United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From to
Commission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
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(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 12,222,379 shares as of February 28, 1999.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran, Inc. and Subsidiaries' Proxy Statement dated April 2,
1999, are incorporated by reference into Part III.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 1998
AMTRAN INC. AND SUBSIDIARIES
Page #
PART I
<S> <C> <C>
Item 1. Business........................................................................................... 4
Item 2. Properties.........................................................................................11
Item 3. Legal Proceedings..................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders................................................11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.......................12
Item 6. Selected Consolidated Financial Data...............................................................12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........................................35
Item 8. Financial Statements and Supplementary Data........................................................37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............50
PART III
Item 10. Directors and Officers of the Registrant...........................................................51
Item 11. Executive Compensation.............................................................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................51
Item 13. Certain Relationships and Related Transactions.....................................................51
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................52
Item 14d. Valuation and Qualifying Accounts..................................................................55
</TABLE>
<PAGE>
PART I
Item 1. Business
Amtran, Inc. (the "Company") owns American Trans Air, Inc. ("ATA"), the eleventh
largest passenger airline in the United States (based on 1998 revenues) and a
leading provider of airline services in selected markets. The Company is also
the largest commercial charter airline in the United States and the largest
charter provider of passenger airline services to the U.S. military, in each
case based on 1998 revenues. For the year ended December 31, 1998, the revenues
of the Company consisted of 55.6% scheduled service, 24.2% commercial charter
service and 13.3% military charter service, with the balance derived from
related services.
Scheduled Service
The Company provides scheduled service through ATA to selected destinations
primarily from its gateways at Chicago-Midway and Indianapolis and also provides
transpacific services between the western United States and Hawaii. In the
second and third quarters of 1998, the Company added scheduled service between
Chicago-Midway and Dallas-Ft. Worth, Denver, New York-LaGuardia and San Juan.
The Company focuses on routes where it believes it can be a leading provider of
nonstop service and targets leisure and value-oriented business travelers.
The Company believes that it has significant competitive advantages in each of
its primary markets.
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 53.4% of the Company's total scheduled service
capacity in 1998. The Company is the number one carrier in terms of market
share in 12 out of its 13 nonstop jet routes from Chicago-Midway.
o Hawaii represented approximately 21.3% of the Company's total scheduled
service capacity in 1998. The Company believes it is the lowest-cost
provider of scheduled service between the western United States and Hawaii,
which is critical in this price-sensitive, predominantly leisure market.
Furthermore, a majority of the Company's capacity in the Hawaiian market is
contracted to the nation's largest independent Hawaiian tour operator,
which assumes capacity, yield and fuel risk.
o Indianapolis represented approximately 16.1% of the Company's total
scheduled service capacity in 1998. The Company began scheduled service
from Indianapolis in 1986 and believes that it benefits from being
perceived as the hometown airline. The Company is the number one provider
in terms of market share in 6 of its 7 nonstop jet routes from
Indianapolis.
Commercial Charter Service
The Company is the largest commercial charter airline in the United States and
provides services throughout the world, primarily to U.S., South American and
European tour operators. The Company seeks to maximize the profitability of
these operations by leveraging its leading market position, diverse aircraft
fleet and worldwide operating capability. The Company believes its commercial
charter services are a predictable source of revenues and operating profits in
part because its commercial charter contracts require tour operators to assume
capacity, yield and fuel price risk, and also because of the Company's ability
to re-deploy assets into favorable markets. The Company's commercial charter
services are marketed and distributed through a network of domestic and
international sales offices.
Military/Government Charter Service
The Company has provided passenger airline services to the U.S. military since
1983 and is currently the largest charter provider of these services. The
Company believes that because these operations are generally less seasonal than
leisure travel, they have tended to have a stabilizing impact on the Company's
operating margins. The U.S. government awards one-year contracts for its
military charter business and pre-negotiates contract prices for each type of
aircraft that a carrier makes available. The Company believes that its fleet of
aircraft is well suited to the needs of the military.
Strategy
The Company intends to enhance its position as a leading provider of passenger
airline services to selected markets where it can capitalize on its competitive
strengths. The key components of this strategy are:
Participate in Markets Where it Can Be a Leader
The Company focuses on markets where it can be a leading provider of airline
services. In scheduled service, the Company concentrates on routes where it can
be the number one or number two carrier. The Company achieves this result
principally through superior nonstop schedules, value-oriented service, focused
marketing efforts and certain airport and aircraft advantages. The Company is
the leading provider of commercial and military charter services in large part
because of its variety of aircraft types, superior operational performance and
its worldwide service capability.
Maintain Low-Cost Position
For 1996, 1997 and 1998, the Company's operating cost per available seat mile
("CASM") of 5.92(cent), 6.09(cent) and 6.09(cent), respectively, was the lowest
among large U.S. passenger airlines. The Company believes that its low-cost
structure provides a significant competitive advantage, allowing it to operate
profitably while pricing competitively in the scheduled service and commercial
and military charter markets. The Company believes its low-cost position is
primarily derived from its simplified product, route structure, low aircraft
ownership costs and low overhead costs.
Target Growth Opportunities
The Company intends to expand its operations selectively in areas where it
believes it can achieve attractive financial returns.
o Charter Expansion. The Company is acquiring five long-range Lockheed
L-1011-500 aircraft primarily for commercial and military charter service,
whose low-cost and high-seating capacity will enable the Company to compete
for business that it cannot now accommodate (e.g., nonstop service to
certain South American, European and Asian destinations).
o Scheduled Service Expansion at Chicago-Midway. The Company plans to
increase frequencies and add up to three additional destinations from its
Chicago-Midway gateway over the next 18 months and to support this
expansion by adding two incremental Boeing 757-200 aircraft to its fleet in
1999 and 2000.
o Selected Acquisitions. The Company continually evaluates possible
acquisitions of related businesses or interests therein to enhance its
competitive position in its market segments. Among other things, in early
1999, it completed the purchase of the 50% interest in its air cargo
operation that it did not previously own and acquired Travel Charter
International, a tour operator. It also has an agreement in principle to
acquire Chicago Express, a commuter airline which presently operates as the
ATA Connection, and Key Travel, another tour operator.
Industry Overview
Scheduled Airline Service
In the United States, the scheduled airline business is dominated by a small
number of large scheduled airlines, all of which have developed hub-and-spoke
route systems. As a result of this structure, many smaller cities or airports
are not served by direct or nonstop flights to leisure destinations and many
secondary leisure destinations do not receive direct or nonstop service from
more than a few major U.S. cities. Unlike most of the scheduled airlines, the
Company has focused on low-frequency, nonstop or direct service from its
principal gateways to leisure or business destinations where there is little or
no competing direct or nonstop service. The Company intends to continue to
pursue this strategy, and in 1998 added nonstop service from Chicago-Midway to
Denver, Dallas-Ft. Worth, New York-LaGuardia and San Juan.
Commercial and Military/Government Charter Airline Service
In the United States, the passenger charter airline business is served by major
scheduled airlines and a number of U.S. and non-U.S. charter airlines.
Historically, charter airlines have supplemented the service provided by
scheduled airlines by providing additional capacity at times of peak demand.
U.S. charter airlines have also provided service to the military both in times
of peak demand, such as during the Persian Gulf War, and on a longer-term basis
to supplement the U.S. military's own passenger fleet. Based on the most
recently available Department of Transportation ("DOT") statistics, total
charter flights by all U.S. airlines represented approximately 2.9% of all
available seat miles ("ASMs") flown within the United States during the twelve
months ended September 30, 1998.
The Company's Airline Operations
Services Offered
The following table provides a summary of the Company's major revenue sources
for the periods indicated:
<TABLE>
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Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(Dollars in millions)
Scheduled service $240.7 $362.0 $386.5 $371.8 $511.3
--------- --------- --------- --------- ----------
Commercial charter 204.0 229.5 226.4 228.1 222.6
Military charter 91.8 77.5 84.2 131.1 121.9
--------- --------- --------- --------- ----------
Total charter service 295.8 307.0 310.6 359.2 344.5
--------- --------- --------- --------- ----------
Other 44.0 46.0 53.8 52.2 63.6
========= ========= ========= ========= ==========
Total $580.5 $715.0 $750.9 $783.2 $919.4
========= ========= ========= ========= ==========
</TABLE>
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be one of the top two largest carriers, focusing primarily
on low-cost, nonstop or direct flights. The Company currently provides scheduled
service primarily from its gateway cities of Chicago-Midway and Indianapolis to
popular vacation destinations such as Hawaii, Las Vegas, Florida, California,
Mexico and the Caribbean, as well as to New York's John F. Kennedy and LaGuardia
Airports, Denver and Dallas-Ft. Worth.
In October 1997, the Company expanded its Chicago Express commuter services by
adding the cities of Lansing and Madison to the flights it had already operated
out of Chicago-Midway to Indianapolis, Milwaukee, Des Moines, Dayton and Grand
Rapids since April 1997. Under the Chicago Express code share agreement, Chicago
Express provides aircraft, crews, insurance and maintenance, and the Company
provides all other services, including marketing, reservation services, fuel and
aircraft handling. The Company receives all passenger and cargo revenues and
pays Chicago Express a fixed fee per flight. The seats sold under the Chicago
Express code share agreement are listed on major computer reservations systems
("CRS") as ATA seats, even though the flights are operated by a separate
airline. Chicago Express uses 19-seat Jetstream 31 propeller aircraft. In
February 1999, the Company entered into an agreement in principle to acquire
Chicago Express. Closing of this transaction is subject to documentation,
approvals and other matters of substance.
Included in the Company's jet scheduled service are bulk sales agreements with
tour operators. Under these arrangements, which are very similar to charter
sales, the tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. The seats which the Company retains are sold through its own scheduled
service distribution network. Under bulk sales arrangements, the Company is
obligated to provide transportation to the tour operators' customers even in the
event of non-payment to the Company by tour operators. To minimize its credit
exposure under these arrangements, the Company requires bonding or a security
deposit for a significant portion of the contract price. Bulk seat sales
amounted to $67.3 million, $59.0 million and $68.6 million in 1996, 1997 and
1998, respectively, which represented 9.0%, 7.5% and 7.5%, respectively, of the
Company's consolidated revenues for such periods.
Commercial Charter
Commercial charter represented 30.2%, 29.1% and 24.2%, respectively of the
Company's consolidated revenues for 1996, 1997 and 1998. The Company's principal
customers for commercial charter are tour operators, sponsors of incentive
travel packages and specialty charter customers.
Tour Operator Programs. These leisure-market programs are generally contracted
for repetitive, round-trip patterns, operating over varying periods of time. In
such an arrangement, the tour operator pays a fixed price for use of the
aircraft, including the crew and all necessary passenger and aircraft handling
services, and assumes responsibility and risk for the actual sale of the
available aircraft seats. Because the Company has a contract with tour operators
for each flight or series of flights, it can, subject to competitive
constraints, structure the terms of each contract to reflect the costs of
providing the specific service, together with an acceptable return. Under most
of its contracts with tour operators, the Company passes through increases in
fuel costs from a contracted price. Under these contracts, if the fuel increase
causes the tour operator's fuel cost to rise in excess of 10%, the tour operator
has the option of canceling the contract. The Company is exposed to increases in
fuel costs that occur within 14 days of flight time.
Although the Company serves tour operators on a worldwide basis, its primary
customers are U.S.-based and European-based tour operators. European tour
operators accounted for 4.6%, 3.2% and 2.2%, respectively of consolidated
revenues for 1996, 1997 and 1998. Contracts with most European tour operators
establish prices payable to the Company in U.S. dollars, thereby reducing the
Company's foreign currency risk. The Company's five largest tour operator
customers represented approximately 22.4%, 16.2%, and 14.4%, respectively, of
the Company's consolidated revenues for 1996, 1997 and 1998, and the ten largest
tour operator customers represented approximately 29.7%, 20.8% and 17.5%,
respectively, of the Company's consolidated revenues for the same periods.
Incentive Travel Programs. Many corporations offer travel to leisure
destinations or special events as incentive awards for their employees. The
Company has historically provided air travel for many corporate incentive
programs. Incentive travel customers range from national incentive marketing
companies who arrange such programs for corporate clients to large corporations
that handle their incentive travel programs on an in-house basis.
Specialty Charters. The Company operates a significant number of specialty
charter flights. These programs are normally contracted on a single round-trip
basis and vary extensively in nature, from flying university alumni to a
football game, to transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site. These flights,
some of which are arranged on very short notice based on aircraft availability,
allow the Company to increase aircraft utilization during off-peak periods.
Military/Government Charter
In 1996, 1997 and 1998, sales to the U.S. military and other governmental
agencies were approximately 11.2%, 16.8% and 13.3%, respectively, of the
Company's consolidated revenues. Traditionally, the Company's focus has been on
short-term military "contract expansion" business which is routinely awarded by
the U.S. government based on price and availability of appropriate aircraft. The
U.S. government awards one-year contracts for its military charter business, and
pre-negotiates contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the participating airlines'
average costs. The short-term expansion business is awarded pro rata to those
carriers with aircraft availability who have been awarded the most fixed-award
business, and then to any additional carrier that has aircraft available. The
Company's contractor teaming arrangement significantly increases the likelihood
that the team will receive both fixed-award and contract expansion business.
The Company is subject to biennial inspections by the Department of Defense as a
condition of retaining its eligibility to perform military charter flights. The
last such inspection was completed in the fourth quarter of 1997. As a result of
the Company's military business, it has been required from time to time to meet
operational standards beyond those normally required by the DOT, Federal
Aviation Administration ("FAA") and other government agencies.
Other Business
In addition to its core charter and scheduled service businesses, the Company
operates several other smaller businesses that complement its core businesses.
For example, the Company sells ground arrangements (hotels, car rentals and
attractions) through its Ambassadair and ATA Vacations subsidiaries; provides
airframe and powerplant mechanic training through American Trans Air Training
Corporation; and provides helicopter charter services through its ExecuJet
subsidiary. Additionally, the Company, through its subsidiary Amber Air Freight,
markets cargo services in the Company's scheduled and charter operations. In
aggregate, these businesses, together with incidental revenues associated with
core charter and scheduled service operations, accounted for 7.1%, 6.6% and
6.9%, respectively, of consolidated revenues in 1996, 1997 and 1998.
Aircraft Fleet
As of December 31, 1998, the Company was certified to operate a fleet of 15
Lockheed L-1011s, 24 Boeing 727-200ADVs and 9 Boeing 757-200s. The Company also
has an agreement in principle to acquire Chicago Express which is certified to
operate Jetstream 31 propeller aircraft. As of December 31, 1998, the Company
had taken delivery of an incremental Lockheed L-1011-500 which was undergoing
modifications, and not yet flight certified. See " - Properties."
Lockheed L-1011 Aircraft
The Company's 15 Lockheed L-1011 aircraft are wide-body aircraft, 11 of which
have a range of 2,971 nautical miles, three of which have a range of 3,425
nautical miles, and one of which has a range of 5,577 nautical miles. These
aircraft conform to the FAA's Stage 3 noise requirements and have a low
ownership cost relative to other wide-body aircraft types. See "--Environmental
Matters." As a result, the Company believes these aircraft provide a competitive
advantage when operated on long-range routes, such as on transatlantic, South
American and transpacific routes. These aircraft have an average age of
approximately 23 years. As of December 31, 1998, 14 of these aircraft were owned
by the Company and one was under an operating lease that expires in March 2003.
The Company has agreed to purchase three additional L-1011-500 aircraft in 1999.
Certain of the Lockheed L-1011 aircraft owned by the Company are subject to
mortgages and other security interests granted in favor of the Company's lenders
under its revolving credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Boeing 727-200ADV Aircraft
The Company's 24 Boeing 727-200ADV aircraft are narrow-body aircraft equipped
with high-thrust, JT8D-15/-15A/-17/-17A engines and have a range of 2,050
nautical miles. These aircraft, of which 16 conform to Stage 3 and eight conform
to Stage 2 noise requirements as of December 31, 1998, have an average age of
approximately 19 years. The Company leases 23 of these aircraft, with initial
lease terms that expire between January 1999 and September 2003, subject to the
Company's right to extend each lease for varying terms or purchase the aircraft.
