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 June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 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 July 31, 1998, there were 14,141,214 shares of Common Stock, $.01
par value, of the Registrant outstanding.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended June 30, 1998
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 6
Statements
Item 2. Management's Discussion and Analysis of 7
Results of Operations and Financial Condition
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 16
Holders
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
Part I Item I - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Passenger service............. $ 91,597 $ 76,419 $ 170,798 $ 147,847
Cargo ........................ 2,939 2,699 5,869 5,292
Other ........................ 5,561 4,226 11,841 10,125
-------- -------- -------- --------
Total operating revenues..... 100,097 83,344 188,508 163,264
-------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits.. 29,178 21,154 55,481 42,562
Aircraft fuel and oil......... 10,410 11,960 21,612 25,362
Commissions .................. 8,128 8,064 14,753 15,183
Dining services .............. 4,920 4,362 9,318 8,188
Station rental, landing and
other fees.................. 6,240 5,768 13,446 12,384
Aircraft maintenance materials
and repairs................. 8,985 8,353 16,452 14,263
Depreciation and amortization. 2,414 2,147 4,749 4,248
Aircraft rentals.............. 4,713 4,312 9,424 8,574
Other......................... 8,278 8,717 17,039 17,520
-------- -------- -------- --------
Total operating expenses..... 83,266 74,837 162,274 148,284
-------- -------- -------- --------
Operating income.................. 16,831 8,507 26,234 14,980
-------- -------- -------- --------
Other income (expense):
Interest income.............. 476 339 890 639
Other........................ (90) (16) (179) (20)
-------- -------- -------- --------
Total other income
(expense)................ 386 323 711 619
-------- -------- -------- --------
Income before income taxes........ 17,217 8,830 26,945 15,599
Provision for income taxes........ 6,456 3,232 10,104 5,770
-------- -------- -------- --------
Net income ....................... $ 10,761 $ 5,598 $ 16,841 $ 9,829
======== ======== ======== ========
Net income per common share -
basic........................... $ 0.76 $ 0.39 $ 1.19 $ 0.69
======== ======== ======== ========
Net income per common share -
diluted......................... $ 0.75 $ 0.39 $ 1.17 $ 0.68
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 18,479 $ 32,066
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $271 and $231 at June 30,
1998 and December 31, 1997,
respectively ........................... 5,827 5,106
Other receivables......................... 358 444
--------- ---------
Total accounts receivable........... 6,185 5,550
Inventories................................. 3,880 3,942
Prepaid expenses............................ 4,630 3,414
Deferred income taxes....................... 5,009 4,655
Aircraft and modifications intended to be
financed by sale and leaseback
transactions.............................. 5,443 6,000
--------- ---------
Total current assets................ 44,923 55,627
--------- ---------
Property and equipment, at cost................ 215,194 160,048
Less accumulated depreciation............... 75,834 70,892
--------- ---------
Net property and equipment..................... 139,360 89,156
Landing slots and leasehold rights, net........ 4,736 4,900
Purchase deposits on flight equipment.......... 2,333 14,500
Other assets................................... 1,916 2,565
--------- ---------
Total assets................................... $ 193,268 $ 166,748
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 4,357 $ 5,560
Air traffic liability....................... 38,200 28,934
Accrued liabilities......................... 33,406 33,989
--------- ---------
Total current liabilities........... 77,260 68,483
--------- ---------
Long-term debt................................. 3,276 3,333
Deferred income taxes.......................... 9,722 12,509
Noncurrent scheduled maintenance expense....... 10,028 7,594
Accrued pension and other postretirement
benefits..................................... 6,919 5,462
Other noncurrent liabilities................... 5,604 5,969
--------- ---------
Total liabilities.............................. 112,809 103,350
--------- ---------
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, 14,464,056 shares
issued in 1998 and 9,642,807 in 1997...... 145 96
Additional paid-in capital.................. 9,608 9,531
Treasury stock, at cost..................... (4,474) (4,572)
Retained earnings........................... 75,180 58,343
--------- ---------
Total shareholders' equity..................... 80,459 63,398
