United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 For the Transition Period From to
Commission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes X No ______
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,856,007 shares outstanding as of
October 31, 1998
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
--------------- --------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 110,807 $ 104,196
Receivables, net of allowance for doubtful accounts
(1998 - $1,416; 1997 - $1,682) 26,433 23,266
Inventories, net 17,604 14,488
Prepaid expenses and other current assets 22,533 20,892
--------------- ---------------
Total current assets 177,377 162,842
Property and equipment:
Flight equipment 548,659 463,576
Facilities and ground equipment 63,052 54,933
--------------- ---------------
611,711 518,509
Accumulated depreciation (287,831) (250,828)
--------------- ---------------
323,880 267,681
Assets held for sale 7,176 8,691
Deposits and other assets 11,978 11,643
--------------- ---------------
Total assets $ 520,411 $ 450,857
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,477 $ 8,975
Accounts payable 15,644 10,511
Air traffic liabilities 68,671 68,554
Accrued expenses 97,426 80,312
--------------- ---------------
Total current liabilities 188,218 168,352
Long-term debt, less current maturities 174,262 182,829
Deferred income taxes 49,581 31,460
Other deferred items 10,395 11,226
Commitments and contingencies
Shareholders' equity:
Preferred stock; authorized 10,000,000 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 12,054,052 - 1998; 11,798,852 - 1997 42,496 38,760
Additional paid-in-capital 13,529 15,340
Deferred compensation - ESOP (1,066) (1,600)
Treasury stock: 193,506 shares - 1998; 185,000 shares 1997 (1,881) (1,760)
Retained earnings 44,877 6,250
--------------- ---------------
97,955 56,990
--------------- ---------------
Total liabilities and shareholders' equity $ 520,411 $ 450,857
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-------------------------------------- --------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
<S> <C> <C> <C> <C>
Scheduled service $ 134,973 $ 102,024 $ 384,456 $ 271,282
Charter 92,949 95,563 277,763 288,928
Ground package 6,092 5,322 17,629 16,347
Other 8,400 7,881 30,335 20,705
------------------ ----------------- ------------------ -----------------
Total operating revenues 242,414 210,790 710,183 597,262
------------------ ----------------- ------------------ -----------------
Operating expenses:
Salaries, wages and benefits 53,442 43,574 155,795 127,981
Fuel and oil 35,554 41,820 107,639 118,890
Handling, landing and navigation fees 22,226 19,906 57,503 54,368
Depreciation and amortization 18,612 16,558 58,293 45,994
Aircraft maintenance, materials and repairs 14,446 15,158 41,641 40,083
Aircraft rentals 13,400 13,474 39,249 41,758
Crew and other employee travel 11,330 10,378 31,218 27,684
Passenger service 10,159 9,977 26,871 25,751
Commissions 6,933 6,964 21,521 19,553
Other selling expenses 5,272 4,122 16,451 10,916
Ground package cost 5,097 4,548 14,985 14,042
Advertising 4,392 3,160 13,421 9,818
Facility and other rentals 2,382 2,200 6,991 6,551
Other 16,272 13,625 47,655 39,797
------------------ ----------------- ------------------ -----------------
Total operating expenses 219,517 205,464 639,233 583,186
------------------ ----------------- ------------------ -----------------
Operating income 22,897 5,326 70,950 14,076
Other income (expense):
Interest income 1,106 585 3,324 810
Interest (expense) (3,204) (2,515) (9,671) (5,835)
Other 49 178 165 361
------------------ ----------------- ------------------ -----------------
Other expenses (2,049) (1,752) (6,182) (4,664)
------------------ ----------------- ------------------ -----------------
Income before income taxes 20,848 3,574 64,768 9,412
Income taxes 8,415 1,828 26,141 5,192
------------------ ----------------- ------------------ -----------------
Net income $ 12,433 $ 1,746 $ 38,627 $ 4,220
================== ================= ================== =================
Basic earnings per common share:
Average shares outstanding 11,766,933 11,586,330 11,654,875 11,577,706
Net income per share $ 1.06 $ 0.15 $ 3.31 $ 0.36
================== ================= ================== =================
Diluted earnings per common share:
Average shares outstanding 13,496,911 11,786,735 12,922,105 11,794,108
Net income per share $ 0.92 $ 0.15 $ 2.99 $ 0.36
================== ================= ================== =================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
1998 1997
------------------------------------
(Unaudited) (Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 38,627 $ 4,220
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 58,293 45,994
Deferred income taxes 18,121 8,495
Other non-cash items 295 (1,653)
Changes in operating assets and liabilities:
Receivables (3,167) (826)
Inventories (2,183) (1,103)
Assets held for sale - 5,206
Prepaid expenses (1,641) (6,024)
Accounts payable 5,133 (7,521)
Air traffic liabilities 117 13,739
Accrued expenses 18,275 10,205
---------------- ---------------
Net cash provided by operating activities 131,870 70,732
---------------- ---------------
Investing activities:
Proceeds from sales of property and equipment 1,061 7,959
Capital expenditures (115,636) (63,519)
Additions to other assets (1,065) (5,092)
---------------- ---------------
Net cash used in investing activities (115,640) (60,652)
---------------- ---------------
Financing activities:
Proceeds from sale of common stock 1,624 -
Purchase of treasury stock (121) -
Payments on short-term debt (4,750) -
Proceeds from long-term debt 6,000 125,000
Payments on long-term debt. (12,372) (126,254)
---------------- ---------------
Net cash used in financing activities (9,619) (1,254)
---------------- ---------------
Increase in cash and cash equivalents 6,611 8,826
Cash and cash equivalents, beginning of period 104,196 73,382
---------------- ---------------
Cash and cash equivalents, end of period $ 110,807 $ 82,208
================ ===============
Supplemental disclosures:
Cash payments for:
Interest $ 13,311 $ 5,043
Income taxes (refunds) 6,412 (314)
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital $ - $ 30,650
expenditures
</TABLE>
See accompanying notes.
<PAGE>
PART I - Financial Information
Item I - Financial Statements
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of Amtran, Inc. and
subsidiaries (the "Company") have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended September 30,
1998 and 1997 reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments, except for the change in
accounting estimate described in footnote 4) necessary to present fairly
the financial position, results of operations and cash flows for such
periods. Results for the nine months ended September 30, 1998, are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
------------------------------------------
Numerator:
<S> <C> <C>
Net income $12,433,000 $1,746,000
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,766,933 11,586,330
Effect of dilutive securities:
Employee stock options 1,729,475 198,905
Restricted shares 503 1,500
--------------------- ----------------------
Dilutive potential common shares 1,729,978 200,405
--------------------- ----------------------
Denominator for diluted earnings per
share - adjusted weighted average shares 13,496,911 11,786,735
===================== ======================
Basic earnings per share $1.06 $0.15
===================== ======================
Diluted earnings per share $0.92 $0.15
===================== ======================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------------------------------------
Numerator:
<S> <C> <C>
Net income $38,627,000 $ 4,220,000
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,654,875 11,577,706
Effect of dilutive securities:
Employee stock options 1,266,727 214,902
Restricted shares 503 1,500
--------------------- ----------------------
Dilutive potential common shares 1,267,230 216,402
--------------------- ----------------------
Denominator for diluted earnings per
share - adjusted weighted average shares 12,922,105 11,974,108
===================== ======================
Basic earnings per share $3.31 $0.36
===================== ======================
Diluted earnings per share $2.99 $0.36
===================== ======================
</TABLE>
3. 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
September 30, 1998, the Company had repurchased 193,506 shares at a total
cost of $1.9 million.
The Company's 1993 Incentive Stock Plan for Key Employees (1993 Plan)
authorized 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 of up
to three years of continued employment.
A summary of common stock option changes follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
(In dollars)
<S> <C> <C>
Outstanding at December 31, 1997 2,512,400 $9.06
Granted 479,700 $9.45
Exercised (228,056) $9.35
Canceled (15,666) $8.91
---------------
Outstanding at September 30, 1998 2,748,378 $9.19
===============
Options exercisable at December 31, 1997 390,232 $12.02
===============
Options exercisable at September 30, 1998 1,071,899 $9.49
===============
</TABLE>
<PAGE>
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.
Options outstanding at September 30, 1998, expire from August 2003 to
October 2008. A total of 1,151,622 shares are reserved for future grants
as of September 30, 1998, under the 1993 and 1996 Plans. The following
table summarizes information concerning outstanding and exercisable
options at September 30, 1998:
Range of Exercise Prices $7 - 11 $12 - 26
Options outstanding:
Weighted-Average Remaining Contractual Life 8.06 years 6.28 years
Weighted-Average Exercise Price $8.54 $14.75
Number 2,468,079 280,299
Options exercisable:
Weighted-Average Exercise Price $8.13 $14.79
Number 856,664 215,235
4. Change in Accounting Estimate
In July 1998 the Company committed to the purchase of five Lockheed L-1011
series 500 aircraft for delivery between August 1998 and June 1999.The
Company already operates 14 Lockheed L-1011 series 50 and series 100
aircraft, 13 of which are owned and one of which is leased. The purchase
agreement will expand the size of the Lockheed L-1011 fleet from 14 to 19
aircraft, and is expected to produce operating economies in such expenses
as crew training, crew salaries, and aircraft maintenance.
As a result of this fleet expansion, the Company now expects to operate
its existing fleet of Lockheed L-1011 series 50 and series 100 aircraft
through December 2004, as opposed to previous retirement dates which had
ranged from 2000 to 2002. The Company implemented this change in
accounting estimate effective July 1, 1998 which, in addition to extending
the estimated useful lives of the 13 owned aircraft, also reduced the
estimated salvage value for these aircraft as of the common retirement
date of December 2004.
This change in accounting estimate resulted in a reduction in depreciation
and amortization expense in the three and nine months ended September 30,
1998 of $972,000, and resulted in an increase in net income of $580,000 in
the same periods. Basic and fully diluted earnings per share in the three
and nine months ended September 30, 1998 were increased by $0.05 and
$0.04, respectively.
<PAGE>
PART I - Financial Information
Item II- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Quarter and Nine Months Ended September 30, 1998, Versus Quarter and Nine Months
Ended September 30, 1997
Overview
Amtran is a leading provider of targeted scheduled airline services and charter
airline services to leisure and other value-oriented travelers. Amtran, through
its principal subsidiary, American Trans Air, Inc. ("ATA"), has been operating
for 25 years and is the eleventh largest U.S. airline in terms of 1997 revenues
and revenue passenger miles ("RPMs"). ATA provides scheduled service 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, as well as to Denver,
Dallas-Ft. Worth and New York City's La Guardia and John F. Kennedy airports.
ATA also provides charter service throughout the world to independent tour
operators, specialty charter customers and the U.S. military.
In the third quarter of 1998, the Company generated record operating earnings
and net income as compared to any third quarter in the Company's 25-year
history. In combination with record first and second quarter 1998 operating
earnings and net income, the Company also generated record operating earnings
and net income in the first nine months of 1998, as compared to any nine-month
period in the Company's history. These results were primarily due to the effects
of record operating revenues, modest growth in unit operating expenses and
higher utilization of aircraft.
The Company generated a consolidated 10.0% and 8.3% improvement, respectively,
in revenue per available seat mile ("RASM") during the third quarter of 1998 and
the nine months ended September 30, 1998, as compared to the same periods of
1997. Scheduled service RASM increased by 12.2% and 11.3%, respectively, in the
third quarter of 1998 and the nine months ended September 30, 1998, as compared
to the same periods of the prior year. The Company increased its total capacity
in this business unit by 17.8% between the third quarters of 1998 and 1997, and
by 27.5% between the nine months ended September 30, 1998 and 1997. Commercial
charter RASM increased by 6.0% between the third quarter of 1998 and the third
quarter of 1997, and by 5.3% between the nine month periods ended September 30,
1998 and 1997. Military/government RASM increased by 6.8% in the third quarter
of 1998 and 5.7% in the nine months ended September 30, 1998, as compared to the
same periods of 1997.
The Company at the same time increased its operating cost per available seat
mile ("CASM") by 2.3% between the third quarter of 1998 and the third quarter of
1997, while CASM was unchanged between the nine-month periods ended September
30, 1998 and 1997. In both sets of comparative periods, salaries, wages and
benefits cost per ASM increased while fuel and oil cost per ASM declined; other
year-over-year changes in cost per ASM between periods were less significant.
In the third quarter of 1998, and for the nine months ended September 30, 1998,
the Company also increased average aircraft utilization as compared to the same
periods of 1997, as measured by average daily block hours flown per aircraft in
service, including spares. The Boeing 727-200 fleet flew an average of 7.6% more
block hours per day in the third quarter of 1998 as compared to the third
quarter of 1997, and 17.5% more block hours per day in the nine months ended
September 30, 1998, as compared to the same period of the prior year. The Boeing
757-200 fleet flew an average of 1.0% more block hours per day in the third
quarter of 1998, as compared to the third quarter of 1997, and 10.8% more block
hours per day in the nine months ended September 30, 1998, as compared to the
same period of the prior year. The Lockheed L-1011 fleet flew an average of 1.4%
fewer block hours per day in the third quarter of 1998, as compared to the third
quarter of 1997, and 5.9% more block hours per day in the nine months ended
September 30, 1998, as compared to the same period of the prior year.