Subsequent to December 31, 1998, the Company purchased eight of the 23 leased
aircraft Prior to December 31, 1999, the Company will be required to make
capital expenditures for engine "hushkits" so that its entire fleet conforms to
Stage 3 noise requirements in accordance with FAA regulations. The Company
currently plans to install hushkits on eight remaining Stage 2 Boeing 727-200
aircraft before the end of 1999. The capital cost to hushkit a Boeing 727-200ADV
aircraft is approximately $2.5 million. See "--Environmental Matters."
Boeing 757-200 Aircraft
The Company's 9 Boeing 757-200 aircraft are relatively new, narrow-body
aircraft, all of which have a range of 3,679 nautical miles. These aircraft, all
of which are leased, have an average age of approximately 3 years and meet Stage
3 noise requirements. The Company's Boeing 757-200s have higher ownership costs
than the Company's Lockheed L-1011 and Boeing 727-200ADV aircraft, but lower
operational costs. In addition, unlike most other narrow-body aircraft, the
Boeing 757-200 has the capacity to operate on extended flights over water. The
leases for the Company's Boeing 757-200 aircraft have initial terms that expire
on various dates between December 1999 and July 2017, subject to the Company's
right to extend each lease for varying terms.
Although Lockheed L-1011 and Boeing 727-200ADV aircraft are subject to the FAA's
Aging Aircraft program, the Company does not currently expect that its cost of
compliance for these aircraft will be material. See "--Regulation."
Flight Operations
Worldwide flight operations are planned and controlled by the Company's Flight
Operations Group based in Indianapolis, Indiana, which is staffed on a 24-hour
basis, seven days a week. Logistical support necessary for extended operations
away from the Company's fixed bases is coordinated through its global
communications network. The Company has the ability to dispatch maintenance and
operational personnel and equipment as necessary to support temporary operations
around the world.
In order to enhance the reliability of its service, the Company seeks to
maintain at least two spare Lockheed L-1011 and three spare Boeing 727-200
aircraft at all times. Spare aircraft can be dispatched on short notice to most
locations where a substitute aircraft is needed for mechanical or other reasons.
These spare aircraft allow the Company to provide a dispatch reliability to its
customers that is difficult for an airline of smaller size to match.
Maintenance and Support
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This 120,000 square-foot facility was designed to meet
the maintenance needs of the Company's fleet and to provide supervision and
control of purchased maintenance services. The Company performs approximately
75% of its own maintenance work, excluding engine overhauls and Lockheed L-1011
and Boeing 727-200 heavy airframe checks.
The Company currently maintains ten permanent maintenance facilities, including
its Indianapolis facility. In addition, the Company utilizes "road teams," which
are dispatched primarily as charter flight operations require to arrange and
supervise maintenance services at temporary locations. The Company also uses
road teams to supervise all maintenance not performed in-house.
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 50.4%, 53.4% and 45.0%, respectively, of consolidated revenues in
1996, 1997 and 1998. The Company closely monitors jet fuel spot prices and crude
oil and heating oil futures markets to provide early indications of potential
shifts in jet fuel prices for timely management review and action. The Company
did not engage in any material fuel hedging activities in 1996 or 1997, but
began a fuel hedging program in 1998 and has hedged a significant portion of its
scheduled service fuel exposure for the first six months of 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Operating Expenses - Fuel and Oil."
Competition
The Company's products and services face varying degrees of competition in
diverse markets.
Competition for Scheduled Services
In scheduled service, the Company competes both against the large U.S. scheduled
service airlines and, from time to time, against smaller regional or start-up
airlines. Competition is generally on the basis of price, schedule and
frequency, quality of service and convenience.
Competition for Commercial Charter Services
In the commercial charter market, the Company competes both against the major
U.S. scheduled airlines, and against small U.S. charter airlines. The Company
also competes against several European and Mexican charter and scheduled
airlines, some of which are larger and have substantially greater financial
resources than the Company. The scheduled carriers compete for leisure travel
customers with the Company's commercial charter operations in a variety of ways,
including wholesaling discounted seats on scheduled flights to tour operators,
promoting packaged tours to travel agents for sale to retail customers and
selling discounted, airfare-only products to the public. As a result, all
charter airlines, including the Company, generally are required to compete for
customers against the lowest revenue-generating seats of the scheduled airlines.
During periods of dramatic fare cuts by other scheduled airlines, the Company is
forced to respond competitively to these deeply discounted prices.
The Company also competes directly against other charter airlines. In the United
States, these charter airlines are smaller in size than the Company. In Europe,
several charter airlines are as large or larger than the Company. Certain
European charter airlines are affiliates of large scheduled airlines or tour
operators. As a result, in addition to their greater access to financial
resources, these charter airlines may also have greater distribution
capabilities, including exclusive or preferential relationships with affiliated
tour operators.
Competition for Military/Government Charter Services
The Company competes for military and other government charters with primarily
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier, alone or
through a teaming arrangement, makes available for use to the military. The
formation of different competing teaming arrangements could adversely affect the
Company's U.S. military charter business.
Insurance
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers'
compensation. Under the Company's current insurance policies, it will not be
covered by such insurance were it to fly, without the consent of its insurance
provider, to certain high-risk countries. The Company does not consider the
inability to operate into or out of any of these countries to be a significant
limitation on its business. The Company will support certain U.S. government
operations in areas where its insurance policy does not provide coverage for
losses when the U.S. government provides replacement insurance coverage.
Employees
As of December 31, 1998, the Company had approximately 6,000 employees,
approximately 2,300 of which were represented under collective bargaining
agreements. The Company's flight attendants are represented by the Association
of Flight Attendants ("AFA") and the Company's cockpit crews are represented by
the Air Line Pilots Association ("ALPA"). The current collective bargaining
agreement with the AFA became amendable in December 1998, and the current
collective bargaining agreement with the ALPA becomes amendable in September
2000. The Company began negotiations with the AFA in the third quarter of 1998
to amend the collective bargaining agreement, and these negotiations are
continuing. The existence of a significant dispute with any sizeable number of
its employees could have a material adverse effect on the Company's operations
and financial condition.
Regulation
The Company is subject to regulation by the DOT and the FAA. The DOT is
primarily responsible for regulating consumer protection and other economic
issues affecting air services and determining a carrier's fitness to engage in
air transportation. In 1981, the DOT granted the Company a Certificate of Public
Convenience and Necessity pursuant to Section 401 of the Federal Aviation Act
authorizing it to engage in air transportation. The Company is also subject to
the jurisdiction of the FAA with respect to its aircraft maintenance and
operations. The FAA requires each carrier to obtain an operating certificate and
operations specifications authorizing the carrier to fly to specific airports
using specified equipment. All of the Company's aircraft must also have and
maintain certificates of airworthiness issued by the FAA. The Company holds an
FAA air carrier operating certificate under Part 121 of the Federal Aviation
Regulations.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
The FAA has issued a series of Airworthiness Directives under its "Aging
Aircraft" program which are applicable to the Company's Lockheed L-1011 and
Boeing 727-200 aircraft. The Company does not currently expect the future cost
of these directives to be material.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company through its cargo affiliate. Labor relations in
the air transportation industry are generally regulated under the Railway Labor
Act, which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. The Company is subject to the jurisdiction of the Federal
Communications Commission regarding the utilization of its radio facilities. In
addition, the Immigration and Naturalization Service, the U.S. Customs Service,
and the Animal and Plant Health Inspection Service of the Department of Agri-
culture have jurisdiction over inspection of the Company's aircraft, passengers
and cargo to ensure the Company's compliance with U.S. immigration, customs and
import laws. The Commerce Department also regulates the export and re-export of
the Company's U.S.-manufactured aircraft and equipment.
In addition to various federal regulations, local governments and authorities in
certain markets have adopted regulations governing various aspects of aircraft
operations, including noise abatement, curfews and use of airport facilities.
Many U.S. airports have adopted or are considering adopting a Passenger Facility
Charge ("PFC") of up to $3.00 generally payable by each passenger departing from
the airport. This charge must be collected from passengers by transporting air
carriers, such as the Company, and must be remitted to the applicable airport
authority. Airport operators must obtain approval of the FAA before they may
implement a PFC. The $3.00 maximum on PFCs may be raised if Congress enacts an
amendment to the legislation authorizing these charges.
Based upon bilateral aviation agreements between the U.S. and other nations,
and, in the absence of such agreements, comity and reciprocity principles, the
Company, as a charter carrier, is generally not restricted as to the frequency
of its flights to and from most foreign destinations. However, these agreements
generally restrict the Company to the carriage of passengers and cargo on
flights which either originate in the U.S. and terminate in a single foreign
nation, or which originate in a single foreign nation and terminate in the U.S.
Proposals for any additional charter service must generally be specifically
approved by the civil aeronautics authorities in the relevant countries.
Approval of such requests is typically based on considerations of comity and
reciprocity and cannot be guaranteed.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft must comply with certain Stage 3 noise restrictions by
certain specified deadlines. These regulations require that the Company achieve
a 75.0% Stage 3 fleet by December 31, 1998. In general, the Company would be
prohibited from operating any Stage 2 aircraft after December 31, 1999. As of
December 31, 1998, 83.3% of the Company's fleet met Stage 3 requirements. The
Company expects to meet future Stage 3 fleet requirements through Boeing 727-200
hushkit modifications.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency ("EPA") regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company believes it has made all necessary modifications to its operating fleet
to meet fuel-venting requirements and smoke-emissions standards.
The Company maintains on its property in Indiana two underground storage tanks
which contain quantities of de-icing fluid and emergency generator fuel. These
tanks are subject to various EPA and State of Indiana regulations. The Company
believes it is in compliance with applicable regulatory requirements with
respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses materials which
are regulated as hazardous under federal, state and local law. The Company
maintains programs to protect the safety of its employees who use these
materials and to manage and dispose of any resulting waste, and believes that it
is in substantial compliance with all applicable laws and regulations.
<PAGE>
Item 2. Properties
The Company leases three adjacent office buildings in Indianapolis, consisting
of approximately 136,000 square feet. These buildings are located approximately
one mile from the Indianapolis International Airport terminal and are used as
principal business offices, an operations center and for the Indianapolis
reservations center.
The Company's Maintenance and Engineering Center is also located at Indianapolis
International Airport. This 120,000 square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. The Indianapolis Maintenance
and Engineering Center is an FAA-certificated repair station and has the
capability to perform routine, as well as non-routine, maintenance on the
Company's aircraft.
In 1998, the Company began construction of a 120,000 square-foot office building
immediately adjacent to the Company's Indianapolis Maintenance and Engineering
Center. This facility will house the Company's Maintenance and Engineering
office staff along with the airline's operations center effective in the second
quarter of 1999.
In 1995, the Company completed the lease of Hangar No. 2 at Chicago's Midway
Airport for an initial lease term of ten years, subject to two five-year renewal
options. The Company has completed significant improvements to this leased
property, which is used to provide line maintenance for the Boeing 757-200 and
Boeing 727-200 narrow-body fleets.
Also in 1995, the Company relocated and expanded its Chicago area reservations
unit to an 18,700 square-foot facility located near Chicago's O'Hare Airport.
This reservation facility primarily serves customers in the greater Chicago
metropolitan area in support of the Company's Chicago-Midway scheduled service
operation.
The Company also routinely leases various properties at airports around the
world for use by passenger service, flight operations and maintenance staffs.
Other properties are also leased for the use of sales office staff. These prop-
perties are used in support of both scheduled and charter flight operations in
such locations as Atlanta, Baltimore, Boston, Cancun, Chicago, Dallas-Ft. Worth,
Denver, Detroit, Ft. Lauderdale, Ft. Myers, Frankfurt, Honolulu, Indianapolis,
Las Vegas, London Gatwick, Los Angeles, Maui, Milwaukee, Minneapolis, New York,
Oakland, Orlando, Phoenix, St. Louis, St.Petersburg, San Francisco, San Juan and
Sarasota.
At December 31, 1998, the Company was certified to operate a fleet of 48
aircraft. The following table summarizes the ownership characteristics of each
aircraft type operated by the Company as of the end of 1998.
<TABLE>
<CAPTION>
Ownership Boeing Boeing Lockheed Lockheed
<S> <C> <C> <C> <C>
Status 727-200ADV 757-200ER L-1011-50/100 L-1011-500
- ---------------------------------------------------- ------------------- ------------------- -------------------
Owned 1 N/A 1 1
(Unencumbered)
Owned N/A N/A 12 N/A
(Encumbered-Pledged on
Bank Facility)
Leased 22 7 N/A N/A
(Fixed Buy-out)
Operating Lease 1 2 1 N/A
(No Buy-out)
TOTAL 24 9 14 1
</TABLE>
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably foreseeable in
light of the nature of the Company's business. The majority of these suits are
covered by insurance. In the opinion of management, the resolution of these
claims will not have a material adverse effect on the business, operating
results or financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the quarter ended
December 31, 1998.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "AMTR." The Company had 279 registered
shareholders at December 31, 1998.
Year Ended December 31, 1998
Market Prices of Common Stock High Low Close
-------- ---------- ----------
First quarter 16 3/8 7 1/2 16 1/4
Second quarter 27 15 1/8 24 5/8
Third quarter 30 20 7/8 23 1/2
Fourth quarter 27 5/8 13 3/4 27 1/8
No dividends have been paid on the Company's common stock since becoming
publicly held.
Item 6. Selected Consolidated Financial Data (Unaudited)
The unaudited selected consolidated financial data in this table have
been derived from the consolidated financial statements of the Company
for the respective periods presented. The data should be read in con-
junction with the consolidated financial statements and related notes.
<TABLE>
<CAPTION>
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
(Dollars in thousands, except per share data and ratios)
-------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 580,522 $ 715,009 $ 750,851 $ 783,193 $ 919,369
Operating expenses 572,107 697,073 786,907 769,709 843,996
Operating income (loss) (1) 8,415 17,936 (36,056) 13,484 75,373
Income (loss) before taxes 5,879 14,653 (39,581) 6,027 67,210
Net income (loss) 3,486 8,524 (26,674) 1,572 40,081
Net income (loss) per share - basic (2) 0.30 0.74 (2.31) 0.14 3.41
Net income (loss) per share - diluted (2) 0.30 0.74 (2.31) 0.13 3.07
Balance Sheet Data (at end of period):
Property and equipment, net $ 223,104 $ 240,768 $ 224,540 $ 267,681 $ 329,332
Total assets 346,288 413,137 369,601 450,857 594,549
Total debt 118,106 138,247 149,371 191,804 246,671
Shareholders' equity (3) 72,753 81,185 54,744 56,990 102,751
Ratio of total debt to shareholders' equity 1.62 1.70 2.73 3.37 2.40
Ratio of total liabilities to shareholders' 3.76 4.09 5.75 6.91 4.79
equity
Selected Operating Statistics for
Consolidated Passenger Services: (4)
Revenue passengers carried (thousands) 4,237.9 5,368.2 5,680.5 5,307.4 6,168.3
Revenue passenger miles (millions) 7,158.8 8,907.7 9,172.4 8,986.0 9,758.1
Available seat miles (millions) 10,443.1 12,521.4 13,295.5 12,647.7 13,851.7
Passenger load factor 68.6% 71.1% 69.0% 71.0% 70.5%
</TABLE>
(1) The Company has reclassified gain (loss) on the sale of
operating assets for 1994-1995 from non-operating gain (loss)
to operating income (loss) to be consistent with the 1996-1998
presentation. Also, in the third quarter of 1996, the Company
recorded a $4.7 million loss on the disposal of leased assets
associated with the reconfiguration of its fleet.
(2) In 1997, the Company adopted Financial Accounting
Standards Board Statement 128, "Earnings per Share," which
established new standards for the calculation and disclosure
of earnings per share. All prior period earnings per share
amounts disclosed in this five-year summary have been restated
to conform to the new standards under Statement 128.
