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, 1997
[ ] 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, 1997, there were 9,419,226 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, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Unaudited Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
Part I Item I - Financial Statements
<TABLE>
<CAPTION>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenues:
Passenger service . . . . . . . . . . . . . . . . . $ 81,731 $ 75,895 $229,578 $207,019
Cargo . . . . . . . . . . . . . . . . . . . . . . . 3,156 2,880 8,448 8,321
Other . . . . . . . . . . . . . . . . . . . . . . . 4,512 4,348 14,637 11,236
________ ________ ________ ________
Total operating revenues . . . . . . . . . . . 89,399 83,123 252,663 226,576
________ ________ ________ ________
Operating expenses:
Salaries, wages and benefits . . . . . . . . . . . . 23,921 20,577 66,483 57,543
Aircraft fuel and oil . . . . . . . . . . . . . . . 12,043 11,916 37,405 33,495
Commissions . . . . . . . . . . . . . . . . . . . . 8,423 7,863 23,606 20,943
Dining services . . . . . . . . . . . . . . . . . . 4,580 3,957 12,768 11,314
Station rental, landing and other fees . . . . . . . 5,800 5,083 18,183 15,620
Aircraft maintenance materials and repairs . . . . . 7,146 5,561 21,409 15,603
Depreciation and amortization . . . . . . . . . . . 2,110 1,897 6,359 5,648
Aircraft rentals . . . . . . . . . . . . . . . . . . 4,373 3,962 12,947 12,110
Other . . . . . . . . . . . . . . . . . . . . . . . 9,215 8,976 26,735 25,958
________ ________ ________ ________
Total operating expenses . . . . . . . . . . . 77,611 69,792 225,895 198,234
________ ________ ________ ________
Operating income . . . . . . . . . . . . . . . . . . . . 11,788 13,331 26,768 28,342
________ ________ ________ ________
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . 233 249 872 771
Other . . . . . . . . . . . . . . . . . . . . . . . (18) (12) (37) (176)
________ ________ ________ ________
Total other income (expense) . . . . . . . . . 215 237 835 595
________ ________ ________ ________
Income before income taxes . . . . . . . . . . . . . . . 12,003 13,568 27,603 28,937
Provision for income taxes . . . . . . . . . . . . . . . 4,445 5,211 10,216 11,154
________ ________ ________ ________
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 7,558 $ 8,357 $ 17,387 $ 17,783
======== ======== ======== ========
Net income per common share . . . . . . . . . . . . . . . $ .80 $ .88 $ 1.83 $ 1.85
======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 24,498 $ 27,589
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $376 and $207 at
September 30, 1997 and December 31,
1996, respectively . . . . . . . . . . . . . . 4,165 4,639
Other receivables . . . . . . . . . . . . . . . . 889 592
-------- --------
Total accounts receivable . . . . . . . . . . 5,054 5,231
Inventories . . . . . . . . . . . . . . . . . . . 3,468 3,122
Prepaid expenses . . . . . . . . . . . . . . . . 3,844 4,247
Deferred income taxes . . . . . . . . . . . . . . 3,333 3,334
Aircraft and modifications intended to
be financed by sale and leaseback
transactions . . . . . . . . . . . . . . . . . . 19,579 9,046
-------- --------
Total current assets . . . . . . . . . . . . 59,776 52,569
-------- --------
Property and equipment, at cost . . . . . . . . . . . 156,551 130,792
Less accumulated depreciation . . . . . . . . . . . 68,517 59,889
-------- --------
Net property and equipment . . . . . . . . . . . . . 88,034 70,903
Landing slots and leasehold rights, net . . . . . . . 4,982 5,228
Other assets . . . . . . . . . . . . . . . . . . . . 4,005 435
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $156,797 $129,135
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 4,179 $ 3,684
Income taxes payable . . . . . . . . . . . . . . . 2,009 -
Air traffic liability . . . . . . . . . . . . . . . 31,289 22,043
Accrued liabilities . . . . . . . . . . . . . . . . 30,395 32,636
-------- --------
Total current liabilities . . . . . . . . . . 67,872 58,363
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . 3,362 -
Deferred income taxes . . . . . . . . . . . . . . . . 10,185 9,894
Other noncurrent liabilities . . . . . . . . . . . . 19,554 20,537
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . 100,973 88,794
-------- --------
Shareholders' 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, 9,642,807 shares
issued . . . . . . . . . . . . . . . . . . . . . . 96 64
Additional paid-in capital . . . . . . . . . . . . 9,511 9,545
Treasury stock, at cost . . . . . . . . . . . . . . (4,573) (2,672)
Retained earnings . . . . . . . . . . . . . . . . . 50,790 33,404
-------- --------
Total shareholders' equity . . . . . . . . . . . . . 55,824 40,341
-------- --------
Total liabilities and shareholders' equity . . . . . $156,797 $129,135