--------- ---------
Total liabilities and shareholders' equity..... $ 193,268 $ 166,748
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income ................................. $ 16,841 $ 9,829
Items not involving the use of cash:
Depreciation and amortization............. 4,749 4,249
Deferred income taxes..................... (3,141) (804)
Other..................................... 2,505 2,085
Changes in operating assets and liabilities:
Accounts receivable....................... (635) (863)
Inventories............................... 62 (448)
Prepaid expenses.......................... (1,216) (662)
Accounts payable.......................... (1,203) 620
Income taxes payable...................... 2,811 894
Accrued liabilities....................... 103 (5,115)
Air traffic liability..................... 5,769 7,369
-------- -------
Net cash provided by operating
activities................................ 26,645 17,154
-------- -------
Investing activities:
Capital expenditures........................ (40,793) (14,791)
Aircraft acquisitions and modifications - -
financed by or intended to be financed
by sale and leaseback transactions........ - (8,299)
Proceeds from sale of property and equipment 3 11
Other....................................... (3,131) (405)
-------- -------
Net cash used in investing activities....... (43,921) (23,484)
-------- -------
Financing activities:
Proceeds from sale and leaseback
transactions.............................. - 1,266
Other....................................... 3,689 98
-------- -------
Net cash provided by financing
activities................................ 3,689 1,364
-------- -------
Net decrease in cash and cash equivalents...... (13,587) (4,966)
Cash and cash equivalents, beginning of
period....................................... 32,066 27,589
-------- -------
Cash and cash equivalents, end of period....... $ 18,479 $ 22,623
======== =======
</TABLE>
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 six-month period ended
June 30, 1998 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, 1997. The results
of operations for the six-month period ended June 30, 1998 are not
necessarily indicative of the results for the entire fiscal year
ending December 31, 1998.
Stock Split
-----------
On April 22, 1998, 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 27 to shareholders of
record as of May 11. The financial and share information presented
herein for all periods has been adjusted to reflect the effect of the
stock dividend.
2. New Accounting Standards
The Company is required to adopt SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the fourth
quarter of 1998. SFAS No. 131 will supersede the business segment
disclosure requirements currently in effect under SFAS No. 14. SFAS
No. 131, among other things, establishes standards regarding the
information a company is required to disclose about its operating
segments and provides guidance regarding what constitutes a reportable
operating segment. The Company is currently evaluating what
disclosures will be required under SFAS No. 131.
The Company is required to adopt the disclosure requirements of SFAS
No. 132, "Employer's Disclosures about Pensions and Other Post-
retirement Benefits," in the fourth quarter of 1998. SFAS No. 132
revises disclosure requirements for such pension and postretirement
benefit plans to, among other things, standardize certain disclosures
and eliminate certain other disclosures no longer deemed useful. SFAS
No. 132 does not change the measurement or recognition criteria for
such plans.
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
--------
The Company's 1998 second quarter operating income was $16.8 million, an
increase of $8.3 million from the second quarter 1997. Net income
increased by $5.2 million, or 92.2%, to $10.8 million. For the first six
months of 1998, operating income was $26.2 million, an increase of $11.3
million from 1997. Year-to-date net income increased from $9.8 million to
$16.8 million, or 71.3%. Year-to-date diluted earnings per share were
$1.17, a $.49, or 72.1%, increase over 1997 results.
The Company's total revenue in the second quarter increased $16.8 million,
or 20.1%, relative to the second quarter 1997. The increase in revenue was
primarily attibutable to record passenger traffic, which increased 13.8%,
which was partially due to three additional aircraft in scheduled service
during the quarter. In addition to the improvement in passenger traffic,
revenue yield increased by 5.3%. The increase in revenue yield was due to
a more favorable fare environment and less competitive pricing pressures
in a number of markets compared to 1997. The Company also posted increased
supplemental revenue from the Midwest Express MasterCard program, aircraft
charters and cargo operations.
