United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the Transition Period From to
Commission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
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(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,645,529 shares as of February 28, 1998.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran, Inc. and Subsidiaries' Proxy Statement dated April 3,
1998, are incorporated by reference into Part III.
<TABLE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 1997
AMTRAN INC. AND SUBSIDIARIES
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Page #
PART I
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Item 1. Business............................................................................................3
Item 2. Properties.........................................................................................18
Item 3. Legal Proceedings..................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders................................................20
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.......................20
Item 6. Selected Consolidated Financial Data...............................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............22
Item 8 Financial Statements and Supplementary Data........................................................52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............68
PART III
Item 10. Directors and Officers of the Registrant...........................................................69
Item 11. Executive Compensation.............................................................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................69
Item 13. Certain Relationships and Related Transactions.....................................................69
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................70
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<PAGE>
PART I
Item 1. Business
General
Amtran, Inc. (the "Company") 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 in operation for 24 years and currently
operates the eleventh largest airline in the United States in
terms of 1997 revenue passenger miles ("RPMs"). The Company
provides charter services throughout the world to independent
tour operators, corporations and the U.S. military, and also
provides scheduled service primarily from its gateway cities of
Chicago-Midway, Indianapolis and Milwaukee to popular vacation
destinations such as Hawaii, Las Vegas, Florida, California,
Mexico and the Caribbean.
Charter Service
The Company is the largest charter airline in the United States
and provides charter airline services throughout the world to
U.S., South American and European tour operators, U.S. military
and government agencies and corporations. In 1997 and 1996, the
Company derived approximately 45.9% and 41.4%, respectively, of
consolidated revenues from charter operations. The charter
business is an attractive niche for the Company because it
provides contractual revenues which are generally more stable
than revenues provided by scheduled service. The customer
generally pays a fixed price for the use of the aircraft and
assumes the responsibility and risk for the actual sale of the
seats, as well as most of the risk of fuel price increases.
Tour Operator Programs
Independent tour operators comprise the largest component of the
Company's charter service operations, representing approximately
29.1% and 30.2%, respectively, of consolidated revenues for 1997
and 1996. Independent tour operators typically contract with the
Company to provide repetitive, round-trip patterns to leisure
destinations for specified periods ranging from several weeks to
several years. The Company believes that its long-standing
relationships with tour operators provide it with a competitive
advantage.
Military/Government
The Company's U.S. military and other government flight
operations comprised approximately 16.8% and 11.2%,
respectively, of consolidated revenues for 1997 and 1996. The
Company has provided charter service to the U.S. military since
1983. Because this business is generally less seasonal than
leisure travel, it tends to have a stabilizing impact on the
Company's operations and earnings. The U.S. government awards
one-year contracts for its military charter business and
pre-negotiates contract prices for each type of aircraft a
carrier makes available. Such contracts are priced utilizing the
participating airlines' average costs, and are therefore more
profitable for low-cost providers such as the Company. The
Company believes its fleet of aircraft, in particular its Boeing
757-200ERs, is well suited for the current requirements of
military passenger service.
Scheduled Service
The Company provides scheduled service primarily from its
gateway cities of Chicago-Midway, Indianapolis and Milwaukee to
popular vacation destinations such as Hawaii, Las Vegas,
Florida, California, Mexico and the Caribbean. In its scheduled
service operations, the Company focuses primarily on providing
low-cost, nonstop or direct flights on routes where it can be a
principal provider. For the 12 months ended September 30, 1997,
based on Department of Transportation ("DOT") statistics, the
Company had the lowest operating cost per available seat mile
("ASM"), approximately 6(cent), of the 11 largest U.S. scheduled
airlines. Notwithstanding the Company's competitive cost
position and business focus, the Company began to incur losses
in its scheduled service in late 1995. In response to these
losses, the Company, as part of the 1996 restructuring described
below, reduced its scheduled service by more than one-third of
its departures and ASMs. The Company's scheduled service
operations comprised 47.5% and 51.5%, respectively, of
consolidated revenues in 1997 and 1996. The 1996 restructuring
strengthened the Company's competitive position for scheduled
service by improving both load factors and yields in these
operations. The Company has substantially improved the
profitability of the scheduled service business in 1997 as
compared to 1996, and has selectively expanded its scheduled
service during 1997.
Strategy
The Company intends to enhance its position as a leading
provider to independent tour operators, the U.S. military and of
targeted scheduled airline services by pursuing a strategy
designed to increase revenues and profitability. The key
components of this strategy are:
(i) Maintain Low-Cost Position. The Company has one of the
lowest operating costs per ASM in the industry, with an average
cost per ASM of approximately 6(cent) for the fiscal years ended
December 31, 1997 and 1996. The Company believes that its
low-cost structure provides a significant competitive advantage,
which allows it to operate profitably while selling highly
competitive fares in both the charter and scheduled service
markets. The Company has achieved its low-cost position
primarily as a result of its route structure, low overhead and
distribution costs, productive and flexible work force and low
aircraft rental and ownership costs.
(ii) Strengthen Leading Position with Tour Operators. The
Company has successfully operated in the charter service
business since 1981, and it expects to continue to enhance its
leading position in this business. By offering low-cost air
travel products that can be tailored to meet the particular
needs of its customers, primarily the tour operators, the
Company believes it is able to differentiate itself from most
major airlines, whose principal focus is on scheduled service,
as well as from smaller charter airlines, which do not have
comparably diverse fleets or the ability to provide a similar
level of customer support. In addition to its low cost, the
Company believes that its product quality, reputation,
long-standing relationships and ability to deliver a customized
service have become increasingly important to tour operators.
(iii) Maintain Leading Position as a Provider to the U.S.
Military. The Company has a long history of serving the
military. The Company believes that its contractor teaming
arrangement and its long-range fleet of Boeing 757-200 aircraft
will allow it to maintain a strong competitive position for
acquiring and servicing current and future military charter
contracts.
(iv) Selectively Participate in Scheduled Service. The Company's
strategy for its scheduled service is to focus primarily on
providing low-cost, nonstop or direct 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 give it a competitive
advantage in the Chicago-Midway market, which accounted for
approximately 41.5% of scheduled service passengers boarded in
1997. Unlike the aircraft used by most of the Company's
competitors at Chicago-Midway, these aircraft can fly larger
passenger capacities substantially longer distances while
operating from the airport's short runways. In Indianapolis, the
Company has a name recognition advantage by being the city's
hometown airline. In the Milwaukee market, the Company is the
only low-cost scheduled alternative. The Company has announced
the addition of nonstop Dallas/Ft. Worth, San Juan and Denver
service from its Chicago-Midway complex beginning in May 1998,
and by June 1998 the Company expects to operate more than 50
daily departures from Chicago-Midway.
(v) Capitalize on Selected Growth Opportunities. The Company
seeks to increase revenues and profitability by capitalizing on
selected growth opportunities in its core businesses. The
Company believes that, as a result of its low-cost structure and
its strong relationships with tour operators and military
contractors, it is well positioned to capture additional
opportunities to serve these markets. The Company intends to
purchase or lease additional aircraft to meet demand from its
military and tour operator charter customers, and potentially to
expand scheduled service. In addition, at various times since
the second quarter of 1996, the Company has actively considered
possible business combinations with other air carriers and other
providers of airline-related services. The Company intends to
continue to evaluate such transactions.
1996 Restructuring of Scheduled Service Operations
An analysis by the Company in 1996 of the profitability of its
scheduled service and charter service business units revealed
that a significant number of scheduled service markets being
served by the Company had become unprofitable at that point in
time. This analysis also showed that the Company's charter
operations were generally profitable during the same periods,
although results from these operations were also adversely
affected by many of the factors that affected scheduled service.
The Company believes that several key factors contributed to the
deterioration of profitability of scheduled service over this
time period. Beginning in January 1996, a growing amount of
low-fare competition entered the Boston-Florida and
midwest-Florida markets, which increased total capacity in these
markets and decreased the average fares earned by the Company.
Operating revenues in all scheduled service markets were further
adversely affected by the ValuJet accident in Florida on May 11,
1996. This event focused significant negative media attention on
airline safety, and on low-fare carriers in particular. In spite
of the Company's excellent safety record, having had no serious
injuries or fatalities since its inception, the Company
estimates that it lost significant scheduled service revenues in
the second and third quarters of 1996 from canceled reservations
and reservations which were never received. Additionally,
effective October 1, 1995, the Company became subject to a
federal excise tax of 4.3(cent) per gallon on jet fuel consumed
in domestic use. During 1996, the market price of jet fuel also
increased significantly as compared to prices paid in comparable
1995 periods, largely due to tight jet fuel inventories relative
to demand throughout this period. See "--Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In August 1996, the Company announced a significant reduction in
scheduled service operations. More than one-third of scheduled
service departures and ASMs were included in this schedule
reduction. The Company eliminated its unprofitable Boston and
intra-Florida operations. The Company also exited, or reduced in
frequency, operations to other selected markets from
Chicago-Midway, Indianapolis and Milwaukee. Exited operations
were phased out over a three-month period ending December 2,
1996. The Company believes this process strengthened its
competitive position and improved both load factors and yields
in its remaining scheduled service operations. The Company has
substantially improved the profitability of these operations in
1997 as compared to 1996.
Based upon the improved financial performance of scheduled
service in 1997 the Company added new service in June between
New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis and St. Petersburg, and also added
several frequencies between the midwest and the west coast for
the summer season. New York service to Chicago-Midway and St.
Petersburg was retained for the 1997-98 winter season. New
nonstop service between Chicago-Midway and Dallas-Ft. Worth,
Denver and San Juan have been announced beginning in May 1998.
In addition, the Company's application for slots at New York's
La Guardia Airport are currently pending with the DOT which, if
approved, the Company intends to use for daily frequencies to
Chicago-Midway. The Company estimates that these additions to
scheduled service will result in flying approximately 22% more
scheduled service ASMs in 1998 than in 1997. In order to operate
this expanded schedule, several narrow-body aircraft have been
reallocated from charter operations and full-time equivalent
employees were increased by approximately 10% as of the fourth
quarter of 1997, as compared to the fourth quarter of 1996.
Background of the Company
ATA flew its maiden flight on a Boeing 720 between Indianapolis
and Orlando in December 1973. It was certificated as a public
charter carrier in 1981 and as a scheduled air carrier in 1985.
ATA grew from approximately 355 million RPMs in 1982, its first
full year as a public charter carrier, to approximately 9.0
billion RPMs in 1997. In 1973, the Company's fleet consisted of
a single leased Boeing 720. As of December 31, 1997, the
Company's fleet consisted of 45 aircraft. The following table
illustrates the growth of the Company over the past ten years:
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Year Ended December 31,
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1988 1989 1990 1991 1992
(Dollars in millions)
Operating revenues $ 253.9 $ 279.1 $ 371.4 $ 414.0 $ 421.8
Net income (loss) $ 7.0 $ 4.4 $ (2.0) $ 5.6 $ (2.1)
Total assets $ 193.4 $ 238.4 $ 251.8 $ 237.4 $ 239.0
Block hours 42,642 49,222 57,847 60,177 65,583
ASMs (in millions) 4,857 5,374 6,755 7,111 7,521
Employees (at period end) 1,789 2,134 2,310 2,205 2,412
Year Ended December 31,
1993 1994 1995 1996 1997
(Dollars in millions)
Operating revenues $ 467.9 $ 580.5 $ 715.0 $ 750.9 $ 783.2
Net income (loss) $ 3.0 $ 3.5 $ 8.5 $ (26.7) $ 1.6
Total assets $ 269.8 $ 346.3 $ 413.1 $ 369.6 $ 450.9
Block hours 76,542 103,657 126,295 138,114 139,426
ASMs (in millions) 8,232 10,443 12,521 13,296 12,648
Employees (at period end) 3,418 4,136 4,830 4,435 5,012
</TABLE>
Services Offered
The Company generally provides its airline services to its
customers in the form of charter and scheduled service. The
following table provides a summary of the Company's major
revenue sources for the periods indicated:
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Year Ended December 31,
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1993 1994 1995 1996 1997
% of % of % of % of % of
Amount total Amount total Amount total Amount total Amount total
---------------------------------- ---------------------------------- -----------------
(Dollars in millions)
Charter
Tour operator $213.7 45.7% $204.0 35.1% $229.5 32.1% $226.4 30.2% $228.1 29.1%
Military 78.4 16.7% 91.8 15.8% 77.5 10.8% 84.2 11.2% 131.1 16.8%
Total charter 292.1 62.4% 295.8 50.9% 307.0 42.9% 310.6 41.4% 359.2 45.9%
Scheduled service 138.0 29.5% 240.7 41.5% 362.0 50.6% 386.5 51.5% 371.8 47.5%
Other 37.8 8.1% 44.0 7.6% 46.0 6.5% 53.8 7.1% 52.2 6.6%
================================== ================================== =================
Total $467.9 100.0% $580.5 100.0% $715.0 100.0% $750.9 100.0% $783.2 100.0%
================================== ================================== =================
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Charter Sales
As illustrated in the above table, charter sales represented
45.9% of the Company's consolidated revenues for 1997 and 41.4%
for 1996. The Company's principal customers for charter sales
are tour operators, military and government agencies, sponsors
of incentive travel packages and specialty charter customers.
Tour Operator Programs
Sales to tour operators accounted for approximately 29.1% of
consolidated revenues for 1997 and 30.2% for 1996. These leisure
market programs are generally contracted for repetitive,
round-trip patterns, operating over varying periods of time. In
such an arrangement, the tour operator pays a fixed price for
use of the aircraft (which includes the services of the cockpit
crew and flight attendants, together with check-in, baggage
handling, maintenance services, catering and all necessary
aircraft handling services) and assumes responsibility and risk
for the actual sale of the available aircraft seats. Because the
Company has a contract with its customers for each flight or
series of flights, it can, subject to competitive constraints,
structure the terms of each contract to reflect the costs of
providing the specific service, together with an acceptable
return.
In connection with its sales to tour operators, the Company
seeks to minimize its exposure to unexpected changes in operat-
ing costs. Under its contracts with tour operators, the Company
is able to pass through most increases in fuel costs from a
contracted price. Under these contracts, if the fuel increase
causes the tour operator's fuel cost to rise in excess of 10%,
the tour operator has the option of canceling the contract. The
Company is exposed to increases in fuel costs that occur within
14 days of flight time, to all increases associated with its
scheduled service (other than bulk-seat sales) and to increases
affecting any contracts that do not include fuel cost escalation
provisions. See "-- Fuel Price Risk Management."
The Company believes that although price is the principal
competitive criterion for its tour operator programs, product
quality, reputation for reliability and delivery of services
which are customized to specific needs have become increasingly
important to the buyer of this product. Accordingly, as the
Company continues to emphasize the growth and profitability of
this business unit, it will seek to maintain its low-cost
pricing advantage, while differentiating itself from competitors
through the delivery of customized services and the maintenance
of consistent and dependable operations. In this manner, the
Company believes that it will produce significant value for its
tour operator partners by delivering an attractively priced
product which exceeds the leisure traveler's expectations.
Although the Company serves tour operators on a worldwide basis,
its primary customers are U.S.-based and European-based tour
operators. European tour operators accounted for 3.2%, 4.6%,
2.4% and 2.3%, respectively, of consolidated revenues for 1997,
1996, 1995 and 1994. In addition, contracts with most European
tour operators establish prices payable to the Company in U.S.
dollars, thereby reducing the Company's foreign currency risk.
The Company's five largest tour operator customers represented
approximately 16% and 22%, respectively, of the Company's
consolidated revenues for 1997 and 1996, and the ten largest
tour operator customers represented approximately 21% and 30% of
the Company's consolidated revenues for the same periods.
Military/Government
In 1997 and 1996, military/government sales were approximately
16.8% and 11.2%, respectively, of the Company's consolidated
revenues. Traditionally, the Company's focus has been on
short-term "contract expansion" business which is routinely
awarded by the U.S. government based on price and availability
of appropriate aircraft. The U.S. government awards one-year
contracts for its military charter business and pre-negotiates
contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the
participating airlines' average costs and are therefore more
profitable for low-cost providers such as the Company. The
short-term expansion business is awarded pro rata to those
carriers with aircraft availability who have been awarded the
most fixed-award business, and then to any additional carrier
that has aircraft available. The Company's contractor teaming
arrangement with four other cargo airlines significantly
increases the likelihood that the team will receive both
fixed-award and contract expansion business, and increases the
Company's opportunity to provide the passenger portion of such
services because the Company represents all of the team's
passenger transport capacity. See " -- Sales and Marketing."
Military and other government flight activity is expected to
remain a significant factor in the Company's business mix.
Because this business is generally less seasonal than leisure
travel, it tends to have a stabilizing impact on the Company's
operations and earnings. The Company believes its fleet of
aircraft is well suited for the requirements of military
passenger service. Although the military is reducing its troop
deployments at foreign bases, the military still desires to
maintain its schedule frequency to these bases. Therefore, the
military has a need for smaller capacity aircraft possessing
long-range capability, such as the Company's Boeing 757-200ER
aircraft. In 1993, the Company became the first North American
carrier to receive Federal Aviation Administration ("FAA")
certification to operate Boeing 757-200 aircraft with 180-minute
Extended Twin Engine Operation ("ETOPS"). This certification
permits specially equipped Boeing 757-200 aircraft to
participate in long-range missions over water in which the
aircraft may fly up to three hours from the nearest alternate
airport. All of the Company's Boeing 757-200s are so equipped
and certified. The Company believes that this 180-minute ETOPS
capability has enhanced the Company's ability to obtain awards
for certain long-range missions.
The Company is subject to biennial inspections by the military
as a condition of retaining its eligibility to perform military
charter flights. The last such inspection was completed in the
fourth quarter of 1997. As a result of the Company's military
business, it has been required from time to time to meet
operational standards beyond those normally required by the DOT,
FAA, and other government agencies.
Other Charter Services
Incentive Travel Programs. Many corporations offer travel to
leisure destinations or special events as incentive awards for
employees. The Company has historically provided air travel for
many corporate incentive programs. Incentive travel customers
range from national incentive marketing companies to large
corporations that handle their incentive travel programs on an
in-house basis.
The Company believes that its flexibility, fleet diversity and
attention to detail have helped to establish it as one of the
leaders in providing the air portion of incentive travel airline
charter services. Generally, incentive travel operations are a
demanding and highly customized part of the charter airline
business. Incentive travel operations can vary from a single
round-trip flight to an extensive overseas pattern involving
thousands of employees and their families.
Specialty Charters. The Company operates a significant number of
specialty charter flights. These programs are normally
contracted on a single round-trip basis and vary extensively in
nature, from flying university alumni to a football game, to
transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site.
These flights, which are arranged on very short notice based on
aircraft availability, allow the Company to increase aircraft
utilization during off-peak periods.
The Company believes it is able to attract customers for
specialty charter due to its fleet size and diversity of
aircraft. The size and geographic dispersion of the Company's
fleet reduces nonproductive ferry time for aircraft and crews,
resulting in more competitive pricing. The diversity of aircraft
types in its fleet also allows the Company to better match a
customer's particular needs with the type of aircraft best
suited to satisfy those requirements.
Scheduled Service Sales
In scheduled service, the Company markets air travel, as well as
packaged leisure travel products, directly to retail consumers
in selected markets. During 1997 and 1996, scheduled service
provided 47.5% and 51.5%, respectively, of the Company's
consolidated revenues. The Company's strategy for its scheduled
service is to offer low-cost, nonstop or direct flights which
provide convenience and a simplified pricing structure oriented
to the buyer of leisure travel services. The Company focuses
primarily on serving selected leisure destinations from airports
which do not have convenient travel alternatives through other
scheduled airlines, or where there is only limited competition.
The Company's scheduled service operations link the Company's
gateway cities of Chicago-Midway, Indianapolis and Milwaukee
with several popular vacation destinations such as Hawaii, Las
Vegas, California, Mexico, Florida and the Caribbean. In August
1996, the Company announced a significant reduction in scheduled
service operations. More than one-third of scheduled service
departures and ASMs were included in this schedule reduction.
The Company completely eliminated its unprofitable Boston and
intra-Florida operations. The Company also exited, or reduced in
frequency, operations to other selected markets from
Chicago-Midway, Indianapolis and Milwaukee during 1996. As
competitive conditions have improved in 1997, the Company has,
on a selective basis, expanded this business, particularly from
its Chicago-Midway gateway.
Beginning October 27, 1996 the Company implemented a code share
agreement with Chicago Express, Inc., an independent commuter
airline. Under this code share agreement, the Company agreed to
purchase a limited number of seats on Chicago Express flights
operating between Chicago-Midway and the cities of Indianapolis
and Milwaukee. As is customary for code share agreements in the
airline industry, the seats purchased by the Company were listed
on major CRS systems as ATA seats, even though the flights were
to be operated by a separate airline. Chicago Express uses
19-seat Jetstream 31 propeller aircraft, which the Company
determined were a more economic alternative to satisfying the
demand in these markets than the use of the Company's own larger
jet aircraft.
Effective April 1, 1997 the Company expanded this relationship
by agreeing to purchase all seats on Jetstream 31 flights
between Chicago-Midway and Indianapolis and Milwaukee, and by
adding similar flights between Chicago-Midway and the cities of
Des Moines, Dayton and Grand Rapids. In October 1997 the Company
added the cities of Lansing and Madison to the flights operated
on its behalf by Chicago Express. In all cases, the Company
purchases all available seats on these flights and markets them
as ATA flights through normal scheduled service distribution
channels.
