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, 1999
[ ] 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, 1999, there were 14,131,433 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
Page 1
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended September 30, 1999
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
----------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
------ ----------------------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
------ -------------------------------
SIGNATURES 21
Page 2
<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 Nine Months
------------ -----------
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues:
<S> <C> <C> <C> <C>
Passenger service............................. $106,251 $ 95,172 $303,156 $265,970
Cargo ........................................ 2,776 2,894 8,702 8,763
Other ........................................ 6,810 5,757 20,521 17,599
-------- -------- -------- --------
Total operating revenues.................. 115,837 103,823 332,379 292,332
-------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits.................. 31,868 28,579 93,099 84,060
Aircraft fuel and oil......................... 14,307 10,532 36,547 32,144
Commissions................................... 8,190 8,434 23,571 23,187
Dining services............................... 6,138 5,314 17,573 14,632
Station rental, landing and other fees........ 7,558 6,274 22,855 19,720
Aircraft maintenance materials and repairs.... 11,392 10,496 33,292 26,949
Depreciation and amortization................. 3,359 2,615 9,452 7,364
Aircraft rentals.............................. 4,675 4,899 14,213 14,323
Other......................................... 10,856 9,764 32,214 26,803
-------- -------- -------- --------
Total operating expenses.................. 98,343 86,907 282,816 249,182
-------- -------- -------- --------
Operating income................................... 17,494 16,916 49,563 43,150
-------- -------- -------- --------
Other income (expense):
Interest income............................... 266 415 668 1,304
Interest expense.............................. (67) (70) (204) (211)
Other......................................... 102 (19) 29 (57)
-------- -------- -------- --------
Total other income........................ 301 326 493 1,036
-------- -------- -------- --------
Income before income taxes......................... 17,795 17,242 50,056 44,186
Provision for income taxes......................... 6,673 6,447 18,771 16,551
-------- -------- -------- --------
Net income......................................... $ 11,122 $ 10,795 $ 31,285 $ 27,635
======== ======== ======== ========
Net income per common share - basic................ $ .79 $ .77 $ 2.21 $ 1.96
======== ======== ======== ========
Net income per common share - diluted.............. $ .78 $ .75 $ 2.19 $ 1.93
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
Part I Item I - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1999 1998
---- ----
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................. $ 29,260 $ 13,455
Accounts receivable:..................................................................
Traffic, less allowance for doubtful accounts of $107 and $251 at September 30,
1999 and December 31, 1998, respectively........................................ 7,654 5,450
Other receivables................................................................. 262 3,804
-------- --------
Total accounts receivable............................................................. 7,916 9,254
Inventories........................................................................... 6,178 4,020
Prepaid expenses...................................................................... 4,684 6,358
Deferred income taxes................................................................. 4,502 5,521
Aircraft and modifications intended to be financed by sale and leaseback transactions. - 951
-------- --------
Total current assets....................................................................... 52,540 39,559
-------- --------
Property and equipment, at cost............................................................ 299,843 243,284
Less accumulated depreciation and amoritzation........................................ 92,520 82,701
-------- --------
Net property and equipment................................................................. 207,323 160,583
Landing slots and leasehold rights, net.................................................... 4,327 4,572
Purchase deposits on flight equipment...................................................... 800 13,383
Other assets............................................................................... 3,382 2,380
-------- --------
Total assets............................................................................... $268,372 $220,477
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 5,754 $ 5,064
Income taxes payable.................................................................. 51 2,305
Air traffic liability................................................................. 46,031 35,285
Scheduled maintenance expense......................................................... 2,655 5,182
Accrued liabilities................................................................... 35,994 34,185
-------- --------
Total current liabilities.................................................................. 90,485 82,021
-------- --------
Long-term debt............................................................................. 3,112 3,206
Deferred income taxes...................................................................... 13,844 13,647
Noncurrent scheduled maintenance expense................................................... 15,887 12,082
Accrued pension and other postretirement benefits.......................................... 9,077 6,201
Other noncurrent liabilities............................................................... 5,741 5,688
-------- --------
Total liabilities.......................................................................... $138,146 $122,845
-------- --------
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, 14,540,531 shares
issued in 1999 and 14,464,056 in 1998............................................. 145 145
Additional paid-in capital............................................................ 11,089 9,680
Treasury stock, at cost............................................................... (6,501) (6,401)
Retained earnings..................................................................... 125,493 94,208
-------- --------
Total shareholders' equity................................................................. 130,226 97,632
-------- --------
Total liabilities and shareholders' equity................................................. $268,372 $220,477
======== ========
See notes to consolidated financial statements.