(3) No dividends were paid in any periods presented.
(4) Operating statistics pertain only to ATA (including operations
under the Chicago Express code share agreement) and do not
include information for other operating subsidiaries of the
Company.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Amtran is a leading provider of targeted scheduled airline services and charter
airline services to leisure and other value-oriented travelers. Amtran, through
its principal subsidiary, ATA, has been operating for 26 years and is the
eleventh largest U.S. airline in terms of 1998 revenues. ATA provides scheduled
service through nonstop and connecting flights from the gateways of
Chicago-Midway and Indianapolis 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 LaGuardia 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 1998, the Company generated record operating earnings and net income as
compared to any previous fiscal year in the Company's 25-year history. These
results were primarily due to the effects of record operating revenues,
unchanged unit operating expenses and higher utilization of aircraft.
1997 was a year of recovery for the Company, after a substantial net loss in
1996. Extensive business unit profitability analysis in late 1996 prompted the
Company to undertake significant restructuring of scheduled service operations
and standardization of the Boeing 757-200 fleet. As a result of these efforts,
the Company finished 1997 with net income, a substantial improvement over 1996.
Results of Operations
In 1998, the Company earned $75.4 million in operating income and $40.1 million
in net income, as compared to operating and net income of $13.5 million and $1.6
million, respectively, in 1997 and an operating and net loss of $36.1 million
and $26.7 million, respectively in 1996.
Operating expenses increased 9.7% to $844.0 million in 1998, as compared to
$769.7 million in 1997. Operating expense per ASM remained unchanged at 6.09
cents in both years. Operating expenses were $786.9 million in 1996, which
equated to 5.92 cents per ASM.
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
<TABLE>
<CAPTION>
Cents per ASM
Year Ended December 31,
------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
Operating revenues: 6.64 6.19 5.65
Operating expenses:
Salaries, wages and benefits 1.52 1.36 1.23
Fuel and oil 0.99 1.22 1.21
Depreciation and amortization 0.57 0.49 0.47
Handling, landing and navigation fees 0.54 0.55 0.53
Aircraft maintenance, materials and repairs 0.39 0.41 0.42
Aircraft rentals 0.38 0.43 0.49
Crew and other employee travel 0.30 0.29 0.27
Passenger service 0.24 0.26 0.25
Commissions 0.21 0.21 0.20
Other selling expenses 0.16 0.12 0.13
Ground package cost 0.14 0.15 0.14
Advertising 0.13 0.10 0.08
Facilities and other rentals 0.07 0.07 0.07
Disposal of assets - - 0.03
Other 0.45 0.43 0.40
Total operating expenses 6.09 6.09 5.92
Operating income (loss) 0.55 0.10 (0.27)
ASMs (in thousands) 13,851,731 12,647,683 13,295,505
</TABLE>
<PAGE>
Year Ended December 31, 1998, Versus Year Ended December 31, 1997
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 45,881 39,517 6,364 16.10
Departures J31(a) 16,388 10,091 6,297 62.40
--------------- --------------- ---------------- ---------------
Total Departures (b) 62,269 49,608 12,661 25.52
--------------- --------------- ---------------- ---------------
Block Hours Jet 144,237 129,216 15,021 11.62
Block Hours J31 16,166 10,210 5,956 58.33
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 160,403 139,426 20,977 15.05
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 9,727,097 8,967,900 759,197 8.47
RPMs J31 (000s) 30,991 18,055 12,936 71.65
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 9,758,088 8,985,955 772,133 8.59
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 13,799,507 12,615,230 1,184,277 9.39
ASMs J31 (000s) 52,224 32,453 19,771 60.92
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 13,851,731 12,647,683 1,204,048 9.52
--------------- --------------- ---------------- ---------------
Load Factor Jet 70.49 71.09 (0.60) (0.84)
Load Factor J31 59.34 55.63 3.71 6.67
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 70.45 71.05 (0.60) (0.84)
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,991,662 5,210,578 781,084 14.99
Passengers Enplaned J31 176,604 96,812 79,792 82.42
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 6,168,266 5,307,390 860,876 16.22
--------------- --------------- ---------------- ---------------
Revenue (000s) $919,369 $783,193 $136,176 17.39
RASM in cents (h) 6.64 6.19 0.45 7.27
CASM in cents (i) 6.09 6.09 - -
Yield in cents (j) 9.42 8.72 0.70 8.03
</TABLE>
See footnotes (a) through (j) on pages 14 and 15.
(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 a code sharing agreement with Chicago Express. Services were
expanded to include Lansing, Michigan and Madison, Wisconsin in October 1997.
Services were provided by Chicago Express 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.
<PAGE>
(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 in 1998 increased 17.4% to $919.4 million from $783.2
million in 1997. This increase was due to a $139.5 million increase in scheduled
service revenues, a $10.5 million increase in other revenues and a $0.9 million
increase in ground package revenues, partially offset by a $5.5 million decrease
in commercial charter revenues, and a $9.2 million decrease in
military/government charter revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 31,237 23,800 7,437 31.25
Departures J31(a) 16,388 10,091 6,297 62.40
--------------- --------------- ---------------- ---------------
Total Departures (b) 47,625 33,891 13,734 40.52
--------------- --------------- ---------------- ---------------
Block Hours Jet 92,263 72,883 19,380 26.59
Block Hours J31 16,166 10,210 5,956 58.33
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 108,429 83,093 25,336 30.49
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 5,777,555 4,523,245 1,254,310 27.73
RPMs J31 (000s) 30,991 18,055 12,936 71.65
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 5,808,546 4,541,300 1,267,246 27.90
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 7,756,330 6,209,825 1,546,505 24.90
ASMs J31 (000s) 52,224 32,453 19,771 60.92
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 7,808,554 6,242,278 1,566,276 25.09
--------------- --------------- ---------------- ---------------
Load Factor Jet 74.49 72.84 1.65 2.27
Load Factor J31 59.34 55.63 3.71 6.67
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 74.39 72.75 1.64 2.25
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 4,094,454 3,087,706 1,006,748 32.61
Passengers Enplaned J31 176,604 96,812 79,792 82.42
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 4,271,058 3,184,518 1,086,540 34.12
--------------- --------------- ---------------- ---------------
Revenues (000s) $511,254 $371,762 $139,492 37.52
RASM in cents (h) 6.55 5.96 0.59 9.90
Yield in cents (j) 8.80 8.19 0.61 7.45
Rev per segment $ (k) 119.70 116.74 2.96 2.54
</TABLE>
See footnotes (a) through (j) on pages 14 and 15.
(k) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
Scheduled service revenues in 1998 increased 37.5% to $511.3 million from $371.8
million in 1997. Scheduled service revenues comprised 55.6% of consolidated
revenues in 1998, as compared to 47.5% of consolidated revenues in 1997.
The Company currently has a code share agreement with Chicago Express under
which Chicago Express operates 19-seat Jetstream 31 propeller aircraft as the
ATA Connection between Chicago-Midway and the cities of Indianapolis, Milwaukee,
Des Moines, Dayton, Grand Rapids, Lansing and Madison. The 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 twelve months ended December 31, 1998, which operated only during
the nine months ended December 31, 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. In February 1999, the Company entered into an agreement
in principle to acquire Chicago Express Airlines, Inc., ATA's code sharing
partner at Chicago-Midway.
The Company's 1998 scheduled service at Chicago-Midway accounted for
approximately 53.4% of scheduled service ASMs and 73.5% of scheduled service
departures, as compared to 42.9% and 63.2%, respectively, in 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
1997. In addition to these new services, the Company added frequencies in 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 1998 and the nine months ended December 31, 1997 served
Chicago-Midway from the cities of Dayton, Des Moines, Grand Rapids, Indianapolis
and Milwaukee. In addition, the Company operated ATA Connection Jetstream 31
service between Chicago-Midway and the cities of Lansing and Madison throughout
1998, while such service was operated only during the fourth quarter of 1997.
<PAGE>
The Company anticipates that its Chicago-Midway operation will represent a focus
of growing significance for its scheduled service business in 1999 and beyond.
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. By the end of 1998, the
Company 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 13 jet gates
and six 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 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 21.3% of scheduled service ASMs and
5.4% of scheduled service departures in 1998, as compared to 24.6% and 6.8%,
respectively, in 1997. The Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. In addition, in 1998, seasonal
nonstop service was operated from San Diego to Honolulu, which was not operated
in 1997. The Company provides these services through a marketing alliance with
the largest independent tour operator serving leisure travelers to Hawaii from
the United States. The Company distributes the remaining seats on these flights
through normal scheduled service distribution channels.
The Company believes it has superior operating efficiencies in west coast-Hawaii
markets due to the relatively low ownership cost of the Lockheed L-1011 fleet
and because of the high daily hours of utilization obtained for both aircraft
and crews.
The Company's Indianapolis service accounted for 16.1% of scheduled service ASMs
and 12.7% of scheduled service departures in 1998, as compared to 20.5% and
18.1%, respectively, in 1997. In 1998, the Company operated nonstop to Cancun,
Ft. Lauderdale, Ft. Myers, Las Vegas, Los Angeles, Orlando, St. Petersburg, San
Francisco and Sarasota. The Company has served Indianapolis for 26 years through
the Ambassadair Travel Club and in scheduled service since 1986.
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 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 25.1%, and to operate with a higher load factor between years,
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 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 24.2% of consolidated
revenues in 1998, as compared to 29.1% in 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 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 during 1999,
which will increase the 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.
<PAGE>
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 9,602 10,589 (987) (9.32)
Block Hours (c) 33,516 36,836 (3,320) (9.01)
RPMs (000s) (d) 3,009,638 3,373,840 (364,202) (10.79)
ASMs (000s) (e) 3,882,202 4,169,102 (286,900) (6.88)
Passengers Enplaned (g) 1,617,901 1,840,056 (222,155) (12.07)
Revenue (000s) $222,571 $228,062 $(5,491) (2.41)
RASM in cents (h) 5.73 5.47 0.26 4.75
</TABLE>
See footnotes (b) through (h) on pages 14 and 15.
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
$176.4 million in revenues in 1998, as compared to $184.3 million in 1997.
Specialty charter (including incentive travel programs) 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.
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 $35.1 million in revenues in 1998, as compared to $34.6
million in 1997.
MilitarylGovernment Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government flight operations of the Company.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 4,447 4,860 (413) (8.50)
Block Hours (c) 16,389 18,704 (2,315) (12.38)
RPMs (000s) (d) 821,813 1,044,317 (222,504) (21.31)
ASMs (000s) (e) 1,963,069 2,165,169 (202,100) (9.33)
Passengers Enplaned (g) 205,641 265,862 (60,221) (22.65)
Revenue (000s) $121,911 $131,115 $(9,204) (7.02)
RASM in cents (h) 6.21 6.06 0.15 2.48
</TABLE>
See footnotes (b) through (h) on pages 14 and 15.
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 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.
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 its
scheduled service passengers. In 1998, ground package revenues increased 4.0% to
$23.2 million, as compared to $22.3 million in 1997.
The Company's Ambassadair Travel Club offers hundreds of tour-guide-accompanied
vacation packages to its approximately 38,000 individual and family members
annually. In 1998, total packages sold decreased 5.0% as compared to 1997, but
the average revenue earned for each ground package sold increased 20.4% between
periods.
ATA Vacations offers numerous ground accommodations to the general public for
use with the Company's scheduled service flights in many areas of the United
States. These packages are marketed through travel agents, as well as directly
by the Company. In 1998, total packages sold decreased 10.2% as compared to
1997, while the average revenue earned for each ground package sold decreased
3.2% between years.
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 are factors that can change from period to
period.
In early 1999, the Company completed the purchase of Travel Charter
International, a tour operator, and has an agreement in principle to acquire
another tour operator, Key Travel.
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 35.1% to $40.4 million in 1998, as compared to $29.9 million
in 1997.
In 1998, as compared to 1997, the Company earned $4.3 million more in substitute
service revenues, $3.2 million more in cancellation and administrative fees, and
$2.4 million more in cargo and other affiliate company revenues, partially
offset by $0.6 million less revenue earned 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 1998 increased 22.5% to $211.3 million
from $172.5 million in 1997.
The Company increased its average equivalent employees by 18.4% between 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 1998 was also
needed to correct for certain employee shortages in 1997, particularly in the
areas of cockpit crews, reservations agents and airframe and power plant
mechanics.
The average rate of pay earned by the Company's employees (including all
categories of salaries, wages and benefits, except for variable compensation)
was unchanged between 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 approximately offset the wage rate
increases applicable to more senior employees.
In 1998, the Company recorded $8.9 million in variable compensation and related
payroll taxes as a result of the significant improvement in earnings as compared
to 1997, when no such compensation was incurred. In the second quarter of 1997,
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 11.8% in 1998 to 1.52 cents,
as compared to 1.36 cents in 1997. This unit-cost increase was attributable to
the faster rate of growth in average equivalent employees between years than
seat capacity, and to the variable compensation earned in 1998, which was not
earned in 1997.
Fuel and Oil. Fuel and oil expense decreased 10.6% to $137.4 million in 1998, as
compared to $153.7 million in 1997. This decrease occurred despite the Company
consuming 9.8% more gallons of jet fuel for flying operations between years,
which resulted in an increase in fuel expense of approximately $15.0 million.
Jet fuel consumption increased primarily due to the increased number of block
hours of jet flying operations between periods. The Company flew 144,237 jet
block hours in 1998, as compared to 129,216 jet block hours in 1997, an increase
of 11.6% between years.
Fuel consumption growth between 1998 and 1997 was less than total block hour
growth, however, since most of the block hour growth in 1998 was in the
narrow-body Boeing 727-200 and Boeing 757-200 fleets, which consume
approximately 50% of the gallons per block hour which are consumed by the
Lockheed L-1011 fleet.
During 1998, the Company's average cost per gallon of jet fuel consumed
decreased by 20.0% as compared to 1997, resulting in a decrease in fuel and oil
expense of approximately $34.4 million between years. This reduction in fuel
price was experienced generally in the airline industry throughout 1998 as a
result of significant reductions in average crude oil and distillate market
prices as compared to 1997.
During the first, second and fourth quarters of 1998, the Company entered into
several fuel price hedge contracts under which the Company sought to reduce the
risk of fuel price increases during the year. The Company hedged some 1998 fuel
consumption under swap agreements which established specific swap prices for
designated periods, and hedged other 1998 fuel consumption under fuel cap
agreements which guaranteed a maximum price per gallon for designated periods.
Since the price of fuel declined during most of 1998, the Company recorded
approximately $2.5 million in additional fuel and oil expense under its hedge
contracts, which added approximately one cent to its average cost per gallon in
1998.
Fuel and oil expense decreased 18.9% to 0.99 cents per ASM in 1998, as compared
to 1.22 cents per ASM in 1997, primarily due to the period-to-period decrease in
the average price of fuel consumed.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, 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 25.9% to
$78.7 million in 1998, as compared to $62.5 million in 1997.
Depreciation expense attributable to owned airframes and leasehold improvements
increased $3.0 million in 1998, as compared to 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 between years. (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 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 $2.4 million in 1998, as compared to
1997.
Amortization of capitalized engine and airframe overhauls increased $11.1
million in 1998, as compared to 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, seven of which were
delivered new from the manufacturer between late 1995 and late 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.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs increased $1.3 million in
1998 as compared to 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
was to reduce depreciation expense in 1998 by $2.1 million.
Depreciation and amortization expense per ASM increased 16.3% to 0.57 cents in
1998, as compared to 0.49 cents in 1997. This increase was 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 1999, at which time increased overhaul
amortization expense per ASM will be incurred for this fleet type as well.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 7.5% to $74.6 million in
1998, as compared to $69.4 million in 1997. The total number of system-wide jet
departures between 1998 and 1997 increased by 16.1% to 45,881 from 39,517,
resulting in approximately $8.8 million in volume-related handling and landing
expense increases between periods.
This volume-related increase was partially offset, however, by a decrease of
approximately $3.3 million in price-and-mix-related handling and landing
expenses for 1998, as compared to 1997, attributable primarily to a change in
jet departure mix.