Included in the Company's scheduled service sales for jet
operations are bulk sales agreements with tour operators. Under
these arrangements, which are very similar to charter sales, the
tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. The portion which the Company retains is sold through
its own scheduled service distribution network. The advantage
for the tour operators is that their product is available for
sale in computer reservations systems ("CRS") and through other
scheduled service distribution channels. Under bulk sales
arrangements, the Company is obligated to provide transportation
to the tour operators' customers even in the event of
non-payment to the Company by the tour operator. To minimize its
exposure under these arrangements, the Company requires bonding
or a security deposit for a significant portion of the contract
price. Bulk seat sales amounted to $71.1 million and $67.3
million in 1997 and 1996, respectively, which represented 9.1%
and 9.0%, respectively, of the Company's consolidated revenues
for such periods.
Other Revenues
In addition to its core charter and scheduled service
businesses, the Company operates several other smaller
businesses that complement its core businesses. For example, the
Company sells ground arrangements (hotels, car rentals and
attractions) through its Ambassadair Travel Club and ATA
Vacations subsidiaries; provides airframe and powerplant
mechanic training through ATA Training Corporation; and provides
helicopter charter services through its ExecuJet subsidiary. In
aggregate, these businesses, together with incidental revenues
associated with charter and scheduled service businesses,
accounted for 6.6% and 7.1%, respectively, of consolidated
revenues in 1997 and 1996.
Sales and Marketing
Charter Sales
Tour Operator Programs. The Company markets its charter services
to tour operators primarily through its own sales force. The
charter sales department's principal office is in Indianapolis,
but it also has offices in Orlando, New York, San Francisco,
Seattle, Boston, Chicago, Detroit and London. Through this sales
force, the Company markets its charter, military and specialty
products. While most of the Company's charter and specialty
products are transacted directly with the end customer, the
Company from time to time will utilize independent brokers to
acquire some contracts.
In general, tour operators either package the Company's flights
with traditional ground components (e.g., hotels, rental cars
and attractions) or sell only the airline passage ("airfare
only"). Tickets on the Company's flights contracted to tour
operators are issued by the tour operator either directly to
passengers or through retail travel agencies. Under current DOT
regulations with respect to charter transportation originating
in the United States, all charter airline tickets must generally
be paid for in cash and all funds received from the sale of
charter seats (and in some cases funds paid for land
arrangements) must be placed into escrow or must be protected by
a surety bond satisfying prescribed standards. Currently, the
Company provides a third-party bond which is unlimited in amount
but restricted in use to the satisfaction of its obligations
under these regulations. Under the terms of its bonding
arrangement, the issuer of the bond has the right to terminate
the bond at any time on 30 days' notice. The Company provides a
$2.5 million letter of credit to secure its potential
obligations to the issuer of the bond. If the bond were to be
materially limited or canceled, the Company, like all other U.S.
charter airlines, would be required to escrow funds to comply
with the DOT requirements summarized above. Compliance with such
requirements would reduce the Company's liquidity and require it
to fund higher levels of working capital ranging up to $13.5
million based upon 1997 peak travel periods. See " --
Regulation."
In general, the Company enters into contracts with tour
operators four to nine months in advance of the commencement of
flight services. Pursuant to these contracts, tour operators,
who may be thinly capitalized, generally are required to pay a
deposit to the Company at the time the contract is executed for
as much as one week's revenue due under the contract (in the
case of recurring pattern contracts), to 10% to 30% of the total
contract price (in the case of non-recurring pattern contracts).
Tour operators are required to pay the remaining balance of the
contract price in full at least two weeks prior to the flight
date. In the event the tour operator fails to make the remaining
payment when due, the Company must either cancel the flight at
least ten days prior to the flight date or, pursuant to DOT
regulations, perform under the contract notwithstanding the
breach by the tour operator. In the event the tour operator
cancels or defaults under the contract with the Company or
otherwise notifies the Company that such tour operator no longer
needs charter service, the Company is entitled to keep
contractually established cancellation fees, which may be more
or less than the deposit. Whether the Company elects to exercise
this right in a particular case will depend upon a number of
factors, including the Company's ability to redeploy the
aircraft, the amount of money on deposit or secured by a letter
of credit, the relationship the Company has with the tour
operator and general market conditions existing at the time. The
Company may choose to renegotiate a contract with a tour
operator from time to time based on market conditions. As part
of any such renegotiation a tour operator may seek to reduce the
per-seat price or the number of flights or seats per flight
which the tour operator is obligated to purchase.
Military/Government. Traditionally, the Company's focus has been
on short-term contract expansion business which is routinely
awarded by the U.S. government based on price and availability
of appropriate aircraft. The short-term expansion business is
awarded pro rata to the carriers with aircraft availability who
have been awarded the most fixed-award business, and then to any
additional carrier that has aircraft available.
Pursuant to the military's fixed-award system, each
participating airline is given certain "mobilization value
points" based on the number and type of aircraft then available
from such airline. A participant may increase the number of its
mobilization value points by teaming up with one or more other
airlines to increase the total number of mobilization value
points of the team. Generally, a charter passenger airline will
seek to team up with one or more cargo airlines and vice versa.
When the military determines its requirements for a contract
year, it determines how much of each particular type of service
it will need (e.g., narrow-body, passenger service). It will
then award each type of business to those carriers or teams that
have committed to make available that type of aircraft and
service, with the carriers or teams with the highest amount of
mobilization value points given a preference. When an award is
made to a team, the charter passenger airline will generally
perform the passenger part of the award and a cargo airline will
perform the cargo part of the award.
In 1992, the Company entered into a contractor teaming
arrangement with four other cargo airlines serving the U.S.
military. The Company currently represents 100% of the passenger
portion of the contractor teaming arrangement. If the Company
used only its own mobilization value points, it would be
entitled to a fixed-award of approximately 1% of total awards
under the system; however, when all of the Company's team
members are taken into account, their portion of the fixed-award
is approximately 34% of total awards under the system. As a
result, the contractor teaming arrangement significantly
increases the likelihood that the team will receive a
fixed-award contract, and, to the extent the award includes
passenger transport, increases the Company's opportunity to
provide such service because the Company represents 100% of the
team's passenger transport capacity. In addition, since the
expansion business awards are correlated with the fixed-award
system, the Company, through its contractor teaming arrangement,
should also receive a greater percentage of the short-term
expansion business. As part of its participation in this
contract teaming arrangement, the Company pays a utilization fee
or commission to the other team members.
Scheduled Service
In scheduled service, the Company markets air travel, as well as
packaged leisure travel products, directly to its customers and
through travel agencies and bulk tour operators in selected
markets. Approximately 74.8% and 71.2% of the Company's
scheduled services were sold by travel agents and bulk tour
operators in 1997 and 1996, respectively, often using computer
reservation systems that have been developed and are controlled
by other airlines. Federal regulations have been promulgated
that are intended to diminish preferential flight schedule
displays and other practices with respect to the reservation
systems that could place the Company and other similar users at
a competitive marketing disadvantage as compared to the airlines
controlling the systems. Travel agents generally receive
commissions based on the price of tickets sold. Accordingly,
airlines compete not only with respect to ticket price but also
with respect to the amount of commissions paid to appointed
agents. Airlines often pay additional commissions to appointed
agents in connection with special revenue programs. The Company
believes that by concentrating its scheduled service operations
in a few selected markets, such as the Company's Chicago-Midway
complex, its marketing and advertising expenditures will be much
more effective. The Company believes this strategy will continue
to strengthen its competitive position and improve both load
factors and yields in its scheduled service operations.
The Company's sales and marketing strategy for scheduled
services has continued to emphasize convenience and simplified
pricing for the leisure traveler. In the summer of 1997, an
electronic ticketing option was implemented which provides
customers with the ability to purchase seats on scheduled
flights using a credit card while eliminating the need to issue
a paper ticket. Also in 1997, the Company became only the fifth
domestic U.S. airline to offer fully interactive capabilities
for customers to purchase tickets electronically via the
internet. In late 1996, the Company introduced convenient coupon
booklets which the customer can purchase in advance for use
throughout the Company's scheduled service system at guaranteed
low fares.
Aircraft Fleet
As of December 31, 1997, the Company was certified to operate a
fleet of 14 Lockheed L-1011s, 24 Boeing 727-200ADVs and 7 Boeing
757-200s. (Jetstream 31 propeller aircraft operated by Chicago
Express are not included on the Company's certificate.)
Lockheed L-1011 Aircraft. The Company's 14 Lockheed L-1011
aircraft are wide-body aircraft, 12 of which have a range of
2,971 nautical miles and 2 of which have a range of 3,425
nautical miles. These aircraft conform to the FAA's Stage 3
noise requirements and have a low ownership cost relative to
other wide-body aircraft types. See " -- Environmental Matters."
As a result, the Company believes these aircraft provide a
competitive advantage when operated on long-range routes, such
as on transatlantic, Caribbean and West Coast-Hawaii routes.
These aircraft have an average age of approximately 23 years. As
of December 31, 1997, 13 of these aircraft were owned by the
Company and one was under an operating lease that expires in
March 2001. Certain of the Lockheed L-1011 aircraft owned by the
Company are subject to mortgages and other security interests
granted in favor of the Company's lenders under its bank credit
facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Credit Facilities."
Boeing 727-200ADV Aircraft. The Company's 24 Boeing 727-200ADV
aircraft are narrow-body aircraft equipped with high thrust,
JT8D-15/-15A/-17/-17A engines and have a range of 2,050 nautical
miles. These aircraft, of which 15 conform to Stage 2 and 9
conform to Stage 3 noise requirements as of December 31, 1997,
have an average age of approximately 18 years. The Company
leases 23 of these aircraft, with initial lease terms that
expire between March 1998 and September 2003, subject to the
Company's right to extend each lease for varying terms. The
Company will be required prior to December 31, 1999 to make
expenditures for engine "hushkits" or to acquire replacement
aircraft so that its entire fleet conforms to Stage 3 noise
requirements in accordance with FAA regulations. The Company
currently plans to install hushkits on six Stage 2 aircraft by
the end of 1998, with the balance of nine Stage 2 aircraft being
converted to Stage 3 in 1999. See "--Environmental Matters".
Boeing 757-200ADV Aircraft. The Company's 7 Boeing 757-200
aircraft are relatively new, narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft, six of
which are leased, have an average age of approximately 3 years
and meet Stage 3 noise requirements. The Company's Boeing
757-200s have higher ownership costs than the Company's Lockheed
L-1011 and Boeing 727-200ADV aircraft, but lower operational
costs. In addition, unlike most other aircraft of similar size,
the Boeing 757-200 has the capacity to operate on extended
flights over water. The leases for the Company's Boeing 757-200
aircraft have initial terms that expire on various dates between
May 2002 and December 2015, subject to the Company's right to
extend each lease for varying terms.
Although Lockheed L-1011 and Boeing 727-200ADV aircraft are
subject to the FAA's Aging Aircraft program, the Company does
not currently expect that its cost of compliance for these
aircraft will be material.
See "-- Regulation."
Flight Operations
Worldwide flight operations are planned and controlled by the
Company's Flight Operations Group operating out of its
facilities located in Indianapolis, Indiana, which are staffed
on a 24-hour basis, seven days a week. Logistical support
necessary for extended operations away from the Company's fixed
bases are coordinated through its global communications network.
The Company's complex operating environment demands a high
degree of skill and flexibility from its Flight Operations
Group.
In order to enhance the reliability of its service, the Company
seeks to maintain at least two spare Lockheed L-1011 and three
spare Boeing 727-200 aircraft at all times. Spare aircraft can
be dispatched on short notice to most locations where a
substitute aircraft is needed for mechanical or other reasons.
These spare aircraft allow the Company to provide to its
customers a dispatch reliability that is hard for an airline of
comparable or smaller size to match.
Maintenance and Support
The Company's Maintenance and Engineering Center is located at
Indianapolis International Airport. This 120,000 square-foot
facility was designed to meet the maintenance needs of the
Company's operations as well as to provide supervision and
control of purchased maintenance services. The Company performs
approximately 75% of its own maintenance work, excluding engine
overhauls and Lockheed L-1011 and Boeing 727-200 heavy airframe
checks.
The Company currently maintains ten permanent maintenance
facilities, including its Indianapolis facility. In addition,
the Company utilizes "road teams," which are dispatched
primarily as charter flight operations require to arrange for
and supervise maintenance services at temporary locations. The
Company also uses road teams to supervise all maintenance not
performed in-house.
The Maintenance and Engineering Center is an FAA-certificated
repair station and has the expertise to perform routine, as well
as non-routine, maintenance on Lockheed L-1011, Boeing 727-200
and Boeing 757-200 aircraft. Capabilities of the Maintenance and
Engineering Center include: (i) airworthiness directive and
service bulletin compliance; (ii) modular teardown and buildup
of Rolls- Royce RB211-22B engines; (iii) non-destructive
testing, including radiographics, x-ray, ultrasound, magnetic
particle and eddy current; (iv) avionics component repair; (v)
on-wing engine testing; (vi) interior modification; (vii) repair
and overhaul of accessories and components, including hydraulic
units and wheel and brake assemblies; and (viii) sheet metal
repair with hot bonding and composite material capabilities. The
Company contracts with third parties for certain engine and
airframe overhaul and other services if the Company does not
have the technical capability or facility capacity, or if such
services can be obtained on a more cost-effective basis from
outside sources.
Fuel Price Risk Management
Most of the Company's contracts with independent tour operators
include fuel price reimbursement clauses. Such clauses generally
state that if the Company's cost of fuel per gallon to perform
the contract meets or exceeds a stated trigger price, fuel costs
in excess of the trigger price are required to be reimbursed to
the Company by the tour operator. Protection under such fuel
escalation provisions is generally limited to those price
increases which occur 14 or more days prior to flight date. Fuel
price increases which occur during the last 14 days prior to
flight date are the responsibility of the Company. In addition,
if the fuel price increase exceeds 10% of the contractual
trigger price, the tour operator generally has the right to
cancel the contract. Tour operator revenues subject to such fuel
price reimbursement clauses represented approximately 29.1% and
30.2%, respectively, of consolidated revenues for 1997 and 1996.
The Company's contract with the U.S. military also includes a
fuel price guarantee, which is incorporated into the
reimbursement rates by aircraft type each contract year. If the
actual cost of fuel consumed is less than the guaranteed price,
the Company is required to reimburse the U.S. military for the
excess revenues received. If the actual cost of fuel consumed is
more than the guaranteed price, the U.S. military reimburses the
Company for the additional costs incurred. In this manner, the
Company is guaranteed to pay the actual cost of fuel up to the
maximum price guaranteed in the contract. This fuel price
guarantee is renegotiated each contract year. Military revenues
subject to the fuel price guarantee represented approximately
16.8% and 11.2%, respectively, of consolidated revenues for 1997
and 1996.
Within the Company's scheduled service business unit are
included bulk seat sales to tour operators. Under these
contracts, which are very similar to tour operator agreements,
the bulk seat contractor may purchase up to 85% of the available
seats on scheduled service flights. Most of these agreements
also provide for fuel escalation reimbursements to be made to
the Company in a manner similar to the tour operator agreements
described above. Scheduled service bulk seat revenues subject to
such fuel price reimbursement clauses represented approximately
9.1% and 9.0%, respectively, of consolidated revenues for 1997
and 1996.
As a result of the fuel reimbursement clauses and guarantees
described above, approximately 54.9% and 50.4%, respectively, of
consolidated revenues in 1997 and 1996 were subject to such fuel
price protection. The Company closely monitors jet fuel spot
prices and crude oil and heating oil futures markets to provide
early indications of potential shifts in jet fuel prices for
timely management review and action. The Company did not engage
in any material fuel hedging activities in 1997 or 1996, but has
begun a hedging program in 1998.
Competition
The Company competes in a number of different markets because it
offers different products and services, and the nature and
intensity of such competition varies from market to market. In
marketing its charter and scheduled airline services, the
Company emphasizes its ability to provide a simplified product
primarily designed to meet the needs of leisure travelers. This
includes offering low fares, nonstop or direct flights from the
customer's city of origin and in-flight services that are
comparable to standard coach service on scheduled airlines. By
offering low-cost air travel products that can be tailored to
meet the specific needs of its customers, particularly
independent tour operators, the Company believes it is able to
differentiate itself from most major scheduled airlines, whose
principal focus is on frequent scheduled service on established
routes, as well as from smaller charter airlines, which often do
not have comparably diverse fleets or the ability to provide
similar support or customization.
In the United States, there are few barriers to entry into the
airline business, apart from the need for certain government
licenses and the availability of aircraft and financing. This is
particularly true for those airlines seeking to operate on a
small scale with limited infrastructure and other support
systems. As a result, the Company may face competition from
start-up airlines in selected markets from time to time. In the
leisure travel market, the Company's principal business, the
competition for airline passengers is significant. The Company
competes with both scheduled and charter airlines, both in the
U.S. and internationally. The Company generally competes on the
basis of price, availability of equipment, quality of service
and convenience.
Competition from Scheduled Airlines
The Company competes against U.S., European and Mexican
scheduled airlines, most of which are significantly larger than
the Company and many of which have greater access to capital
than the Company. These airlines compete for leisure travel
customers in a variety of ways, including wholesaling discounted
seats to tour operators on scheduled flights, promoting
prepackaged tours to travel agents for sale to retail customers
and selling discounted, airfare-only products to the public.
Charter airlines generally have a lower cost structure than most
scheduled airlines. The major scheduled airlines typically incur
higher costs related to aircraft ownership, labor, marketing and
airport facilities, among other items. Because of their cost
structures, the scheduled airlines generally do not compete
directly with charter airlines on a price basis except with a
limited inventory of seats. However, during periods of dramatic
fare cuts by the scheduled airlines, the Company is forced to
compete more broadly against larger numbers of deeply discounted
seats. The scheduled airlines do compete regularly with charter
airlines by selling varying amounts of excess seat capacity to
tour operators and consolidators at discounted bulk rates, and
also selling charter services on a limited basis.
The Company's charter service also competes against the
scheduled airlines on the basis of convenience and quality of
service. As the U.S. scheduled airline industry has
consolidated, the traffic patterns have evolved into what is
commonly referred to as the "hub-and-spoke" system. Partially as
a result of the creation of numerous hub-and-spoke route
systems, many smaller cities are not served by direct or nonstop
flights to leisure destinations, and many secondary leisure
destinations do not receive direct or nonstop service from more
than a few major U.S. cities. The Company, through tour
operators, targets these markets by offering nonstop service to
leisure destinations on a limited-frequency basis designed to
appeal to the leisure traveler and to provide relatively high
load factors. The Company believes that a significant amount of
its charter flights provide attractive leisure nonstop service
to destinations not as conveniently available to passengers
through scheduled airline hub-and-spoke systems.
The Company competes directly with several scheduled airlines on
certain leisure routes, particularly in the Indianapolis,
Milwaukee and Chicago-Midway markets. Although several airlines
serve these markets, the Company historically has been able to
compete successfully for the leisure customer. The Company is
continually evaluating its scheduled service markets for their
future potential in light of competitive conditions.
Competition from Charter Airlines
In addition to competing with major domestic, European and
Mexican scheduled airlines, the Company also faces competition
from charter airlines. In the U.S., the Company competes
primarily with Sun Country and Miami Air, two smaller U.S.
charter airlines. This is the lowest number of domestic charter
carriers competing for this business in many years, a situation
that could promote additional entries into the charter market.
In Europe, the Company competes with large European charter
airlines, several of which are owned by more highly integrated
transportation companies which also own tour operators and
travel agencies or scheduled airlines. To date, the Company has
been able to compete successfully against U.S., Mexican and
European charter airlines.
Insurance
The Company carries types and amounts of insurance customary in
the airline industry, including coverage for public liability,
passenger liability, property damage, aircraft loss or damage,
baggage and cargo liability and worker's compensation. Under the
Company's current insurance policies, it will not be covered by
such insurance were it to fly, without the consent of its
insurance provider, to certain high risk countries. The Company
does not consider the inability to operate into or out of any of
these countries to be a significant limitation on its business.
The Company will support certain U.S. government operations in
areas where its insurance policy does not provide coverage for
losses when the U.S.
government provides replacement insurance coverage.
Employees
As of December 31, 1997, the Company had 5,012 employees,
approximately 1,900 of which were represented under collective
bargaining agreements. In June 1991, the Company's flight
attendants elected the Association of Flight Attendants ("AFA")
as their representative. In December 1994, the flight attendants
ratified a four-year collective agreement. In June 1993, the
Company's cockpit crews elected the International Brotherhood of
Teamsters ("IBT") as their representative. In September 1996, a
four-year collective agreement was ratified by the cockpit
crews.
The Company believes that its relations with its employees are
good. However, the existence of a significant dispute with any
sizeable number of its employees could have a material adverse
effect on the Company's operations and financial condition.
Regulation
The Company is an air carrier subject to the jurisdiction of and
regulation by the DOT and the FAA. The DOT is primarily
responsible for regulating consumer protection and other
economic issues affecting air services and determining a
carrier's fitness to engage in air transportation. In 1981, the
Company was granted by the DOT a Certificate of Public
Convenience and Necessity pursuant to Section 401 of the Federal
Aviation Act authorizing it to engage in air transportation. The
Company is also subject to the jurisdiction of the FAA with
respect to its aircraft maintenance and operations. The FAA
requires each carrier to obtain an operating certificate and
operations specifications authorizing the carrier to fly to
specific airports using specified equipment. All of the
Company's aircraft must also have and maintain certificates of
airworthiness issued by the FAA. The Company holds an FAA air
carrier operating certificate under Part 121 of the Federal
Aviation Regulations.
The Company believes it is in compliance with all requirements
necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate
issued by the FAA. A modification, suspension or revocation of
any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
The FAA has issued a series of Airworthiness Directives under
its "Aging Aircraft" program which are applicable to the
Company's Lockheed L-1011 and Boeing 727-200 aircraft. The
Company does not currently expect the future cost of these
directives to be material.
