
Net cash used in investing activities (29,597) (25,951)
-------------------- --------------------
Financing activities:
Payments on short-term debt (4,750) -
Payments on long-term debt (4,820) (2,066)
-------------------- --------------------
Net cash used in financing activities (9,570) (2,066)
-------------------- --------------------
Increase (decrease) in cash and cash equivalents 4,701 (7,429)
Cash and cash equivalents, beginning of period 104,196 73,382
-------------------- --------------------
Cash and cash equivalents, end of period $ 108,897 $ 65,953
==================== ====================
Supplemental disclosures:
Cash payments for:
Interest $ 6,210 $ 2,051
Income taxes (refunds) (1,766) 312
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item I - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of Amtran, Inc. and
subsidiaries (the "Company") have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended March 31,
1998 and 1997 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, 1998, are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
1998 1997
------------------------------
(Dollars in thousands, except
shares and per share data)
Numerator:
Net income $12,399 $ 3,222
Denominator:
Denominator for basic earnings per
share - weighted average shares 1,565,419 11,571,847
Effect of dilutive securities:
Employee stock options 536,661 223,564
Restricted shares 1,500 1,500
-------------- -------------
Dilutive potential common shares 538,161 225,064
-------------- -------------
Denominator for diluted earnings per
share - adjusted weighted average
shares 12,103,580 11,796,911
============== =============
Basic earnings per share $ 1.07 $ .28
============== =============
Diluted earnings per share $ 1.02 $ .27
============== =============
<PAGE>
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Amtran is a leading provider of charter airline services and, on a targeted
basis, scheduled airline services to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, American Trans Air, Inc. ("ATA"), has
been operating for 25 years and is the eleventh largest U.S. airline in terms of
1997 revenue passenger miles. ATA provides charter service throughout the world
to independent tour operators, specialty charter customers and the U.S.
military. Scheduled service is provided through nonstop and connecting flights
from the gateway cities of Chicago-Midway, Indianapolis and Milwaukee to popular
vacation destinations such as Hawaii, Las Vegas, Florida, California, Mexico and
the Caribbean.
In the first quarter of 1998 the Company generated record operating earnings and
net income as compared to any quarter in the Company's 25-year history. Although
all business units performed well during this period, scheduled service
generated the strongest overall growth in pricing and traffic of the Company's
major business units. The Company believes that several key factors were
significant in producing these record profits in the first quarter of 1998.
The Company generated a consolidated 4.8% improvement in revenue per ASM
("RASM") during the first quarter of 1998 as compared to the first quarter of
1997. Military RASM increased by 7.2% due primarily to rate increases obtained
for the current contract year; scheduled service RASM increased by 4.3% due to
strong customer demand, even though the Company increased total capacity in this
business unit by 37.8% between quarters; and commercial charter RASM increased
by 3.1%.
The Company at the same time reduced its operating cost per ASM ("CASM") by 2.1%
between quarters. Fuel price reductions were a significant contributor to lower
operating costs. After adjusting for fuel, CASM for all other operating expenses
increased by 2.9% in the first quarter of 1998, as compared to the same period
of 1997, in spite of upward cost pressures in such expense lines as salaries and
benefits, depreciation and amortization, and scheduled service distribution
expenses. The Company remains focused on controlling growth in operating costs
in 1998 so as to retain most of the benefit of strengthened revenues and lower
fuel costs, and believes that most unit cost increases which did occur in the
first quarter of 1998 actually provided, or will provide in future periods,
offsetting benefits to operating margins through enhanced revenues or improved
operating efficiencies.
In the first quarter of 1998, the Company also significantly increased average
aircraft utilization as compared to the prior year, as measured by average daily
block hours flown per aircraft including spares. The Boeing 757-200 fleet flew
an average of 20.6% more block hours per day; the Boeing 727-200 fleet flew an
average of 20.2% more block hours per day; and the Lockheed L-1011 fleet flew an
average of 7.2% more block hours per day in the 1998 quarter as compared to the
1997 quarter.
The combined effects of record operating revenues, lower operating expenses, and
the more productive use of aircraft generated a record operating income in the
first quarter of 1998 that was more than triple the operating income of the
first quarter of 1997, as well as being a record for quarterly net income. Other
records established in the first quarter of 1998 included scheduled service
yield of 9.09 cents and commercial charter RASM of 6.10 cents.
Results of Operations
For the quarter ended March 31, 1998, the Company earned $23.4 million in
operating income, an increase of 203.9% as compared to operating income of $7.7
million in the comparable period of 1997; and the Company earned $12.4 million
in net income in the first quarter of 1998, an increase of 287.5% as compared to
net income of $3.2 million in the first quarter of 1997.
The Company's first quarter 1998 operating revenues increased 18.0% to $229.3
million, as compared to $194.3 million in the same period of 1997. Operating
revenues per ASM increased 4.8% to 6.82 cents in the first quarter of 1998, as
compared to 6.51 cents in the same period of the prior year. ASMs increased
12.7% to 3.363 billion from 2.985 billion, RPMs increased 8.3% to 2.394 billion
from 2.210 billion, and passenger load factor decreased 2.8 points to 71.2% as
compared to 74.0%. Yield in the first quarter of 1998 increased 9.0% to 9.58
cents per RPM, as compared to 8.79 cents per RPM in 1997. Total passengers
boarded increased 10.9% to 1,560,979 in the first quarter of 1998, as compared
to 1,407,128 in 1997, while total departures increased 54.7% to 14,892 from
9,629 between the same comparable periods, and block hours increased 26.4% to
39,156 in the 1998 quarter as compared to 30,969 in the 1997 quarter.
Operating expenses increased 10.3% to $205.9 million in the first quarter of
1998 as compared to $186.6 million in the comparable period of 1997. The
operating cost per ASM decreased 2.1% to 6.12 cents in the first quarter of 1998
as compared to 6.25 cents in the first quarter of 1997, since the Company's
operating expenses grew more slowly than the growth in seat capacity between
years.
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.
- --------------------------------------------------------------------------------
Cents per ASM
Quarter Ended March 31,
-------------------------------
1998 1997
Operating revenues: 6.82 6.51
Operating expenses:
Salaries, wages and benefits 1.48 1.36
Fuel and oil 1.09 1.36
Depreciation and amortization 0.54 0.47
Handling, landing and navigation fees 0.52 0.58
Aircraft rentals 0.38 0.47
Aircraft maintenance, materials and repairs 0.38 0.37
Crew and other employee travel 0.28 0.27
Passenger service 0.24 0.27
Commissions 0.21 0.20
Other selling expenses 0.17 0.11
Ground package cost 0.17 0.18
Advertising 0.13 0.12
Facility and other rents 0.07 0.07
Other operating expenses 0.46 0.42
Total operating expenses 6.12 6.25
Operating income 0.70 0.26
ASMs (in thousands) 3,363,030 2,984,994
- --------------------------------------------------------------------------------
<PAGE>
Quarter Ended March 31, 1998, Versus Quarter Ended March 31, 1997
Consolidated Flight Operations and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
<S> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 11,178 9,629 1,549 16.09
Departures J31(a) 3,714 -- 3,714 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 14,892 9,629 5,263 54.66
--------------- --------------- ---------------- ---------------
Block Hours Jet 35,606 30,969 4,637 14.97
Block Hours J31 3,550 -- 3,550 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 39,156 30,969 8,187 26.44
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 2,388,383 2,210,061 178,322 8.07
RPMs J31 (000s) 6,112 -- 6,112 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 2,394,495 2,210,061 184,434 8.35
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 3,351,090 2,984,994 366,096 12.26
ASMs J31 (000s) 11,940 -- 11,940 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 3,363,030 2,984,994 378,036 12.66
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.27 74.04 (2.77) (3.74)
Load Factor J31 51.19 -- N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.20 74.04 (2.84) (3.84)
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 1,526,649 1,407,128 119,521 8.49
Passengers Enplaned J31 34,330 -- 34,330 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 1,560,979 1,407,128 153,851 10.93
--------------- --------------- ---------------- ---------------
Revenue $(000s) 229,305 194,284 35,021 18.03
RASM in cents (h) 6.82 6.51 0.31 4.76
CASM in cents (i) 6.12 6.25 (0.13) (2.08)
Yield in cents (j) 9.58 8.79 0.79 8.99
- -----------------------------------------------------------------------------------------------------
</TABLE>
N/M - Not meaningful
(a) Effective April 1, 1997, the Company began ATA Connection service between
Chicago-Midway and the cities of Indianapolis, Milwaukee, Des Moines, Dayton and
Grand Rapids under an agreement with Chicago Express. Services were expanded to
include Lansing, Michigan and Madison, Wisconsin in October 1997. Services are
provided using Jetstream 31 ("J31") propeller aircraft.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(e) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(f) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and U.S.
military business units, load factor is less relevant because an entire aircraft
is sold by the Company instead of individual seats. Since both costs and
revenues are largely fixed for these types of flights, changes in load factor
have less impact on business unit profitability. Consolidated load factors and
scheduled service load factors for the Company are shown in the appropriate
tables for industry comparability, but load factors for individual charter
businesses are omitted from applicable tables.
(g) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(h) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (j) below for the definition of yield).
(i) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM". CASM measures the
Company's effectiveness in minimizing the operating cost of producing total seat
capacity.
(j) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the Company's
ability to optimize the price paid by customers purchasing individual seats.