Results of Operations
For the quarter ended September 30, 1998, the Company earned $22.9 million in
operating income, as compared to an operating income of $5.3 million in the
comparable quarter of 1997; and the Company earned $71.0 million in operating
income in the nine months ended September 30, 1998, as compared to an operating
income of $14.1 million in the nine months ended September 30, 1997.
For the quarter ended September 30, 1998, the Company earned $12.4 million in
net income, as compared to net income of $1.7 million in the comparable quarter
of 1997; and the Company earned $38.6 million in net income in the nine months
ended September 30, 1998, as compared to net income of $4.2 million earned in
the nine months ended September 30, 1997.
The Company's third quarter 1998 operating revenues increased 15.0% to $242.4
million, as compared to $210.8 million in the same period of 1997. RASM
increased 10.0% to 6.37 cents in the third quarter of 1998, as compared to 5.79
cents in the same period of the prior year. Available seat miles ("ASMs")
increased 4.5% to 3.806 billion from 3.641 billion, RPMs increased 4.9% to 2.769
billion from 2.640 billion, and passenger load factor increased 0.3 points to
72.8% as compared to 72.5%. Yield in the third quarter of 1998 increased 9.7% to
8.75 cents per RPM, as compared to 7.98 cents per RPM in 1997. Total passengers
boarded increased 14.7% to 1,557,292 in the third quarter of 1998, as compared
to 1,357,267 in the third quarter of 1997, while total departures increased
17.5% to 16,133 from 13,733 between the same comparable periods, and block hours
increased 8.5% to 42,325 in the 1998 third quarter, as compared to 39,001 in the
1997 third quarter.
The Company's operating revenues for the nine months ended September 30, 1998,
increased 18.9% to $710.2 million, as compared to $597.3 million in the same
period of 1997. RASM increased 8.3% to 6.65 cents in the nine months ended
September 30, 1998, as compared to 6.14 cents in the same period of the prior
year. ASMs increased 9.7% to 10.677 billion from 9.731 billion, RPMs increased
8.6% to 7.663 billion from 7.056 billion, and passenger load factor decreased
0.7 points to 71.8% as compared to 72.5%. Yield in the nine months ended
September 30, 1998 increased 9.6% to 9.27 cents per RPM, as compared to 8.46
cents per RPM in 1997. Total passengers boarded increased 15.2% to 4,732,693 in
the nine months ended September 30, 1998, as compared to 4,108,093 in the same
period of 1997, while total departures increased 30.5% to 46,887 from 35,943
between the same comparable periods, and block hours increased 16.8% to 122,219
in the nine months ended September 30, 1998, as compared to 104,683 in the nine
months ended September 30, 1997.
Operating expenses increased 6.8% to $219.5 million in the third quarter of
1998, as compared to $205.5 million in the third quarter of 1997, and operating
expenses increased 9.6% to $639.2 million in the nine months ended September 30,
1998, as compared to $583.2 million in the same period of 1997. Operating
expense per ASM increased 2.3% to 5.77 cents in the third quarter of 1998, as
compared to 5.64 cents in the third quarter of 1997, while operating expense per
ASM remained unchanged at 5.99 cents in the nine-month periods ended September
30, 1998 and 1997.
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents Per ASM Cents Per ASM
Three Months Ended September 30, Nine Months Ended September 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Total operating revenues 6.37 5.79 6.65 6.14
Operating expenses:
Salaries, wages and benefits 1.41 1.20 1.46 1.32
Fuel and oil 0.93 1.15 1.01 1.22
Handling, landing and navigation fees 0.58 0.55 0.54 0.56
Depreciation and amortization 0.49 0.45 0.55 0.47
Aircraft maintenance, materials and repairs 0.38 0.42 0.39 0.41
Aircraft rentals 0.35 0.37 0.37 0.43
Crew and other employee travel 0.30 0.29 0.29 0.29
Passenger service 0.27 0.27 0.25 0.26
Commissions 0.18 0.19 0.20 0.20
Other selling expenses 0.14 0.11 0.15 0.11
Ground package cost 0.13 0.12 0.14 0.14
Advertising 0.12 0.09 0.12 0.10
Facility and other rentals 0.06 0.06 0.07 0.07
Other 0.43 0.37 0.45 0.41
---- ---- ---- ----
Total operating expenses 5.77 5.64 5.99 5.99
---- ---- ---- ----
Operating income 0.60 0.15 0.66 0.15
---- ---- ---- ----
ASMs (in thousands) 3,805,993 3,640,917 10,676,929 9,731,059
</TABLE>
<PAGE>
Consolidated Flight Operations and Financial Data
The following tables set forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
<TABLE>
<CAPTION>
- - ------------------------------------- ----------------------------------------------------------------
Three Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Departures Jet 11,875 10,567 1,308 12.38
Departures J31(a) 4,258 3,166 1,092 34.49
--------------- --------------- ---------------- ---------------
Total Departures (b) 16,133 13,733 2,400 17.48
--------------- --------------- ---------------- ---------------
Block Hours Jet 38,003 35,683 2,320 6.50
Block Hours J31 4,322 3,328 994 29.87
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 42,325 39,011 3,314 8.50
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 2,760,708 2,634,314 126,394 4.80
RPMs J31 (000s) 8,574 6,185 2,389 38.63
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 2,769,282 2,640,499 128,783 4.88
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 3,792,501 3,630,553 161,948 4.46
ASMs J31 (000s) 13,492 10,364 3,128 30.18
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 3,805,993 3,640,917 165,076 4.53
--------------- --------------- ---------------- ---------------
Load Factor Jet 72.79 72.56 0.23 0.32
Load Factor J31 63.55 59.68 3.87 6.48
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 72.76 72.52 0.24 0.33
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 1,507,928 1,324,282 183,646 13.87
Passengers Enplaned J31 49,364 32,985 16,379 49.66
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 1,557,292 1,357,267 200,025 14.74
--------------- --------------- ---------------- ---------------
Revenue $(000s) 242,414 210,790 31,624 15.00
RASM in cents (h) 6.37 5.79 0.58 10.02
CASM in cents (i) 5.77 5.64 0.13 2.30
Yield in cents (j) 8.75 7.98 0.77 9.65
- - ------------------------------------- --------------- --------------- ---------------- ---------------
See footnotes (a) through (j) on pages 12-13.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------- ----------------------------------------------------------------
Nine Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Departures Jet 34,749 29,840 4,909 16.45
Departures J31(a) 12,138 6,103 6,035 98.89
--------------- --------------- ---------------- ---------------
Total Departures (b) 46,887 35,943 10,944 30.45
--------------- --------------- ---------------- ---------------
Block Hours Jet 110,372 98,226 12,146 12.37
Block Hours J31 11,847 6,457 5,390 83.48
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 122,219 104,683 17,536 16.75
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 7,640,306 7,043,685 596,621 8.47
RPMs J31 (000s) 22,808 12,231 10,577 86.48
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 7,663,114 7,055,916 607,198 8.61
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 10,638,219 9,710,839 927,380 9.55
ASMs J31 (000s) 38,710 20,220 18,490 91.44
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 10,676,929 9,731,059 945,870 9.72
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.82 72.53 (0.71) (0.98)
Load Factor J31 58.92 60.49 (1.57) (2.60)
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.77 72.51 (0.74) (1.02)
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 4,602,544 4,043,535 559,009 13.82
Passengers Enplaned J31 130,149 64,558 65,591 101.60
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 4,732,693 4,108,093 624,600 15.20
--------------- --------------- ---------------- ---------------
Revenue $(000s) 710,183 597,262 112,921 18.91
RASM in cents (h) 6.65 6.14 0.51 8.31
CASM in cents (i) 5.99 5.99 - -
Yield in cents (j) 9.27 8.46 0.81 9.57
- - ------------------------------------- --------------- --------------- ---------------- ---------------
</TABLE>
(a) Effective April 1, 1997, the Company began ATA Connection service between
Chicago-Midway and the cities of Indianapolis, Milwaukee, Des Moines, Dayton and
Grand Rapids under an agreement with Chicago Express. Services were expanded to
include Lansing, Michigan and Madison, Wisconsin in October 1997. Services are
provided using Jetstream 31 ("J31") propeller aircraft.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(e) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(f) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, 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 charter flights, changes in
load factor have less impact on business unit profitability. Consolidated load
factors and scheduled service load factors for the Company are shown in the
appropriate tables for industry comparability, but load factors for individual
charter businesses are omitted from applicable tables.
(g) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(h) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (j) below for the definition of yield).
(i) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available 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 average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
entire aircraft is sold at one time for one price. Consolidated yields and
scheduled service yields are shown in the appropriate tables for industry
comparability, but yields for individual charter businesses are omitted from
applicable tables.
Operating Revenues
Total operating revenues for the third quarter of 1998 increased 15.0% to $242.4
million from $210.8 million in the third quarter of 1997. This increase was due
to a $32.9 million increase in scheduled service revenues, a $0.8 million
increase in ground package revenues and a $0.5 million increase in other
revenues, partially offset by a $1.3 million decrease in military/government
charter revenues and a $1.3 million decrease in commercial charter revenues.
Total operating revenues for the nine months ended September 30, 1998, increased
18.9% to $710.2 million from $597.3 million in the nine months ended September
30, 1997. This increase was due to a $113.2 million increase in scheduled
service revenues, a $9.6 million increase in other revenues and a $1.3 million
increase in ground package revenues, partially offset by a $6.5 million decrease
in commercial charter revenues, and a $4.7 million decrease in
military/government charter revenues.
<PAGE>
Scheduled Service Revenues. The following tables set forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated as the ATA Connection.
<TABLE>
<CAPTION>
- - ------------------------------------- ----------------------------------------------------------------
Three Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Departures Jet 8,195 6,581 1,614 24.53
Departures J31(a) 4,258 3,166 1,092 34.49
--------------- --------------- ---------------- ---------------
Total Departures (b) 12,453 9,747 2,706 27.76
--------------- --------------- ---------------- ---------------
Block Hours Jet 24,307 20,571 3,736 18.16
Block Hours J31 4,322 3,328 994 29.87
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 28,629 23,899 4,730 19.79
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 1,581,758 1,310,890 270,868 20.66
RPMs J31 (000s) 8,574 6,185 2,389 38.63
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 1,590,332 1,317,075 273,257 20.75
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 2,144,651 1,821,904 322,747 17.71
ASMs J31 (000s) 13,492 10,364 3,128 30.18
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 2,158,143 1,832,268 325,875 17.79
--------------- --------------- ---------------- ---------------
Load Factor Jet 73.75 71.95 1.80 2.50
Load Factor J31 63.55 59.68 3.87 6.48
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 73.69 71.88 1.81 2.52
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 1,062,699 838,623 224,076 26.72
Passengers Enplaned J31 49,364 32,985 16,379 49.66
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 1,112,063 871,608 240,455 27.59
--------------- --------------- ---------------- ---------------
Revenues $(000s) 134,973 102,024 32,949 32.30
RASM in cents (h) 6.25 5.57 0.68 12.21
Yield in cents (j) 8.49 7.75 0.74 9.55
Rev per segment $ (k) 121.37 117.05 4.32 3.69
- - ------------------------------------- --------------- --------------- ---------------- ---------------
</TABLE>
See footnotes (a) through (j) on pages 12-13.
(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.
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------- ----------------------------------------------------------------
Nine Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Departures Jet 23,026 17,035 5,991 35.17
Departures J31(a) 12,138 6,103 6,035 98.89
--------------- --------------- ---------------- ---------------
Total Departures (b) 35,164 23,138 12,026 51.98
--------------- --------------- ---------------- ---------------
Block Hours Jet 68,392 52,443 15,949 30.41
Block Hours J31 11,847 6,457 5,390 83.48
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 80,239 58,900 21,339 36.23
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 4,359,466 3,375,501 983,965 29.15
RPMs J31 (000s) 22,808 12,231 10,577 86.48
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 4,382,274 3,387,732 994,542 29.36
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 5,767,773 4,535,656 1,232,117 27.17
ASMs J31 (000s) 38,710 20,220 18,490 91.44
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 5,806,483 4,555,876 1,250,607 27.45
--------------- --------------- ---------------- ---------------
Load Factor Jet 75.58 74.42 1.16 1.56
Load Factor J31 58.92 60.49 (1.57) (2.60)
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 75.47 74.36 1.11 1.49
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 3,055,545 2,276,910 778,635 34.20
Passengers Enplaned J31 130,149 64,558 65,591 101.60
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 3,185,694 2,341,468 844,226 36.06
--------------- --------------- ---------------- ---------------
Revenues $(000s) 384,456 271,282 113,174 41.72
RASM in cents (h) 6.62 5.95 0.67 11.26
Yield in cents (j) 8.77 8.01 0.76 9.49
Rev per segment $ (k) 120.68 115.86 4.82 4.16
- - ------------------------------------- --------------- --------------- ---------------- ---------------
</TABLE>
See footnotes (a) through (j) on pages 12-13. See footnote (k) on page 14.
