FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 1-13934
MIDWEST EXPRESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of Principal executive offices)
(Zip code)
414-570-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter 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 October 31, 1996 there were 6,325,193 shares of Common Stock, $.01
par value, of the Registrant outstanding.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended September 30, 1996
INDEX
PART I - FINANCIAL INFORMATION
Page
No.
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Unaudited Notes to Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 9
Results of Operations and Financial Condition
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
Operating revenues:
Passenger service $ 75,895 $ 63,261 $207,019 $179,725
Cargo 2,880 2,500 8,321 7,814
Other 4,348 2,085 11,236 8,241
-------- -------- ------- -------
Total operating revenues 83,123 67,846 226,576 195,780
Operating expenses: -------- -------- ------- -------
Salaries, wages and benefits 20,577 16,325 57,543 47,109
Aircraft fuel and oil 11,916 8,279 33,495 25,729
Commissions 7,863 6,636 20,943 18,505
Dining services 3,957 3,720 11,314 11,344
Station rental, landing and
other fees 5,083 4,385 15,620 14,256
Aircraft maintenance materials
and repairs 5,561 4,273 15,603 12,934
Depreciation and amortization 1,857 1,937 5,648 5,607
Aircraft rentals 3,962 3,697 12,110 11,240
Other 8,976 7,497 25,958 22,485
------- -------- -------- --------
Total operating expenses 69,792 56,749 198,234 169,209
------- -------- -------- --------
Operating income 13,331 11,097 28,342 26,571
------- -------- -------- --------
Other income (expense):
Interest expense (11) - (34) (36)
Interest income 249 547 771 1,479
Other (1) (1,598) (142) (1,598)
-------- -------- -------- -------
Total other income
(expense) 237 (1,051) 595 (155)
-------- -------- -------- -------
Income before income taxes 13,568 10,046 28,937 26,416
Provision for income taxes 5,211 3,741 11,154 10,207
-------- ------- --------- --------
Net income $ 8,357 $ 6,305 $ 17,783 $ 16,209
======== ======= ========= ========
Net income per common share $ 1.31 $ 0.93(1) $ 2.78 $ 2.31(1)
======== ======= ========= ========
Weighted average shares
outstanding 6,367,356 6,428,571 6,408,017 6,428,571
========= ========= ========= =========
(1) Pro forma
See notes to consolidated financial statements.
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 33,901 $ 14,626
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $312 and $307 at
September 30, 1996 and December 31,
1995, respectively 4,344 5,229
Other receivables:
Kimberly-Clark Corporation and
affiliated companies - 61
Other 1,367 1,659
-------- --------
Total accounts receivable 5,711 6,949
Inventories 3,282 2,726
Prepaid expenses:
Commissions 1,271 1,996
Other 2,404 1,536
-------- --------
Total prepaid expenses 3,675 3,532
Deferred income taxes 3,871 3,253
Aircraft and modifications intended
to be financed by sale and
leaseback transactions 16,822 -
-------- --------
Total current assets 67,262 31,086
-------- --------
Property and equipment, at cost 114,170 107,830
Less accumulated depreciation and
amortization 57,491 51,911
--------- --------
Net property and equipment 56,679 55,919
Landing slots and leasehold rights,
net 5,310 5,556
Other assets 514 272
-------- --------
Total assets $129,765 $ 92,833
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,009 $ 3,687
Income taxes payable 4,009 1,381
Air traffic liability 24,720 17,250
Accrued liabilities:
Vacation pay 2,872 2,628
Scheduled maintenance expense 5,325 4,253
Frequent flyer awards 2,677 2,064
Other 18,460 9,664
-------- --------
Total current liabilities 61,072 40,927
-------- --------
Deferred income taxes 9,791 13,731
Noncurrent scheduled maintenance
expense 10,190 10,483
Accrued pension and other post
retirement benefits 5,686 3,748
Other noncurrent liabilities 6,768 2,680
-------- --------
Total liabilities 93,507 71,569
-------- --------
Stockholders' equity:
Preferred stock, without par value,
5,000,000 shares authorized, no
shares issued or outstanding - -
Common stock, $.01 par value,
25,000,000 shares authorized,
6,428,571 shares issued 64 64
Additional paid-in capital 9,546 9,546
Treasury stock, 103,700 shares at
September 30, 1996 (2,790) -
Retained earnings 29,438 11,654
-------- -------
Total stockholders' equity 36,258 21,264
-------- -------
Total liabilities and stockholders'
equity $129,765 $ 92,833
======== =======
See notes to consolidated financial statements.