Yield is less relevant to the commercial charter and U.S. military business
units because the entire aircraft is sold at one time for one price.
Consolidated yields and scheduled service yields are shown in the appropriate
tables for industry comparability, but yields for individual charter businesses
are omitted from applicable tables.
Operating Revenues
Total operating revenues for the first quarter of 1998 increased 18.0% to $229.3
million from $194.3 million in the first quarter of 1997. This increase was due
to a $35.9 million increase in scheduled service revenues, a $4.6 million
increase in other revenues, a $2.3 million increase in military charter service
revenues, and a $0.5 million increase in ground package revenues, partially
offset by an $8.3 million decrease in commercial charter revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated as the ATA Connection.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
<S> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 7,095 4,991 2,104 42.16
Departures J31(a) 3,714 -- 3,714 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 10,809 4,991 5,818 116.57
--------------- --------------- ---------------- ---------------
Block Hours Jet 21,085 14,926 6,159 41.26
Block Hours J31 3,550 -- 3,550 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 24,635 14,926 9,709 65.05
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 1,290,761 950,158 340,603 35.85
RPMs J31 (000s) 6,112 -- 6,112 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 1,296,873 950,158 346,715 36.49
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 1,719,042 1,256,319 462,723 36.83
ASMs J31 (000s) 11,940 -- 11,940 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 1,730,982 1,256,319 474,663 37.78
--------------- --------------- ---------------- ---------------
Load Factor Jet 75.09 75.63 (0.54) (0.71)
Load Factor J31 51.19 -- N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 74.92 75.63 (0.71) (0.94)
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 939,785 686,496 253,289 36.90
Passengers Enplaned J31 34,330 -- 34,330 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 974,115 686,496 287,619 41.90
--------------- --------------- ---------------- ---------------
Revenues $(000s) 117,889 82,004 35,885 43.76
RASM in cents (h) 6.81 6.53 0.28 4.29
Yield in cents (j) 9.09 8.63 0.46 5.33
Rev per segment $ (k) 121.02 119.45 1.57 1.31
- ------------------------------------------------------------------------------------------------------
</TABLE>
N/M - Not Meaningful
See footnotes (a) through (j) on pages 9-10.
(k) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
Scheduled service revenues in the first quarter of 1998 increased 43.8% to
$117.9 million from $82.0 million in the first quarter of 1997. Scheduled
service revenues comprised 51.4% of consolidated revenues in the 1998 quarter,
as compared to 42.2% of consolidated revenues in 1997. Scheduled service RPMs
increased 36.5% to 1.297 billion from 950.2 million, while ASMs increased 37.8%
to 1.731 billion from 1.256 billion, resulting in an decrease of 0.7 points in
passenger load factor to 74.9% in the first quarter of 1998, from 75.6% in the
same period of 1997. Scheduled service yield in the 1998 first quarter increased
5.3% to 9.09 cents from 8.63 cents in 1997, while RASM increased 4.3% to 6.81
cents from 6.53 cents between the same periods.
Scheduled service departures in the first quarter of 1998 increased 116.6% to
10,809 from 4,991 in the first quarter of 1997; block hours increased 65.1% to
24,635 in 1998, from 14,926 in 1997; and passengers boarded increased 41.9%
between periods to 974,115, as compared to 686,496. Year-over-year percentage
changes in departures, block hours and passengers boarded were significantly
impacted by the operation of ATA Connection Jetstream 31 commuter flights in the
first quarter of 1998, which did not operate in the first quarter of 1997; such
operations generate comparatively less impact to ASMs and RPMs due to the small
seat capacity and short stage length of ATA Connection propeller aircraft as
compared to the Company's jet operations. The Company currently has a code share
agreement with Chicago Express under which Chicago Express operates 19-seat
Jetstream 31 propeller aircraft between Chicago-Midway and the cities of
Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids, Lansing and Madison.
The Company's first quarter 1997 scheduled service jet operations included
services 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 from San Francisco,
Los Angeles and Phoenix; and service between Orlando and San Juan and Nassau.
The Company began new service in June 1997, between New York's John F. Kennedy
International Airport and Chicago Midway, Indianapolis and St. Petersburg, and
also added frequencies between the midwest and west coast for the 1997 summer
season. New York service to Chicago-Midway and St. Petersburg was retained for
the 1997-98 winter season, although service to Indianapolis was discontinued in
late 1997.
The Company's first quarter 1998 jet scheduled service at Chicago-Midway
accounted for approximately 48.9% of scheduled service jet departures, as
compared to 48.1% of such departures in the first quarter of 1997. In addition
to the single new destination to New York's Kennedy Airport from Chicago-Midway,
the Company added new frequencies in 1998 to many existing markets, including
Ft. Lauderdale, Orlando, St. Petersburg, Las Vegas, Phoenix, Los Angeles and San
Francisco. The Company's frequencies between Chicago-Midway and Ft. Myers and
Sarasota did not change significantly between quarters. All of the ATA
Connection Jetstream 31 departures in the first quarter of 1998 served
Chicago-Midway from the cities of Indianapolis, Milwaukee, Des Moines, Dayton,
Grand Rapids, Lansing and Madison, whereas such service was not in effect in the
first quarter of 1997. When considering all jet and propeller services from
Chicago-Midway to seventeen nonstop destinations served in the first quarter of
1998, such service accounted for 66.5% of scheduled service departures in that
period, as compared to 48.1% of scheduled service departures in the first
quarter of 1997.
The Company anticipates that its Chicago-Midway operation will represent a focus
of growing significance for its scheduled service business in 1998 and beyond.
The Company has announced a significant expansion of Chicago-Midway jet services
for the 1998 summer season. Prominent in this expansion are the addition on May
1 of three daily nonstop flights to Dallas-Ft. Worth and two daily nonstop
flights to Denver, and the addition of three daily nonstop flights to San Juan,
Puerto Rico on May 25. The Company has also announced three daily nonstop
flights to New York's La Guardia airport beginning July 7, using slots newly
awarded to the Company by the Department of Transportation. The Company will
also add new frequencies to several of its existing jet markets from
Chicago-Midway for the 1998 summer season, including Orlando, St. Petersburg,
San Francisco, Phoenix, Ft. Lauderdale and Los Angeles. The Company expects to
operate 54 average peak daily departures from Chicago-Midway and serve 21
destinations on a nonstop basis in the summer of 1998, including ATA Connection
Jetstream 31 commuter services. This capacity expansion is expected to require
the addition of five hundred new employees in the Chicago area by the end of
1998. In the first and second quarters of 1998 the Company will also complete an
estimated $1.5 million renovation of the existing terminal facilities at
Chicago-Midway to enhance its attractiveness and functionality for customers
during the upcoming 1998 summer season. The Company has also announced that it
will occupy 12 gates at the new Chicago-Midway terminal which is presently
scheduled for completion in 2002, an increase of 100% over the six gates
currently occupied in the existing terminal.
The Company's growing commitment to Chicago-Midway is consistent with its
strategy for enhancing revenues and profitability in scheduled service by
focusing primarily on low-cost, nonstop flights from airports where it has
market or aircraft advantages in addition to its low cost. The Company believes
that its high performance Boeing 757-200 and Boeing 727-200ADV aircraft
presently give it a competitive advantage at Chicago-Midway because, unlike many
aircraft flown by its competitors, these aircraft can fly larger passenger
capacities substantially longer distances while operating from the airport's
short runways. The Company also expects its growing concentration of connecting
flights at Chicago-Midway to provide both revenue premiums and operating cost
efficiencies, as compared to the Company's other gateway cities.
The Company's Indianapolis gateway accounted for 25.4% of scheduled service jet
departures in the first quarter of 1998, as compared to 27.4% of such departures
in the same period of 1997. In the first quarter of 1998 the Company added
nonstop service to Los Angeles, Montego Bay and Nassau, and operated
significantly expanded frequencies to St. Petersburg, Sarasota and Ft.
Lauderdale as compared to the first quarter of 1997. The Company operated
similar frequencies in both quarters to Cancun, Las Vegas, Orlando, and Ft.
Myers, and also operated limited seasonal service to San Francisco in early
1998. The Company has served Indianapolis for 25 years through the Ambassadair
Travel Club, and in scheduled service since 1986. The Company believes that as
the Indianapolis "hometown airline," it has developed significant brand
recognition and customer loyalty in this market which provides a competitive
advantage. The ATA Connection commuter service from Indianapolis to
Chicago-Midway offers Indianapolis-originating customers a large selection of
additional connections west to Hawaii, east to New York and south to Florida and
the Caribbean which are more economically served from Indianapolis through this
connection than by direct flights.
The Company's Milwaukee gateway accounted for 7.6% of scheduled service jet
departures in the first quarter of 1998, as compared to 8.7% of such departures
in the first quarter of 1997. The Company provided nonstop service to Orlando,
St. Petersburg and Ft. Myers in both quarters, although frequencies were
increased to St. Petersburg and Ft. Myers and decreased to Orlando in the first
quarter of 1998 as compared to the prior year. The Company believes that it is
the only low-cost choice in the Milwaukee market to these destinations.
