Page 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
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 Act of 1934
during the preceding 12 months (or for such shorter period 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
As of November 10, 2000 there were 21,203,282 shares of common stock, par
value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
(In thousands except for share data and par 1999 2000
values) (Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 57,447 $ 65,039
Accounts receivable, net 31,023 42,790
Expendable parts and fuel inventory, 4,114 6,722
net
Prepaid expenses and other current 6,347 14,782
assets
Notes receivable 6,239 -
Deferred tax asset 2,850 3,169
Total current assets 108,020 132,502
Property and equipment at cost, net of
accumulated depreciation and amortization 133,160 141,645
Intangible assets, net of accumulated 2,232 2,129
amortization
Debt issuance costs, net of accumulated 3,309 2,671
amortization
Aircraft deposits 38,690 48,420
Other assets 8,342 10,037
Total assets $ 293,753 $ 337,404
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,343 $ 8,349
Current portion of long-term debt 4,758 4,340
Current portion of capital lease 1,627 1,507
obligations
Accrued aircraft early retirement - 2,340
costs
Accrued liabilities 35,852 48,658
Total current liabilities 47,580 65,194
Long-term debt, less current portion 87,244 64,373
Capital lease obligations, less current 5,543 4,403
portion
Deferred tax liability 12,459 12,619
Accrued aircraft early retirement costs - 5,820
Deferred credits, net 15,403 22,098
Total liabilities 168,229 174,507
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000;shares issued
21,083,927and 23,613,425 respectively;
shares outstanding 18,628,261 and 421 471
21,090,259 respectively
Additional paid-in capital 89,126 110,670
Less: Common stock in treasury, at cost,
2,455,666 shares and 2,523,166 shares, (34,106) (35,302)
respectively
Retained earnings 70,083 87,058
Total stockholders' equity 125,524 162,897
Total liabilities and stockholders' $ 293,753 $ 337,404
equity
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands, except for per share data) 1999 2000
<S> <C> <C>
Operating revenues:
Passenger $ 89,758 $ 112,749
Other 1,264 2,607
Total operating revenues 91,022 115,356
Operating expenses:
Salaries and related costs 21,763 28,370
Aircraft fuel 8,715 16,720
Aircraft maintenance and materials 5,272 9,286
Aircraft rentals 11,625 15,435
Traffic commissions and related fees 14,633 15,577
Facility rents and landing fees 4,590 5,274
Depreciation and amortization 2,350 2,901
Other 7,542 10,882
Aircraft early retirement charge - 8,686
Total operating expenses 76,490 113,131
Operating income 14,532 2,225
Other income (expense):
Interest expense (1,408) (1,316)
Interest income 882 1,284
Other, net (27) (54)
Total other income (expense) (553) (86)
Income before income tax provision 13,979 2,139
Income tax provision (benefit) 5,628 (527)
Net income $ 8,351 $2,666
Income per share:
-basic $0.45 $0.13
-diluted $0.40 $0.12
Weighted average shares used in computation:
-basic 18,655 21,072
-diluted 21,632 21,932
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
(In thousands, except for per share data) 1999 2000
<S> <C> <C>
Operating revenues:
Passenger $ 252,571 $ 317,664
Other 3,851 6,523
Total operating revenues 256,422 324,187
Operating expenses:
Salaries and related costs 62,074 78,808
Aircraft fuel 23,335 43,321
Aircraft maintenance and materials 17,638 26,294
Aircraft rentals 33,344 42,208
Traffic commissions and related fees 40,459 44,554
Facility rents and landing fees 13,171 14,371
Depreciation and amortization 6,461 8,130
Other 21,231 30,420
Aircraft early retirement charge - 8,686
Total operating expenses 217,713 296,792
Operating income 38,709 27,395
Other income (expense):
Interest expense (3,905) (4,733)
Interest income 2,777 3,408
Other, net (106) (224)
Total other income (expense) (1,234) (1,549)
Income before income tax provision and cumulative
effect of accounting change 37,475 25,846
Income tax provision 14,293 8,871
Income before cumulative effect of
accounting change 23,182 16,975
Cumulative effect of accounting change, net of (888) -
income tax
Net income $ 22,294 $16,975
Income per share:
Basic:
Income before cumulative effect of accounting $1.21 $0.86
change
Cumulative effect of accounting change (0.04) -
Net income $1.17 $0.86
Diluted:
Income before cumulative effect of accounting $1.07 $0.80
change
Cumulative effect of accounting change (0.04) -
Net income $1.03 $0.80
Weighted average shares used in computation:
-basic 19,089 19,696
-diluted 22,159 21,726
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings,
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
(In thousands) 1999 2000
<S> <C> <C>
Cash flows from operating activities:
Net income $22,294 $16,975
Adjustments to reconcile net income to net cash
provided by
operating activities:
Depreciation and amortization 6,511 8,461
Write off of preoperating costs 1,486 -
Amortization of deferred credits (785) (1,159)
Capitalized interest (net) (738) (1,576)
Other 901 239
Changes in operating assets and liabilities:
Accounts and notes receivable (5,523) (6,907)
Expendable parts and fuel inventory (757) (2,673)
Prepaid expenses and other current assets (8,753) (8,501)
Accounts payable 1,802 10,795
Accrued liabilities 8,560 12,655
Accrued aircraft early retirement costs - 8,160
Net cash provided by operating activities 24,998 36,469
Cash flows from investing activities:
Purchases of property and equipment (29,403) (15,110)
Funding Obligation for regional terminal (7,751) -
Proceeds from sales of assets 6,547 120
Payments for aircraft deposits and other (net) (17,267) (9,830)
Net cash used in investing activities (47,874) (24,820)
Cash flows from financing activities:
Proceeds from issuance of long term debt 22,413 -
Payments of long-term debt (3,162) (3,471)
Payments of capital lease obligations (1,275) (1,259)
Deferred financing costs and other (239) (80)
Purchase of treasury stock (17,192) (1,196)
Proceeds from exercise of stock options 1,191 1,949
Net cash provided by (used in) financing 1,736 (4,057)
activities
Net increase (decrease) in cash and cash (21,140) 7,592
equivalents
Cash and cash equivalents, beginning of period 64,412 57,447
Cash and cash equivalents, end of period $ 43,272 $ 65,039
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiaries, principally, Atlantic Coast Airlines
("ACA") and Atlantic Coast Jet, Inc. ("ACJet") (together, the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in these unaudited
condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such consolidated
financial statements. Results of operations for the three and nine month
periods presented are not necessarily indicative of the results to be
expected for the year ending December 31, 2000. Certain amounts as
previously reported have been reclassified to conform to the current year
presentation. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements, and the notes thereto, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
2. OTHER COMMITMENTS
The Company periodically enters into a series of put and call contracts
as an interest rate hedge designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent financing relating to
the delivery of aircraft. As such, effective gains or losses realized
when permanent financing is obtained will be amortized over the term of
the related aircraft lease or will be depreciated as part of the aircraft
acquisition cost for owned aircraft. On July 6, 2000 the Company entered
into six interest rate forward transactions maturing between August 2000
and January 2001 as an interest rate hedge relating to the delivery of
six aircraft. These transactions settle shortly before the aircraft are
scheduled to be delivered and had an aggregate notional value of $51
million. In the third quarter of 2000, the Company settled three of
these interest rate forward transactions by paying the counterparty
approximately $350,000. The three remaining interest rate forward
transactions will settle in October and November of 2000, and January of
2001, respectively. Had the interest rate forward transactions settled
on September 30, 2000, the Company would have paid approximately
$605,000.