======== ========
See notes to consolidated financial statements.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30,
1997 1996
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 17,387 $ 17,783
Items not involving the use of cash:
Depreciation and amortization . . . . . . . . . . 6,359 5,648
Deferred income taxes . . . . . . . . . . . . . . 292 (4,558)
Other . . . . . . . . . . . . . . . . . . . . . . 3,236 2,376
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . 177 1,239
Inventories . . . . . . . . . . . . . . . . . . . (346) (556)
Prepaid expenses . . . . . . . . . . . . . . . . 403 (143)
Accounts payable . . . . . . . . . . . . . . . . 495 (680)
Income taxes payable . . . . . . . . . . . . . . 2,009 2,628
Accrued liabilities . . . . . . . . . . . . . . . (2,358) 10,210
Air traffic liability . . . . . . . . . . . . . . 9,246 7,470
-------- --------
Net cash provided by operating activities . . . . . 36,900 41,417
-------- --------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . (23,042) (8,542)
Aircraft acquisitions and modifications
financed by or intended to be financed
by sale and leaseback transactions . . . . . . . . (11,799) (85,582)
Proceeds from sale of property and equipment . . . 49 5
Other . . . . . . . . . . . . . . . . . . . . . . . (3,570) (243)
-------- --------
Net cash used in investing activities . . . . . . . (38,362) (94,362)
-------- --------
Financing activities:
Proceeds from sale and leaseback transactions . . . 1,266 73,695
Purchase of treasury stock . . . . . . . . . . . . (1,977) (2,790)
Other . . . . . . . . . . . . . . . . . . . . . . . (918) 1,315
-------- --------
Net cash (used in) provided by
financing activities . . . . . . . . . . . . . . . (1,629) 72,220
-------- --------
Net (decrease) increase in cash
and cash equivalents . . . . . . . . . . . . . . . . (3,091) 19,275
Cash and cash equivalents,
beginning of period . . . . . . . . . . . . . . . . 27,589 14,626
-------- --------
Cash and cash equivalents, end
of period . . . . . . . . . . . . . . . . . . . . .
$ 24,498 $ 33,901
======== ========
Supplemental schedule of non-cash
investing and financing activities:
Long-term debt assumed in
connection with capital expenditures . . . . . . . $ 3,487 -
========
See notes to consolidated financial statements.
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Basis of Presentation
The consolidated financial statements for the nine-month period ended
September 30, 1997 are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) that 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
Shareholders and incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The results
of operations for the nine-month period ended September 30, 1997 are
not necessarily indicative of the results for the entire fiscal year
ending December 31, 1997.
Stock Split
On April 23, 1997, the Company announced that its board of
directors had approved a plan to split its stock 3-for-2 in the
form of a 50% stock dividend. The new shares were issued May 28
to shareholders of record as of May 12. The financial and share
information presented herein for all periods has been adjusted
to reflect the effect of the stock dividend.
2. Financing Agreements
During May 1997, the Company amended its revolving credit
facility with three banks, extending its available credit to
$55,000,000.
During August 1997, the Company purchased its headquarters building,
which it previously leased. As part of the transaction, the Company
assumed $3,500,000 of long-term debt. The mortgage note has an
interest rate of 8.25% and is payable in monthly installments through
April 2011.
3. Commitments and Contingencies
As discussed in Note 11 to the Company's consolidated financial
statements for the year ended December 31, 1996 and in Item 3 of the
Company's Annual Report on Form 10-K for that year, a Commissioner of
the Equal Employment Opportunity Commission ("EEOC") filed charges
against the Company on July 8, 1992. On May 30, 1997, the EEOC
commenced litigation in the federal District Court for the Eastern
District of Wisconsin relating to such charges seeking compensatory
and punitive damages in unspecified amounts for its claimants. The
litigation involves a smaller number of claimants than the original
charges. When the Company responds to the complaint in the
litigation, the Company will deny the EEOC's allegations, and the
Company intends to vigorously defend itself against the charges
unless a settlement can be reached that would make it economically
impractical to contest the charges. The accompanying financial
statements do not reflect any liability with respect to the EEOC's
claims, and the Company does not believe the amount of any settlement
or adverse judgment would be material to the Company.
