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, 2000
[ ] 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, 2000, there were 14,003,550 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
1
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended June 30, 2000
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 9
----------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
------ ----------------------------------------------------------
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 19
------ -------------------------------
SIGNATURES 20
2
<PAGE>
Part I Item 1. - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating revenues:
<S> <C> <C> <C> <C>
Passenger service...................................... $116,082 $108,044 $212,246 $196,906
Cargo.................................................. 2,602 2,893 5,499 5,926
Other.................................................. 7,134 6,725 14,837 13,711
------- ------- ------- -------
Total operating revenues............................ 125,818 117,662 232,582 216,543
------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits........................... 36,719 32,210 72,295 61,232
Aircraft fuel and oil.................................. 20,855 11,883 40,861 22,240
Commissions ........................................... 6,588 8,314 12,409 15,381
Dining services........................................ 6,430 6,237 11,896 11,435
Station rental, landing and other fees................. 8,238 7,293 17,009 15,296
Aircraft maintenance materials and repairs............. 14,534 11,522 26,512 21,900
Depreciation and amortization.......................... 4,088 3,124 8,001 6,093
Aircraft rentals....................................... 6,049 4,648 12,243 9,538
Other.................................................. 8,912 11,627 20,578 21,359
------- ------- ------- -------
Total operating expenses............................ 112,413 96,858 221,804 184,474
------- ------- ------- -------
Operating income........................................... 13,405 20,804 10,778 32,069
------- ------- ------- -------
Other income (expense):
Interest income........................................ 742 195 966 402
Interest expense....................................... (65) (68) (131) (137)
Other.................................................. (57) (35) (75) (73)
------- ------- ------- -------
Total other income (expense)........................ 620 92 760 192
------- ------- ------- -------
Income before income taxes and cumulative
effect of accounting changes............................ 14,025 20,896 11,538 32,261
Provision for income taxes................................. 5,185 7,836 4,261 12,098
------- ------- ------- -------
Income before cumulative effect of
accounting changes...................................... 8,840 13,060 7,277 20,163
Cumulative effect of accounting changes,
net of applicable income taxes of $2,768................ - - (4,713) -
------- ------- ------- -------
Net income................................................. $8,840 $ 13,060 $2,564 $ 20,163
======= ======= ======= =======
Income per common share - basic:
Income before cumulative effect of
accounting changes.................................. $ 0.63 $ 0.92 $ 0.52 $ 1.43
Cumulative effect of accounting changes, net........... - - (0.34) -
------- ------- ------- -------
Net income................................................. $ 0.63 $ 0.92 $ 0.18 $ 1.43
======= ======= ======= =======
Income per common share - diluted:
Income before cumulative effect of
accounting changes.................................. $ 0.63 $ 0.91 $ 0.51 $ 1.41
Cumulative effect of accounting changes, net........... - - (0.33) -
------- ------- ------- -------
Net income................................................. $ 0.63 $ 0.91 $ 0.18 $ 1.41
======= ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
Part I Item 1. - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................................................. $ 25,923 $ 16,049
Accounts receivable: less allowance for doubtful accounts of $133 and
$166 at June 30, 2000 and December 31, 1999, respectively.............................. 10,318 10,237
Inventories................................................................................ 7,546 7,270
Prepaid expenses........................................................................... 4,875 4,645
Deferred income taxes...................................................................... 8,830 4,687
-------- --------
Total current assets................................................................... 57,492 42,888
Property and equipment, at cost................................................................. 316,675 308,418
Less accumulated depreciation.............................................................. 97,591 96,969
-------- --------
Net property and equipment...................................................................... 219,084 211,449
Landing slots and leasehold rights, net......................................................... 4,065 4,244
Purchase deposits on flight equipment........................................................... 2,800 2,000
Other assets.................................................................................... 3,618 3,248
-------- --------
Total assets.................................................................................... $287,059 $263,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 6,863 $ 4,796
Income taxes payable....................................................................... 3,173 -
Air traffic liability...................................................................... 56,392 36,428
Accrued liabilities........................................................................ 35,553 38,718
-------- --------
Total current liabilities.............................................................. 101,981 79,942