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30
1996 1995
Operating activities:
Net income $ 17,783 $ 16,209
Items not involving the use of cash:
Depreciation and amortization 5,648 5,607
Deferred income taxes (4,558) (2,756)
Other 2,376 1,488
Changes in operating assets and liabilities:
Accounts receivable 1,239 2,836
Inventories (556) (650)
Prepaid expenses (143) 256
Accounts payable (680) (1,844)
Income taxes payable 2,628 (2,346)
Accrued liabilities 10,210 4,412
Air traffic liability 7,470 2,100
-------- --------
Net cash provided by operating activities 41,417 25,312
-------- --------
Investing activities:
Capital expenditures (8,542) (5,564)
Aircraft acquisitions and modifications
financed by or intended to be financed
by sale and leaseback transactions (85,582) (7,723)
Proceeds from sale of property and
equipment 5 336
Other (243) 693
-------- -------
Net cash used in investing activities (94,362) (4,535)
-------- -------
Financing activities:
Proceeds from sale and leaseback
transactions 73,695 7,723
Purchase of treasury stock (2,790) -
Net increase in advances to Kimberly-
Clark - 22,713
Dividends to Kimberly-Clark - (34,832)
Other 1,315 592
-------- --------
Net cash provided by (used in)
financing activities 72,220 (11,527)
-------- --------
Net increase in cash and cash
equivalents 19,275 9,250
Cash and cash equivalents, beginning
of period 14,626 -
-------- --------
Cash and cash equivalents, end
of period $ 33,901 $ 9,250
======== ========
See notes to consolidated financial statements.
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Organization
During the second quarter 1996, Kimberly-Clark Corporation ("Kimberly-
Clark") sold its remaining interest in the Company, consisting of
1,288,571 shares, or approximately 20% of all outstanding stock, in an
underwritten secondary public offering. The Company did not receive any
proceeds from this offering.
Basis of Presentation
The consolidated financial statements for the nine month period ended
September 30, 1996 are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim period. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders and
incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. The results of operations for the
nine month period ended September 30, 1996 are not necessarily
indicative of the results for the entire fiscal year ending December 31,
1996.
2. Pro Forma Condensed Income Statements
The following unaudited pro forma condensed income statements for the
three and nine month periods ended September 30, 1995, respectively,
give effect to estimated changes in the Company's historical costs
assuming the Company's initial public offering (the "Offering") had
occurred January 1, 1995 and the Company had operated as an independent
company during the three and nine month periods ended September 30,
1995. The pro forma adjustments to reflect these changes in costs
include (i) a lease guarantee fee charged by Kimberly-Clark to continue
to guarantee certain aircraft leases, (ii) estimated incremental
administrative and management expense to reflect costs of obtaining, on
an arm's length basis as an independent company, certain services that
Kimberly-Clark had provided in the past, (iii) increased costs due to a
new management structure, (iv) costs associated with being a publicly-
owned entity, and (v) net changes in interest income and expense to
reflect the Company's financial position subsequent to the Offering.
Pro forma net income per common share was computed based on an assumed
weighted average 6,428,571 shares of common stock outstanding.
Management believes the assumptions used in preparing the pro forma
adjustments provide a reasonable basis on which to present the pro forma
condensed income statements. The following pro forma condensed income
statements are provided for informational purposes only, should not be
construed to be indicative of the Company's results of operations had
the Offering been consummated on the date assumed, and are not intended
to project the Company's results of operations for any future periods.
Three Months Ended September 30, 1995
Pro Forma
Historical Adjustments Pro Forma
(in thousands, except per share amount)
Operating revenues $ 67,846 $ - $ 67,846
Operating expenses 56,749 629 57,378
------- --------- -------
Operating income 11,097 (629) 10,468
Interest income (expense),
net 547 56 603
Other expense (1,598) - (1,598)
------- -------- -------
Income before income taxes 10,046 (573) 9,473
Provision for income taxes 3,741 (223) 3,518
------- ------- --------
Net income $ 6,305 $ (350) $ 5,955
======= ======= ========
Net income per common share $ 0.93
========
Nine Months Ended September 30, 1995
Pro Forma
Historical Adjustments Pro Forma
(in thousands, except per share amount)
Operating revenues $195,780 $ - $195,780
Operating expenses 169,209 2,152 171,361
------- ------- -------
Operating income 26,571 (2,152) 24,419
Interest income (expense), net 1,443 (67) 1,376
Other expense (1,598) - (1,598)
------- ------- -------
Income before income taxes 26,416 (2,219) 24,197
Provision for income taxes 10,207 (865) 9,342
------- ------- -------
Net income $ 16,209 $ (1,354) $ 14,855
======= ======= =======
Net income per common share $ 2.31
=======
3. Leases
During the second and third quarters of 1996, the Company refinanced its
fifteen 19-seat aircraft by completing sale and leaseback transactions.