The Company's costs increased by $8.4 million, or 11.3%, in the second
quarter 1998 due to higher labor and maintenance costs and expenses
associated with the service expansions during 1997 and 1998. These higher
costs were partially offset by lower fuel prices and reduced travel agent
commission expense. The Company benefited from significantly lower fuel
prices in the second quarter 1998, which averaged 22.4% less than in the
second quarter 1997. Lower fuel prices favorably impacted operating income
by $3.0 million in the second quarter 1998. In addition, a reduced travel
agent commission structure contributed $1.4 million to operating income in
the second quarter 1998. In the second quarter 1997, the Company's costs
were adversely affected by an unscheduled engine repair, which impacted
operating income by $1.3 million in the quarter. 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>
Midwest Express Operations
--------------------------
<S> <C> <C> <C> <C> <C> <C>
Origin & Destination Passengers 451,580 400,831 12.7 827,198 741,210 11.6
Revenue Passenger Miles (000s) 412,624 362,070 14.0 764,480 675,487 13.2
Scheduled Service Available Seat
Miles (000s) 609,009 548,071 11.1 1,194,795 1,068,508 11.8
Total Available Seat Miles (000s) 613,774 553,638 10.9 1,210,433 1,090,356 11.0
Load Factor (%) 67.8% 66.1% 1.7 64.0% 63.2% 0.8
Revenue Yield $0.196 $0.185 6.2 $0.197 $0.192 2.8
Cost per total ASM $0.122 $0.120 2.0 $0.120 $0.120 -0.2
Average Passenger Trip Length 913.7 903.3 1.2 924.2 911.3 1.4
Number of Flights 10,127 9,688 4.5 19,920 18,832 5.8
Into-plane Fuel Cost per Gallon $0.560 $0.725 -22.8 $0.587 $0.765 -23.2
Full-time Equivalent Employees at
End of Period 1,971 1,820 8.3 1,971 1,820 8.3
Aircraft in Service at End of Period 26 23 13.0 26 23 13.0
Skyway Airlines Operations
--------------------------
Origin & Destination Passengers 85,306 76,140 12.0 156,169 144,922 7.8
Revenue Passenger Miles (000s) 19,707 17,803 10.7 36,140 33,626 7.5
Scheduled Service Available Seat
Miles (000s) 40,790 39,382 3.6 80,310 78,048 2.9
Total Available Seat Miles (000s) 40,790 39,488 3.3 80,346 78,229 2.7
Load Factor (%) 48.3% 45.2% 3.1 45.0% 43.1% 1.9
Revenue Yield $0.538 $0.532 1.1 $0.554 $0.543 2.1
Cost per total ASM $0.227 $0.239 -4.9 $0.234 $0.242 -3.2
Average Passenger Trip Length 231.0 233.8 -1.2 231.4 232.0 -0.3
Number of Flights 10,924 10,356 5.5 21,441 20,429 5.0
Into-plane Fuel Cost per Gallon $0.629 $0.760 -17.2 $0.652 $0.809 -19.4
Full-time Equivalent Employees at
End of Period 285 247 15.4 285 247 15.4
Aircraft in Service at End of Period 15 15 - 15 15 -
</TABLE>
Note: All statistics exclude charter operations except the
following: total available seat miles ("ASM"), cost per
total ASM, into-plane fuel cost, number of employees and
aircraft in service. 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 June 30, Six Months Ended June 30,
1998 1997 1998 1997
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 $0.140 91.5% $0.129 91.7% $0.132 90.6% $0.126 90.6%
Cargo 0.004 2.9% 0.005 3.2% 0.005 3.1% 0.005 3.3%
Other 0.009 5.6% 0.007 5.1% 0.009 6.3% 0.009 6.1%
----- ------ ----- ------ ----- ------ ----- ------
Total operating revenues 0.153 100.0% 0.141 100.0% 0.146 100.0% 0.140 100.0%
Operating expenses:
Salaries, wages and benefits 0.045 29.2% 0.036 25.4% 0.043 29.4% 0.037 26.1%
Aircraft fuel and oil 0.016 10.4% 0.020 14.3% 0.017 11.5% 0.022 15.5%
Commissions 0.012 8.1% 0.013 9.7% 0.012 7.8% 0.013 9.3%
Dining services 0.007 4.9% 0.007 5.2% 0.007 5.0% 0.007 5.0%
Station rental, landing
and other fees 0.009 6.2% 0.010 6.9% 0.010 7.1% 0.011 7.6%
Aircraft maintenance
materials/repairs 0.014 9.0% 0.014 10.0% 0.013 8.7% 0.012 8.7%
Depreciation and
amortization 0.004 2.4% 0.003 2.6% 0.004 2.5% 0.003 2.6%
