FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 000-23447
MIDWAY AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3915637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WEST MORGAN STREET, SUITE 1200
DURHAM, NORTH CAROLINA 27701
(Address of principal executive offices)
(Zip Code)
919-956-4800
(Registrant's telephone number, including area code)
Indicate by checkmark 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 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 June 30, 1998 there were 8,564,295 shares of Common Stock, $.01 par value,
of the registrant outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
Midway Airlines Corporation
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(unaudited) 1997
------------ --------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $31,812 $54,509
Restricted cash 9,820 2,811
Short-term investments 13,090 751
Accounts receivable:
Credit cards 1,403 1,937
Travel agencies 12,589 5,443
Other 1,176 674
Inventories 3,212 2,109
Prepaids and other 5,406 6,723
------------ --------------
Total current assets 78,508 74,957
Equipment and property:
Flight 97,369 45,214
Other 9,828 5,968
Less accumulated depreciation and amortization 6,970 4,608
------------ --------------
Total equipment and property, net 100,227 46,574
Other noncurrent assets:
Equipment and aircraft purchase deposits 13,914 17,133
Aircraft lease deposits and other 5,014 3,448
------------ --------------
Total other noncurrent assets 18,928 20,581
Total assets $197,663 $142,112
============ ==============
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $6,729 $6,777
Accrued expenses 6,193 4,324
Accrued excise taxes 1,613 1,421
Accrued income taxes 3,917 3,698
Advance ticket sales 27,666 21,859
Other current liabilities 4,429 5,709
Current maturities of long-term debt and capital leases obligations 7,763 9,016
------------ --------------
Total current liabilities 58,310 52,804
Noncurrent liabilities:
Long-term debt & capital lease obligations 80,117 39,187
Other 247 308
------------ --------------
Total noncurrent liabilities 80,364 39,495
------------ --------------
Total liabilities 138,674 92,299
Stockholders' equity:
Preferred Stock - -
Common Stock 85 85
Additional paid-in-capital 45,387 45,364
Retained earnings ($49.8 million of accumulated deficit
eliminated in the quasi-reorganization as of June 30, 1997) 13,517 4,364
------------ --------------
Total stockholders' equity 58,989 49,813
Total liabilities and stockholders' equity $197,663 $142,112
============ ==============
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Operations
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-------------------------------------
(Unaudited)
-------------- --------------
1998 1997
-------------- --------------
<S> <C>
Operating revenues:
Passenger $54,204 $45,656
Cargo 555 483
Contract and other 949 1,099
-------------- --------------
Total revenues 55,708 47,238
Operating expenses:
Wages, salaries and related costs 8,143 6,178
Aircraft fuel 4,927 5,149
Aircraft and engine rentals 7,360 7,363
Commissions 4,179 3,376
Maintenance, materials and repairs 4,020 4,022
Other rentals and landing fees 2,335 2,323
Depreciation and amortization 1,493 436
Other 13,811 11,948
Special recapitalization charges - -
-------------- --------------
Total operating expenses 46,268 40,795
-------------- --------------
Operating income 9,440 6,443
Other income (expense):
Interest income 945 506
Interest expense (1,555) (486)
Miscellaneous - (1)
-------------- --------------
Total other income (expense) (610) 19
-------------- --------------
Income before income taxes and extraordinary gain 8,830 6,462
Income tax expense 3,532 2,546
-------------- --------------
Income before extraordinary gain 5,298 3,916
Extraordinary gain - -
-------------- --------------
============== ==============
Net income $5,298 $3,916
============== ==============
Earnings Per Share ($)
Basic earnings per share (before
extraordinary gain): $0.62 $0.67
Basic earnings per share $0.62 $0.67
Diluted earnings per share (before
extraordinary gain) $0.54 $0.63
Diluted earnings per share $0.54 $0.63
Weighted average shares used in computing earnings per share
Basic 8,562,757 5,859,375
Diluted 9,791,826 6,249,858
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Operations
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
----------------------------
(Unaudited)
------------- ----------
1998 1997
---------- ----------
<S> <C>
Operating revenues:
Passenger $103,278 $91,689
Cargo 965 1,000
Contract and other 1,986 2,402
---------- ----------
Total revenues 106,229 95,091
Operating expenses:
Wages, salaries and related costs 15,631 12,389
Aircraft fuel 10,011 11,238
Aircraft and engine rentals 14,733 15,515
Commissions 8,163 7,121
Maintenance, materials and repairs 8,128 8,569
Other rentals and landing fees 4,780 5,013
Depreciation and amortization 2,534 767
Other 26,243 24,155
Special recapitalization charges - 1,225
---------- ----------
Total operating expenses 90,223 85,992
---------- ----------
Operating income 16,006 9,099
Other income (expense):
Interest income 1,922 802
Interest expense (2,673) (777)
Miscellaneous - -
---------- ----------
Total other income (expense) (751) 25
---------- ----------
Income before income taxes and extraordinary gain 15,255 9,124
Income tax expense 6,102 3,866
---------- ----------