4. New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be
adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. The impact of adopting
Statement 128 on the calculation of earnings per share for the nine
months ended September 30, 1997 and September 30, 1996 would not be
material.
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's 1997 third quarter operating income was $11.8 million, a
decrease of $1.5 million from the third quarter 1996. Net income
decreased by $.8 million, or 9.6%, to $7.6 million. For the first nine
months of 1997, operating income was $26.8 million, a decrease of $1.6
million from 1996. Year-to-date net income decreased from $17.8 million
to $17.4 million, or 2.2%. Year-to-date earnings per share were $1.83, a
$.02, or 1.1%, decrease from 1996 results.
Although the Company's total revenue in the third quarter increased $6.3
million, or 7.6%, relative to the third quarter 1996, operating costs
increased by $7.8 million, or 11.2%. The increase in revenue was
primarily attributable to record passenger traffic, which increased 12.9%.
The Company had two additional aircraft in scheduled service during the
quarter, with the principal new routes of Milwaukee-Orlando and Kansas
City-New York La Guardia. Offsetting the improvement in passenger traffic
was a 4.6% decrease in revenue yield. The yield reduction resulted from
the reinstatement of the 10% federal excise tax on passenger travel on
March 7, 1997, which was suspended during much of 1996. In addition, the
Company incurred competitive pricing pressure on a number of routes,
particularly West Coast markets. Finally, yield decreased as a result of a
change in product mix. As anticipated, each of the new routes added by the
Company had lower revenue yields than the system average. The Company
believes, from an overall profit perspective, the lower revenue yield will
be offset, at least to some extent, by a longer aircraft stage length and
higher load factors on these routes.
The Company's financial results benefited from lower fuel prices which
resulted in a $1.0 million improvement in operating expenses. Costs
increased due to higher maintenance expenditures, higher labor rates and
airport costs. In addition, costs were also affected by an unanticipated
delay in completing several aircraft modifications and refurbishments as
initially scheduled. This delay caused the Company to temporarily use the
one aircraft dedicated to its charter program for scheduled service. In
addition, the delay caused a temporary excess in aircraft flight crews and
other costs. Additional detail on cost changes is included in subsequent
sections.
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,
% %
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Midwest Express Operations
Origin & Destination Passengers 413,473 366,592 12.8 1,154,683 1,034,204 11.6
Revenue Passenger Miles (000s) 374,693 329,319 13.8 1,050,179 931,729 12.7
Scheduled Service Available Seat Miles (000s) 571,362 514,911 11.0 1,639,871 1,447,219 13.3
Total Available Seat Miles(000s) 576,684 527,462 9.3 1,667,040 1,477,720 12.8
Load Factor (%) 65.6% 64.0% 1.6 64.0% 64.4% -0.4
Revenue Yield $0.191 $0.199 -4.1 $0.192 $0.191 0.1
Cost per total ASM $0.120 $0.117 2.1 $0.120 $0.119 1.3
Average Passenger Trip Length 906.2 898.3 0.9 909.5 900.9 1.0
Number of Flights 9,961 9,128 9.1 28,793 25,886 11.2
Into-plane Fuel Cost per Gallon $0.680 $0.737 -7.7 $0.735 $0.730 0.8
Full-time Equivalent Employees at End of Period 1,850 1,579 17.2 1,850 1,579 17.2
Aircraft in Service at End of Period 24 22 n.m. 24 22 n.m.
Skyway Airlines Operations
Origin & Destination Passengers 77,868 82,521 -5.6 222,790 235,086 -5.2
Revenue Passenger Miles (000s) 18,451 19,026 -3.0 52,077 54,249 -4.0
Scheduled Service Available Seat Miles (000s) 41,168 41,882 -1.7 119,215 120,590 -1.1
Total Available Seat Miles(000s) 41,236 41,923 -1.6 119,465 120,774 -1.1
Load Factor (%) 44.8% 45.4% -0.6 43.7% 45.0% -1.3
Revenue Yield $0.551 $0.541 1.8 $0.546 $0.529 3.1
Cost per total ASM $0.231 $0.210 9.7 $0.238 $0.212 12.2
Average Passenger Trip Length 237.0 230.6 2.8 233.7 230.8 1.3
Number of Flights 10,771 10,805 -0.3 31,200 31,369 -0.5
Into-plane Fuel Cost per Gallon $0.766 $0.832 -8.0 $0.794 $0.804 -1.2
Full-time Equivalent Employees at End of Period 264 235 12.3 264 235 12.3
Aircraft in Service at End of Period 15 15 -- 15 15 --
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.