The Company's Hawaii service accounted for 7.3% of scheduled service jet
departures in the first quarter of 1998, as compared to 9.8% of such departures
in the same quarter of 1997. The Company provided nonstop services in both
quarters from the mainland cities of Los Angeles, San Francisco and Phoenix to
both Honolulu and Maui, with connecting service between Honolulu and Maui. In
addition, in the first quarter of 1998 nonstop service was operated from Seattle
to Maui, which was not operated in the first quarter of 1997. The Company
provides these services through a marketing alliance with Pleasant Hawaiian
Holidays, a large tour operator serving leisure travelers to Hawaii from the
United States. The Company uses primarily wide-body Lockheed L-1011 aircraft,
supplemented with some narrow-body flights using Boeing 757-200 aircraft.
Pleasant Hawaiian Holidays generally purchases approximately 80% of the
available seats on these flights and markets them to their leisure customers,
often in conjunction with ground arrangements. The Company distributes the
remaining seats on these flights through normal scheduled service distribution
channels. The Company believes it has superior operating efficiencies in west
coast-Hawaii markets due to the relatively low ownership cost of the Lockheed
L-1011 fleet, and because of the high daily hours of utilization obtained for
both aircraft and crews.
The Company's San Juan service accounted for 6.3% of scheduled service jet
departures in the first quarter of 1998, as compared to 2.2% of such departures
in the same period of 1997. The Company provided nonstop service between San
Juan and Orlando in both quarters, although frequencies were significantly
increased in the first quarter of 1998, at which time the Company also began
nonstop service between San Juan and St. Petersburg, which was not operated in
the first quarter of 1997. The Company continues to evaluate the profitability
of its scheduled service business unit and may further expand scheduled service
in targeted markets. The Company believes that first quarter 1998 scheduled
service yields have benefited from unprecedented customer demand for air
transportation in the United States during a period of constrained industry
growth in seat capacity relative to this demand. The ability of the Company to
increase its own scheduled service seat capacity by 37.8%, with a negligible
(0.7) point loss in load factor between quarters, further underscores the
fundamental strength of demand in the domestic scheduled service marketplace.
The Company believes that its scheduled service product is attractively priced
and has developed strong customer acceptance in the leisure and value-oriented
business traveler markets that the Company has chosen to serve, and is therefore
well positioned for continued profitability.
Commercial Charter Revenues. The Company's commercial charter revenues are
derived principally from independent tour operators and specialty charter
customers. The Company's commercial charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Commercial charter revenue growth in the 1998 quarter was constrained by
the reassignment of several narrow-body aircraft to scheduled service expansion
and by subservice contracts with other airlines, which the Company believes are
more profitable for these aircraft than the charter applications they replaced.
The Company, however, continues to believe that tour operator and specialty
charter are businesses where the Company's experience and size provide
meaningful competitive advantage, and are businesses to which the Company
remains fully committed. Commercial charter revenues accounted for 26.7% of
consolidated revenues in the first quarter of 1998, as compared to 35.8% in the
first quarter of 1997.
The Company is addressing its seat capacity limitations in the commercial
charter business unit through the planned acquisition of long-range Lockheed
L-1011 series 500 aircraft. The Company announced on April 27 that it had signed
a letter of intent to purchase up to five such aircraft from Royal Jordanian
Airlines, for delivery in late 1998 and throughout 1999. Although these
aircraft, in respect of maintenance and cockpit design, are comparable to the
Company's existing fleet of Lockheed L-1011 series 50 and series 100 aircraft,
they differ operationally in that their ten-to-eleven-hour range permits them to
operate nonstop to parts of Asia, South America and Central and Eastern Europe
using an all-coach seating configuration preferred by the Company's commercial
charter customers. If the terms of the letter of intent are satisfied, the
Company expects to place these aircraft into service in commercial charter
operations between December 1998 and the fourth quarter of 1999, which would
provide a substantial increase in available seat capacity for the commercial
charter business unit, in addition to opening new long-range market
opportunities to the Company which it cannot economically or operationally serve
with its existing fleet.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three Months Ended March 31,
<S> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 2,655 3,378 (723) (21.40)
Block Hours (c) 9,073 11,241 (2,168) (19.29)
RPMs (000s) (d) 827,715 1,008,711 (180,996) (17.94)
ASMs (000s) (e) 1,030,760 1,206,913 (176,153) (14.60)
Passengers Enplaned (g) 508,833 651,901 (143,068) (21.95)
Revenue $(000s) 61,304 69,641 (8,337) (11.97)
RASM in cents (h) 5.95 5.77 0.18 3.12
- ---------------------------------------------------------------------------------------------------
</TABLE>
See footnotes (b) through (h) on pages 9-10.
Commercial charter revenues derived from independent tour operators and
specialty charter customers decreased 11.9% to $61.3 million in the first
quarter of 1998, as compared to $69.6 million in the first quarter of 1997.
Commercial charter RPMs decreased 18.0% to 827.7 million in 1998 from 1.009
billion in 1997, while ASMs decreased 14.6% to 1.031 billion from 1.207 billion.
Commercial charter RASM increased 3.1% to 5.95 cents from 5.77 cents between the
same periods. Commercial charter passengers boarded decreased 22.0% to 508,833
in 1998, as compared to 651,901 in 1997; departures decreased 21.4% to 2,655 in
1998, as compared to 3,378 in 1997; and block hours decreased 19.3% to 9,073 in
1998, as compared to 11,241 in 1997.
The Company operates in two principal components of the commercial charter
business, known as "track charter" and "specialty charter." The larger track
charter business component is generally comprised of low frequency but
repetitive domestic and international flights between city pairs, which support
high passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts.
The Company believes that although price is the principal competitive criterion
for its commercial charter programs, product quality, reputation for reliability
and delivery of services which are customized to specific needs have become
increasingly important to the buyer of this product. Accordingly, as the Company
continues to emphasize the growth and profitability of this business unit, it
will seek to maintain its low-cost pricing advantage, while differentiating
itself from competitors through the delivery of customized services and the
maintenance of consistent and dependable operations. In this manner, the Company
believes that it will produce significant value for its tour operator partners
by delivering an attractively priced product which exceeds the leisure
traveler's expectations.
Specialty charter is a product which is designed to meet the unique requirements
of the customer and is a business characterized by lower frequency of operation
and by greater variation in city pairs served than the track charter business.
Specialty charter includes such diverse contracts as flying university alumni to
football games, transporting political candidates on campaign trips and moving
NASA space shuttle ground crews to alternate landing sites. The Company also
operates an increasing number of trips in all-first-class configuration for
certain corporate and high-end leisure clients. Although lower utilization of
crews and aircraft and infrequent service to specialty destinations often result
in higher average operating costs, the Company has determined that the revenue
premium earned by meeting special customer requirements usually more than
compensates for these increased costs. In addition, specialty charter programs
sometimes permit the Company to increase overall aircraft utilization by
providing filler traffic during periods of low demand from other programs such
as track charter. The Company believes that it is competitively advantaged to
attract this type of business due to the size and geographic dispersion of its
fleet, which reduces costly ferry time for aircraft and crews and thus permits
more competitive pricing. The diversity of the Company's three fleet types also
permits the Company to meet a customer's particular needs by choosing the
aircraft type which provides the most economical solution for those
requirements.
<PAGE>
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the military
flight operations of the Company.
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31,
1998 1997 Inc (Dec) % Inc (Dec)
<S> <C> <C> <C> <C>
Departures (b) 1,219 1,220 (1) (0.08)
Block Hours (c) 4,563 4,689 (126) (2.69)
RPMs (000s) (d) 232,361 247,731 (15,370) (6.20)
ASMs (000s) (e) 515,655 514,248 1,407 0.27
Passengers Enplaned (g) 58,637 66,303 (7,666) (11.56)
Revenue $(000s) 33,018 30,706 2,313 7.53
RASM in cents (h) 6.40 5.97 0.43 7.20
- -----------------------------------------------------------------------------------------------
</TABLE>
See footnotes (b) through (h) on pages 9-10.
Charter revenues derived from the U.S. military increased 7.5% to $33.0 million
in the first quarter of 1998, as compared to $30.7 million in the first quarter
of 1997. In the first quarter of 1998, the Company's U.S. military revenues
represented 14.4% of consolidated revenues, as compared to 15.8% in the first
quarter of 1997. U.S. military RPMs decreased 6.2% to 232.4 million in 1998,
from 247.7 million in 1997, while ASMs increased 0.3% to 515.7 million from
514.2 million. Military RASM increased 7.2% to 6.40 cents from 5.97 cents
between the same time periods. U.S. military passengers boarded decreased 11.6%
to 58,637 in 1998, as compared to 66,303 in 1997; departures increased 0.1% to
1,219 in 1998, as compared to 1,220 in 1997; and block hours decreased 2.7% to
4,563 in 1998 as compared to 4,689 in 1997.
The Company participates in two related military programs known as "fixed award"
and "short-term expansion." Pursuant to the U.S. military's fixed award system,
each participating airline is awarded certain "mobilization value points" based
upon the number and type of aircraft made available by that airline for military
flying. In order to increase the number of points awarded, in 1992 the Company
entered into a contractor teaming arrangement with four other cargo airlines
serving the U.S. military. Under this arrangement, the team has a greater
likelihood of receiving fixed award business and, to the extent that the award
includes passenger transport, the opportunity for the Company to operate this
flying is enhanced since the Company represents all of the passenger transport
capacity of the team. As part of its participation in this teaming arrangement,
the Company pays a commission to the team, which passes that revenue on to all
team members based upon their mobilization points. All airlines participating in
the fixed award business contract annually with the U.S. military from October 1
to the following September 30. For each contract year, reimbursement rates are
determined for aircraft types and mission categories based upon operating cost
data submitted by the participating airlines. These contracts generally are not
subject to renegotiation once they become effective.