Income before extraordinary gain 9,153 5,258
Extraordinary gain 15,272
---------- ----------
Net income $9,153 $20,530
========== ==========
Earnings Per Share ($)
Basic earnings per share (before
extraordinary gain): $1.07 $ 0.90
Basic earnings per share $1.07 $ 3.50
Diluted earnings per share (before
extraordinary gain) $0.93 $ 0.84
Diluted earnings per share $0.93 $ 3.28
Weighted average shares used in computing earnings per share
Basic 8,560,737 5,859,375
Diluted 9,797,367 6,249,858
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Cash Flows
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
(Unaudited)
1998 1997 1997
-------------------------- -------------
<S> <C>
Operating Activities
Net income $9,153 $20,530 $24,894
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 2,534 767 1,999
Capitalized interest on purchase deposits (409) - -
Special recapitalization charge - 1,225 750
Extraordinary gain - (15,272) (15,969)
Changes in operating assets and liabilities
Restricted cash (7,009) (1,582) (811)
Accounts receivable (7,114) (5,940) (1,760)
Inventories (1,103) (34) (1,714)
Prepaids & other 1,285 (531) (226)
Aircraft lease deposits & other (838) (209) (462)
Accounts payable & accrued expenses 1,821 (466) 897
Accrued excise taxes and income taxes 411 (27) (1,505)
Advance ticket sales 5,807 5,274 2,708
Other current liabilities (1,275) (2,567) 243
Other noncurrent liabilities (61) (61) (279)
========================== =============
Net cash provided by operating activities 3,202 1,107 8,765
========================== =============
Investing activities
Purchase of short-term investments (13,090) (63,325) (78,278)
Sale of short-term investments 751 41,234 77,527
Purchase of equipment and property (1,693) (942) (7,335)
Aircraft and equipment purchase deposits 2,312 - (17,133)
========================== =============
Net cash used in investing activities (11,720) (23,033) (25,219)
========================== =============
Financing activities
Issuance of common & preferred stock 23 22,000 60,257
Repayment of debt (14,382) (962) (1,481)
Accreted interest on long term debt 328 681 1,518
Principal payments on capital lease (148) (70) (136)
========================== =============
Net cash provided by financing activities (14,179) 21,649 60,158
========================== =============
Increase (decrease) in cash and cash equivalents (22,697) (277) 43,704
Cash and cash equivalents , beginning of period 54,509 10,805 10,805
-------------------------- -------------
Cash and cash equivalents , end of period $31,812 $10,528 $54,509
========================== =============
Supplemental cash flow information
Interest paid $957 $96 $125
========================== =============
Income taxes paid $5,882 $408 $2,600
========================== =============
</TABLE>
<PAGE>
MIDWAY AIRLINES CORPORATION
Notes to Financial Statements
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 is unaudited.)
1. BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by Midway
Airlines Corporation (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. The information furnished in the
financial statements includes normal recurring adjustments and reflects all
adjustments which, in the opinion of management, are necessary for a fair
presentation of such financial statements. Results of operations for the six
month periods presented are not necessarily indicative of the results to be
expected for the year ending December 31, 1998. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commissions, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements, and the
notes thereto, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents include investments with an original maturity of three
months or less or which may be redeemed without penalty at any time. These
investments are stated at cost, which approximates market value. As of June 30,
1998 and December 31, 1997, approximately $9.8 and $2.8 million, respectively,
of cash and cash equivalents were restricted as to withdrawal; these funds serve
as collateral to support letters of credit and a credit card holdback; and are
classified as restricted cash in the balance sheets.
3. HEDGED LOAN OBLIGATIONS
During December 1997, the Company entered into four Treasury Lock transactions
("Treasury Locks") with Bombardier, Inc., based on a 10 year US Treasury
Benchmark (the "Treasury rate"), to substantially eliminate the Company's
exposure to interest rate fluctuations on long-term financing for the purchase
of five Canadair Regional Jet ("CRJ") aircraft to be financed during the first
six months of 1998. The Treasury Lock arrangements contemplate that the Company
will receive or pay upon dates certain (the intended financing date for each CRJ
aircraft) an amount which is equal to the present value of the difference
between the interest cost of a financing entered into at the time of entry into
the Treasury Lock arrangements and the interest cost of the same financing
entered into at a later date. The effect of such arrangements is that the
Company essentially agreed to borrow at fixed rates over periods extending to
16.5 years. The net cash amounts paid or received on the agreements are recorded
and recognized as an adjustment of interest expense over the life of the related
loans. The amount paid on the first four aircraft as of June 30, 1998, totaled
approximately $907,000.