</TABLE>
Page 4
<PAGE>
Part I Item I - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Operating activities:
<S> <C> <C>
Net income............................................................. $ 31,285 $ 27,635
Items not involving the use of cash:
Depreciation and amortization...................................... 9,452 7,364
Deferred income taxes.............................................. 1,216 (3,576)
Other.............................................................. 4,415 3,637
Changes in operating assets and liabilities:
Accounts receivable................................................ 1,338 (772)
Inventories........................................................ (2,158) (101)
Prepaid expenses................................................... 1,674 (1,441)
Accounts payable................................................... 690 245
Income taxes payable............................................... (2,254) 2,847
Accrued liabilities................................................ 3,301 10,266
Air traffic liability.............................................. 10,746 8,289
-------- --------
Net cash provided by operating activities.............................. 59,705 54,393
-------- --------
Investing activities:
Capital expenditures................................................... (62,413) (75,482)
Aircraft acquisitions and modifications financed by or intended to be
financed by sale and leaseback transactions........................ - 557
Proceeds from sale of property and equipment........................... 58 309
Other.................................................................. (1,252) 12,868
-------- --------
Net cash used in investing activities.................................. (63,607) (61,748)
-------- --------
Financing activities:
Proceeds from sale and leaseback transactions.......................... 15,951 4,492
Purchase of treasury stock............................................. - (2,003)
Other.................................................................. 3,756 767
-------- --------
Net cash provided by financing activities................................... 19,707 3,256
-------- --------
Net increase (decrease) in cash and cash equivalents........................ 15,805 (4,099)
Cash and cash equivalents, beginning of period.............................. 13,455 32,066
-------- --------
Cash and cash equivalents, end of period.................................... $ 29,260 $ 27,967
======== ========
See notes to consolidated financial statements.
</TABLE>
Page 5
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
The consolidated financial statements for the nine-month period ended
September 30, 1999 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, 1998. The results of operations for the nine-month period ended
September 30, 1999 are not necessarily indicative of the results for the
entire fiscal year ending December 31, 1999.
2. New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
Company is currently in the process of evaluating the accounting and
disclosure effects of this Statement and anticipates adopting the
Statement in the first quarter of 2001.
3. Reclassifications
Certain reclassifications have been made in prior year financial
statements to conform to the current year's presentation.
4. Segment Reporting
Midwest Express Airlines, Inc. and Astral Aviation, Inc., doing business
as Skyway Airlines, constitute the reportable segments of the Company. The
Company's reportable segments are strategic units that are managed
independently because they provide different services with different cost
structures and marketing strategies. Additional detail on segment
reporting is included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. Financial information for the three months
and nine months ended September 30 on the two operating segments, Midwest
Express and Astral, follows (in thousands):
Page 6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues................... 105,352 11,317 (832) 115,837
Operating income..................... 16,510 984 - 17,494
Depreciation and amortization........ 3,157 202 - 3,359
Interest income...................... 227 200 (161) 266
Interest expense..................... 228 - (161) 67
Income before income taxes........... 16,468 1,327 - 17,795
Provision for income taxes........... 6,175 498 - 6,673
Total assets......................... 258,063 24,310 (14,001) 268,372
Capital expenditures................. 24,981 1,064 - 26,045
<CAPTION>
Three Months Ended September 30, 1998
-------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues................... 93,238 11,692 (1,107) 103,823
Operating income..................... 15,025 1,891 - 16,916
Depreciation and amortization........ 2,442 173 - 2,615
Interest income...................... 415 156 (156) 415
Interest expense..................... 226 - (156) 70
Income before income taxes........... 15,195 2,047 - 17,242
Provision for income taxes........... 5,679 768 - 6,447
Total assets......................... 204,806 21,226 (13,341) 212,691
Capital expenditures................. 34,578 111 - 34,689
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues................... 302,122 32,879 (2,622) 332,379
Operating income..................... 47,182 2,381 - 49,563
Depreciation and amortization........ 8,851 601 - 9,452
Interest income...................... 628 483 (443) 668
Interest expense..................... 647 - (443) 204
Income before income taxes........... 47,051 3,005 - 50,056
Provision for income taxes........... 17,644 1,127 - 18,771
Total assets......................... 258,063 24,310 (14,001) 268,372
Capital expenditures................. 60,151 2,262 - 62,413
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues................... 263,502 31,882 (3,052) 292,332
Operating income..................... 39,853 3,297 - 43,150
Depreciation and amortization........ 6,854 510 - 7,364
Interest income...................... 1,304 410 (410) 1,304
Interest expense..................... 621 - (410) 211
Income before income taxes........... 40,478 3,708 - 44,186
Provision for income taxes........... 15,161 1,390 - 16,551
Total assets......................... 204,806 21,226 (13,341) 212,691
Capital expenditures................. 75,280 202 - 75,482
</TABLE>
Page 7
<PAGE>
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
Results of Operations
Overview
- --------
The Company's 1999 third quarter operating income was $17.5 million, an increase
of $.6 million from the third quarter 1998. Net income increased by $.3 million,
or 3.0%, to $11.1 million. For the first nine months of 1999, operating income
was $49.6 million, an increase of $6.4 million from 1998. Year-to-date net
income increased from $27.6 million to $31.3 million, or 13.2%. Year-to-date
diluted earnings per share were $2.19, a $.26, or 13.5% increase over 1998
results.