Periodically, the Company enters into commodity swap transactions to
hedge price changes of crude oil. The Company realized a reduction in
fuel expense of approximately $829,000 on swap contracts settled in the
third quarter. The Company is currently unhedged for fuel purchases for
the remainder of this year and 2001. As Delta Air Lines, Inc. bears the
economic risk of fuel price fluctuations for future fuel requirements
associated with the Delta Connection program, the Company has limited its
exposure to fuel price increases on approximately 13% of its anticipated
jet fuel requirements for the fourth quarter of 2000.
In February 1999, the Company entered into an asset-based lending
agreement with a financial institution that provides the Company with a
line of credit for up to $35 million depending on the amount of assigned
ticket receivables and the value of certain rotable spare parts. The $35
million line of credit replaced a previous $20 million line of credit and
will expire on September 30, 2001, or upon termination of the United
Express marketing agreement, whichever is sooner. The interest rate on
this line is LIBOR plus .75% to 1.75% depending on the Company's fixed
charge coverage ratio. At September 30, 2000 this interest rate was
7.89%. The Company pledged $3.1 million of this line of credit to
collateralize letters of credit issued on behalf of the Company by a
financial institution. As of September 30, 2000, the available amount of
credit under the line was $31.9 million. As of September 30, 2000 there
were no outstanding borrowings on the $35 million line of credit.
The company has leased a new three-story 77,000 square foot office
building for a term of ten years to use as its corporate headquarters.
It plans to occupy this facility beginning December 2000. The estimated
additional annual rental expense to the Company is approximately $2
million.
As of September 30, 2000, the Company had firm orders for 36 Canadair
Regional Jets ("CRJs") with delivery dates scheduled through 2002, in
addition to the 33 previously delivered, a conditional order for 27 CRJs,
and options for an additional 80 CRJs. The Company also had a firm order
with Fairchild Aerospace Corporation for 16 Fairchild Dornier 32 seat
328JET regional jet aircraft ("328JET") with delivery dates scheduled
through 2001, in addition to the 9 previously delivered, and a
conditional order for 15 328JET regional jet aircraft, and options for an
additional 85 328JET jet aircraft. The value of the aircraft on firm
order was approximately $830 million and the value of the aircraft in the
conditional orders (excluding the option aircraft) was approximately $650
million. The conditional portion of the CRJ and 328JET orders are
contingent on the Company receiving United's approval to operate
additional aircraft in the United Express operation. The Company at its
option may waive the condition and enter into commitments for firm
delivery positions under the Fairchild agreement.
The Company previously announced that Fairchild notified the Company that
it had made the decision to cancel the Fairchild Dornier 428JET
("428JET") program which the company ordered as part of a contingent
order for its United Express operation. The cancellation of the 428JET
program provides the Company with certain rights under the purchase
agreement.
3. NOTES RECEIVABLE
Included in notes receivable at December 31, 1999 was a note from the
Metropolitan Washington Airports Authority for $4.7 million related to
the financing of the construction costs of a regional terminal at
Washington-Dulles airport. This note was paid in full in April 2000. The
note receivable balance at December 31, 1999 also included a promissory
note from an executive officer of the Company dated as of May 24, 1999
with a balance, including accrued interest, of $1.5 million. This note
was paid in full during the first quarter of 2000.
4. INCOME TAXES
For the nine month period ended September 30, 2000, the Company had a
combined effective tax rate for state and federal taxes of 34.3%, and a
combined statutory tax rate for state and federal taxes of approximately
40%. The Company's effective tax rate for the nine month period ended
September 30, 1999 was 38.1%. The Company's 2000 effective tax rate was
positively affected in the third quarter of 2000 by the receipt of a
favorable ruling request which allowed the Company to obtain additional
tax credits to offset income tax and the realization of certain tax
benefits that were previously reserved which together reduced income tax
expense by approximately $1.4 million for the third quarter 2000.
5. INCOME PER SHARE
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
computed by dividing net income by the weighted average number of common
shares outstanding and common stock equivalents, which consist of shares
subject to stock options computed using the treasury stock method. In
addition, under the if-converted method, dilutive convertible securities
are included in the denominator while related interest expense, net of
tax, for convertible debt is added to the numerator. A reconciliation of
the numerator and denominator used in computing basic and diluted income
per share is as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
(in thousands except for per share data) 1999 2000
<S> <C> <C>
Income (basic) $8,351 $2,666
Interest expense on 7% Convertible Notes net of tax 208 -
effect
Income (diluted) $8,559 $2,666
Weighted average shares outstanding (basic) 18,655 21,072
Incremental shares related to stock options 775 860
Incremental shares related to 7% Convertible 2,202 -
Notes
Weighted average shares outstanding (diluted) 21,632 21,932
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands except for per share data) 1999 2000
<S> <C> <C>
Income (basic) $22,294 $16,975
Interest expense on 7% Convertible Notes net of tax 623 421
effect
Income (diluted) $22,917 $17,396
Weighted average shares outstanding (basic) 19,089 19,696
Incremental shares related to stock options 868 778
Incremental shares related to 7% Convertible 2,202 1,252
Notes
Weighted average shares outstanding (diluted) 22,159 21,726
</TABLE>
6. DEBT CONVERSION
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004
(the "Notes"), receiving net proceeds of approximately $55.6 million. The
Notes were convertible into shares of Common Stock, par value $0.02, of
the Company by the holders at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $9 per
share, subject to certain adjustments. On May 15, 2000, the Company
called the remaining $19.8 million of Notes outstanding for redemption at
104% of face value effective July 3, 2000. The Noteholders elected to
convert all of the Notes into common stock and approximately 2.2 million
shares were issued in exchange for the Notes during the period May 25,
2000 to June 26, 2000, resulting in an addition to paid in capital of
approximately $20 million offset by a reduction of approximately $471,000
for the unamortized debt issuance costs relating to the Notes in
connection with their conversion.
7. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The American Institute of Certified Public Accountants issued Statement
of Position 98-5 on accounting for start-up costs, including preoperating
costs related to the introduction of new fleet types by airlines. The new
accounting guidelines were effective for 1999. The Company had previously
deferred certain start-up costs related to the introduction of the CRJs
and was expensing such costs ratably over four years. In January 1999,
the Company recorded a charge for the remaining unamortized balance of
approximately $888,000; net of $598,000 of income tax, associated with
previously deferred preoperating costs.
8. AIRCRAFT EARLY RETIREMENT CHARGE
In the third quarter, the Company recorded an operating charge of
approximately $8.7 million ($5.2 million net of income tax savings) for
the present value of future lease and other costs associated with the
early retirement of seven British Aerospace 19 seat Jetstream 32
turboprop aircraft ("J32") which were removed from service during the
period. The Company is still operating 21 J32s and continues to evaluate
its plans to early retire these aircraft from its fleet by the end of
2001.
9. SUBSEQUENT EVENTS
In November 2000, the Company reached an agreement with Fairchild Dornier
to take delivery of five additional 328JETs, for a total of 30 328JETs,
for the Delta Connection operation. The Company now has remaining firm
orders for 19 328JETs, in addition to the 11 already delivered, which
includes two 328JETs delivered after September 30, 2000.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third Quarter Operating Statistics (excluding aircraft early retirement
charge)
<TABLE>
<CAPTION>
Increase
Three months ended September 30, 1999 2000 (Decrease
)
<S> <C> <C> <C>
Revenue passengers carried 879,748 997,444 13.4%
Revenue passenger miles ("RPMs") 280,168 339,563 21.2%
(000's)
Available seat miles ("ASMs") (000's) 456,899 577,798 26.5%
Passenger load factor 61.3% 58.8% (2.5 pts)
Break-even passenger load factor(1,2) 51.4% 53.1% 1.7 pts
Revenue per ASM (cents) 19.6 19.5 (0.5)%
Yield (cents) 32.0 33.2 3.8%
Cost per ASM (cents) (2) 16.7 18.1 8.4%
Average passenger fare $102.03 $113.04 10.8%
Average passenger segment (miles) 318 340 6.9%
Revenue departures (completed) 49,575 53,914 8.8%
Revenue block hours 63,339 67,053 5.9%
Aircraft utilization (block hours) 8.9 8.4 (5.6)%
Average cost per gallon of fuel (cents) 74.2 110.6 49.1%
Aircraft in service (end of period) 80 95 18.8%
</TABLE>
(1) "BREAK-EVEN PASSENGER LOAD FACTOR" REPRESENTS THE PERCENTAGE OF ASMS
WHICH MUST BE FLOWN BY REVENUE PASSENGERS FOR THE AIRLINE TO BREAK-EVEN
AT THE OPERATING INCOME LEVEL.
(2) "BREAK-EVEN PASSENGER LOAD FACTOR" AND "COST PER ASM (CENTS)" EXCLUDES
THE AIRCRAFT EARLY RETIREMENT CHARGE.
Comparison of three months ended September 30, 1999, to three months
ended September 30, 2000.
Results of Operations
Forward Looking Statements
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking statements
are subject to risks, uncertainties, assumptions and other factors that
may cause the actual results of the Company to be materially different
from those reflected in such forward-looking statements. Factors that
could cause the Company's future results to differ materially from the
expectations described here include: the response of the Company's
competitors to the Company's business strategy, market acceptance of new
regional jet service, the costs of implementing jet service, the cost of
fuel, United Airline's proposed merger with USAirways, Inc., the
resulting effects on United and USAirway's regional carriers assuming the
merger is completed, labor issues affecting United Airlines, United
Airlines operational performance, the ability of the Company to obtain
favorable financing terms for its aircraft, the ability of the aircraft
manufacturers to deliver aircraft on schedule, the ability to identify,
implement and profitably operate new business opportunities, the ability
to hire and retain employees, satisfactory resolution of amendable union
contracts, the weather, changes in and satisfaction of regulatory
requirements including requirements relating to fleet expansion, airport
and airspace congestion, general economic and industry conditions, and
the factors discussed below and in the Company's Annual Report on Form 10-
K for the year ended December 31, 1999. The Company undertakes no
obligation to update any of the forward-looking information included in
this filing, whether as a result of new information, future events,
changed expectations, or otherwise.
General
In the third quarter of 2000 the Company posted net income of
$2.7 million compared to net income of $8.4 million for the third quarter
of 1999. In the three months ended September 30, 2000, the Company
earned pretax income of $2.1 million compared to $14.0 million in the
three months ended September 30, 1999. Unit revenues, revenue per ASM
("RASM"), decreased 0.5% to 19.5 cents, while unit costs, operating cost
per ASM ("CASM"), including the aircraft early retirement charge,
increased 17.4% to 19.6 centscompared to the third quarter 1999. This
resulted in operating margin decreasing to 1.9% for the third quarter of
2000 from 16.0% for the third quarter of 1999. Total passengers
increased 13.4% in the third quarter of 2000 compared to the third
quarter of 1999 to 997,444 passengers.
Results for the third quarter of 2000 include an operating
charge of $8.7 million related to the early retirement of seven leased
British Aerospace 19 seat Jetstream 32 turboprop aircraft ("J32") and a
one time tax benefit of $1.4 million. Excluding these special items, the
company would have reported net income of $6.5 million, operating income
of $10.9 million and a cost per ASM of 18.1 cents.
Operating Revenues
The Company's operating revenues increased 26.7% to $115.3
million in the third quarter of 2000 compared to $91.0 million in the
third quarter of 1999. The increase resulted from a 26.5% increase in
ASMs and an 3.8% increase in yield (ratio of passenger revenue to revenue
passenger miles). Load factor decreased 2.5 percentage points, to 58.8%
in the third quarter of 2000 compared to 61.3% in the third quarter of
1999. During the third quarter 2000, United Airlines announced that a
combination of issues related to labor negotiations, unusually severe
weather, record numbers of passengers and a strained air traffic system
had a major impact on its operations throughout the summer. In September
United cancelled or delayed many flights, and reduced its future flight
schedules. United reached agreement on a new labor contract with its
pilot group in September and the contract was ratified by the general
pilot membership in October. While United's labor issues did not
directly affect the Company's flight operations, they did negatively
affect the Company's revenue in the third quarter as negative publicity
and United flight disruptions caused potential passengers to find
alternative airline service.