Scheduled service revenues in the third quarter of 1998 increased 32.4% to
$135.0 million from $102.0 million in the third quarter of 1997. Scheduled
service revenues comprised 55.7% of consolidated revenues in the 1998 third
quarter, as compared to 48.4% of consolidated revenues in the same period of
1997. Scheduled service RPMs increased 20.7% to 1.590 billion from 1.317
billion, while ASMs increased 17.8% to 2.158 billion from 1.832 billion,
resulting in an increase of 1.8 points in passenger load factor to 73.7% in the
third quarter of 1998, from 71.9% in the same period of 1997. Scheduled service
yield in the 1998 third quarter increased 9.6% to 8.49 cents from 7.75 cents in
the third quarter of 1997, while RASM increased 12.2% to 6.25 cents from 5.57
cents between the same periods.
Scheduled service revenues in the nine months ended September 30, 1998,
increased 41.7% to $384.5 million from $271.3 million in the nine months ended
September 30, 1997. Scheduled service revenues comprised 54.1% of consolidated
revenues in the nine months ended September 30, 1998, as compared to 45.4% of
consolidated revenues in the same period of 1997. Scheduled service RPMs
increased 29.3% to 4.382 billion from 3.388 billion, while ASMs increased 27.4%
to 5.806 billion from 4.556 billion, resulting in an increase of 1.1 points in
passenger load factor to 75.5% in the nine months ended September 30, 1998, from
74.4% in the same period of 1997. Scheduled service yield in the nine months
ended September 30, 1998, increased 9.5% to 8.77 cents from 8.01 cents in the
nine months ended September 30, 1997, while RASM increased 11.3% to 6.62 cents
from 5.95 cents between the same periods.
Scheduled service departures in the third quarter of 1998 increased 27.8% to
12,453 from 9,747 in the third quarter of 1997; block hours increased 19.8% to
28,629 in the third quarter of 1998, from 23,899 in the third quarter of 1997;
and passengers boarded increased 27.6% between periods to 1,112,063, as compared
to 871,608. Scheduled service departures in the nine months ended September 30,
1998, increased 52.0% to 35,164 from 23,138 in the nine months ended September
30, 1997; block hours increased 36.2% to 80,239 in the nine months ended
September 30, 1998, from 58,900 in the nine months ended September 30, 1997; and
passengers boarded increased 36.1% between periods to 3,185,694, as compared to
2,341,468. Period-to-period percentage changes in departures, block hours and
passengers boarded were significantly impacted by the operation of ATA
Connection Jetstream 31 commuter flights in the nine months ended September 30,
1998, which operated only during the six months ended September 30, 1997. Such
operations in all periods generate comparatively less impact to ASMs and RPMs
due to the small seat capacity and short stage length of ATA Connection
propeller aircraft as compared to the Company's jet aircraft. The Company
currently has a code share agreement with Chicago Express under which Chicago
Express operates 19-seat Jetstream 31 propeller aircraft between Chicago-Midway
and the cities of Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids,
Lansing and Madison.
The Company's third quarter 1998 scheduled service at Chicago-Midway (excluding
New York services and direct service to San Juan, discussed separately below)
accounted for approximately 46.0% of scheduled service ASMs and 68.3% of
scheduled service departures, as compared to 37.3% and 59.5%, respectively, in
the third quarter of 1997. On May 1, 1998, the Company began three daily nonstop
flights to Dallas-Ft. Worth and two daily nonstop flights to Denver, none of
which services were provided during the third quarter of 1997. In addition to
these new services, the Company added frequencies in the third quarter of 1998
to most existing jet markets, including Ft. Lauderdale, Ft. Myers, Las Vegas,
Los Angeles, Orlando, Phoenix, St. Petersburg and San Francisco. Flight
frequencies to Sarasota declined between periods. ATA Connection Jetstream 31
flights in the third quarters of 1998 and 1997 served Chicago-Midway from the
cities of Dayton, Des Moines, Grand Rapids, Indianapolis, and Milwaukee;
frequencies were approximately the same in all of these markets in the 1998
third quarter as compared to the same period of 1997. In addition, the Company
operated ATA Connection Jetstream 31 service between Chicago-Midway and the
cities of Lansing and Madison in the third quarter of 1998, while such service
was not operated in the same period of 1997. During the nine months ended
September 30, 1998, scheduled service at Chicago-Midway (excluding New York
services and direct service to San Juan, discussed separately below) accounted
for approximately 46.2% of scheduled service ASMs and 66.8% of scheduled service
departures, as compared to 40.8% and 58.3%, respectively, in the nine months
ended September 30, 1997.
The Company anticipates that its Chicago-Midway operation will represent a focus
of growing significance for its scheduled service business in 1999 and beyond.
In addition to the new markets and expanded service to many existing markets
described above, the Company began three daily nonstop flights to New York's La
Guardia airport on July 7, 1998 using slots newly awarded to the Company by the
Department of Transportation ("DOT"). The Company operated 57 daily jet and
commuter departures from Chicago-Midway and served 21 destinations on a nonstop
basis in the summer of 1998, as compared to 15 nonstop destinations served in
the summer of 1997. This capacity expansion is expected to require the addition
of five hundred new employees in the Chicago area by the end of 1998. By the end
of the third quarter of 1998, the Company also substantially completed a $1.5
million renovation of the existing terminal facilities at Chicago-Midway to
enhance their attractiveness and convenience for the Company's customers. The
Company also presently expects to occupy 12 jet gates and 6 commuter aircraft
gates at the new Chicago-Midway terminal which is presently scheduled for
completion in 2002, as compared to the six jet gates currently occupied in the
existing terminal.
The Company's growing commitment to Chicago-Midway is consistent with its
strategy for enhancing revenues and profitability in scheduled service by
focusing primarily on low-cost, nonstop flights from airports where it has
market or aircraft advantages in addition to its low cost. The Company believes
that its high performance Boeing 757-200 and Boeing 727-200ADV aircraft
presently give it a competitive advantage at Chicago-Midway because, unlike many
aircraft flown by its competitors, these aircraft can fly larger passenger
capacities substantially longer distances while operating from the airport's
short runways. The Company also expects its growing concentration of connecting
flights at Chicago-Midway to provide both revenue premiums and operating cost
efficiencies, as compared to the Company's other gateway cities.
The Company's Hawaii service accounted for 27.6% of scheduled service ASMs and
7.0% of scheduled service departures in the third quarter of 1998, as compared
to 29.6% and 8.0%, respectively, in the third quarter of 1997. The Company
provided nonstop services in both quarters from Los Angeles, Phoenix and San
Francisco to both Honolulu and Maui, with connecting service between Honolulu
and Maui. In addition, in the third quarter of 1998, seasonal nonstop service
was operated from San Diego to Honolulu, which was not operated in the third
quarter of 1997. The Company provides these services through a marketing
alliance with Pleasant Hawaiian Holidays, the largest independent tour operator
serving leisure travelers to Hawaii from the United States. The Company uses
primarily wide-body Lockheed L-1011 aircraft, supplemented with some narrow-body
flights using Boeing 757-200 aircraft. Pleasant Hawaiian Holidays purchases a
majority of the available seats on these flights and markets them to their
leisure customers, often in conjunction with ground arrangements. The Company
distributes the remaining seats on these flights through normal scheduled
service distribution channels. The Company believes it has superior operating
efficiencies in west coast-Hawaii markets due to the relatively low ownership
cost of the Lockheed L-1011 fleet and because of the high daily hours of
utilization obtained for both aircraft and crews. During the nine months ended
September 30, 1998, Hawaii services accounted for approximately 23.1% of
scheduled service ASMs and 5.8% of scheduled service departures, as compared to
26.9% and 7.9%, respectively, in the nine months ended September 30, 1997.
The Company's Indianapolis service accounted for 13.1% of scheduled service ASMs
and 10.8% of scheduled service departures in the third quarter of 1998, as
compared to 18.8% and 15.8%, respectively, in the same period of 1997. In the
third quarter of 1998, the Company operated nonstop to Cancun, Ft. Lauderdale,
Ft. Myers, Las Vegas, Los Angeles, Orlando, St. Petersburg, San Francisco and
Sarasota. Frequencies were reduced between years in Cancun, Las Vegas, Los
Angeles and San Francisco in order to redeploy narrow-body aircraft into more
profitable markets such as Chicago-Midway to New York and San Juan. The Company
has served Indianapolis for 25 years through the Ambassadair Travel Club and in
scheduled service since 1986. The ATA Connection commuter service between
Indianapolis and Chicago-Midway offers Indianapolis-originating customers a
large selection of additional jet connections west to Denver, Phoenix and
Hawaii, east to New York, and south to Dallas-Ft. Worth and San Juan which are
more economically served from Indianapolis through this connection than by
direct flights. During the nine months ended September 30, 1998, scheduled
service at Indianapolis accounted for approximately 16.4% of scheduled service
ASMs and 13.1% of scheduled service departures, as compared to 20.2% and 18.9%,
respectively, in the nine months ended September 30, 1997.
The Company's San Juan, Puerto Rico service accounted for 6.1% of scheduled
service ASMs and 4.4% of scheduled service departures in the third quarter of
1998, as compared to 4.6% and 4.1%, respectively, in the third quarter of 1997.
The Company provided nonstop service from San Juan to Orlando and St. Petersburg
in both quarters, although frequencies to Orlando were significantly increased
in the third quarter of 1998 as compared to the third quarter of 1997. The
Company also began serving San Juan on a nonstop basis from Chicago-Midway on
May 26, 1998, while such nonstop service was not operated in the third quarter
of 1997. During the nine months ended September 30, 1998, scheduled service at
San Juan accounted for approximately 5.4% of scheduled service ASMs and 4.4% of
scheduled service departures, as compared to 3.5% and 3.3%, respectively, in the
nine months ended September 30, 1997.
The Company's New York service accounted for 5.1% of scheduled service ASMs and
6.7% of scheduled service departures in the third quarter of 1998, as compared
to 5.0% and 6.9%, respectively, in the third quarter of 1997.The Company began
nonstop service to New York's John F. Kennedy International Airport from
Chicago-Midway, Indianapolis and St. Petersburg in June 1997; services from
Indianapolis were discontinued in the fall of 1997, and services from St.
Petersburg were discontinued in May 1998. In April 1998, the Company was awarded
landing slots at New York's La Guardia Airport, with which it began the
operation of three daily nonstops to Chicago-Midway on July 7, 1998. During the
nine months ended September 30, 1998, scheduled service at New York accounted
for approximately 4.6% of scheduled service ASMs and 5.6% of scheduled service
departures, as compared to 2.7% and 3.8%, respectively, in the nine months ended
September 30, 1997.
The Company's Milwaukee service accounted for 2.0% of scheduled service ASMs and
1.8% of scheduled service departures in the third quarter of 1998, as compared
to 1.9% and 1.9%, respectively, in the third quarter of 1997. The Company
provided nonstop service to Orlando in both quarters although frequencies were
increased slightly in the third quarter of 1998 as compared to the same period
of 1997. The Company believes that in the Orlando market, it is the only direct
low-cost choice from Milwaukee. During the nine months ended September 30, 1998,
scheduled service at Milwaukee accounted for approximately 3.5% of scheduled
service ASMs and 3.0% of scheduled service departures, as compared to 4.2% and
4.4%, respectively, in the nine months ended September 30, 1997.
The Company continues to evaluate the profitability of its scheduled service
markets and expects to adjust its service from time to time. The Company
believes that scheduled service yields and load factors in the first three
quarters of 1998 have benefited from strong customer demand for air
transportation in the United States during a period of constrained industry
growth in seat capacity relative to this demand. The ability of the Company to
increase its year-over-year scheduled service seat capacity by 17.8% in the
third quarter of 1998, and 27.5% in the nine months ended September 30, 1998,
and to operate with a higher load factor in both comparative periods, further
underscores the fundamental strength of current demand in its domestic scheduled
service.
Commercial Charter Revenues. The Company's commercial charter revenues are
derived principally from independent tour operators and specialty charter
customers. The Company's commercial charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Commercial charter revenue growth in the first nine months of 1998 was
constrained by the reassignment of several narrow-body aircraft to scheduled
service expansion and by subservice contracts with other airlines, which the
Company believes have been more profitable for these aircraft than the
commercial charter applications they replaced. The Company, however, continues
to believe that tour operator and specialty charter are businesses where the
Company's experience and size provide meaningful competitive advantage and are
businesses to which the Company remains committed. Commercial charter revenues
accounted for 25.9% of consolidated revenues in the third quarter of 1998, as
compared to 30.4% in the third quarter of 1997, and for 25.1% of consolidated
revenues in the nine months ended September 30, 1998, as compared to 31.0% in
the same period of 1997.
The Company is addressing its seat capacity limitations in the commercial (and
military/government) charter business units through the acquisition of
long-range Lockheed L-1011 series 500 aircraft. In July 1998, the Company
committed to the purchase of five such aircraft from Royal Jordanian Airlines,
for delivery between the third quarter of 1998 and the second quarter of 1999.
Although Lockheed L-1011 series 500 maintenance procedures and cockpit design
are similar to the Company's existing fleet of Lockheed L-1011 series 50 and
series 100 aircraft, they differ operationally in that their ten-to-eleven-hour
range permits them to operate nonstop to parts of Asia, South America and
Central and Eastern Europe using an all-coach seating configuration preferred by
the U.S. military and most of the Company's commercial charter customers. The
Company expects to place these aircraft into service in commercial and
military/government charter operations between December 1998 and December 1999,
which would provide a substantial increase in available seat capacity for these
charter business units, in addition to opening new long-range market
opportunities to the Company which it cannot serve with its existing fleet.