Aircraft rentals 0.007 4.7% 0.008 5.2% 0.007 5.0% 0.007 5.3%
Other 0.013 8.3% 0.015 10.5% 0.013 9.1% 0.015 10.7%
----- ------ ----- ------ ----- ------ ----- ------
Total operating expenses $0.127 83.2% $0.126 89.8% $0.126 86.1% $0.127 90.8%
===== ====== ===== ====== ===== ====== ===== ======
Total ASMs (000s) 654,564 593,125 1,290,779 1,168,585
</TABLE>
Note: Numbers in this table cannot be recalculated due to rounding.
Three Months Ended June 30, 1998 Compared to
Three Months Ended June 30, 1997
--------------------------------------------
Operating Revenues
------------------
Company operating revenues totalled $100.1 million in the second quarter
1998, a $16.8 million, or 20.1%, increase over revenues for the second
quarter 1997. Passenger revenues accounted for 91.5% of total revenues and
increased $15.2 million, or 19.9%, from 1997 to $91.6 million. The
increase is attributable to a 13.8% increase in passenger volume, as
measured by revenue passenger miles, and a 5.3% increase in revenue yield.
Midwest Express passenger revenue increased by $14.0 million, or 21.0%,
from 1997 to $81.0 million. This increase reflects a 12.7% increase in
origin and destination passengers and a 6.2% increase in revenue yield.
Total capacity, as measured by scheduled service ASMs, increased 11.1%
because of three additional aircraft in scheduled service during the
second quarter 1998. Load factor increased from 66.1% in 1997 to 67.8% in
1998. Yield was positively impacted by a more favorable fare environment
and less competitive pricing pressures in a number of markets compared to
1997.
Skyway passenger revenue increased by $1.1 million, or 11.9%, from 1997 to
$10.6 million. This increase was caused by a 12.0% increase in origin and
destination passengers and a 1.1% increase in revenue yield. Total
capacity increased by 3.6%. Load factor increased from 45.2% in 1997 to
48.3% in 1998.
Revenue from cargo, charter and other services increased $1.6 million in
the second quarter 1998. Midwest Express benefited from increased revenue
from the Midwest Express MasterCard program of $.7 million, ticket
exchange administrative fees of $.3 million, additional cargo revenue of
$.2 million and charter revenue of $.2 million.
Operating Expenses
------------------
Second quarter 1998 operating expenses increased by $8.4 million, or
11.3%, from 1997. The increase was primarily due to expanded operations,
offset by lower fuel and travel agent commission costs in 1998 and an
unscheduled engine repair in 1997. Cost per total ASM increased 0.8%, from
12.6 cents in 1997 to 12.7 cents in 1998.
Salaries, wages and benefits increased by $8.0 million, or 37.9%. On a
cost per total ASM basis, these costs increased 25.0%, from 3.6 cents in 1997
to 4.5 cents in 1998. Labor costs increased $4.2 million because of accruals
for Midwest Express' profit sharing and management incentive programs. The
profit sharing and incentive plans, which benefit substantially all
employees and are dependent entirely on achieving certain levels of
profitability, are payable annually and accrued monthly based on earnings-
to-date and projected results for the remainder of the year. The labor
cost increase also reflects the addition of approximately 189 full-time
equivalent employees (151 at Midwest Express and 38 at Skyway) since June
30, 1997 and increases in labor rates. Midwest Express added employees
throughout the organization to support the aircraft placed in service
during 1997 and 1998; Skyway added employees primarily in the flight
operations and maintenance functions. The labor cost increase was also due
to fewer maintenance labor hours being capitalized to major maintenance
projects, thereby resulting in more maintenance labor hours being charged
to expensed projects during the quarter.