<PAGE>
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
JUNE 30 DECEMBER 31
1998 1997
------------------------
Maintenance $843 $1,992
Landing fees 492 561
Other 3,094 3,156
========================
$4,429 $5,709
========================
5. LONG-TERM DEBT
In February 1998, the interim loans which financed the purchase of the first CRJ
aircraft in December 1997 were refinanced. The third, fourth, and fifth aircraft
were received in March, April, and June 1998, respectively with permanent
financing completed in March, April, and July 1998, respectively. All five
aircraft bear an effective interest rate of 7.2% for 16.5 years. The Company's
interest in the five CRJ aircraft stands as collateral for its obligations under
all of the notes evidencing these loans as well as any other loans provided by
the initial lender.
The aggregate principal maturities at June 30, 1998 are as follows (in
thousands):
Year Ended June 30,
- --------------------
1999 $ 7,622
2000 4,795
2001 5,196
2002 5,646
2003 6,112
Thereafter 58,200
---------
Principal Balance at June 30, 1998 $ 87,571
==========
6. LEASES
In April 1998, the Company acquired a spare engine from Rolls Royce for the
F-100 fleet. The engine is being leased over seven years at a rate tied to the
LIBOR which adjusts every six months. The initial six month period has an
interest rate of 5.8%. At the end of this lease, the Company becomes the owner
of this spare engine.
7. COMMITMENTS AND CONTINGENCIES
The Company has executed an aircraft purchase agreement with Bombardier, Inc.
for the acquisition of up to 30 newly manufactured CRJ-200ER Canadair Regional
Jet ("CRJs") aircraft. As of June 30, 1998, the Company has taken delivery of
five CRJ aircraft, with an additional eight aircraft scheduled to be delivered
through June 1999. The Company has options to acquire up to 17 additional CRJ
aircraft over a two year period with delivery dates beginning in 1999.
The Company expects to arrange a combination of third party debt and leveraged
lease financing for the eight additional CRJs now on order. For each aircraft
that is purchased (as opposed to leased), the Company anticipates an initial
cash outlay of approximately $4 million. Standby lease financing, on terms
reasonably acceptable to management, has been arranged for the CRJs to be
delivered in 1998 and 1999.
Pursuant to an agreement with GE Aircraft Engines, a division of General
Electric International, Inc., the Company has agreed to purchase two CF34-3B1
spare engines to support the operation of the initial ten CRJ aircraft. This
<PAGE>
agreement also provides for the purchase of an additional spare engine for each
five CRJ aircraft Midway acquires. The Company expects to arrange financing for
the two spare CRJ engines the Company has agreed to acquire.
The Company has agreed to purchase a spare engine for its F-100 fleet. The
engine will be delivered in August 1998 and financed with a bank loan.
In September 1997, the Civil Aviation Security Division of the Federal Aviation
Administration ("FAA") conducted an investigation of the Company's compliance
with certain regulations requiring the Company to verify the accuracy of
background information provided by its employees who have access to secure
airport areas. The Company revised its background check procedures during the
course of the FAA's investigation and then obtained and verified the necessary
background information of those employees who had been identified by the FAA as
having insufficient background check documentation. This investigation will
likely result in the finding of violations of these regulations. While the
Company is unable to determine whether the FAA will pursue an assessment as a
result of the findings of this investigation,if such an assessment were sought,
the Company does not believe that such an assessment would have a material
effect on the Company.
The Company has been named as a defendant in certain pending litigation. The
outcome of these matters cannot be predicted, but it is management's belief that
whatever the outcome, the results will not, either individually or in the
aggregate have a material adverse effect on the Company's financial position,
results of operations or cash flows.
In March 1995, Midway reached an agreement with Airbus for the acquisition of
four firm Airbus A320 and four option A319 or A320 aircraft with deliveries
beginning in 1998. Pursuant to a renegotiation of the agreement in 1997, the
delivery dates of these aircraft have been moved to 2005 and later. The Company
is required to make deposits on the four firm aircraft in amounts to be
determined beginning in 2003. The Company is considering several alternatives
with respect to the A320s, including restructuring its agreement with Airbus or
selling its position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
For the three months ended June 30,
----------------------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
Available seat miles (000s) 387,752 343,933
Revenue passenger miles (000s) 261,474 219,355
Load factor 67.4% 63.8%
Break-even load factor 56.4% 54.8%
Departures 8,808 6,640
Block Hours 13,952 10,593
Total revenue per available seat mile (cents) 14.37 13.73
Yield (cents) 20.73 20.81
Average fare $105 $110
Cost per available seat mile (cents) 12.09 11.86
Onboard passengers 515,761 415,559
Average seats per departure 89 101
Average stage length (miles) 481 528
Aircraft (average during period) 17.2 13.0
Aircraft utilization (hours per day) 8.9 9.0
Fuel price per gallon (cents) 57.5 70.7
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Capacity. In the three months ended June 30, 1998, the company produced 388
million ASMs, an increase of 44 million or 12.7% over the three months ended
June 30, 1997. The increase in ASM production is attributable to 32.7% more
departures (to 8,808), offset by an 8.9% shorter average stage length (to 481
miles) and 11.9% fewer seats per departure (to 89 seats). These changes resulted
from the addition over the past seven months of five 50 seat CRJs which added
frequency to shorter routes and enabled the addition of new short haul routes.