The following tables set forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
<TABLE>
<CAPTION>
- - ----------------------------------- ----------------------------------------------------------------
Three Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
<S> <C> <C> <C> <C>
Departures (b) 2,521 2,710 (189) (6.97)
Block Hours (c) 9,527 10,425 (898) (8.61)
RPMs (000s) (d) 972,345 1,063,118 (90,773) (8.54)
ASMs (000s) (e) 1,176,448 1,271,372 (94,924) (7.47)
Passengers Enplaned (g) 393,948 416,964 (23,016) (5.52)
Revenue $(000s) 62,782 64,107 (1,325) (2.07)
RASM in cents (h) 5.34 5.04 0.30 5.95
- - ----------------------------------- --------------- ---------------- --------------- ---------------
- - ----------------------------------- ----------------------------------------------------------------
Nine Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 7,573 8,712 (1,139) (13.07)
Block Hours (c) 26,577 30,268 (3,691) (12.19)
RPMs (000s) (d) 2,478,914 2,803,584 (324,670) (11.58)
ASMs (000s) (e) 3,110,695 3,390,689 (279,994) (8.26)
Passengers Enplaned (g) 1,309,403 1,535,560 (226,157) (14.73)
Revenue $(000s) 178,468 184,912 (6,444) (3.48)
RASM in cents (h) 5.74 5.45 0.29 5.32
- - ----------------------------------- --------------- ---------------- --------------- ---------------
</TABLE>
See footnotes (b) through (h) on pages 12-13.
Commercial charter revenues decreased 2.0% to $62.8 million in the third quarter
of 1998, as compared to $64.1 million in the third quarter of 1997. Commercial
charter RPMs decreased 8.5% to 972.3 million in the third quarter of 1998 from
1.063 billion in the third quarter of 1997, while ASMs decreased 7.5% to 1.176
billion from 1.271 billion. Commercial charter RASM increased 6.0% to 5.34 cents
from 5.04 cents between the same periods. Commercial charter passengers boarded
decreased 5.5% to 393,948 in the third quarter of 1998, as compared to 416,964
in the third quarter of 1997; departures decreased 7.0% to 2,521, as compared to
2,710; and block hours decreased 8.6% to 9,527, as compared to 10,425 between
the same periods.
Commercial charter revenues decreased 3.5% to $178.5 million in the nine months
ended September 30, 1998, as compared to $184.9 million in the nine months ended
September 30, 1997. Commercial charter RPMs decreased 11.6% to 2.479 billion in
the nine months ended September 30, 1998 from 2.804 billion in the same period
of 1997, while ASMs decreased 8.3% to 3.111 billion from 3.391 billion.
Commercial charter RASM increased 5.3% to 5.74 cents from 5.45 cents between the
same periods. Commercial charter passengers boarded decreased 14.7% to 1,309,403
in the nine months ended September 30, 1998, as compared to 1,535,560 in the
same period of 1997; departures decreased 13.1% to 7,573, as compared to 8,712;
and block hours decreased 12.2% to 26,577, as compared to 30,268 between the
same periods.
The Company operates in two principal components of the commercial charter
business, known as "track charter" and "specialty charter." The larger track
charter business component is generally comprised of low frequency but
repetitive domestic and international flights between city pairs, which support
high passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts. Track charter accounted for approximately
$55.9 million in revenues in the third quarter of 1998, as compared to $54.8
million in the same period of 1997, and comprised approximately $150.0 million
in revenues in the nine months ended September 30, 1998, as compared to $155.9
million in the same period of 1997.
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 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. Specialty
charter accounted for approximately $3.9 million in revenues in the third
quarter of 1998, as compared to $7.7 million in the same period of 1997, and
comprised approximately $20.3 million in revenues in the nine months ended
September 30, 1998, as compared to $22.4 million in the same period of 1997.
The Company believes that although price is the principal competitive criterion
for its commercial charter programs, product quality, reputation for reliability
and delivery of services which are customized to specific needs have become
increasingly important to the buyer of this product. Accordingly, as the Company
continues to emphasize the growth and profitability of this business unit, it
will seek to maintain its low-cost pricing advantage, while differentiating
itself from competitors through the delivery of customized services and the
maintenance of consistent and dependable operations. In this manner, the Company
believes that it will produce significant value for its tour operator partners
by delivering an attractively priced product which meets or exceeds their
customers' expectations.
MilitarylGovernment Charter Revenues. The following tables set forth, for the
periods indicated, certain key operating and financial data for the
military/government flight operations of the Company.
<TABLE>
<CAPTION>
- - -------------------------------- ---------------------------------------------------------------
Three Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
<S> <C> <C> <C> <C>
Departures (b) 1,141 1,190 (49) (4.12)
Block Hours (c) 4,118 4,475 (357) (7.98)
RPMs (000s) (d) 204,279 252,031 (47,752) (18.95)
ASMs (000s) (e) 467,118 520,180 (53,062) (10.20)
Passengers Enplaned (g) 50,145 62,102 (11,957) (19.25)
Revenue $(000s) 30,167 31,456 (1,289) (4.10)
RASM in cents (h) 6.46 6.05 0.41 6.78
- - -------------------------------- --------------- --------------- --------------- ---------------
- - -------------------------------- ---------------------------------------------------------------
Nine Months Ended September 30,
1998 1997 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures (b) 3,600 3,917 (317) (8.09)
Block Hours (c) 13,475 15,071 (1,596) (10.59)
RPMs (000s) (d) 691,580 848,575 (156,995) (18.50)
ASMs (000s) (e) 1,580,959 1,750,832 (169,873) (9.70)
Passengers Enplaned (g) 168,301 218,945 (50,644) (23.13)
Revenue $(000s) 99,295 104,016 (4,721) (4.54)
RASM in cents (h) 6.28 5.94 0.34 5.72
- - -------------------------------- --------------- --------------- --------------- ---------------
</TABLE>
See footnotes (b) through (h) on pages 12-13.
Military/government charter revenues decreased 4.1% to $30.2 million in the
third quarter of 1998, as compared to $31.5 million in the third quarter of
1997. In the third quarter of 1998, the Company's U.S. military revenues
represented 12.4% of consolidated revenues, as compared to 14.9% in the third
quarter of 1997. U.S. military RPMs decreased 18.9% to 204.3 million in the
third quarter of 1998, from 252.0 million in the third quarter of 1997, while
ASMs decreased 10.2% to 467.1 million from 520.2 million. Military RASM
increased 6.8% to 6.46 cents from 6.05 cents between the same time periods. U.S.
military passengers boarded decreased 19.3% to 50,145 in the third quarter of
1998, as compared to 62,102 in the third quarter of 1997; departures decreased
4.1% to 1,141, as compared to 1,190; and block hours decreased 8.0% to 4,118, as
compared to 4,475 between the same periods.
Military/government charter revenues decreased 4.5% to $99.3 million in the nine
months ended September 30, 1998, as compared to $104.0 million in the nine
months ended September 30, 1997. In the nine months ended September 30, 1998,
the Company's U.S. military revenues represented 14.0% of consolidated revenues,
as compared to 17.4% in the nine months ended September 30, 1997. U.S. military
RPMs decreased 18.5% to 691.6 million in the nine months ended September 30,
1998, from 848.6 million in the same period of 1997, while ASMs decreased 9.7%
to 1.581 billion from 1.751 billion. Military RASM increased 5.7% to 6.28 cents
from 5.94 cents between the same time periods. U.S. military passengers boarded
decreased 23.1% to 168,301 in the nine months ended September 30, 1998, as
compared to 218,945 in the same period of 1997; departures decreased 8.1% to
3,600, as compared to 3,917; and block hours decreased 10.6% to 13,475, as
compared to 15,071 between the same periods.
The Company participates in two related military/government charter 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, the Company has entered into a contractor teaming arrangement
with four other cargo airlines. 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 are generally 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 provided fixed-award business and
then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The Company committed up to four Boeing 757-200 aircraft to the
military/government charter business in the first nine months of 1998 and 1997,
although approximately 9.7% fewer ASMs were provided to this business unit in
the nine months ended September 30, 1998, as compared to the same period of
1997, due to the reassignment of some aircraft hours to scheduled service and
substitute service. As a result of more accurately documenting the actual costs
associated with military flying, the Company was able to obtain approval for
some rate increases for the U.S. military contract year ending September 30,
1998, which resulted in higher RASM in the quarter and nine months ended
September 30, 1998, as compared to the same periods of the prior year.
Because military flying is generally less seasonal than leisure travel programs,
the Company believes that the military/government charter business tends to have
a stabilizing impact on seasonal earnings fluctuations. The Company is also
contractually protected from changes in fuel prices. The Company further
believes that its fleet of aircraft has a competitive advantage in serving the
transportation needs of the U.S. military. Although foreign bases have reduced
troop size, the Company believes that the U.S. military still desires to
maintain its service frequency to those bases and therefore often has a
preference for smaller-capacity, long-range aircraft such as the Company's
Boeing 757-200. Furthermore, in 1993, the Company became the first North
American carrier to receive Federal Aviation Administration ("FAA")
certification to operate Boeing 757-200 aircraft with 180-minute Extended Twin
Engine Operation ("ETOPS"), permitting these aircraft to operate missions over
water to airports up to three hours from the nearest alternate airport. The
Company believes that this certification, which applies to all of the Company's
Boeing 757-200 fleet, provides a competitive advantage in receiving awards of
certain military flying.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (i) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (ii) the percentage of
passenger capacity of the Company with respect to its own team; (iii) the amount
of fixed award and expansion flying required by the U.S. military in each
contract year; and (iv) the availability of the Company's aircraft to accept and
fly expansion awards. In 1997, there was an unusual amount of both fixed award
and expansion business available to the Company as compared to prior years.
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
to its Ambassadair club members and through its ATA Vacations subsidiary to the
general public. In the third quarter of 1998, ground package revenues increased
15.1% to $6.1 million, as compared to $5.3 million in the third quarter of 1997,
and in the nine months ended September 30, 1998, ground package revenues
increased 8.0% to $17.6 million, as compared to $16.3 million in the same period
of 1997.
The Company's Ambassadair Travel Club offers hundreds of tour-guide-accompanied
vacation packages to its approximately 35,000 individual and family members
annually. In the third quarter of 1998, total packages sold increased 21.8% as
compared to the third quarter of 1997, and were unchanged between the nine month
periods ended September 30, 1998 and 1997. The average revenue earned for each
ground package sold increased 18.7% and 22.7%, respectively, between the same
sets of comparative periods.
ATA Vacations offers numerous ground package combinations to the general public
for use on the Company's scheduled service flights throughout the United States.
These packages are marketed through travel agents, as well as directly by the
Company. In the third quarter and the nine months ended September 30, 1998,
total packages sold decreased 23.3% and 10.5%, respectively, as compared to the
same periods of 1997, while the average revenue earned for each ground package
sold increased 3.7% between the third quarters of 1998 and 1997, and decreased
4.2% between the nine month periods ended September 30, 1998 and 1997.
The number of ground packages sold and the average revenue earned by the Company
for a ground package sale are a function of the mix of vacation destinations
served, the quality and types of ground accommodations offered and general
competitive conditions with other air carriers offering similar products in the
Company's markets, all of which factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues of
affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of the Company. Other
revenues increased 6.3% to $8.4 million in the third quarter of 1998, as
compared to $7.9 million in the third quarter of 1997, and by 46.4% to $30.3
million in the nine months ended September 30, 1998, as compared to $20.7
million in the same period of 1997.
In the third quarter of 1998, as compared to the third quarter of 1997, the
Company recorded $0.8 million more in cancellation and administrative fees and
$0.4 million more in cargo and other affiliate company revenues, partially
offset by $0.2 million less revenue from the sales of surplus and obsolete
aircraft parts, and $0.7 million less revenue from providing substitute service
to other airlines. In the nine months ended September 30, 1998, as compared to
the same period of 1997, the Company earned $5.4 million more in substitute
service revenues, $2.4 million more in cancellation and administrative fees, and
$1.6 million more in cargo and other affiliate company revenues, partially
offset by $0.5 million less revenue from the sale of surplus and obsolete
aircraft parts.
A substitute service agreement typically provides for the Company to operate
aircraft with its crews on routes designated by the customer airline to carry
the passengers of that airline for a limited period of time. The Company has
seen increased demand for this type of service in 1998 due to delays in new
aircraft deliveries being experienced by various airlines. The Company also
increased its administrative fee for change-of-reservation on non-refundable
scheduled service tickets from $50 to $60 per change effective August 1998, and
the volume of such fees earned also increased between years in proportion to the
increase in scheduled service passengers boarded.
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 local, state and federal taxes.
Salaries, wages and benefits expense in the third quarter of 1998 increased
22.5% to $53.4 million from $43.6 million in the third quarter of 1997, and
increased 21.7% to $155.8 million in the nine months ended September 30, 1998,
as compared to $128.0 million in the same period of 1997.