The leases, which require periodic lease payments through early 2009 for
ten of the aircraft and through 2001 for the other five aircraft,
increased the Company's commitments for operating leases by $63 million.
During the second and third quarter 1996, the Company finalized sale and
leaseback transactions on three DC-9 aircraft which were put into
service during 1996. The leases on these aircraft, which require
periodic lease payments through 2006, increased the Company's
commitments for operating leases by $19 million.
4. Stock Option Plan
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based
method of accounting for stock options. Entities have the option of
either adopting the measurement criteria of the statement for accounting
purposes, thereby recognizing an amount in results of operations on a
prospective basis, or disclosing in the financial statement footnotes
the pro forma effects of the new measurement criteria. The Company
intends to adopt the pro forma disclosure features of SFAS No. 123,
which are effective for fiscal years beginning after December 15, 1995.
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's 1996 third quarter operating income was $13.3 million, an
increase of $2.2 million from the third quarter 1995. Net income
increased by $2.1 million, or 32.5%, to $8.4 million. For the first nine
months of 1996, operating income was $28.3 million, an increase of $1.8
million from 1995. Year-to-date net income increased from $16.2 million
to $17.8 million, or 9.7%. Year-to-date earnings per share were $2.78, a
$.47, or 20.3%, increase over pro forma 1995 results.
The Company's total revenue in the third quarter increased $15.3 million,
or 22.5%, relative to the third quarter 1995, while operating costs
increased by $13.0 million, or 23.0%. The favorable change in revenue in
the quarter was primarily the result of improvements in passenger revenue
yield, increased passenger volume resulting from service expansions in May
1996 and, to a lesser extent, in September 1996, continued improvements in
Midwest Express' Omaha base of operations, and revenue from the Midwest
Express credit card program. The cost increases in the third quarter were
the result of higher fuel prices, higher labor costs, Midwest Express'
profit sharing programs, added costs of being a public company and the
service expansions in May and September 1996.
Midwest Express' Omaha base of operations generated approximately $.9
million more in operating income in the third quarter of 1996 compared to
the third quarter 1995. Revenue increased 22.7% while capacity increased
4.0%. Improvements were attained in both revenue yield and load factor.
For the third quarter 1996, the Omaha operations had a passenger load
factor of 60.7% and a revenue yield of 15.0 cents. This compared
favorably to the third quarter 1995, when the Omaha operations had a load
factor of 53.9% and revenue yield of 14.7 cents.
Increased fuel prices in the third quarter resulted in $2.3 million of
higher costs. Fuel prices were 23.3% higher during the third quarter of
1996 than in the third quarter of 1995, averaging 74.5 cents per gallon in
1996 and 60.4 cents per gallon in 1995. This difference includes the 4.3
cent federal excise tax that was effective for airlines in October 1995.
Into-plane fuel prices have continued to increase in October 1996
averaging approximately 85 cents per gallon for the month.
One additional DC-9 aircraft was placed in service in September 1996.
This aircraft was used to provide new service between Kansas City and
Boston and between Omaha and Kansas City. The latter service was
supplemented by service provided by Skyway Airlines. The third quarter
also benefited from the service expansion in May 1996 when two DC-9
aircraft were placed in service. One of these aircraft has been used
exclusively in the charter business and the second has been used to expand
scheduled service on May 1, 1996 with incremental flights in five
Milwaukee-based markets.