The cost per ASM for handling, landing and navigation fees decreased 1.8% to
0.54 cents in 1998, from 0.55 cents in 1997.
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 light airframe check and line maintenance
activities, and other non-capitalized direct costs related to fleet maintenance,
including spare engine leases, parts loan and exchange fees, and related
shipping costs. Aircraft maintenance, materials and repairs expense increased
4.3% to $53.7 million in 1998, as compared to $51.5 million in 1997.
The Company performed a total of 51 light airframe checks on its fleet during
1998, as compared to 44 such checks performed in 1997, an increase of 15.9%
between years. The cost of materials consumed and components repaired in
association with such light checks and other maintenance activity increased by
$1.6 million between 1998 and 1997.
The cost per ASM of aircraft maintenance, materials and repairs decreased 4.9%
to 0.39 cents in 1998, as compared to 0.41 cents in 1997.
Aircraft Rentals. Aircraft rentals expense for 1998 decreased 2.4% to $53.1
million from $54.4 million in 1997. The Company purchased one leased Boeing
757-200 in September 1997; returned one leased Boeing 757-200 to the lessor in
November of 1997; and added one new leased Boeing 757-200 each in December 1997
and August 1998. These fleet changes resulted in a reduction in Boeing 757-200
rentals expense of $0.9 million in 1998, as compared to 1997. Aircraft rentals
expense for the Boeing 727-200 and Lockheed L-1011 fleets did not change
significantly between years.
Aircraft rentals cost per ASM for 1998 was 0.38 cents, a decrease of 11.6% from
0.43 cents per ASM in 1997. Such reduction in cost per ASM was primarily
attributable to the increased utilization of all aircraft types between years,
producing more ASMs with approximately the same fleet size.
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 13.7% to $41.6 million in
1998, as compared to $36.6 million in 1997. During 1998, the Company's average
full-time-equivalent cockpit and cabin crew employment was 13.5% higher than in
1997, while jet block hours flown increased by 11.6% between the same periods.
The average cost of hotel rooms per full-time-equivalent crew member increased
4.4% in 1998, as compared to 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 5.4% in 1998, as compared to 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 an incremental cost.
The cost per ASM for crew and other employee travel increased 3.4% to 0.30 cents
in 1998, as compared to 0.29 cents in 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 1998 and 1997,
catering represented 84.1% and 83.0%, respectively, of total passenger service
expense.
The total cost of passenger service increased 3.7% to $34.0 million in 1998, as
compared to $32.8 million in 1997. The Company experienced a decrease of
approximately 10.2% in the average unit cost of catering each passenger between
years, primarily because in 1998 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 $3.3 million in catering expense in 1998, as
compared to 1997. Total jet passengers boarded, however, increased 15.0% between
years, resulting in approximately $4.0 million in higher volume-related catering
expenses between the same sets of comparative periods.
The cost per ASM of passenger service declined 7.7% to 0.24 cents in 1998 from
0.26 cents in 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 increased 9.2% to $28.5 million in 1998, as
compared to $26.1 million in 1997.
Scheduled service commissions expense increased by $2.3 million between 1998 and
1997. This increase was lower than the related increase of 37.5% in scheduled
service revenues between 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 1998, as
compared to 1997. Neither commercial charter nor military/government charter
commissions expense changed significantly between 1998 and 1997.
The cost per ASM of commissions expense was unchanged at 0.21 cents for both
1998 and 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 42.6% to $22.1 million
in 1998, as compared to $15.5 million in 1997. Scheduled service passengers
boarded increased 34.1% between the same periods.
CRS fees increased $3.1 million in 1998, as compared to 1997, due to a 40.2%
increase in total CRS bookings made for the expanded scheduled service business
unit between periods, and due to a 7.5% increase in the average cost of each CRS
booking. Toll-free telephone costs increased $0.5 million between 1998 and 1997,
primarily due to higher toll-free usage related to higher scheduled service
reservations activity. Credit card discount expense increased $3.0 million in
1998 as compared to 1997, due to higher 1998 earned revenues in scheduled
service which were sold using credit cards as payment.
Other selling cost per ASM increased 33.3% to 0.16 cents in 1998, as compared to
0.12 cents in 1997.
Ground Package Cost. Ground package cost is incurred by the Company with 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 1.0% to $19.4 million in 1998, as compared to $19.2 million in
1997. The number of Ambassadair ground packages sold in 1998 decreased 5.0%, as
compared to 1997, while the average cost of Ambassadair ground packages sold
increased by 29.8% between years. The number of ATA Vacations ground packages
sold in 1998 decreased 10.2% as compared to 1997, while the average cost of ATA
Vacations ground packages sold decreased by 7.6% between the same periods.
The cost per ASM of ground packages decreased 6.7% to 0.14 cents in 1998, as
compared to 0.15 cents in 1997.
Advertising. Advertising expense increased 40.2% to $17.8 million in 1998, as
compared to $12.7 million in 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 1998, consistent with the Company's overall strategy to enhance
scheduled service RASM through increases in load factor and yield.
The 40.2% increase in total advertising expense between years was slightly
greater than the 37.5% increase in scheduled service revenues between the same
periods. The majority of the Company's growth in 1998 was from increased
frequencies at existing gateway cities such as Chicago-Midway, which provided
some advertising efficiencies in 1998 as compared to the prior year. Such
market-related efficiency was partially offset, however, 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 LaGuardia airport, as well as to launch the Company's fall
promotions in the third and fourth quarters of 1998.
The cost per ASM of advertising increased 30.0% to 0.13 cents in 1998, as
compared to 0.10 cents in 1997.
Facilities and Other Rentals. Facilities and other rentals include 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 facilities and other
rentals increased 10.5% to $9.5 million in 1998, as compared to $8.6 million in
1997. The rate of growth in facilities costs between periods was comparable to
the 9.5% rate of ASM growth between 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 0.07 cents in
both 1998 and 1997.
Other Operating Expenses. Other operating expenses increased 14.5% to $62.2
million in 1998, as compared to $54.3 million in 1997. Other operating expenses
which experienced significant changes between periods included: (i) $3.1 million
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 1998, which were
served in only the fourth quarter of 1997; (ii) $2.3 million in higher expenses
associated with the operation of the Company's affiliate business; and (iii)
$1.7 million 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.
Other operating cost per ASM increased 4.7% to 0.45 cents in 1998, as compared
to 0.43 cents in 1997.
Interest Income and Expense. Interest expense in 1998 increased to $12.8 million
as compared to $9.5 million in 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. Additionally, in December 1998, the Company
sold $125.0 million principal amount of 9.625% unsecured senior notes.
Prior to completing these new financings, the Company utilized secured bank
credit facilities to finance cash flow requirements of the Company as they
arose, thereby minimizing the level of borrowings on which interest would be
paid. During 1998, the Company's weighted average debt outstanding was
approximately $159.1 million, as compared to $117.2 million in 1997.
The weighted average effective interest rate applicable to the Company's
outstanding debt in 1998 was 8.56%, as compared to 8.06% in 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.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $4.4 million in interest income in 1998,
as compared to $1.6 million in 1997.
Income Tax Expense. In 1998 the Company recorded $27.1 million in income tax
expense applicable to $67.2 million of pre-tax income for that period, while in
1997 income tax expense was $4.5 million on pre-tax income of $6.0 million. The
effective tax rate applicable to 1998 was 40.4%, as compared to 73.9% in 1997.
Income tax expense in both sets of comparative periods was 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
and other permanent differences 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 1997.
<PAGE>
Income tax expense for 1997 was also significantly affected by the one-time $2.0
million charge to salaries, wages and benefits for the 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
taxable income.
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated by Chicago Express as the ATA
Connection under a code sharing agreement.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 39,517 46,416 (6,899) (14.86)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 49,608 46,416 3,192 6.88
--------------- --------------- ---------------- ---------------
Block Hours Jet 129,216 138,114 (8,898) (6.44)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 139,426 138,114 1,312 0.95
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 8,967,900 9,172,438 (204,538) (2.23)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 8,985,955 9,172,438 (186,483) (2.03)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 12,615,230 13,295,505 (680,275) (5.12)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 12,647,683 13,295,505 (647,822) (4.87)
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.09 68.99 2.10 3.04
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.05 68.99 2.06 2.99
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,210,578 5,680,496 (469,918) (8.27)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 5,307,390 5,680,496 (373,106) (6.57)
--------------- --------------- ---------------- ---------------
Revenue (000s) $783,193 $750,851 $32,342 4.31
RASM in cents (h) 6.19 5.65 0.54 9.56
CASM in cents (i) 6.09 5.92 0.17 2.87
Yield in cents (j) 8.72 8.19 0.53 6.47
</TABLE>
N/M - Not meaningful
See footnotes (a) through (j) on pages 14 and 15.
<PAGE>
Operating Revenues
Total operating revenues for 1997 increased 4.3% to $783.2 million from $750.9
million in 1996. This increase was due to a $1.6 million increase in commercial
charter revenues and a $47.0 million increase in military charter revenues,
partially offset by a $14.7 million decrease in scheduled service revenues and a
$1.6 million decrease in other revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations 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 on the Company's behalf by Chicago
Express as the ATA Connection.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
<S> <C> <C> <C> <C>
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 23,800 31,467 (7,667) (24.37)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 33,891 31,467 2,424 7.70
--------------- --------------- ---------------- ---------------
Block Hours Jet 72,883 85,836 (12,953) (15.09)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 83,093 85,836 (2,743) (3.20)
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 4,523,245 4,918,045 (394,800) (8.03)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 4,541,300 4,918,045 (376,745) (7.66)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 6,209,825 7,304,897 (1,095,072) (14.99)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 6,242,278 7,304,897 (1,062,619) (14.55)
--------------- --------------- ---------------- ---------------
Load Factor Jet 72.84 67.33 5.51 8.18
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 72.75 67.33 5.42 8.05
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 3,087,706 3,551,141 (463,435) (13.05)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 3,184,518 3,551,141 (366,623) (10.32)
--------------- --------------- ---------------- ---------------
Revenues (000s) $371,762 $386,488 $(14,726) (3.81)
RASM in cents (h) 5.96 5.29 0.67 12.67
Yield in cents (j) 8.19 7.86 0.33 4.20
Rev per segment $ (k) 116.74 108.83 7.91 7.27
</TABLE>
N/M - Not Meaningful
See footnotes (a) through (k) on pages 14 - 16.
Scheduled service revenues in 1997 decreased 3.8% to $371.8 million from $386.5
million in 1996. Scheduled service revenues comprised 47.5% of consolidated
revenues in 1997, as compared to 51.5% of consolidated revenues in 1996.
The Company added scheduled service capacity during the second and third
quarters of 1996 which primarily included expanded direct and connecting
frequencies through the Company's four major gateways of Chicago-Midway,
Indianapolis, Milwaukee and Boston to west coast and Florida markets already
being served. New seasonal scheduled service was also introduced in the second
and third quarters of 1996 from New York to Shannon and Dublin, Ireland, and
Belfast, Northern Ireland, and from the midwest to Seattle. New year-round
service also commenced to San Diego, California, in the second quarter of 1996.
The introduction of this new capacity coincided closely, however, with the May
11, 1996, ValuJet accident in Florida, and the resulting persistent negative
media attention directed toward airline safety, especially toward low-fare
airlines. On May 12, the Company experienced a cabin decompression incident on
one of its own flights which, although it resulted in no serious injury to crew
or passengers, nevertheless attracted additional negative media attention
occurring as it did one day after the ValuJet tragedy. As a consequence, during
the second and third quarters of 1996, the Company estimates that it lost
significant scheduled service revenues from both canceled reservations and
reservations which were never received. An analysis by the Company in the third
quarter of 1996 of the profitability of its scheduled service and commercial and
military charter service business units disclosed that a number of scheduled
service markets then being served by the Company had become unprofitable at that
point in time.
As a result of this analysis, in August 1996 the Company announced a significant
restructuring of scheduled service operations. The Company eliminated its Boston
and intra-Florida scheduled service operations and also exited, or reduced in
frequency, certain markets served from Chicago-Midway, Indianapolis and
Milwaukee. In conjunction with this restructuring, the Company completed a 15%
reduction in its employee and contract work forces by the end of 1996.
In addition, the Company re-evaluated the relative economic performance of its
three aircraft fleet types in the context of the restructured markets to be
served by the Company and optimized the type and number of aircraft through a
fleet restructuring which was completed by the end of 1996. The Company reduced
the number of Boeing 757-200 aircraft from 11 units at the end of 1995 to seven
units at the end of 1996. The remaining seven Boeing 757-200 aircraft were all
powered by Rolls-Royce engines. The Company committed the seven Boeing 757-200s
to mission-specific uses in the U.S. military and scheduled service business
units.
After the 1996 restructuring, the Company's 1997 core jet scheduled service
included flights between Chicago-Midway and five Florida cities, Las Vegas,
Phoenix, Los Angeles and San Francisco; Indianapolis to four Florida cities, Las
Vegas and Cancun; Milwaukee to three Florida cities; Hawaii service from San
Francisco, Los Angeles and Phoenix; and service between Orlando and San Juan and
Nassau.
As a result of the 1996 restructuring, scheduled service profitability was
substantially improved in 1997 as compared to 1996. Profitability was enhanced
through a combination of significantly higher load factors and yields between
periods, even though total revenues in scheduled service declined between years.
The Company believes that profitability was enhanced in this business unit
through the selective elimination of flights which had previously produced
below-average load factors and yield, and that the elimination of intra-Florida
flying in particular was a prominent factor in this improvement. Profitability
was further enhanced in certain scheduled service markets through the
reassignment of aircraft fleet types to provide better balance within markets
between revenues, costs and aircraft operational capabilities.
Scheduled service profitability improvement in 1997 was accomplished in spite of
what would normally have been a demand-dampening effect from the re-introduction
of the U.S. departure and 10% federal excise taxes on tickets on March 7, 1997,
which had expired on January 1, 1997. In August 1997, federal legislation was
enacted which extends these taxes until 2007. The U.S. departure tax for
international destinations was increased from $6 to $12 per passenger, and a new
U.S. arrivals tax of $12 per passenger was added for passengers arriving into
the United States from international cities. Effective October 1, 1997, the new
tax law also changed the method of computation of the federal excise tax from a
standard 10% of ticket sale value to a declining percentage of ticket sale value
(ranging from 9.0% to 7.5%), plus an increasing inflation-indexed charge per
passenger segment flown (ranging from $1 to $3). The Company does not currently
believe that the change in federal excise tax computation has placed it at
either a significant pricing advantage or disadvantage as compared to the
previous computation method. The Company does believe that certain of its
low-fare competitors may be disadvantaged by the new computation method due to
their lower average segment fares and higher average intermediate stops as
compared to the Company in similar markets.
The Company began new service in June 1997, between New York's John F. Kennedy
International Airport and Chicago-Midway, Indianapolis and St. Petersburg, and
also added several frequencies between the midwest and the west coast for the
summer season. New York service to Chicago-Midway and St. Petersburg was
retained for the 1997-98 winter season.
Commercial Charter Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the commercial charter
flying operations of the Company.
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
Departures (b) 10,589 10,920 (331) (3.03)
Block Hours (c) 36,836 38,154 (1,318) (3.45)
RPMs (000s) (d) 3,373,840 3,470,450 (96,610) (2.78)
ASMs (000s) (e) 4,169,102 4,363,220 (194,118) (4.45)
Passengers Enplaned (g) 1,840,056 1,854,262 (14,206) (0.77)
Revenue (000s) $228,062 $226,400 $1,662 0.73
RASM in cents (h) 5.47 5.19 0.28 5.39
See footnotes (b) through (h) on pages 14 and 15 .
<PAGE>
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the military
flight business of the Company.