The Company's total revenue in the third quarter increased $12.0 million, or
11.6%, relative to the third quarter 1998. The increase in revenue was primarily
attributable to record passenger traffic resulting from continued strong
passenger demand for air travel and four additional aircraft in service.
Traffic, as measured by scheduled service revenue passenger miles (RPMs),
increased 16.1%, while capacity increased 17.7%. Operating income in comparison
to the previous year was negatively impacted by the Northwest Airlines and Air
Canada pilot strikes that benefited third quarter 1998 operating income by an
estimated $1.2 million. Revenue yield decreased 3.8% because a higher percentage
of traffic was in lower yield markets such as Milwaukee-Phoenix and
Milwaukee-Orlando, and because of competitive pricing pressure in several
markets. The Company realized increased revenue from the Midwest Express
MasterCard program and frequent flyer partnership programs.
The Company's operating costs increased by $11.4 million, or 13.2%, in the third
quarter primarily due to higher fuel prices and costs associated with capacity
growth. The Company placed four additional MD80 aircraft into scheduled service
since third quarter 1998. On a cost per available seat mile (ASM) basis, costs
decreased from 12.5(cent) in third quarter 1998 to 12.1(cent) in the third
quarter 1999, or 3.4%. Excluding the impact of higher fuel prices, unit costs
(cost per total ASM) decreased 5.7%. Unit costs decreased due to reduced profit
sharing expenses at Midwest Express, lower travel agent commission costs and
economies of scale associated with company growth. Unit costs were adversely
affected by reduced capacity due to a pilot shortage in August and September and
cancellations caused by Hurricane Floyd. Additional detail on cost changes is
included in subsequent sections.
Page 8
<PAGE>
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,
------------- -------------
% %
1999 1998 Change * 1999 1998 Change *
---- ---- ------ ---- ---- ------
Midwest Express Operations
- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Origin & Destination Passengers 551,727 485,286 13.7 1,537,763 1,312,484 17.2
Revenue Passenger Miles (000s) 521,222 444,579 17.2 1,465,682 1,209,059 21.2
Scheduled Service Available Seat Miles (000s) 766,277 644,906 18.8 2,233,314 1,839,701 21.4
Total Available Seat Miles (000s) 769,658 651,038 18.2 2,250,883 1,861,471 20.9
Load Factor (%) 68.0% 68.9% -0.9 pts. 65.6% 65.7% -0.1 pts.
Revenue Yield $0.182 $0.188 -3.0 $0.185 $0.194 -4.8
Cost per total ASM $0.115 $0.120 -3.9 $0.113 $0.120 -5.7
Average Passenger Trip Length 944.7 916.1 3.1 953.1 921.2 3.5
Number of Flights 11,635 10,739 8.3 34,050 30,659 11.1
Into-plane Fuel Cost per Gallon $0.637 $0.534 19.2 $0.560 $0.569 -1.6
Full-time Equivalent Employees at End of Period 2,360 2,066 14.2 2,360 2,066 14.2
Aircraft in Service at End of Period 31 27 14.8 31 27 14.8
Skyway Airlines Operations
- --------------------------
Origin & Destination Passengers 94,710 99,144 -4.5 267,760 255,313 4.9
Revenue Passenger Miles (000s) 21,153 22,695 -6.8 60,622 58,835 3.0
Scheduled Service Available Seat Miles (000s) 41,205 41,332 -0.3 121,566 121,642 -0.1
Total Available Seat Miles (000s) 41,340 41,473 -0.3 122,001 121,818 0.2
Load Factor (%) 51.3% 54.9% -3.6 pts. 49.9% 48.4% 1.5 pts.
Revenue Yield $0.530 $0.510 3.9 $0.537 $0.537 0.0
Cost per total ASM $0.250 $0.236 5.8 $0.250 $0.235 6.5
Average Passenger Trip Length 223.3 228.9 -2.4 226.4 230.4 -1.7
Number of Flights 11,209 11,148 0.5 32,800 32,589 0.6
Into-plane Fuel Cost per Gallon $0.776 $0.623 24.5 $0.659 $0.642 2.6
Full-time Equivalent Employees at End of Period 368 297 23.9 368 297 23.9
Aircraft in Service at End of Period 15 15 - 15 15 -
Note: All statistics exclude charter operations except the following: total available seat miles, 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.
* Percentage change calculations may not be recomputed due to rounding.