Operating Revenues. The Company's operating revenues increased 17.9% to $55.7
million for the three months ended June 30, 1998 from $47.2 million for the
three months ended June 30, 1997. The increase is attributable to a 19.2%
increase in revenue passenger miles to 261 million offset slightly by a 0.4%
decrease in passenger yield (revenue per RPM) to 20.73 cents. Revenue per ASM
increased 4.7% to 14.37 cents per ASM due to the 3.6 percentage point increase
in load factor to 67.4% offset by the 0.4% decrease in yield.
Operating Expenses. The Company's operating expenses increased 13.4% to $46.3
million for the three months ended June 30, 1998 from $40.8 million for the
three months ended June 30, 1997. Total expenses increased primarily due to the
increases in number of employees, wages, commissions, profit sharing, and
depreciation expenses partially offset by reduction in fuel prices. Total
operating expense per ASM increased 0.5% to 11.93 cents from 11.87 cents. This
increase is attributable to the 13.4% increase in costs noted above offset by
the 12.7% increase in ASMs.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- --------------------------
1998 1997 (1)
------------------------- --------------------------
PERCENT PERCENT
OF COST OF COST
TOTAL PER ASM TOTAL PER ASM
EXPENSES (CENTS) EXPENSES (CENTS)
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Wages, salaries and related costs 17.4% 2.10 15.1% 1.80
Aircraft fuel 10.5% 1.27 12.6% 1.50
Aircraft and engine rentals 15.7% 1.90 18.0% 2.14
Commissions 8.9% 1.08 8.3% 0.98
Maintenance, materials and repairs 8.6% 1.04 9.9% 1.17
Other rentals and landing fees 5.0% 0.60 5.7% 0.68
Depreciation and amortization 3.2% 0.38 1.1% 0.13
Other operating expenses 29.4% 3.56 29.3% 3.47
----------- --------- --------- --------
Total operating expenses 98.7% 11.93 100.0% 11.87
----------- --------- --------- --------
Other (income)/expense 1.3% 0.16 - -0.01
----------- --------- --------- --------
Total expenses 100.0% 12.09 100.0% 11.86
=========== ========= ========= ========
</TABLE>
(1) Certain June 30, 1997 amounts were reclassified to reflect
classifications in 1997 audited financial statements and June 30, 1998
unaudited financial statements.
<PAGE>
Wages, salaries and related costs increased $2.0 million or 31.8% to $8.1
million for the three months ended June 30, 1998 from $6.2 million for the three
months ended June 30, 1997. The increase is attributable to a 1.3% increase in
average wage per employee, a 14.8% increase in employees due to increased
staffing associated with the addition of the CRJs and increased staffing in
reservations (due to the cancellation of a third party service contract and the
work being brought in-house), and accruals for the Company's Profit Sharing Plan
implemented in 1998 ($960 thousand in the three months ended June 30, 1998).
Wages, salaries and related cost per ASM increased 0.30 cents or 16.7% to 2.10
cents. The increase in unit costs is attributable to the items noted above as
well as the changes noted in "Capacity".
Aircraft fuel expense decreased 4.3% to $4.9 million for the three months
ended June 30, 1998 from $5.1 million for the three months ended June 30, 1997.
The decrease was due to a 18.7% decrease in the average fuel price per gallon to
57.5 cents from 70.7 cents, and the flying of the lower fuel burn CRJ aircraft,
partially offset by the 31.7% increase in block hours. Aircraft fuel expense per
ASM decreased 15.3% to 1.27 cents from 1.50 cents.
Aircraft and engine rental expense remained stable at $7.4 million for the
three months ended June 30, 1998 and 1997. Aircraft and engine rentals expense
per ASM decreased 11.2% to 1.90 cents from 2.14 cents. The decrease in cost per
ASM resulted from a combination of the 12.7% increase in ASMs discussed above in
"Capacity" and no rental expense from the owned CRJs.