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
Departures (b) 4,860 3,414 1,446 42.36
Block Hours (c) 18,704 12,294 6,410 52.14
RPMs (000s) (d) 1,044,317 665,494 378,823 56.92
ASMs (000s) (e) 2,165,169 1,442,113 723,056 50.14
Passengers Enplaned (g) 265,862 185,575 80,287 43.26
Revenue (000s) $131,115 $84,200 $46,915 55.72
RASM in cents (h) 6.06 5.84 0.22 3.77
See footnotes (b) through (h) on pages 14 and 15.
The U.S. military business grew at a faster year-over-year rate than any other
business unit of the Company during 1997. As a result of the restructuring of
scheduled service and the reconfiguration of the Company's fleet in 1996, the
Company committed four of its seven remaining Boeing 757-200 aircraft to the
U.S. military for the contract year ending September 30, 1997. As a result of an
analysis undertaken during 1996, the Company was also successful in more
accurately documenting the actual costs associated with military flying and was
therefore able to obtain rate increases for the contract year ending September
30, 1997. The Company obtained additional rate increases for the contract year
ending September 30, 1998.
Ground Package Revenues. In 1997 and 1996, ground package revenues were un-
changed at $22.3 million.
In 1997, total Ambassadair packages sold increased 9.4% over 1996, and the
average revenue earned for each ground package sold increased 8.2% between
periods.
During 1997, the number of ATA Vacations ground packages sold increased 0.5% as
compared to 1996. Lack of growth in the number of ground packages sold between
periods was mainly due to the reduction of the Company's scheduled service
operations between years. During 1997, the average revenue earned for each
ground package sold decreased 15.8% as compared to 1996.
Other Revenues. Other revenues decreased 5.1% to $29.9 million in 1997, as
compared to $31.5 million in 1996, primarily due to a reduction in revenues
earned between periods by providing substitute service to other airlines,
partially offset by increases in other miscellaneous revenue categories.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits expense in 1997 in-
creased 5.2% to $172.5 million from $164.0 million in 1996.
Approximately $3.2 million of the increase between periods was attributable to
changes made in the third quarter of 1996 in senior executive positions and
associated senior executive compensation plans. Special compensation totaling
$3.0 million was prepaid to the Company's former President and Chief Executive
Officer during the fourth quarter of 1996 and the first quarter of 1997, which
was being amortized to expense over the anticipated two-year term of his
employment ending August 1998. Due to his resignation in late May 1997, a
one-time charge to expense for the unamortized $2.0 million prepaid balance was
made in the second quarter of 1997 to salaries, wages and benefits, whereas no
such charge to expense was incurred in the prior year.
The cost of salaries and wages earned by cockpit crew members and related flight
operations support staff in 1997 was approximately $5.8 million higher than in
1996. These cost increases were incurred even though jet block hours flown by
cockpit crew members declined by 6.4% between periods. This increase in the unit
cost of cockpit crews was attributable to the following significant factors: (i)
the implementation of the cockpit crew collective bargaining agreement in August
1996, under which a 7.5% rate increase became effective; (ii) crew utilization
for U.S. military flying was significantly lower than for scheduled service and
tour operator flying, and U.S. military block hours increased as a percentage of
total block hours to 14.5% in 1997, as compared to 8.9% in 1996; (iii) cockpit
crew shortages during the first three quarters of 1997 resulted in the need to
increase premium pay to cockpit crew members in order to adequately staff the
spring and summer flying schedule; and (iv) cockpit crew productivity was
reduced by the fleet restructuring completed during 1996, which increased the
percentage of jet block hours flown by three-crew-member aircraft (Lockheed
L-1011 and Boeing 727-200) to 78.9% in 1997, as compared to 70.6% in 1996.
The salaries, wages and benefits cost for other employee groups declined by $0.8
million in 1997 as compared to 1996. These costs declined partially as a result
of the decline in equivalent full-time employment between periods. Total
equivalent full-time employment declined by 7.7% between years, although
equivalent full-time employment in the fourth quarter of 1997 was 10.0% higher
than in the fourth quarter of 1996. The increase in employment in late 1997 was
primarily due to the addition of cockpit and cabin crews and reservations agents
to adequately staff expected growth in flying capacity in 1998 compared to the
fourth quarter of 1996 when the Company had just completed significant staff
reductions.
In addition to those planned staff reductions completed during the fourth
quarter of 1996, the change in salaries, wages and benefits expense for other
employee groups was significantly affected by reduced employment in Maintenance
and Engineering, which accounted for a $1.4 million reduction in expense between
1997 and 1996. Employment of Maintenance and Engineering staff, such as airframe
and powerplant mechanics and engineers, was constrained in 1997 by broad
shortages in related labor markets attributable to very strong current demand
for these skills within the airline industry. The Company compensated for some
of these shortages in 1997 by acquiring these skills through third-party
contract labor vendors. The cost of maintenance contract labor (which is a
component of Aircraft Maintenance, Materials and Repairs) increased by $2.3
million in 1997 as compared to 1996.
Salaries, wages and benefits cost per ASM increased 10.6% in 1997 to 1.36 cents,
as compared to 1.23 cents in 1996.
Fuel and Oil. Fuel and oil expense for 1997 decreased 4.7% to $153.7 million
from $161.2 million in 1996. During 1997, as compared to 1996, the Company
consumed 3.1% fewer gallons of jet fuel for flying operations, which resulted in
a reduction in fuel expense of approximately $5.4 million between periods. The
reduction in jet fuel consumed was due to the reduced number of block hours of
jet flying operations between years. The Company flew 129,216 jet block hours in
1997, as compared to 138,114 jet block hours in 1996, a decrease of 6.4% between
periods.
During 1997, the Company's average cost per gallon of fuel consumed decreased by
1.8% as compared to 1996, which resulted in a decrease in fuel and oil expense
of approximately $2.9 million between years. Also, during the last three
quarters of 1997, the Company incurred approximately $1.0 million in fuel and
oil expense to operate the Jetstream 31 aircraft under its agreement with
Chicago Express, which was not in effect in the last three quarters of 1996.
Fuel and oil expense increased 0.8% to 1.22 cents per ASM in 1997, as compared
to 1.21 cents per ASM in 1996.
Depreciation and Amortization. Depreciation and amortization expense increased
1.3% to $62.5 million in 1997, as compared to $61.7 million in 1996.
Depreciation expense attributable to owned airframes and engines decreased $0.4
million in 1997 as compared to 1996. The Company reduced its year-over-year
investment in engines and airframe improvements due to the reconfiguration of
the Boeing 757-200 fleet in the fourth quarter of 1996. As a result of the net
reduction of four Boeing 757-200 aircraft at the end of 1996, as compared to the
end of 1995, and the complete elimination of Pratt & Whitney-powered Boeing
757-200s from the fleet, some airframe and leasehold improvements were disposed
of, and all spare Pratt & Whitney engines and rotable parts were reclassified as
Assets Held for Sale in the accompanying balance sheet. None of these assets,
therefore, gave rise to depreciation expense in 1997. The Company did increase
its investment in computer equipment and furniture and fixtures between years;
placed the west bay of the renovated Midway Hangar No. 2 into service in
mid-1996; and incurred increased debt issue costs between years relating to debt
facility and senior unsecured notes issued, as well as aircraft lease
negotiations completed primarily in the fourth quarter of 1996. These changes,
together with increased costs pertaining to remaining rotable components and the
provision for obsolescence of aircraft parts inventories, resulted in an
increase in depreciation expense of $0.8 million in 1997 as compared to 1996.
Amortization of capitalized engine and airframe overhauls increased $0.4 million
in 1997 as compared to 1996 after including the offsetting amortization
associated with manufacturers' credits. Changes to the cost of overhaul
amortization were partly due to the reduction of total block hours and cycles
flown between comparable periods. This expense was also favorably impacted by
the late-1996 reconfiguration of the Boeing 757-200 fleet and, in particular,
the disposal of all Pratt & Whitney-powered Boeing 757-200 aircraft. All
unamortized net book values of engine and airframe overhauls pertaining to the
Pratt & Whitney-powered aircraft were charged to the cost of the disposal of
these assets in the third quarter of 1996. The Company's seven remaining
Rolls-Royce-powered Boeing 757-200 aircraft, four of which were delivered new
from the manufacturer in late 1995 and late 1996, are not presently generating
any engine and airframe overhaul expense since the initial post-delivery
overhauls for the Rolls-Royce-powered Boeing 757-200s are not yet due under the
Company's maintenance programs. The net reduction in engine and airframe
amortization expense in 1997 pertaining to changes in the Company's Boeing
757-200 fleet was approximately $3.5 million as compared to 1996. Engine and
airframe amortization for the Company's fleet of Boeing 727-200 aircraft
increased by approximately $2.6 million in 1997 as compared to 1996 due to the
on-going expansion of this fleet type and due to the completion of new overhauls
for Pratt & Whitney JT8D engines that power the Boeing 727-200 fleet. The
increase between years in engine and airframe amortization expense for the
Company's Lockheed L-1011 fleet was approximately $0.8 million, which was
primarily due to the addition of airframe overhauls to the fleet.
Depreciation and amortization expense per ASM increased 6.5% to 0.49 cents
in 1997, as compared to 0.46 cents in the prior year.
Handling, Landing and Navigation Fees. Handling, landing and navigation fees
decreased by 1.0% to $69.4 million in 1997, as compared to $70.1 million in
1996. Due to the restructuring of scheduled service in the fourth quarter of
1996, the absolute number of system-wide jet departures between 1997 and 1996
declined by 14.9% to 39,517 from 46,416, which resulted in approximately $7.4
million in volume-related handling and landing expense reductions between
periods. This volume-related decline was partially offset, however, by an
approximately $4.8 million price-related handling and landing expense increase
between periods attributable primarily to a change in jet departure mix. As a
result of the reduction in the Company's narrow-body Boeing 757-200 fleet and
the shift of revenue production towards charter operations, the Company's jet
departures in 1997 included proportionately more international and wide-body
operations than in 1996. In 1997, 21.1% of the Company's jet departures were
operated with wide-body aircraft, as compared to 19.4% in 1996, and 22.4% of the
Company's 1997 jet departures were from international locations, as compared to
18.9% in the prior year.
The cost per ASM for handling, landing and navigation fees increased 3.8% to
0.55 cents in 1997, from 0.53 cents in 1996.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and
repairs expense decreased 6.7% to $51.5 million in 1997, as compared to $55.2
million in 1996. The cost per ASM decreased by 2.4% to 0.41 cents in 1997, as
compared to 0.42 cents in the prior year.
Repair costs were $4.2 million lower in 1997 as compared to the prior year. This
was due to a reduction in both the total number of repairs performed and the
average unit cost of repairs between periods. Negotiations were completed in
early 1997 with several repair vendors which resulted in reduced unit charges
for some repair activity. Additionally, the Company established a maintenance
disposition board in late 1996 which carefully reviews significant repair
decisions in light of anticipated fleet requirements and the available quantity
of serviceable components in stock.
The cost of expendable parts consumed increased $1.9 million in 1997, as
compared to 1996. The increase in the cost of expendable parts consumed was
closely related to the Company's light airframe maintenance check programs for
its fleet, which resulted in several more light airframe checks being completed
in 1997 than in the previous year.
The cost of maintenance contract labor increased by $2.3 million in 1997, as
compared to 1996. As explained above under "Salaries, Wages and Benefits," the
Company increased its utilization of maintenance contract labor in 1997 to
compensate for some employment shortages of airframe and powerplant mechanics
and engineers.
The cost of parts loans and exchanges was $1.3 million lower in 1997, as
compared to 1996, due to improved internal procedures to limit the need for such
loans and exchanges.
Return condition expenses accrued in 1997 were $1.8 million lower than in 1996,
primarily due to the negotiation of new terms and conditions for several
aircraft leases during 1997, which eliminated return condition obligations which
had existed prior to those negotiations.
Aircraft Rentals. Aircraft rentals expense for 1997 decreased 16.8% to $54.4
million in 1997 from $65.4 million in 1996. This decrease was primarily
attributable to the reconfiguration of the Company's Boeing 757-200 fleet in the
fourth quarter of 1996, as a result of which the number of Boeing 757-200
aircraft operated by the Company was reduced by four units. The reduction in the
size of the Boeing 757-200 fleet was an integral component of the Company's 1996
restructuring of scheduled service based upon profitability analysis which
disclosed that, for some uses of the Boeing 757-200 in the Company's markets, it
was more profitable to substitute other aircraft with lower ownership costs.
Aircraft rentals expense declined by $14.4 million between 1997 and 1996 as a
result of the Boeing 757-200 fleet restructuring.
Four additional Boeing 727-200 aircraft were acquired and financed by
sale/leasebacks at various times during the first three quarters of 1996, while
one Boeing 727-200 aircraft previously on an operating lease was purchased
during the second quarter of 1996 and was subsequently sold and leased back in
September 1997. The net increase in leased Boeing 727-200 aircraft between
years, together with the incorporation of hushkits into new sale/leasebacks of
several Boeing 727-200 aircraft between periods, added approximately $3.2
million in aircraft rentals expense between 1997 and 1996.
Aircraft rentals expense for 1997 was 0.43 cents per ASM, a decrease of 12.2%
from 0.49 cents per ASM in 1996. The period-to-period decrease in the size of
the Boeing 757-200 fleet was a significant factor in this change since the
rental cost of ASMs produced by this fleet type was significantly higher than
for the Company's other aircraft.
Crew and Other Employee Travel. The cost of crew and other employee travel
increased 1.9% to $36.6 million in 1997, as compared to $35.9 million in 1996.
During 1997, the Company's average full-time-equivalent cockpit and cabin crew
employment was 8.6% lower as compared to the prior year, even though jet block
hours decreased by only 6.4% between periods. Although the Company did
experience some crew shortages in the first quarter of 1996 associated with
severe winter weather, shortages of both cockpit and cabin crews were more
chronic in the first nine months of 1997, and per-crew-member travel costs were
consequently higher since crews spent greater amounts of time away from their
bases to operate the Company's schedule. In addition, average crew travel costs
for the U.S. military and specialty charter businesses are much higher than for
track charter and scheduled service since these flights more often operate away
from crew bases.
The cost per ASM for crew and other employee travel increased 7.4% to 0.29 cents
in 1997, as compared to 0.27 cents in 1996.
Passenger Service. For 1997 and 1996, catering represented 83.0% and 80.4%,
respectively, of total passenger service expense.
The cost of passenger service increased 0.3% in 1997 to $32.8 million, as
compared to $32.7 million in 1996. This change between periods was primarily due
to an increase of approximately 8.4% in the average cost to cater each
passenger, offset by a decrease of 8.3% in jet passengers boarded to 5,210,578
in 1997, as compared to 5,680,496 in 1996. Catering unit cost increased due to a
change in the mix of passengers boarded from fewer scheduled service toward more
charter and military passengers; the latter passengers, particularly military,
are the most expensive passengers to cater in the Company's business mix.
Military and charter passengers accounted for 40.4% of passengers boarded in
1997, as compared to 35.9% of passengers boarded in 1996.
The cost per ASM of passenger service increased 4.0% to 0.26 cents in 1997, as
compared to 0.25 cents in 1996.
Commissions. Commissions expense decreased 2.2% to $26.1 million in 1997, as
compared to $26.7 million in 1996. Scheduled service commissions expense
declined by $2.2 million between periods, primarily as a result of the decline
in total scheduled service revenues earned, and also partly as a result of an
industry-wide reduction in the standard travel agency commission rate from 10%
to 8% during October 1997. Military and commercial charter commissions expense
increased by $1.9 million and $0.1 million, respectively, due to the increased
level of commissionable revenues earned in those business units in 1997, as
compared to 1996.
The cost per ASM of commissions expense increased by 5.0% to 0.21 cents in 1997,
as compared to 0.20 cents in 1996.
Other Selling Expenses. Other selling expenses decreased 11.9% to $15.5 million
in 1997, as compared to $17.6 million in 1996.
CRS fees decreased $1.3 million in 1997, as compared to 1996 due to both a 7.7%
decrease in total CRS bookings made for the smaller scheduled service business
unit between periods, and due to a 14.4% reduction in the average cost of each
CRS booking made between years. Toll-free telephone costs decreased $0.7 million
between periods due to less usage and lower rates.