Aircraft fuel and oil, and associated taxes decreased $1.6 million, or
13.0%, in 1998. Into-plane fuel prices decreased 22.4% in 1998, averaging
56.5 cents per gallon in 1998 and 72.8 cents per gallon in 1997. Fuel
consumption increased by 12.4% in the quarter, primarily because Midwest
Express operated 8.1% more aircraft flight hours. Fuel costs in July 1998
continued to trend downward, averaging 53.2 cents per gallon.
Commissions increased by $.1 million, or 0.8%, and decreased 8.7% on a
cost per total ASM basis. The new commission rate structure implemented in
the third quarter 1997, which lowered travel agent commissions from 10% to
8%, reduced commission expenses by $1.4 million. This reduction was offset
by the increase in passenger revenue of 19.9%.
Dining services costs increased by $.6 million, or 12.8%, from 1997. The
increase was primarily due to the 12.7% increase in origin and destination
passengers at Midwest Express.
Station rental, landing and other fees increased by $.5 million, or 8.2%,
from 1997. The increase was caused by 4.5% more flight segments at Midwest
Express and higher airport costs, particularly at Ronald Reagan National
Airport in Washington D.C.
Maintenance costs increased by $.6 million, or 7.6%, from 1997. The
increase was attributable to more flight hours at Midwest Express, an
increase in accrual rates for future engine and airframe overhauls, and
higher than expected costs for a major aircraft maintenance check that
required maintenance outsourcing. The increase was offset by an
unscheduled repair of one MD-88 engine that adversely affected 1997 costs
by $1.3 million. In addition, this event resulted in the lease of an
additional engine during the 1997 second quarter.
Depreciation and amortization increased by $.3 million, or 12.4%, from
1997. The increase was primarily the result of the depreciation associated
with capital spending.
Aircraft rental costs increased by $.4 million, or 9.3%, from 1997 as a
result of Midwest Express leasing three additional aircraft in 1998.
Other operating expenses decreased by $.4 million, or 5.0%, from 1997. The
decrease was primarily due to a non-recurring $1.1 million airport rental
credit received from Milwaukee County to distribute an airport rental
surplus. The rental credit was offset by higher expenses associated with
passenger booking fees, telephone expenses, air cargo and mail handling,
and the Company's frequent flyer program.
Provision for Income Taxes
--------------------------
Income tax expense for the second quarter 1998 was $6.5 million, a $3.2
million increase from 1997. The effective tax rates for the second quarter
of 1998 and 1997 were 37.5% and 36.6%, 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 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 second quarter increased $5.2 million from 1997. The
net income margin increased to 10.8% in 1998 from 6.7% in 1997.
Six Months Ended June 30, 1998 Compared to
Six Months Ended June 30, 1997
Operating Revenues
------------------
Company operating revenues totalled $188.5 million for the six months
ended June 30, 1998, a $25.2 million, or 15.5%, increase over 1997.
Passenger revenues accounted for 90.6% of total revenues and increased
$23.0 million, or 15.5%, from 1997 to $170.8 million. The increase is
attributable to a 12.9% increase in passenger volume, as measured by
revenue passenger miles, and a 2.3% increase in revenue yield.
Midwest Express passenger revenue increased by $21.2 million, or 16.3%,
from 1997 to $150.8 million. This increase was caused by an 11.6% increase
in origin and destination passengers, a 2.8% increase in revenue yield and
a 1.4% increase in average passenger trip length. Total Midwest Express
capacity, as measured by scheduled service ASMs, increased 11.8%. Load
factor increased from 63.2% in 1997 to 64.0% in 1998.