</TABLE>
Page 9
<PAGE>
<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:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- ------- --- -------
Operating revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passenger service $0.131 91.7% $0.137 91.7% $0.128 91.2% $0.134 91.0%
Cargo $0.003 2.4% 0.004 2.8% $0.004 2.6% 0.004 3.0%
Other $0.008 5.9% 0.008 5.5% $0.009 6.2% 0.009 6.0%
------ ---- ----- ---- ------ ---- ----- ----
Total operating revenues $0.143 100.0% 0.150 100% $0.140 100.0% 0.147 100%
------ ------ ----- ---- ------ ------ ----- ----
Operating expenses:
Salaries, wages and benefits $0.039 27.5% 0.041 27.5% $0.039 28.0% 0.042 28.8%
Aircraft fuel and oil $0.018 12.4% 0.015 10.1% $0.015 11.0% 0.016 11.0%
Commissions $0.010 7.1% 0.012 8.1% $0.010 7.1% 0.012 7.9%
Dining services $0.008 5.3% 0.008 5.1% $0.007 5.3% 0.007 5.0%
Station rental, landing and other fees $0.009 6.5% 0.009 6.0% $0.010 6.9% 0.010 6.7%
Aircraft maintenance materials/repairs $0.014 9.8% 0.015 10.1% $0.014 10.0% 0.014 9.2%
Depreciation and amortization $0.004 2.9% 0.004 2.5% $0.004 2.8% 0.004 2.5%
Aircraft rentals $0.006 4.0% 0.007 4.7% $0.006 4.3% 0.007 4.9%
Other $0.013 9.4% 0.014 9.4% $0.014 9.7% 0.014 9.2%
------ ---- ----- ---- ------ ---- ----- ----
Total operating expenses $0.121 84.9% $0.126 83.5% $0.119 85.1% $0.126 85.2%
====== ===== ====== ===== ====== ===== ====== =====
Total ASMs (000s) 810,998 692,511 2,372,884 1,983,289
Note: Numbers, percents and totals in this table may not be recomputed due to rounding.
</TABLE>
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
-------------------------------------
Operating Revenues
- ------------------
Company operating revenues totaled $115.8 million in the third quarter 1999, a
$12.0 million, or 11.6% increase over the third quarter 1998. Passenger revenues
accounted for 91.7% of total revenues and increased $11.1 million, or 11.6%,
from 1998 to $106.3 million. The increase was attributable to a 16.1% increase
in passenger volume, as measured by revenue passenger miles.
Midwest Express Airlines' passenger revenue increased by $11.4 million, or
13.7%, from 1998 to $95.0 million. This increase was caused by a 13.7% increase
in origin and designation passengers. Total capacity, as measured by scheduled
service ASMs, increased 18.8% due to four additional aircraft in scheduled
service during the past year. Load factor decreased from 68.9% in 1998 to 68.0%
in 1999. Revenue yield decreased 3.0% because a higher percentage of traffic was
in lower yield markets such as Milwaukee-Phoenix and Milwaukee-Orlando, and
because of competitive pricing pressure in several markets.
Page 10
<PAGE>
Skyway passenger revenue decreased by $.4 million, or 3.1%, from 1998 to $11.2
million. This decrease was primarily caused by a 6.8% decrease in passenger
volume, as measured by revenue passenger miles, offset by a 3.9% increase in
revenue yield. Load factor decreased from 54.9% to 51.3%, the reduction being
directly attributable to the impact of the Northwest Airlines' pilot strike in
September 1998.
Revenue from cargo, charter and other services increased $.9 million in the
third quarter 1999. Midwest Express benefited from increased revenue of $.8
million from the Midwest Express MasterCard program, $.4 million from increased
revenue from frequent flyer partnership programs and $.3 million from increased
ground handling services for other airlines. Partially offsetting these
increases were decreases of $.5 million in charter revenue and $.1 million in
cargo revenue.
Operating Expenses
- ------------------
1999 operating expenses increased by $11.4 million, or 13.2%, from 1998. The
cost increase was primarily due to higher fuel prices and service expansion.
Midwest Express operated 8.3% more flights during the quarter and had four
additional aircraft in service. Cost per total ASM decreased 3.4%, from
12.5(cent) in 1998 to 12.1(cent) in 1999.
Salaries, wages and benefits increased by $3.3 million, or 11.5%. Labor costs
increased by $5.9 million due to the addition of approximately 365 full-time
equivalent employees (294 at Midwest Express and 71 at Skyway) since September
30, 1998 and increases in labor rates. Midwest Express added employees
throughout the organization to support the aircraft placed in service during
1999; Skyway added employees to support ramp and gate operations at the
Milwaukee airport and the start-up of the regional jet program. These increases
were partially offset by a $2.6 million reduction in the profit sharing accrual.
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. On a cost per total ASM basis, labor
costs decreased 4.6%, from 4.1(cent) in 1998 to 3.9(cent) in 1999.
Aircraft fuel and oil and associated taxes increased $3.8 million, or 35.8%, in
third quarter 1999. Fuel consumption increased 13.4% in the quarter, primarily
because Midwest Express operated 12.5% more aircraft flight hours. Into-plane
fuel prices (which represent the Company's cost after the effect of any hedging)
increased 19.4% in 1999, averaging 64.5(cent) per gallon for third quarter 1999
and 54.0(cent) per gallon for third quarter 1998. Fuel hedging programs resulted
in $.9 million savings during the quarter and $.2 million savings in October.