Operating Statistics
The following table provides selected operating statistics for Midwest
Express and Skyway.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
% %
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Midwest Express Operations
Origin & Destination Passengers 366,592 330,061 11.1 1,034,204 991,811 4.3
Revenue Passenger Miles (000's) 329,319 289,709 13.7 931,729 880,313 5.8
Scheduled Service Available Seat
Miles (000's) 514,911 433,349 18.8 1,447,219 1,359,216 6.5
Total Available Seat Miles (000's) 527,462 438,485 20.3 1,477,720 1,384,837 6.7
Load Factor (%) 64.0% 66.9% -2.9 64.4% 64.8% -0.4
Revenue Yield $0.199 $0.187 6.3 $0.191 $0.176 8.9
Cost per total ASM $0.117 $0.113 3.6 $0.119 $0.108 10.3
Average Passenger Trip Length 898.3 877.7 2.3 900.9 887.6 1.5
Number of Flights 9,128 8,083 12.9 25,886 24,911 3.9
Into-plane Fuel Cost per Gallon $0.737 $0.597 23.5 $0.730 $0.597 22.3
Full-time equivalent Employees at
End of Period 1,579 1,394 13.3 1,579 1,394 13.3
Aircraft in Service at End of Period 22 19 15.8 22 19 15.8
Skyway Airlines Operations
Origin & Destination Passengers 82,521 78,092 5.7 235,086 223,491 5.2
Revenue Passenger Miles (000's) 19,026 18,177 4.7 54,249 50,278 7.9
Scheduled Service Available Seat
Miles (000's) 41,882 42,218 -0.8 120,590 117,301 2.8
Total Available Seat Miles (000's) 41,923 42,218 -0.7 120,774 117,301 3.0
Load Factor (%) 45.4% 43.1% 2.3 45.0% 42.9% 2.1
Revenue Yield $0.541 $0.495 9.4 $0.529 $0.499 6.0
Cost per total ASM $0.210 $0.188 11.5 $0.212 $0.193 9.9
Average Passenger Trip Length 230.6 232.8 -0.9 230.8 225.0 2.6
Number of Flights 10,805 11,175 -3.3 31,369 32,509 -3.5
Into-plane Fuel Cost per Gallon $0.832 $0.667 24.7 $0.804 $0.674 19.3
Full-time equivalent Employees
at End of Period 235 216 8.8 235 216 8.8
Aircraft in Service at End of Period 15 15 - 15 15 -
</TABLE>
Note: With the exception of total available seat miles, cost per total
ASM, into-plane fuel cost, number of employees and aircraft in
service, statistics exclude charter operations. Aircraft
acquired but not yet placed into service are excluded from the
aircraft in service statistics.
The following table provides operating revenues and expenses for the
Company expressed as cents per total ASM, including charter operations,
and as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Passenger service $0.133 91.3% $0.132 93.2% $0.130 91.4% $0.120 91.8%
Cargo 0.005 3.5% 0.005 3.7% 0.005 3.7% 0.005 4.0%
Other 0.008 5.2% 0.004 3.1% 0.007 4.9% 0.005 4.2%
------- ------- ------ ------ ------ ------ ------ ------
Total operating revenues 0.146 100.0% 0.141 100.0% 0.142 100.0% 0.130 100.0%
Operating expenses:
Salaries, wages and
benefits 0.036 24.7% 0.034 24.1% 0.036 25.4% 0.031 24.1%
Aircraft fuel and oil 0.021 14.3% 0.017 12.2% 0.021 14.8% 0.017 13.1%
Commissions 0.014 9.5% 0.014 9.8% 0.013 9.2% 0.012 9.4%
Dining services 0.007 4.8% 0.008 5.5% 0.007 5.0% 0.008 5.8%
Station rental, landing
and other fees 0.009 6.1% 0.009 6.5% 0.010 6.9% 0.010 7.3%
Aircraft maintenance
materials/repairs 0.009 6.7% 0.009 6.3% 0.010 6.9% 0.009 6.6%
Depreciation and
amortization 0.004 2.3% 0.004 2.8% 0.003 2.5% 0.004 2.9%
Aircraft rentals 0.007 4.8% 0.008 5.4% 0.008 5.3% 0.007 5.7%
Other 0.016 10.8% 0.015 11.0% 0.016 11.5% 0.015 11.5%
------ ------ ------ ----- ------ ----- ------ ------
Total operating expenses $0.123 84.0% $0.118 83.6% $0.124 87.5% $0.113 86.4%
====== ====== ====== ===== ====== ===== ====== ======
Total ASMs (000's) 569,385 480,703 1,598,494 1,502,137
</TABLE>
Note: Numbers in this table cannot be recalculated due to rounding.
Three Months Ended September 30, 1996 Compared to
Three Months Ended September 30, 1995
Operating Revenues
Company operating revenues totalled $83.1 million in the third quarter
1996, a $15.3 million, or 22.5%, increase over revenues for the third
quarter 1995. Passenger revenues accounted for 91.3% of total revenues and
increased $12.6 million, or 20.0%, from 1995 to $75.9 million. The
increase is attributable to a 13.1% increase in passenger volume, as
measured by revenue passenger miles, and a 6.0% increase in revenue yield.
Midwest Express passenger revenue increased by $11.3 million, or 20.9%,
from 1995 to $65.6 million. This increase was caused by a 11.1% increase
in origin and destination passengers, a 6.3% increase in revenue yield and
a 2.3% increase in average passenger trip length. Total capacity, as
measured by scheduled service ASMs, increased 18.8% because of the
addition of one aircraft in both May and September and several schedule
changes that increased aircraft utilization. Load factor decreased from
66.9% in 1995 to 64.0% in 1996. Part of the decrease was caused by the
lower load factor on the new flights added in May and September, which
averaged a load factor of 53.2%. The yield improvement was generally the
result of an improved pricing environment in the industry.