Several aspects of airline operations are subject to regulation
or oversight by federal agencies other than the DOT and FAA. The
United States Postal Service has jurisdiction over certain
aspects of the transportation of mail and related services
provided by the Company through its cargo affiliate. Labor
relations in the air transportation industry are generally
regulated under the Railway Labor Act, which vests in the
National Mediation Board certain regulatory powers with respect
to disputes between airlines and labor unions arising under
collective bargaining agreements. The Company is subject to the
jurisdiction of the Federal Communications Commission regarding
the utilization of its radio facilities. In addition, the
Immigration and Naturalization Service, the U.S. Customs
Service, and the Animal and Plant Health Inspection Service of
the Department of Agriculture have jurisdiction over inspection
of the Company's aircraft, passengers and cargo to ensure the
Company's compliance with U.S. immigration, customs and import
laws. The Commerce Department also regulates the export and
re-export of the Company's U.S.-manufactured aircraft and
equipment.
In addition to various federal regulations, local governments
and authorities in certain markets have adopted regulations
governing various aspects of aircraft operations, including
noise abatement, curfews and use of airport facilities. Many
U.S. airports have adopted or are considering adopting a
"Passenger Facility Charge" of up to $3.00 generally payable by
each passenger departing from the airport. This charge must be
collected from passengers by transporting air carriers, such as
the Company, and must be remitted to the applicable airport
authority. Airport operators must obtain approval of the FAA
before they may implement a Passenger Facility Charge.
Based upon bilateral aviation agreements between the U.S. and
other nations, and, in the absence of such agreements, comity
and reciprocity principles, the Company, as a charter carrier,
is generally not restricted as to the frequency of its flights
to and from most destinations in Europe. However, these
agreements generally restrict the Company to the carriage of
passengers and cargo on flights which either originate in the
U.S. and terminate in a single European nation, or which
originate in a single European nation and terminate in the U.S.
Proposals for any additional charter service must generally be
specifically approved by the civil aeronautics authorities in
the relevant countries. Approval of such requests is typically
based on considerations of comity and reciprocity and cannot be
guaranteed.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, the Company's aircraft must comply with certain
Stage 3 noise restrictions by certain specified deadlines. These
regulations require that the Company achieve a 75% Stage 3 fleet
by December 31, 1998. In general, the Company would be
prohibited from operating any Stage 2 aircraft after December
31, 1999. As of December 31, 1997, 67% of the Company's fleet
met Stage 3 requirements. The Company expects to meet future
Stage 3 fleet requirements through Boeing 727-200 hushkit
modifications, combined with additional future deliveries of
Stage 3 aircraft.
In addition to the aircraft noise regulations administered by
the FAA, the Environmental Protection Agency ("EPA") regulates
operations, including air carrier operations, which affect the
quality of air in the United States. The Company believes it has
made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke-emissions standards.
The Company maintains on its property in Indiana two underground
storage tanks which contain quantities of de-icing fluid and
emergency generator fuel. These tanks are subject to various EPA
and State of Indiana regulations. The Company believes it is in
substantial compliance with applicable regulatory requirements
with respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses
materials which are regulated as hazardous under federal, state
and local law. The Company maintains programs to protect the
safety of its employees who use these materials and to manage
and dispose of any waste generated by the use of these
materials, and believes that it is in substantial compliance
with all applicable laws and regulations.
Item 2. Properties
The Company leases three adjacent office buildings in
Indianapolis, consisting of approximately 136,000 square feet.
These buildings are located approximately one mile from the
Indianapolis International Airport terminal and are used as
principal business offices and for the operation of the
Indianapolis reservations center.
The Company's Maintenance and Engineering Center is also located
at Indianapolis International Airport. This 120,000 square-foot
facility was designed to meet the base maintenance needs of the
Company's operations, as well as to provide support services for
other maintenance locations. The Indianapolis Maintenance and
Engineering Center is an FAA-certificated repair station and has
the capability to perform routine, as well as non-routine,
maintenance on the Company's aircraft.
In 1998, the Company expects to begin construction of an 80,000
square foot office building immediately adjacent to the
Company's Indianapolis Maintenance and Engineering Center. This
facility will house the Company's Maintenance and Engineering
professional staff and also will serve as a training center for
various groups within the Company.
In 1995, the Company completed the lease of Hangar No. 2 at
Chicago's Midway Airport for an initial lease term of ten years,
subject to two five-year renewal options. The Company has
subsequently completed significant improvements to this leased
property, which is used to support line maintenance for the
Boeing 757-200 and Boeing 727-200 narrow-body fleets.
Also in 1995, the Company relocated and expanded its Chicago
area reservations unit to an 18,700 square-foot facility located
near Chicago's O'Hare Airport. This reservation facility
primarily serves customers in the greater Chicago metropolitan
area in support of the Company's Chicago-Midway scheduled
service operation.
The Company also routinely leases various properties at airports
around the world for use by its passenger service, flight oper-
ations, crews and maintenance staffs. Other properties are also
leased for the use of sales office staff. These properties are
used in support of both scheduled and charter flight operations
at such diverse locations as Baltimore, Boston, Cancun, Chicago,
Cleveland, Dallas/Ft. Worth, Detroit, Ft. Lauderdale, Ft. Myers,
Frankfurt, Honolulu, Indianapolis, Las Vegas, London Gatwick,
Los Angeles, Miami, Milwaukee, Minneapolis, New York, Orlando,
Philadelphia, Phoenix, St. Louis, St. Petersburg, San Francisco,
San Juan and Sarasota.
<PAGE>
At December 31, 1997, the Company was certified to operate a
fleet of 45 aircraft. The following table summarizes the
ownership, lease term (where applicable), standard seating
configuration (all coach), and Stage 2/Stage 3 noise
characteristics of each aircraft operated by the Company as of
the end of 1997.
<TABLE>
<CAPTION>
Aircraft Owned/Leased Lease Expiration Seats Stage
(month/year)
---------------------------------- -------------------- -------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-100 Owned n/a 362 3
Lockheed L-1011-100 Leased 03/2002 362 3
Boeing 727-200ADV Owned n/a 173 2
Boeing 727-200ADV Leased 03/1998 173 2
Boeing 727-200ADV Leased 04/1998 173 2
Boeing 727-200ADV Leased 11/1998 173 2
Boeing 727-200ADV Leased 01/1999 173 3
Boeing 727-200ADV Leased 12/1999 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 12/2001 173 3
Boeing 727-200ADV Leased 03/2002 173 3
Boeing 727-200ADV Leased 05/2002 173 3
Boeing 727-200ADV Leased 08/2002 173 3
Boeing 727-200ADV Leased 09/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 727-200ADV Leased 09/2003 173 3
Boeing 757-28AER Owned n/a 216 3
Boeing 757-2Q8 Leased 05/2002 216 3
Boeing 757-23N Leased 04/2008 216 3
Boeing 757-23N Leased 12/2010 216 3
Boeing 757-23N Leased 06/2014 216 3
Boeing 757-23N Leased 12/2014 216 3
Boeing 757-23N Leased 12/2015 216 3
</TABLE>
<PAGE>
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the
Company arise periodically involving complaints which are normal and
reasonably foreseeable in light of the nature of the Company's
business. The majority of these suits are covered by insurance. In
the opinion of management, the resolution of these claims will not
have a material adverse effect on the business, operating results or
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1997.
Part II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "AMTR." The Company had
327 registered shareholders at December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Market Prices of Common Stock High Low Close
-------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
First quarter 10 7/8 7 8 3/8
Second quarter 9 5/8 7 7/8 8 1/4
Third quarter 8 3/4 6 5/8 8 1/4
Fourth quarter 8 1/2 6 7/8 7 7/8
</TABLE>
No dividends have been paid on the Company's common stock since
becoming publicly held.
<PAGE>
PART II - Continued
Item 6. Selected Consolidated Financial Data - (Unaudited)
The unaudited selected consolidated financial data in this table have
been derived from the consolidated financial statements of the
Company for the respective periods presented. The data should be read
in conjunction with the consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
(In thousands, except per share data and ratios)
-------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 467,909 $ 580,522 $ 715,009 $ 750,851 $ 783,193
Operating expenses 461,289 572,107 697,073 786,907 769,709
Operating income (loss) (1) 6,620 8,415 17,936 (36,056) 13,484
Income (loss) before taxes 3,866 5,879 14,653 (39,581) 6,027
Net income (loss) 3,035 3,486 8,524 (26,674) 1,572
Net income (loss) per share - basic (2) 0.28 0.30 0.74 (2.31) 0.14
Net income (loss) per share - diluted (2) 0.28 0.30 0.74 (2.31) 0.13
Balance Sheet Data:
Property and equipment, net $ 172,244 $ 223,104 $ 240,768 $ 224,540 $ 267,681
Total assets 269,830 346,288 413,137 369,601 450,857
Total debt 79,332 118,106 138,247 149,371 191,804
Shareholders' equity (3) 69,941 72,753 81,185 54,744 56,990
Ratio of total debt to shareholders' equity 1.13 1.62 1.70 2.73 3.37
Ratio of total liabilities to shareholders' equity 2.86 3.76 4.09 5.75 6.91
Selected Operating Statistics for
Consolidated Passenger Services: (4)
Revenue passengers carried (thousands) 2,971.8 4,237.9 5,368.2 5,680.5 5,307.4
Revenue passenger miles (millions) 5,593.5 7,158.8 8,907.7 9,172.4 8,986.0
Available seat miles (millions) 8,232.5 10,443.1 12,521.4 13,295.5 12,647.7
Passenger load factor 67.9% 68.6% 71.1% 69.0% 71.0%
</TABLE>
(1) The Company has reclassified gain (loss) on the sale of
operating assets for 1993-1995 from non-operating gain (loss)
to operating income (loss) to be consistent with the 1996-1997
presentation. Also, in the third quarter of 1996 the Company
recorded a $4.7 million loss on the disposal of leased assets
associated with the reconfiguration of its fleet.
(2) In 1997, the Company adopted Financial Accounting
Standards Board Statement 128, "Earnings per Share", which
establishes new standards for the calculation and disclosure
of earnings per share. All prior period earnings per share
amounts disclosed in this five-year summary have been restated
to conform to the new standards under Statement 128.
(3) No dividends were paid in any periods presented.
(4) Operating statistics pertain only to ATA and do not include
information for other operating subsidiaries of the Company.
<PAGE>
Item 7. 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 24 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.
An analysis by the Company in 1996 of the profitability of its scheduled service
and charter service business units disclosed that a significant number of
scheduled service markets then being served by the Company had become
increasingly unprofitable at that point in time. The Company believes that
several key factors had contributed to the deterioration of profitability of
scheduled service operations in that time period, including (i) a significant
increase in competition from larger carriers in the Company's scheduled service
markets; (ii) the negative impact on low-fare carriers, such as the Company,
from unfavorable media coverage of the ValuJet accident in Florida on May 11,
1996, and, to a lesser extent, the Company's own decompression incident on the
following day; (iii) a significant increase in jet fuel costs; and (iv) a
federal excise tax on jet fuel beginning in the fourth quarter of 1995.
In August 1996, the Company announced a significant restructuring of scheduled
service operations. More than one-third of scheduled service capacity operated
during the summer of 1996 was eliminated. The Company completely eliminated its
Boston and intra-Florida scheduled service operations and also exited
completely, or reduced in frequency, certain markets served from Chicago-Midway,
Indianapolis and Milwaukee. In conjunction with this restructuring, the Company
completed a 15% reduction in its employee and contract work forces by the end of
1996.
In addition, the Company re-evaluated the relative economic performance of its
three aircraft fleet types in the context of the restructured markets to be
served by the Company and optimized the type and number of aircraft through a
fleet restructuring which was completed by the end of 1996. The Company reduced
the number of Boeing 757-200 aircraft from 11 units at the end of 1995 to seven
units at the end of 1996. The remaining seven Boeing 757-200 aircraft are all
powered by Rolls-Royce engines. The Company committed the seven Boeing 757-200s
to mission-specific uses in the U.S. military and scheduled service business
units.
As a result of the 1996 restructuring, the Company believes that it has
established a better economic platform from which to pursue its long-term
strategies of: (i) maintaining its low-cost advantage versus competitors; (ii)
strengthening its leading position in the charter business; (iii) maintaining
its leading position as a provider to the U.S. military; (iv) selectively
participating in scheduled service; and (v) capitalizing on selected growth
opportunities in areas of the Company's core competency.
Results of Operations
In 1997 the results of operations for the Company showed significant improvement
as compared to 1996. For the twelve months ended December 31, 1997, the Company
earned $13.5 million in operating income, as compared to an operating loss of
$36.1 million in the twelve months ended December 31, 1996; and the Company
earned $1.6 million in net income in 1997, as compared to a net loss of $26.7
million in 1996. Operating results for 1997 were significantly impacted by the
accelerated recognition in the second quarter of $2.0 million in prepaid
compensation expense due to the resignation of its former President and Chief
Executive Officer in May 1997. Approximately $1.7 million of this amount
provided no income tax benefit to the Company.
The Company's 1997 operating revenues increased 4.3% to $783.2 million, as
compared to $750.9 million in 1996. Operating revenues per ASM increased 9.6% to
6.19 cents in 1997, as compared to 5.65 cents in 1996. ASMs decreased 4.9% to
12.648 billion from 13.296 billion, RPMs decreased 2.0% to 8.986 billion from
9.172 billion, and passenger load factor increased 2.0 points to 71.0% as
compared to 69.0%. Yield in 1997 increased 6.5% to 8.72 cents per RPM, as
compared to 8.19 cents per RPM in 1996. Total passengers boarded decreased 6.6%
to 5,307,390 in 1997, as compared to 5,680,496 in 1996, while total departures
increased 6.9% to 49,608 from 46,416 between the same comparable periods.
Operating expenses decreased 2.2% to $769.7 million in 1997 as compared to
$786.9 million in 1996. Cost per ASM increased 2.9% to 6.09 cents in 1997 as
compared to 5.92 cents in 1996.
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents per ASM
Year Ended December 31,
------------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
Operating revenues: 6.19 5.65 5.71
Operating expenses:
Salaries, wages and benefits 1.36 1.23 1.13
Fuel and oil 1.22 1.21 1.03
Handling, landing and navigation fees 0.55 0.53 0.59
Depreciation and amortization 0.49 0.47 0.45
Aircraft rentals 0.43 0.49 0.44
Aircraft maintenance, materials and repairs 0.41 0.42 0.44
Crew and other employee travel 0.29 0.27 0.25
Passenger service 0.26 0.25 0.28
Commissions 0.21 0.20 0.20
Ground package cost 0.15 0.14 0.13
Other selling expenses 0.12 0.13 0.12
Advertising 0.10 0.08 0.07
Facility and other rents 0.07 0.07 0.06
Disposal of assets - 0.03 -
Other operating expenses 0.43 0.40 0.37
Total operating expenses 6.09 5.92 5.56
Operating income (loss) 0.10 (0.27) 0.15
ASMs (in thousands) 12,647,683 13,295,505 12,521,405
</TABLE>
<PAGE>
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
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 includes the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units.
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------------------------------------
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 39,517 46,416 (6,899) (14.86)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 49,608 46,416 3,192 6.88
--------------- --------------- ---------------- ---------------
Block Hours Jet 129,216 138,114 (8,898) (6.44)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 139,426 138,114 1,312 0.95
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 8,967,900 9,172,438 (204,538) (2.23)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 8,985,955 9,172,438 (186,483) (2.03)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 12,615,230 13,295,505 (680,275) (5.12)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 12,647,683 13,295,505 (647,822) (4.87)
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.09 68.99 2.10 3.04
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.05 68.99 2.06 2.99
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,210,578 5,680,496 (469,918) (8.27)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 5,307,390 5,680,496 (373,106) (6.57)
--------------- --------------- ---------------- ---------------
Revenue $(000s) 783,193 750,851 32,342 4.31
RASM in cents (h) 6.19 5.65 0.54 9.56
CASM in cents (i) 6.09 5.92 0.17 2.87
Yield in cents (j) 8.72 8.19 0.53 6.47
- ------------------------------------- --------------- --------------- ---------------- ---------------
</TABLE>
N/M - Not meaningful
(a) Effective April 1, 1997, the Company began 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.
(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 tour operator and U.S. military
business units, load factor is less relevant because an entire aircraft is sold
by the Company instead of individual seats. Since both costs and revenues are
largely fixed for these types of flights, changes in load factor have less
impact on business unit profitability. Consolidated load factors 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 ability to maximize revenues from the sale of total available seat
capacity. In the case of scheduled service, RASM is a measure of the combined
impact of load factor and yield (see (j) below for the definition of yield). In
the case of tour operator and U.S. military businesses, RASM is a measure of the
Company's ability to maximize revenues from the sale of an entire aircraft at
one time. In all cases, RASM adjusts for the differing seat capacities on the
Company's various fleet types.
(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 tour operator 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 1997 increased 4.3% to $783.2 million from $750.9
million in 1996. This increase was due to a $48.6 million increase in charter
revenues, partially offset by a $14.7 million decrease in scheduled service
revenues and a $1.6 million decrease in other 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 includes the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service.
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------------------------------------
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Departures Jet 23,800 31,467 (7,667) (24.37)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 33,891 31,467 2,424 7.70
--------------- --------------- ---------------- ---------------
Block Hours Jet 72,883 85,836 (12,953) (15.09)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 83,093 85,836 (2,743) (3.20)
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 4,523,245 4,918,045 (394,800) (8.03)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 4,541,300 4,918,045 (376,745) (7.66)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 6,209,825 7,304,897 (1,095,072) (14.99)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 6,242,278 7,304,897 (1,062,619) (14.55)
--------------- --------------- ---------------- ---------------
Load Factor Jet 72.84 67.33 5.51 8.18
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 72.75 67.33 5.42 8.05
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 3,087,706 3,551,141 (463,435) (13.05)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 3,184,518 3,551,141 (366,623) (10.32)
--------------- --------------- ---------------- ---------------
Revenues $(000s) 371,762 386,488 (14,726) (3.81)
RASM in cents (h) 5.96 5.29 0.67 12.67
Yield in cents (j) 8.19 7.86 0.33 4.20
Rev per segment $ (k) 116.74 108.83 7.91 7.27
- ------------------------------------- --------------- --------------- ---------------- ---------------
</TABLE>
N/M - Not Meaningful
See footnotes (a) through (j) on pages 24-25.
(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 1997 decreased 3.8% to $371.8 million from $386.5
million in 1996. Scheduled service revenues comprised 47.5% of consolidated
revenues in 1997, as compared to 51.5% of consolidated revenues in 1996.
Scheduled service RPMs decreased 7.7% to 4.541 billion from 4.918 billion, while
ASMs decreased 14.6% to 6.242 billion from 7.305 billion, resulting in an
increase of 5.5 points in passenger load factor to 72.8% in 1997, from 67.3% in
1996. Scheduled service yield in 1997 increased 4.2% to 8.19 cents from 7.86
cents in 1996, while RASM increased 12.7% to 5.96 cents from 5.29 cents between
the same periods. Scheduled service departures in 1997 increased 7.7% to 33,891
from 31,467 in 1996; block hours decreased 3.2% to 83,093 in 1997, from 85,836
in 1996; and passengers boarded decreased 10.3% between periods to 3,184,518, as
compared to 3,551,141.
The Company added scheduled service capacity during the second and third
quarters of 1996 which primarily included expanded direct and connecting
frequencies through the Company's four major gateway cities of Chicago-Midway,
Indianapolis, Milwaukee and Boston to west coast and Florida markets already
being served. New seasonal scheduled service was also introduced in the second
and third quarters of 1996 from New York to Shannon and Dublin, Ireland, and
Belfast, Northern Ireland, and from the midwest to Seattle. New year-round
service also commenced to San Diego, California, in the second quarter of 1996.
The introduction of this new capacity coincided closely, however, with the May
11, 1996 ValuJet accident in Florida and the resulting persistent negative media
attention directed toward airline safety, and especially toward low-fare
airlines. On May 12, the Company experienced a cabin decompression incident on
one of its own flights which, although it resulted in no serious injury to crew
or passengers, nevertheless attracted additional negative media attention,
occurring as it did one day after the ValuJet tragedy. As a consequence, during
the second and third quarters of 1996, the Company estimates that it lost
significant scheduled service revenues from both canceled reservations and
reservations which were never received.
In association with the 1996 restructuring of the Company's scheduled service
operations, a significant reduction in scheduled service was announced on August
26, 1996. Between September 4 and December 2, 1996, more than one-third of the
scheduled service capacity operating during the 1996 summer months was
eliminated. All scheduled service flights to and from Boston were eliminated by
December 2, 1996, including service to West Palm Beach, San Juan, Montego Bay,
St. Petersburg, Las Vegas, Orlando and Ft. Lauderdale. Intra-Florida services
connecting the cities of Ft. Lauderdale, Orlando, Miami, Sarasota, St.
Petersburg and Ft. Myers were eliminated as of October 27, 1996. Other selected
services from Indianapolis, Chicago-Midway and Milwaukee to Florida and to
west-coast destinations were also reduced or eliminated by October 27, 1996. The
Company's scheduled service between Chicago-Midway and the cities of
Indianapolis and Milwaukee was replaced with a code share agreement with Chicago
Express on October 27, 1996 as discussed further below. In association with this
service reduction, all scheduled service ceased at Seattle, Grand Cayman, West
Palm Beach, Montego Bay, Miami and San Diego.