The Company increased its average equivalent employees by 20.0% and 17.9%,
respectively, between the three and nine month periods ended September 30, 1998
and 1997 in order to appropriately staff the growth in available seats offered
between periods. Categories of employees where this growth was most significant
included cockpit and cabin crews, reservations agents, airport passenger and
ramp service agents, and aircraft maintenance personnel, all of which are
influenced directly by flight activity. Some employment growth in the first nine
months of 1998 was also needed to correct for certain employee shortages in the
first nine months of 1997, particularly in the areas of cockpit crews,
reservations agents and airframe and power plant mechanics. Between the third
quarter of 1998 and the third quarter of 1997, jet departures increased by
12.4%, jet block hours increased by 6.5% and jet passengers boarded increased by
13.9%. Between the nine months ended September 30, 1998 and 1997, jet departures
increased by 16.5%, jet block hours increased by 12.4% and jet passengers
boarded increased by 13.8%.
The average rate of pay earned by the Company's employees (including all
categories of salaries, wages and benefits, except for variable compensation)
decreased 0.3% between the third quarters of 1998 and 1997, and increased by
0.3% between the nine month periods ended September 30, 1998 and 1997. While
most employees received wage rate increases between years, new employees are
generally hired at lower average starting rates of pay than those rates in
effect for more senior employees. The increase in new employees between periods
largely offset the wage rate increases applicable to more senior employees.
In the three and nine months ended September 30, 1998, the Company recorded $1.3
million and $6.5 million, respectively, in variable compensation as a result of
the significant improvement in earnings as compared to the same periods of 1997,
when no such compensation was incurred. In the second quarter of 1997, however,
a one-time charge of $2.0 million was recorded for variable compensation expense
associated with the resignation of the Company's former President and Chief
Executive Officer.
Salaries, wages and benefits cost per ASM increased 17.5% in the third quarter
of 1998 to 1.41 cents, as compared to 1.20 cents in the third quarter of 1997,
and the cost per ASM increased 10.6% in the nine months ended September 30,
1998, to 1.46 cents, as compared to 1.32 cents in the same period of 1997. This
unit-cost increase was attributable to the faster rate of growth in average
equivalent employees between years and to the variable compensation earned in
1998, which was not earned in 1997.
Fuel and Oil. Fuel and oil expense decreased 14.8% to $35.6 million in the third
quarter of 1998, as compared to $41.8 million in the third quarter of 1997, and
decreased 9.5% to $107.6 million in the nine months ended September 30, 1998, as
compared to $118.9 million in the same period of 1997. These decreases occurred
despite the Company consuming 6.8% and 10.1%, respectively, more gallons of jet
fuel for flying operations in the third quarter and nine months ended September
30, 1998, as compared to the same periods of 1997, which resulted in an increase
in fuel expense of approximately $2.8 million and $12.1 million, respectively,
between comparable periods. Jet fuel consumption increased due to the increased
number of block hours of jet flying operations between periods. The Company flew
38,003 jet block hours in the third quarter of 1998, as compared to 35,683 jet
block hours in the same period of 1997, an increase of 6.5% between quarters,
and flew 110,372 jet block hours in the nine months ended September 30, 1998, as
compared to 98,226 jet block hours in the same period of 1997, an increase of
12.4% between periods.
During the third quarter and nine months ended September 30, 1998, the Company's
average cost per gallon of jet fuel consumed decreased by 19.0% and 19.3%,
respectively, as compared to the same periods of 1997, resulting in a decrease
in fuel and oil expense of approximately $8.4 million and $25.8 million,
respectively, between comparable periods. This reduction in fuel price was
experienced generally in the airline industry in the first nine months of 1998
as a result of significant reductions in average crude oil and distillate
product prices as compared to the same period of 1997.
During the first quarter of 1998, the Company entered into two fuel price hedge
contracts under which the Company sought to reduce the risk of fuel price
increases during February and March. The Company hedged approximately 27.3% of
first quarter 1998 gallon consumption under a swap agreement which established a
specific swap price for February and March, and hedged an additional 27.3% of
first quarter 1998 gallon consumption under a fuel cap agreement which
guaranteed a maximum price per gallon for February and March. In the first
quarter of 1998 the Company recorded $1.1 million in fuel and oil expense under
the swap agreement, and recorded $0.3 million for the premiums paid under the
fuel cap agreement.
During the second quarter of 1998, the Company entered into a fuel price hedge
agreement, providing a fuel price minimum and maximum guarantee for
approximately 39.8% of second quarter 1998 gallon consumption. The Company
recorded $0.7 million in fuel and oil expense under the agreement in the second
quarter of 1998.
The Company did not enter into any fuel price hedge agreements during the third
quarter of 1998, although such hedge agreements have been entered into for a
portion of expected fuel consumption in the fourth quarter of 1998 and the first
quarter of 1999.
Also during the nine months ended September 30, 1998, the Company incurred
approximately $0.5 million in higher fuel and oil expense than was incurred in
the nine months ended September 30, 1997 to operate the ATA Connection Jetstream
31 aircraft pursuant to its agreement with Chicago Express.
Fuel and oil expense decreased 19.1% to 0.93 cents per ASM in the third quarter
of 1998, as compared to 1.15 cents per ASM in the third quarter of 1997, and
decreased 17.2% to 1.01 cents per ASM in the nine months ended September 30,
1998, as compared to 1.22 cents per ASM in same period of 1997. This unit cost
reduction was substantially due to the period-to-period decrease in the average
price of fuel consumed.
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 incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 11.6% to $22.2 million in the
third quarter of 1998, as compared to $19.9 million in the third quarter of
1997, and increased 5.7% to $57.5 million in the nine months ended September 30,
1998, as compared to $54.4 million in the same period of 1997. During the three
and nine month periods ended September 30, 1998, the average cost per system jet
departure for third-party aircraft handling decreased 2.3% and 5.7%,
respectively, as compared to the same periods of 1997. The total number of
system-wide jet departures between the third quarters of 1998 and 1997 increased
by 12.4% to 11,875 from 10,567, resulting in approximately $2.1 million in
volume-related handling and landing expense increases between periods, and the
total number of system-wide jet departures between the nine month periods ended
September 30, 1998 and 1997 increased by 16.5% to 34,749 from 29,840, resulting
in approximately $7.0 million in volume-related handling and landing expense
increases between years.
These volume-related increases were partially offset, however, by decreases of
approximately $0.2 million and $2.5 million, respectively, in
price-and-mix-related handling and landing expenses for the three and nine month
periods ending September 30, 1998, as compared to the same periods of 1997,
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 U.S. domestic airports. As a result of
the shift of revenue production towards scheduled service operations in the
three and nine month periods ended September 30, 1998, as compared to the same
periods of 1997, the Company's jet departures in the 1998 periods included
proportionately more domestic and narrow-body operations than in the 1997
periods. In the three and nine months ended September 30, 1998, approximately
80.5% and 80.8%, respectively, of the Company's jet departures were operated
with narrow-body aircraft, as compared to 78.0% and 77.7%, respectively in the
same periods of 1997; and 82.5% and 82.6%, respectively, of the Company's jet
departures in the three and nine months ended September 30, 1998 were from
domestic locations, as compared to 74.7% and 75.6%, respectively, in the same
periods of 1997.
The cost per ASM for handling, landing and navigation fees increased 5.5% to
0.58 cents in the third quarter of 1998, from 0.55 cents in the third quarter of
1997, and decreased 3.6% to 0.54 cents in the nine months ended September 30,
1998, as compared to 0.56 cents in the same period of 1997.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, leasehold improvements 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 12.0% to
$18.6 million in the third quarter of 1998, as compared to $16.6 million in the
third quarter of 1997, and increased 26.7% to $58.3 million in the nine months
ended September 30, 1998, as compared to $46.0 million in the same period of
1997.
Depreciation expense attributable to owned airframes, leasehold improvements and
engines increased $1.1 million and $2.1 million, respectively, in the three and
nine months ended September 30, 1998, as compared to the same periods of 1997.
The Company purchased one Boeing 757-200 and one Boeing 727-200 aircraft in late
1997 which had been previously financed through operating leases, thereby
increasing depreciation expense on airframes and engines between those periods.
(The Company recorded a reduction in aircraft rental expense between periods for
the termination of operating leases for these aircraft, which is further
described below under "Aircraft Rentals.") The Company also incurred increased
debt issue costs between years relating to debt facility and senior unsecured
notes issued in July 1997; recorded additional inventory obsolescence expense
for certain aircraft parts held for sale which were sold during the first
quarter of 1998; and increased its investment in rotable parts and computer
hardware and software, among other items of property and equipment. These
changes resulted in an increase in depreciation expense of $0.8 million in the
third quarter of 1998, as compared to the same period of 1997, and by $1.7
million in the nine months ended September 30, 1998, as compared to the nine
months ended September 30, 1997.
Amortization of capitalized engine and airframe overhauls increased $2.0 million
and $8.3 million, respectively, in the three and nine months ended September 30,
1998, as compared to the same periods of 1997, after including the offsetting
amortization associated with manufacturers' credits. Changes to the cost of
overhaul amortization were partly due to the increase in total block hours and
cycles flown between comparable periods for the Boeing 727-200 and Lockheed
L-1011 fleets, since such expense varies with that activity, and partly due to
the completion of more engine and airframe overhauls between periods for these
fleet types. Rolls-Royce-powered Boeing 757-200 aircraft, six of which were
delivered new from the manufacturer between late 1995 and mid- 1998, are not
presently generating any engine or airframe overhaul expense, since the initial
post-delivery overhauls for these aircraft are not yet due under the Company's
maintenance programs.
Boeing 727-200 block hours increased 7.6% and 17.5%, respectively, and cycles
increased 13.4% and 21.3%, respectively, in the three and nine months ended
September 30, 1998, as compared to the same periods of 1997. Engine and airframe
amortization for the Company's fleet of Boeing 727-200 aircraft increased by
approximately $2.6 million and $6.6 million, respectively, between the same
comparable periods, partly due to increases in flight activity as noted above,
and partly due to the completion of new overhauls for Pratt & Whitney JT8D
engines that power the Boeing 727-200 fleet, as well as additional airframe
overhauls. The number of such overhauls in service has increased as some Boeing
727-200 aircraft added to the Company's fleet in 1995 and 1996 have now
undergone their first overhauls under the Company's maintenance program.
In the third quarter of 1998 engine and airframe amortization expense for the
Company's Lockheed L-1011 fleet was approximately $0.4 million lower than in the
third quarter of 1997, due primarily to the realization of manufacturer' credits
applied to overhaul costs in that period. In the nine months ended September 30,
1998, such engine and airframe amortization was approximately $1.4 million
higher than in the same period of 1997. This increase was primarily due to
increases in total engine and airframe overhauls in service between those
periods, and was also partly due to slightly more flight activity for this fleet
type. Lockheed L-1011 block hours increased 0.6%, and cycles increased 0.4% in
the nine months ended September 30, 1998, as compared to the same period of
1997.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs decreased $0.9 million in
the third quarter of 1998 as compared to the third quarter of 1997, and
increased $1.2 million in the nine months ended September 30, 1998 as compared
to the same period of 1997. When these early engine failures can be economically
repaired, the related repairs are charged to aircraft maintenance, materials and
repairs expense.
Effective July 1, 1998, the Company extended the estimated useful life of the 13
owned Lockheed L-1011 series 50 and series 100 aircraft to a common retirement
date of December 2004, and also reduced the estimated salvage value of the
related airframes, engines and rotables. The effect of this change in estimate,
as is more fully explained in footnote 4, was to reduce depreciation expense in
the three and nine months ended September 30, 1998 by $972,000.
Depreciation and amortization expense per ASM increased 8.9% to 0.49 cents in
the third quarter of 1998, as compared to 0.45 cents in the third quarter of
1997, and increased 17.0% to 0.55 cents in the nine months ended September 30,
1998, as compared to 0.47 cents in the same period of 1997. These increases were
primarily due to the increased amount of overhaul cost incurred to maintain the
Company's Boeing 727-200 and Lockheed L-1011 airframes and engines. Airframes
and engines which originally enter the Company's fleet from time to time often
do not require such overhauls until several years later. Therefore, units added
to the Company's fleet over the last several years are currently scheduled for
or are undergoing overhaul. Such overhaul expense incurred and to be incurred is
incremental in comparison to prior periods. Although the Company's fleet of new
Boeing 757-200 aircraft has not yet begun this initial overhaul cycle, the
Company anticipates that it will do so beginning in late 1998 and 1999, at which
time increased overhaul amortization expense per ASM will be incurred for this
fleet type as well.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for heavy check and line maintenance activities, and
other non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense decreased 5.3% to $14.4
million in the third quarter of 1998, as compared to $15.2 million in the third
quarter of 1997, while it increased 3.7% to $41.6 million in the nine months
ended September 30, 1998, from $40.1 million in the same period of 1997.
The Company performed a total of 9 airframe checks on its fleet during the third
quarter of 1998, as compared to 12 such checks performed in the third quarter of
1997, a decrease of 25.0% between quarters; while for the nine months ended
September 30, 1998, the Company performed 45 airframe checks, as compared to 36
for the same period in 1997, a 25.0% increase between periods. The cost of
materials consumed and components repaired in association with such checks and
other maintenance activity increased by $0.8 million between the third quarters
of 1998 and 1997, while for the nine months ended September 30, 1998, these
expenses increased $2.4 million as compared to the same period of 1997.
Contract labor for the three and nine months ended September 30, 1998 decreased
$1.2 million and $0.2 million, respectively, as compared to the same time
periods in 1997. These reductions were due to one airframe check being performed
at a third-party vendor location in the third quarter of 1998, as compared to 7
in the same period of 1997, and 15 airframe checks being performed at
third-party vendor locations in the nine months ended September 30, 1998, as
compared to 14 in the same period of 1997. Contract labor is incurred when heavy
maintenance checks on the Company's airframes are performed by outside vendors
using their own personnel under maintenance programs approved and supervised by
the Company.