</TABLE>
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,
1997 1996 1997 1996
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 $0.132 91.4% $0.133 91.3% $0.128 90.9% $0.130 91.4%
Cargo 0.005 3.5% 0.005 3.5% 0.005 3.3% 0.005 3.7%
Other 0.008 5.1% 0.008 5.2% 0.008 5.8% 0.007 4.9%
------ ------ ------ ------ ------ ------ ------ ------
Total operating revenues 0.145 100.0% 0.146 100.0% 0.141 100.0% 0.142 100.0%
Operating expenses:
Salaries, wages and benefits 0.039 26.7% 0.036 24.7% 0.037 26.3% 0.036 25.4%
Aircraft fuel and oil 0.020 13.5% 0.021 14.3% 0.021 14.8% 0.021 14.8%
Commissions 0.014 9.4% 0.014 9.5% 0.013 9.3% 0.013 9.2%
Dining services 0.007 5.1% 0.007 4.8% 0.007 5.1% 0.007 5.0%
Station rental, landing and other fees 0.009 6.5% 0.009 6.1% 0.010 7.2% 0.010 6.9%
Aircraft maintenance materials/repairs 0.012 8.0% 0.009 6.7% 0.012 8.5% 0.010 6.9%
Depreciation and amortization 0.003 2.4% 0.004 2.3% 0.004 2.5% 0.003 2.5%
Aircraft rentals 0.007 4.9% 0.007 4.8% 0.007 5.1% 0.008 5.3%
Other 0.015 10.3% 0.016 10.8% 0.015 10.6% 0.016 11.5%
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses $0.126 86.8% $0.123 84.0% $0.126 89.4% $0.124 87.5%
====== ====== ====== ====== ====== ====== ====== ======
Total ASMs (000s) 617,920 569,385 1,786,505 1,598,494
Note: Numbers in this table cannot be recalculated due to rounding.
</TABLE>
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Operating Revenues
Company operating revenues totalled $89.4 million in the third quarter
1997, a $6.3 million, or 7.6%, increase over revenues for the third
quarter 1996. Passenger revenues accounted for 91.4% of total revenues and
increased $5.8 million, or 7.7%, from 1996 to $81.7 million. The increase
is attributable to a 12.9% increase in passenger volume, as measured by
revenue passenger miles, offset by a 4.6% decrease in revenue yield.
Midwest Express Airlines passenger revenue increased by $6.0 million, or
9.1%, from 1996 to $71.6 million. This increase reflects a 12.8% increase
in origin and destination passengers, offset by a 4.1% decrease in revenue
yield. Total capacity, as measured by scheduled service ASMs, increased
11.0% because of two additional aircraft in scheduled service during the
1997 quarter. Load factor increased from 64.0% in 1996 to 65.6% in 1997.
Revenue yield was negatively impacted by the reinstatement of the federal
excise tax on passenger tickets effective March 7, 1997, competitive
pricing pressures and the start-up of several new routes that were
impacted by introductory and competitive pricing. Of the 4.1% yield
decrease in the third quarter 1997, approximately 1.7% was caused by
service initiated in March 1997 in the Milwaukee-Orlando market. This
market will typically have higher load factors, but lower revenue yields,
than the remainder of the Midwest Express system.
Skyway passenger revenue decreased by $.1 million, or 1.2%, from 1996 to
$10.2 million. This decrease was caused by a 5.6% decrease in origin and
destination passengers, offset by a 1.8% increase in revenue yield. Total
capacity decreased by 1.7%, as a result of maintenance issues and a
schedule change. Load factor decreased from 45.4% in 1996 to 44.8% in
1997.
Revenue from cargo, charter and other services increased $.4 million in
the third quarter 1997. Midwest Express benefited from increased revenue
of $.6 million from the Midwest Express MasterCard program, increased
cargo revenue of $.3 million, and additional ground service contracts of
$.1 million. Charter revenue decreased $.8 million because in 1997 Midwest
Express had delays with an aircraft refurbishment that required the use of
its dedicated charter jet aircraft for scheduled service. During the
fourth quarter of 1997, the dedicated charter jet aircraft has returned to
charter service.
Operating Expenses
1997 operating expenses increased by $7.8 million, or 11.2%, from 1996.
The cost increase was primarily due to expanded operations, but was offset
by lower fuel prices. Cost per total ASM increased 2.4%, from 12.3 cents
in 1996 to 12.6 cents in 1997.