On October 27, 1996 the Company also implemented a commuter code share
partnership with Chicago Express to provide incremental connecting traffic
between Indianapolis, Milwaukee and other smaller midwestern cities into the
Company's Chicago-Midway connections with certain Florida and west-coast
destinations. This partnership was replaced with a contractual agreement with
Chicago Express effective April 1, 1997, under which Chicago Express now
operates 19-seat Jetstream 31 propeller aircraft between Chicago-Midway and the
cities of Indianapolis, Milwaukee, Des Moines, Dayton and Grand Rapids, on
behalf of ATA. Service between Chicago-Midway and Lansing, Michigan and Madison,
Wisconsin was added under this agreement effective in the fourth quarter of
1997.
After the 1996 restructuring, the Company's 1997 core jet scheduled service
included flights between Chicago-Midway and five Florida cities, Las Vegas,
Phoenix, Los Angeles and San Francisco; Indianapolis to four Florida cities, Las
Vegas and Cancun; Milwaukee to three Florida cities; Hawaii service from San
Francisco, Los Angeles and Phoenix; and service between Orlando and San Juan and
Nassau.
As a result of the restructuring of scheduled service operations in the manner
described above, scheduled service profitability was substantially improved in
1997 as compared to 1996. Profitability was enhanced through a combination of
significantly higher load factors and yields between periods, even though total
revenues in scheduled service declined between years. The Company believes that
profitability was enhanced in this business unit through the selective
elimination of flights which had previously produced below-average load factors
and yield, and that the elimination of intra-Florida flying in particular was a
prominent factor in this improvement. Profitability was further enhanced in
certain scheduled service markets through the reassignment of aircraft fleet
types to provide better balance within markets between revenues, costs, and
aircraft operational capabilities.
Scheduled service profitability improvement in 1997 was accomplished in spite of
what would normally have been a demand-dampening effect from the re-introduction
of the U.S. departure and 10% federal excise taxes on tickets on March 7, 1997,
which had expired on January 1, 1997. In August 1997, federal legislation was
enacted which extends these taxes until 2007. The U.S. departure tax for
international destinations was increased from $6 to $12 per passenger, and a new
U.S. arrivals tax of $12 per passenger was added for passengers arriving into
the United States from international cities. Effective October 1, 1997, the new
tax law also changed the method of computation of the federal excise tax from a
standard 10% of ticket sale value, to a declining percentage of ticket sale
value (ranging from 9.0% to 7.5%), plus an increasing inflation-indexed charge
per passenger segment flown (ranging from $1 to $3). The Company does not
currently believe that the change in federal excise tax computation has placed
it at either a significant pricing advantage or disadvantage as compared to the
previous computation method. The Company does believe that certain of its
low-fare competitors may be disadvantaged by the new computation method due to
their lower average segment fares and higher average intermediate stops as
compared to the Company in similar markets.
The Company continues to evaluate the profit and loss performance of its
scheduled service business, and the Company may change the level of scheduled
service operations from time to time. The Company began new service in June
1997, between New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis and St. Petersburg, and also added several
frequencies between the midwest and the west coast for the summer season. New
York service to Chicago-Midway and St. Petersburg was retained for the 1997-98
winter season. New nonstop service between Chicago-Midway and Dallas/Ft. Worth,
San Juan and Denver have been announced beginning in May 1998. In addition, the
Company's application for slots at New York's LaGuardia Airport are currently
pending with the DOT which, if approved, the Company intends to use for daily
frequencies from Chicago-Midway.
Charter Revenues. The Company's charter revenues are derived principally from
independent tour operators, specialty charter customers and from the United
States military. The Company's charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Total charter revenues increased 15.6% to $359.2 million in 1997, as
compared to $310.6 million in 1996. Charter revenue growth, prior to scheduled
service restructuring in late 1996, had been constrained by the dedication of a
significant portion of the Company's fleet to scheduled service expansion,
including the utilization of two Lockheed L-1011 aircraft for scheduled service
to Ireland and Northern Ireland between May and September 1996. The Company's
restructuring strategy, as reflected in the Company's results of operations for
1997, included a renewed emphasis on charter revenue sources. The Company
believes that tour operator, specialty charter and military operations are
businesses where the Company's experience and size provide meaningful
competitive advantage. Charter revenues produced 45.9% of consolidated revenues
in 1997, as compared to 41.4% in 1996.
Tour Operator Programs. The following table sets forth, for the periods
indicated, certain key operating and financial data for the tour operator flying
operations of the Company.
<TABLE>
<CAPTION>
- ----------------------------------- ----------------------------------------------------------------
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
<S> <C> <C> <C> <C>
Departures (b) 10,589 10,920 (331) (3.03)
Block Hours (c) 36,836 38,154 (1,318) (3.45)
RPMs (000s) (d) 3,373,840 3,470,450 (96,610) (2.78)
ASMs (000s) (e) 4,169,102 4,363,220 (194,118) (4.45)
Passengers Enplaned (g) 1,840,056 1,854,262 (14,206) (0.77)
Revenue $(000s) 228,062 226,400 1,662 0.73
RASM in cents (h) 5.47 5.19 0.28 5.39
- ----------------------------------- --------------- ---------------- --------------- ---------------
</TABLE>
See footnotes (b) through (h) on pages 24-25.
Charter revenues derived from independent tour operators increased 0.8% to
$228.1 million in 1997, as compared to $226.4 million in 1996. Tour operator
RPMs decreased 2.8% to 3.374 billion in 1997 from 3.470 billion in 1996, while
ASMs decreased 4.4% to 4.169 billion from 4.363 billion. Tour operator RASM
increased 5.4% to 5.47 cents from 5.19 cents between the same periods. Tour
operator passengers boarded decreased 0.8% to 1,840,056 in 1997, as compared to
1,854,262 in 1996; tour operator departures decreased 3.0% to 10,589 in 1997, as
compared to 10,920 in 1996; and tour operator block hours decreased 3.5% to
36,836 in 1997, as compared to 38,154 in 1996.
The Company operates in two principal components of the tour operator business,
known as "track charter" and "specialty charter." The larger track charter
business component is generally comprised of low frequency but repetitive
domestic and international flights between city pairs, which support high
passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts.
The Company believes that although price is the principal competitive criterion
for its tour operator programs, product quality, reputation for reliability and
delivery of services which are customized to specific needs have become
increasingly important to the buyer of this product. Accordingly, as the Company
continues to emphasize the growth and profitability of this business unit, it
will seek to maintain its low-cost pricing advantage, while differentiating
itself from competitors through the delivery of customized services and the
maintenance of consistent and dependable operations. In this manner, the Company
believes that it will produce significant value for its tour operator partners
by delivering an attractively priced product which exceeds the leisure
traveler's expectations.
Specialty charter is a product which is designed to meet the unique requirements
of the customer and is a business characterized by lower frequency of operation
and by greater variation in city pairs served than the track charter business.
Specialty charter includes such diverse contracts as flying university alumni to
football games, transporting political candidates on campaign trips and moving
NASA space shuttle ground crews to alternate landing sites. The Company also
operates an increasing number of trips in all-first-class configuration for
certain corporate and high-end leisure clients. Although lower utilization of
crews and aircraft and infrequent service to specialty destinations often result
in higher average operating costs, the Company has determined that the revenue
premium earned by meeting special customer requirements usually more than
compensates for these increased costs. In addition, specialty charter programs
sometimes permit the Company to increase overall aircraft utilization by
providing filler traffic during periods of low demand from other programs such
as track charter. The Company believes that it is competitively advantaged to
attract this type of business due to the size and geographic dispersion of its
fleet, which reduces costly ferry time for aircraft and crews and thus permits
more competitive pricing. The diversity of the Company's three fleet types also
permits the Company to meet a customer's particular needs by choosing the
aircraft type which provides the most economical solution for those
requirements.
Military Programs. The following table sets forth, for the periods indicated,
certain key operating and financial data for the military flight operations of
the Company.
<TABLE>
<CAPTION>
- -------------------------------- ---------------------------------------------------------------
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
<S> <C> <C> <C> <C>
Departures (b) 4,860 3,414 1,446 42.36
Block Hours (c) 18,704 12,294 6,410 52.14
RPMs (000s) (d) 1,044,317 665,494 378,823 56.92
ASMs (000s) (e) 2,165,169 1,442,113 723,056 50.14
Passengers Enplaned (g) 265,862 185,575 80,287 43.26
Revenue $(000s) 131,115 84,200 46,915 55.72
RASM in cents (h) 6.06 5.84 0.22 3.77
- -------------------------------- --------------- --------------- --------------- ---------------
</TABLE>
See footnotes (b) through (h) on pages 24-25.
Charter revenues derived from the U.S. military increased 55.7% to $131.1
million in 1997, as compared to $84.2 million in 1996. U.S. military RPMs
increased 56.9% to 1.044 billion in 1997, from 665.5 million in 1996, while ASMs
increased 50.1% to 2.165 billion from 1.442 billion. Military RASM increased
3.8% to 6.06 cents from 5.84 cents between the same time periods. U.S. military
passengers boarded increased 43.3% to 265,862 in 1997, as compared to 185,575 in
1996; U.S. military departures increased 42.4% to 4,860 in 1997, as compared
to 3,414 in 1996; and U.S. military block hours increased 52.1% to 18,704 in
1997 as compared to 12,294 in 1996.
The Company participates in two related military programs known as "fixed award"
and "short-term expansion." Pursuant to the U.S. military's fixed award system,
each participating airline is awarded certain "mobilization value points" based
upon the number and type of aircraft made available by that airline for military
flying. In order to increase the number of points awarded, in 1992 the Company
entered into a contractor teaming arrangement with four other cargo 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 U.S. military business grew at a faster year-over-year rate than any other
business unit of the Company during 1997. In 1997, the Company's U.S. military
revenues represented 16.8% of consolidated revenues, as compared to 11.2% in
1996. As a result of the restructuring of scheduled service and the
reconfiguration of the Company's fleet in 1996, the Company committed four of
its seven remaining Boeing 757-200 aircraft to the U.S. military for the
contract year ending September 30, 1997. As a result of an analysis undertaken
during 1996, the Company was also successful in more accurately documenting the
actual costs associated with military flying and was therefore able to obtain
rate increases for the contract year ending September 30, 1997. The Company has
obtained additional rate increases for the contract year ending September 30,
1998.
Because military flying is generally less seasonal than leisure travel programs,
the Company believes that a larger U.S. military business operation will tend to
have a stabilizing impact on seasonal earnings fluctuations. The Company is also
contractually protected from changes in fuel prices. The Company further
believes that its fleet of aircraft is competitively advantaged to serving the
transportation needs of the U.S. military. Although foreign bases have been
reduced in troop size, the U.S. military still desires to maintain its service
frequency to those bases and therefore often has a preference for
smaller-capacity, long-range aircraft such as the Company's Boeing 757-200.
Furthermore, in 1993, the Company became the first North American carrier to
receive FAA certification to operate Boeing 757-200 aircraft with 180-minute
ETOPS, which permits these aircraft to operate missions over water which can be
up to three hours from the nearest alternate airport. The Company believes that
this certification, which applies to all of the Company's Boeing 757-200 fleet,
provides a competitive advantage in receiving awards of certain military flying.
The overall amount of military business that the Company receives in any one
year is dependent upon the percentage its team is of the total, the percentage
it is of the passengers' business of the team, and the amount of expansion
business available and which the Company is able to fly. In 1997, there was an
unusual amount of both contract and expansion business that was available for
the Company. In 1998, the Company expects that there will be somewhat less
flying available for it to do.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair Travel Club subsidiary exclusively to club members and
through its ATA Vacations subsidiary to the general public. In 1997 and 1996,
ground package revenues were unchanged at $22.3 million.
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 1997, total packages sold increased 9.4% over 1996, and the average
revenue earned for each ground package sold increased 8.2% between 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. During 1997, the number of ground packages sold increased 0.5% as
compared to 1996. Lack of growth in the number of ground packages sold between
periods was mainly due to the reduction of the Company's scheduled service
operations between years. During 1997, the average revenue earned for each
ground package sold decreased 15.8% as compared to 1996.
The average revenue earned by the Company for a ground package sale is a
function of the mix of vacation destinations served, the quality and types of
ground accommodations offered and general competitive conditions with other air
carriers offering similar products in the Company's markets, all of which
factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues of
affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of ATA. Other revenues
decreased 5.1% to $29.9 million in 1997, as compared to $31.5 million in 1996,
primarily due to a reduction in revenues earned between periods by providing
substitute service to other airlines, partially offset by increases in other
miscellaneous revenue categories. A substitute service agreement typically
provides for the Company to operate aircraft with its crews on routes designated
by the customer airline to carry the passengers of that airline for a limited
period of time.
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 1997 increased 5.2% to $172.5 million from $164.0
million in 1996.
Approximately $3.2 million of the increase between periods was attributable to
changes made in the third quarter of 1996 in senior executive positions and
associated senior executive compensation plans. Special compensation totaling
$3.0 million was prepaid to the Company's former President and Chief Executive
Officer during the fourth quarter of 1996 and the first quarter of 1997, which
was being amortized to expense over the anticipated two-year term of his
employment ending August 1998. Due to his resignation in late May 1997, a
one-time charge to expense for the unamortized $2.0 million prepaid balance was
made in the second quarter of 1997 to salaries, wages and benefits, whereas no
such charge to expense was incurred in the prior year.
The cost of salaries and wages earned by cockpit crew members and related flight
operations support staff in 1997 was approximately $5.8 million higher than in
1996. These cost increases were incurred even though jet block hours flown by
cockpit crew members declined by 6.4% between periods. This increase in the unit
cost of cockpit crews was attributable to the following significant factors: (i)
the implementation of the cockpit crew collective bargaining agreement in August
1996, under which a 7.5% rate increase became effective; (ii) crew utilization
for U.S. military flying is significantly lower than for scheduled service and
tour operator flying, and U.S. military block hours increased as a percentage of
total block hours to 14.5% in 1997, as compared to 8.9% in 1996; (iii) cockpit
crew shortages during the first three quarters of 1997 resulted in the need to
increase premium pay to cockpit crew members in order to adequately staff the
spring and summer flying schedule; and (iv) cockpit crew productivity was
reduced by the fleet restructuring completed during 1996, which increased the
percentage of jet block hours flown by three-crew-member aircraft (Lockheed
L-1011 and Boeing 727-200) to 78.9% in 1997, as compared to 70.6% in 1996.
The salaries, wages and benefits cost for other employee groups declined by $0.8
million in 1997 as compared to 1996. These costs declined partially as a result
of the decline in equivalent full-time employment between periods. Total
equivalent full-time employment declined by 7.7% between years, although
equivalent full-time employment in the fourth quarter of 1997 was 10.0% higher
that in the fourth quarter of 1996. The increase in employment in late 1997 was
primarily due to the addition of cockpit and cabin crews and reservations agents
to adequately staff expected growth in flying capacity in 1998 compared to the
fourth quarter of 1996 when the Company had just completed significant staff
reductions.
In addition to those planned staff reductions completed during the fourth
quarter of 1996, the change in salaries, wages and benefits expense for other
employee groups was significantly affected by reduced employment in Maintenance
and Engineering, which accounted for a $1.4 million reduction in expense between
1997 and 1996. Employment of Maintenance and Engineering staff, such as airframe
and powerplant mechanics and engineers, was constrained in 1997 by broad
shortages in related labor markets attributable to very strong current demand
for these skills within the airline industry. The Company compensated for some
of these shortages in 1997 by acquiring these skills through third-party
contract labor vendors. The cost of maintenance contract labor (which is a
component of Aircraft Maintenance, Materials and Repairs) increased by $2.3
million in 1997 as compared to 1996.
Salaries, wages and benefits cost per ASM increased 10.6% in 1997 to 1.36 cents,
as compared to 1.23 cents in 1996.
Fuel and Oil. Fuel and oil expense for 1997 decreased 4.7% to $153.7 million
from $161.2 million in 1996. During 1997, as compared to 1996, the Company
consumed 3.1% fewer gallons of jet fuel for flying operations, which resulted in
a reduction in fuel expense of approximately $5.4 million between periods. The
reduction in jet fuel consumed was due to the reduced number of block hours of
jet flying operations between years. The Company flew 129,216 jet block hours in
1997, as compared to 138,114 jet block hours in 1996, a decrease of 6.4% between
periods. During 1997, the Company's average cost per gallon of fuel consumed
decreased by 1.8% as compared to 1996, which resulted in a decrease in fuel and
oil expense of approximately $2.9 million between years. Also during the last
three quarters of 1997, the Company incurred approximately $1.0 million in fuel
and oil expense to operate the Jetstream 31 aircraft under its agreement with
Chicago Express, which was not in effect in the last three quarters of 1996.
Fuel and oil expense increased 0.8% to 1.22 cents per ASM in 1997, as compared
to 1.21 cents per ASM in 1996. The increase in the cost per ASM of fuel and oil
expense between periods was partly due to the change in mix of jet block hours
flown from the more-fuel-efficient twin-engine Boeing 757-200 aircraft to the
less-fuel-efficient three-engine Boeing 727-200 and Lockheed L-1011 aircraft. In
1997, 21.1% of total jet block hours were flown by the Boeing 757-200 fleet, as
compared to 29.4% in 1996. The increase in cost per ASM caused by the shift in
fleet mix of jet block hours flown was substantially offset by the 1.8%
reduction in the average cost of jet fuel between periods.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees decreased by 1.0% to $69.4 million in
1997, as compared to $70.1 million in 1996. During 1997, the average cost per
system jet departure for third-party aircraft handling increased 6.9% as
compared to 1996, and the average cost of landing fees per system jet departure
increased 5.2% between the same periods. Due to the restructuring of scheduled
service in the fourth quarter of 1996, the absolute number of system-wide jet
departures between 1997 and 1996 declined by 14.9% to 39,517 from 46,416, which
resulted in approximately $7.4 million in volume-related handling and landing
expense reductions between periods. This volume-related decline was partially
offset, however, by an approximately $4.8 million price-related handling and
landing expense increase 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 reduction in the Company's
narrow-body Boeing 757-200 fleet and the shift of revenue production towards
charter operations, the Company's jet departures in 1997 included
proportionately more international and wide-body operations than in 1996. In
1997, 21.1% of the Company's jet departures were operated with wide-body
aircraft, as compared to 19.4% in 1996, and 22.4% of the Company's 1997 jet
departures were from international locations, as compared to 18.9% in the prior
year.
The cost per ASM for handling, landing and navigation fees increased 3.8% to
0.55 cents in 1997, from 0.53 cents in 1996.
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 1.3% to $62.5 million in 1997,
as compared to $61.7 million in 1996.
Depreciation expense attributable to owned airframes and engines decreased $0.4
million in 1997 as compared to 1996. The Company reduced its year-over-year
investment in engines and airframe improvements due to the reconfiguration of
the Boeing 757-200 fleet in the fourth quarter of 1996. As a result of the net
reduction of four Boeing 757-200 aircraft at the end of 1996 as compared to the
end of 1995, and the complete elimination of Pratt & Whitney-powered Boeing
757-200s from the fleet, some airframe and leasehold improvements were disposed
of, and all spare Pratt & Whitney engines and rotable parts were reclassified as
Assets Held for Sale in the accompanying balance sheet. None of these assets
therefore gave rise to depreciation expense in 1997. The Company did increase
its investment in computer equipment and furniture and fixtures between years;
placed the west bay of the renovated Midway Hangar No. 2 into service in
mid-1996; and incurred increased debt issue costs between years relating to debt
facility and senior unsecured notes issued, as well as aircraft lease
negotiations completed primarily in the fourth quarter of 1996. These changes,
together with increased costs pertaining to remaining rotable components and the
provision for obsolescence of aircraft parts inventories, resulted in an
increase in depreciation expense of $0.8 million in 1997 as compared to 1996.
Amortization of capitalized engine and airframe overhauls increased $0.4 million
in 1997 as compared to 1996 after including the offsetting amortization
associated with manufacturers' credits. Changes to the cost of overhaul
amortization were partly due to the reduction of total block hours and cycles
flown between comparable periods. This expense was also favorably impacted by
the late-1996 reconfiguration of the Boeing 757-200 fleet and, in particular,
the disposal of all Pratt & Whitney-powered Boeing 757-200 aircraft. All
unamortized net book values of engine and airframe overhauls pertaining to the
Pratt & Whitney-powered aircraft were charged to the cost of the disposal of
these assets in the third quarter of 1996. The Company's seven remaining
Rolls-Royce-powered Boeing 757-200 aircraft, four of which were delivered new
from the manufacturer in late 1995 and late 1996, are not presently generating
any engine and airframe overhaul expense since the initial post-delivery
overhauls for the Rolls-Royce-powered Boeing 757-200s are not yet due under the
Company's maintenance programs. The net reduction in engine and airframe
amortization expense in 1997 pertaining to changes in the Company's Boeing
757-200 fleet was approximately $3.5 million as compared to 1996. Engine and
airframe amortization for the Company's fleet of Boeing 727-200 aircraft
increased by approximately $2.6 million in 1997 as compared to 1996 due to the
on-going expansion of this fleet type and due to the completion of new overhauls
for Pratt & Whitney JT8D engines that power the Boeing 727-200 fleet. The
increase between years in engine and airframe amortization expense for the
Company's Lockheed L-1011 fleet was approximately $0.8 million, which was
primarily due to the addition of airframe overhauls to the fleet.
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 was unchanged between 1997
and 1996. When these engine failures can be economically repaired, the related
repairs are charged to aircraft maintenance, materials and repairs expense.
Depreciation and amortization expense per ASM increased 6.5% to 0.49 cents
in 1997, as compared to 0.46 cents in the prior year.