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. The accrual
is based upon the actual condition of the aircraft as each lease termination
date approaches, and the Company's ability to estimate the expected cost of
conforming to these conditions. Return condition expenses accrued in the third
quarter of 1998 were $0.2 million lower than in the third quarter of 1997, while
for the nine months ended September 30, 1998, return condition expenses were
$0.7 million lower than in the same period of 1997, primarily due to the
negotiation of purchase options on some leased aircraft during the first quarter
of 1998, eliminating return condition obligations existing prior to those
negotiations.
The cost per ASM of aircraft maintenance, materials and repairs decreased 9.5%
to 0.38 cents in the third quarter of 1998, as compared to 0.42 cents in the
third quarter of 1997, while the cost per ASM decreased 4.9% to 0.39 cents in
the nine months ended September 30, 1998, as compared to 0.41 cents for the same
period of 1997.
Aircraft Rentals. Aircraft rentals expense for the third quarter of 1998
decreased 0.7% to $13.4 million from $13.5 million in the third quarter of 1997,
and decreased 6.2% to $39.2 million in the nine months ended September 30, 1998,
as compared to $41.8 million in the same period of 1997.
The Company returned one leased Boeing 757-200 to the lessor in the fourth
quarter of 1997, which reduced aircraft rentals expense by $1.0 million and $3.0
million, respectively, in the three and nine month periods ended September 30,
1998, as compared to the same periods of 1997. In September 1997, the Company
purchased one Boeing 757-200, and in December 1997 purchased one Boeing 727-200,
both of which had been previously leased; such purchases reduced aircraft
rentals expense by $0.9 million and $3.7 million, respectively, in the three and
nine month periods ended September 30, 1998, as compared to the same periods of
1997. The Company took delivery of one new Boeing 757-200 from the manufacturer
in December 1997, and a second new Boeing 757-200 in July 1998, which deliveries
increased aircraft rentals expense by $1.5 million and $3.5 million,
respectively, in the three and nine month periods ended September 30, 1998, as
compared to the same periods of 1997. The Company also completed the sale and
leaseback of a previously owned Boeing 727-200 in September 1997, which
increased aircraft rentals expense by $0.2 million and $0.7 million,
respectively, in the three and nine month periods ended September 30, 1998, as
compared to the same periods of 1997.
Aircraft rentals cost per ASM for the third quarter of 1998 was 0.35 cents, a
decrease of 5.4% from 0.37 cents per ASM in the same period of 1997, and was
0.37 cents in the nine months ended September 30, 1998, a decrease of 14.0% as
compared to 0.43 cents in the same period of 1997. The cancellation of operating
leases and purchase of the Boeing 757-200 and Boeing 727-200 aircraft during
1997 was a primary cause for this unit cost reduction, although a related unit
cost increase was incurred for depreciation and amortization as a result of that
purchase.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crew members incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of air transportation is
generally more significant for the commercial and military/government charter
business units 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 scheduled, commercial and
military/government charter services, although higher per diem and hotel rates
generally apply to international assignments.
The cost of crew and other employee travel increased 8.7% to $11.3 million in
the third quarter of 1998, as compared to $10.4 million in the third quarter of
1997, and increased 12.6% to $31.2 million in the nine months ended September
30, 1998, as compared to $27.7 million in the same period of 1997. During the
three and nine months ended September 30, 1998, the Company's average
full-time-equivalent cockpit and cabin crew employment was 10.0% and 13.8%
higher, respectively, than in the same periods of 1997, while jet block hours
flown increased by 6.5% and 12.4%, respectively, between the same periods.
Although the Company experienced some limited crew shortages in the first
quarter of 1998 associated with higher aircraft utilization, such shortages had
been substantially eliminated by the second quarter of 1998, thereby reducing
the related travel costs of moving some crews away from their bases. Shortages
of both cockpit and cabin crews were more significant in the first two quarters
of 1997, following the crew furlough which occurred in the fourth quarter of
1996, when crews were more frequently moved out of base to operate the Company's
worldwide schedule.
The average cost of hotel rooms per full-time-equivalent crew member increased
9.7% and 6.9%, respectively, in the three and nine month periods ended September
30, 1998, as compared to the same periods of 1997. Such hotel costs increased
due to both higher room rates paid in 1998, and due to aircraft flow changes
associated with the Company's 1998 summer schedule which resulted in more crews
terminating their daily flying away from their home bases than in the prior
year.
The average cost of crew positioning per full-time-equivalent crew member
decreased 6.7% and 9.3%, respectively, in the three and nine month periods ended
September 30, 1998, as compared to the same periods of 1997. Crew positioning
costs declined primarily due to the shift of revenue production from commercial
charter and military/government charter to scheduled service. Crews positioning
out of base for scheduled service can often position at no cost on Company
flights, whereas positioning to remote international locations for charter
service is usually done on other carriers at a substantial cost.
The average cost of crew per diem per full-time-equivalent crew member decreased
3.2% in the third quarter of 1998 as compared to the third quarter of 1997, and
increased 0.7% in the nine months ended September 30, 1998 ad compared to the
same period of 1997. The shift from charter to scheduled service, and the change
in scheduled service aircraft flows, had approximate equal and offsetting
effects on per diem between years.
The cost per ASM for crew and other employee travel was unchanged at 0.29 cents
in the nine month periods ended September 30, 1998 and 1997, and increased by
3.4% to 0.30 cents in the third quarter of 1998, as compared to 0.29 cents in
the same period of 1997.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For the third quarters of
1998 and 1997, catering represented 81.6% and 83.5%, respectively, of total
passenger service expense, and for the nine month periods ended September 30,
1998 and 1997, catering represented 83.6% and 82.8%, respectively, of total
passenger service expense.
The total cost of passenger service increased 2.0% to $10.2 million in the third
quarter of 1998, as compared to $10.0 million in the third quarter of 1997, and
increased 4.3% to $26.9 million in the nine months ended September 30, 1998, as
compared to $25.8 million in the same period of 1997. The Company experienced a
decrease of approximately 10.2% and 7.0%, respectively, in the average unit cost
of catering each passenger in the three and nine month periods ended September
30, 1998, as compared to the same periods of 1997, primarily because in the 1998
periods there were relatively more scheduled service passengers in the Company's
business mix, who are provided a less expensive catering product than the
Company's longer-stage-length commercial and military/government charter
passengers. This resulted in a price-and-business-mix reduction of $0.9 million
and $1.9 million, respectively, of catering expense in the three and nine months
ended September 30, 1998, as compared to the same periods of 1997. Total jet
passengers boarded, however, increased 13.9% and 13.8%, respectively, between
the same comparative periods, resulting in approximately $0.9 million and $2.7
million, respectively, in higher volume-related catering expenses between the
same sets of comparative periods.
The cost of handling passengers inconvenienced by flight delays and
cancellations increased by $0.3 million between the third quarters of 1998 and
1997 due to a 17.9% increase in the number of delayed flights per system-wide
departure in the 1998 third quarter as compared to the prior year. In the nine
months ended September 30, 1998 and 1997, such costs were approximately
unchanged.
The cost per ASM of passenger service was unchanged at 0.27 cents in the third
quarters of 1998 and 1997, and decreased 3.8% to 0.25 cents in the nine months
ended September 30, 1998, as compared to 0.26 cents in the same period of 1997.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense decreased 1.4% to $6.9 million in the third
quarter of 1998, as compared to $7.0 million in the third quarter of 1997, and
increased 9.7% to $21.5 million in the nine months ended September 30, 1998, as
compared to $19.6 million in the same period of 1997.
Scheduled service commissions expense increased by $0.1 million and $2.0
million, respectively, between the three and nine month periods ended September
30, 1998 and 1997. These increases were lower than the related increases of
32.3% and 41.7%, respectively, in scheduled service revenues for the same
periods, partially because of an industry-wide reduction in the standard travel
agency commission rate from 10% to 8% which became effective in October 1997,
and partially due to relatively more non-commissionable bulk seat scheduled
service sales being made in the three and nine month periods ended September 30,
1998, as compared to the same periods of 1997. Neither commercial charter nor
military/government charter commissions expense changed significantly between
the three and nine month periods ended September 30, 1998 and 1997.
The cost per ASM of commissions expense was unchanged at 0.20 cents for the nine
month periods ended September 30, 1998 and 1997, and decreased 5.3% to 0.18
cents in the third quarter of 1998, as compared to 0.19 cents in the third
quarter of 1997.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems ("CRS") 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 service, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses primarily associated
with single-seat sales. Other selling expenses increased 29.3% to $5.3 million
in the third quarter of 1998, as compared to $4.1 million in the third quarter
of 1997, and increased 51.4% to $16.5 million in the nine months ended September
30, 1998, as compared to $10.9 million in the same period of 1997. Scheduled
service ASMs increased 17.8% and 27.5%, respectively, in the three and nine
months ended September 30, 1998, as compared to the same periods of 1997.
CRS fees increased $0.5 million and $2.4 million, respectively, in the three and
nine month periods ended September 30, 1998, as compared to the same periods of
1997, due to both a 28.4% and 43.2% increase, respectively, in total CRS
bookings made for the expanded scheduled service business unit between
comparative periods, and due to a 4.7% and 8.1% increase, respectively, in the
average cost of each CRS booking. Bookings for the Company's scheduled service
seats are often confirmed several weeks or more in advance of the customer's
actual date of travel, and such booking expenses are therefore frequently
recognized one or more accounting periods in advance of the recognition of the
related revenues.
Toll-free telephone costs increased $0.7 million between the nine month periods
ended September 30, 1998 and 1997, primarily due to higher toll-free usage
related to higher scheduled service reservations activity. Toll-free costs were
not significantly different between the third quarter of 1998 and 1997. Credit
card discount expense increased $0.7 million and $2.4 million, respectively, in
the three and nine month periods ended September 30, 1998 and 1997, as compared
to the same periods of 1997, due to higher 1998 earned revenues in scheduled
service which were sold using credit cards as payment.
Other selling cost per ASM increased 27.3% to 0.14 cents in the third quarter of
1998, as compared to 0.11 cents in the same quarter of the previous year, and
increased 36.4% to 0.15 cents in the nine months ended September 30, 1998, as
compared to 0.11 cents in the same period of 1997, primarily due to the
significant growth in scheduled service ASMs between years where such selling
expenses are incurred.
Ground Package Cost. Ground package cost is incurred by the Company to reimburse
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair and ATA Vacations customers.
Ground package cost increased 13.3% to $5.1 million in the third quarter of
1998, as compared to $4.5 million in the third quarter of 1997, and increased
7.1% to $15.0 million in the nine months ended September 30, 1998, as compared
to $14.0 million in the same period of 1997. The number of Ambassadair ground
packages sold in the nine-month period ended September 30, 1998, increased
21.8%, as compared to the same period of 1997, while the number of Ambassadair
ground packages sold was unchanged in the third quarters of 1998 and 1997. The
average cost of Ambassadair ground packages sold increased by 17.0% and 29.8%,
respectively, between the three and nine month periods ended September 30, 1998,
as compared to the same periods of 1997. The number of ATA Vacations ground
packages sold in the three and nine-month periods ended September 30, 1998
decreased 23.3% and 10.5%, respectively, as compared to the same periods of
1997, while the average cost of ATA Vacations ground packages sold increased by
4.6% and decreased by 7.6%, respectively.
The cost per ASM of ground packages increased 8.3% to 0.13 cents in the third
quarter of 1998, as compared to 0.12 cents in the third quarter of 1997, and
remained unchanged at 0.14 cents in the nine months ended September 30, 1998 and
1997.
Advertising. Advertising expense increased 37.5% to $4.4 million in the third
quarter of 1998, as compared to $3.2 million in the comparable period of 1997,
and increased 36.7% to $13.4 million in the nine months ended September 30,
1998, as compared to $9.8 million in the same period of 1997. The Company incurs
advertising costs primarily to support single-seat scheduled service sales and
the sale of air-and-ground packages. Advertising support for these lines of
businesses was increased in the three and nine month periods ended September 30,
1998, consistent with the Company's overall strategy to enhance scheduled
service RASM through increases in load factor and yield.
The 36.7% increase in total advertising expense in the nine months ended
September 30, 1998, was smaller than the 41.7% increase in scheduled service
revenues in the same period of 1998, since the majority of the Company's growth
in the first nine months of 1998 was from increased frequencies at existing
gateway cities such as Chicago-Midway, thus providing advertising efficiencies
in the 1998 period, as compared to the prior year. Such market-related
efficiency was not achieved in the third quarter of 1998, however, during which
advertising costs increased 37.5%, and scheduled service revenues grew by 32.3%,
as compared to the prior year. This lower efficiency was due to temporarily
higher advertising support required in the second and third quarters of 1998 for
the introduction of the Company's new services to Dallas-Ft. Worth, Denver, San
Juan, and New York's La Guardia airport, as well as to launch the Company's fall
promotions in September 1998.
The cost per ASM of advertising increased 33.3% to 0.12 cents in the third
quarter of 1998, as compared to 0.09 cents in the third quarter of 1997, and
increased by 20.0% to 0.12 cents in the nine months ended September 30, 1998, as
compared to 0.10 cents in the same period of 1997.