Commission expense increased 23.8% to $4.2 million for the three months ended
June 30, 1998 from $3.4 million for the three months ended June 30, 1997. This
was due to the 18.7% increase in passenger revenue and an increase in override
commissions. Commission expense per ASM increased 10.2% to 1.08 cents from 0.98
cents, primarily driven by the 4.7% increase in revenue per available seat mile
to 14.37 cents from 13.73 cents plus the override comissions increase.
Maintenance, materials and repairs expense remained stable at $4.0 million
for the three months ended June 30, 1998 compared to the three months ended June
30, 1997. While the expense was stable, the cost per aircraft decreased, which
is largely attributable to the new maintenance contracts on most of the
Company's aircraft and the addition of the new CRJ aircraft, offset somewhat by
increases driven by the growth in block hours. Maintenance, materials and
repairs expense per ASM decreased 11.1% to 1.04 cents from 1.17 cents due to the
changes noted above, plus the addition to the fleet of the new CRJ aircraft.
Other rentals and landing fees expense remained stable at $2.3 million for
the three months ended June 30, 1998 as compared to the three months ended June
30, 1997 Other rentals and landing fees expense per ASM decreased 11.8% to 0.60
cents from 0.68 cents due to decreased facility rent at the Orlando hangar in
the second quarter, lower landing fees at RDU, offset by increased departures
and ASMs.
Depreciation and amortization expense increased 242.4% to $1.5 million for
the three months ended June 30, 1998 from $0.4 million for the three months
ended June 30, 1997. Depreciation and amortization expense per ASM increased
192.3% to 0.38 cents from 0.13 cents in the three months ended June 30, 1997.
The increase is attributable to the purchase of the CRJs and approximately $8.1
million in spare parts since July 1, 1997.
Other operating expense increased 15.6% to $13.8 million for the three months
ended June 30, 1998 from $11.9 million for the three months ended June 30, 1997.
Other operating expenses consist primarily of reservations, ground handling,
advertising, general and administrative expense and insurance. The expense
increase is attributable to the 32.7% increase in departures and 24.1% increase
in passengers, partially offset by savings in insurance, marketing and
administrative expenses. Other operating expense per ASM increased 2.6% to 3.56
cents from 3.47 cents in the three months ended June 30, 1997.
Net interest expense was $0.6 million for the three months ended June 30,
1998. The expense is attributable to the debt service for the CRJ loans. Net
interest expense per ASM for the three months ended June 30, 1009 was 0.16.
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C> <C>
Available seat miles (000s) 760,918 710,877
Revenue passenger miles (000s) 493,541 440,512
Load factor 64.9% 62.0%
Break-even load factor 55.3% 55.0%
Departures 16,559 13,414
Block Hours 26,309 21,824
Total revenue per available seat mile (cents) 13.96 13.38
Yield (cents) 20.93 20.81
Average fare $108 $112
Cost per available seat mile (cents) 11.96 12.10
Onboard passengers 957,721 818,205
Average seats per departure 92 102
Average stage length (miles) 488 539
Aircraft (average during period) 16.1 13.0
Aircraft utilization (hours per day) 9.0 9.3
Fuel price per gallon (cents) 60.1 77.3
</TABLE>
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Capacity. In the six months ended June 30, 1998, the company produced 761
million ASMs, an increase of 50 million or 7.0% over the six months ended June
30, 1997. The increase in ASM production is attributable to 23.4% more
departures (to 16,559), offset by a 9.5% shorter average stage length (to 488
miles) and 9.8% fewer seats per departure (to 92 seats). These changes resulted
from the addition over the past seven months of five 50 seat CRJs which added
frequency to existing shorter routes and enabled the addition of new short haul
routes, as well as the Company's cancellation of service on certain longer haul
routes.
Operating Revenues. The Company's operating revenues increased 11.7% to
$106.2 million for the six months ended June 30, 1998 from $95.1 million for the
six months ended June 30, 1997. The increase is attributable to a 12.0% increase
in revenue passenger miles to 494 million and a 0.58% increase in passenger
yield (revenue per RPM) to 20.93 cents. Revenue per ASM increased 4.3% to 13.96
cents per ASM due to the 0.58% increase in yield combined with a 2.9 percentage
point increase in load factor to 64.9%.