Aircraft Rentals. Aircraft rentals expense for 1997 decreased 16.8% to $54.4
million in 1997 from $65.4 million in 1996. This decrease was primarily
attributable to the reconfiguration of the Company's Boeing 757-200 fleet in the
fourth quarter of 1996, as a result of which the number of Boeing 757-200
aircraft operated by the Company was reduced by four units. The reduction in the
size of the Boeing 757-200 fleet was an integral component of the Company's 1996
restructuring of scheduled service, based upon profitability analysis which
disclosed that, for some uses of the Boeing 757-200 in the Company's markets, it
was more profitable to substitute other aircraft with lower ownership costs.
Aircraft rentals expense declined by $14.4 million between 1997 and 1996 as a
result of the Boeing 757-200 fleet restructuring.
Four additional Boeing 727-200 aircraft were acquired and financed by
sale/leasebacks at various times during the first three quarters of 1996, while
one Boeing 727-200 aircraft previously on an operating lease was purchased
during the second quarter of 1996, and was subsequently sold and leased back in
September 1997. The net increase in leased Boeing 727-200 aircraft between
years, together with the incorporation of hushkits into new sale/leasebacks of
several Boeing 727-200 aircraft between periods, added approximately $3.2
million in aircraft rentals expense between 1997 and 1996.
Aircraft rentals expense for 1997 was 0.43 cents per ASM, a decrease of 12.2%
from 0.49 cents per ASM in 1996. The period-to-period decrease in the size of
the Boeing 757-200 fleet was a significant factor in this change since the
rental cost of ASMs produced by this fleet type is significantly higher than for
the Company's other aircraft. With the reduction in the higher-ownership-cost
Boeing 757-200 aircraft in late 1996, the Company anticipates that the cost per
ASM produced by its leased aircraft fleet will continue at lower levels in
future quarters.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for base and line maintenance activities, and other
non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense decreased 6.7% to $51.5
million in 1997, as compared to $55.2 million in 1996. The cost per ASM
decreased by 2.4% to 0.41 cents in 1997, as compared to 0.42 cents in the prior
year.
Repair costs were $4.2 million lower in 1997 as compared to the prior year. This
was due to a reduction in both the total number of repairs performed and the
average unit cost of repairs between periods. Negotiations were completed in
early 1997 with several repair vendors which resulted in reduced unit charges
for some repair activity. Additionally, the Company established a maintenance
disposition board in late 1996 which carefully reviews significant repair
decisions in light of anticipated fleet requirements and the available quantity
of serviceable components in stock.
The cost of expendable parts consumed increased $1.9 million in 1997 as compared
to 1996. The increase in the cost of expendable parts consumed was closely
related to the Company's heavy maintenance check programs for its fleet, which
resulted in several more heavy airframe checks being completed in 1997 than in
the previous year.
The cost of maintenance contract labor increased by $2.3 million in 1997 as
compared to 1996. As explained above under "Salaries, Wages and Benefits," the
Company increased its utilization of maintenance contract labor in 1997 to
compensate for some shortages of airframe and powerplant mechanics and
engineers.
The cost of parts loans and exchanges was $1.3 million lower in 1997 as compared
to 1996 due to improved internal procedures to limit the need for such loans and
exchanges.
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 1997 were $1.8 million
lower than in 1996, primarily due to the negotiation of new terms and conditions
for several aircraft leases during 1997, which eliminated return condition
obligations which had existed 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 that is incurred to position crews away from their bases to
operate all Company flights throughout the world. The cost of air transportation
is generally more significant for the charter business unit since these flights
often operate between cities in which Company crews are not normally based and
may involve extensive international positioning of crews. Hotel and per diem
expenses are incurred for both scheduled and charter services, although higher
per diem and hotel rates generally apply to international assignments.
The cost of crew and other employee travel increased 1.9% to $36.6 million in
1997, as compared to $35.9 million in 1996. During 1997, the Company's average
full-time-equivalent cockpit and cabin crew employment was 8.6% lower as
compared to the prior year, even though jet block hours decreased by only 6.4%
between periods. Although the Company did experience some crew shortages in the
first quarter of 1996 associated with severe winter weather, shortages of both
cockpit and cabin crews were more chronic in the first nine months of 1997, and
per-crew-member travel costs were consequently higher since crews spent greater
amounts of time away from their bases to operate the Company's schedule. In
addition, average crew travel costs for the U.S. military and specialty charter
businesses are much higher than for track charter and scheduled service since
these flights more often operate away from crew bases.
The cost per ASM for crew and other employee travel increased 7.4% to 0.29 cents
in 1997, as compared to 0.27 cents in 1996.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For 1997 and 1996,
catering represented 83.0% and 80.4%, respectively, of total passenger service
expense.
The cost of passenger service increased 0.3% in 1997 to $32.8 million, as
compared to $32.7 million in 1996. This change between periods was primarily due
to an increase of approximately 8.4% in the average cost to cater each
passenger, offset by a decrease of 8.3% in jet passengers boarded to 5,210,578
in 1997, as compared to 5,680,496 in 1996. Catering unit cost increased due to a
change in the mix of passengers boarded from fewer scheduled service toward more
charter and military passengers; the latter passengers, particularly military,
are the most expensive passengers to cater in the Company's business mix.
Military and charter passengers accounted for 40.4% of passengers boarded in
1997, as compared to 35.9% of passengers boarded in 1996.
The cost per ASM of passenger service increased 4.0% to 0.26 cents in 1997, as
compared to 0.25 cents in 1996.
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 tour operator and military business. Commissions
expense decreased 2.2% to $26.1 million in 1997, as compared to $26.7 million in
1996. Scheduled service commissions expense declined by $2.2 million between
periods, primarily as a result of the decline in total scheduled service
revenues earned, and also as a result of an industry-wide reduction in the
standard travel agency commission rate from 10% to 8% during October 1997.
Military and tour operator commissions expense increased by $1.9 million and
$0.1 million, respectively, due to the increased level of commissionable
revenues earned in those business units in 1997 as compared to 1996.
The cost per ASM of commissions expense increased by 5.0% to 0.21 cents in 1997,
as compared to 0.20 cents in 1996.
Ground Package Cost. Ground package cost includes the expenses incurred by the
Company for hotels, car rental companies, cruise lines and similar vendors to
provide ground and cruise accommodations to Ambassadair and ATA Vacations
customers. Ground package cost increased 5.5% to $19.2 million in 1997, as
compared to $18.2 million in 1996. The increase in cost between periods was
primarily due to a 9.4% increase in the number of Ambassadair ground packages
sold. There was no material change in the average cost of ground packages sold
between years.
Ground package cost per ASM increased by 7.1% to 0.15 cents in 1997, as compared
to 0.14 cents in 1996.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems (CRSs) to reserve single-seat sales for
scheduled service; (ii) credit card discount expenses incurred when selling
single seats and ground packages to customers using credit cards for payment;
(iii) costs of providing toll-free telephone services, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses that are primarily
associated with single-seat sales. Other selling expenses decreased 11.9% to
$15.5 million in 1997, as compared to $17.6 million in 1996.
CRS fees decreased $1.3 million in 1997 as compared to 1996 due to both a 7.7%
decrease in total CRS bookings made for the smaller scheduled service business
unit between periods, and due to a 14.4% reduction in the average cost of each
CRS booking made between years. Toll-free telephone costs decreased $0.7 million
between periods due to less usage and lower rates. Other selling cost per ASM
decreased 7.7% to 0.12 cents in 1997, as compared to 0.13 cents in the previous
year.
Advertising. Advertising expense increased 23.3% to $12.7 million in 1997, as
compared to $10.3 million in 1996. The Company incurs advertising costs
primarily to support single-seat scheduled service sales and the sale of
air-and-ground packages. Advertising support for these lines of business was
increased in 1997 consistent with the Company's overall strategy to enhance RASM
in these businesses through increases in load factor and yield. Additionally,
advertising was comparatively low in the third quarter of 1996 due to the
restructuring of numerous scheduled service markets which was initiated in the
latter part of that quarter.
The cost per ASM of advertising increased 25.0% to 0.10 cents in 1997, as
compared to 0.08 cents in 1996. This increase in cost per ASM resulted from
higher absolute advertising dollars being spent in a period of declining ASMs,
but was nevertheless an integral part of the Company's strategy in 1997 to
enhance profitability in the scheduled service business.
Facility and Other Rentals. Facility and other rentals includes the cost of all
ground facilities that are leased by the Company such as airport space, regional
sales offices and general offices. The cost of facility and other rentals
decreased 10.4% to $8.6 million in 1997, as compared to $9.6 million in 1996.
There were some changes in specific facilities utilized by the Company between
periods, such as the addition of hangar space at Chicago-Midway and the
elimination of airport facilities at Boston. The Company also reduced total
facility expense between years through the sublease of excess facilities to
third parties.
The cost per ASM for facility and other rentals was unchanged between periods at
0.07 cents.
Other Operating Expenses. Other operating expenses increased 0.9% to $54.3
million in 1997, as compared to $53.8 million in 1996. Other operating expenses
which experienced significant increases between years included (i) the cost of
the Chicago Express commuter agreement, which became effective April 1, 1997;
and (ii) the cost of property and sales taxes. Other operating expenses which
experienced significant decreases between periods included (i) the cost of
insurance; (ii) the cost of data and voice communications; and (iii) the cost of
professional consulting fees. Several other categories of other operating
expenses were lower in 1997 than in 1996 primarily due to the smaller size of
the airline between periods.
Other operating cost per ASM increased 4.9% to 0.43 cents in 1997, as compared
to 0.41 cents in 1996.
Interest Income and Expense. Interest expense in 1997 increased 111.1% to $9.5
million, as compared to $4.5 million in 1996. The increase in interest expense
between periods was primarily due to the change in the Company's capital
structure which resulted from the two financings completed on July 24, 1997, at
which time the Company (i) sold $100.0 million principal amount of 10.5%
unsecured seven-year notes, and (ii) entered into a new $50.0 million secured
revolving credit facility, thereby replacing the former secured revolving credit
facility of $122.0 million.
The capital structure of the Company, prior to completing these new financings,
provided for 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 1997, the weighted average borrowings were approximately
$117.2 million, as compared to $86.1 million in 1996.
The weighted average effective interest rate applicable to the Company's
borrowings in 1997 was 8.06%, as compared to 5.18% in 1996. 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 rates which were
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 $1.6 million in
interest income in 1997, an increase of 166.7% over interest income of $0.6
million earned in 1996.
Income Tax Expense
In 1997, the Company recorded $4.5 million in income tax expense applicable to
the income before income taxes for that year, while in 1996 income tax credits
of $12.9 million were recognized pertaining to the loss before income taxes for
that year of $39.6 million. The effective tax rate applicable to 1997 was 73.9%,
while the effective tax rate applicable to 1996 was 32.6%.
Income tax expense and credits in both periods were significantly affected by
the non-deductibility for federal income tax purposes of 50% of amounts paid for
crew per diem. The effect of this permanent difference on the effective income
tax rate for financial accounting purposes becomes more pronounced in cases
where before-tax income or loss approaches zero, which was a significant cause
for the unusually high effective tax rate in 1997.
Income tax expense and the effective tax rate for 1997 were also significantly
affected by the one-time $2.0 million charge to salaries, wages and benefits in
the second quarter of 1997 for the prepaid executive compensation package
provided to the Company's former President and Chief Executive Officer. Of the
total compensation paid to this former executive of the Company in 1997,
approximately $1.7 million is permanently non-deductible against the Company's
federal income taxes, and thus constitutes an additional significant permanent
difference between income for federal income tax purposes and financial
accounting income in 1997 which did not exist in 1996.
Year Ended December 31, 1996, Versus Year Ended December 31, 1995
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, which
includes the consolidated operations of Lockheed L-1011, Boeing 727-200 and
Boeing 757-200 aircraft in all of the Company's business units.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------------- ---------------
Twelve Months Ended December 31,
1996 1995 Inc (Dec) % Inc (Dec)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Departures (b) 46,416 42,815 3,601 8.41
Block Hours (c) 138,114 126,295 11,819 9.36
RPMs (000s) (d) 9,172,438 8,907,698 264,740 2.97
ASMs (000s) (e) 13,295,505 12,521,405 774,100 6.18
Load Factor (f) 68.99 71.14 (2.15) (3.02)
Passengers Enplaned (g) 5,680,496 5,368,171 312,325 5.82
Revenue $(000s) 750,851 715,009 35,842 5.01
RASM in cents (h) 5.65 5.71 (0.06)
(1.05)
CASM in cents (i) 5.92 5.56 0.36 6.47
Yield in cents (j) 8.19 8.03 0.16 1.99
- -------------------------------- --------------- --------------- --------------- ---------------
</TABLE>
See footnotes (b) through (j) on pages 24-25.
Operating Revenues
Total operating revenues in 1996 increased 5.0% to $750.9 million from $715.0
million in 1995. This increase was due to a $24.5 million increase in scheduled
service revenues, a $3.5 million increase in charter revenues, a $1.9 million
increase in ground package revenues and a $6.0 million increase in other
revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
flight operations of the Company, which includes the consolidated operations of
Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in scheduled
service.
<TABLE>
<CAPTION>
- ---------------------------------- ---------------------------------------------------------------
Twelve Months Ended December 31,
1996 1995 Inc (Dec) % Inc (Dec)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Departures (b) 31,467 27,573 3,894 14.12
Block Hours (c) 85,836 73,816 12,020 16.28
RPMs (000s) (d) 4,918,045 4,673,210 244,835 5.24
ASMs (000s) (e) 7,304,897 6,604,087 700,810 10.61
Load Factor (f) 67.33 70.76 (3.43) (4.85)
Passengers Enplaned (g) 3,551,141 3,304,369 246,772 7.47
Revenue $(000s) 386,488 361,967 24,521 6.77
RASM in cents (h) 5.29 5.48 (0.19) (3.47)
Yield in cents (j) 7.86 7.75 0.11 1.42
Revenue per segment $ (k) 108.83 109.54 (0.71) (0.65)
- ---------------------------------- --------------- --------------- --------------- ---------------
</TABLE>
See footnotes (b) through (j) on pages 24-25.
(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 1996 increased 6.8% to $386.5 million from $362.0
million in 1995. Scheduled service revenues comprised 51.5% of total operating
revenues in 1996, as compared to 50.6% of operating revenues in 1995. Scheduled
service RPMs increased 5.2% to 4.918 billion from 4.673 billion, while ASMs
increased 10.6% to 7.305 billion from 6.604 billion, resulting in a reduction in
passenger load factor to 67.3% in 1996 from 70.8% in 1995. Yield on scheduled
service in 1996 increased 1.4% to 7.86 cents per RPM from 7.75 cents per RPM in
1995. Scheduled service departures in 1996 increased 14.1% to 31,467 from 27,573
in 1995, while passengers boarded increased 7.5% over such period to 3,551,141,
as compared to 3,304,369.
Charter Revenues. Total charter revenues increased 1.1% to $310.6 million in
1996, as compared to $307.1 million in 1995. Charter revenue growth, prior to
scheduled service restructuring in late 1996, was constrained by the dedication
of a significant portion of the Company's fleet to scheduled service expansion,
including the utilization of two Lockheed L-1011 aircraft for scheduled services
to Ireland and Northern Ireland between May and September 1996.
The analysis of profitability by business unit which was performed by the
Company for the six quarters ended June 30, 1996, disclosed that both military
and tour operator components had produced consistent profits over the period
studied. The Company's Lockheed L-1011 fleet performed well in a charter
environment based upon relatively low frequency of operation and high passenger
load factors, and the Boeing 757-200 performed well in the military business
unit while the Boeing 727-200 worked well with certain tour operators. The
Company began to implement strategies to improve the financial performance of
charter operations in the third and fourth quarters of 1996, and both tour
operator and military flying are expected to play a role of growing significance
in the Company's future business operations.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the tour operator flying operations of the Company.
- --------------------------------------------------------------------------------
Twelve Months Ended December 31,
1996 1995 Inc (Dec) % Inc (Dec)
Departures (b) 10,920 11,324 (404) (3.57)
Block Hours (c) 38,154 39,451 (1,297) (3.29)
RPMs (000s) (d) 3,470,450 3,550,527 (80,077) (2.26)
ASMs (000s) (e) 4,363,220 4,450,261 (87,041) (1.96)
Passengers Enplaned (g) 1,854,262 1,839,386 14,876 0.81
Revenue $(000s) 226,400 229,500 (3,100) (1.35)
RASM in cents (h) 5.19 5.16 0.03 0.58
- --------------------------------------------------------------------------------
See footnotes (b) through (h) on pages 24-25.
Charter revenues derived from independent tour operators decreased 1.4% to
$226.4 million in 1996, as compared to $229.5 million in 1995. Tour operator
revenues comprised 30.2% of consolidated revenues in 1996, as compared to 32.1%
of consolidated revenues in 1995. Tour operator ASMs decreased 2.0% to 4.363
billion from 4.450 billion, and the RASM on tour operator revenues in 1996
increased 0.6% to 5.19 cents, as compared to 5.16 cents in 1995. Tour operator
passengers boarded increased 0.8% to 1,854,262 in 1996, as compared to 1,839,386
in 1995, and tour operator departures decreased 3.6% to 10,920 in 1996, as
compared to 11,324 in 1995.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the military flight operations of the Company.
- --------------------------------------------------------------------------------
Twelve Months Ended December 31,
1996 1995 Inc (Dec) % Inc (Dec)
Departures (b) 3,414 3,713 (299) (8.05)
Block Hours (c) 12,294 12,377 (83) (0.67)
RPMs (000s) (d) 665,494 639,040 26,454 4.14
ASMs (000s) (e) 1,442,113 1,382,482 59,631 4.31
Passengers Enplaned (g) 185,575 198,711 (13,136) (6.61)
Revenue $(000s) 84,200 77,500 6,700 8.65
RASM in cents (h) 5.84 5.61 0.23 4.10
- --------------------------------------------------------------------------------
See footnotes (b) through (h) on pages 24-25.
Charter revenues derived from the U.S. military increased 8.7% to $84.2 million
in 1996, as compared to $77.5 million in 1995. Military revenues comprised 11.2%
of consolidated revenues in 1996, as compared to 10.8% of consolidated revenues
in 1995. U.S. military ASMs increased 4.3% to 1.442 billion from 1.382 billion.
The RASM on U.S. military revenues in 1996 increased 4.1% to 5.84 cents as
compared to 5.61 cents in 1995. U.S. military passengers boarded decreased 6.6%
to 185,575 in 1996, as compared to 198,711 in 1995, and U.S. military
departures decreased 8.1% to 3,414 in 1996, as compared to 3,713 in 1995.
Ground Package Revenues. Ground package revenues increased 9.3% to $22.3 million
in 1996, as compared to $20.4 million in 1995.
In 1996, total packages sold increased 2.4% as compared to 1995, and the average
price of each ground package sold by the Company's Ambassadair Travel Club
increased 18.0% as compared to the prior year.
During 1996, the number of ATA Vacations ground packages sold increased 21.8% as
compared to 1995, but the average price of each ground package sold decreased
16.9% as compared to the prior year.
The average price paid to the Company for a ground package sale is a function of
the mix of vacation destinations served, the quality and types of ground
accommodations offered, and general competitive conditions with other air
carriers offering similar products in the Company's markets. Some ATA Vacations
markets experienced price reductions in 1996 due to intense price competition.
Other Revenues. Other revenues increased 23.5% to $31.5 million in 1996, as
compared to $25.5 million in 1995. Approximately $3.8 million of the revenue
increase between years was attributable to an increase in the number of block
hours of substitute service provided by the Company to other airlines. The
remaining increase in other revenues between periods was primarily due to
revenue growth in several of the Company's affiliated businesses.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits expense for 1996
increased 16.2% to $164.0 million from $141.1 million in 1995. Approximately
$15.9 million of the increase in 1996 was attributable to the addition of
cockpit and cabin crews, reservations agents, base station staff and maintenance
staff to support the Company's growth in capacity between periods, and
approximately $3.6 million of the increase was attributable to the related
growth in employee benefits costs. Average Company full-time-equivalent
employees increased by 11.7% in 1996 as compared to the prior year, although the
reduction-in-force implemented in late 1996 resulted in approximately 6.1% fewer
full-time-equivalent employees in the fourth quarter of 1996 as compared to the
fourth quarter of 1995. The Company substantially completed this reduction in
force in the fourth quarter of 1996, and recorded $183,000 in related severance
costs in 1996.
Salaries, wages and benefits expense in 1996 was 1.23 cents per ASM, an increase
of 8.8% from a cost of 1.13 cents per ASM in 1995. The cost per ASM increased
partially as a result of a 3.4% increase in the average rate of pay for the
Company's employees as compared to the prior year. In addition, the Company has
increased employment in several maintenance and base station locations in lieu
of continuing the use of third-party contractors, as it believes it can provide
more reliable operations and better customer service at a lower total cost by
using its own employees in these selected locations. The Company has experienced
related savings in the expense lines of handling, landing and navigation fees,
and in aircraft maintenance, materials and repairs, as further described in
those following sections.
In December 1994, the Company implemented a four-year collective bargaining
agreement with its flight attendants, which was the first of the Company's labor
groups to elect union representation. An additional four-year collective
bargaining agreement was ratified by the Company's cockpit crews on September
23, 1996. The pay-related terms of the new cockpit crew agreement were
implemented retroactively to August 6, 1996, including, among other things, a
rate increase of approximately 7.5% to cockpit crew pay scales for the first
year of the new contract.
Fuel and Oil. Fuel and oil expense for 1996 increased 24.4% to $161.2 million
from $129.6 million in 1995, due to an increase in fuel consumed to operate the
Company's expanded block hours of flying, an increase in the average price paid
per gallon of fuel consumed and the imposition of a 4.3-cent-per-gallon excise
tax on jet fuel consumed for domestic use effective October 1, 1995.