Facility and Other Rentals. Facility and other rentals includes the cost of all
ground facilities that are leased by the Company such as airport space, regional
sales offices and general offices. The cost of facility and other rentals
increased 9.1% to $2.4 million in the third quarter of 1998, as compared to $2.2
million in the third quarter of 1997, and increased 6.1% to $7.0 million in the
nine months ended September 30, 1998, as compared to $6.6 million in the same
period of 1997. The rate of growth in facilities costs between periods was
comparable to the 4.5% and 9.7% rates of ASM growth, respectively, in the three
and nine-month periods ended September 30, 1998 and 1997, due to the addition of
new facilities for services to Denver, Dallas- Ft. Worth and New York's
LaGuardia airport between periods.
The cost per ASM for facility and other rentals was unchanged at 0.06 cents in
the third quarters of 1998 and 1997, and was unchanged at 0.07 cents in the
nine-month periods ended September 30, 1998 and 1997.
Other Operating Expenses. Other operating expenses increased 19.9% to $16.3
million in the third quarter of 1998, as compared to $13.6 million in the third
quarter of 1997, and increased 19.8% to $47.7 million in the nine months ended
September 30, 1998, as compared to $39.8 million in the same period of 1997.
Other operating expenses which experienced significant changes between the third
quarters and nine months ended September 30, 1998 and 1997 included: (i) $0.7
million and $2.9 million, respectively, of additional costs for the Chicago
Express Jetstream 31 code share agreement, which agreement was not in effect in
the 1997 first quarter, and because such code share was expanded to include
Lansing and Madison in the first three quarters of 1998, which were not served
in 1997; (ii) $0.1 million and $2.0 million, respectively, in higher costs
associated with the short-term leasing of substitute aircraft, and the
reprotection of some of the Company's passengers on other airlines, due to
higher-than-normal delayed and irregular flight operations primarily in the
second quarter of 1998; and (iii) $0.8 million and $0.3 million, respectively,
in higher general, hull and liability insurance costs.
Other operating cost per ASM increased 16.2% to 0.43 cents in the third quarter
of 1998, as compared to 0.37 cents in the third quarter of 1997, and increased
9.8% to 0.45 cents in the nine months ended September 30, 1998, as compared to
0.41 cents in the same period of 1997.
Interest Income and Expense. Interest expense in the third quarter and nine
months ended September 30, 1998, increased to $3.2 million and $9.7 million,
respectively, as compared to $2.5 million and $5.8 million in the same periods
of 1997. The increase in interest expense between periods was primarily due to
changes in the Company's capital structure resulting from the two financings
completed on July 24, 1997, at which time the Company (i) sold $100.0 million
principal amount of 10.5% unsecured seven-year notes, and (ii) entered into a
new $50.0 million secured revolving credit facility, thereby replacing the
former secured revolving credit facility of $122.0 million as of June 30, 1997.
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. During the third quarter and nine months ended
September 30, 1998, the Company's weighted average borrowings were approximately
$151.3 million and $152.3 million, respectively, as compared to $119.0 million
and $99.0 million in the comparable periods of 1997.
The weighted average effective interest rates applicable to the Company's
borrowings in the third quarter and nine months ended September 30, 1998, were
8.47% and 8.47%, respectively, as compared to 8.45% and 7.86% in the comparable
periods of 1997. The increase in the weighted average effective interest rates
between years was primarily due to the 10.5% interest rate applicable to the
$100.0 million in unsecured notes issued on July 24, 1997, which was higher than
the average interest rate which was applicable to borrowings under the former
credit facility.
In order to reduce 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 $1.1 million and
$3.3 million, respectively, in interest income in the three and nine months
ended September 30, 1998, as compared to $0.6 million and $0.8 million earned in
the same periods of 1997.
Income Tax Expense
In the third quarter of 1998, the Company recorded $8.4 million in income tax
expense applicable to $20.8 million of pre-tax income for that period, while in
the third quarter of 1997 income tax expense of $1.8 million was recognized
pertaining to pre-tax income of $3.6 million. In the nine months ended September
30, 1998, income tax expense of $26.1 million was recorded, as compared to $5.2
million in the same period of 1997. The effective tax rates applicable to the
three and nine months ended September 30, 1998, were 40.4%, and 40.4%,
respectively, as compared to 51.1% and 55.2% in the same periods of 1997.
Income tax expense in both sets of comparative periods was significantly
affected by the permanent non-deductibility for federal income tax purposes of a
percentage of amounts paid for crew per diem (45% in 1998 and 50% in 1997). The
effect of this permanent difference on the effective income tax rate for
financial accounting purposes becomes more pronounced in cases where before-tax
income approaches zero, which was a significant reason for the higher effective
tax rate in the quarter and nine months ended September 30, 1997.
Income tax expense for the second quarter of 1997 was also significantly
affected by the one-time $2.0 million charge to salaries, wages and benefits for
the prepaid executive compensation package provided to the Company's former
President and Chief Executive Officer. Of the total compensation paid to this
former executive of the Company in 1997, approximately $1.7 million was
non-deductible against the Company's federal income taxes.
Liquidity and Capital Resources
Cash Flows. The Company has historically financed its working capital and
capital expenditure requirements from cash flow from operations and long-term
borrowings from banks and other lenders. As described further below, in the
third quarter of 1997, the Company completed two separate financings designed to
lengthen the maturity of its long-term debt and diversify its credit sources,
including the issuance of unsecured notes and a revolving credit facility that
had an extended maturity, lower interest rate and less restrictive covenants
than the former credit facility.
In the nine months ended September 30, 1998 and 1997, net cash provided by
operating activities was $131.9 million and $70.7 million, respectively. The
increase in cash provided by operating activities between periods was
attributable to such factors as increased earnings and related deferred income
taxes, higher depreciation and amortization, higher accrued expenses and other
factors.
Net cash used in investing activities was $115.6 million and $60.7 million,
respectively, for the nine month periods ended September 30, 1998 and 1997. Such
amounts primarily included capital expenditures totaling $115.6 million and
$63.5 million, respectively, for engine and airframe overhauls, airframe
improvements, hushkit installations, the purchase of rotable parts, and for
purchase deposits made on Boeing 757-200 and Lockheed L-1011-500 aircraft
scheduled to be delivered by the end of 1999.
Net cash used in financing activities was $9.6 million and $1.2 million,
respectively, for the nine months ended September 30, 1998 and 1997. Financing
activities in the 1998 period included $4.8 million to repay a short-term note
issued in connection with the purchase of a Boeing 727-200 aircraft in December
1997, plus $6.4 million in long-term debt reductions, partially offset by $1.6
million in proceeds from the issuance of common stock in association with the
exercise of stock options by employees.
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 nine total aircraft to be delivered between late 1995 and late
1999. In conjunction with the Boeing purchase agreement, the Company entered
into a separate agreement with Rolls-Royce Commercial Aero Engines Limited for
19 RB211-535E4 engines to power the nine 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 late
1998 delivery of the final two engines covered by this agreement, 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 six aircraft under these agreements in September
and December 1995, November and December 1996, November 1997 and July 1998, all
of which were financed under leases accounted for as operating leases. The final
three deliveries under this agreement are scheduled for December 1998, September
1999 and October 1999. Advanced payments totaling approximately $19.2 million
($6.4 million per aircraft) are required prior to delivery of the three
remaining aircraft, with the remaining purchase price payable at delivery. As of
September 30, 1998 and 1997 the Company had recorded fixed asset additions for
$12.7 million and $10.6 million, respectively, in advanced payments applicable
to aircraft scheduled for future delivery. The Company intends to finance the
remaining three deliveries under this agreement through sale/leaseback
transactions accounted for as operating leases.
In July 1998 the Company committed to the purchase of five Lockheed L-1011
series 500 aircraft, three spare engines, and certain associated spare parts.
These aircraft are powered by Rolls-Royce RB211-524B4-02 engines. The Company
accepted delivery of the first aircraft under this purchase agreement in the
third quarter of 1998, and expects to accept delivery of each of the additional
four aircraft in November 1998, January 1999, March 1999, and June 1999. Upon
delivery of each aircraft, the Company intends to complete certain modifications
and improvements to the airframes and interiors in order to qualify them to
operate in a standard coach seating configuration of 307 seats. Such
modifications are expected to require approximately 90 days from date of
delivery of the unmodified aircraft from the seller. The modified aircraft are
expected to be placed into revenue service between December 1998 and December
1999, operating primarily in the commercial and military/government charter
business segments. The Company expects that the total cost of the five modified
aircraft, together with spare engines and spare parts, will be approximately
$100.0 million. The Company expects to finance this purchase through the
issuance of long-term debt.
The Company purchased an additional Rolls-Royce-powered Boeing 757-200 aircraft
from an aircraft lessor in September 1997, financing this purchase through a
payment of cash and the issuance of a $30.7 million note which, as amended,
matures on October 15, 1999. The note requires monthly payments of $400,000 in
principal and interest from October 15, 1997, through September, 1999, with the
balance due at maturity.
In the fourth quarter of 1997, the Company purchased a Boeing 727-200 aircraft
which had been previously financed by the Company through a lease accounted for
as an operating lease, financing this purchase through the issuance of a
short-term note and a payment of cash. This note was repaid in the first quarter
of 1998. The Company issued a long-term note (secured by this aircraft) in
September 1998 for $6.0 million, which requires repayment of $1.0 million in
October 1998 and $100,000 per month in principal and interest from November 1998
through October 2002, with the balance due in November 2002.
In the second and third quarters of 1998, the Company purchased and improved one
Lockheed L-1011-100 aircraft, which was placed into service in late July 1998.
Issuance of Unsecured Notes. On July 24, 1997, the Company completed two
separate financings designed to lengthen the maturity of the Company's long-term
debt and diversify its credit sources. On that date, the Company (i) sold $100.0
million principal amount of unsecured seven-year notes in a private offering
under Rule 144A, and (ii) entered into a new secured revolving credit facility.
The Company subsequently completed an exchange offer to holders of the unsecured
seven-year notes in January 1998, under which offer those notes issued in the
original private offering could be tendered in exchange for fully registered
notes of equal value.
The unsecured senior notes mature on August 1, 2004. Each note bears interest at
the annual rate of 10.5%, payable on February 1 and August 1 of each year
beginning February 1, 1998. The notes rank pari passu with all unsecured,
unsubordinated indebtedness of the Company existing now or created in the
future, are effectively subordinated to the Company's obligations under secured
indebtedness to the extent of such security, and will be senior to any
subordinated indebtedness of the Company created in the future. All payments of
interest and principal are unconditionally guaranteed on an unsecured,
unsubordinated basis, jointly and severally, by each of the active subsidiaries
of the Company. The Company may redeem the notes, in whole or in part, at any
time on or after August 1, 2002, initially at 105.25% of their principal amount
plus accrued interest, declining ratably to 100.0% of their principal amount
plus accrued interest at maturity. At any time prior to August 1, 2000, the
Company may redeem up to 35.0% of the original aggregate principal amount of the
notes with the proceeds of sales of common stock, at a redemption price of
110.5% of their principal amount (plus accrued interest), provided that at least
$65.0 million in aggregate principal amount of the notes remains outstanding
after such redemption. The notes are subject to covenants for the benefit of the
note holders, including, among other things, limitations on: (i) the incurrence
of additional indebtedness; (ii) the making of certain restricted payments;
(iii) the creation of consensual restrictions on the payment of dividends and
other payments by certain subsidiaries; (iv) the issuance and sale of capital
stock by certain subsidiaries; (v) the issuance of guarantees by certain
subsidiaries; (vi) certain transactions with shareholders and affiliates; (vii)
the creation of liens on certain assets or properties; (viii) certain types of
sale/leaseback transactions; and (ix) certain sales, transfers or other
dispositions of assets.
The net proceeds of the unsecured notes were approximately $96.9 million, after
application of costs and fees of issuance. The Company used a portion of the net
proceeds to repay in full the Company's prior bank facility and will use the
balance of the proceeds for general corporate purposes, which may include the
purchase of additional aircraft and/or the refinancing of existing leased
aircraft, among other things.
Credit Facilities. Concurrently with the issuance of the unsecured notes, on
July 24, 1997, the Company entered into a new $50.0 million revolving credit
facility that includes up to $25.0 million for stand-by letters of credit. ATA
is the borrower under the new credit facility, which is guaranteed by the
Company and each of the Company's other active subsidiaries. The principal
amount of the new facility matures on April 1, 2001, and borrowings are secured
by certain Lockheed L-1011 aircraft and engines. The loan-to-value ratio for
collateral securing the new facility may not exceed 75% at any time. Borrowings
under the new facility bear interest, at the option of ATA, at either (i) LIBOR
plus 1.50% to 2.50% (depending upon certain financial ratios); or (ii) the agent
bank's prime rate plus 0.0% to 0.5% (depending upon certain financial ratios).
The facility contains various covenants including, among other things: (i)
limitations on incurrence of debt and liens on assets; (ii) limitations on
capital expenditures; (iii) restrictions on payment of dividends and other
distributions to stockholders; (iv) limitations on mergers and the sale of
assets; (v) restrictions on the prepayment or redemption of certain
indebtedness, including the 10.5% notes; and (vi) maintenance of certain
financial ratios such as minimum tangible net worth, cash-flow-to-interest
expense and aircraft rentals and total adjusted liabilities to tangible net
worth.