Short-term expansion business is awarded by the U.S. military first on a pro
rata basis to those carriers who have been awarded fixed-contract business and
then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The Company principally committed four Boeing 757-200 aircraft to the military
charter business in both quarters, and provided substantially the same number of
military ASMs between years, although the relatively faster growth in scheduled
service ASMs reduced the relative share of military ASMs between years. As a
result of more accurately documenting the actual costs associated with military
flying, the Company was able to obtain approval for some rate increases for the
U.S. military contract year ending September 30, 1998, which resulted in higher
RASM in the 1998 first quarter as compared to the same quarter of the prior
year.
Because military flying is generally less seasonal than leisure travel programs,
the Company believes that a larger U.S. military charter business will tend to
have a stabilizing impact on seasonal earnings fluctuations. The Company is also
contractually protected from changes in fuel prices. The Company further
believes that its fleet of aircraft has a competitive advantage to serve the
transportation needs of the U.S. military. Although foreign bases have reduced
troop size, the U.S. military still desires to maintain its service frequency to
those bases and therefore often has a preference for smaller-capacity,
long-range aircraft such as the Company's Boeing 757-200. Furthermore, in 1993,
the Company became the first North American carrier to receive Federal Aviation
Administration certification to operate Boeing 757-200 aircraft with 180-minute
Extended Twin Engine Operation ("ETOPS"), permitting these aircraft to operate
missions over water to airports up to three hours from the nearest alternate
airport. The Company believes that this certification, which applies to all of
the Company's Boeing 757-200 fleet, provides a competitive advantage in
receiving awards of certain military flying.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (i) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (ii) the percentage of
passenger capacity of the Company with respect to its own team; (iii) the amount
of fixed award and expansion flying required by the U.S. military in each
contract year; and (iv) the availability of the Company's aircraft to accept and
fly expansion awards. In 1997, there was an unusual amount of both fixed award
and expansion business available to the Company as compared to prior years. The
Company expects that it will operate approximately as much military flying in
1998 as it did in 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
exclusively to its Ambassadair club members and through its ATA Vacations
subsidiary to the general public. In the first quarter of 1998, ground package
revenues increased 8.5% to $6.4 million, as compared to $5.9 million in the
first quarter of 1997.
The Company's Ambassadair Travel Club offers hundreds of tour-guide-accompanied
vacation packages to its approximately 35,000 individual and family members
annually. In the first quarter of 1998, total packages sold decreased 3.1%, as
compared to the first quarter of 1997, while the average revenue earned for each
ground package sold increased 26.3% between those periods .
ATA Vacations offers numerous ground package combinations to the general public
for use on the Company's scheduled service flights throughout the United States.
These packages are marketed through travel agents, as well as directly by the
Company. In the first quarter of 1998, the number of ground packages sold
increased 8.8%, as compared to the first quarter of 1997, while the average
revenue earned for each ground package sold decreased 10.0% between these
periods.
The average revenue earned by the Company for a ground package sale is a
function of the mix of vacation destinations served, the quality and types of
ground accommodations offered and general competitive conditions with other air
carriers offering similar products in the Company's markets, all of which
factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues of
affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of the Company. Other
revenues increased 75.4% to $10.7 million in the first quarter of 1998, as
compared to $6.1 million in the same period of 1997, primarily due to a $2.9
million increase in revenues earned between periods by providing substitute
service to other airlines. A substitute service agreement typically provides for
the Company to operate aircraft with its crews on routes designated by the
customer airline to carry the passengers of that airline for a limited period of
time. The Company has experienced increased demand for this type of service in
1998 due to some delays in new aircraft deliveries to several airlines from the
manufacturers.
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 in the first quarter of 1998 increased 22.7% to $49.7
million from $40.5 million in the first quarter of 1997.
The Company increased its average equivalent employees by 15.5% between quarters
in order to appropriately staff the growth in available seats offered between
periods. Categories of employees where this growth was most significant included
cockpit and cabin crews, reservations agents, airport passenger and ramp service
agents, and aircraft maintenance personnel, all of which are influenced directly
by flight activity. Between the first quarter of 1998 and the first quarter of
1997, jet departures increased by 16.1%, jet block hours increased by 15.0%, and
jet passengers boarded increased by 8.5%. Some employment growth in the first
quarter of 1998 was also needed to correct for certain employee shortages in
1997, particularly in the areas of cockpit crews, reservations agents and
airframe and power plant mechanics.
The average rate of pay earned by the Company's employees (including base wages
and overtime but excluding benefits) was unchanged between the first quarters of
1997 and 1998. This result was due to the downward impact of the 15.5% increase
in average equivalent employees on average pay in some employment categories, as
new employees were often hired at lower average rates of pay than average rates
in effect for existing employee groups, even though wage rate increases were
given to many existing employee groups through performance or scale increases in
pay between these periods.
In the first quarter of 1998, the Company recorded $2.5 million in variable
compensation incurred as a result of the significant improvement in net income
as compared to the same quarter of 1997, when no such compensation was earned.
Salaries, wages and benefits cost per ASM increased 8.8% in the first quarter of
1998 to 1.48 cents, as compared to 1.36 cents in 1997. The majority of this unit
cost increase was attributable to the incentive compensation earned in the first
quarter of 1998 which was not earned in the prior year.
Fuel and Oil. Fuel and oil expense for the first quarter of 1998 decreased 9.6%
to $36.8 million from $40.7 million in the first quarter of 1997. During the
first quarter of 1998, the Company consumed 10.4% more gallons of jet fuel for
flying operations than during the first quarter of 1997, which resulted in an
increase in fuel expense of approximately $4.9 million between periods. Jet fuel
consumption increased due to the increased number of block hours of jet flying
operations between quarters. The Company flew 35,606 jet block hours in the
first quarter of 1998, as compared to 30,969 jet block hours in the same period
of 1997, an increase of 15.0% between periods. The slower rate of growth in
gallons consumed as compared to block hours flown was due to a change in the mix
of block hours flown by fleet type between periods. Most of the Company's growth
in block hours between quarters occurred in the narrow-body Boeing 727-200 and
Boeing 757-200 fleets, which burn fuel at less than half the rate per block hour
as the larger wide-body Lockheed L-1011 aircraft. In the first quarter of 1998,
the percentage of jet block hours flown by the Boeing 727-200 and Boeing 757-200
fleets was 77.6%, as compared to 74.2% in the first quarter of 1997.
During the first quarter of 1998, the Company's average cost per gallon of fuel
consumed decreased by 22.3% as compared to the first quarter of 1997, resulting
in a decrease in fuel and oil expense of approximately $9.2 million between
years. This reduction in fuel price was experienced throughout the airline
industry in the first quarter of 1998 as a result of significant reductions in
average crude oil and distillate product prices as compared to the same period
of 1997.
During the first quarter of 1998, the Company entered into two fuel price hedge
contracts under which the Company sought to reduce the risk of fuel price
increases during February and March. The Company insured approximately 27.3% of
first quarter 1998 gallon consumption under a swap agreement which established a
specific swap price for February and March, and insured an additional 27.3% of
first quarter 1998 gallon consumption under a fuel cap agreement which
guaranteed a maximum price per gallon for February and March. The Company
recorded $1.1 million in fuel and oil expense under the swap agreement in the
first quarter of 1998, since the actual price of jet fuel was lower than the
agreed swap price, and recorded fuel and oil expense of $0.3 million in the
first quarter of 1998 for the fuel cap agreement. Had such agreements not been
in effect in the first quarter of 1998, fuel and oil expense would have been
approximately $1.4 million lower during that quarter, and the average price of
fuel consumed would have been approximately 2.6 cents per gallon lower, or a
total of 25.4% lower than prices paid in the first quarter of 1997.
The Company has entered into a fuel collar agreement for the second quarter of
1998, providing a fuel price minimum and maximum for a portion of gallons
expected to be consumed in the second quarter. This collar agreement may impact
the Company's fuel expense if the actual price of fuel is below the collar
minimum price, in which case the Company must reimburse the fuel cost savings to
the other party, or if it is above the collar maximum price, in which case the
other party must reimburse the Company's excess fuel cost.
Also during the first quarter of 1998, the Company incurred approximately $0.4
million in fuel and oil expense to operate the Jetstream 31 aircraft pursuant to
its agreement with Chicago Express, which agreement was not in effect in the
first quarter of 1997.
Fuel and oil expense decreased 19.9% to 1.09 cents per ASM in the first quarter
of 1998, as compared to 1.36 cents per ASM in the same quarter of 1997. This
unit cost reduction was substantially due to the quarter-to-quarter decrease in
the average price of fuel consumed.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, and rotable parts for all
fleet types, together with other property and equipment owned by the Company.
Amortization is primarily 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 increased 29.1% to $18.2 million in the
first quarter of 1998, as compared to $14.1 million in the first quarter of
1997.
Depreciation expense attributable to owned airframes and engines increased $0.4
million in the first quarter of 1998, as compared to the same period of 1997.
The Company purchased one Boeing 757-200 and one Boeing 727-200 aircraft in late
1997 which had been previously financed through operating leases, thereby
increasing depreciation expense on airframes and engines between those periods.