Other selling cost per ASM decreased 7.7% to 0.12 cents in 1997, as compared to
0.13 cents in the previous year.
Ground Package Cost. Ground package cost increased 5.5% to $19.2 million in
1997, as compared to $18.2 million in 1996. The increase in cost between periods
was primarily due to a 9.4% increase in the number of Ambassadair ground
packages sold. There was no material change in the average cost of ground
packages sold between years.
Ground package cost per ASM increased by 7.1% to 0.15 cents in 1997, as compared
to 0.14 cents in 1996.
Advertising. Advertising expense increased 23.3% to $12.7 million in 1997, as
compared to $10.3 million in 1996. The Company incurs advertising costs
primarily to support single-seat scheduled service sales and the sale of
air-and-ground packages. Advertising support for these lines of business was
increased in 1997 consistent with the Company's overall strategy to enhance RASM
in these businesses through increases in load factor and yield. Additionally,
advertising was comparatively low in the third quarter of 1996 due to the
restructuring of numerous scheduled service markets which was initiated in the
latter part of that quarter.
The cost per ASM of advertising increased 25.0% to 0.10 cents in 1997, as
compared to 0.08 cents in 1996. This increase in cost per ASM resulted from
higher absolute advertising dollars being spent in a period of declining ASMs,
but was nevertheless an integral part of the Company's strategy in 1997 to
enhance profitability in the scheduled service business.
Facilities and Other Rentals. The cost of facility and other rentals decreased
10.4% to $8.6 million in 1997, as compared to $9.6 million in 1996. There were
some changes in specific facilities utilized by the Company between periods,
such as the addition of hangar space at Chicago-Midway and the elimination of
airport facilities at Boston. The Company also reduced total facility expense
between years through the sublease of excess facilities to third parties.
The cost per ASM for facility and other rentals was unchanged between periods at
0.07 cents.
Other Operating Expenses. Other operating expenses increased 0.9% to $54.3
million in 1997, as compared to $53.8 million in 1996. Other operating expenses
which experienced significant increases between years included (i) the cost of
the Chicago Express Agreement; and (ii) the cost of property and sales taxes.
Other operating expenses which experienced significant decreases between periods
included (i) the cost of insurance; (ii) the cost of data and voice
communications; and (iii) the cost of professional consulting fees. Several
other categories of other operating expenses were lower in 1997 than in 1996,
primarily due to the smaller size of the airline between periods.
Other operating cost per ASM increased 4.9% to 0.43 cents in 1997, as compared
to 0.41 cents in 1996.
Interest Income and Expense. Interest expense in 1997 increased 111.1% to $9.5
million, as compared to $4.5 million in 1996. The increase in interest expense
between periods was primarily due to the change in the Company's capital
structure from (i) the offering of the 10 1/2 % notes, and (ii) the
implementation of the credit facility. During 1997, the weighted average
borrowings were approximately $117.2 million, as compared to $86.1 million in
1996. The weighted average effective interest rate applicable to the Company's
borrowings in 1997 was 8.06%, as compared to 5.18% in 1996. The increase in the
weighted average effective interest rates between years was primarily due to the
10.5% interest rate applicable to the unsecured notes, which was higher than the
average interest rates applicable to borrowings under the former credit
facility.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $1.6 million in interest income in 1997,
an increase of 166.7% over interest income of $0.6 million earned in 1996.
Income Tax Expense. In 1997, the Company recorded $4.5 million in income tax
expense applicable to the income before income taxes for that year, while in
1996 income tax credits of $12.9 million were recognized pertaining to the loss
before income taxes for that year of $39.6 million. The effective tax rate
applicable to 1997 was 73.9%, while the effective tax rate applicable to 1996
was 32.6%.
Income tax expense and credits in both periods were affected by the
non-deductibility for federal income tax purposes of 50% of amounts paid for
crew per diem. The effect of this and other permanent differences on the
effective income tax rate for financial accounting purposes becomes more
pronounced in cases where before-tax income or loss approaches zero, which was a
significant cause for the unusually high effective tax rate in 1997.
Income tax expense and the effective tax rate for 1997 were also significantly
affected by the one-time $2.0 million charge to salaries, wages and benefits in
the second quarter of 1997 for the 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 taxable income.
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 and the fourth quarter of 1998, the Company completed
several separate financings designed to lengthen the maturity of its long-term
debt and diversify its credit sources, including the issuance of $225.0 million
total in two series of unsecured notes, and the renegotiation of a revolving
credit facility that had an extended maturity, lower interest rate and less
restrictive covenants than the former credit facility.
In 1998, 1997 and 1996, net cash provided by operating activities was $151.8
million, $99.9 million and $32.2 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, growth in air traffic liabilities, higher accrued
expenses and other factors.
Net cash used in investing activities was $142.4 million, $76.1 million and
$63.2 million, respectively, in 1998, 1997 and 1996. Such amounts primarily
included capital expenditures totaling $175.4 million, $84.2 million and $69.9
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 for future
delivery.
Net cash used in financing activities was $59.3 million, $6.9 million and $11.6
million, respectively, for 1998, 1997 and 1996. Financing activities in the 1998
period included proceeds of $125.0 million from the sale of unsecured notes,
offset by $71.5 million in credit facility and other debt repayments. In 1997,
proceeds of $100.0 million were recorded from the sale of unsecured notes, which
was applied primarily to the repayment of other long-term debt.
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 10 total aircraft to be delivered between 1995 and 2000. In
conjunction with the Boeing purchase agreement, the Company entered into a
separate agreement with Rolls-Royce Commercial Aero Engines Limited for 21
RB211-535E4 engines to power the ten 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. The Company accepted delivery of the first
seven aircraft under these agreements in September and December 1995, November
and December 1996, November 1997, July 1998 and December 1998, all of which were
financed under leases accounted for as operating leases. The aggregate purchase
price under these two agreements for the remaining three aircraft is
approximately $50.0 million per aircraft, subject to escalation. The final three
deliveries are scheduled for September 1999, October 1999 and June 2000.
Advanced payments totaling approximately $19.5 million ($6.5 million per
aircraft) are required prior to delivery of the three remaining aircraft, with
the remaining purchase price payable at delivery. As of December 31, 1998, 1997
and 1996, the Company had recorded fixed asset additions for $13.0 million, $6.0
million and $2.7 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 two aircraft under this purchase agreement in
1998 and expects to accept delivery of the remaining three in 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 during 1999, operating primarily in
the commercial and military/government charter businesses. 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 has financed
this purchase primarily through the issuance of unsecured notes in December
1998.
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. The note required
monthly payments of $400,000 in principal and interest from October 15, 1997,
through September 1999, with the balance due at maturity. The Company
re-financed this aircraft through a sale/leaseback transaction in December 1998,
at which time the note was repaid in full. The new lease expires in December
1999, at which time the aircraft will be returned to the lessor, unless the
lessor exercises its right to leave the aircraft with the Company for up to two
additional years at a reduced rental amount.
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 then issued a long-term note (secured by this aircraft) in
September 1998 for $6.0 million, which required 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. This note was
repaid in December 1998.
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.
Financings in 1997. On July 24, 1997, the Company sold $100.0 million principal
amount of unsecured seven-year notes in a private offering under Rule 144A. 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 net proceeds of the unsecured notes were approximately $96.9 million, after
deduction 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.
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 included
up to $25.0 million for stand-by letters of credit. ATA was the borrower under
the new credit facility, which was guaranteed by the Company and each of the
Company's other active subsidiaries. The principal amount of the new facility
was scheduled to mature on April 1, 2001, and borrowings were secured by certain
Lockheed L-1011 aircraft and engines.
As of December 31, 1997, the Company had borrowed the maximum amount then
available against its existing credit facility, of which $34.0 million was
repaid on January 2, 1998. There were no borrowings against the credit facility
at December 31, 1998.
The Company also maintained 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 bore interest at the lender's prime rate
plus 0.25% per annum. There were no borrowings against this facility as of
December 31, 1998 and 1997; however, the Company did have outstanding letters of
credit secured by this facility aggregating $3.8 million and $3.5 million,
respectively. No amounts had been drawn against letters of credit at December
31, 1998 or 1997. This separate revolving credit facility was eliminated in
association with the implementation of the 1999 credit facility described below.
Financings in 1998 and 1999. In December 1998, the Company sold $125.0 million
principal amount of unsecured senior notes in a public offering. Interest is
payable on June 15 and December 15 of each year beginning June 15, 1999.
The net proceeds of the $125.0 million unsecured notes were approximately $121.0
million, after deducting costs and fees of issuance. The Company plans to use
the net proceeds for the purchase of Lockheed L-1011-500 aircraft, engines and
spare parts, and, together with available cash and bank facility borrowings, for
the purchase of Boeing 727-200 ADV aircraft, engines, engine hushkits and spare
parts.
In January 1999, the Company revised the revolving credit facility to provide a
maximum of $75.0 million, including up to $25.0 million for stand-by letters of
credit. The terms and conditions remained the same as the July 1997 facility,
except that the 1999 facility matures January 2, 2003, and borrowings under the
facility bear interest, at the option of ATA, at either LIBOR plus 1.25% to
2.50% or the agent bank's prime rate. The 1999 facility is subject to the same
restrictive covenants as the prior facility, except that the 1999 facility
limits certain non-aircraft-related capital expenditures to $15.0 million,
rather than the $10.0 million limitation in the prior revolving credit facility.
Aircraft Purchase Commitments and Options. The Company has signed purchase
agreements to acquire 16 Boeing 727-200ADV aircraft at agreed prices. Fourteen
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 8 of the Boeing 727-200
aircraft currently operated by the Company in order to meet federal Stage 3
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 to designate the seriousness and immediacy of impact to
the Company, should the component fail due to lack of compliance with Year 2000
standards.
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 compliance 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 58% 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 39% 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 31% 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 120 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 37 plans are now complete. A total of 66 plans are
currently in progress and are substantially on schedule for future completion.
The remaining 17 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 120 project plans, approximately 45% 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 641 "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 395 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 $7.0 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 $4.5 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 $3.6 million of this estimated cost has been
incurred as of January 31, 1999, with the remaining $3.4 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 government 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 assessed 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.
Future Accounting Changes
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This accounting standard,
which is effective for fiscal years beginning after December 15, 1998,
specifically defines the criteria under which costs incurred in connection with
internal-use computer software projects are to be treated as a current period
expense or to be capitalized. The adoption of SOP 98-1 is not expected to have a
material effect on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This accounting standard, which is effective for fiscal years
beginning after December 15, 1998, requires that certain costs of start-up
activities and organization costs be expenses as incurred. The adoption of SOP
98-5 is not expected to have a material effect on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
requires that all derivatives be recognized as either assets or liabilities at
fair value. The Company is evaluating the new statement's provisions and has not
yet determined either the date on which it will adopt SFAS No. 133 or the impact
of adoption on the results of operations or financial position.
Forward-Looking Information
Information contained within "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" includes
forward-looking information which can be identified by forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
"anticipates," or the negative thereof, or other variations in comparable
terminology. Such forward-looking information is based upon management's current
knowledge of factors affecting the Company's business. The differences between
expected outcomes and actual results can be material, depending upon the
circumstances. Therefore, where the Company expresses an expectation or belief
as to future results in any forward-looking information, such expectation or
belief is expressed in good faith and is believed to have a reasonable basis.
The Company can provide no assurance that the statement of expectation or belief
will result or will be achieved or accomplished as there are many risks
associated with business, the airline industry and the Company specifically that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by the Company.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain market risks, including commodity price risk
resulting from aircraft fuel price fluctuations and interest rate risk. The
adverse effects of potential changes in these market risks are discussed below.
The sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate the Company's exposure to such changes.
See the notes to consolidated financial statements for a description of the
Company's accounting policies and other information related to these financial
instruments.
Aircraft Fuel. The Company's results of operations are significantly impacted by
changes in the price of aircraft fuel. During 1998, aircraft fuel accounted for
approximately 16.3% of the Company's operating expenses. Based on the Company's
1999 projected fuel consumption, a one cent change in the average annual price
per gallon of aircraft fuel would impact the Company's annual aircraft fuel
expense by approximately $2.0 million, after the effect of hedging instruments
and contractual fuel reimbursement guarantees in place as of December 31, 1998.
In order to reduce the short-term risk associated with fuel price increases, the
Company has entered into certain fuel swap contracts and fuel cap agreements.
The Company's short-term risk is also mitigated by contractual fuel price
guarantees contained in the military charter contracts, which enable the Company
to pass through increases in fuel cost. Both the Company's fuel hedging strategy
and military fuel guarantees could result in the Company not fully benefiting
from certain fuel price declines. As of December 31, 1998, the Company had
hedged or guaranteed as part of projected military activity, approximately 22.6%
of its projected 1999 fuel requirements, including 52.5% of the first quarter
and 17.8% of the second quarter.
Interest Rates. The Company's results of operations are affected by fluctuations
in market interest rates. The Company has approximately $75.0 million of
variable-rate debt available through a revolving credit facility. In 1999, the
Company does not project to incur significant borrowings under the facility, so
the risk of exposure to market interest rate fluctuations is not significant.
As of December 31, 1998, the Company had fixed-rate debt with a carrying value
of $225.0 million. Based upon discounted future cash flows using current
incremental borrowing rates for similar types of instruments, the fair value of
the fixed-rate debt is estimated at approximately $229.0 million. Market risk,
estimated as the potential increase in fair value resulting from a hypothetical
1.0% decrease in interest rates was approximately $14.5 million as of December
31, 1998.
If 1999 average short-term interest rates decreased by 1.0% over 1998 average
rates, the Company's projected interest income from short-term investments would
decrease by approximately $0.9 million during 1999.
<PAGE>
PART II - Continued
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Amtran, Inc.