The average price would have been 69.0(cent) per gallon in the third quarter
1999 in the absence of hedging. Into-plane fuel prices in October 1999 trended
upward, averaging 72.0(cent) per gallon. The Company manages the price risk of
fuel primarily by purchasing caps, which are commodity options that establish
ceiling prices. The Company has hedged approximately 28% of fourth quarter 1999
and 25% of first quarter 2000 forecasted fuel requirements.
Page 11
<PAGE>
Commissions decreased by $.2 million, or 2.9%. This decrease was primarily due
to a cap placed on travel agent commissions of $25 one-way and $50 round trip,
which was implemented February 1, 1999 and was partially offset by an 11.6%
increase in passenger revenue. In addition, the Company realized savings due to
increased travel booked directly through its reservations center, the Midwest
Express Web site and other travel-related Web sites. Commission costs decreased
17.1% on a cost per total ASM basis. On October 19, 1999, the Company announced
the commission rate structure will be further reduced from an 8% to a 5% base
commission, with the maximum travel agent's commission remaining at $50 per
round trip or $25 for a one-way ticket.
Dining services costs increased by $.8 million, or 15.5%, from 1998. The
increase was primarily due to a 13.7% increase in Midwest Express origin and
destination passengers and higher food and service prices. Dining services costs
decreased 1.4% on a cost per total ASM basis.
Station rental, landing and other fees increased by $1.3 million, or 20.5%, from
1998. On a cost per total ASM basis, these costs increased 2.9%. The increase
was caused by 8.3% more flight segments at Midwest Express, higher ground
handling services costs and security fees.
Maintenance costs increased by $.9 million, or 8.5%, from 1998. Midwest Express
continued to experience a significant number of airframe maintenance, aircraft
refurbishment and heavy checks requiring the extensive use of contract labor.
Additionally, the increase was caused by more flight hours at Midwest Express.
Aircraft maintenance costs decreased from 1998 because of $1.6 million of
incremental costs for two major aircraft maintenance checks that required
outsourcing in the third quarter of 1998. Aircraft maintenance expense decreased
7.3% on a cost per total ASM basis, but increased 8.0% if the 1998 incremental
costs are removed.
Depreciation and amortization increased by $.7 million, or 28.4%, from 1998. The
increase was primarily the result of depreciation associated with four MD-80
aircraft placed in service during the last year.
Aircraft rental costs decreased by $.2 million, or 4.6%, from 1998. The decrease
was a result of renegotiating the leases for two MD-88 aircraft during second
quarter 1999.
Other costs increased by $1.1 million, or 11.2%, from 1998. Other operating
expenses consist primarily of advertising and promotion, insurance, property
taxes, reservation fees, administration and other items. The increase was
primarily due to higher advertising to support new service, higher legal fees,
higher frequent flyer expenses, higher booking fees associated with record
passenger volume, and increased flight simulator costs to support increased
pilot training. Other costs decreased 5.1% on a cost per total ASM basis due to
economies of scale realized by adding capacity without similar increases in
overhead spending.
Provision for Income Taxes
- --------------------------
Income tax expense for third quarter 1999 was $6.7 million, a $.2 million
increase from 1998. The effective tax rates for the third quarter of 1999 and
1998 were 37.5% and 37.4%
Page 12
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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 third quarter increased $.3 million from 1998. The net income
margin decreased from 10.4% in 1998 to 9.6% in 1999.
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
------------------------------------
Operating Revenues
- ------------------
Company operating revenues totaled $332.4 million for the nine months ended
September 30, 1999, a $40.0 million, or 13.7% increase over 1998. Passenger
revenue accounted for 91.2% of total revenues and increased $37.2 million, or
14.0%, from 1998 to $303.2 million. The increase is attributable to a 20.4%
increase in passenger volume, as measured by revenue passenger miles, partially
offset by a 5.3% decrease in revenue yield.
Midwest Express Airlines passenger revenue increased by $36.2 million, or 15.5%,
from 1998 to $270.6 million. This increase was caused by a 17.2% increase in
origin and destination passengers, partially offset by a 4.8% deterioration in
revenue yield. Revenue yield decreased primarily due to operating larger
aircraft on certain routes, competitive pricing pressures in several markets and
increased passenger volume in lower-yield markets. Total Midwest Express
capacity, as measured by scheduled service ASMs, increased 21.4%. Load factor
decreased from 65.7% in 1998 to 65.6% in 1999.
Skyway passenger revenue increased by $1.0 million, or 3.0%, from 1998 to $32.6
million. This increase was caused by a 4.9% increase in origin and destination
passengers. Revenue yield remained unchanged from 1998 to 1999. Load factor
increased from 48.4% in 1998 to 49.9% in 1999.