Skyway passenger revenue increased by $1.8 million, or 9.8%, from 1997 to
$20.0 million. This increase was caused by a 7.8% increase in origin and
destination passengers and a 2.1% increase in revenue yield. Load factor
increased from 43.1% in 1997 to 45.0% in 1998.
Revenue from cargo, charter and other services increased $2.3 million, or
14.9%, in 1998. Midwest Express benefited from increased revenue from the
Midwest Express MasterCard program of $1.2 million, additional cargo
revenue of $.6 million, refund administration fees of $.4 million and
additional ground service contracts of $.3 million, offset by decreased
charter revenue of $.4 million.
Operating Expenses
------------------
1998 operating expenses increased by $14.0 million, or 9.4%, from 1997,
primarily due to expanded operations, offset by lower fuel and travel
agent commission costs in 1998 and an unscheduled engine repair in 1997.
Cost per total ASM decreased 0.9% from 12.7 cents in 1997 to 12.6 cents
in 1998.
Salaries, wages and benefits increased $12.9 million, or 30.4%, from 1997.
On a cost per total ASM basis, these costs increased 18.0%, from 3.6 cents
in 1997 to 4.3 cents in 1998. Labor costs increased $4.4 million because of
accruals for Midwest Express' profit sharing and management incentive
programs. The profit sharing and incentive plans, which benefit
substantially all employees and are dependent on achieving certain levels
of profitability, are payable annually and accrued monthly based on
earnings-to-date and projected results for the remainder of the year. The
labor cost increase also reflects the addition of approximately 189 full-
time equivalent employees (151 at Midwest Express and 38 at Skyway) since
June 30, 1997 and increases in labor rates. Midwest Express added
employees throughout the organization to support the aircraft placed in
service during 1997 and 1998; Skyway added employees primarily in the
flight operations and maintenance functions. The labor cost increase was
also due to fewer maintenance labor hours being capitalized to major
maintenance projects, thereby resulting in more maintenance labor hours
being charged to expensed projects during the quarter.
Aircraft fuel and oil, and associated taxes decreased $3.8 million, or
14.8%, in 1998. Into-plane fuel prices decreased 22.9% in 1998, averaging
59.2 cents per gallon in 1998 and 76.8 cents per gallon in 1997. Fuel
consumption increased by 10.7% in 1998, primarily because Midwest Express
operated 8.5% more aircraft flight hours.
Commissions decreased by $.4 million, or 2.8%, and decreased 12.0% on a
cost per total ASM basis. The new commission rate structure implemented in
the third quarter 1997, which lowered travel agent commissions from 10% to
8%, reduced commission expenses by $2.7 million. This reduction was offset
by the increase in passenger revenue of 15.5%.
Dining services costs increased by $1.1 million, or 13.8%, from 1997. The
increase was primarily due to the 11.6% increase in origin and destination
passengers at Midwest Express.
Station rental, landing and other fees increased by $1.1 million, or 8.6%,
from 1997. The increase was caused by 5.8% more flight segments at Midwest
Express and higher airport costs, particularly at Ronald Reagan National
Airport in Washington D.C.
Maintenance costs increased by $2.2 million, or 15.3%, from 1997. The
increase was attributable to more flight hours at Midwest Express, an
increase in accrual rates for future engine and airframe overhauls, and
higher than expected costs for a major aircraft maintenance check that
required maintenance outsourcing. The increase was offset by an
unscheduled repair of one MD-88 engine that adversely affected costs by
$1.3 million in 1997. In addition, this event resulted in the lease of an
additional engine during the 1997 second quarter.
Depreciation and amortization increased by $.5 million, or 11.8%, from
1997. The increase was primarily the result of the depreciation associated
with capital spending.
Aircraft rental costs increased by $.9 million, or 9.9%, from 1997 as a
result of Midwest Express leasing three additional aircraft in 1998.
Other operating expenses decreased by $.5 million, or 2.7%, from 1997. The
decrease was primarily due to a non-recurring $1.1 million airport rental
credit received from Milwaukee County to distribute an airport rental
surplus. The rental credit was offset by higher expenses associated with
passenger booking fees, telephone expenses, air cargo and mail handling,
and the Company's frequent flyer program.