The increase in ASMs is the result of service expansion
utilizing additional 50 seat Canadair Regional Jets ("CRJs"), and the
addition of nine 32 seat Fairchild Dornier 328JET ("328JET") aircraft.
The Company was operating 33 CRJs as of September 30, 2000 as compared to
20 as of September 30, 1999. The nine 328JET aircraft were placed in
revenue service during the third quarter of 2000. The average aircraft
stage length for all aircraft in the fleet increased 8.4% to 295 miles
for the third quarter of 2000 as compared to 272 miles for the third
quarter of 1999. The average aircraft stage length of the CRJ increased
3.4% to 448 miles for the third quarter of 2000 as compared to 433 miles
for the third quarter of 1999.
The increase in other revenues reflects the reimbursement from
Delta Air Lines, Inc. of amounts incurred related to certain pilot
training for the Delta Connection operation.
Operating Expenses
Excluding the $8.7 million aircraft early retirement charge,
the Company's operating expenses increased 36.5% in the third quarter of
2000 compared to the third quarter of 1999 due primarily to: a 49.1%
increase in the average price per gallon of jet fuel coupled with a 21%
increase in the average fuel burn rate to 225 gallons per hour; a 26.5%
increase in ASMs; and a 13.4% increase in passengers carried. The
increase in ASMs, passengers and burn rate reflects the addition of
thirteen CRJs and nine 328JETs into scheduled service, net of the early
retirement of seven J32s since the end of the third quarter of 1999. A
summary of operating expenses as a percentage of operating revenues and
cost per ASM for the three months ended September 30, 1999, and 2000 is
as follows:
<TABLE>
<CAPTION>
Three Months ended September 30,
1999 2000
<S> <C> <C> <C> <C>
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 23.9% 4.8 24.6% 4.9
Aircraft fuel 9.6% 1.9 14.5% 2.9
Aircraft maintenance and 5.8% 1.2 8.1% 1.6
materials
Aircraft rentals 12.8% 2.5 13.4% 2.7
Traffic commissions and related 16.1% 3.2 13.5% 2.7
fees
Facility rents and landing fees 5.0% 1.0 4.6% 0.9
Depreciation and amortization 2.6% 0.5 2.5% 0.5
Other 8.2% 1.6 9.4% 1.9
Aircraft early retirement charge - - 7.5% 1.5
Total 84.0% 16.7 98.1% 19.6
</TABLE>
Cost per ASM increased 17.4% on a year-over-year basis to 19.6
cents during the third quarter of 2000 primarily due to a 49.1% increase
in the year-over-year price per gallon of jet fuel, and the aircraft
early retirement charge. Excluding the aircraft early retirement charge,
the cost per ASM increased 8.4% on a year-over-year basis.
Salaries and related costs per ASM increased 2% to 4.9 cents in
the third quarter of 2000 compared to 4.8 cents in the third quarter of
1999. In absolute dollars, salaries and related costs increased 30.4%
from $21.8 million in the third quarter of 1999 to $28.4 million in the
third quarter of 2000. The increase resulted primarily from additional
flight crews, customer service personnel and maintenance personnel to
support the Company's already increased and future level of operations.
The cost per ASM of aircraft fuel increased to 2.9 cents in the
third quarter of 2000 compared to 1.9 cents in the third quarter of 1999.
In absolute dollars, aircraft fuel expense increased 91.9% from $8.7
million in the third quarter of 1999 to $16.7 million in the third
quarter of 2000. The increased fuel expense resulted from the 49.1%
increase in the average cost per gallon of fuel from 74.2 cents to $1.106
including applicable taxes and into-plane fees and the 21.0% increase in
the average burn rate per hour of jet fuel consumed. The Company hedged
approximately 19.5% of its jet fuel requirements for the third quarter of
2000 as compared to hedging approximately 59.3% of its jet fuel
requirements for the third quarter of 1999. The Company reduced its fuel
expense by approximately $829,000 during the third quarter of 2000 as a
result of its fuel hedging activity as compared to reducing its fuel
expense approximately $950,000 during the third quarter of 1999. There
can be no assurance that future increases in fuel prices will not
adversely affect the Company's operating expenses. The Company has not
entered into additional hedge transactions to reduce its exposure to fuel
price increases during the remainder of 2000. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
increased to 1.6 cents in the third quarter of 2000 compared to 1.2 cents
in the third quarter of 1999. In absolute dollars, aircraft maintenance
and materials expense increased 76.1% from $5.3 million in the third
quarter of 1999 to $9.3 million in the third quarter of 2000. The
increased expense resulted from the increase in the size of the total
fleet, the continual increase in the average age of the turboprop fleets,
the gradual expiration of manufacturer's warranties on the CRJs, and the
$1.5 million one time benefit in the third quarter of 1999 related to the
introduction of a maintenance contract covering the GE engines operating
on the CRJ fleet.
The cost per ASM of aircraft rentals increased to 2.7 cents in
the third quarter of 2000 compared to 2.5 cents in the third quarter of
1999. In absolute dollars, aircraft rentals increased 32.8% from $11.6
million in the third quarter of 1999 to $15.4 million in the third
quarter of 2000, reflecting the addition of thirteen CRJ aircraft and
nine 328JET aircraft since September 30, 1999.
The cost per ASM of traffic commissions and related fees
decreased 15.6% to 2.7 cents for the second quarter of 2000 compared to
3.2 cents for the second quarter of 1999. In absolute dollars, traffic
commissions and related fees increased 6.5% from $14.6 million in the
third quarter of 1999 to $15.6 million in the third quarter of 2000. The
increase resulted from a 25.6% increase in passenger revenues and a 13.4%
increase in revenue passengers. These increases were partially offset by
a reduction in the travel agency commission rate.
The cost per ASM of facility rents and landing fees decreased
from 1.0 cents in the third quarter of 1999 to 0.9 cents in the third
quarter of 2000. In absolute dollars, facility rents and landing fees
increased 14.9% from $4.6 million in the third quarter of 1999 to $5.3
million in the third quarter of 2000.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for the third quarter of 2000 and the third quarter of
1999. In absolute dollars, depreciation and amortization increased 23.4%
from $2.4 million in the third quarter of 1999 to $2.9 million in the
third quarter of 2000 primarily as a result of additional rotable spare
parts associated with the CRJs and the purchase of one CRJ in the fourth
quarter of 1999.
The cost per ASM of other operating expenses increased to 1.9
cents in the third quarter of 2000 from 1.6 cents in the third quarter of
1999. In absolute dollars, other operating expenses increased 44.2% from
$7.5 million in the third quarter of 1999 to $10.9 million in the third
quarter of 2000. The increased costs result primarily from additional
training and related expenses associated with the 13 aircraft placed in
service during the third quarter of 2000.