During 1996, the Company consumed 7.4% more gallons of jet fuel for flying
operations and flew 9.4% more block hours than in 1995, which accounted for
approximately $9.1 million in additional fuel and oil expense between years
(excluding price and tax changes). The growth in gallons of fuel consumed was
lower than the growth in block hours flown between years due to a change in the
mix of block hours flown by fleet type. Of greatest significance was the 4.1%
reduction of total block hours flown by the Lockheed L-1011 fleet between
periods since the fuel burn per block hour for this wide-body aircraft is
approximately twice as high as the burn rates for the Company's other fleet
types.
During 1996, the Company's average price paid per gallon of fuel consumed
(excluding the excise tax described in the following paragraph) increased by
12.8% as compared to 1995. Fuel price increases paid by the Company reflected
generally tighter supply conditions for aviation fuel, which persisted
throughout most of 1996 as compared to the prior year. The Company estimates
that the year-over-year increase in average price paid for jet fuel resulted in
approximately $16.1 million in additional fuel and oil expense between periods.
On October 1, 1995, the Company became subject to a 4.3-cent-per-gallon excise
tax on jet fuel consumed for domestic use by commercial air carriers. The effect
of this tax in the first three quarters of 1996, as compared to the first three
quarters of 1995, was to increase the Company's cost of jet fuel by
approximately $6.4 million.
Fuel and oil expense for 1996 was 1.21 cents per ASM, an increase of 17.5% as
compared to 1.03 cents per ASM in 1995. The increase in the cost per ASM of fuel
and oil expense was primarily a result of higher prices and the new excise tax,
partially offset by the expanded use of the more-fuel-efficient twin-engine
Boeing 757-200 aircraft in the Company's fleet. During 1996, the Company's
Boeing 757-200 aircraft accounted for 29.4% of total block hours flown, as
compared to 27.8% of total block hours flown in 1995. Due to the reduction of
the Company's Boeing 757-200 fleet in late 1996, the Company's mix of block
hours flown in future years is expected to reflect a lower proportion of
fuel-efficient Boeing 757-200 block hours, and a higher proportion of the
less-fuel-efficient Boeing 727-200 and Lockheed L-1011 fleet types.
Handling, Landing and Navigation Fees. Handling, landing and navigation fees
decreased by 5.8% to $70.1 million in 1996, as compared to $74.4 million in
1995. During 1996, the average cost per system departure for third-party
aircraft handling declined 15.0% as compared to the prior year, and the average
cost of landing fees per system departure decreased 12.2% between the same
periods.
Because each airport served by the Company has a different schedule of fees,
including variable prices for different aircraft types, average handling and
landing fee costs are a function of the mix of airports served as well as the
fleet composition of departing aircraft. On average, these costs for narrow-body
aircraft are less than for wide-body aircraft, and the average costs at domestic
U.S. airports are less than the average costs at most foreign airports. In 1996,
80.6% of the Company's departures were operated with narrow-body aircraft, as
compared to 77.6% in 1995, and 81.1% of the Company's departures were from U.S.
domestic locations, as compared to 79.6% in 1995.
Handling costs also vary from period to period according to decisions made by
the Company to use third-party handling services at some airports in lieu of
using the Company's own employees. During 1996, the Company implemented a policy
of "self-handling" at four domestic U.S. airports with significant operations,
which had been substantially handled using third-party contractors in the prior
year. This change resulted in lower absolute third-party handling costs for
these locations and contributed to lower system average contract handling costs
per departure for 1996, as compared to 1995. The Company incurred higher
salaries, wages and benefits expense as a result of this policy change, as noted
in "Salaries, Wages and Benefits."
The cost per ASM for handling, landing and navigation fees decreased 10.2% to
0.53 cents in 1996 from 0.59 cents in 1995.
Depreciation and Amortization. Depreciation and amortization expense for 1996
increased 10.6% to $61.7 million from $55.8 million in 1995.
Depreciation expense attributable to owned airframes and engines, and other
property and equipment owned by the Company, increased $2.9 million in 1996 as
compared to the prior year. The Company increased its year-over-year ownership
of engines and rotable aircraft components to support the expanding fleet, and
increased its investment in computer equipment and furniture and fixtures. The
Company also placed the west bay of the renovated Midway Hangar No. 2 into
service in mid-1996 and incurred increased debt issue costs between years
related to debt facility and aircraft lease negotiations completed in 1996.
Amortization of capitalized engine and airframe overhauls increased $1.9 million
in 1996 as compared to the prior year, after including the offsetting
amortization of approximately $1.0 million in associated manufacturers' credits.
The increasing cost of overhaul amortization reflects the increase in the number
of aircraft added to the Company's fleet and the increase in cycles and block
hours flown between years. New aircraft introduced into the Company's fleet
generally do not require airframe or engine overhauls until one or more years
after first entering service. Therefore, the resulting amortization of these
overhauls generally occurs on a delayed basis from the date the aircraft is
placed into service. Accordingly, the Company anticipates that the average cost
of engine and airframe amortization per block hour and cycle will increase in
future years for all fleet types, as all aircraft receive their initial engine
and airframe overhauls after being placed into service.
The cost of engine overhauls that become worthless due to early engine failures,
and which cannot be economically repaired, is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs increased $1.1 million
between years.
Depreciation and amortization cost per ASM increased 2.2% to 0.46 cents in 1996,
as compared to 0.45 cents in 1995.
Aircraft Rentals. Aircraft rentals expense for 1996 increased 17.4% to $65.4
million from $55.7 million in 1995. This increase was attributable to continued
growth in the size of the Company's leased aircraft fleet, although the Company
significantly reduced the size of its Boeing 757-200 fleet in the fourth quarter
of 1996, as is more fully described in "Disposal of Assets."
The addition of three leased Boeing 757-200 aircraft in the first three quarters
of 1996 resulted in approximately $10.6 million of increased aircraft rentals
for that time period, as compared to the prior year. The subsequent reduction of
this fleet type by a net four units (after including two new deliveries from the
manufacturer in December 1996) resulted in a year-over-year fourth quarter
reduction of aircraft rent expense of approximately $3.6 million. The reduction
in the size of the Boeing 757-200 fleet was an integral component of the
Company's restructuring of scheduled service, based upon profitability analysis
which disclosed that for some uses of the Boeing 757-200 in the Company's
markets prior to restructuring, it was more profitable to substitute other
aircraft with lower ownership costs.
Several additional Boeing 727-200 and Lockheed L-1011 aircraft leased in 1996
contributed $2.8 million and $0.5 million, respectively, in incremental aircraft
rentals between years. Aircraft rentals expense was reduced by $0.6 million for
the first four months of 1996, as compared to the prior year, due to the
purchase of four Pratt & Whitney spare engines in May 1995, which had been
previously leased. Due to the elimination of all Pratt & Whitney- powered Boeing
757-200 aircraft from the Company's fleet, the Company reclassified these owned
spare engines as "Assets Held for Sale" in the accompanying balance sheet.
Aircraft rentals expense for 1996 was 0.49 cents per ASM, an increase of 11.4%
from 0.44 cents per ASM in 1995. The period-over-period increase in the size of
the Boeing 757-200 fleet was a significant factor in this change, since the
rental cost of ASMs produced by this fleet type is significantly higher than for
the Company's other aircraft.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and
repairs expense decreased 0.4% to $55.2 million in 1996, as compared to $55.4
million in 1995. The cost per ASM decreased by 4.5% to 0.42 cents in 1996, as
compared to 0.44 cents in the prior year.
Although the cost of repairs for repairable and rotable components increased
$1.4 million between periods, the cost of expendable parts consumed decreased
$2.1 million, and the cost of parts loans and exchanges decreased $0.6 million.
Aircraft maintenance, materials and repairs cost was also reduced by $0.8
million in 1996, as compared to 1995, due to a planned reduction in the use of
third-party maintenance staff in favor of using more Company maintenance
employees for both base and line maintenance activities. The Company incurred
higher salaries, wages and benefits expense as a result of this policy change,
as noted in a preceding section.
The cost of the Company's maintenance, materials and repairs remained
essentially unchanged in 1996, as contrasted with the 6.2% increase in ASMs
between years, and the 9.4% increase in block hours. This favorable comparison
is partly due to the significant expansion of the Company's fleet during 1996.
When used aircraft are initially brought into the Company's fleet, the cost of
maintenance, materials and repairs required to bridge that aircraft into the
Company's maintenance program are capitalized. Such expenditures normally extend
the available flying hours for that aircraft before routine heavy maintenance,
materials and repairs expenses begin to be incurred, although those aircraft
begin producing both ASMs and block hours immediately upon acquisition. The more
favorable comparison to block hours between years is also indicative of the
faster growth in the Company's twin-engine Boeing 757-200 fleet, which is
composed of newer and more technologically advanced aircraft which require
relatively less routine maintenance than the Company's older three-engine
Lockheed L-1011 and Boeing 727-200 fleets. The Boeing 757-200 fleet accounted
for 29.4% of block hours in 1996, as compared to 27.8% in 1995.
Return condition expenses accrued in 1996 were $1.1 million more than in 1995.
This increase was primarily due to changes in the mix of aircraft leases and
associated return conditions which became effective during 1996, offset by both
the extensive restructuring of the Boeing 757-200 fleet and the sale/leaseback
of six hushkitted Boeing 727-200 aircraft during 1996 under new lease terms and
conditions.
Crew and Other Employee Travel. The cost of crew and other employee travel
increased 14.0% to $35.9 million in 1996, as compared to $31.5 million in 1995.
During 1996, the Company increased its average full-time-equivalent crew
employment by 4.1% as compared to the prior year, even though departures
increased by 8.4% and block hours increased by 9.4% between periods. In the
first quarter of 1996, the Company experienced crew shortages, which were
exacerbated by severe winter weather, causing significant flight delays,
diversions and cancellations. The Company's crew complement in the third quarter
of 1996 was again insufficient to effectively operate the flying schedule and
resulted in more crew time being spent away from base during that quarter.
The cost per ASM for crew and other employee travel increased 8.0% to 0.27 cents
in 1996, as compared to 0.25 cents in the prior year. This increase in unit cost
was approximately equivalent to a 9.0% average increase in the cost per crew
member of hotel, positioning and per diem expenses between years.
Passenger Service. For 1996 and 1995, catering represented 80.3% and 84.9%,
respectively, of total passenger service expense. The cost of passenger service
decreased 6.0% in 1996 to $32.7 million, as compared to $34.8 million in 1995.
Although total passengers boarded increased by 5.8% to 5,680,496 in 1996, as
compared to 5,368,171 in 1995, the average cost to cater each passenger declined
19.1% between years due to a planned reduction in catering service levels in
select charter and scheduled service markets beginning in the second quarter of
1995. This cost reduction was partially offset by a 6.6% increase in military
passengers boarded between years, which are the most expensive passengers to
cater in the Company's business mix.
The cost of servicing passengers who were inconvenienced by flight delays and
cancellations increased by $1.4 million between years. Approximately $0.7
million of this increase was incurred in association with the severe winter
weather and consequent flight schedule disruptions which occurred in the first
quarter of 1996.
The cost per ASM of passenger service decreased 10.7% to 0.25 cents in 1996, as
compared to 0.28 cents in the prior year. The lower cost per ASM was primarily
due to the lower cost of catering per passenger boarded, partially offset by the
higher cost per ASM of servicing inconvenienced passengers.
Commissions. Commissions expense increased 7.7% to $26.7 million in 1996, as
compared to $24.8 million in 1995. The primary reason for the increase between
years was the corresponding increase in scheduled service revenues earned,
approximately two-thirds of which was generated through travel agencies which
received a commission on such sales. The cost per ASM of commissions expense was
unchanged at 0.20 cents for both 1996 and 1995.
Ground Package Cost. Ground package cost increased 14.5% to $18.2 million in
1996, as compared to $15.9 million in 1995. This increase in cost is primarily
due to the increase in the number of ground packages sold between periods. In
1996, Ambassadair sold 2.4% more ground packages, and ATA Vacations sold 21.8%
more ground packages, than in 1995. The average cost of each ground package sold
by Ambassadair increased 19.9% between years, while the average cost of each
ground package sold by ATA Vacations decreased by 11.2% between periods.
Ground package cost per ASM increased by 7.7% to 0.14 cents in 1996, as compared
to 0.13 cents in 1995, which reflects the comparatively faster growth in ground
package sales produced by Ambassadair and ATA Vacations as compared to the
overall ASM growth of the Company between years.
Other Selling Expenses. Other selling expenses increased 18.1% to $17.6 million
in 1996, as compared to $14.9 million in 1995. Approximately $1.1 million and
$0.2 million, respectively, of this increase was attributable to more credit
card discounts and CRS fees incurred to support the growth in scheduled service
between years. Another $1.2 million of the increase was due to higher usage of
toll-free telephone service between periods, some of which was associated with
the accommodation of passengers onto other carriers' flights due to the
Company's reduction of scheduled service in the third and fourth quarters of
1996. Other selling cost per ASM increased 8.3% to 0.13 cents in 1996, as
compared to 0.12 cents in 1995.
Advertising. Advertising expense increased 15.7% to $10.3 million in 1996, as
compared to $8.9 million in 1995. Advertising support for single-seat scheduled
service and ground package sales increased consistent with the growth in
associated revenues and the need to meet competitive actions in the Company's
markets. The cost per ASM of advertising increased 14.3% to 0.08 cents in 1996,
as compared to 0.07 cents in 1995.
Facilities and Other Rentals. The cost of facilities and other rentals increased
29.7% to $9.6 million in 1996, as compared to $7.4 million in 1995. The increase
in expense noted for 1996 was partly attributable to higher facility costs
resulting from the Company becoming a signatory carrier at Orlando International
Airport, together with a year-over-year increase in facility costs for Boston
operations prior to the elimination of scheduled service at Boston in the fourth
quarter of 1996. The increased facility costs at Orlando International Airport
have associated savings in lower handling and landing fees for the Company's
flights at that airport.
Also in 1996, the Company incurred higher facility rental expense in association
with the late 1995 sale/leaseback of the Indianapolis hangar to the City of
Indianapolis, for the Chicago-Midway Hangar No. 2 and for the new Chicago
reservations facility, which was first occupied in September 1995.
The cost per ASM for facility and other rents increased 16.7% to 0.07 cents in
1996, as compared to 0.06 cents in 1995.
Disposal of Assets. During the third quarter of 1996, the Company committed to a
plan to dispose of up to seven Boeing 757-200 aircraft. A letter of intent was
signed with a major lessor on July 29, which included the cancellation of
operating leases on five aircraft and the return of those aircraft to the lessor
before the end of 1996. Negotiations also commenced with a major lessor during
the third quarter for the cancellation of operating leases on two additional
aircraft in 1996.
During the third quarter, the Company recorded a loss on disposal of the initial
five aircraft according to the terms and conditions negotiated and agreed in the
letter of intent. An estimate of the expected loss on disposal of the additional
two aircraft was also recorded in the third quarter, although a specific letter
of intent had not yet been signed. The total loss on disposal recorded in the
third quarter was $4.7 million for all aircraft. These aircraft transactions
were all completed during the fourth quarter of 1996, at which time the
estimated loss on disposal was reduced by $0.2 million to an actual loss of $4.5
million.
The source of the loss on the termination of these aircraft leases was primarily
from the write-off of the unused net book value of the associated airframe and
engine overhauls. For several aircraft, the Company was required to meet
additional maintenance return conditions associated with airframes and engines,
the cost of which was charged to the loss on disposal. These costs were
partially offset by cash proceeds received from the lessor and by the
application of associated deferred aircraft rent credits and manufacturers'
credits.
In addition to these costs, the Company also owned four spare Pratt & Whitney
engines, together with consumable, repairable and rotable components specific to
the Pratt & Whitney-powered Boeing 757-200s. The net book value of these engines
and parts approximated $14.1 million as of December 31, 1996, and were
reclassified as Assets Held For Sale in the accompanying balance sheet.
Other Expenses. Other operating expenses increased 15.6% to $54.0 million in
1996, as compared to $46.7 million in 1995. Significant components of the
year-over-year variance included increases in substitute service and passenger
reprotection costs, professional fees, data communications costs, insurance
costs and consulting fees in connection with the detailed route profitability
study.
Other operating cost per ASM increased 10.8% to 0.41 cents in 1996, as compared
to 0.37 cents in 1995.
Income Tax Expense
In 1996, the Company recorded $12.9 million in tax credits applicable to the
loss before income taxes for that year, while income tax expense of $6.1 million
was recognized pertaining to income before income taxes for 1995. The effective
tax rate applicable to tax credits in 1996 was 32.6%, and the effective tax rate
for income earned in 1995 was 41.8%. The Company's effective income tax rates
are unfavorably influenced by the permanent non-deductibility from taxable
income of 50% of crew per diem expenses incurred in both years. The impact of
this permanent difference on effective tax rates becomes more pronounced as
taxable income or loss approach zero.
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.
For 1997, 1996 and 1995, net cash provided by operating activities was $99.9
million, $32.2 million and $87.1 million, respectively. The increase in cash
provided by operating activities between 1996 and 1997 was attributable to such
factors as increased earnings, growth in scheduled service air traffic liability
associated with advanced ticket sales, the liquidation of certain assets held
for sale, and other factors. The decrease in cash provided by operating
activities between 1995 and 1996 was due primarily to the lower profitability
between years, coupled with the reduction in air traffic liability associated
with the 1996 restructuring of scheduled service.
Net cash used in investing activities was $76.1 million, $63.2 million and $44.0
million, respectively, for 1997, 1996 and 1995. Such amounts included cash
capital expenditures totaling $84.2 million in 1997, $69.9 million in 1996, and
$57.8 million in 1995 for engine overhauls, airframe improvements and the
purchase of rotable parts. Cash capital expenditures were supplemented with
other capital expenditures, financed directly with debt, totaling $35.4 million
in 1997, $0.0 million in 1996 and $31.7 million in 1995. The $35.4 million in
new debt issued in 1997 was to directly finance the purchase of one Boeing
757-200 aircraft and one Boeing 727-200 aircraft, both of which had previously
been subject to leases accounted for as operating leases.
Net cash provided by (used in) financing activities was $6.9 million, $11.6
million and $(12.1) million, respectively, in 1997, 1996 and 1995. Debt proceeds
in the 1997 period included $100.0 million in proceeds from the issuance of the
10.5% senior unsecured notes and $34.0 million in proceeds from borrowing
against the new credit facility. Debt proceeds in the 1996 period included
primarily the addition of $15.0 million in revolving credit facility
availability for financing the installation of hushkits on Boeing 727-200
aircraft. Payments on long-term debt in the 1997 period included primarily the
full repayment of the former credit facility of $122.0 million.
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
December 31, 1997, 1996 and 1995, the Company had recorded $6.0 million, $2.7
million and $5.0 million, respectively, in advanced payments applicable to
aircraft scheduled for future delivery. The Company intends to finance both
future deliveries under this agreement through sale/leaseback transactions
accounted for as operating leases.
In the first quarter of 1996, the Company purchased four Boeing 727-200
aircraft, financing all of these through sale/leasebacks accounted for as
operating leases by the end of the third quarter of 1996. In the second quarter
of 1996, the Company purchased a fifth Boeing 727-200 aircraft which had been
previously financed by the Company through a lease accounted for as an operating
lease. This aircraft was financed through a separate bridge debt facility until
the completion of a sale/leaseback transaction during the third quarter of 1997.
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.
On July 29, 1996, the Company entered into a letter of intent with a major
lessor to cancel several Boeing 757-200 and Lockheed L-1011 operating aircraft
leases then in effect. Under the terms of the letter of intent, the Company
canceled leases on five Boeing 757-200 aircraft powered by Pratt & Whitney
engines and returned these aircraft to the lessor by the end of 1996. The
Company was required to meet certain return conditions associated with several
aircraft, such as providing maintenance checks to airframes. The lessor
reimbursed the Company for certain leasehold improvements made to some aircraft
and credited the Company for certain prepayments made in earlier years to
satisfy qualified maintenance expenditures for several aircraft over their
original lease terms. The cancellation of these leases reduced the Company's
fleet of Pratt & Whitney-powered Boeing 757-200 aircraft from seven to two
units. The Company also agreed to terminate existing operating leases on three
Lockheed L-1011 aircraft and to purchase the airframes pertaining to these
aircraft for $1.5 million, while signing a new operating lease covering only the
nine related engines. The Lockheed L-1011 airframe and engine portion of this
transaction was not completed until the second quarter of 1997. The lessor also
provided the Company with approximately $6.9 million in additional unsecured
financing for a term of seven years. This transaction resulted in the
recognition of a $2.3 million loss on disposal of assets in the third quarter of
1996.
The Company also agreed to purchase one Rolls-Royce-powered Boeing 757-200
aircraft from the same lessor in the fourth quarter of 1996. This purchase was
not completed in 1996, and the aircraft was acquired from the lessor on a
short-term rental agreement pending the completion of the purchase in September
1997. The Company financed this purchase through a payment of cash and the
issuance of a $30.7 million note which, as amended, matures on January 15, 1999.
The note requires monthly payments of $400,000 in principal and interest from
October 15, 1997 through December 15, 1998, 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. The temporary acquisition of this aircraft in late
1996, together with the delivery of two new Rolls-Royce-powered Boeing 757-200
aircraft from the manufacturer in the fourth quarter of 1996, and the return of
the last two Pratt & Whitney-powered Boeing 757-200 aircraft discussed in the
next paragraph, resulted in an all-Rolls-Royce-powered Boeing 757-200 fleet of
seven units by the end of 1996.