Revenue from cargo, charter and other services increased $2.9 million, or 10.8%,
in 1999. Midwest Express benefited from increased revenue from the Midwest
Express MasterCard program of $2.3 million, $.8 million from the MCI calling
card program and $.5 million from ticket exchange fees. These increases were
partially offset by a $.8 million reduction in charter revenue.
Operating Expenses
- ------------------
1999 operating expenses increased by $33.6 million, or 13.5%, from 1998,
primarily due to service expansion as total capacity, measured by available seat
miles, increased by 20.1%. Cost per total ASM decreased 5.1% from 12.6(cent) in
1998 to 11.9(cent) in 1999.
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<PAGE>
Salaries, wages and benefits increased $9.0 million, or 10.8%, from 1998. On a
cost per total ASM basis, these costs decreased 7.4%, from 4.2(cent) in 1998 to
3.9(cent) in 1999. The labor cost increase reflects the addition of
approximately 365 full-time equivalent employees (294 at Midwest Express and 71
at Skyway) since September 30, 1998 and increases in labor rates. Midwest
Express added employees throughout the organization to support the aircraft
placed in service during 1999; Skyway added employees primarily to support
ground service operations at the Milwaukee airport and the start-up of the
regional jet program. Partially offsetting these increases were the accruals for
Midwest Express' profit sharing and management incentive programs, which were
$3.8 million lower in 1999 than 1998. The profit sharing and incentive programs,
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.
Aircraft fuel and oil, and associated taxes increased $4.4 million, or 13.7%, in
1999. Into-plane fuel prices which reflect the Company's cost after the effect
of any hedging, decreased 1.4% in 1999, averaging 56.6(cent) per gallon in 1999
and 57.4(cent) per gallon in 1998. Fuel consumption increased 15.1% in 1999,
primarily because Midwest Express operated 14.6% more aircraft flight hours. The
Company's fuel hedging program resulted in a $1.7 million savings, net of hedge
premium, through October 1999.
Commissions increased by $.4 million, or 1.7%, but decreased 15.0% on a cost per
total ASM basis. The increase was primarily due to a 14.0% increase in passenger
revenue, partially offset by a cap on travel agent commissions implemented in
February 1999. The Company also realized savings due to increased travel booked
directly through the reservations center, Midwest Express Web site and other
travel-related Web sites.
Dining services costs increased by $2.9 million, or 20.1%, from 1998. The
increase was primarily due to the 17.2% increase in origin and destination
passengers at Midwest Express.
Station rental, landing and other fees increased by $3.1 million, or 15.9%, from
1998. The increase was caused by 11.1% more flight segments at Midwest Express
and higher airport costs. On a cost per total ASM basis, these costs decreased
3.1%.
Maintenance costs increased by $6.3 million, or 23.5%, from 1998. Aircraft
maintenance costs increased 3.3% on a cost per total ASM basis. The increase was
attributable to more flight hours at Midwest Express, an increase in accrual
rates for future engine overhauls and higher-than-expected costs for a major
aircraft maintenance check that required maintenance outsourcing.
Depreciation and amortization increased $2.1 million, or 28.4%, from 1998. The
increase was primarily the result of the depreciation associated with the
additional aircraft placed in service.
Aircraft rental costs decreased $.1 million, or .8%, from 1998. On a cost per
total ASM basis, these costs decreased 17.1% because the aircraft added to
service have all been owned.
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<PAGE>
Other operating expenses increased $5.4 million, or 20.2%, from 1998. The
increase was primarily due to a $1.1 million nonrecurring airport rental credit
received in 1998 from Milwaukee County to distribute an airport rental surplus,
higher professional and financial services, higher advertising and promotion
spending, higher booking fees, higher travel and entertainment expenses, higher
flight simulator rent costs and an increase in legal services. On a cost per
total ASM basis, these costs increased .5%.
Provision for Income Taxes
- --------------------------
Income tax expense for the first nine months of 1999 was $18.8 million, an
increase of $2.2 million from 1998. The effective tax rate for the first nine
months 1999 and 1998 was 37.5%.
Net Income
- ----------
Net income for the first nine months increased $3.7 million from 1998. The net
income margin decreased to 9.4% in 1999 from 9.5% in 1998.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $29.3 million at September 30,
1999, compared to $13.5 million at December 31, 1998. Net cash provided by
operating activities totaled $59.7 million for the nine months ended September
30, 1999. Net cash used in investing activities totaled $63.6 million, primarily
due to capital expenditures of $62.4 million, including $15.1 million of
purchase deposits on flight equipment.
As of September 30, 1999, the Company had a working capital deficit of $37.9
million versus a $42.5 million deficit on December 31, 1998. The working capital
deficit is primarily due to the Company's air traffic liability (which
represents deferred revenue for advance bookings, whereby passengers have
purchased tickets for future flights and is recognized when the passenger
travels). Because of this, the Company expects to operate at a working capital
deficit, which is common in the industry.