Salaries, wages and benefits increased by $3.3 million, or 16.3%. The
labor cost increase reflects the addition of approximately 300 full-time
equivalent employees since September 30, 1996; 271 at Midwest Express and
29 at Skyway. Midwest Express added employees throughout the organization
to support the aircraft placed in service during 1996 and 1997. In
addition, employees were added to support aircraft ramp operations in
Boston, Kansas City and Washington, D.C., which were previously contracted
from other airlines. Salaries, wages and benefits were also adversely
affected by an unanticipated delay in completing several new aircraft
modifications and refurbishments as initially scheduled. This delay caused
a temporary excess in aircraft flight crews during the third quarter of
1997. The labor cost increase was also due to an adjustment in pay scales
for most operations' employees at Midwest Express effective January 1,
1997. These rate adjustments were implemented based on industry salary
surveys and management's desire to increase pay scales to maintain a
competitive position in the industry. Labor costs were reduced by a
reduction in accruals for Midwest Express' profit sharing and management
incentive programs. The profit sharing and incentive plans, which benefit
substantially all employees, are based entirely on achieving certain
levels of profitability, payable annually and accrued monthly based on
earnings to date and projected results for the remainder of the year.
Aircraft fuel and oil and associated taxes increased $.1 million, or 1.1%,
in 1997. Into-plane fuel prices decreased 7.8% in 1997, averaging 68.7
cents per gallon in 1997 and 74.5 cents per gallon in 1996. Fuel
consumption increased by 9.6% in the quarter because Midwest Express
operated 9.0% more aircraft block hours. Fuel costs in October 1997
averaged 71.1 cents per gallon.
Commissions increased by $.6 million, or 7.1%, primarily due to the
increase in passenger revenue.
Dining services costs increased by $.6 million, or 15.7%, from 1996. The
increase was primarily due to the 12.8% increase in origin and destination
passengers and a 2.6% increase in dining service costs.
Station rental, landing and other fees increased by $.7 million, or 14.1%,
from 1996. The increase was caused by 9.1% more flight segments by Midwest
Express and higher airport costs, primarily for purchased security
services and landing fees. In addition, station rental costs increased at
Washington National Airport due to a new terminal at the airport.
Maintenance costs increased by $1.6 million, or 28.5%, from 1996. The
increase was attributable to more flight hours at Midwest Express,
increases in Skyway maintenance due to the expiration of manufacturer
warranties on most aircraft, an increase in unscheduled engine repairs,
and an increase in accrual rates for future engine and airframe overhauls.
Depreciation and amortization increased by $.2 million, or 11.2%, from
1996. The increase was primarily the result of the depreciation associated
with capital spending and the decision to exercise purchase options on two
leased jet aircraft in October 1996, offset by two jet aircraft becoming
fully depreciated during 1997.
Aircraft rental costs increased by $.4 million in 1997, as a result of
Midwest Express leasing two additional aircraft in 1997. This increased
cost was partially offset by lower lease costs for Skyway's 15 turboprop
aircraft that were refinanced in the second and third quarter 1996, and
the decision to exercise purchase options on two leased jet aircraft in
October 1996.
Other operating expenses increased by $.2 million, or 2.7%, from 1996.
Other cost increases included additional advertising, additional overnight
costs for flight crews associated with flight schedule changes, booking
fees, professional and financial services, software and telecommunication
costs. These cost increases were partially offset by lower charter costs,
facilities rental and headquarter relocation costs in the third quarter
1997.
Provision for Income Taxes
Income tax expense for the third quarter 1997 was $4.4 million, a $.8
million decrease from 1996. The effective tax rates for the third quarter
of 1997 and 1996 were 37.0% and 38.4%, respectively. For purposes of
calculating the Company's income tax expense and effective tax rate, the
Company treats amounts payable to an affiliate of Kimberly-Clark
Corporation under a tax allocation and separation agreement entered into
in connection with the Company's initial public offering as if they were
payable to taxing authorities.
Net Income
Net income for the third quarter decreased $.8 million from 1996. The net
income margin changed from 10.1% in 1996 to 8.5% in 1997.
Nine Months Ended September 30, 1997 compared to
Nine Months Ended September 30, 1996
Operating Revenues
Company operating revenues totalled $252.7 million for the nine months
ended September 30, 1997, a $26.1 million, or 11.5%, increase over 1996.
Passenger revenues accounted for 90.9% of total revenues and increased
$22.6 million, or 10.9%, from 1996 to $229.6 million. The increase is
attributable to an 11.8% increase in passenger volume, as measured by
revenue passenger miles, offset by a .8% decrease in revenue yield.