In the third quarter, the Company retired seven J32 turboprop
aircraft and took an operating charge of $8.7 million or 1.5 cents per
ASM for the present value of future lease obligations and other costs.
As a result of the foregoing changes in operating expenses and
a 26.5% increase in ASMs, total cost per ASM increased to 18.1 cents in
the third quarter of 2000 (excluding the aircraft early retirement
charge) compared to 16.7 cents in the third quarter of 1999. In absolute
dollars, total operating expenses, excluding the $8.7 million operating
charge for the retirement of
seven J32 turboprop aircraft, increased 36.5% from $76.5 million in the
third quarter of 1999 to $104.4 million in the third quarter of 2000.
The Company's statutory tax rate for federal and state income
taxes was 40% for the third quarter of 2000, offset by a tax benefit due
to a favorable state income tax ruling request, and the realization of
certain tax benefits that were previously reserved resulting in a net tax
benefit for the third quarter of 2000. This compares to a statutory tax
rate of 40% and an effective tax rate of 40.3% for the third quarter of
1999.
Nine Months Operating Statistics (excluding the aircraft early retirement
charge)
<TABLE>
<CAPTION>
Increase
(Decrease)
Nine months ended September 30, 1999 2000 % Change
<S> <C> <C> <C>
Revenue passengers carried 2,390,975 2,710,010 13.3%
Revenue passenger miles ("RPMs") 767,221 898,894 17.2%
(000's)
Available seat miles ("ASMs") (000's) 1,307,999 1,570,600 20.1%
Passenger load factor 58.7% 57.2% (1.5) pts
Break-even passenger load factor(1,2) 49.7% 50.7% 1.0 pts
Revenue per ASM (cents) 19.3 20.2 4.7%
Yield (cents) 32.9 35.3 7.3%
Cost per ASM (cents)(2) 16.6 18.3 10.2%
Average passenger fare $105.64 $117.22 11.0%
Average passenger segment (miles) 321 332 3.4%
Revenue departures 138,770 145,607 4.9%
Revenue block hours 184,705 189,750 2.7%
Aircraft utilization (block hours) 9.1 8.7 (4.4%)
Average cost per gallon of fuel (cents) 69.5 106.0 52.5%
Aircraft in service (end of period) 80 95 18.8%
</TABLE>
(1) "BREAK-EVEN PASSENGER LOAD FACTOR" REPRESENTS THE PERCENTAGE OF ASMS
WHICH MUST BE FLOWN BY REVENUE PASSENGERS FOR THE AIRLINE TO BREAK-EVEN
AT THE OPERATING INCOME LEVEL.
(2) "BREAK-EVEN PASSENGER LOAD FACTOR" AND "COST PER ASM (CENTS)" EXCLUDES
THE AIRCRAFT EARLY RETIREMENT CHARGE.
Comparison of nine months ended September 30, 1999, to nine months ended
September 30, 2000.
Results of Operations
General
In the first nine months of 2000, the Company posted net income
of $17.0 million compared to income of $23.2 million, excluding the
cumulative effect of an accounting charge of $888,000 prescribed by
Statement of Position 98-5, for the first nine months of 1999. For the
nine months ended September 30, 2000, the Company earned pretax income of
$25.9 million compared to $37.5 million for the nine months ended
September 30, 1999. Unit revenues, RASM, increased 4.7% to 20.2 cents
period over period, while unit costs, CASM, including the aircraft early
retirement charge, increased 13.9% to 18.9 cents, period over period.
Operating margin decreased to 8.5% for the first nine months of 2000 from
15.1% for the first nine months of 1999.
Results for the nine months ended September 30, 2000 include an
operating charge of $8.7 million related to the early retirement of seven
leased J32 turboprop aircraft, and a one time tax benefit of $1.4
million. Excluding these special items, results for the third quarter
2000 would have been net income of $20.7 million, operating income of
$36.1 million, and CASM of 18.3 cents.
Operating Revenues
The Company's operating revenues increased 26.4% to $324.2
million in the first nine months of 2000 compared to $256.4 million in
the first nine months of 1999. The increase resulted from a 20.1%
increase in ASMs and a 7.3% increase in yield, partially offset by a
decrease in load factor of 1.5 percentage points.
The increase in ASM's is the result of service expansion
utilizing the CRJ, and the addition of nine 328JET aircraft. The Company
was operating 33 CRJs as of September 30, 2000 as compared to 20 as of
September 30, 1999. The nine 328JET aircraft were placed in revenue
service during the third quarter of 2000. The average aircraft stage
length for all aircraft in the fleet increased 4.4% over the first nine
months of 1999 to 284 miles.
The period over period percentage increase in yield is
primarily the result of generally higher business fares realized by
airlines as a result of improved yield management using United's Orion
system compared to the first nine months of 1999, and of the effects of
the near industry-wide implementation of a fuel surcharge in February
2000. Total passengers increased 13.3% in the first nine months of 2000
compared to the first nine months of 1999.
Other revenues increased 69.4% reflecting the reimbursement
from Delta Air Lines, Inc. of amounts incurred related to pilot training
for the Delta Connection operation.
Operating Expenses
Excluding the $8.7 million operating charge, the Company's
operating expenses increased 32.3% in the first nine months of 2000
compared to the first nine months of 1999 due primarily to: a 52.5%
increase in the average price per gallon of jet fuel coupled with a 18.4%
increase in the average fuel burn rate to 215 gallons per hour; a 20.1%
increase in ASMs; a 13.3% increase in passengers carried; and expenses
for the certification and start-up of the ACJet operation. The increase
in ASMs, passengers and burn rate reflects the addition of thirteen CRJs
and nine 328JETs into scheduled service, net of the early retirement of
seven J32s since September 30, 1999. A summary of operating expenses as
a percentage of operating revenues and cost per ASM for the nine months
ended September 30, 1999, and 2000 is as follows:
<TABLE>
<CAPTION>
Nine Months ended September 30,
1999 2000
<S> <C> <C> <C> <C>
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 24.2% 4.7 24.3% 5.0
Aircraft fuel 9.1% 1.8 13.4% 2.8
Aircraft maintenance and 6.9% 1.3 8.1% 1.7
materials
Aircraft rentals 13.0% 2.6 13.0% 2.7
Traffic commissions and related 15.8% 3.1 13.7% 2.8
fees
Facility rents and landing fees 5.1% 1.0 4.4% 0.9
Depreciation and amortization 2.5% 0.5 2.5% 0.5
Other 8.3% 1.6 9.4% 1.9
Aircraft early retirement charge - - 2.7% .6
Total 84.9% 16.6 91.5% 18.9
</TABLE>
Cost per ASM increased 13.9% to 18.9 cents during the first
nine months of 2000 compared to 16.6 cents during the first nine months
of 1999 primarily due to a 52.5% increase in the year over year price per
gallon of jet fuel, the expenses associated with the certification and
start-up of ACJet, and the aircraft early retirement charge. Excluding
the aircraft early retirement charge, costs per ASM increased 10.2% to
18.3 cents during the first nine months of 2000 compared to 16.6 cents
during the first nine months of 1999.