As of September 30, 1999, the Company had two credit facilities, a $55.0 million
revolving bank credit facility and a $20.0 million secondary revolving credit
facility with Kimberly-Clark. The Company used the revolving credit agreement to
obtain letters of credit totaling approximately $9.9 million that reduce the
amount of available credit. The outstanding letters of credit are used to
support financing on the Company's maintenance facility and for various other
purposes. The Company borrowed and repaid $10.0 million under the revolving bank
credit facility in third quarter 1999 for short-term liquidity needs.
Net cash used for capital expenditures totaled $62.4 million for the nine months
ended September 30, 1999. Capital expenditures primarily consisted of aircraft
purchases and refurbishment costs. Other capital expenditures included aircraft
engine hush kit components, capitalized engine overhauls, acquisition of
capitalized spare parts, and construction of new gates at the Milwaukee airport
to support the Skyway operation. The Company anticipates full-year capital
spending to be
Page 15
<PAGE>
approximately $80.0 million, excluding the five regional jets that the Company
is in process of acquiring. To date, the Company has leased these aircraft and
is planning to finance the remaining delivery in the same manner.
During 1997, the Company executed definitive purchase documents to acquire eight
McDonnell Douglas MD-80 series aircraft. The Company financed seven deliveries
using internal cash flow, and financed one MD-82 with a twelve-year operating
lease in the third quarter 1999.
As of September 30, 1999, 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 second quarter 2001.
The Company's Board of Directors has authorized a $15.0 million share-repurchase
program. As of September 30, 1999, the Company has purchased a total of 418,625
shares of common stock at a cost of $6.8 million under the program. However, no
shares were repurchased during the third quarter.
Pending Developments
This Form 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, potential delays related to acquired
aircraft, fuel prices and year 2000 compliance. 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.
MD-80 Aircraft - During January 1999, Midwest Express placed into service the
second and third of eight MD-80 series aircraft the Company agreed to purchase
in 1997. The fourth and fifth aircraft were placed into service in April 1999
and August 1999, respectively. The sixth aircraft is currently being refurbished
and has a scheduled in-service date of December 1999. The seventh and eighth
aircraft were received in the third and early fourth quarter, respectively, and
are expected to enter service in the second and third quarter of 2000. The
Company has financed seven deliveries with internal cash flow; a sale lease-back
transaction was completed in the third quarter 1999 for the eighth aircraft.
These aircraft will be used to increase capacity on the Company's high-traffic
routes and expand service in existing or new markets.
Page 16
<PAGE>
In August 1999, the Company signed a letter of intent to acquire four MD-80
series aircraft currently operated by Scandinavian Airlines System and made a
$.4 million deposit. A definitive purchase agreement is expected to be completed
in November 1999. Assuming successful completion of negotiations, delivery of
the aircraft is anticipated to begin in September 2000 and continue through
November 2001. After refurbishment and modification, three aircraft are expected
to enter scheduled service in 2001, and the last in 2002. The Company expects
that this project, including aircraft refurbishment, modification and support
equipment, will cost approximately $60.0 million. Financing alternatives are
currently being evaluated.
Regional Jets - In third quarter 1999, four of the five Fairchild Aerospace
328JET aircraft the Company agreed to purchase were financed via operating
leases. The fifth 328JET aircraft will be financed in the fourth quarter under
the same lease structure. Three aircraft were placed in service in October 1999,
and the remaining two aircraft are expected to be in service by the end of 1999.
The 32-passenger aircraft will replace DC-9 jet service in Grand Rapids and
Toronto, provide new service to Pittsburgh, and supplement turboprop service on
select flights to four Midwest cities in the fourth quarter 1999 and first
quarter 2000. The Company expects that the cost of these five aircraft,
including purchase price and support equipment, will total approximately $55.0
million. The Company also holds options for 10 additional jet aircraft to
support future growth, which are exercisable after January 1, 2001.
Headquarters Building Expansion - In July 1999, the Company announced it will
add a 55,000-square-foot training facility to its Oak Creek, Wisconsin
headquarters. Ground breaking for the building took place in October 1999, with
facility completion anticipated in August 2000. The Company expects the cost of
this project to be approximately $6.0 million and anticipates funding this
project by cash flows from operations.
Second Call Center - In July 1999, the Company announced plans for a second
reservations call center to be located in the Kansas City. The Company expects
the cost of this project to be less than $1.0 million and to be completed in
first quarter 2000.
Milwaukee Airport Business Club - In October 1999, the Company announced it will
open a business club at General Mitchell International Airport in Milwaukee. The
4,600-square-foot club is expected to open by mid-year 2000. The Company expects
the cost of this project to be $.6 million and anticipates funding this project
by cash flow from operations.
Labor Relations - In December 1997, Midwest Express pilots elected the Air Line
Pilots Association (ALPA), a labor union, for representation in collective
bargaining. Negotiations began in August 1998. In February 1999, ALPA requested
assistance from the National Mediation Board. The Company and ALPA continue in
mediated negotiations. In April 1999, Midwest Express flight attendants elected
the Association of Flight Attendants, AFL-CIO, a labor union, for representation
in collective bargaining. Negotiations have not yet begun.