(The Company recorded a reduction in aircraft rental expense between quarters
for the termination of operating leases for these aircraft, which is further
described below under "Aircraft Rentals.") The Company also incurred increased
debt issue costs between years relating to debt facility and senior unsecured
notes issued in July 1997; recorded additional inventory obsolescence expense
for certain aircraft parts held for sale which were sold during the first
quarter of 1998; and increased its investment in rotable parts and computer
hardware and software. These changes resulted in an increase in depreciation
expense of $0.6 million in the first quarter of 1998 as compared to the same
period of 1997.
Amortization of capitalized engine and airframe overhauls increased $2.9 million
in the first quarter of 1998 as compared to the first quarter of 1997, after
including the offsetting amortization associated with manufacturers' credits.
Changes to the cost of overhaul amortization were partly due to the increase in
total block hours and cycles flown between comparable periods for the Boeing
727-200 fleet, since such expense varies with that activity, and partly due to
the completion of more engine and airframe overhauls between periods for the
Boeing 727-200 and Lockheed L-1011 fleets. Rolls-Royce-powered Boeing 757-200
aircraft, five of which were delivered new from the manufacturer between late
1995 and late 1997, are not presently generating any engine or airframe overhaul
expense since the initial post-delivery overhauls for these aircraft are not yet
due under the Company's maintenance programs.
Boeing 727-200 block hours increased 20.3% and cycles increased 21.6% in the
first quarter of 1998, as compared to the first quarter of 1997. Engine and
airframe amortization for the Company's fleet of Boeing 727-200 aircraft
increased by approximately $1.7 million in the first quarter of 1998, as
compared to the first quarter of 1997, partly due to increases in flight
activity, and partly due to the completion of new overhauls for Pratt & Whitney
JT8D engines that power the Boeing 727-200 fleet as well as additional airframe
overhauls. The number of such overhauls in service has increased as some Boeing
727-200 aircraft added to the Company's fleet in 1995 and 1996 are now
undergoing their first overhauls under the Company's maintenance program.
The increase between the first quarter of 1998 and the first quarter of 1997 in
engine and airframe amortization expense for the Company's Lockheed L-1011 fleet
was approximately $1.0 million, $0.6 million of which was due to an increase in
total engine overhauls in service between those periods, since block hours and
cycles for this fleet type did not change significantly between periods. The
remaining $0.4 million of the increase was due to a quarter-to-quarter reduction
in manufacturers' credits applied to overhaul costs, since fewer such credits
are being earned currently than in prior years.
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 did not change
significantly 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 expense per ASM increased 14.9% to 0.54 cents in
the first quarter of 1998, as compared to 0.47 cents in the first quarter of the
prior year. This increase is primarily due to the increased amount of overhaul
cost incurred to maintain the Company's Boeing 727-200 and Lockheed L-1011
airframes and engines. Airframes and engines which originally enter the
Company's fleet from time to time often do not require such overhauls until
several years later. Therefore, units added to the Company's fleet over the last
several years are currently scheduled for or are undergoing overhaul. Such
overhaul expense incurred and to be incurred is incremental in comparison to
prior periods. Although the Company's fleet of new Boeing 757-200 aircraft has
not yet begun this initial overhaul cycle, the Company anticipates that it will
do so beginning in late 1998 and 1999, at which time increased overhaul
amortization per ASM will be incurred for this fleet type as well.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 1.7% to $17.5 million in the
first quarter of 1998, as compared to $17.2 million in the first quarter of
1997. During the 1998 quarter, the average cost per system jet departure for
third-party aircraft handling decreased 2.9% as compared to the 1997 quarter,
and the average cost of landing fees per system jet departure decreased 5.1%
between the same periods. The total number of system-wide jet departures between
quarters increased by 16.1% to 11,178 from 9,629, resulting in approximately
$1.5 million in volume-related handling and landing expense increases between
periods. This volume-related increase was partially offset, however, by an
approximately $1.1 million price-related handling and landing expense decrease
between periods attributable primarily to a change in jet departure mix. Because
each airport served by the Company has a different schedule of fees, including
variable prices for different aircraft types, average handling and landing fee
costs are a function of the mix of airports served and the fleet composition of
departing aircraft. On average, handling and landing fee costs for Lockheed
L-1011 wide-body aircraft are higher than for narrow-body aircraft, and average
costs at foreign airports are higher than at many U.S. domestic airports. As a
result of the shift of revenue production towards scheduled service operations
in the first quarter of 1998, as compared to the same period of 1997, the
Company's jet departures in the 1998 quarter included proportionately more
domestic and narrow-body operations than in the 1997 quarter. In the first
quarter of 1998, 80.8% of the Company's jet departures were operated with
narrow-body aircraft, as compared to 77.3% in the first quarter of 1997, and
81.7% of the Company's first quarter 1998 jet departures were from domestic
locations, as compared to 75.2% in the first quarter of 1997.
The cost per ASM for handling, landing and navigation fees decreased 10.3% to
0.52 cents in the first quarter of 1998, from 0.58 cents in the comparable 1997
period. This decrease in unit cost was primarily due to the reduced average cost
of handling and landing per departure described above.
Aircraft Rentals. Aircraft rentals expense for the first quarter of 1998
decreased 8.5% to $12.9 million from $14.1 million in the first quarter of 1997.
Approximately $1.4 million of this decrease was attributable to the purchase of
one Boeing 757-200 aircraft and one Boeing 727-200 aircraft in September and
December 1997, respectively, which had been previously financed under operating
leases. (The Company incurred additional depreciation expense for these two
aircraft in the first quarter of 1998 as compared to the first quarter of 1997,
as is described above under "Depreciation and Amortization." )
Other transactions which affected aircraft rentals expense between quarters
included: (i) the return of one Boeing 757-200 to the lessor during 1997, and
the delivery of one new Boeing 757-200 aircraft from the manufacturer in the
fourth quarter of 1997, which had approximately equal and offsetting impacts to
rental expense between quarters; (ii) the sale/leaseback of one Boeing 727-200
in September 1997, which increased aircraft rentals expense by $0.3 million
between quarters; and (iii) the cancellation of leases on three Lockheed L-1011
airframes during 1997, which reduced aircraft rentals expense by $0.1 million
between quarters.
Aircraft rentals expense for the first quarter of 1998 was 0.38 cents per ASM, a
decrease of 19.1% from 0.47 cents per ASM in the same period of 1997. The
cancellation of the operating lease and purchase of the Boeing 757-200 aircraft
during 1997 was the primary cause for this unit cost reduction, although a unit
cost increase was incurred for depreciation and amortization as a result of that
purchase.
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 heavy check and line maintenance activities, and
other non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense increased 15.3% to $12.8
million in the first quarter of 1998, as compared to $11.1 million in the first
quarter of 1997. The cost per ASM increased by 2.7% to 0.38 cents in the 1998
quarter, as compared to 0.37 cents in the 1997 quarter.
The most significant change in maintenance expense components in the first
quarter of 1998 as compared to the prior year was a $1.1 million increase in the
cost of off-site contract labor. This labor is used to perform heavy maintenance
checks to the Company's airframes under approved and supervised maintenance
programs. The Company performed a total of 12 such airframe checks on its fleet
during the first quarter of 1998, as compared to 11 such checks performed in the
first quarter of 1997, an increase of 9.1% between quarters. However, in the
case of the Boeing 727-200 fleet, five such checks were performed off-site by
contract vendors in the 1998 quarter, while no such checks occurred off-site in
the first quarter of 1997. The cost of materials consumed and components
repaired in association with such checks and other maintenance activity
increased by $0.9 million between quarters.
Many 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
1998 were $0.1 million lower than in the first quarter of 1997, primarily due to
the negotiation of purchase options on some of the leased aircraft during the
first quarter of 1998, eliminating return condition obligations existing prior
to those negotiations.
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 incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of air transportation is
generally more significant for the commercial 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 commercial charter
services, and higher per diem and hotel rates generally apply to international
assignments.
The cost of crew and other employee travel increased 19.0% to $9.4 million in
the first quarter of 1998, as compared to $7.9 million in the first quarter of
1997. During the 1998 quarter, the Company's average full-time-equivalent
cockpit and cabin crew employment was 17.1% higher, as compared to the 1997
quarter, even though jet block hours increased by only 15.0% between periods.
Although the Company experienced some limited crew shortages in the first
quarter of 1998 associated with high aircraft utilization, shortages of both
cockpit and cabin crews were more significant in the first quarter of 1997,
immediately following a crew furlough program occurring in the fourth quarter of
1996.
The shift in revenue production emphasis away from commercial charter and toward
scheduled service in the first quarter of 1998 resulted in a 17.1% reduction in
the unit cost per crew member of positioning. However, the cost per crew member
of hotels and per diem expenses increased by 22.4% and 8.0%, respectively, in
the 1998 quarter as compared to 1997. The unit cost increase for hotels
reflected strong domestic hotel occupancy in the 1998 quarter resulting in the
incurrence of higher room rates for crew members than in the prior period.
The cost per ASM for crew and other employee travel increased 3.7% to 0.28 cents
in the first quarter of 1998, as compared to 0.27 cents in the comparable period
of 1997.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For the first quarter of
1998 and 1997, catering represented 84.1% and 77.8%, respectively, of total
passenger service expense.