Salaries and related costs per ASM increased 6.4% to 5.0 cents
in the first nine months of 2000 compared to the first nine months of
1999. In absolute dollars, salaries and related costs increased 27% from
$62.1 million in the first nine months of 1999 to $78.8 million in the
first nine months of 2000. The increase resulted primarily from
additional flight crews, customer service personnel and maintenance
personnel to support the Company's already increased and future level of
operations.
The cost per ASM of aircraft fuel increased 55.6% to 2.8 cents
for the first nine months of 2000 as compared to 1.8 cents for the first
nine months of 1999. In absolute dollars, aircraft fuel expense
increased 85.6% from $23.3 million in the first nine months of 1999 to
$43.3 million in the first nine months of 2000. The increased fuel
expense resulted from the 52.5% increase in the average cost per gallon
of fuel from 69.5 cents to $1.06 including applicable taxes and into-
plane fees, and the 18.4% increase in the average burn rate per hour of
jet fuel. The Company hedged approximately 11.3% of its jet fuel
requirements for the first nine months of 2000 as compared to hedging
approximately 70.7% of its jet fuel requirements for the first nine
months of 1999. The Company reduced its fuel expense by approximately
$1.2 million during the first nine months of 2000 as a result of its fuel
hedging activity as compared a reduction of approximately $355,000 during
the first nine months of 1999. There can be no assurance that future
increases in fuel prices will not adversely affect the Company's
operating expenses. The Company has not entered into additional hedge
transactions to reduce its exposure to fuel price increases during the
remainder of 2000. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
increased 30.8% to 1.7 cents in the first nine months of 2000 compared to
the first nine months of 1999. In absolute dollars, aircraft maintenance
and materials expense increased 49.1% from $17.6 million in the first
nine months of 1999 to $26.3 million in the first nine months of 2000.
The increased expense resulted from the increase in the size of the total
fleet, the continual increase in the average age of the turboprop fleets,
the gradual expiration of manufacturer's warranties on the CRJs, and the
$1.5 million one time benefit in the third quarter of 1999 related to the
introduction of a maintenance contract covering the GE engines operating
on the CRJ fleet.
The cost per ASM of aircraft rentals increased to 2.7 cents for
the first nine months of 2000 compared to 2.6 cents for the first nine
months of 1999. In absolute dollars, aircraft rental expense increased
26.6% to $42.2 million. The increase is the result of adding thirteen
CRJs since September 30, 1999 and nine 328JET aircraft during the first
nine months of 2000. The 328JET aircraft are part of the Company's Delta
Connection operation, which were placed in revenue service on August 1,
2000.
The cost per ASM of traffic commissions and related fees
decreased to 2.8 cents in the first nine months of 2000 compared to 3.1
cents in the first nine months of 1999. In absolute dollars, traffic
commissions and related fees increased 10.1%, from $40.5 million in the
first nine months of 1999 to $44.6 million in the first nine months of
2000. The increase resulted from a 25.8% increase in passenger revenues
and a 13.3% increase in passengers.
The cost per ASM of facility rents and landing fees decreased
10%, from 1.0 cent in the first nine months of 1999 to 0.9 cents for the
first nine months of 2000. In absolute dollars, facility rents and
landing fees increased 9.1% from $13.2 million in the first nine months
of 1999 to $14.4 million in the first nine months of 2000. The increased
costs result primarily from the 4.9% increase in the number of departures
and to the heavier landing weight of the CRJ aircraft.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents. In absolute dollars, depreciation and amortization
increased 25.8% from $6.5 million in the first nine months of 1999 to
$8.1 million in the first nine months of 2000 primarily as a result of
additional rotable spare parts and engines associated with the CRJs and
the full year to date effect from the purchase of two CRJs in 1999.
The cost per ASM of other operating expenses increased to 1.9
cents in the first nine months of 2000 from 1.6 cents in the first nine
months of 1999. In absolute dollars, other operating expenses increased
43.3% from $21.2 million in the first nine months of 1999 to $30.4
million in the first nine months of 2000. The increased costs result
primarily from the 13.3% increase in revenue passengers which resulted in
higher passenger handling costs and expenses for ACJet pre-operating
activities including regulatory compliance, employee recruitment,
training, establishment of operating infrastructure, establishment of
third party contractual arrangements, and aircraft proving runs.
In the third quarter, the Company retired seven J32 turboprop
aircraft and took an operating charge of $8.7 million or 0.6 cents per
ASM for the present value of future lease obligations and other costs.
.
As a result of the foregoing changes in operating expenses,
and a 20.1% increase in ASMs, total cost per ASM increased to 18.3 cents
in the first nine months of 2000 (excluding the aircraft early retirement
charge) compared to 16.6 cents in the first nine months of 1999. In
absolute dollars, total operating expenses, excluding the $8.7 million
operating charge for the retirement of seven J32 turboprop aircraft,
increased 32.3% from $217.7 million in the first nine months of 1999 to
$288.1 million in the first nine months of 2000.
The Company's combined effective tax rate for state and federal
taxes during the first nine months of 2000 was approximately 34.3% as
compared to 38.1% for the first nine months of 1999. This decrease is due
to a favorable state income tax ruling request and the realization of
certain tax benefits that were previously reserved.
In January 1999, the Company recorded a charge for the
remaining unamortized balance of approximately $888,000; net of income
tax, associated with previously deferred preoperating costs.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth in the MD&A section
under Forward Looking Statements.
As of November 10, 2000, the Company was operating a fleet of
98 aircraft comprised of 34 CRJs, 11 328JET's, 32 British Aerospace
Jetstream 41's ("J41s") and 21 British Aerospace Jetstream J32's
("J32s"). During the third quarter 2000, the Company early retired seven
J32 aircraft and took a charge of approximately $5.2 million, net of
income tax savings, related to the remaining lease and other retirement
costs for these aircraft. The Company continues to evaluate the
remaining 21 aircraft in the J32 fleet, and anticipates removing them
from service over the next year. The estimated cost to eliminate the
remaining J32 aircraft is between $10 and $13 million, net of income tax
savings. The timing of any additional charge is dependent on the
finalization of the Company's plans for the removal from service of these
aircraft.