Midwest Express Airlines passenger revenue increased by $22.9 million, or
12.8%, from 1996 to $201.2 million. This increase was caused by an 11.6%
increase in passengers and a 1.0% increase in average passenger trip
length. Total Midwest Express capacity, as measured by scheduled service
ASMs, increased 13.3%. Load factor decreased from 64.4% in 1996 to 64.0%
in 1997.
Skyway passenger revenue decreased $.3 million, or 1.1%, from 1996 to
$28.4 million. This decrease was caused by a 5.2% decrease in passengers,
offset by a 3.1% increase in revenue yield. Load factor decreased from
45.0% in 1996 to 43.7% in 1997.
Revenue from cargo, charter and other services increased $3.5 million, or
18.0%, in 1997. Midwest Express benefited from increased revenue of $1.8
million from the Midwest Express MasterCard program and additional ground
service contracts of $.6 million. Charter revenue increased $.4 million,
because Midwest Express had one aircraft dedicated to charter operations
during the first four months of 1997 but did not have a dedicated aircraft
until the second quarter 1996. During portions of the second and third
quarters 1997, Midwest Express had delays with an aircraft refurbishment
that required the use of the dedicated charter jet aircraft for scheduled
service.
Operating Expenses
1997 operating expenses increased $27.7 million, or 14.0%, from 1996,
primarily due to expanded operations and an unscheduled engine repair.
Cost per total ASM increased 1.9%, from 12.4 cents in 1996 to 12.6 cents
in 1997.
Salaries, wages and benefits increased $8.9 million, or 15.5%, from 1996.
On a cost per total ASM basis, these costs increased 3.4%, from 3.6 cents
in 1996 to 3.7 cents in 1997. The labor cost increase reflects the
addition of approximately 300 full-time equivalent employees since
September 30, 1996; 271 at Midwest Express and 29 at Skyway. Midwest
Express added employees throughout the organization to support the
aircraft placed in service during 1996 and 1997. In addition, employees
were added to support aircraft ramp operations in Boston, Kansas City and
Washington, D.C., which were previously contracted from other airlines.
Salaries, wages and benefits were also adversely affected by an
unanticipated delay in completing several new aircraft modifications and
refurbishments as initially scheduled. This delay caused a temporary
excess in aircraft flight crews during the 1997 second and third quarters.
The labor cost increase was also due to an adjustment in pay scales for
most operations' employees at Midwest Express effective January 1, 1997.
These rate adjustments were implemented based on industry salary surveys
and management's desire to increase pay scales to maintain a competitive
position in the industry. Labor costs were reduced by a reduction in
accruals for Midwest Express' profit sharing and management incentive
programs.
Aircraft fuel and oil and associated taxes increased $3.9 million, or
11.7%, from 1996. Into-plane fuel prices increased .5% in 1997, averaging
74.0 cents per gallon in 1997 and 73.6 cents in 1996. Fuel consumption
increased 11.1% because of a 13.0% increase in Midwest Express aircraft
block hours.
Commissions increased by $2.7 million, or 12.7%, primarily due to higher
passenger revenue.
Dining services costs increased $1.5 million, or 12.9%, in 1997, primarily
due to the increase in passengers at Midwest Express.
Station rental, landing and other fees increased by $2.6 million, or
16.4%, from 1996. The increase was caused by 11.2% more flight segments by
Midwest Express, increased costs for and use of deicing fluid, and
significantly higher airport costs, primarily for purchased security
services and landing fees.
Maintenance costs increased by $5.8 million, or 37.2%, from 1996. The
increase was attributable in part to an unscheduled repair of one MD-88
engine that adversely affected costs by $1.3 million. In addition, this
event resulted in the lease of an additional engine during the nine
months. The increase was also attributable to more flight hours at Midwest
Express, increases in Skyway maintenance due to the expiration of
manufacturer warranties on most aircraft, and an increase in unscheduled
engine repairs.
Depreciation and amortization increased by $.7 million, or 12.6%, from
1996. The increase was primarily the result of the depreciation associated
with capital spending and the decision to exercise purchase options on two
leased jet aircraft in October 1996, offset by two jet aircraft becoming
fully depreciated during both 1996 and 1997.
Aircraft rental costs increased $.8 million as a result of Midwest Express
leasing additional aircraft in 1997. This increased cost was partially
offset by lower lease costs for Skyway's 15 turboprop aircraft that were
refinanced in the second and third quarter 1996, and the decision to
exercise purchase options on two leased aircraft in October 1996.