We have audited the accompanying consolidated balance sheets of Amtran, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amtran, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
/S/ERNST & YOUNG LLP
Indianapolis, Indiana
January 26, 1999
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
<S> <C> <C>
1998 1997
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 172,936 $ 104,196
Receivables, net of allowance for doubtful accounts
(1998 - $1,163; 1997 - $1,682) 24,921 23,266
Inventories, net 19,567 14,488
Prepaid expenses and other current assets 25,604 20,892
----------------- -----------------
Total current assets 243,028 162,842
Property and equipment:
Flight equipment 557,302 463,576
Facilities and ground equipment 68,848 54,933
----------------- -----------------
626,150 518,509
Accumulated depreciation (296,818) (250,828)
----------------- -----------------
329,332 267,681
Assets held for sale 7,176 8,691
Deposits and other assets 15,013 11,643
----------------- -----------------
Total assets $ 594,549 $ 450,857
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,476 $ 8,975
Accounts payable 7,158 10,511
Air traffic liabilities 76,662 68,554
Accrued expenses 98,548 80,312
----------------- -----------------
Total current liabilities 183,844 168,352
Long-term debt, less current maturities 245,195 182,829
Deferred income taxes 52,620 31,460
Other deferred items 10,139 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 12,374,577 - 1998; 11,829,230 - 1997 47,632 38,760
Treasury stock; 193,506 shares - 1998; 185,000 shares - (1,881) (1,760)
1997
Additional paid-in-capital 11,735 15,340
Retained earnings 46,331 6,250
Deferred compensation - ESOP (1,066) (1,600)
----------------- -----------------
102,751 56,990
----------------- -----------------
Total liabilities and shareholders' equity $ 594,549 $ 450,857
================= =================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
------------------------------------------------
Operating revenues:
Scheduled service $ 511,254 $ 371,762 $ 386,488
Charter 344,482 359,177 310,569
Ground package 23,186 22,317 22,302
Other 40,447 29,937 31,492
-------------- -------------- --------------
Total operating revenues 919,369 783,193 750,851
-------------- -------------- --------------
Operating expenses:
Salaries, wages and benefits 211,304 172,499 163,990
Fuel and oil 137,401 153,701 161,226
Depreciation and amortization 78,665 62,468 61,661
Handling, landing and navigation fees 74,640 69,383 70,122
Aircraft maintenance, materials and repairs 53,655 51,465 55,175
Aircraft rentals 53,128 54,441 65,427
Crew and other employee travel 41,565 36,596 35,855
Passenger service 34,031 32,812 32,745
Commissions 28,483 26,102 26,677
Other selling expenses 22,147 15,462 17,563
Ground package cost 19,466 19,230 18,246
Advertising 17,772 12,658 10,320
Facilities and other rentals 9,536 8,557 9,625
Disposal of assets - - 4,475
Other 62,203 54,335 53,800
-------------- -------------- --------------
Total operating expenses 843,996 769,709 786,907
-------------- -------------- --------------
Operating income (loss) 75,373 13,484 (36,056)
Other income (expense):
Interest income 4,433 1,584 617
Interest (expense) (12,808) (9,454) (4,465)
Other 212 413 323
-------------- -------------- --------------
Other expenses (8,163) (7,457) (3,525)
-------------- -------------- --------------
Income (loss) before income taxes 67,210 6,027 (39,581)
Income taxes (credits) 27,129 4,455 (12,907)
-------------- -------------- --------------
Net income (loss) $ 40,081 $ 1,572 $ (26,674)
============== ============== ==============
Basic earnings per common share:
Average shares outstanding 11,739,106 11,577,727 11,535,425
Net income (loss) per share $ 3.41 $ 0.14 $ (2.31)
============== ============== ==============
Diluted earnings per common share:
Average shares outstanding 13,066,222 11,673,330 11,535,425
Net income (loss) per share $ 3.07 $ 0.13 $ (2.31)
============== ============== ==============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Additional Deferred
Common Treasury Paid-in Retained Compensation
Stock Stock Capital Earnings ESOP
-------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 38,259 $ (1,581) $ 15,821 $ 31,352 $ (2,666)
Net loss - - - (26,674) -
Issuance of common stock for ESOP - - (173) - 533
Restricted stock grants 32 - (7) - -
Stock options exercised 50 - (23) - -
Purchase of 16,000 shares of treasury - (179) - - -
stock
------------- ------------ -------------- -------------- --------------
Balance, December 31, 1996 38,341 (1,760) 15,618 4,678 (2,133)
Net income - - - 1,572 -
Issuance of common stock for ESOP - - (214) - 533
Restricted stock grants 419 - (185) - -
Executive stock options expired - - 121 - -
------------- ------------ -------------- -------------- --------------
Balance, December 31, 1997 38,760 (1,760) 15,340 6,250 (1,600)
Net income - - - 40,081 -
Issuance of common stock for ESOP - - (257) - 534
Restricted stock grants 147 - (66) - -
Stock options exercised 8,725 - (4,089) - -
Purchase of 8,506 shares of treasury - (121) - - -
stock
Disqualifying disposition of stock - - 807 - -
------------- ------------ -------------- -------------- --------------
Balance, December 31, 1998 $ 47,632 $ (1,881) $ 11,735 $ 46,331 $ (1,066)
============= ============ ============== ============== ==============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
-------------------------------------------------
Operating activities:
Net income (loss) $ 40,081 $ 1,572 $ (26,674)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 78,665 62,468 61,661
Deferred income taxes (credits) 21,160 11,244 (13,246)
Other non-cash items 1,708 (666) 28,185
Changes in operating assets and liabilities:
Receivables (1,655) (3,027) 3,919
Inventories (4,356) (1,637) (948)
Assets held for sale - 5,356 (14,112)
Prepaid expenses (4,712) (6,321) 6,081
Accounts payable (3,353) (3,160) 2,519
Air traffic liabilities 8,108 18,655 (6,632)
Accrued expenses 16,166 15,452 (8,582)
------------- -------------- --------------
Net cash provided by operating activities 151,812 99,936 32,171
------------- -------------- --------------
Investing activities:
Proceeds from sales of property and equipment 37,061 8,005 529
Capital expenditures (175,417) (84,233) (69,884)
Reductions of (additions to) other assets (3,996) 173 6,194
------------- -------------- --------------
Net cash used in investing activities (142,352) (76,055) (63,161)
------------- -------------- --------------
Financing activities:
Payments on short-term debt (4,750) - -
Proceeds from long-term debt 131,000 134,000 21,390
Payments on long-term debt (71,485) (127,067) (9,580)
Proceeds from stock option exercises 4,636 - -
Purchase of treasury stock (121) - (179)
------------- -------------- --------------
Net cash provided by financing activities 59,280 6,933 11,631
------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 68,740 30,814 (19,359)
Cash and cash equivalents, beginning of period 104,196 73,382 92,741
------------- -------------- --------------
Cash and cash equivalents, end of period $ 172,936 $ 104,196 $ 73,382
============= ============== ==============
Supplemental disclosures:
Cash payments for:
Interest $ 14,685 $ 6,197 $ 3,823
Income taxes (refunds) 7,897 (311) 515
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital $ - $ 30,650 $ -
expenditures
Issuance of short-term debt directly for capital - 4,750 -
expenditures
</TABLE>
See accompanying notes.
<PAGE>
Part II - Continued
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Business Description
The consolidated financial statements include the accounts of Amtran, Inc.
(the "Company") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The Company operates principally in one business segment through American
Trans Air, Inc. ("ATA"), its principal subsidiary, which accounts for
approximately 95.0% of the Company's operating revenues. ATA is a
U.S.-certificated air carrier providing domestic and international charter
and scheduled passenger air services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are carried at cost and are primarily comprised of
investments in U.S. Treasury bills, commercial paper and time deposits
which are purchased with original maturities of three months or less (see
Note 2).
Assets Held For Sale
Assets held for sale are carried at the lower of net book value or
estimated net realizable value.
Inventories
Inventories consist primarily of expendable aircraft spare parts, fuel and
other supplies. Aircraft parts inventories are stated at cost and are
reduced by an allowance for obsolescence. The obsolescence allowance is
provided by amortizing the cost of the aircraft parts inventory, net of an
estimated residual value, over its estimated useful service life. The
obsolescence allowance at December 31, 1998 and 1997, was $8.4 million and
$7.6 million, respectively. Inventories are charged to expense when
consumed.
Revenue Recognition
Revenues are recognized when the transportation is provided. Customer
flight deposits and unused passenger tickets sold are included in air
traffic liability. As is customary within the industry, the Company
performs periodic evaluations of this estimated liability, and any
adjustments resulting therefrom, which can be significant, are included in
the results of operations for the periods in which the evaluations are
completed.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is recognized. The
amount of passenger traffic commissions paid but not yet recognized as
expense is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
Property and Equipment
Property and equipment is recorded at cost and is depreciated to residual
value over its estimated useful service life using the straight-line
method. Advanced payments for future aircraft purchases are recorded at
cost. As of December 31, 1998 and 1997, the Company had made advanced
payments for future aircraft deliveries totaling $13.0 million and $6.0
million, respectively. The estimated useful service lives for the
principal depreciable asset classifications are as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Asset Estimated Useful Service Life
--------------------------------------------------- ------------------------------------------
Aircraft and related equipment:
Lockheed L-1011 (Series 50 and 100) Depreciating to common retirement date of
December 2004 (see Note 13)
Boeing 757-200 20 years
Boeing 727-200 11 years
Major rotable parts, avionics and assemblies Life of equipment to which applicable
(Generally ranging from 6 -16 years)
Improvements to leased flight equipment Period of benefit or term of lease
Other property and equipment 3 - 7 years
</TABLE>
The costs of major airframe and engine overhauls are capitalized and
amortized over their estimated useful lives based upon usage (or to
earlier fleet common retirement dates) for both owned and leased aircraft.
The most significant component of the Company's property and equipment is
aircraft and related improvements and parts. All aircraft are registered
in the United States. The Company therefore considers all property and
equipment to be domestic.
Financial Instruments
The carrying amounts of cash equivalents, receivables and both
variable-rate and fixed-rate debt (see Note 5) approximate fair value. The
fair value of fixed-rate debt, including current maturities, is estimated
using discounted cash flow analysis based on the Company's current
incremental rates for similar types of borrowing arrangements.
During 1998, the Company began entering into fuel hedge contracts to
reduce the risk of fuel price increases. The Company hedges fuel
consumption under both swap agreements which establish specific swap
prices for designated periods and fuel cap agreements which guarantee a
maximum price per gallon for designated periods. When the market fuel
price remains below that established in hedge contracts, the Company
records the cost of the fuel hedge contract as a component of fuel expense
in the period the fuel is consumed.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1998 1997
--------------------------------
(In thousands)
Cash $ 7,389 $ 25,406
Commercial paper 161,285 34,817
U.S. Treasury repurchase agreements 4,262 43,973
------------- -------------
$ 172,936 $ 104,196
============= =============
</TABLE>
3. Property and Equipment
The Company's property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1998 1997
------------------ ----------------
(In thousands)
Flight equipment, including airframes, engines and
other $ 557,302 $ 463,576
Less accumulated depreciation 258,025 219,590
------------------ -------------
299,277 243,986
------------------ -------------
Facilities and ground equipment 68,848 54,933
Less accumulated depreciation 38,793 31,238
------------------ -------------
30,055 23,695
------------------ -------------
$ 329,332 $ 267,681
================== =============
</TABLE>
<PAGE>
4. Short-Term Borrowings
The Company maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for issuance of letters of credit.
The credit facility is available until January 1999 and is collateralized
by certain aircraft engines. Borrowings against the facility bear interest
at the bank's prime rate plus .25%. There were no borrowings against this
credit facility at December 31, 1998 or 1997. At December 31, 1998 and
1997, the Company had outstanding letters of credit aggregating $3.8
million and $3.5 million, respectively, under such facility. This facility
was terminated in January 1999.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1998 1997
------------ ------------
(In thousands)
Unsecured Senior Notes, fixed rate of 9.625% payable on $125,000 $ -
December 15, 2005
Unsecured Senior Notes, fixed rate of 10.5% payable on 100,000 100,000
August 1, 2004
Other 21,671 91,804
------------- ------------
246,671 191,804
Less current maturities 1,476 8,975
------------- ------------
$245,195 $182,829
============== ============
</TABLE>
In December 1998, the Company sold $125.0 million principal amount of
unsecured senior notes. Interest is payable on June 15 and December 15 of
each year beginning June 15, 1999. The Company may redeem the notes, in
whole or in part, at any time on or after June 15, 2003, initially at
104.81% of their principal amount plus accrued interest, declining to
102.41% of their principal amount plus accrued interest on June 15, 2004,
then to 100.0% of their principal amount plus accrued interest at
maturity. At any time prior to June 15, 2001, the Company may redeem up to
35.0% of the principal amount of the notes with the proceeds of one or
more sales of its common stock, at a redemption price of 109.625% of their
principal amount plus accrued interest, provided that at least $81.25
million aggregate principal amount of the notes remains outstanding after
such redemption.
The net proceeds of the $125.0 million unsecured notes were approximately
$121.0 million, after deducting costs and fees of issuance. The Company
plans to use the net proceeds for the purchase of Lockheed L-1011-500
aircraft, engines and spare parts, and, together with available cash and
bank facility borrowings, for the purchase of Boeing 727-200 ADV aircraft,
engines, engine hushkits and spare parts.
In July 1997, the Company sold $100.0 million principal amount of
unsecured senior notes. Interest is payable on February 1 and August 1 of
each year beginning February 1, 1998. The Company may redeem the notes, in
whole or in part, at any time on or after August 1, 2002, initially at
105.25% of their principal amount plus accrued interest, declining ratably
to 100.0% of their principal amount plus accrued interest at maturity. At
any time prior to August 1, 2000, the Company may redeem up to 35.0% of
the original aggregate principal amount of the notes with the proceeds of
sales of common stock, at a redemption price of 110.5% of their principal
amount plus accrued interest, provided that at least $65.0 million in
aggregate principal amount of the notes remains outstanding after such
redemption.
The net proceeds of the $100.0 million unsecured notes were approximately
$96.9 million, after deducting costs and fees of issuance. The Company
used a portion of the net proceeds to repay in full the Company's prior
bank facility and used the balance of the proceeds for general corporate
purposes.
The Company's 1998 revolving credit facility provides a maximum of $50.0
million, including up to $25.0 million for stand-by letters of credit. ATA
is the borrower under the credit facility, which is guaranteed by the
Company and each of the Company's other active subsidiaries. The principal
amount of the facility matures on April 1, 2001, and borrowings are
secured by certain Lockheed L-1011-50 and L-1011-100 aircraft and engines.
The loan-to-value ratio for collateral securing the facility may not
exceed 75.0% at any time. Borrowings under the facility bear interest, at
the option of ATA, at either LIBOR plus 1.5% to 2.5% or the agent bank's
prime rate.
In January 1999, the Company revised the revolving credit facility to
provide a maximum of $75.0 million, including up to $25.0 million for
stand-by letters of credit. The terms and conditions remained
substantially the same except that the 1999 facility expires January 2,
2003, and borrowings under the facility bear interest, at the option of
ATA, at either LIBOR plus 1.25% to 2.50% or the agent bank's prime rate.
The 1999 facility is subject to similar restrictive covenants as the 1998
facility, except that the 1999 facility limits certain non-aircraft
related capital expenditures to $15.0 million, rather than the $10.0
million limitation in the 1998 revolving credit facility.
The notes and credit facilities are subject to restrictive covenants,
including, among other things, limitations on: the incurrence of
additional indebtedness; the payment of dividends; certain transactions
with shareholders and affiliates; or the creation of liens on or other
transactions involving certain assets. In addition, certain covenants
require certain financial ratios to be maintained.
Future maturities of long-term debt are as follows:
December 31, 1998
-----------------------
(In thousands)
1999 $ 1,476
2000 11,374
2001 1,374
2002 1,193
2003 254
Thereafter 231,000
-----------------------
$ 246,671
=======================
Interest capitalized in connection with long-term asset purchase
agreements and construction projects was $2.0 million and $0.7 million in
1998 and 1997, respectively.
6. Lease Commitments
At December 31, 1998, the Company had aircraft leases on one Lockheed
L-1011-100, 23 Boeing 727-200s and nine Boeing 757-200s. The Lockheed
L-1011-100 has an initial term of 60 months which expires in 2003. The
Boeing 757-200s have initial lease terms which expire from 1999 through
2017. The Boeing 727-200s have initial lease terms of three to seven years
and expire between 1999 and 2003. The Company also leases nine engines for
use on the Lockheed L-1011-50s and L-1011-100s, two engines for use on
Boeing 727-200s and two engines for use on the Boeing 757-200s. The
L-1011-50 and L-1011-100 engine leases expire in 2001, the 727-200 leases
expire in June 1999 and the 757-200 leases expire in 2008 and 2011. All
aircraft leases are accounted for as operating leases.
The Company is responsible for all maintenance costs on these aircraft and
engines and must meet specified airframe and engine return conditions.
As of December 31, 1998, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance
facilities, with original lease terms that vary from 1.5 to 33 years and
expire at various dates through 2028. The lease agreements relating to the
ground facilities, which are primarily owned by governmental units or
authorities, generally do not provide for transfer of ownership nor do
they contain options to purchase.
The Company leases its headquarters facility from the City of Indianapolis
under a capital lease agreement which expires in 1999. The agreement has
two options to extend of three and five years, respectively, and is
cancelable with advance notice. The Company is responsible for
maintenance, taxes, insurance and other expenses incidental to the
operation of the facilities.
Future minimum lease payments at December 31, 1998, for noncancelable
operating leases with initial terms of more than one year are as follows:
Facilities
Flight and Ground
Equipment Equipment Total
----------------- ------------------ ----------------
(In thousands)
1999 $ 63,696 $ 7,272 $ 70,968
2000 56,198 5,879 62,077
2001 46,149 4,046 50,195
2002 40,009 3,805 43,814
2003 32,646 2,904 35,550
Thereafter 307,030 19,827 326,857
----------------- ----------------- ----------------
$ 545,728 $43,733 $589,461
================= ================= ================
Rental expense for all operating leases in 1998, 1997 and 1996 was $62.7
million, $63.0 million and $75.0 million, respectively.