Year 2000 - In January 1998, the Company created an executive oversight
committee and a year 2000 project team. With safety of the Company's customers
and employees as the highest
Page 17
<PAGE>
priority, a comprehensive plan to address issues related to the impact of the
year 2000 was developed. The Company's Year 2000 Project involves five phases:
Awareness, Inventory/Assessment, Remediation, Validation and Implementation.
More than 24,000 items have been inventoried and assessed. Items inventoried
include, but are not limited to, aircraft components, computers, elevators, jet
bridges, ground equipment, telephones, computer applications and HVAC. An
extensive review of aircraft components relative to flight safety was conducted
and both the Midwest Express fleet of McDonnell Douglas DC-9s and MD-80s, and
Skyway Airlines' fleet of 15 Beechcraft 1900Ds are fully year 2000 compliant.
Skyway's new fleet of Fairchild 328 regional jets are being delivered year 2000
compliant.
Substantially all internal systems - financial, operational and non-information
technology systems - have been inventoried, assessed and remediated. This
includes all operational and safety-related systems. The Company's one major
internally developed and maintained system which is used for purchasing,
inventory, accounts payable, and aircraft maintenance planning and records was
remediated, tested and successfully implemented on schedule in September 1999.
The Company realizes that preparedness is also predicated on many external
factors. Therefore, the Company is actively contacting suppliers and vendors to
evaluate their respective levels of preparedness. All of the Company's critical
business partners have been contacted. The Company has received favorable year
2000 readiness responses from all of its mission-critical vendors and suppliers,
and continues to follow up to ensure readiness predictions are achieved. These
efforts are designed to minimize the extent to which the Company will be
vulnerable to suppliers' failure to remediate 2000 issues. The Company has a
contingency plan in place for partners who unexpectedly encounter year 2000
issues.
The Company is also actively involved with the Air Transport Association (ATA)
in an airline industry effort to identify potential year-2000-related issues
within the industry infrastructure, including common vendors, suppliers,
airports and government agencies such as the Federal Aviation Administration
(FAA). With the FAA having been certified year 2000 compliant in July, focus has
now turned to the nation's airports. Data being accumulated by ATA indicates
that airports are making significant progress in achieving year 2000 compliance,
and those airports not already compliant have appropriate plans in place to
reach year 2000 compliance before year end.
The implications for the Company of the Company, a critical vendor or supplier,
the FAA, airports, or other third parties not being prepared for the year 2000
could have a material adverse effect on the Company, resulting in customer
inconvenience, increased costs, grounded or delayed flights, or a degraded level
of safety. To be prepared to address unexpected occurrences, the remainder of
the year will be devoted to reviewing and/or creating, enhancing and testing
contingency plans for those scenarios within the Company's control. However, due
to the complexity and pervasiveness of the year 2000 issue, and in particular
the uncertainty regarding the compliance
Page 18
<PAGE>
programs of third parties, no assurance can be given that the Company's
compliance plan will be achieved, and actual results could differ materially
from those expected.
The Company has spent $.7 million through September 1999 on the year 2000
project and estimates that the overall cost associated with year 2000 readiness
will be $.8 million, approximately 50% of which is from reallocation of existing
internal resources. Costs associated with year 2000 readiness are expensed as
incurred and have been funded using internal cash flow.
Other Issues - The Company's Annual Report for the year ended December 31, 1998,
disclosed certain issues relating to the maintenance program and sales taxes.
These issues remain pending.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------ ----------------------------------------------------------
There have been no material changes in the Company's market risk since December
31, 1998.
Page 19
<PAGE>
PART II - OTHER INFORMATION
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, 1999.
Page 20
<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 9, 1999 By /s/ Timothy E. Hoeksema
---------------- ---------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: November 9, 1999 By /s/ Robert S. Bahlman
---------------- ----------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
Page 21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
Page 22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC. AS OF AND
FOR THE PERIOD ENDING SEPTEMBER 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 29,260
<SECURITIES> 0
<RECEIVABLES> 8,023
<ALLOWANCES> 107
<INVENTORY> 6,178
<CURRENT-ASSETS> 52,540
<PP&E> 299,843
<DEPRECIATION> 92,520
<TOTAL-ASSETS> 268,372
<CURRENT-LIABILITIES> 90,485
<BONDS> 3,112
0
0
<COMMON> 145
<OTHER-SE> 130,081
<TOTAL-LIABILITY-AND-EQUITY> 268,372
<SALES> 0
<TOTAL-REVENUES> 332,379
<CGS> 0
<TOTAL-COSTS> 282,816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (45)
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> 50,056
<INCOME-TAX> 18,771
<INCOME-CONTINUING> 31,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,285
<EPS-BASIC> 2.21
<EPS-DILUTED> 2.19
</TABLE>