In September 1996, the Company began negotiations with a major lessor to cancel
existing operating leases on the Company's remaining two Pratt & Whitney-powered
Boeing 757-200 aircraft. These aircraft were returned to the lessor by the end
of 1996. This transaction resulted in the recognition of a $2.4 million loss on
disposal of assets in the third quarter of 1996.
Issuance of Unsecured Notes. On July 24, 1997, the Company completed two
separate financings designed to lengthen the maturity of the Company's long-term
debt and diversify its credit sources. On that date, the Company (i) sold $100.0
million principal amount of unsecured seven-year notes in a private offering
under Rule 144A, and (ii) entered into a new secured revolving credit facility.
The 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.
The Company's former credit facility had initially provided a maximum of $125.0
million, including $25.0 million for stand-by letters of credit, subject to the
maintenance of certain collateral value, including certain owned Lockheed L-1011
aircraft, certain receivables, and certain rotables and spare parts. As a result
of the Company's need to restructure its scheduled service business, the Company
renegotiated certain terms of the former credit facility effective September 30,
1996, including the modification of certain loan covenants to take into account
the expected losses in the third and fourth quarters of 1996. In return for this
covenant relief, the Company agreed to implement changes to the underlying
collateral for the former facility and to change the interest rates applicable
to borrowings under the facility. The Company pledged additional owned engines
and equipment as collateral for the facility as of the implementation date of
the new agreement. The Company further agreed to reduce the $63.0 million of
borrowing availability secured by the owned Lockheed L-1011 fleet by $1.0
million per month from April 1997 through September 1997, and by $1.5 million
per month from October 1997 through April 1999. Loans under the renegotiated
facility were subject to interest, at the Company's option, at either (i) prime
to prime plus 0.75%, or (ii) the Eurodollar rate plus 1.50% to 2.75%. The former
facility was scheduled to mature on April 1, 1999, and contained various
covenants and events of default, including: maintenance of a specified
debt-to-equity ratio and a minimum level of net worth; achievement of a minimum
level of cash flow; and restrictions on aircraft acquisitions, liens, loans to
officers, change of control, indebtedness, lease commitments and payment of
dividends.
At December 31, 1996, the Company had classified $19.9 million of former credit
facility borrowings to current maturities of long-term debt. Of this amount,
$10.5 million was attributable to the scheduled reduction of availability
secured by the owned Lockheed L-1011 fleet during the 12 months ending December
31, 1997. The remaining $9.4 million represented the amount of the spare Pratt &
Whitney engines which were pledged to the credit facility and which were to be
repaid from the anticipated sale. The net book value of these spare engines,
which approximates estimated market value, is classified as Assets Held for Sale
in the accompanying balance sheet. In July 1997, the Company sold two of the
four spare Pratt & Whitney engines, and the Company continues to market the
remaining two spare engines and parts to users of Pratt & Whitney powerplants.
At December 31, 1997, the Company reclassified the remaining $8.7 million in net
book value for spare engines and parts to long-term assets held for sale.
As of December 31, 1997, 1996 and 1995, the Company had borrowed the maximum
amounts then available against its credit facilities, of which $34.0 million was
repaid on January 2, 1998, $46.0 million was repaid on January 2, 1997, and
$68.0 million was repaid on January 2, 1996.
The Company also maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for securing the issuance of letters of
credit. Borrowings against this credit facility bear interest at the lender's
prime rate plus 0.25% per annum. There were no borrowings against this facility
as of December 31, 1997 or 1996; however, the Company did have outstanding
letters of credit secured by this facility aggregating $3.5 million and $4.1
million, respectively.
Stock Repurchase Program. In February 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. Between 1994
and 1996, the Company repurchased 185,000 shares of common stock under this
program. No shares were repurchased during 1997.
Subsequent Purchase Commitments and Options For Boeing 727-200 Aircraft. 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 Stage 3 noise requirements for its fleet.
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."
The Year 2000 Project. 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.
Computer Infrastructure. The Company currently uses approximately 650 separate
computer infrastructure components to support various aspects of its world-wide
operations. Such components include major software packages (both purchased and
internally developed), operating systems for computers, computer hardware and
peripheral devices, and local and wide-area communications networks. Based upon
the Company's risk assessment completed in the first quarter of 1998, it
currently believes that over 50% of its computer infrastructure components are
fully compliant with year 2000 standards. Approximately 170 projects have been
identified to address components which are not believed to be year 2000
compliant and to test those components believed to be compliant. Although work
on non-critical components will continue throughout 1999, the Company plans to
ensure compliance of all mission-critical components by July 1999, and all
forward-looking systems prior to the date when they might be impacted.
Properties and Facilities Infrastructure. The Company currently uses
approximately 40 computer-dependent systems in its properties and facilities for
such purposes as providing heat and light, electrical power and security. These
systems were inventoried during the first quarter of 1998, and all maintenance
contracts were also evaluated. The Company presently believes that there are no
significant issues for these systems which would prevent achieving year 2000
readiness by the end of 1999. A certification of compliance is being requested
from each supplier associated with these systems, and the Company has prepared
approximately 25 project plans to test the year 2000 readiness of these systems.
Aircraft Computer Components. The Company is dependent upon a number of computer
devices on board its aircraft which are used to support such activities as radio
communications, air navigation, and certain flight instruments and controls,
among other things. These devices are supplied by large third party vendors such
as aircraft manufacturers and avionics and aircraft parts suppliers. The Company
has completed a year 2000 assessment of these devices in cooperation with the
third party vendors, and currently believes that only a small number of aircraft
computer components are not presently year 2000 compliant. The Company is in the
process of obtaining year 2000 compliance certification from these vendors, as
well as determining what corrective steps will be needed to bring all such
components into compliance with year 2000 standards.
Vendor and Supplier Readiness. The Company is dependent upon a number of vendors
and suppliers to provide essential goods and services to operate the Company's
flight schedule throughout the world. For example, the Company consumed over 200
million gallons of jet fuel in 1997 which was supplied by several dozen vendors
at hundreds of delivery points throughout the world. Fuel vendors are dependent
upon a large number of computer devices in providing these services to the
Company, and the failure of such devices to operate correctly during and after
the year 2000 could result in the inability of such suppliers to meet their fuel
delivery commitments to the Company, in which case the Company could suffer
serious disruptions to its flight schedule due to lack of fuel. The Company is
therefore communicating with all such major vendors and suppliers to ascertain
what actions these vendors are taking to ensure their readiness to provide
essential goods and services to the Company after 1999. The Company is
requesting written certification of year 2000 readiness from all essential
suppliers, and will further take such steps as it believes are necessary to
validate such compliance.
Domestic and International Airports. The Company flies to over 400 individual
airports world-wide each year. The smooth operation of many airports used by the
Company is highly dependent upon computer systems and hardware devices. Such
airports are typically operated by governmental or quasi-governmental agencies,
both foreign and domestic, who are primarily responsible for the installation
and operation of all computer devices at those airports. Computers and software
packages control such aspects of airport operations as radar tracking of
aircraft, instrument landing systems, air and ground communications, runway
lighting, baggage delivery, environmental controls such as heat and lighting,
passenger security screening, and arrivals and departures data display.
Other governmental agencies use computers to provide essential services at
airports, such as customs and immigration screening and weather reporting. The
safe and efficient operation of the Company's aircraft in airspace between
airports is also highly dependent on computer systems and hardware which are
operated and maintained primarily by domestic and foreign governmental agencies.
In the United States, the Federal Aviation Administration has primary
responsibility for the operation of the domestic air traffic control system,
including regional air traffic control and radar systems.
As a member of the Air Transport Association Year 2000 Committee, the Company is
participating with other airlines to test and validate the year 2000 readiness
of the air transportation infrastructure such as airports and air traffic
control systems. At present, no comprehensive inventory and risk assessment of
airport and air traffic control systems has been completed, and therefore the
Company cannot determine to what degree, if any, the air transportation
infrastructure is at risk of failing to meet year 2000 readiness standards. In
addition, the Company cannot presently estimate what cost, if any, will be
incurred by the Company to make modifications to its aircraft or other systems
or hardware to comply with requirements which may be imposed before the year
2000 by governmental agencies as part of their efforts to prepare for operations
in the year 2000 and beyond.
Estimated Costs of Achieving Year 2000 Readiness. 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 capital 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 capital and labor costs represents the
cost of 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 "Business" and "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 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 16.8% and 11.2%,
respectively, of consolidated revenues in 1997 and 1996. No other single
customer of the Company accounts for more than 10% of operating revenues.
7. Approximately two-thirds of the Company's operating revenues are sold by
travel agents and tour operators who generally have a choice of airlines when
booking a customer's travel. Although the Company intends to offer attractive
and competitive products to travel agents and tour operators and further intends
to maintain favorable relationships with them, any significant actions by large
numbers of travel agencies or tour operators to favor other airlines, or to
disfavor the Company, could have a material adverse effect on the Company.
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 20.0% and 20.5%, respectively, of operating
expenses in 1997 and 1996. Fuel prices are subject to factors which are beyond
the control of the Company, such as market supply and demand conditions, and
political or economic factors. Although the Company is able to contractually
pass through some fuel price increases to the U.S. military and tour operators,
a significant increase in fuel prices could have a material adverse effect on
the demand for the Company's services at profitable prices.
12. In June 1991, the Company's flight attendants elected the AFA as their
representative and ratified a four-year collective bargaining agreement in
December 1994. In June 1993, the Company's cockpit crews elected the IBT 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 and the Federal Aviation Administration and by
certain other governmental agencies, such as the Federal Communications
Commission, the Commerce Department, the Customs Service, the Immigration and
Naturalization Service, the Animal and Plant Inspection Service of the
Department of Agriculture, and the Environmental Protection Agency. These
agencies propose and issue regulations from time to time which can significantly
increase the cost of airline operations. For example, the FAA in recent years
has issued a number of aircraft maintenance directives and other regulations
requiring action by the Company on such matters as collision avoidance systems,
airborne wind shear avoidance systems, noise abatement, airworthiness of aging
aircraft and increased inspection requirements. Other laws and regulations have
been considered from time to time that would prohibit or restrict the ownership
and/or transfer of airline routes and takeoff or landing slots at certain
airports. The Company cannot predict the nature of future changes in laws or
regulations to which it may become subject, and such laws and regulations could
have a material adverse effect on the financial condition of the Company.
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>
PART II - Continued
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Amtran, Inc.
We have audited the accompanying consolidated balance sheets of Amtran, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amtran, Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
/S/ERNST & YOUNG LLP
Indianapolis, Indiana
February 4, 1998
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
1997 1996
------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 104,196 $ 73,382
Receivables, net of allowance for doubtful accounts
(1997 - $1,682; 1996 - $1,274) 23,266 20,239
Inventories, net 14,488 13,888
Assets held for sale - 14,112
Prepaid expenses and other current assets 20,892 14,571
------------------ ------------------
Total current assets 162,842 136,192
Property and equipment:
Flight equipment 463,576 381,186
Facilities and ground equipment 54,933 51,874
------------------ ------------------
518,509 433,060
Accumulated depreciation (250,828) (208,520)
------------------ ------------------
267,681 224,540
Assets held for sale 8,691 -
Deposits and other assets 11,643 8,869
------------------ ------------------
Total assets $ 450,857 $ 369,601
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,975 $ 30,271
Accounts payable 10,511 13,671
Air traffic liabilities 68,554 49,899
Accrued expenses 80,312 64,813
------------------ ------------------
Total current liabilities 168,352 158,654
Long-term debt, less current maturities 182,829 119,100
Deferred income taxes 31,460 20,216
Other deferred items 11,226 16,887
Commitments and contingencies
Shareholders' equity:
Preferred stock; authorized 10,000,000 shares; none issued - -
Common stock, without par value; authorized 30,000,000
shares; issued 11,829,230 - 1997; 11,799,852 - 1996 38,760 38,341
Treasury stock: 185,000 shares (1,760) (1,760)
Additional paid-in-capital 15,340 15,618
Retained earnings 6,250 4,678
Deferred compensation - ESOP (1,600) (2,133)
------------------ ------------------
56,990 54,744
------------------ ------------------
Total liabilities and shareholders' equity $ 450,857 $ 369,601
================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year ended December 31,
1997 1996 1995
------------------------------------------------------
Operating revenues:
<S> <C> <C> <C>
Scheduled service $ 371,762 $ 386,488 $ 361,967
Charter 359,177 310,569 307,091
Ground package 22,317 22,302 20,421
Other 29,937 31,492 25,530
---------------- ---------------- ----------------
Total operating revenues 783,193 750,851 715,009
---------------- ---------------- ----------------
Operating expenses:
Salaries, wages and benefits 172,499 163,990 141,072
Fuel and oil 153,701 161,226 129,636
Handling, landing and navigation fees 69,383 70,122 74,400
Depreciation and amortization 62,468 61,661 55,827
Aircraft rentals 54,441 65,427 55,738
Aircraft maintenance, materials and repairs 51,465 55,175 55,423
Crew and other employee travel 36,596 35,855 31,466
Passenger service 32,812 32,745 34,831
Commissions 26,102 26,677 24,837
Ground package cost 19,230 18,246 15,926
Other selling expenses 15,462 17,563 14,934
Advertising 12,658 10,320 8,852
Facilities and other rentals 8,557 9,625 7,414
Disposal of assets - 4,475 -
Other 54,335 53,800 46,717
---------------- ---------------- ----------------
Total operating expenses 769,709 786,907 697,073
---------------- ---------------- ----------------
Operating income (loss) 13,484 (36,056) 17,936
Other income (expense):
Interest income 1,584 617 410
Interest (expense) (9,454) (4,465) (4,163)
Other 413 323 470
---------------- ---------------- ----------------
Other expenses (7,457) (3,525) (3,283)
---------------- ---------------- ----------------
Income (loss) before income taxes 6,027 (39,581) 14,653
Income taxes (credits) 4,455 (12,907) 6,129
---------------- ---------------- ----------------
Net income (loss) $ 1,572 $ (26,674) $ 8,524
================ ================ ================
Basic earnings per common share:
Average shares outstanding 11,577,727 11,535,425 11,481,861
Net income (loss) per share $ 0.14 $ (2.31) $ 0.74
================ ================ ================
Diluted earnings per common share:
Average shares outstanding 11,673,330 11,535,425 11,519,232
Net income (loss) per share $ 0.13 $ (2.31) $ 0.74
================ ================ ================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Additional Deferred
Common Treasury Paid-in Retained Compensation
Stock Stock Capital Earnings ESOP
-------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 37,941 $ (1,091) $ 16,008 $ 22,828 $ (2,933)
Net income - - - 8,524 -
Issuance of common stock for ESOP - - (111) - 267
Restricted stock grants 152 - (19) - -
Stock options exercised 166 - (57) - -
Purchase of 54,000 shares of - (490) - - -
treasury stock ------------- ------------- ------------- ------------- ----------------
Balance, December 31, 1995 38,259 (1,581) 15,821 31,352 (2,666)
Net loss - - - (26,674) -
Issuance of common stock for ESOP - - (173) - 533
Restricted stock grants 32 - (7) - -
Stock options exercised 50 - (23) - -
Purchase of 16,000 shares of - (179) - - -
treasury stock
------------- ------------- ------------- ------------- ----------------
Balance, December 31, 1996 38,341 (1,760) 15,618 4,678 (2,133)
Net income - - - 1,572 -
Issuance of common stock for ESOP - - (214) - 533
Restricted stock grants 419 - (185) - -
Executive stock options expired - - 121 - -
------------- ------------- ------------- ------------- ----------------
Balance, December 31, 1997 $ 38,760 $ (1,760) $ 15,340 $ 6,250 $ (1,600)
============= ============= ============= ============= ================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
1997 1996 1995
-------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 1,572 $ (26,674) $ 8,524
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 62,468 61,661 55,827
Deferred income taxes (credits) 11,244 (13,246) 4,025
Other non-cash items (666) 28,185 9,699
Changes in operating assets and liabilities:
Receivables (3,027) 3,919 (6,768)
Inventories (1,637) (948) 2,739
Assets held for sale 5,356 (14,112) -
Prepaid expenses (6,321) 6,081 (4,061)
Accounts payable (3,160) 2,519 (166)
Air traffic liabilities 18,655 (6,632) 10,466
Accrued expenses 15,452 (8,582) 6,793
--------------- --------------- ---------------
Net cash provided by operating activities 99,936 32,171 87,078
--------------- --------------- ---------------
Investing activities:
Proceeds from sales of property and equipment 8,005 529 21,564
Capital expenditures (84,233) (69,884) (57,835)
Reductions of (additions to) other assets 173 6,194 (7,761)
--------------- --------------- ---------------
Net cash used in investing activities (76,055) (63,161) (44,032)
--------------- --------------- ---------------
Financing activities:
Proceeds from long-term debt 134,000 21,390 6,000
Payments on long-term debt (127,067) (9,580) (17,567)
Purchase of treasury stock - (179) (490)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 6,933 11,631 (12,057)
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 30,814 (19,359) 30,989
Cash and cash equivalents, beginning of period 73,382 92,741 61,752
--------------- --------------- ---------------
Cash and cash equivalents, end of period $ 104,196 $ 73,382 $ 92,741
=============== =============== ===============
Supplemental disclosures:
Cash payments for:
Interest $ 6,197 $ 3,823 $ 4,515
Income taxes (refunds) (311) 515 1,069
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital $ 30,650 $ - $ 31,708
expenditures
Issuance of short-term debt directly for capital 4,750 - -
expenditures
</TABLE>
See accompanying notes.
<PAGE>
Part II - Continued
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Business Description
The consolidated financial statements include the accounts of Amtran, Inc.
(the "Company") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The Company operates principally in one business segment through American
Trans Air, Inc. ("ATA"), its principal subsidiary, which accounts for
approximately 95% of the Company's operating revenues. ATA is a
U.S.-certificated air carrier providing domestic and international charter
and scheduled passenger services. Approximately 48% of the Company's 1997
operating revenues were generated through scheduled services to such
destinations as Hawaii, Las Vegas, Florida, California, Mexico and the
Caribbean, while approximately 46% of 1997 operating revenues were derived
from charter operations with independent tour operators and the U.S.
military to numerous destinations throughout the world.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are carried at cost and are primarily comprised of
investments in U.S. Treasury bills, commercial paper and time deposits
which are purchased with original maturities of three months or less (see
Note 2).
Assets Held For Sale
Assets held for sale are carried at the lower of net book value or
estimated net realizable value.
Inventories
Inventories consist primarily of expendable aircraft spare parts, fuel and
other supplies. Aircraft parts inventories are stated at cost and are
reduced by an allowance for obsolescence. The obsolescence allowance is
provided by amortizing the cost of the aircraft parts inventory, net of an
estimated residual value, over its estimated useful service life. The
obsolescence allowance at December 31, 1997 and 1996, was $7.6 million and
$6.6 million, respectively. Inventories are charged to expense when
consumed.
Revenue Recognition
Revenues are recognized when the transportation is provided. Customer
flight deposits and unused passenger tickets sold are included in air
traffic liability. As is customary within the industry, the Company
performs periodic evaluations of this estimated liability, and any
adjustments resulting therefrom, which can be significant, are included in
the results of operations for the periods in which the evaluations are
completed.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is recognized. The
amount of passenger traffic commissions paid but not yet recognized as
expense is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
<PAGE>
Property and Equipment
Property and equipment is recorded at cost and is depreciated to residual
value over its estimated useful service life using the straight-line
method. Advanced payments for future aircraft purchases are recorded at
cost. As of December 31, 1997 and 1996, the Company had made advanced
payments for future aircraft deliveries totaling $6.0 million and $2.7
million, respectively. The estimated useful service lives for the
principal depreciable asset classifications are as follows:
<TABLE>
<CAPTION>
Asset Estimated Useful Service Life
--------------------------------------------------- -------------------------------------------------------------
Aircraft and related equipment:
<S> <C> <C>
Lockheed L-1011 16 years
Boeing 757-200 20 years
Boeing 727-200 11 years
Major rotable parts, avionics and assemblies Life of equipment to which applicable
(Generally ranging from 10-16 years)
Improvements to leased flight equipment Period of benefit or term of lease
Other property and equipment 3 - 7 years
</TABLE>
The costs of major airframe and engine overhauls are capitalized and
amortized over their estimated useful lives based upon usage (or to
earlier fleet common retirement dates) for both owned and leased aircraft.
Financial Instruments
The carrying amounts of cash equivalents, receivables and both
variable-rate and fixed-rate debt (see Note 5) approximate fair value. The
fair value of fixed-rate debt, including current maturities, is estimated
using discounted cash flow analysis based on the Company's current
incremental rates for similar types of borrowing arrangements.
Income (Loss) Per Share
In 1997, the Company adopted Financial Accounting Standards Board ("FASB")
Statement 128, "Earnings per Share", which establishes new standards for
the calculation and disclosure of earnings per share. All prior period
earnings per share amounts disclosed in the financial statements have been
restated to conform to the new standards under Statement 128 (see Note
10).
2. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following:
December 31,
1997 1996
--------------- ----------------
(In thousands)
Cash $ 25,406 $ 18,523
Commercial paper 34,817 -
U.S. Treasury repurchase agreements 43,973 54,859
--------------- ----------------
$ 104,196 $ 73,382
=============== ================
Cash equivalents of $0.0 and $6.3 million at December 31, 1997 and
December 31, 1996, respectively, were pledged to collateralize amounts
which could become due under letters of credit. At December 31, 1997 and
1996, there were no amounts drawn against letters of credit (see Note 4).