As of November 10, 2000 the Company had firm orders for 34 CRJs
in addition to the 35 previously delivered, conditional orders for 27
CRJs, and options for an additional 80 CRJs. The Company also had firm
orders for 19 328JETs in addition to the 11 previously delivered,
conditional orders for 15 328JETs, and options for an additional 85
328JETs. The continued delivery of these additional jet aircraft into the
United Express and Delta Connection programs will expand the Company's
business into new markets and increase capacity in existing markets. In
general, service to new markets and increased capacity to existing
markets will result in increased operating expense that may not be
immediately offset by increases in operating revenues.
The Company previously announced that Fairchild notified the
Company that it had made the decision to cancel the Fairchild Dornier
428JET ("428JET") program which the company ordered as part of a
contingent order for its United Express operation. The cancellation of
the 428JET program provides the Company with certain rights under the
purchase agreement.
During the third quarter 2000, United Airlines announced that a
combination of issues related to labor negotiations, unusually severe
weather, record numbers of passengers and a strained air traffic system
had a major impact on its operations throughout the summer. In September
United cancelled or delayed many flights, and reduced its future flight
schedules. United reached agreement on a new labor contract with its
pilot group in September and the contract was ratified by the general
pilot membership in October. While United's labor issues did not
directly affect the Company's flight operations, they did negatively
affect the Company's revenue in the third quarter as negative publicity
and United flight disruptions caused potential passengers to find
alternative airline service. Following United's agreement with its pilot
group, the Company has seen a return of advanced bookings to levels
experienced prior to United's summer operational problems. United is
presently engaged in separate contract talks with its mechanics and with
its flight attendants. These talks have received recent media attention
which may affect the traveling public's perception of United and its
operations. The Company's labor force is not covered by agreements
affecting United's work force. While the Company has not identified any
effect from this publicity on its operations or passenger trends as of
the date of this report, it is unable to accurately predict the impact,
if any, that United's labor issues may have on its fourth quarter and
2001 results of operations.
A number of competitive and regulatory developments are
affecting the markets and environment in which the Company competes. In
May 2000, United Airlines and US Airways announced their intentions to
merge. Subsequently other major airlines have indicated that they are
engaging in merger discussions. It is not clear whether the United-
USAirways merger will be consummated, or whether other major airlines
will also merge. If the United-USAirways merger is completed, the
implications for the regional airlines with code share agreements with
these two major airlines is also uncertain. The Company believes that
its agreements with United Airlines for its United Express franchise and
with Delta Airlines for its Delta Connection franchise position it
favorably for continued success, even if industry consolidation does
occur.
Four of the nation's busiest airports are subject to FAA
regulations limiting the number of hourly take off and landings. The
Company conducts flight operations at three of the four airports--New
York's LaGuardia and JF Kennedy (JFK) airports and Chicago's O'Hare
airport. The right to conduct a take off or landing during a certain
time of the day is called a slot. Legislation granting the Secretary of
Transportation authority to grant exemptions from these FAA rules was
recently enacted in May 2000. As a result, the DOT has granted
exemptions from the FAA rules to all carriers that qualify under the
statute for an exemption. Essentially, a carrier is entitled to
exemption slots to serve LaGuardia, JFK and O'Hare if the carrier
operates with small equipment (less than 71 seats) to defined small
airports if the carrier did not previously provide such service (`small
market exemptions"). Also carriers that had not previously provided more
than 10 round trip flights per day to any of the three airports can do so
by operating up to 10 flights per day at each airport to communities of
any size. In addition, the legislation provides that all FAA slot
controls will be eliminated at O'Hare after July 1, 2002 and after
January 1, 2007 for LaGuardia and JFK. The new law affords the Company
opportunities to increase service at slot controlled airports. However,
it will also increase competitive pressure at these airports, the effect
of which cannot be determined at this time. The Company continues to
evaluate additional growth opportunities made available by this
legislation. The Company has utilized this legislation to add service
from Chicago O'Hare to Columbia, SC, Greenville/Spartanburg, SC, and
Tulsa, OK, and has increased flying in other O'Hare markets. The Company
also operates as a Delta Connection carrier at LaGuardia, and has relied
on small market exemptions to gain access to the airport. Recently the
Port Authority of New York New Jersey, operator of LaGuardia airport and
the FAA announced a plan to reduce the number of flights that will be
permitted to be added at LaGuardia to no more than 75 round trip flights
per day. This plan, if implemented in its current form, would require
carriers to reduce the level of service they are currently providing to
LaGuardia using small market exemptions. As a result Delta may direct
the Company's Delta Connection operation to reduce service to LaGuardia
and commence service in other markets.
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"). The ALPA collective bargaining agreement became
amendable in February 2000. Negotiations between the parties are
ongoing. The Company will continue to operate under the terms of the
existing agreement until negotiations are completed and a new agreement
is ratified.
Fuel price increases in the second half of 1999 and to date in
2000 have had a material impact on cost of operations throughout the
airline industry. In February 2000, most airlines including the Company
implemented a fuel surcharge of $10 each way on most domestic non-sale
airfares. On September 8, 2000 the fuel surcharge was increased to $20
each way on most domestic non-sale airfares. The Company's results will
continue to be affected by fuel price volatility. The Company has not
entered into any commodity swap transactions to hedge fuel purchases for
the remainder of this year or 2001. Based on the fact that Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for future
fuel requirements associated with the Delta Connection program, the
Company's exposure to fuel price increases is currently limited on
approximately 13% of its anticipated jet fuel requirements for the fourth
quarter 2000, and approximately 30% for fiscal year 2001. The company
continues to monitor fuel prices, and may enter into additional hedge
transactions for future fuel requirements.
Liquidity and Capital Resources
As of September 30, 2000, the Company had cash, cash
equivalents and short-term investments of $65.0 million and working
capital of $67.3 million compared to $43.3 million and $54.0 million
respectively as of September 30, 1999. During the first nine months of
2000, cash and cash equivalents increased by $7.6 million, reflecting net
cash provided by operating activities of $36.5 million, net cash used in
investing activities of $24.8 million, and net cash used in financing
activities of $4.1 million. The net cash provided by operating activities
is primarily the result of net income for the period of $17.0 million, an
increase of $10.8 million in accounts payable and $20.8 million in
accrued liabilities resulting from the increased operation and the
accrual of future lease obligations related to the early retirement of
seven J32 aircraft, and non cash depreciation and amortization expenses
of $8.5 million, offset by an $8.5 million increase in prepaid expenses
related to aircraft rent and a $6.9 million increase in receivables due
to the increase in passenger revenues. In order to minimize total
aircraft rental expense over the entire life of the related aircraft
leveraged lease transactions, the Company has uneven semiannual lease
payment dates of January 1 and July 1 for its CRJ aircraft. Currently,
approximately 50% of the Company's annual lease payments are due in
January and 25.4% in July. The net cash used in investing activities
consisted primarily of the purchase of property and equipment including
aircraft spare parts, and aircraft deposits related to the aircraft on
order. Financing activities consisted primarily of proceeds from the
exercise of stock options, offset by the repurchase of the Company's
stock under the stock repurchase program and payments on long term debt
and capital lease obligations.