As of September 30, 1998 and 1997, the Company had borrowed $25.0 million
against its existing credit facility, all of which was repaid on October 1, 1998
and 1997.
The Company also maintains a $5.0 million revolving credit facility for its
short-term borrowing needs and for securing the issuance of letters of credit.
Borrowings against this credit facility bear interest at the lender's prime rate
plus 0.25% per annum. There were no borrowings against this facility as of
September 30, 1998 and 1997; however, the Company did have outstanding letters
of credit secured by this facility aggregating $4.1 million and $3.5 million,
respectively.
No amounts had been drawn against letters of credit at September 30, 1998 or
1997.
Assets Held For Sale. At September 30, 1998 the Company had classified $7.2
million in net book value of two spare Pratt & Whitney engines as Assets Held
for Sale in the accompanying balance sheet. In July 1997, the Company sold two
similar spare Pratt & Whitney engines and, during the first quarter of 1998,
also sold related Pratt & Whitney parts and materials, neither of which sale
resulted in a material gain or loss. The net book value of the two remaining
spare engines approximates fair market value, and the Company continues to
market these engines.
Stock Repurchase Program. In February 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. Between 1994
and 1996, the Company repurchased 185,000 shares of common stock under this
program. No shares were repurchased during 1997 or the first quarter of 1998. In
the second quarter of 1998, the Company repurchased 8,506 shares for the purpose
of allowing individuals with restricted stock to pay required taxes.
Aircraft Purchase Commitments and Options. The Company has signed purchase
agreements to acquire 15 Boeing 727-200ADV aircraft at agreed prices. Thirteen
of these aircraft are currently leased by the Company. The other two aircraft,
currently on lease to another airline, may be purchased in 1999, depending upon
the exercise of lease extension options available to the current lessee. The
Company currently intends to install engine hushkits on these Boeing 727-200
aircraft in order to meet federal stage three noise regulations for its fleet by
December 31, 1999.
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."
State of Readiness. 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.
During the course of its inventory, the Company identified approximately 693
separate computer infrastructure components which are used to support various
aspects of its world-wide operations. Such components include software packages
(both purchased and internally developed), operating systems for computers,
computer hardware and peripheral devices, local and wide-area communications
networks, aircraft computers and components, and a variety of other items of
technology infrastructure including those associated with the operation of
properties and facilities. The Company then classified each of these components
using an internal scale from 1 to 5 to designate the seriousness and immediacy
of impact to the Company, should the component fail due to lack of compliance
with year 2000 standards, with category 5 being the highest risk.
The Company's year 2000 project involves the completion of five specific phases
of work. The first, or awareness phase (now 100% complete) includes the creation
of a year 2000 project team, development of written standards and processes for
the year 2000 project, communications to Company employees about the year 2000
problem and the Company's approach to addressing it, creation of year 2000 com-
pliance standards for newly acquired technology components, and written
standards and procedures for year 2000 project status reporting.
The second phase is inventory and assessment (now 100% complete), which includes
such activities as creating an inventory of all technology infrastructure
components used by the Company, developing standards for assessing and ranking
year 2000 risk for such components, completing risk assessments for all
components, providing year 2000 certification standards for such components,
development of a critical vendor database, development of renovation standards
and guidelines, development of testing standards and guidelines, creation of
testing environments, developing an inventory of tools needed to complete
assessment, conversion and testing of components, development of year 2000
resource budgets, and completion of high-level contingency plans.
The third phase is renovation (now 54% complete), which includes the conversion,
replacement or elimination of selected hardware platforms and devices, operating
systems, databases, purchased software, utilities, and internal and external
interfaces. Renovation requires the completion and documentation of software and
hardware changes, development of replacement systems, and decommissioning
systems to be eliminated. Renovation also includes the completion and
documentation of unit testing, and the creation of a final test plan for system,
integration and stress testing of all changes. Contingency plans will also be
updated and completed, based upon completion of renovation efforts and unit test
results.
The fourth phase is validation (now 7% complete), which includes user acceptance
testing of all new or renovated components. Such testing is expected to validate
year 2000 operational readiness of the individual components, up to but not
including testing of the integration of those components with other components
sharing common interfaces or other interdependencies.
The fifth phase is implementation (now 4% complete), which includes integration
testing of individual components as to interfaces and interdependencies with
other components or elements of the Company's technology infrastructure.
With respect to the 693 computer infrastructure components, the Company has
prepared approximately 105 individual project plans with tasks and milestones
which define the work to be done to complete the five phases of year 2000
readiness. A total of 4 plans are now complete. A total of 65 plans are
currently in progress and are substantially on schedule for future completion.
The remaining 36 plans have not yet commenced, but the Company expects to
complete them prior to the end of 1999. Of the total hours of work included in
the Company's 105 project plans, approximately 28% of such work is now complete.
The Company is dependent upon a large number of third party vendors and
suppliers who provide essential goods and services to the Company throughout the
world. In order to insure that essential goods and services are supplied to the
Company without interruptions caused by the year 2000 problem, the Company has
undertaken a "vendor year 2000 readiness" project.
Some third party vendor relationships are very significant to the Company. The
loss of access to some goods and services provided by some vendors, such as tour
operator and airline reservation systems, could have severe consequences on the
Company's business operations
Under the Company's vendor readiness plan, significant Company vendors have been
grouped according to the expected safety, operations or financial impacts from a
loss of access to essential goods or services due to the vendor failing to
become year 2000 compliant, and the expected time and effort which would be
required to replace the non-compliant vendor with a compliant vendor. Under this
classification system, the Company has identified 751 "tier 3" vendors whose
lack of year 2000 compliance and the resulting loss of essential goods and
services, could create immediate and severe safety, operations or financial
impact to the Company, with replacement of such vendors taking considerable time
and effort. The Company has further classified 565 vendors as "tier 2" vendors,
which could pose significant safety, operations or financial impacts to the
Company should they be non-year-2000 compliant, but which impacts would not be
immediate, and for which only moderate time and effort would be required to
locate compliant replacement vendors. All remaining significant vendors have
been classified as "tier 1" vendors (totaling over 2,000), none of which would
pose a significant safety, operations or financial impact in the event of
non-compliance with year 2000 standards, and all of which could easily be
replaced with alternative vendors.
In addition to the third-party dependencies enumerated above, the Company is
also highly dependent upon the operation of airports and air traffic control
systems in the United States and in foreign countries. Each year the Company
flies to over 400 individual airports world-wide which are typically operated by
governmental or quasi-governmental agencies. Other governmental agencies use
computers to provide essential services at airports, such as customs and
immigration screening and weather reporting.
As a member of the Air Transport Association Year 2000 Committee, the Company is
participating with other member airlines to test and validate the year 2000
readiness of the air transportation infrastructure such as airports and air
traffic control systems. As yet, no comprehensive inventory and risk assessment
of domestic and international airports has been completed, and therefore the
Company cannot determine to what degree, if any, domestic and international
airports are at risk of failing to meet year 2000 readiness standards.
Under the direction of the Air Transport Association Year 2000 Committee a
separate evaluation of aviation-related federal agencies is also in progress.
This evaluation includes the year 2000 readiness of the Federal Aviation
Administration, particularly with respect to the operation of the domestic air
traffic control system; the Department of Transportation; the Immigration and
Naturalization Service; and the National Weather Service. Based upon
representations made by such federal agencies, they expect to be able to provide
uninterrupted services to the air transportation industry, including the
Company, during the year 2000. Efforts of the Air Transport Association Year
2000 Committee are directed toward completing an independent verification of
readiness of these agencies, which is still incomplete at this time.
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, vendor
readiness, aircraft and airports, will be approximately $6.1 million. Such
estimated cost includes approximately $2.5 million in capital expenditures to
acquire new software and hardware to replace non-compliant computer devices, as
well as approximately $3.6 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. Approximately $1.8 million of this estimated cost has been
incurred as of September 30, 1998 (of which $0.9 million was expense and $0.9
million was capital), with the remaining $4.3 million to be incurred by the end
of 1999. 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.
Year 2000 Risks and Contingency Plans. The Company believes that its computer
infrastructure project plans and vendor readiness plan, together with its
participation on the Air Transport Association Year 2000 Committee, 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, however, 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. 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.
The Company has developed a number of high-level contingency plans addressing
how it would respond to specific year 2000 issues arising from non-compliant
computer infrastructure components, vendors and federal agencies. Such
contingency plans will be broadened and formalized as more advanced phases of
the Company's year 2000 project are completed, and risks in individual areas are
more thoroughly understood and alternative approaches to existing systems and
components are identified. Contingency plans include such strategies as securing
alternative vendors and adding staff to implement manual workarounds, where
feasible.
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes forward-looking information which
can be identified by forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "anticipates," or the negative thereof, or other
variations in comparable terminology. Such forward-looking information is based
upon management's current knowledge of factors affecting the Company's business.
The differences between expected outcomes and actual results can be material,
depending upon the circumstances. Therefore, where the Company expresses an
expectation or belief as to future results in any forward-looking information,
such expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but the Company can provide no assurance that the statement of
expectation or belief will result or will be achieved or accomplished.
The Company has identified the following important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by the Company.
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.
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.
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.
The vast majority of the Company's scheduled service and commercial charter
business, other than military/government charter, 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.
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 12.4% and 14.9%,
respectively, of consolidated revenues in the third quarters of 1998 and 1997,
and 14.0% and 17.4%, respectively, of consolidated revenues for the nine-month
periods ended September 30, 1998 and 1997. No other single customer of the
Company accounts for more than 10% of operating revenues.
More than two-thirds of the Company's operating revenues are sold by travel
agents and tour operators who generally have a choice of airlines when booking a
customer's travel. Although the Company intends to offer attractive and
competitive products to travel agents and tour operators and further intends to
maintain favorable relationships with them, any significant actions by large
numbers of travel agents or tour operators to favor other airlines, or to
disfavor the Company, could have a material adverse effect on the Company.
The Company's airline businesses are significantly affected by seasonal factors.
Historically, the Company has experienced reduced demand for leisure travel
during the second and fourth quarters of each year, although during the second
quarter of 1998 the Company experienced unusually strong demand as compared to
any prior second quarter in the Company's history. The Company's results of
operations for any single quarter are not necessarily indicative of the
Company's annual results of operations.
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 scheduled service flight does not vary significantly with the number of
passengers carried, and therefore the revenue impact of a small increase or
decrease in average scheduled service 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.
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.
Jet fuel comprises a significant percentage of the total operating expenses of
the Company, accounting for 16.2% and 20.4%, respectively, of operating expenses
in the third quarters of 1998 and 1997, and 16.8% and 20.4%, respectively, of
operating expenses in the nine-month periods ended September 30, 1998 and 1997.
Fuel prices are subject to factors which are beyond the control of the Company,
such as market supply and demand conditions, and political or economic factors.
Although the Company is able to contractually pass through some fuel price
increases to the U.S. military and tour operators, and although the Company has
engaged in some fuel price hedging activity in the first six months of 1998, a
significant increase in fuel prices could have a material adverse effect on the
demand for the Company's services at profitable prices.
In June 1991, the Company's flight attendants elected the Association of Flight
Attendants as their representative and ratified a four-year collective
bargaining agreement in December 1994. In June 1993, the Company's cockpit crews
elected the International Brotherhood of Teamsters as their representative and
ratified a four-year collective bargaining agreement in September 1996. The
Company believes that its relations with employee groups are good. However, the
existence of a significant labor dispute with any sizable group of employees
could have a material adverse effect on the Company's operations.
The Company is subject to regulation under the jurisdictions of the DOT and the
FAA and by certain other governmental agencies, such as the Federal
Communications Commission, the Commerce Department, the Customs Service, the
Immigration and Naturalization Service, the Animal and Plant Inspection Service
of the Department of Agriculture, and the Environmental Protection Agency. These
agencies propose and issue regulations from time to time which can significantly
increase the cost of airline operations. For example, the FAA in recent years
has issued a number of aircraft maintenance directives and other regulations
requiring action by the Company on such matters as collision avoidance systems,
airborne wind shear avoidance systems, noise abatement, airworthiness of aging
aircraft and increased inspection requirements. Other laws and regulations have
been considered from time to time that would prohibit or restrict the ownership
and/or transfer of airline routes and takeoff or landing slots at certain
airports. The Company cannot predict the nature of future changes in laws or
regulations to which it may become subject, and such laws and regulations could
have a material adverse effect on the financial condition of the Company.
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.
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.
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.
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, including the potential acquisition of other
business entities by the Company. 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.
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 - Other Information
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports of Form 8-K
(a) None.
(b) On July 7, 1998, the Company filed a Form 8-K which contained one exhibit.
Exhibit 99(c) included the Company's regular monthly press release for June
1998 traffic, dated July 7, 1998. On July 16, 1998, the Company filed a
Form 8-K which contained one exhibit. Exhibit 99(d) included a press
release by the Company dated July 16, 1998 describing the Company's second
quarter earnings.
<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: November 14, 1998 John P. Tague
John P. Tague
President and Chief Executive Officer
Director
Date: November 14, 1998 James W. Hlavacek
James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date: November 14, 1998 Kenneth K. Wolff
Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
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