The total cost of passenger service was unchanged at $8.2 million in the first
quarters of 1998 and 1997. The Company experienced a decrease of approximately
1.1% in the average cost of catering each passenger, but total jet passengers
boarded increased 8.5% to 1,526,649 in the first quarter of 1998, as compared to
1,407,128 in the first quarter of 1997, resulting in a $0.6 million increase in
catering costs between quarters. The cost of handling passengers inconvenienced
by flight delays and cancellations decreased by $0.5 million between quarters
due to a reduction in the average length of such delays. Such decrease occurred
even though the total number of delays over 15 minutes increased slightly
between years.
The cost per ASM of passenger service decreased 11.1% to 0.24 cents in the first
quarter of 1998, as compared to 0.27 cents in the first quarter of 1997.
Commissions. The Company incurs 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 commercial and military charter business.
Commissions expense increased 22.0% to $7.2 million in the first quarter of
1998, as compared to $5.9 million in the first quarter of 1997. Scheduled
service commissions expense increased by $1.2 million, or 27.3%, between
quarters partly as a result of the 43.8% increase in total scheduled service
revenues earned. This increase in commissions expense was partially offset by an
industry-wide reduction in the standard travel agency commission rate from 10%
to 8% during October 1997. Military charter commissions expense increased by
$0.1 million due to the increased level of commissionable military revenues
earned between quarters, while there was no material change in commercial
charter commissions expense between periods.
The cost per ASM of commissions expense increased by 5.0% to 0.21 cents in the
first quarter of 1998, as compared to 0.20 cents in the same period of 1997,
primarily due to the shift in revenue production to scheduled service where
higher unit rates of commission apply as compared to the commercial and military
charter businesses.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems ("CSR") 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 primarily associated
with single-seat sales. Other selling expenses increased 75.0% to $5.6 million
in the first quarter of 1998, as compared to $3.2 million in the first quarter
of 1997.
CRS fees increased $1.2 million in the first quarter of 1998, as compared to the
first quarter of 1997, due to both a 67.8% increase in total CRS bookings made
for the expanded scheduled service business unit between quarters, and due to a
21.2% increase in the average cost of each CRS booking made between periods.
Toll-free telephone costs increased $0.4 million between periods due to higher
usage related to higher reservations activity, while credit card discount
expense increased $0.8 million due to higher earned revenues in scheduled
service which were sold using credit card forms of payment.
Other selling cost per ASM increased 54.5% to 0.17 cents in the first quarter of
1998, as compared to 0.11 cents in the same quarter of the previous year,
primarily due to the substantial growth in scheduled service ASMs between years
where such selling expenses are incurred.
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 5.8% to $5.5 million in the first
quarter of 1998, as compared to $5.2 million in the first quarter of 1997. The
increase in cost between periods was primarily due to a 3.7% increase in the
number of Ambassadair and ATA Vacations ground packages sold, together with a
small increase in the average package cost between quarters.
Advertising. Advertising expense increased 20.0% to $4.2 million in the first
quarter of 1998, as compared to $3.5 million in the comparable period of 1997.
The Company incurs advertising costs primarily to support single-seat scheduled
service sales and the sale of air-and-ground packages. Advertising support for
these lines of business was increased in the 1998 quarter consistent with the
Company's overall strategy to enhance RASM in these businesses through increases
in load factor and yield. The increase in total advertising expense was smaller
than the 43.8% increase in scheduled service revenues between quarters since the
majority of the Company's growth in the 1998 quarter was from increased
frequencies in existing markets, providing greater advertising efficiencies in
the 1998 quarter as compared to total scheduled service capacity.
The cost per ASM of advertising increased 8.3% to 0.13 cents in the first
quarter of 1998, as compared to 0.12 cents in the first quarter of 1997,
primarily due to the substantial growth in scheduled service ASMs between years
where such advertising is incurred.
Facility and Other Rentals. Facility and other rentals includes the cost of all
ground facilities that are leased by the Company such as airport space, regional
sales offices and general offices. The cost of facility and other rentals
increased 14.3% to $2.4 million in the first quarter of 1998, as compared to
$2.1 million in the same period of 1997. This increase in facility costs was
consistent with the 12.7% increase in ASMs between quarters, and was required to
support the increase in flight activity at airport locations. The cost per ASM
for facility and other rentals was unchanged between periods at 0.07 cents.
Other Operating Expenses. Other operating expenses increased 21.3% to $15.4
million in the first quarter of 1998, as compared to $12.7 million in the first
quarter of 1997. Other operating expenses which experienced significant changes
between years included (i) $1.5 million of additional costs for the Chicago
Express Jetstream 31 code share agreement, which agreement was not in effect in
the 1997 first quarter; (ii) $0.9 million in increased costs associated with the
general growth of the Company between quarters, including such expenses as
passenger reprotection on other airlines, flight simulator training for cockpit
crews, computer hardware and maintenance agreements, and uncollectible accounts;
(iii) $0.4 million in increased aircraft rental costs for small corporate
aircraft used primarily to position crews and aircraft parts; (iv) $0.2 million
in losses on the sale of primarily surplus aircraft parts; and (v) $0.2 million
in reduced hull and liability insurance expenses.
Other operating cost per ASM increased 9.5% to 0.46 cents in the first quarter
of 1998, as compared to 0.42 cents in the same quarter of 1997.
Interest Income and Expense. Interest expense in the first quarter of 1998
increased 106.3% to $3.3 million, as compared to $1.6 million in the same period
of 1997. The increase in interest expense between periods was primarily due to
changes in the Company's capital structure resulting from the two financings
completed on July 24, 1997, at which time the Company (i) sold $100.0 million
principal amount of 10.5% unsecured seven-year notes, and (ii) entered into a
new $50.0 million secured revolving credit facility, thereby replacing the
former secured revolving credit facility of $122.0 million.
The capital structure of the Company, prior to completing these new financings,
provided for borrowings under the former credit facility to be constantly
adjusted to meet the expected cash flow requirements of the Company, thereby
minimizing the level of borrowings on which interest would be paid. Under the
new capital structure of the Company, the borrowings under the 10.5% notes
remain fixed at $100.0 million without regard to actual cash requirements at any
point in time. During the first quarter of 1998, the weighted average borrowings
were approximately $153.0 million, as compared to $85.6 million in the first
quarter of 1997.
The weighted average effective interest rate applicable to the Company's
borrowings in the first quarter of 1998 was 8.51%, as compared to 7.54% in the
same period of 1997. The increase in the weighted average effective interest
rates between years was primarily due to the 10.5% interest rate applicable to
the $100.0 million in unsecured notes issued on July 24, 1997, which was higher
than the average interest rate which was applicable to borrowings under the
former credit facility.
In order to minimize the interest expense impact of the $100.0 million of 10.5%
unsecured notes, the Company invested excess cash balances in short-term
government securities and commercial paper and thereby earned $1.0 million in
interest income in the first quarter of 1998, an increase of 900.0% over
interest income of $0.1 million earned in the same quarter of 1997.
<PAGE>
Income Tax Expense
In the first quarter of 1998, the Company recorded $8.9 million in income tax
expense applicable to $21.3 million of pre-tax income for that year, while in
the first quarter of 1997 income tax expense of $3.1 million was recognized
pertaining to $6.3 million in pre-tax income. The effective tax rate applicable
to the first quarter of 1998 was 41.7%, while the effective tax rate applicable
to the first quarter of 1997 was 49.0%.
Income tax expense and credits in both periods were significantly affected by
the permanent non-deductibility for federal income tax purposes of a percentage
of amounts paid for crew per diem (45% in 1998 and 50% in 1997). The effect of
this permanent difference on the effective income tax rate for financial
accounting purposes becomes more pronounced in cases where before-tax income
approaches zero, which was the primary reason for the higher effective tax rate
in the 1997 first quarter.
Liquidity and Capital Resources
Cash Flows. The Company has historically financed its working capital and
capital expenditure requirements from cash flow from operations and long-term
borrowings from banks and other lenders. As described further below, in the
third quarter of 1997 the Company completed two separate financings designed to
lengthen the maturity of its long-term debt and diversify its credit sources,
including the issuance of unsecured notes and a revolving credit facility that
had an extended maturity, lower interest rate and less restrictive covenants
than the former credit facility.
In the first quarters of 1998 and 1997, net cash provided by operating
activities was $43.9 million and $20.6 million, respectively. The increase in
cash provided by operating activities between quarters was attributable to such
factors as increased earnings, growth in scheduled service air traffic liability
associated with advanced ticket sales, and other factors.
Net cash used in investing activities was $29.6 million and $26.0 million,
respectively, for the first quarters of 1998 and 1997. Such amounts primarily
included capital expenditures totaling $26.9 million in the first quarter of
1998 and $20.4 million in the same period of 1997 for engine overhauls, airframe
improvements and the purchase of rotable parts.
Net cash used in financing activities was $9.6 million and $2.1 million,
respectively, for the first quarters of 1998 and 1997. Debt repayments in the
1998 period included $4.8 million to repay a short-term note issued in
connection with the purchase of a Boeing 727-200 aircraft in December 1997, plus
$4.8 million in other scheduled debt repayments.