Skyway passenger revenue increased by $1.3 million, or 14.5%, from 1995 to
$10.3 million. This increase was caused by a 5.7% increase in origin and
destination passengers and a 9.4% increase in revenue yield. Average
passenger trip length decreased .9%. Total capacity decreased by .8%, the
result of a temporary reduction in aircraft utilization to accomplish
scheduled maintenance. Load factor increased from 43.1% in 1995 to 45.4%
in 1996. The general improvement in Skyway revenue was caused by several
schedule changes implemented in the second quarter of 1996. These changes
included the elimination of several routes and the start-up of service
between Milwaukee and Nashville. The above factors all contributed to
record earnings contribution by Skyway in the third quarter 1996.
Revenue from cargo, charter and other services increased $2.6 million in
the third quarter 1996. The Midwest Express MasterCard program, which was
initiated in October 1995, generated $1.2 million in revenue. Charter
revenue increased $1.1 million because Midwest Express had one aircraft
dedicated to charter operations during the third quarter 1996 and did not
have a dedicated aircraft in the third quarter 1995. Revenue from cargo,
mail and small parcel services increased $.4 million, or 15.2%, due to the
flight schedule changes in May and September 1996.
Operating Expenses
1996 operating expenses increased by $13.0 million, or 23.0%, from 1995.
The increase was primarily the result of higher fuel prices, higher labor
costs, Midwest Express' profit sharing programs, added costs of being a
public company, and the service expansions in May and September 1996.
Cost per total ASM increased 3.8%, from 11.8 cents in 1995 to 12.3 cents
in 1996.
Salaries, wages and benefits increased by $4.3 million, or 26.0%. On a
cost per total ASM basis, these costs increased 6.4%, from 3.4 cents in
1995 to 3.6 cents in 1996. Approximately $1.4 million of the labor cost
change is due to increased labor rates. Most of this change was due to an
adjustment in pay scales for pilots and other operations employees at
Midwest Express effective January 1, 1996. These rate adjustments were
implemented based upon industry salary surveys and management's desire to
increase pay scales to maintain a competitive position within the
industry. Labor costs increased $1.6 million because of accruals for
Midwest Express' profit sharing and management incentive programs that
were implemented on January 1, 1996. The profit sharing and incentive
plans, which benefit substantially all Midwest Express employees, are
based entirely on achieving certain levels of profitability, are payable
annually and are accrued monthly based upon earnings to-date and projected
results for the remainder of the year. The labor cost increase also
reflects the addition of approximately 204 full-time equivalent employees
since September 30, 1995; 185 at Midwest Express and 19 at Skyway. Midwest
Express added employees throughout the organization to support the
aircraft placed in service during 1996. In addition, positions were added
as a result of the increased responsibilities of being a separate stand-
alone company, higher passenger volumes and regulatory requirements.
Skyway added employees primarily in the operations function due to changes
in regulatory requirements and to support flight schedule changes.
Aircraft fuel and oil and associated taxes increased $3.6 million, or
43.9%, in 1996. Into-plane fuel prices increased 23.3% in 1996, averaging
74.5 cents per gallon in 1996 and 60.4 cents per gallon in 1995. Of the
price increase, 4.3 cents is attributable to the federal fuel excise tax
surcharge that applied to airlines effective October 1, 1995. Fuel
consumption increased by 16.7% in the quarter, primarily because Midwest
Express operated 22.5% more aircraft flight hours.
Commissions increased by $1.2 million, or 18.5%, primarily due to the
20.0% increase in passenger revenue.
Maintenance costs increased by $1.3 million, or 30.1%, from 1995. The
increase was caused by more flight hours at Midwest Express, an increase
in aircraft component repair costs, the short term lease of an engine
through August 1996, and an increase in airframe overhaul accruals. The
latter cost increase is the result of plans to complete major airframe
maintenance (D Checks) on several aircraft sooner than previously planned
to facilitate aircraft maintenance and refurbishment scheduling.
Aircraft rental costs increased by $.3 million in 1996. Midwest Express
is leasing three additional aircraft in 1996. This increased cost was
partially offset by lower lease costs for Skyway's fifteen turboprop
aircraft that were refinanced in the second and third quarter 1996.
Other operating expenses increased by $1.5 million, or 19.7%, from 1995.
The largest component of the increase was the added costs associated with
being a public company. These costs included expenditures or accruals for
the annual report, external audit fees, investor relations, regulatory
reporting, corporate communications, legal fees and other services. Other
cost increases included higher insurance costs because of more aircraft,
additional overnight costs for flight crews associated with the May and
September schedule changes, increased charter costs due to additional
charter volume and increased booking fees due to higher passenger volumes.