Other operating expenses increased by $.8 million, or 3.0%, from 1996.
Other cost increases included increased charter costs due to additional
charter volume, higher property tax costs because of more aircraft,
additional overnight costs for flight crews associated with flight
schedule changes, professional and financial services, software and
telecommunication costs. These cost increases were partially offset by
lower advertising, legal costs, facilities rental and headquarter
relocation costs in 1997.
Provision for Income Taxes
Income tax expense for the first nine months of 1997 was $10.2 million, a
decrease of $.9 million from 1996. The effective tax rates for the first
nine months 1997 and 1996 were 37.0% and 38.5%, respectively.
Net Income
Net income for the first nine months decreased $.4 million from 1996. The
net income margin decreased to 6.9% in 1997 from 7.8% in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $24.5 million at
September 30, 1997, compared to $27.6 million at December 31, 1996. Net
cash provided by operating activities totalled $36.9 million for the nine
months ended September 30, 1997. Net cash used in investing activities
totalled $38.4 million, primarily due to aircraft acquisitions and related
modifications of $11.8 million in 1997, which are intended to be financed
by sale and leaseback transactions, and due to capital expenditures of
$23.0 million. Net cash used in financing activities totalled $1.6
million, primarily due to purchases of treasury stock totalling $2.0
million.
As of September 30, 1997, the Company had a working capital deficit of
$8.1 million versus a $5.8 million deficit at December 31, 1996. The
working capital deficit is due to the Company's air traffic liability
(advance bookings, whereby passengers have purchased tickets for future
flights), accrued scheduled maintenance expense and accrued lease
payments. Because of these items, the Company expects to operate
periodically with a working capital deficit, which is not unusual for the
industry.
As of September 30, 1997, the Company's two credit facilities, a $55.0
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 $11.1 million that reduce
the amount of available credit.
Capital expenditures totalled $23.0 million for the nine months ended
September 30, 1997, not including aircraft acquisitions. Capital
expenditures primarily consisted of the completion of Midwest Express'
hangar expansion, the acquisition of an office building for Skyway,
capitalized engine overhauls, capitalized aircraft major engine
maintenance, hush kits, leasehold improvements and one spare aircraft
engine. During August 1997, the Company also purchased its headquarters
building, which it previously leased. As part of the transaction, the
Company assumed $3.5 million of long-term debt. The mortgage note has an
interest rate of 8.25% and is payable in monthly installments through
April 2011.
During 1998, Midwest Express will construct a new 70,000-square-foot
hangar to handle maintenance support for its current fleet and planned
growth. The new structure will include five aircraft bays, and be used for
heavy maintenance and other long-term jobs. Midwest Express expects the
facility to cost $8.0 million.
Aircraft acquisitions and modifications intended to be financed by sale
and leaseback transactions totalled $11.8 million during the nine months
ended September 30, 1997. Modifications to aircraft not yet in service
include maintenance inspection and modification, hush kit installation,
and complete interior refurbishment. The Company has yet to finalize
financing on three of the DC-9-30 aircraft acquired in 1996. During the
remainder of 1997, the Company intends to finalize a sale and leaseback
transaction on one of these DC-9-30 aircraft, in which case the Company
would be reimbursed for approximately $4.3 million of related aircraft
modification costs incurred to September 30, 1997. The Company anticipates
finalizing sale and leaseback transactions on the two remaining DC-9-30
aircraft in early 1998.
As of September 30, 1997, leases relating to three of Midwest Express' jet
aircraft are guaranteed by Kimberly-Clark in return for a guarantee fee
paid by the Company. Kimberly-Clark will continue to guarantee these
leases until the end of the current lease terms. None of these jet
aircraft leases expire before 2001.
During the second quarter 1997, the Company's board of directors approved
increasing the Company's share repurchase program by $10 million over and
above the original $5 million limit authorized by the board in December
1995. During the third quarter 1997, the Company repurchased 80,000 shares
totalling $2.0 million. As of September 30, 1997, the Company has
purchased a total of 235,550 shares at a cost of $4.8 million under the
share repurchase program.