7. Income Taxes
The provision for income tax expense (credit) consisted of the following:
December 31,
1998 1997 1996
------------- -------------- -----------
(In thousands)
Federal:
Current $ 6,403 $ 173 $ -
Deferred 18,102 3,706 (11,798)
------------- ------------- -----------
24,505 3,879 (11,798)
State:
Current 686 163 161
Deferred 1,938 413 (1,270)
------------- ------------- -----------
2,624 576 (1,109)
------------- ------------- -----------
Income tax expense (credit) $27,129 $ 4,455 $(12,907)
============= ============= ===========
The provision for income taxes differed from the amount obtained by
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C> <C>
1998 1997 1996
--------- ------------- -----------
(In thousands)
Federal income taxes (credit) at statutory rate $23,523 $ 2,049 $(13,457)
State income taxes (credit), net of federal benefit 1,711 367 (732)
Non-deductible expenses 1,234 1,947 1,282
Other, net 661 92 -
---------- ------------ -----------
Income tax expense (credit) $27,129 $ 4,455 $(12,907)
========== ============ ===========
</TABLE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the
financial statements. The principal temporary differences relate to the
use of accelerated methods of depreciation and amortization for tax
purposes. Deferred tax liability and asset components are as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1998 1997
-------------------------
(In thousands)
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $ 76,560 $ 61,117
Other taxable temporary differences 502 597
------------ -----------
Deferred tax liabilities 77,062 61,714
------------ -----------
Deferred tax assets:
Tax benefit of net operating loss carryforwards 18,102 28,744
Alternative minimum tax and other tax credit carryforwards 8,726 3,032
Vacation pay accrual 3,225 2,595
Amortization of lease credits 1,964 1,979
Other deductible temporary differences 3,302 3,660
------------ -----------
Deferred tax assets 35,319 40,010
------------ -----------
Deferred taxes classified as:
Current asset
Current asset $ 10,877 $ 9,756
============ ===========
Non-current liability $ 52,620 $ 31,460
============ ===========
</TABLE>
At December 31, 1998, for federal tax reporting purposes, the Company had
approximately $47.3 million of net operating loss carryforwards available
to offset future federal taxable income and $8.7 million of alternative
minimum tax and other tax credit carryforwards available to offset future
federal tax liabilities. The net operating loss carryforwards expire as
follows: 2009, $14.2 million; 2011, $33.1 million. The alternative minimum
tax and other tax credit carryforwards of $8.7 million have no expiration
dates.
8. Retirement Plan
The Company has a defined contribution 401(k) savings plan which provides
for participation by substantially all the Company's employees who have
completed one year of service. The Company has elected to contribute an
amount equal to 40.0% in 1998, 35.0% in 1997, and 30.0% in 1996, of the
amount contributed by each participant up to the first six percent of
eligible compensation. Company matching contributions expensed in 1998,
1997 and 1996 were $2.3 million, $1.8 million and $1.3 million,
respectively.
In 1993, the Company added an Employee Stock Ownership Plan ("ESOP")
feature to its existing 401(k) savings plan. The ESOP used the proceeds of
a $3.2 million loan from the Company to purchase 200,000 shares of the
Company's common stock. The selling shareholder was the Company's
principal shareholder. The Company recognized $0.7 million, $0.3 million
and $0.3 million in 1998, 1997 and 1996, respectively, as compensation
expense related to the ESOP. Shares of common stock held by the ESOP will
be allocated to participating employees annually as part of the Company's
401(k) savings plan contribution. The fair value of the shares allocated
during the year is recognized as compensation expense.
9. Shareholders' Equity
In the first quarter of 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. As of
December 31, 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)
authorizes the grant of options for up to 900,000 shares of the Company's
common stock. The Company's 1996 Incentive Stock Plan for Key Employees
(1996 Plan) authorizes the grant of options for up to 3,000,000 shares of
the Company's common stock. Options granted have 5 to 10-year terms and
generally vest and become fully exercisable over specified periods 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
--------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995 395,300 $11.92
---------------
Granted 1,302,400 7.87
Exercised (3,100) 8.94
Canceled (64,700) 10.87
---------------
Outstanding at December 31, 1996 1,629,900 8.74
---------------
Granted 1,588,500 8.49
Canceled (706,000) 7.14
---------------
Outstanding at December 31, 1997 2,512,400 9.39
---------------
Granted 560,900 9.67
Exercised (545,347) 8.50
Canceled (157,700) 9.08
---------------
Outstanding at December 31, 1998 2,370,253 $ 9.38
===============
Options exercisable at December 31, 1997 390,232 $12.02
===============
Options exercisable at December 31, 1998 755,075 $10.13
===============
</TABLE>
During 1996, the Company adopted the disclosure provisions of FASB
Statement No. 123 "Accounting for Stock-Based Compensation" (FAS 123) with
respect to its stock options. As permitted by FAS 123, the Company has
elected to continue to account for employee stock options following
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and related Interpretations. Under APB 25, because
the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The weighted-average fair value of options granted during 1998 and 1997 is
estimated at $5.12 and $5.28 per share, respectively, on the grant date.
These estimates were made using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1998 and 1997:
risk-free interest rate of 5.0% and 6.0%; expected market price volatility
of .44 and .40; weighted-average expected option life equal to the
contractual term; estimated forfeitures of 5.0%; and no dividends.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models use highly subjective assumptions, including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employees' stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3
years). The Company's pro forma information follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
(In thousands, except per share data)
Net income (loss) as reported $ 40,081 $1,572 $(26,674)
Net income (loss) pro forma 37,209 89 (28,864)
Diluted income (loss) per share as reported 3.07 .13 (2.31)
Diluted income (loss) per share pro forma 2.85 .01 (2.50)
</TABLE>
Options outstanding at December 31, 1998, expire from August 2003 to
November 2008. A total of 970,883 shares are reserved for future grants as
of December 31, 1998, under the 1993 and 1996 Plans. The following table
summarizes information concerning outstanding and exercisable options at
December 31, 1998:
Range of Exercise Prices $7 - 14 $15 - 27
Options outstanding:
Weighted-Average Remaining
Contractual Life 8.1 years 5.2 years
Weighted-Average Exercise Price $8.88 $16.57
Number 2,216,953 153,300
Options exercisable:
Weighted-Average Exercise Price $8.89 $16.00
Number 623,075 132,000
10. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---------------- ---------------- ----------------
Numerator:
Net income (loss) $40,081,000 $1,572,000 $(26,674,000)
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,739,106 11,577,727 11,535,425
Effect of dilutive securities:
Employee stock options 1,327,116 64,725 -
Restricted shares - 30,878 -
---------------- ---------------- ----------------
Dilutive potential common shares 1,327,116 95,603 -
---------------- ---------------- ----------------
Denominator for diluted earnings per
share - adjusted weighted average shares 13,066,222 11,673,330 11,535,425
================ ================ ================
Basic earnings per share $ 3.41 $ 0.14 $ (2.31)
================ ================ ================
Diluted earnings per share $ 3.07 $ 0.13 $ (2.31)
================ ================ ================
</TABLE>
Potentially dilutive securities were not included in the computation of
1996 diluted earnings per share because the year resulted in a net loss
and, therefore, their effect would be antidilutive.
11. Major Customer
The United States government is the only customer that accounted for more
than 10.0% of consolidated revenues. U.S. government revenues accounted
for 13.3%, 16.8% and 11.2% of consolidated revenues for 1998, 1997 and
1996, respectively.
12. Commitments and Contingencies
In July 1998, the Company committed to the purchase of five Lockheed
L-1011 series 500 aircraft. The Company accepted delivery of two aircraft
under this purchase agreement in 1998, with planned deliveries of the
additional three aircraft in 1999. The Company plans to finance this
purchase with the net proceeds of the $125.0 million unsecured senior
notes sold in December 1998.
In November 1994, the Company signed a purchase agreement for six new
Boeing 757-200s, which, as subsequently amended, now provides for the
delivery of ten total aircraft. The amended agreement provides for
deliveries of aircraft between 1995 and 2000. As of December 31, 1998, the
Company had taken delivery of seven Boeing 757-200s under this purchase
agreement and financed those aircraft using leases accounted for as
operating leases. The final three deliveries under this agreement are
scheduled for September 1999, October 1999 and June 2000. The remaining
aircraft have an aggregate purchase price of approximately $50.0 million
per aircraft, subject to escalation. Advance payments totaling
approximately $19.5 million ($6.5 million per aircraft) are required to be
made for the remaining undelivered aircraft, with the balance of the
purchase price due upon delivery. As of December 31, 1998 and 1997, the
Company had made $13.0 million and $6.0 million in advanced payments,
respectively, pertaining to future aircraft deliveries.
The Company has signed purchase agreements to acquire 16 Boeing 727-200ADV
aircraft at agreed upon prices. Fourteen of the aircraft to be purchased
are currently leased by the Company. The remaining two aircraft, currently
on lease to another airline, may be purchased in 1999, depending upon the
exercise of lease extension options available to the current lessee.
Various claims, contractual disputes and lawsuits against the Company
arise periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
13. 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.
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 and related
engines, overhauls and spare parts, 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 of $2.1 million
in depreciation and amortization expense for the year ended December 31,
1998, and resulted in an increase in net income of $1.2 million in the
same period. Basic and fully diluted earnings per share for the year ended
December 31, 1998, were increased by $0.10 and $0.09, respectively.
<PAGE>
<TABLE>
<CAPTION>
Financial Statements and Supplementary Data
Amtran, Inc. and Subsidiaries
1998 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
Operating revenues $229,305 $238,464 $242,414 $209,186
Operating expenses 205,896 213,820 219,517 204,763
Operating income 23,409 24,644 22,897 4,423
Other expenses (2,138) (1,995) (2,049) (1,981)
Income before income taxes 21,271 22,649 20,848 2,442
Income taxes 8,872 8,854 8,415 988
Net income $ 12,399 $ 13,795 $ 12,433 $ 1,454
Net income per share - basic $ 1.07 $ 1.19 $ 1.06 $ .12
Net income per share - diluted $ 1.02 $ 1.05 $ .92 $ .11
Amtran, Inc. and Subsidiaries
1997 Quarterly Financial Summary
(Unaudited)
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------- ------------------- ------------------ ------------------ -------------------------
Operating revenues $194,284 $192,187 $210,790 $185,932
Operating expenses 186,556 191,166 205,464 186,523
Operating income (loss) 7,728 1,021 5,326 (591)
Other expenses (1,411) (1,501) (1,752) (2,793)
Income (loss) before income taxes 6,317 (480) 3,574 (3,384)
Income taxes (credits) 3,095 269 1,828 (737)
Net income (loss) $ 3,222 $ (749) $ 1,746 $(2,647)
Net income (loss) per share - basic $ .28 $ (.06) $ .15 $ (.23)
Net income (loss) per share - diluted $ .27 $ (.06) $ .15 $ (.23)
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change of auditors or disagreements on accounting methods have occurred which
would require disclosure hereunder.
<PAGE>
Part III
Item 10. Directors and Officers of the Registrant
The information contained on pages 4 and 5 of Amtran, Inc. and Subsidiaries'
Proxy Statement dated April 2, 1999, with respect to directors and executive
officers of the Company, is incorporated herein by reference in response to this
item.
Item 11. Executive Compensation
The information contained on pages 12 through 15 of Amtran, Inc. and
Subsidiaries' Proxy Statement dated April 2, 1999, with respect to executive
compensation and transactions, is incorporated herein by reference in response
to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained on pages 10 and 11 of Amtran, Inc. and Subsidiaries'
Proxy Statement dated April 2, 1999, with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on page 6 of Amtran, Inc. and Subsidiaries' Proxy
Statement dated April 2, 1999, with respect to certain relationships and related
transactions, is incorporated herein by reference in response to this item.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the
Company and its subsidiaries are included in Item 8:
o Consolidated Balance Sheets for years ended December 31, 1998
and 1997
o Consolidated Statements of Operations for years ended
December 31, 1998, 1997 and 1996
o Consolidated Statements of Changes in Shareholders'Equity for
years ended December 31, 1998, 1997 and 1996
o Consolidated Statements of Cash Flows for years ended
December 31, 1998, 1997 and 1996
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following consolidated financial information for the years
1998, 1997 and 1996 is included in Item 14(d):
Page
o Schedule II - Valuation and Qualifying Accounts 55
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
The following exhibits are submitted as a separate
section of this report:
Page
23. Consent of Independent Auditor 54
(b) Reports on Form 8-K
There were no Form 8-Ks filed during the quarter ended
December 31, 1998
(c) Exhibits
This section is not applicable.
(d) Financial Statement Schedule
This section is not applicable.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amtran, Inc.
(Registrant)
Date March 31, 1999 John P. Tague
John P. Tague
President and Chief Executive Officer
Director
Date March 31, 1999 James W. Hlavacek
James W. Hlavacek
Executive Vice President, Chief Operating Officer
and President of ATA Training Corporation
Director
Date March 31, 1999 Kenneth K. Wolff
Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
Director
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-52655) of Amtran, Inc. and its
subsidiaries and in the related Prospectus and in the Registration
Statement (Form S-8 No. 33-65708) pertaining to the 1993 Incentive
Stock Plan for Key Employees of Amtran, Inc. and its subsidiaries
of our report dated January 26, 1999, with respect to the
consolidated financial statements and schedule of Amtran, Inc.,
included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/S/ERNST & YOUNG LLP
Indianapolis, Indiana
March 29, 1999
<PAGE>
<TABLE>
<CAPTION>
PART IV SCHEDULE II
Item 14(d)
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN COLUMN E
D
- ------------------------------------------- ------------- ---------------------------- ------------ -------------
Additions
----------------------------
<S> <C> <C> <C> <C> <C>
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
Description of Period Expenses Describe Describe Period
- ------------------------------------------- ------------- ------------ ------------- ------------ ----------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,303 $ 791 $ - $ 820 (1) $ 1,274
Allowance for obsolescence -Inventory 5,574 1,432 - 412 (2) 6,594
------------- ------------ ------------- ------------ -------------
Totals $ 6,877 $ 2,223 $ - $ 1,232 $ 7,868
============= ============ ============= ============ =============
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,274 $ 1,261 $ - $ 853 (1) $ 1,682
Allowance for obsolescence - Inventory 6,594 1,474 - 437 (2) 7,631
Valuation allowance - Assets held for sale - 200 - - 200
------------- ------------ ------------- ------------ -------------
Totals $ 7,868 $ 2,935 $ - $ 1,290 $ 9,513
============= ============ ============= ============ =============
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,682 $ 1,492 $ - $ 2,011 (1) $ 1,163
Allowance for obsolescence - Inventory 7,631 1,905 - 1,095 (2) 8,441
Valuation allowance - Assets held for sale 200 - - 200 (3) -
------------- ------------ ------------- ------------ -------------
Totals $ 9,513 $ 3,397 $ - $ 3,306 $ 9,604
============= ============ ============= ============ =============
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Obsolescence allowance related to inventory items transferred to flight
equipment or sold
(3) Valuation allowance related to parts sold
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000898904
<NAME> AMTRAN INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 172,936
<SECURITIES> 0
<RECEIVABLES> 26,084
<ALLOWANCES> 1,163
<INVENTORY> 19,567
<CURRENT-ASSETS> 243,028
<PP&E> 626,150
<DEPRECIATION> 296,818
<TOTAL-ASSETS> 594,549
<CURRENT-LIABILITIES> 183,844
<BONDS> 0
0
0
<COMMON> 47,632
<OTHER-SE> 55,119
<TOTAL-LIABILITY-AND-EQUITY> 594,549
<SALES> 919,369
<TOTAL-REVENUES> 919,369
<CGS> 0
<TOTAL-COSTS> 843,996
<OTHER-EXPENSES> (4,645)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,808
<INCOME-PRETAX> 67,210
<INCOME-TAX> 27,129
<INCOME-CONTINUING> 40,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,081
<EPS-PRIMARY> 3.41
<EPS-DILUTED> 3.07
</TABLE>