These cost increases were partially offset by lower advertising and
promotional costs in the third quarter.
Interest Income
Interest income for the third quarter 1995 relates to an intercompany cash
management program the Company had with Kimberly-Clark prior to the
Company's initial public offering (the "Offering"). Market rates of
interest were earned on the amount of cash the Company had advanced to
Kimberly-Clark. Interest income in the third quarter 1996 reflects
interest income the Company earned on cash and cash equivalents during the
quarter.
Other Income and Expense
Other expenses in the third quarter 1995 include an employee stock grant
of $.9 million and costs associated with the Offering of $.7 million.
Provision for Income Taxes
Income tax expense for the third quarter 1996 was $5.2 million, a $1.5
million increase from 1995. The effective tax rates for the third quarter
of 1996 and 1995 were 38.4% and 37.2%, respectively. The lower effective
tax rate in the third quarter 1995 was the result of the tax benefits of
the employee stock grant, which was valued at cost for book purposes and
at market rates on the date of the contribution for tax purposes. For
purposes of calculating the Company's income tax expense and effective tax
rate for periods after the Offering, the Company treats amounts payable to
an affiliate of Kimberly-Clark under a tax allocation and separation
agreement entered into in connection with the Offering as if they were
payable to taxing authorities.
Net Income
Net income for the third quarter increased $2.1 million from 1995. The
net income margin changed from 9.3% in 1995 to 10.1% in 1996.
Nine Months Ended September 30, 1996 compared to
Nine Months Ended September 30, 1995
Operating Revenues
Company operating revenues totalled $226.6 million for the nine months
ended June 30, 1996, a $30.8 million, or 15.7%, increase over 1995.
Passenger revenues accounted for 91.4% of total revenues and increased
$27.3 million, or 15.2%, from 1995 to $207.0 million. The increase is
attributable to a 6.0% increase in passenger volume, as measured by
revenue passenger miles, and an 8.7% increase in revenue yield.
Midwest Express passenger revenue increased by $23.6 million, or 15.3%,
from 1995 to $178.3 million. This increase was caused by a 4.3% increase
in origin and destination passengers, an 8.9% increase in revenue yield
and a 1.5% increase in average passenger trip length. Midwest Express
capacity, as measured by scheduled service ASMs, increased 6.5%. The
increase in capacity is primarily due to the addition of two aircraft to
scheduled service during May and September 1996, partly offset by flight
cancellations caused by poor weather and lower aircraft utilization in the
second quarter. Load factor decreased from 64.8% in 1995 to 64.4% in
1996. Revenue yield increased primarily because of an improved
competitive environment, most significantly the discontinuation by
Continental Airlines of their "Lite" product in the second quarter 1995,
and because of improved industry pricing. Yield gains were broad-based,
with almost every market realizing improvement.
Skyway passenger revenue increased by $3.7 million, or 14.6%, from 1995 to
$28.7 million. This increase was caused by a 5.2% increase in origin and
destination passengers, a 6.0% increase in revenue yield and a 2.6%
increase in average passenger trip length. The volume increase was
attributable to two aircraft that were placed in service in the second
quarter of 1995 and to an increase in load factor, from 42.9% in 1995 to
45.0% in 1996. The improvement in load factor and yield resulted in an
overall increase in total revenue per available seat mile of 11.4%.
Revenue from other services increased $3.5 million, or 21.8%, in 1996.
The Midwest Express Mastercard program, initiated in October 1995,
generated $3.0 million in revenue during the nine months ended September
30, 1996. Charter services revenue increased $.6 million year-to-date,
reflecting the addition of a dedicated charter aircraft again in the
second quarter 1996 after not having a dedicated charter aircraft since
the second quarter 1995. Revenue from other frequent flyer agreements
increased $.3 million. The revenue increase was partly offset by $1.3
million less revenue from maintenance contract services, as the
maintenance function was fully utilized to maintain Midwest Express
aircraft in 1996 and completed fewer services for other airlines. Revenue
from cargo, mail and small parcel services increased $.5 million, or 6.5%.
Operating Expenses
1996 operating expenses increased $29.0 million, or 17.2%, from 1995,
primarily due to higher fuel prices, higher labor costs, Midwest Express'
profit sharing programs, added costs of being a public company, pre-
operating costs associated with recently acquired aircraft, and the
service expansions in May and September 1996. Cost per total ASM
increased 10.1%, from 11.3 cents in 1995 to 12.4 cents in 1996.
Salaries, wages and benefits increased $10.4 million, or 22.1%, from 1995.