Aircraft and Fleet Transactions. In November 1994, the Company signed a purchase
agreement for six new Boeing 757-200s which, as subsequently amended, now
provides for seven total aircraft to be delivered between late 1995 and late
1998. In conjunction with the Boeing purchase agreement, the Company entered
into a separate agreement with Rolls-Royce Commercial Aero Engines Limited for
15 RB211-535E4 engines to power the seven Boeing 757-200 aircraft and to provide
one spare engine. Under the Rolls-Royce agreement, which became effective
January 1, 1995, Rolls-Royce has provided the Company various spare parts
credits and engine overhaul cost guarantees. If the Company does not take
delivery of the engines, a prorated amount of the credits that have been used
are required to be refunded to Rolls-Royce. The aggregate purchase price under
these two agreements is approximately $50.0 million per aircraft, subject to
escalation. The Company accepted delivery of the first five aircraft under these
agreements in September and December 1995, November and December 1996, and
November 1997, all of which were financed under leases accounted for as
operating leases. The final two deliveries under this agreement are scheduled
for July 1998 and December 1998. Advanced payments totaling approximately $12.6
million ($6.3 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, 1998 and 1997 the Company had recorded $11.0 million and $5.9 million,
respectively, in advanced payments applicable to aircraft scheduled for future
delivery. The Company intends to finance the remaining two deliveries under this
agreement through sale/leaseback transactions accounted for as operating leases.
The Company purchased an additional Rolls-Royce-powered Boeing 757-200 aircraft
from an aircraft lessor in September 1997, financing this purchase through a
payment of cash and the issuance of a $30.7 million note which, as amended,
matures on July 15, 1999. The note requires monthly payments of $400,000 in
principal and interest from October 15, 1997 through June 15, 1999, with the
balance due at maturity. The Company currently intends to sell this aircraft and
repay this note, subject to a short-term rental agreement under which the
aircraft would continue to be operated by the Company.
In the second quarter of 1996, the Company purchased a Boeing 727-200 aircraft
which had been previously financed by the Company through a lease accounted for
as an operating lease. This aircraft was financed through a separate bridge debt
facility until the completion of a sale/leaseback transaction during the third
quarter of 1997. In the fourth quarter of 1997, the Company purchased an
additional Boeing 727-200 aircraft which had been previously financed by the
Company through a lease accounted for as an operating lease, financing this
purchase through the issuance of a short-term note and a payment of cash. The
Company currently expects to finance this aircraft through a sale/leaseback
transaction accounted for as an operating lease in 1998.
Issuance of Unsecured Notes. On July 24, 1997, the Company completed two
separate financings designed to lengthen the maturity of the Company's long-term
debt and diversify its credit sources. On that date, the Company (i) sold $100.0
million principal amount of unsecured seven-year notes in a private offering
under Rule 144A, and (ii) entered into a new secured revolving credit facility.
The Company subsequently completed an exchange offer to holders of the unsecured
seven-year notes in January 1998, under which offer those notes issued in the
original private offering could be tendered in exchange for fully registered
notes of equal value.
The unsecured senior notes mature on August 1, 2004. Each note bears interest at
the annual rate of 10.5%, payable on February 1 and August 1 of each year
beginning February 1, 1998. The notes rank pari passu with all unsecured,
unsubordinated indebtedness of the Company existing now or created in the
future, are effectively subordinated to the Company's obligations under secured
indebtedness to the extent of such security, and will be senior to any
subordinated indebtedness of the Company created in the future. All payments of
interest and principal are unconditionally guaranteed on an unsecured,
unsubordinated basis, jointly and severally, by each of the active subsidiaries
of the Company. The Company may redeem the notes, in whole or in part, at any
time on or after August 1, 2002, initially at 105.25% of their principal amount
plus accrued interest, declining ratably to 100.0% of their principal amount
plus accrued interest at maturity. At any time prior to August 1, 2000, the
Company may redeem up to 35.0% of the original aggregate principal amount of the
notes with the proceeds of sales of common stock, at a redemption price of
110.5% of their principal amount (plus accrued interest), provided that at least
$65.0 million in aggregate principal amount of the notes remains outstanding
after such redemption. The notes are subject to covenants for the benefit of the
note holders, including, among other things, limitations on: (i) the incurrence
of additional indebtedness; (ii) the making of certain restricted payments;
(iii) the creation of consensual restrictions on the payment of dividends and
other payments by certain subsidiaries; (iv) the issuance and sale of capital
stock by certain subsidiaries; (v) the issuance of guarantees by certain
subsidiaries; (vi) certain transactions with shareholders and affiliates; (vii)
the creation of liens on certain assets or properties; (viii) certain types of
sale/leaseback transactions; and (ix) certain sales, transfers or other
dispositions of assets.
The net proceeds of the unsecured notes were approximately $96.9 million, after
application of costs and fees of issuance. The Company used a portion of the net
proceeds to repay in full the Company's prior bank facility and will use the
balance of the proceeds for general corporate purposes, which may include the
purchase of additional aircraft and/or the refinancing of existing leased
aircraft.
Credit Facilities. Concurrently with the issuance of the unsecured notes, on
July 24, 1997, the Company entered into a new $50.0 million revolving credit
facility that includes up to $25.0 million for stand-by letters of credit. ATA
is the borrower under the new credit facility, which is guaranteed by the
Company and each of the Company's other active subsidiaries. The principal
amount of the new facility matures on April 1, 2001, and borrowings are secured
by certain Lockheed L-1011 aircraft and engines. The loan-to-value ratio for
collateral securing the new facility may not exceed 75% at any time. Borrowings
under the new facility bear interest, at the option of ATA, at either (i) LIBOR
plus 1.50% to 2.50% (depending upon certain financial ratios); or (ii) the agent
bank's prime rate plus 0.0% to 0.5% (depending upon certain financial ratios).
The facility contains various covenants including, among other things: (i)
limitations on incurrence of debt and liens on assets; (ii) limitations on
capital expenditures; (iii) restrictions on payment of dividends and other
distributions to stockholders; (iv) limitations on mergers and the sale of
assets; (v) restrictions on the prepayment or redemption of certain
indebtedness, including the 10.5% notes; and (vi) maintenance of certain
financial ratios such as minimum tangible net worth, cash-flow-to-interest
expense and aircraft rentals and total adjusted liabilities to tangible net
worth.
As of March 31, 1998, the Company had borrowed $30.0 million against its
existing credit facility, all of which was repaid on April 1, 1998. As of March
31, 1997, the Company had borrowed $115.0 million against its existing credit
facility, of which $60.0 million was repaid on April 1, 1997.
The Company also maintains a $5.0 million revolving credit facility 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, 1998 and 1997; however, the Company did have outstanding letters of credit
secured by this facility aggregating $3.5 million and $4.0 million,
respectively. No amounts had been drawn against letters of credit at March 31,
1998 or 1997.
Assets Held For Sale. At March 31, 1998 the Company had classified $7.2 million
in net book value of two spare Pratt & Whitney engines as Assets Held for Sale
in the accompanying balance sheet. In July 1997, the Company sold two similar
spare Pratt & Whitney engines, and during the first quarter of 1998 also sold
related Pratt & Whitney parts and materials, neither of which sale resulted in a
material gain or loss. The net book value of the two remaining spare engines
approximates fair market value, and the Company continues to market these
engines to users of the Pratt & Whitney power plants.
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. Between 1994
and 1996, the Company repurchased 185,000 shares of common stock under this
program. No shares were repurchased during 1997 or the first quarter of 1998.
Subsequent Aircraft Purchase Commitments and Options. The Company has signed
purchase agreements to acquire 11 Boeing 727-200ADV aircraft at agreed prices.
Nine of these aircraft are currently leased by the Company. The other two
aircraft, currently on lease to another airline, may be purchased in either
February, August or October 1999, depending upon the exercise of lease extension
options available to the current lessee. The Company currently intends to
install engine hushkits on these Boeing 727-200 aircraft in order to meet
federal Stage 3 noise regulations for its fleet by December 31, 1999.
The Company has entered into a letter of intent to acquire up to five Lockheed
L-1011-500 aircraft for delivery between late 1998 and late 1999. If the terms
of the letter of intent are satisfied, these additional wide-body aircraft may
be used in both commercial and military charter business units to serve market
opportunities in Asia, South America and Europe.
Year 2000
Until recently many computer programs were written to store only two digits of
year-related date information in order to make the storage and manipulation of
such data more efficient. Programs which use two digit date fields, however, may
not be able to distinguish between such years as 1900 and 2000. In some
circumstances this date limitation could result in system failures or
miscalculations, potentially causing disruptions of business processes or system
operations. The date field limitation is frequently referred to as the "Year
2000 Problem."
In the fourth quarter of 1997 the Company initiated a Year 2000 Project to
address this issue. During the first quarter of 1998 the Company inventoried its
internal computer systems, facilities infrastructure, aircraft components and
other hardware, and completed a year 2000 risk assessment for these items. The
Company also began active participation on the Year 2000 Committee of the Air
Transport Association, an airline industry trade association. This committee
represents most major U.S. airlines and is evaluating the year 2000 readiness of
federal, state and local governments to provide reliable operations for airports
and air traffic control systems beyond December 1999.
Renovation, testing and implementation of systems for year 2000 readiness is now
in progress and will be ongoing through the end of 1999. Renovation of systems
will include several different strategies such as the conversion, replacement,
upgrade or elimination of selected hardware platforms, applications, operating
systems, databases, purchased packages, utilities and internal and external
interfaces. The Company plans to use both internal and external consulting
resources to complete these modifications.