Operating Expenses. The Company's operating expenses increased 4.9% to $90.2
million for the six months ended June 30, 1998 from $86.0 million for the six
months ended June 30, 1997. Total expenses increased primarily due to the
increases in number of employees, wages, commissions, profit sharing, and
depreciation expenses partially offset by reduction in fuel prices and the
absence in the first six months of 1998 of the Special Recapitalization Charge
which was reflected in the first six months of 1997. Total operating expense per
ASM decreased 2.0% to 11.86 cents from 12.10 cents. Excluding the one-time
charges for the Recapitalization in 1997, operating expense per ASM decreased
0.6% to 11.86 cents from 11.93 cents. This decrease is attributable to the 4.9%
increase in costs noted above offset by the 7% increase in ASMs.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ ----------------------
1998 1997 (1)
------------------------ ----------------------
PERCENT PERCENT
OF COST OF COST
TOTAL PER ASM TOTAL PER ASM
EXPENSES (CENTS) EXPENSES (CENTS)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Wages, salaries and related costs 17.2% 2.05 14.4% 1.74
Aircraft fuel 11.0% 1.32 13.1% 1.58
Aircraft and engine rentals 16.2% 1.94 18.0% 2.18
Commissions 9.0% 1.07 8.3% 1.00
Maintenance, materials and repairs 8.9% 1.07 10.0% 1.21
Other rentals and landing fees 5.3% 0.63 5.8% 0.71
Depreciation and amortization 2.8% 0.33 0.9% 0.11
Other operating expenses 28.8% 3.45 28.1% 3.40
---------- --------- --------- --------
Sub-total operating expenses before
recapitalization charges 99.2% 11.86 98.6% 11.93
---------- --------- --------- --------
Recapitalization charge 0.0% 0.00 1.4% 0.17
---------- --------- --------- --------
Total operating expenses 99.2% 11.86 100.0% 12.10
---------- --------- --------- --------
Other (income)/expense 0.8% 0.10 - 0.00
---------- --------- --------- --------
Total expenses 100.0% 11.96 100.0% 12.10
========== ========= ========= ========
</TABLE>
(1) Certain June 30, 1997 amounts were reclassified to reflect
classifications in 1997 audited financial statements and June 30, 1998
unaudited financial statements.
Wages, salaries and related costs increased $3.2 million or 26.2% to $15.6
million for the six months ended June 30, 1998 from $12.4 million for the six
months ended June 30, 1997. The increase is attributable to a 0.4% increase in
average wage per employee, a 12.8% increase in employees due to increased
staffing associated with the addition of the CRJs and increased staffing in
reservations (due to the cancellation of a third party service contract and the
work being brought in-house), and accruals for the Company's Profit Sharing Plan
implemented in 1998 ($1.6 million in the first six months of 1998). Wages,
salaries and related cost per ASM increased 0.31 cents or 17.8% to 2.05 cents.
The increase in unit costs is attributable to the items noted above as well as
the changes noted in "Capacity".
Aircraft fuel expense decreased 10.9% to $10.0 million for the six months
ended June 30, 1998 from $11.2 million for the six months ended June 30, 1997.
The decrease was due to a 22.3% decrease in the average fuel price per gallon to
60.1 cents from 77.3 cents, and the flying of the lower fuel burn CRJ aircraft,
partially offset by the 20.6% increase in block hours. Aircraft fuel expense per
ASM decreased 16.5% to 1.32 cents from 1.58 cents.
Aircraft and engine rental expense decreased 5.0% to $14.7 million for the
six months ended June 30, 1998 from $15.5 million for the six months ended June
30, 1997. The decrease in expense is attributable to the 1ower lease rates for
the F100s after the Recapitalization in February 1997 partially offset by the
rental of spare engines in early 1998. Aircraft and engine rentals expense per
ASM decreased 11.0% to 1.94 cents from 2.18 cents. The decrease in cost per ASM
resulted from a combination of the 7.0% increase in ASMs discussed above in
"Capacity" and no rental expense from the owned CRJs, supplemented by the
overall decrease in lease rates for the Fokker aircraft.
Commission expense increased 14.6% to $8.2 million for the six months ended
June 30, 1998 from $7.1 million for the six months ended June 30, 1997. This was
due to the 12.6% increase in passenger revenue and an increase in override
commissions. Commission expense per ASM increased 7.0% to 1.07 cents from 1.00
cents, primarily driven by the 4.3% increase in revenue per available seat mile
to 13.96 cents from 13.38 cents plus the override commissions increase.
Maintenance, materials and repairs expense decreased 5.1% to $8.1 million for
the six months ended June 30, 1998 from $8.6 million for the six months ended
June 30, 1997. The expense decrease is largely attributable to the new
maintenance contracts on most of the Company's aircraft, offset somewhat by
increases driven by the growth in block hours. Maintenance, materials and
repairs expense per ASM decreased 11.6% to 1.07 cents from 1.21 cents due to the
changes noted above.
Other rentals and landing fees expense decreased 4.6% to $4.8 million for the
six months ended June 30, 1998 from $5.0 million for the six months ended June
30, 1997 Other rentals and landing fees expense per ASM decreased 11.3% to 0.63
cents from 0.71 cents, due to decreased facility rent at the Orlando hangar in
the second quarter, and lower landing fees at RDU, offset by increased
departures and ASMs.