On a cost per total ASM basis these costs increased 14.8%, from 3.1 cents
in 1995 to 3.6 cents in 1996. Approximately $4.0 million of the labor
cost change was due to increased labor rates. Most of this change was due
to an adjustment in pay scales for pilots and other operations employees
as previously explained. Labor costs increased $3.8 million because of
accruals for Midwest Express' profit sharing and management incentive
programs that were implemented on January 1, 1996. The remainder of the
change in labor costs was primarily due to an increase in the number of
employees required due to expanded service and administrative
requirements.
Aircraft fuel and oil and associated taxes increased $7.8 million, or
30.2%, from 1995. Into-plane fuel prices increased 22.1% in 1996,
averaging 73.6 cents per gallon in 1996 and 60.3 cents in 1995. Of the
13.3 cent increase, 4.3 cents is attributable to the federal fuel excise
tax surcharge to which airlines were subject beginning October 1, 1995.
Fuel consumption increased 6.8% because of a 2.3% increase in total
aircraft flight hours primarily caused by the service expansions in May
and September 1996.
Commissions increased by $2.4 million, or 13.2%, due to increased
passenger revenue. Of the increase, $2.1 million related to increased
travel agency commissions and $.3 million to increased credit card fees.
Dining services costs were almost identical in 1996 and 1995 despite
volume increases. Total dining services costs (including food, beverages,
linen, catering equipment and supplies) decreased from $11.44 per Midwest
Express passenger in 1995 to $10.94 in 1996. The decrease was primarily
due to a reduction in costs following the negotiation of a long term
contract with the primary food caterer for Midwest Express. Reduced
pricing was effective January 1, 1996. The reduction in the cost per
passenger was offset by increased passenger volume.
Maintenance costs increased by $2.7 million, or 20.6%, from 1995. Midwest
Express maintenance costs increased by $1.9 million, or 17.5%, and Skyway
maintenance costs increased $.8 million, or 33.4%. The cost increase at
Midwest Express was caused by 1.5% more total aircraft flight hours and an
increase in aircraft component repair costs. In addition, Midwest Express
plans to complete major airframe maintenance (D Checks) on several
aircraft sooner than previously planned to facilitate aircraft maintenance
and refurbishment scheduling. Maintenance accruals were increased to
reflect this change. Increased costs at Skyway were caused by a 3.2%
increase in flight hours, the expiration of warranties on some aircraft,
and higher component repair costs, primarily for scheduled propeller
overhauls.
Aircraft rental costs increased $.9 million, or 7.7%, in 1996. The
increase is primarily attributable to more aircraft in the fleet. Midwest
Express is leasing three additional aircraft in 1996 and Skyway added two
aircraft in May 1995.
Other operating expenses increased by $3.5 million, or 15.4%, from 1995.
The increase includes approximately $.6 million of costs associated with
acquiring and transporting recently acquired Midwest Express aircraft from
Asia to Milwaukee. Other significant cost increases included higher costs
associated with being a public company, insurance for additional aircraft,
increased passenger booking fees due to higher passenger volumes, more
crew rooms due to flight schedule changes and higher charter costs due to
increased charter volume. The increased costs were partly offset by lower
advertising and promotional expenditures.
Interest Income
Interest income in 1995 relates to an intercompany cash management program
the Company had with Kimberly-Clark prior to the Offering in September
1995. Market rates of interest were earned on the amount of cash the
Company had advanced to Kimberly-Clark. Interest income in 1996 reflects
interest income on the Company's cash and cash equivalents during the
first nine months.
Other Income and Expense
Other expenses in 1996 primarily reflected the costs of the secondary
public offering completed in the second quarter. Other expenses in 1995
include an employee stock grant of $.9 million and costs associated with
the Offering of $.7 million.
Provision for Income Taxes
Income tax expense for the first nine months 1996 was $11.2 million, an
increase of $.9 million from 1995. The effective tax rates for the first
nine months 1996 and 1995 were 38.5% and 38.6%, respectively. For
purposes of calculating the Company's income tax expense and effective tax
rate for periods after the Offering, the Company treats amounts payable to
an affiliate of Kimberly-Clark under a tax allocation and separation
agreement entered into in connection with the Offering as if they were
payable to taxing authorities.
Net Income
Net income for the first nine months increased $1.6 million from 1995.
The net income margin decreased to 7.8% in 1996 from 8.3% in 1995.
Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $33.9 million at
September 30, 1996 compared to $14.6 million at December 31, 1995. Net
cash provided by operating activities totalled $41.4 million for the nine
months ended September 30, 1996. Net cash used in investing activities
totalled $94.4 million, primarily due to aircraft acquisitions and related
modifications in 1996 of $85.6 million which were financed by or intended
to be financed by sale and leaseback transactions and due to capital
expenditures of $8.5 million. Net cash provided by financing activities
totalled $72.2 million, primarily due to proceeds from sale and leaseback
transactions of $73.7 million offset by the purchase of treasury stock
totalling $2.8 million.
As of September 30, 1996, the Company operated in a positive working
capital position at $6.2 million compared to a working capital deficit of
$9.8 million at December 31, 1995, reflecting increased working capital
provided by operations. Historically, the Company has operated with a
working capital deficit and may do so in the future.
The Company has no debt, other than its lease commitments. As of
September 30, 1996, the Company's two credit facilities, a $35.0 million
revolving bank credit facility and a $20.0 million secondary revolving
credit facility with Kimberly-Clark, have not been used except for letters
of credit totalling approximately $7.8 million that reduce the amount of
available credit.
Capital expenditures totalled $8.5 million for the nine months ended
September 30, 1996, not including aircraft acquisitions. Capital
expenditures primarily consisted of built-in engine overhauls, capitalized
aircraft major maintenance, two spare aircraft engines, an aircraft hush
kit, and telecommunication equipment.
Aircraft acquisitions and modifications financed by or intended to be
financed by sale and leaseback transactions totalled $85.6 million during
the nine months ended September 30, 1996. During the nine months ended
September 30, 1996, the Company secured financing on the acquisition and
related modifications of three newly acquired DC-9-30 aircraft and
refinanced fifteen 19-seat aircraft under sale and leaseback transactions
totalling $73.7 million. During the remainder of 1996, the Company
intends to finalize sale and leaseback transactions on two DC-9-30
aircraft acquired during the year, in which case the Company would be
reimbursed for approximately $8.8 million of related aircraft acquisition
and modification costs incurred to September 30, 1996. Three additional
DC-9-30 aircraft acquired during the year will be financed in 1997.
As of September 30, 1996, leases relating to five of Midwest Express' jet
aircraft were guaranteed by Kimberly-Clark in return for a guarantee fee
paid by the Company. During October 1996, Midwest Express completed the
purchase of two DC-9-30 aircraft, which had been under lease, pursuant to
the exercise of purchase options. After completing the purchase of these
aircraft, only three aircraft remain subject to leases guaranteed by
Kimberly-Clark. Kimberly-Clark will continue to guarantee these leases
until the end of the current lease terms.
The Company believes its cash flow from operations, funds available from
credit facilities and available long-term financing for the acquisition of
jet aircraft and turboprop aircraft will be adequate to provide for
working capital needs and capital expenditures through 1997.
Pending Developments
New Aircraft - Midwest Express' 23rd jet will enter service in late 1996
and will be used in place of the carrier's two MD-88 aircraft during
January and February 1997, when first one and then the other will be off-
line for routine heavy maintenance. Three DC-9 aircraft acquired during
1996 will go into service during 1997 after extensive maintenance
inspection and modification, hush kit installation and complete interior
refurbishment. The airline has not announced how it will utilize those
aircraft.
Labor Relations - In July 1995, Skyway pilots elected the Air Line Pilots
Association ("ALPA") as the labor union representing them for collective
bargaining purposes. In October 1996, the Company and ALPA have jointly
requested contract mediation by the National Mediation Board.
Other Issues - The Company's Form 10-Q for the first quarter ended March
31, 1996, disclosed certain issues relating to sales and income tax
exposures. These issues remain pending.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed herewith or incorporated by reference are set
forth on the attached Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
<PAGE>
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.
Midwest Express Holdings, Inc.
Date: November 5, 1996 By /s/ Timothy E. Hoeksema
Timothy E. Hoeksema
Chairman of the Board,
President and Chief Executive
Officer
Date: November 5, 1996 By /s/ Robert S. Bahlman
Robert S. Bahlman
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Number Description
(27) Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC. AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 33,901
<SECURITIES> 0
<RECEIVABLES> 4,344
<ALLOWANCES> 312
<INVENTORY> 3,282
<CURRENT-ASSETS> 67,262
<PP&E> 114,170
<DEPRECIATION> 57,491
<TOTAL-ASSETS> 129,765
<CURRENT-LIABILITIES> 67,072
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 36,194
<TOTAL-LIABILITY-AND-EQUITY> 129,765
<SALES> 0
<TOTAL-REVENUES> 226,576
<CGS> 0
<TOTAL-COSTS> 198,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 28,937
<INCOME-TAX> 11,154
<INCOME-CONTINUING> 17,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,783
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.78
</TABLE>