3. Property and Equipment
The Company's property and equipment consisted of the following:
December 31,
1997 1996
-------------------------
(In thousands)
Flight equipment, including airframes, $ 463,576 $ 381,186
engines and other
Less accumulated depreciation 219,590 182,392
---------- ----------
243,986 198,794
---------- ----------
Facilities and ground equipment 54,933 51,874
Less accumulated depreciation 31,238 26,128
---------- ----------
23,695 25,746
---------- ----------
$ 267,681 $ 224,540
========== ==========
4. Short-Term Borrowings
The Company maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for issuance of letters of credit.
The credit facility is available until June 1998 and is collateralized by
certain aircraft engines. Borrowings against the facility bear interest at
the bank's prime rate plus .25%. There were no borrowings against this
credit facility at December 31, 1997 or 1996. At December 31, 1997 and
1996, the Company had outstanding letters of credit aggregating $3.5
million and $4.1 million, respectively, under such facility.
<PAGE>
5. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ---- -------------
(In thousands)
<S> <C> <C> <C>
Unsecured Senior Notes, fixed rate of 10.5% payable on $100,000 $ -
August 1, 2004
Note payable to bank; prime to prime plus 0.5% (8.5% and 9.0% at
December 31, 1997), payable on or before April 2001 34,000 123,246
Note payable to institutional lender; fixed rate of 7.80% payable
in varying installments through September 2003 7,045 8,420
Note payable to institutional lender; fixed rate of 7.08% payable
in varying installments through January 1999 29,982 -
City of Indianapolis advance, payable in December 2000 10,000 10,000
City of Chicago variable rate special facility revenue bonds (4.29%
on December 31, 1997), payable in December 2020 6,000 6,000
Other 4,777 1,705
-------------- -------------
191,804 149,371
Less current maturities 8,975 30,271
-------------- -------------
$182,829 $119,100
============== =============
</TABLE>
On July 24, 1997, the Company completed two separate financings designed
to lengthen the maturity of the Company's long-term debt and diversify its
credit sources. On that date, the Company (i) sold $100.0 million
principal amount of unsecured seven-year notes in a private offering under
Rule 144A, and (ii) entered into a new secured revolving credit facility.
The unsecured senior notes mature on August 1, 2004. Each note bears
interest at the annual rate of 10.5%, payable on February 1 and August 1
of each year beginning February 1, 1998. 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 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 used the balance of the proceeds for general corporate
purposes.
Concurrently with the issuance of the unsecured notes, 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 LIBOR plus 1.50% to 2.50% or the agent bank's prime rate.
The Company's former credit facility had initially provided a maximum of
$125.0 million, including $25.0 million for stand-by letters of credit,
subject to the maintenance of certain collateral value, including certain
owned Lockheed L-1011 aircraft, certain receivables, and certain rotables
and spare parts. Loans under the former credit facility were subject to
interest, at the Company's option, at either prime to prime plus 0.75%, or
the Eurodollar rate plus 1.50% to 2.75%. The former facility was scheduled
to mature on April 1, 1999.
The notes and credit facility are subject to restrictive covenants,
including, among other things, limitations on: the incurrence of
additional indebtedness; the payment of dividends; certain transactions
with shareholders and affiliates; or the creation of liens on or other
transactions involving certain assets. In addition, certain covenants
require certain financial ratios to be maintained.
In December 1995, the Company entered into a sale/lease transaction with
the City of Indianapolis on its maintenance facility at the Indianapolis
International Airport which resulted in the advance of $10.0 million in
cash to the Company, as secured by the maintenance facility. The Company
is obligated to pay $0.6 million per year to the City of Indianapolis for
five years, which represents interest on the City's associated outstanding
debt obligation. As of December 2000, the advance of $10.0 million must be
repaid to the City of Indianapolis. The Company may elect to repay the
balance using special facility bonds underwritten by the City's Airport
Authority or by using the Company's own funds.
The Company has made voluntary prepayments of long-term debt which has had
the effect of reducing interest expense by approximately $3.4 million and
$5.9 million during 1997 and 1996, respectively.
Future maturities of long-term debt are as follows:
December 31, 1997
-----------------------
(In thousands)
1998 $ 8,975
1999 28,626
2000 11,382
2001 35,374
2002 1,192
Thereafter 106,255
-----------------------
$ 191,804
=======================
Interest capitalized in connection with long-term asset purchase agree-
ments was $0.7 million and $1.4 million in 1997 and 1996, respectively.
In December 1997, the Company purchased a Boeing 727-200 and issued a $4.7
million note payable which is classified in current maturities of
long-term debt. The note payable is due in the first quarter of 1998, and
is secured by $4.7 million in cash held in escrow. This restricted cash is
classified as cash and cash equivalents at December 31, 1997. The note was
repaid in January 1998.
<PAGE>
6. Lease Commitments
At December 31, 1997, the Company had aircraft leases on one Lockheed
L-1011, 23 Boeing 727-200s, and six Boeing 757-200s. The Lockheed L-1011
has an initial term of 60 months which expires in 2002. The Boeing
757-200s have initial lease terms that expire from 2002 through 2015. The
Boeing 727-200s have initial terms of three to seven years and expire
between 1998 and 2003. The Company also leases nine engines for use on the
Lockheed L-1011s through 2001.
The Company is responsible for all maintenance costs on these aircraft and
must meet specified airframe and engine return conditions.
As of December 31, 1997, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance
facilities, with original lease terms that vary from 3 to 40 years and
expire at various dates through 2035. The lease agreements relating to the
ground facilities, which are primarily owned by governmental units or
authorities, generally do not provide for transfer of ownership nor do
they contain options to purchase.
In December 1995, the Company sold its option to purchase its headquarters
facility to the City of Indianapolis for $2.9 million, and thereafter
entered into a capital lease agreement with the City relating to the
continued use of the headquarters and maintenance facility. A gain on the
sale of the option equal to $1.3 million was recognized in income in 1995,
with the remainder of the gain to be amortized to income during the
periods the headquarters facilities are used. The headquarters agreement
has an initial term of four years, with two options to extend of three and
five years, respectively, and is cancelable after two years with advance
notice. The Company is responsible for maintenance, taxes, insurance and
other expenses incidental to the operation of the facilities.
Future minimum lease payments at December 31, 1997, for noncancelable
operating leases with initial terms of more than one year are as follows:
Facilities
Flight And Ground
Equipment Equipment Total
-------------------------------------------------
(In thousands)
1998 $ 48,380 $6,458 $54,838
1999 46,842 5,825 52,667
2000 37,150 5,230 42,380
2001 37,451 3,877 41,328
2002 31,412 3,754 35,166
Thereafter 229,946 22,941 252,887
--------------- ------------- -------------
$431,181 $48,085 $479,266
=============== ============= =============
Rental expense for all operating leases in 1997, 1996 and 1995 was $63.0
million, $75.0 million and $63.0 million, respectively.
<PAGE>
7. Income Taxes
The provision for income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---------------- ---------------- ----------------
(In thousands)
Federal:
<S> <C> <C>
Current $ 173 $1,280
$ -
Deferred 3,706 (11,798) 4,399
---------------- ---------------- ----------------
3,879 (11,798) 5,679
State:
Current 163 161 107
Deferred 413 (1,270) 343
576 (1,109) 450
Income tax expense (credit) $ 4,455 $(12,907) $6,129
================= ================= ================
</TABLE>
The provision for income taxes differed from the amount obtained by
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------ ------------- -----------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate (credit) $2,049 $(13,457) $4,982
State income taxes (credit), net of federal benefit 367 (732) 535
Non-deductible expenses 1,947 1,282 998
Benefit of change in estimate of state income tax rate - - (258)
Benefit of tax reserve adjustments - - (203)
Other, net 92 - 75
------------ ------------- -----------
Income tax expense (credit) $4,455 $(12,907) $6,129
============ ============= ===========
</TABLE>
<PAGE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the
financial statements. The principal temporary differences relate to the
use of accelerated methods of depreciation and amortization for tax
purposes. Deferred income tax liability components are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
Deferred tax liabilities:
<S> <C> <C>
Tax depreciation in excess of book depreciation $61,117 $56,885
Other taxable temporary differences 597 476
-------------- ----------
Deferred tax liabilities $61,714 $57,361
-------------- ----------
Deferred tax assets:
Tax benefit of net operating loss carryforwards $ 28,744 $ 29,852
Investment and other tax credit carryforwards 3,032 4,720
Vacation pay accrual 2,595 2,044
Amortization of lease credits 1,979 -
Other deductible temporary differences 3,660 4,928
-------------- ---------
Deferred tax assets $40,010 $41,544
-------------- ---------
Deferred taxes classified as:
Current asset
Current asset $ 9,756 $ 4,399
============== ========
Non-current liability $31,460 $20,216
============== ========
</TABLE>
At December 31, 1997, for federal tax reporting purposes, the Company had
approximately $78.6 million of net operating loss carryforwards available
to offset future federal taxable income and $3.0 million of investment and
other tax credit carryforwards available to offset future federal tax
liabilities. The net operating loss carryforwards expire as follows: 2002,
$10.2 million; 2003, $8.1 million; 2004, $9.0 million; 2005, $3.5 million;
2009, $14.7 million; 2011, $33.1 million. Investment tax credit
carryforwards of $1.6 million expire principally in 2000, and other tax
credit carryforwards of $1.4 million have no expiration dates.
8. Retirement Plan
The Company has a defined contribution 401(k) savings plan which provides
for participation by substantially all the Company's employees who have
completed one year of service. The Company has elected to contribute an
amount equal to 35% in 1997, and 30% in 1996 and 1995, of the amount
contributed by each participant up to the first six percent of eligible
compensation. Company matching contributions expensed in 1997, 1996 and
1995 were $1.8 million, $1.3 million and $1.2 million, respectively.
In 1993, the Company added an Employee Stock Ownership Plan ("ESOP")
feature to its existing 401(k) savings plan. The ESOP used the proceeds of
a $3.2 million loan from the Company to purchase 200,000 shares of the
Company's common stock. The selling shareholder was the Company's
principal shareholder. The Company recognized $0.3 million, $0.3 million,
and $0.4 million in 1997, 1996 and 1995, respectively, as compensation
expense related to the ESOP. Shares of common stock held by the ESOP will
be allocated to participating employees annually as part of the Company's
401(k) savings plan contribution. The fair value of the shares allocated
during the year is recognized as compensation expense.
9. Shareholders' Equity
In the first quarter of 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. As of
December 31, 1997, the Company had repurchased 185,000 shares at a total
cost of $1.8 million.
The Company's 1993 Incentive Stock Plan for Key Employees (1993 Plan)
authorizes the grant of options for up to 900,000 shares of the Company's
common stock. The Company's 1996 Incentive Stock Plan for Key Employees
(1996 Plan) authorizes the grant of options for up to 3,000,000 shares of
the Company's common stock. Options granted have 5 to 10-year terms and
generally vest and become fully exercisable over specified periods up to
three years of continued employment.
A summary of common stock option changes follows:
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
(In dollars)
Outstanding at December 31, 1994 313,050 13.73
Granted 190,000 8.71
Exercised 10,417 10.56
Canceled 97,333 11.73
---------
Outstanding at December 31, 1995 395,300 11.92
---------
Granted 1,302,400 7.87
Exercised 3,100 8.94
Canceled 64,700 10.87
----------
Outstanding at December 31, 1996 1,629,900 8.74
---------
Granted 1,588,500 8.49
Exercised - -
Canceled 706,000 7.14
----------
Outstanding at December 31, 1997 2,512,400 9.39
==========
Options exercisable at December 31, 1996 497,015 9.99
==========
Options exercisable at December 31, 1997 390,232 12.02
==========
During 1996, the Company adopted FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) with respect to its stock options. As
permitted by FAS 123, the Company has elected to continue to account for
employee stock options following Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
The weighted-average fair value of options granted during 1997 and 1996 is
estimated at $5.28 and $4.49 per share, respectively, on the grant date.
These estimates were made using the Black-Scholes option
<PAGE>
pricing model with the following weighted-average assumptions for 1997 and
1996: risk-free interest rate of 6%; expected market price volatility of
.40 and .48; weighted-average expected option life equal to the
contractual term; estimated forfeitures of 5%; and no dividends.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models use highly subjective assumptions, including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion the existing models do
not necessarily provide a reliable single measure of the fair value of its
employees' stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3
years). Therefore, because FAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1998. The Company's pro forma information follows:
1997 1996 1995
(In thousands, except per share data)
Net income (loss) as reported $ 1,572 $ (26,674) $ 8,524
Net income (loss) pro forma 89 (28,864) 8,456
Diluted income (loss) per share
as reported .13 (2.31) .74
Diluted income (loss) per share
pro forma .01 (2.50) .74
Options outstanding at December 31, 1997, expire from August 2003 to
February 2007. A total of 1,387,600 shares are reserved for future grants
as of December 31, 1997, under the 1993 and 1996 Plans. The following
table summarizes information concerning outstanding and exercisable
options at December 31, 1997:
Range of Exercise Prices $7 - 11 $12 - 16
Options outstanding:
Weighted-Average Remaining
Contractual Life 8.8 years 7.3 years
Weighted-Average Exercise Price $8.50 $14.30
Number 1,226,200 286,200
Options exercisable:
Weighted-Average Exercise Price $9.19 $15.11
Number 203,791 186,441
<PAGE>
10. Earnings per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995
------------ ------------ --------------
(Dollars in thousands, except shares and per share data)
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $ 1,572 $ (26,674) $ 8 ,524
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,577,727 11,535,425 11,481,861
Effect of dilutive securities:
Employee stock options 64,725 - 37,371
Restricted shares 30,878 - -
------------- ---------------- ----------------
Dilutive potential common shares 95,603 - 37,371
------------- ---------------- ----------------
Denominator for diluted earnings per
share - adjusted weighted average shares 11,673,330 11,535,425 11,519,232
============= ================ ================
Basic earnings per share $ 0.14 $ (2.31) $ 0.74
============= ================ ================
Diluted earnings per share $ 0.13 $ (2.31) 0.74
============= ================ ================
Potentially dilutive securities were not included in the computation of 1996 diluted earnings per share because the year
resulted in a net loss and, therefore, their effect would be antidilutive.
</TABLE>
11. Major Customer
The United States government is the only customer that accounted for more
than 10% of consolidated revenues. U.S. government revenues accounted for
16.8%, 11.2% and 10.8% of consolidated revenues for 1997, 1996 and 1995,
respectively.
12. Commitments and Contingencies
In November 1994, the Company signed a purchase agreement for six new
Boeing 757-200s, which, as subsequently amended, now provides for the
delivery of seven total aircraft. The amended agreement provides for
deliveries of aircraft between 1995 and 1998. As of December 31, 1997, the
Company had taken delivery of five Boeing 757-200s under this purchase
agreement and financed those aircraft using leases accounted for as
operating leases. The two remaining aircraft have an aggregate purchase
price of approximately $50.0 million per aircraft, subject to escalation.
Advance payments totaling approximately $12.6 million ($6.3 million per
aircraft) are required to be made for the remaining two undelivered
aircraft, with the balance of the purchase price due upon delivery. As of
December 31, 1997 and 1996, the Company had made $6.0 million and $2.7
million in advanced payments, respectively, pertaining to future aircraft
deliveries.
Various claims, contractual disputes and lawsuits against the Company
arise periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
<PAGE>
The Company has signed purchase agreements to acquire 11 Boeing 727-200ADV
aircraft at agreed prices. Nine of the aircraft to be purchased are
currently leased by the Company. The remaining 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.
<TABLE>
<CAPTION>
Financial Statements and Supplementary Data
Amtran, Inc. and Subsidiaries
1997 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
<S> <C> <C> <C> <C>
Operating revenues $194,284 $192,187 $210,790 $185,931
Operating expenses 186,556 191,166 205,464 186,523
Operating income (loss) 7,728 1,021 5,326 (592)
Other expenses (1,411) (1,501) (1,752) (2,793)
Income (loss) before income taxes 6,317 (480) 3,574 (3,385)
Income taxes (credits) 3,095 269 1,828 (737)
Net income (loss) $ 3,222 $ (749) $ 1,746 $(2,648)
Net income (loss) per share - basic $ .28 $ (.06) $ .15 $ (.23)
Net income (loss) per share - diluted $ .27 $ (.06) $ .15 $ (.23)
Amtran, Inc. and Subsidiaries
1996 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
Operating revenues $207,135 $195,395 $199,698 $148,623
Operating expenses 201,704 198,321 218,776 168,106
Operating income (loss) 5,431 (2,926) (19,078) (19,483)
Other expenses (1,069) (648) (355) (1,453)
Income (loss) before income taxes 4,362 (3,574) (19,433) (20,936)
Income taxes (credits) 2,009 (1,289) (6,800) (6,827)
Net income (loss) $ 2,353 $(2,285) $(12,633) $(14,109)
Net income (loss) per share - basic $ .21 $ (.20) $ (1.09) $ (1.23)
Net income (loss) per share - diluted $ .20 $ (.20) $ (1.09) $ (1.23)
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change of auditors or disagreements on accounting methods have occurred which
would require disclosure hereunder.
<PAGE>
Part III
Item 10. Directors and Officers of the Registrant
The information contained on pages 4 and 5 of Amtran, Inc. and Subsidiaries'
Proxy Statement dated April 3, 1998, with respect to directors and executive
officers of the Company, is incorporated herein by reference in response to this
item.
Item 11. Executive Compensation
The information contained on pages 12 through 15 of Amtran, Inc. and
Subsidiaries' Proxy Statement dated April 3, 1998, with respect to executive
compensation and transactions, is incorporated herein by reference in response
to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained on pages 10 and 11 of Amtran, Inc. and Subsidiaries'
Proxy Statement dated April 3, 1998, with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on page 6 of Amtran, Inc. and Subsidiaries' Proxy
Statement dated April 3, 1998, with respect to certain relationships and related
transactions, is incorporated herein by reference in response to this item.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries for the year ended December 31, 1997, are
included in Item 8:
o Consolidated Balance Sheets for years ended December 31, 1997
and 1996
o Consolidated Statements of Operations for years ended
December 31, 1997, 1996 and 1995
o Consolidated Statements of Changes in Shareholders' Equity
for years ended December 31, 1997, 1996 and 1995
o Consolidated Statements of Cash Flows for years ended
December 31, 1997, 1996 and 1995
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following consolidated financial information for the years
1997, 1996 and 1995 is included in Item 14(d):
Page
o Schedule II - Valuation and Qualifying Accounts 73
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits
The following exhibits are submitted as a separate
section of this report:
Page
23. Consent of Independent Auditor 72
(b) Reports on Form 8-K
There were no Form 8-Ks filed during the quarter ended December
31, 1997.
(c) Exhibits
This section is not applicable.
(d) Financial Statement Schedule
This section is not applicable.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amtran, Inc.
(Registrant)
Date March 31, 1998 John P. Tague
President and Chief Executive Officer
Director
Date March 31, 1998 James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date March 31, 1998 Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
Date March 31, 1998 Dalen D. Thomas
Senior Vice President, Sales, Marketing and Strategic
Planning
Director
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement Form S-8 No. 33-65708 pertaining to the 1993 Incentive
Stock Plan for Key Employees of Amtran, Inc. and its subsidiaries
of our report dated February 4, 1998, with respect to the
consolidated financial statements and schedule of Amtran, Inc.,
included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/S/ERNST & YOUNG LLP
Indianapolis, Indiana
March 26, 1998
<PAGE>
<TABLE>
<CAPTION>
PART IV SCHEDULE II
Item 14
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- -------------- ------------------------------- -------------- --------------
Additions
-------------------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
Description of Period Expenses Describe Describe Period
- ------------------------------------------- -------------- -------------- -------------- -------------- --------------
Year ended December 31, 1995:
Deducted from asset accounts:
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 1,347 $ 2,115 $ - $ 2,159 (1) $ 1,303
Allowance for obsolescence - 6,564 258 - 1,248 (2) 5,574
Inventory
-------------- -------------- -------------- -------------- --------------
Totals $ 7,911 $ 2,373 $ - $ 3,407 $ 6,877
============== ============== ============== ============== ==============
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,303 $ 791 $ - $ 820 (1) $ 1,274
Allowance for obsolescence - 5,574 1,432 - 412 (2) 6,594
Inventory
-------------- -------------- -------------- -------------- --------------
Totals $ 6,877 $ 2,223 $ - $ 1,232 $ 7,868
============== ============== ============== ============== ==============
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,274 $ 1,261 $ - $ 853 (1) $ 1,682
Allowance for obsolescence - 6,594 1,474 - 437 (2) 7,631
Inventory
Valuation allowance - Assets
held for sale - 200 - - 200
-------------- -------------- -------------- -------------- --------------
Totals $ 7,868 $ 2,935 $ - $ 1,290 $ 9,513
============== ============== ============== ============== ==============
(1) Uncollectible accounts written off, net of recoveries
(2) Obsolescence allowance related to inventory items transferred to flight equipment or sold
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000898904
<NAME> AMTRAN INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 104,196
<SECURITIES> 0
<RECEIVABLES> 24,948
<ALLOWANCES> 1,682
<INVENTORY> 14,488
<CURRENT-ASSETS> 162,842
<PP&E> 518,509
<DEPRECIATION> 250,828
<TOTAL-ASSETS> 450,857
<CURRENT-LIABILITIES> 168,352
<BONDS> 0
0
0
<COMMON> 38,760
<OTHER-SE> 18,230
<TOTAL-LIABILITY-AND-EQUITY> 450,857
<SALES> 783,193
<TOTAL-REVENUES> 783,193
<CGS> 0
<TOTAL-COSTS> 769,709
<OTHER-EXPENSES> (1,997)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,454
<INCOME-PRETAX> 6,027
<INCOME-TAX> 4,455
<INCOME-CONTINUING> 1,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,572
<EPS-PRIMARY> .14
<EPS-DILUTED> .13
</TABLE>