Based upon all data currently available to the Company, it presently estimates
that the total cost of meeting year 2000 standards, including computer and
facilities infrastructure, aircraft and airports, will range between $6.0 and
$8.0 million. Such estimated cost includes approximately $4.0 million in
expenditures to acquire new software and hardware to replace non-compliant
computer devices, as well as from $2.0 to $4.0 million in labor and related
expenses to perform all year 2000 project work to insure the readiness of
remaining computer devices for operation after 1999. The range of labor cost
estimates between $2.0 and $4.0 million is due to the different costs of
internal and external labor needed to perform this work, as well as the
potential increase in all technology labor costs due to year 2000-related skills
shortages which may occur before the end of 1999. Approximately 40% of the
aforementioned costs are related to already budgeted 1998 systems upgrade or
replacement projects which are being pursued for reasons other than year 2000
compliance, however, year 2000 compliance will be one of the by-products. It is
possible that the Company will determine that additional costs beyond those
estimated above will be required to complete all year 2000 activities as testing
and implementation proceeds through the end of 1999. The Company expects to
incur most of these costs during 1998 and 1999, with no significant portion of
these costs having been incurred in 1997.
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes forward-looking information which
can be identified by forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "anticipates," or the negative thereof, or other
variations in comparable terminology. Such forward-looking information is based
upon management's current knowledge of factors affecting the Company's business.
The differences between expected outcomes and actual results can be material,
depending upon the circumstances. Therefore, where the Company expresses an
expectation or belief as to future results in any forward-looking information,
such expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but the Company can provide no assurance that the statement of
expectation or belief will result or will be achieved or accomplished.
The Company has identified the following important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by the Company.
1. The Company's capital structure is subject to significant financial leverage,
which could impair the Company's ability to obtain new or additional financing
for working capital and capital expenditures, could increase the Company's
vulnerability to a sustained economic downturn and could restrict the Company's
ability to take advantage of new business opportunities or limit the Company's
flexibility to respond to changing business conditions.
2. 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.
3. As previously disclosed by the Company, possible business combinations with
other entities have been considered. The Company intends to continue to evaluate
such potential combinations. It is possible that the Company will enter into a
transaction in the future that would result in a merger or other change in
control of the Company. The Company's current credit facility and certain
unsecured term debt may be accelerated upon such a merger or consolidation. In
some circumstances, this acceleration could limit potential business
combinations.
4. 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.
5. The vast majority of the Company's scheduled service and commercial charter
business, other than U.S. military, is leisure travel. Since leisure travel is
largely discretionary spending on the part of the Company's customers, the
Company's results of operations can be adversely affected by economic conditions
which reduce discretionary purchases.
6. The Company is subject to the risk that one or more customers who have
contracted with the Company will cancel or default on such contracts and that
the Company might be unable in such circumstances to obtain other business to
replace the resulting loss in revenues. The Company's largest single customer is
the U.S. military, which accounted for approximately 14.4% and 15.8%,
respectively, of consolidated revenues in the first quarters of 1998 and 1997.
No other single customer of the Company accounts for more than 10% of operating
revenues.
7. More than 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.
8. The Company's airline businesses are significantly affected by seasonal
factors. Typically, the Company experiences reduced demand for leisure travel
during the second and fourth quarters of each year. In recent years, the Company
has experienced its most robust demand in the first and third quarters. As a
result, the Company's results of operations for any single quarter are not
necessarily indicative of the Company's annual results of operations.
9. The airline industry as a whole, and scheduled service in particular, is
characterized by high fixed costs of operation. The high fixed cost of operating
a flight does not vary significantly with the number of passengers carried, and
therefore the revenue impact of a small increase or decrease in average
passenger load factor could, in the aggregate, have a significant effect on the
profitability of those flights. Accordingly, a relatively minor shortfall in
scheduled service load factor and associated revenue could have a material
adverse effect on the Company.
10. The Company faces intense competition from other airlines in many of its
scheduled service markets, including other low-fare airlines. The future actions
of existing and potential competitors in all of the Company's scheduled service
markets, including changes in prices and seat capacity offered, could have a
material effect on the profit performance of this business unit.
11. Jet fuel comprises a significant percentage of the total operating expenses
of the Company, accounting for 17.9% and 21.8%, respectively, of operating
expenses in the first quarters of 1998 and 1997. Fuel prices are subject to
factors which are beyond the control of the Company, such as market supply and
demand conditions, and political or economic factors. Although the Company is
able to contractually pass through some fuel price increases to the U.S.
military and tour operators, a significant increase in fuel prices could have a
material adverse effect on the demand for the Company's services at profitable
prices.
12. In June 1991, the Company's flight attendants elected the Association of
Flight Attendants as their representative and ratified a four-year collective
bargaining agreement in December 1994. In June 1993, the Company's cockpit crews
elected the International Brotherhood of Teamsters as their representative and
ratified a four-year collective bargaining agreement in September 1996. The
Company believes that its relations with employee groups are good. However, the
existence of a significant labor dispute with any sizeable group of employees
could have a material adverse effect on the Company's operations.
13. The Company is subject to regulation under the jurisdictions of the
Department of Transportation ("DOT") and the Federal Aviation Administration
("FAA") and by certain other governmental agencies, such as the Federal
Communications Commission, the Commerce Department, the Customs Service, the
Immigration and Naturalization Service, the Animal and Plant Inspection Service
of the Department of Agriculture, and the Environmental Protection Agency. These
agencies propose and issue regulations from time to time which can significantly
increase the cost of airline operations. For example, the FAA in recent years
has issued a number of aircraft maintenance directives and other regulations
requiring action by the Company on such matters as collision avoidance systems,
airborne wind shear avoidance systems, noise abatement, airworthiness of aging
aircraft and increased inspection requirements. Other laws and regulations have
been considered from time to time that would prohibit or restrict the ownership
and/or transfer of airline routes and takeoff or landing slots at certain
airports. The Company cannot predict the nature of future changes in laws or
regulations to which it may become subject, and such laws and regulations could
have a material adverse effect on the financial condition of the Company.
14. In 1981, the Company was granted a Certificate of Public Convenience and
Necessity by the DOT pursuant to Section 401 of the Federal Aviation Act
authorizing it to engage in air transportation. The FAA further requires the
Company to obtain an operating certificate and operations specifications
authorizing the Company to fly to specific airports using specific equipment.
All of the Company's aircraft must also maintain certificates of airworthiness
issued by the FAA. The Company holds an FAA air operating certificate under Part
121 of the Federal Aviation Regulations. The Company believes that it is in
compliance with all requirements necessary to maintain in good standing its
operating authority granted by the DOT and its air carrier operating certificate
issued by the FAA. A modification, suspension or revocation of any of the
Company's DOT or FAA authorizations or certificates could have a material
adverse effect on the Company.
15. Under current DOT regulations with respect to charter transportation
originating in the United States, all charter airline tickets must generally be
paid for in cash, and all funds received from the sale of charter seats (and in
some cases ground arrangements) must be placed into escrow by the tour operator
or be protected by a surety bond meeting prescribed standards. The Company
currently provides an unlimited third-party bond in order to meet these
regulations. The issuer of the bond has the right to terminate the bond on 30
days' notice. If this bond were to be materially limited or canceled, the
Company would be required to escrow funds to comply with DOT regulations, which
could materially reduce the Company's liquidity and require it to fund higher
levels of working capital.
16. The Company is currently preparing its software systems and hardware
components for operational compliance with year 2000 standards. The Company
believes, based upon its assessment of year 2000 readiness, that it has
developed a year 2000 project plan which, if successfully completed, will
mitigate all significant risks of business and operational disruption arising
from non-compliant computer components. Successful completion of this plan is
dependent upon the availability to the Company of a wide range of technical
skills from both internal and external sources, and is also dependent upon the
availability of purchased software and hardware components. The Company cannot
be assured that such resources and components can be acquired in the quantities
needed, or by the times needed, to successfully complete the year 2000 project
plan, in which case it is possible that the Company could suffer serious
disruptions to business processes and operations as a consequence of system
failures attributable to the year 2000 problem. Such disruptions could impair
the Company's ability to operate its flight schedule, and could impose
significant economic penalties on the Company by increasing the cost of
operations through the temporary loss of efficiencies provided by computer
software and hardware.
In addition, the Company cannot be assured that domestic and foreign air
transportation infrastructure, such as airports and air traffic control systems,
will be fully compliant with year 2000 requirements by the end of 1999. A
significant lack of readiness of the air transportation infrastructure to meet
year 2000 standards could result in a material adverse effect on the Company's
results of operations and financial condition by imposing serious limitations on
the Company's ability to operate its flight schedule.
17. The Company is subject to potential financial losses which may be incurred
in the event of an aircraft accident, including the repair or replacement of a
damaged aircraft and its subsequent loss from service, and the potential claims
of injured passengers and others. Under DOT regulations, the Company maintains
liability insurance on all aircraft. Although the Company currently believes
that its insurance coverage is adequate, there can be no assurance that the
amount of such coverage will be sufficient or that the Company will not be
required to bear substantial financial losses from an accident. Substantial
claims from such an accident could result in a material adverse change in the
Company's financial position and could seriously inhibit customer acceptance of
the Company's services.
<PAGE>
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 14, 1998 John P. Tague
President and Chief Executive Officer
Director
Date May 14, 1998 James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date May 14, 1998 Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
Date May 14, 1998 Dalen D. Thomas
Senior Vice President, Sales, Marketing and Strategic
Planning
Director
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