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
This Pending Developments section contains forward-looking statements that
may state the Company's or management's intentions, hopes, beliefs,
expectations or predictions of the future. It is important to note that
the Company's actual results could differ materially from those projected
in such forward-looking statements. Factors that could affect the actual
results include, but are not limited to, uncertainties related to general
economic factors, industry conditions, scheduling developments, successful
negotiation of definitive aircraft acquisition documents, government
regulations, refurbishment schedules and potential delays relating to
acquired aircraft. Additional information concerning factors that could
cause actual results to differ materially from those in the forward-
looking statements is contained from time to time in the Company's SEC
filings, including but not limited to the Company's report on Form 10-K
for the year ended December 31, 1996; the Company's prospectus dated
September 22, 1995 included in Registration Statement No. 33-95212 on Form
S-1; and the Company's prospectus dated May 23, 1996 included in
Registration Statement No. 333-03325 on Form S-1.
DC-9 Aircraft - As of September 30, 1997, two DC-9 aircraft acquired
during 1996 had not yet been placed into service. The first aircraft will
initially be used as a maintenance spare beginning in the first quarter
1998. The second aircraft will be placed into service during the second
quarter 1998; plans for this aircraft have not been announced.
MD-80 Series Aircraft - During the third quarter 1997, the Company signed
a letter of intent to acquire eight McDonnell Douglas MD-80 series
aircraft and made deposits totalling $5.2 million. Currently operated by
Japan Air Systems, the aircraft will be acquired through Dolphin Trade &
Finance, Ltd. The Company is currently negotiating the terms of the
definitive documents and expects to finalize them in the fourth quarter of
1997. Assuming successful completion of such negotiations, the aircraft
are expected to be delivered to Midwest Express beginning January 1998 and
continuing through 1999. After refurbishment and modification, the first
aircraft will enter scheduled service in mid-1998. The Company expects
that this project, including aircraft refurbishment, modification and
support equipment, will cost approximately $125.0 million and will be
financed as deliveries take place.
Federal Excise Tax - Effective October 1, 1997, the U.S. government
changed the federal excise ticket tax structure. The Company expects the
change in the ticket tax to favorably impact its financial statements;
however, the change is not expected to be material.
Labor Relations - During the third quarter 1997, an application was filed
on behalf of the International Brotherhood of Teamsters for the services
of the National Mediation Board to conduct an election to determine
representation of the pilots of Midwest Express. The election will be held
in the fourth quarter, with the ballots counted on December 2, 1997.
Commission Rate Structure - Effective September 25, 1997, the Company
changed its travel agency commission rate structure. The Company now pays
an 8% base commission rate, down from 10%, with no commission cap. The
Company's operating income during the nine months ended September 30,
1997 would have increased approximately $3.2 million had the new
commission rate structure been in place during that period.
Other Issues - The Company's annual report for the year ended December 31,
1996 disclosed certain issues relating to the White House Commission on
Aviation Safety and Security, Skyway labor relations and sales taxes.
These issues remain pending.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As discussed in Note 11 to the Company's consolidated financial statements
for the year ended December 31, 1996 and in Item 3 of the Company's Annual
Report on Form 10-K for that year, a Commissioner of the Equal Employment
Opportunity Commission ("EEOC") filed charges against the Company on July
8, 1992. On May 30, 1997, the EEOC commenced litigation in the federal
District Court for the Eastern District of Wisconsin relating to such
charges seeking compensatory and punitive damages in unspecified amounts
for its claimants. The litigation involves a smaller number of claimants
than the original charges. When the Company responds to the complaint in
the litigation, the Company will deny the EEOC's allegations, and the
Company intends to vigorously defend itself against the charges unless a
settlement can be reached that would make it economically impractical to
contest the charges. The accompanying financial statements do not reflect
any liability with respect to the EEOC's claims, and the Company does not
believe the amount of any settlement or adverse judgment would be material
to the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
<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 13, 1997 By /s/ Robert S. Bahlman
Robert S. Bahlman
Vice President, Chief Financial Officer
and Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MIDWEST EXPRESS HOLDINGS, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 24,498
<SECURITIES> 0
<RECEIVABLES> 4,165
<ALLOWANCES> 376
<INVENTORY> 3,468
<CURRENT-ASSETS> 59,776
<PP&E> 156,551
<DEPRECIATION> 68,517
<TOTAL-ASSETS> 156,797
<CURRENT-LIABILITIES> 67,872
<BONDS> 3,362
0
0
<COMMON> 96
<OTHER-SE> 55,728
<TOTAL-LIABILITY-AND-EQUITY> 156,797
<SALES> 0
<TOTAL-REVENUES> 252,663
<CGS> 0
<TOTAL-COSTS> 225,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 114
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 27,603
<INCOME-TAX> 10,216
<INCOME-CONTINUING> 17,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,387
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.83
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