Depreciation and amortization expense increased 230.4% to $2.5 million for
the six months ended June 30, 1998 from $0.8 million for the six months ended
June 30, 1997. Depreciation and amortization expense per ASM increased 200% to
0.33 cents from 0.11 cents in the six months ended June 30, 1997. The increase
is attributable to the purchase of the CRJs and approximately $8.1 million in
spare parts since July 1, 1997.
Other operating expense increased 8.6% to $26.2 million for the six months
ended June 30, 1998 from $24.1 million for the six months ended June 30, 1997.
Other operating expenses consist primarily of reservations, ground handling,
advertising, general and administrative expense and insurance. The expense
increase is attributable to the 23.4% increase in departures and 17.1% increase
in passengers, partially offset by savings in insurance, marketing and
administrative expenses. Other operating expense per ASM remained stable at 3.45
cents versus 3.40 cents in 1997.
Net interest expense was $0.8 million for the six months ended June 30, 1998.
The expense is attributable to the debt service for the CRJ loans. Net interest
expense per ASM for the six months ended June 30, 1998 was 0.10.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's cash position and working capital improved during the three
months ended June 30, 1998 compared to the three months ended June 30, 1997. As
of June 30, 1998, the Company had cash, restricted cash, and short-term
investments of $54.7 million and working capital of $20.2 million compared to
$36.2 million and $9.6 million respectively as of June 30, 1997. During the
three months ended June 30, 1998, cash, restricted cash and short-term
investments increased $3.5 million, reflecting net cash provided by operating
activities of $9.2 million (excluding changes in restricted cash), net cash used
in investing activities of $1.9 million (excluding changes in short-term
investments), and net cash used in financing activities of $3.9 million. During
the three months ended June 30, 1998, net cash provided by operating activities
was primarily due to net income supplemented by a net decrease in operating
assets and liabilities; net cash used in investing activities was due to
purchases of equipment and property, offset by returns of equipment purchase
deposits; and net cash used in financing activities reflects repayment of debt
and capital lease obligations. During the three months ended June 30, 1997,
cash, restricted cash and short-term investments increased $2.4 million,
reflecting net cash provided by operating activities of $2.9 million (net of
changes in restricted cash), net cash used in investing activities of $0.7
million (excluding purchases and sales of short-term investments), and net cash
provided by financing activities of $0.1 million. During the three months ended
June 30, 1997, net cash provided by operating activities was primarily due net
income offset by a net increase in operating assets and liabilities; net cash
used in investing activities was due to purchases of equipment; and net cash
provided by financing activities was due to the capitalization of interest on
long-term debt.
Capital Resources
Since the February 1997 Recapitalization, the Company has been able to
generate sufficient funds from operations to meet its working capital
requirements and does not currently have any lines of credit. The Company
believes that the working capital available from ongoing operations, combined
with financing that has been arranged for aircraft and spare engines to be
delivered, will be sufficient to meet its anticipated requirements for capital
expenditures and other cash requirements for the foreseeable future.
Capital Expenditures
<PAGE>
The Company's cash outflows for capital expenditures in the six months ended
June 30, 1998 and 1997 were $1.7 million and $0.9 million, respectively,
excluding financed purchases.
In September 1997 the Company agreed to acquire 10 Canadair CRJ aircraft
between December 1997 and December 1998, and took options on 20 more aircraft
which would be delivered 10 each in 1999 and 2000. Of the 20 options, the first
three were exercised in April 1998 for delivery in the first six months of 1999.
The first five aircraft have been received and placed in service as of June 30,
1998. Several financing alternatives have been arranged for the firm orders,
including standby or long-term lease financing, short-term bridge financing, and
a firm commitment for the purchase financing of the first five CRJs of which
financing for the first four was completed as of June 30, 1998, with the fifth
completed in July 1998. The Company expects to arrange a combination of third
party debt and leveraged lease financing for the remaining CRJs, but will use
the standby lease financing in the event that it cannot arrange more attractive
financing from third party sources. For each aircraft that is purchased (as
opposed to leased), the Company anticipates an initial cash outlay of
approximately $4 million.
Midway expects to arrange financing for two spare CRJ engines the Company has
agreed to acquire. The Company anticipates spending approximately $1 million on
CRJ rotable parts during 1998. To support its operation of F-100 aircraft the
Company recently agreed to purchase a refurbished Rolls Royce Tay 650-15 Engine
for delivery in August 1998 and took delivery in early April 1998 of a new spare
Rolls Royce Tay 650-15 engine which will be lease purchased over seven years
(See Note 6 of the financial statements).