Provision for Income Taxes
--------------------------
Income tax expense for the first six months 1998 was $10.1 million, an
increase of $4.3 million from 1997. The effective tax rates for the first
six months 1998 and 1997 were 37.5% and 37.0%, respectively.
Net Income
----------
Net income for the first six months increased $7.0 million from 1997. The
net income margin increased to 8.9% in 1998 from 6.0% in 1997.
Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $18.5 million at June 30,
1998, compared to $32.1 million at December 31, 1997. Net cash provided by
operating activities totalled $26.6 million for the six months ended June
30, 1998. Net cash used in investing activities totalled $43.9 million,
primarily due to capital expenditures of $40.8 million.
As of June 30, 1998, the Company had a working capital deficit of $17.2
million versus a $12.9 million deficit on December 31, 1997. 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 June 30, 1998, 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 $12.4 million that reduce the amount of
available credit.
Capital expenditures totalled $40.8 million for the six months ended June
30, 1998. Capital expenditures primarily consisted of aircraft purchase
and refurbishment costs, capitalized engine overhauls, capitalized
aircraft major maintenance and ground equipment.
Subsequent to June 30, 1998, the Company was reimbursed for $3.9 million
of related aircraft acquisition and modification costs associated with
sale and leaseback transactions on two DC-9-30 aircraft.
During 1997, the Company executed definitive purchase documents to acquire
eight McDonnell Douglas MD-80 series aircraft. During the first six months
of 1998, the Company took delivery of two of these aircraft. The Company
will receive the remaining six aircraft during the remainder of 1998 and
throughout 1999. The Company expects to finance the first four of these
aircraft using internal cash flow and the remaining four with debt
financing.
As of March 31, 1998, 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 expires before 2001.
The Company's Board of Directors has authorized a $15.0 million common
stock repurchase program. As of June 30, 1998, the Company has purchased a
total of 353,325 shares of common stock at a cost of $4.8 million under
the share repurchase program. Subsequent to June 30, 1998, the Company
repurchased an additional 65,300 shares at a cost of $2.0 million.
The Company believes its cash flow from operations, funds available from
credit facilities and available long-term financing for the acquisition of
jet aircraft will be adequate to provide for working capital needs and
capital expenditures through 1998.
Pending Developments
This 10-Q filing, and particularly this Pending Developments section,
contains forward-looking statements that may state the Company's or
management's intentions, hopes, beliefs, expectations or predictions for
the future. It is important to note that the Company's actual results
could differ materially from those projected results due to factors that
include, but are not limited to, uncertainties related to general economic
factors, industry conditions, scheduling developments, government
regulations, labor relations, aircraft maintenance and 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 prospectus dated May 23, 1996 included in Registration
Statement on Form S-1 No. 333-03325.
Stock Split - On April 22, 1998, 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 27 to shareholders of
record as of May 11. Fractional shares were paid to shareholders in
cash. The financial and share information presented in Management's
Discussion and Analysis of Results of Operations and Financial Condition
has been adjusted to reflect the effect of the stock split for all
periods.
Regional Jets - On July 8, 1998, the Company announced that it has entered
into an agreement with Fairchild Dornier to acquire five regional jets,
with an option to purchase 10 additional aircraft. The aircraft are
expected to be delivered to Astral beginning March 1999 continuing through
September 1999. The Company expects that this project, including aircraft
purchase price and support equipment, will cost approximately $60.0
million and will be financed as deliveries take place. The Company is
currently evaluating financing alternatives.
Year 2000 - The Company has developed plans to address issues related to
the impact of the year 2000 on its computer systems. The Company's Year
2000 Project involves five phases: Awareness, Assessment, Renovation,
Validation and Implementation. Financial, operational and non-information
technology systems have been assessed, and initial plans have been
developed to address systems modification requirements. To date, the
Company has identified one internal system that will require a moderate
amount of correction. This system will be modified using in-house
resources, and the modifications will be completed by year-end 1998. The
Company is also currently evaluating non-information technology systems
that include embedded technology such as microcontrollers in aircraft
parts, airport equipment and facility infrastructures. The financial
impact of making the required system changes is not expected to be
material to the Company's consolidated financial position, results of
operations or cash flows.