Other Financing
In February 1999, the Company entered into an asset-based lending
agreement with a financial institution that provides the Company with a
line of credit for up to $35 million depending on the amount of assigned
ticket receivables and the value of certain rotable spare parts. The $35
million line of credit replaced a previous $20 million line of credit and
was originally set to expire on September 30, 2000. On July 1, 2000 the
line of credit was automatically renewed for one additional year, under
the existing terms, to now expire on September 30, 2001. The interest
rate on this line is LIBOR plus from .75% to 1.75% depending on the
Company's fixed charge coverage ratio. The Company has pledged $3.1
million of the line of credit to collateralize letters of credit issued
on behalf of the Company by a financial institution. As of September 30,
2000, the available amount of credit under the $35 million line was $31.9
million.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004
(the "Notes"), receiving net proceeds of approximately $55.6 million. The
Notes were convertible into shares of Common Stock, par value $0.02, of
the Company by the holders at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $9 per
share, subject to certain adjustments. On May 15, 2000, the Company
called the remaining $19.8 million of Notes outstanding for redemption at
104% of face value effective July 3, 2000. The Noteholders elected to
convert all of the Notes into common stock and approximately 2.2 million
shares were issued in exchange for the Notes during the period May 25,
2000 to June 26, 2000.
Other Commitments
On July 6, 2000 the Company entered into six interest rate
forward transactions maturing between August 2000 and January 2001 as an
interest rate hedge designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent financing relating to
the delivery of six aircraft. These transactions settle on the first day
of the month in which the aircraft will be delivered and have an
aggregate notional amount of $51 million. Effective gains or losses
realized when permanent financing is obtained will be amortized over the
term of the related aircraft lease or will be depreciated as part of the
aircraft acquisition cost for owned aircraft. Through November 1, 2000,
the Company had settled five of the six bond forward transactions by
paying the counterparty approximately $700,000. Had the remaining open
interest rate forward transaction settled on November 1, 2000, the
Company would have paid approximately $240,000.
The company has leased a new three-story 77,000 square foot
office building for a term of ten years to use as its corporate
headquarters. It plans to occupy this facility beginning December 2000.
The estimated additional annual rental expense to the Company is
approximately $2 million.
Aircraft
As of November 10, 2000, the Company had a total of 35 CRJs on firm
order, 27 CRJs on conditional order, and held options for 80 additional
CRJs. The Company also had on firm order with Fairchild Aerospace
Corporation, 19 328JETs, a conditional order for 15 328JETs, and held
options for 85 328JETs. The Company is obligated to purchase and finance
(including the possible use of leveraged leases) the 54 firm ordered
aircraft at an approximate capital cost of $840 million. The Company
expects to take delivery of three CRJs and five 328JET's during the
fourth quarter of 2000, and anticipates leasing these aircraft on terms
similar to previously delivered aircraft. Scheduled deliveries for future
years excluding conditional and option aircraft are 18 CRJs and 14
328JET's in 2001 and 13 CRJs in 2002.
The conditional orders for 27 CRJ aircraft and 15 328JETs are
conditioned on the Company receiving United's approval to operate
additional jets as United Express. The value of the aircraft in the
conditional order (excluding the option aircraft) is approximately $650
million. The Company at its option may waive the condition and enter
into commitments for firm delivery positions.
Capital Equipment and Debt Service
Capital expenditures for the first nine months of 2000 were
$15.1 million compared to $26.2 million for the same period in 1999.
Capital expenditures for 2000 include continued expenses for the
Company's replacement project of its computer software systems, rotable
spare parts for the CRJ, 328JET, and J41 aircraft, ground equipment, and
computer and office equipment. Capital expenditures for the first nine
months of 1999 included the purchase of a CRJ aircraft. For the remainder
of 2000, the Company anticipates spending approximately seven million
dollars for rotable spare parts related to the CRJ, 328JET, and J41
aircraft, ground service equipment, facilities, leasehold improvements,
telecommunications systems, computers and software.
Debt service including capital leases, for the nine months
ended September 30, 2000 was $4.7 million compared to $4.4 million in the
same period of 1999.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the asset-based credit
facility, and other available equipment financing, will be sufficient to
meet its working capital needs, capital expenditures, and debt service
requirements for the next twelve months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not designated
as hedging instruments, or for the ineffective portion of a hedging
instrument, the change in fair value will affect current period earnings.
In July 1999, the FASB issued Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133" which defers the effective date of Statement No. 133 by one
year. In June 2000, the FASB issued Statement No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities an
amendment to FASB Statement No. 133", which provides additional guidance
and amendments to Statement No. 133. Therefore, the Company will adopt
Statement No. 133 during its first quarter of fiscal 2001 and is
currently assessing the impact this statement will have on interest rate
swaps and any future hedging contracts that may be entered into by the
Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in jet
fuel pricing and in interest rates.
For 2000, the Company hedged a portion of its exposure to jet
fuel price fluctuations by entering into commodity swap contracts for
approximately 8% of its estimated 2000 fuel requirements for the United
Express program. The swap contracts, which were all settled by September
30, 2000, were designed to provide protection against sharp increases in
the price of jet fuel. In addition, Delta Air Lines, Inc. bears the
economic risk of fuel price fluctuations for the fuel requirements of the
Company's Delta Connection program. Based on the Company's projected fuel
consumption for the year 2000, a one-cent increase in the average annual
price per gallon of jet fuel would increase the Company's annual aircraft
fuel expense by approximately $606,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. The Company has periodically entered into put and call contracts
and bond forward transactions designed to limit the Company's exposure to
interest rate changes until permanent financing is secured upon delivery
of the CRJs.
.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED September 30, 2000
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation incidental to its
business, none of which the Company believes is likely to have a material
effect on the Company's financial position.
ITEM 2. Changes in Securities.
> None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
November 13, 2000 By: /S/ Richard J. Surratt
Richard J. Surratt
Senior Vice President and Chief
Financial Officer
November 13, 2000 By: /S/ Kerry B. Skeen
Kerry B. Skeen
Chairman and Chief Executive
Officer