The Company's fixed costs will increase significantly with the induction of
the CRJs. Based on the current interest rate environment, the Company estimates
that its fixed charges will increase by approximately $12 million to $13 million
per year as a result of its debt-financed purchase or leveraged lease financing
of the eight remaining CRJs. However, depending upon the financing method
ultimately chosen, the Company's balance sheet liabilities may or may not
increase.
Other Financing
The Company has significant lease obligations for aircraft that are
classified as operating leases and therefore not reflected as liabilities on the
Company's balance sheet. The remaining terms of such leases range from less than
one year to approximately fifteen years. The Company's total rent expense for
the six months ended June 30, 1998 and 1997 under all non-cancelable aircraft
operating leases was approximately $14.2 million and $14.7 million,
respectively.
Year 2000
The Company uses a significant number of computer software programs and
embedded operating systems that are essential to its operations. As a result,
the Company has implemented a Year 2000 project to ensure that the Company's
computer systems will function properly in the year 2000 and thereafter. The
Company anticipates completing its Year 2000 project prior to there being any
material impact on the operations of the Company, and believes that, with
modifications to its existing software and systems and/or conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems.
The Company has also initiated communications with its significant
suppliers and vendors with which its systems interface and exchange data or upon
which its business depends. The Company is coordinating efforts with these
parties to minimize the extent to which its business will be vulnerable to their
failure to remediate their own Year 2000 issues. The Company's business is also
dependent upon certain governmental organizations or entities such as the
Federal Aviation Administration ( "FAA") that provide essential aviation
industry infrastructure. There can be no assurance that the systems of such
third parties on which the Company's business relies (including those of the
FAA) will be modified on a timely basis. The Company's business, financial
condition or results of operations could be materially adversely affected by the
failure of its systems or those operated by other parties to operate properly
beyond 1999. To the extent possible, the Company will be developing and
executing contingency plans designed to allow continued operation in the event
of failure of the Company's or third parties' systems.
The total costs of the Company's Year 2000 project are expected to be
immaterial and will be funded through cash from operations. The cost of the
Company's Year 2000 project is limited by the substantial outsourcing of its
systems and the relative youth of the Company and its operating systems. The
costs of the Company's Year 2000
<PAGE>
project and the date on which the Company believes it will be completed are
based on management's best estimates and include assumptions regarding
third-party modification plans. However, in particular due to the potential
impact of third-party modification plans, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in reports to share
owners. All statements which address operational performance, events or
developments which are anticipated to occur in the future, including statements
relating to revenue growth, cost reductions and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance.
The following are some of the factors that could cause actual results to
differ materially from estimates contained in the Company's forward-looking
statements:
o The ability to generate sufficient cash flows to support capital expansion
plans and general operating activities.
o Competitive product and pricing pressures and the ability to gain or
maintain market share as a result of actions by competitors.
o Change in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations) and environmental laws.
o Fluctuations in the cost and availability of materials, fuel and labor,
including the continued availability of landing slots at New York's LaGuardia
Airport and Washington, D.C.'s National Airport.
o The ability to achieve earnings forecasts, which are based on projected
traffic and fares in the different markets the Company serves, some of which
are more profitable than others.
o Interest rate fluctuations and other capital market conditions.
o The ability to enter and develop new markets. The effectiveness of
advertising, marketing and promotional programs.
o The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange
Commission filings.
o Adverse weather conditions, which could effect the Company's ability to
operate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended June 30, 1998, 5,600 shares were issued as a
result of the exercise of purchase options, options for the purchase of 69,479
shares were forfeited due to the end of employment with the Company.
Through June 30, 1998, net proceeds from the offering were
used as follows:
1. $0.6 million as security for the Treasury Lock commitment
(see note 3 to the financial statements),
2. $1.0 million paid in settlement of the Treasury Lock,
3. $7.0 million to secure the Company's performance of its
obligations under a credit card processing agreement,
<PAGE>
4. $13.9 million for down payments on debt-financed aircraft,
and
5. $15.2 million was invested in marketable securities pending
future use.
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.
In April 1998, the Company extended its sublease on its headquarters and
reservations office space in Durham, North Carolina, through July 1999. In June
1998, the Company signed a lease for its future headquarters and reservation
office space located approximately one mile from Raleigh Durham International
Airport. The Company expects to occupy this space by January 1999. The Company's
sublease for a hangar facility in Orlando, Florida expired in April 1998. The
Company continues to occupy a portion of an adjacent facility with lessor's
consent while an extension is being negotiated for a portion of the originally
subleased space.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
On June 16, 1998, the Company filed a Form 8-K reporting that in June 1998,
the National Mediation Board had authorized the International Association of
Machinists & Aerospace Workers, AFL-CIO to represent the Company's fleet service
employees.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Midway Airlines Corporation
Registrant
July 28, 1998 By /s/ STEVEN WESTBERG
Steven Westberg
Sr. Vice President and CFO
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