The Company is also participating with the airline industry to identify
potential year 2000 issues at airports and within industry infrastructure,
including common vendors, suppliers and government agencies, including the
Federal Aviation Administration ("FAA"). FAA operations are made possible
by many critical computer systems; without these specialized systems, the
FAA could not effectively control air traffic, target airlines for
inspection, or provide up-to-date weather conditions to pilots and air
traffic controllers.
The implications of the Company or FAA not meeting their year 2000
deadline could adversely affect the Company, resulting in customer
inconvenience, increased airline costs, grounded or delayed flights, or
degraded levels of safety.
Other Issues - The Company's annual report for the year ended December 31,
1997, disclosed certain issues relating to MD-80 series aircraft, labor
relations and sales taxes. These issues remain pending.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
------- ----------------------------------------------------
At the Company's Annual Meeting of Shareholders held on April 22, 1998,
the following individuals were elected to the Board of Directors:
Authority Authority
Granted Withheld
--------- ---------
John F. Bergstrom 8,665,134 147,038
Samuel K. Skinner 8,649,095 163,077
Frederick P. Stratton, Jr. 8,661,601 150,571
John W. Weekly 8,652,805 159,367
The term of office for the following directors continued after the
Company's Annual Meeting: Oscar C. Boldt, James G. Grosklaus, Timothy E.
Hoeksema, Brenda F. Skelton, Richard H. Sonnentag, David H. Treitel.
Item 5. Other Information.
------- ------------------
A shareholder wishing to include a proposal pursuant to Rule 14a-8 under
the Securities Exchange Act of 1934, as amended ("Rule 14a-8"), in the
Company's proxy statement for the 1999 Annual Meeting of Shareholders must
forward the proposal to the Company by November 19, 1998. The Company's
By-Laws establish procedures for shareholder nominations for elections for
directors of the Company and for bringing business before any annual
meeting of shareholders of the Company. Among other things, to bring
business before an annual meeting, a shareholder must give written notice
to the Secretary of the Company not more than 100 days nor less than 75
days prior to the first anniversary of the date of the Annual Meeting of
Shareholders of the Company in the immediately preceding year. The notice
must contain certain information about the proposed business or the
nominee and the shareholder making the proposal. Under the By-Laws, if the
Company does not receive a shareholder proposal submitted otherwise than
pursuant to Rule 14a-8 prior to February 6, 1999, then the notice will be
considered untimely and the Company is not required to present such
proposal at the 1999 Annual Meeting of Shareholders. If the Board of
Directors chooses to present such proposal at the 1999 Annual Meeting of
Shareholders, then the persons named in proxies solicited by the Board of
Directors for the 1999 Annual Meeting of Shareholders may exercise
discretionary voting power with respect to such proposal.
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
June 30, 1998.
<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: August 14, 1998 By: /s/ Robert S. Bahlman
Robert S. Bahlman
Senior Vice President, Chief
Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC. AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,479
<SECURITIES> 0
<RECEIVABLES> 6,456
<ALLOWANCES> 271
<INVENTORY> 3,880
<CURRENT-ASSETS> 44,923
<PP&E> 215,194
<DEPRECIATION> 75,834
<TOTAL-ASSETS> 139,360
<CURRENT-LIABILITIES> 77,260
<BONDS> 3,276
0
0
<COMMON> 145
<OTHER-SE> 80,314
<TOTAL-LIABILITY-AND-EQUITY> 193,268
<SALES> 0
<TOTAL-REVENUES> 188,508
<CGS> 0
<TOTAL-COSTS> 162,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 26,945
<INCOME-TAX> 10,104
<INCOME-CONTINUING> 16,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,841
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.17
</TABLE>