Long-term debt.................................................................................. 2,987 3,068
Deferred income taxes........................................................................... 14,680 14,283
Noncurrent scheduled maintenance expense........................................................ 8,997 16,991
Accrued pension and other postretirement benefits............................................... 10,774 9,115
Deferred frequent flyer partner liability....................................................... 6,937 -
Other noncurrent liabilities.................................................................... 6,325 6,891
-------- --------
Total liabilities............................................................................... 152,681 130,290
-------- --------
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, 14,549,531 shares
issued at June 30, 2000 and 14,543,231 at December 31, 1999............................ 145 145
Additional paid-in capital................................................................. 11,352 11,147
Treasury stock, at cost, 602,231 shares at June 30, 2000 and 531,104 shares
at December 31, 1999................................................................... (12,682) (10,752)
Retained earnings.......................................................................... 135,563 132,999
-------- --------
Total shareholders' equity...................................................................... 134,378 133,539
-------- --------
Total liabilities and shareholders' equity...................................................... $287,059 $263,829
======== ========
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Part I Item 1. - Financial Statements
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended June30,
-----------------------
2000 1999
---- ----
Operating activities:
<S> <C> <C>
Net income................................................................................ $2,564 $20,163
Items not involving the use of cash:
Cumulative effect of accounting changes, net.......................................... 4,713 -
Depreciation and amortization......................................................... 8,001 6,093
Deferred income taxes................................................................. (3,746) (20)
Other................................................................................. 2,456 2,697
Changes in operating assets and liabilities:
Accounts receivable................................................................... (81) (2,145)
Inventories........................................................................... (276) (1,019)
Prepaid expenses....................................................................... (230) 279
Accounts payable...................................................................... 2,067 1,407
Accrued liabilities................................................................... 5,331 (1,743)
Air traffic liability................................................................. 11,849 6,716
Deferred frequent flyer partner revenue............................................... 571 -
-------- --------
Net cash provided by operating activities................................................. 33,219 32,428
-------- --------
Investing activities:
Capital expenditures...................................................................... (21,499) (35,167)
Purchase deposits on flight equipment..................................................... (800) (1,200)
Proceeds from sale of property and equipment.............................................. 146 28
Other..................................................................................... (493) (973)
-------- --------
Net cash used in investing activities..................................................... (22,646) (37,313)
-------- --------
Financing activities:
Proceeds from sale and leaseback transactions............................................. - 951
Other..................................................................................... (699) 5,073
-------- --------
Net cash (used in) provided by financing activities....................................... (699) 6,024
-------- --------
Net increase in cash and cash equivalents...................................................... 9,874 1,139
Cash and cash equivalents, beginning of period................................................. 16,049 13,455
-------- --------
Cash and cash equivalents, end of period....................................................... $ 25,923 $ 14,594
======== ========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
The consolidated financial statements for the six-month period ended June
30, 2000 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 notes thereto, together with
Management's Discussion and Analysis of Results of Operations and Financial
Condition, contained in the Midwest Express Holdings, Inc. (the "Company")
Annual Report to Shareholders and incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for the six-month period ended June 30, 2000 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 2000.
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. Cumulative Effect of Accounting Changes
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" ("SAB 101"), issued by
the Securities and Exchange Commission in December 1999. SAB 101 provides
guidance on the application of generally accepted accounting principles to
revenue recognition in financial statements. Prior to the issuance of SAB
101, the Company recognized all revenue from Frequent Flyer miles sold to
partners, net of the incremental cost of providing future air travel, when
the mileage was sold, which was consistent with most major airlines.
Beginning January 1, 2000, as a result of adopting SAB 101, the Company
changed its method used to account for the sale of Frequent Flyer mileage
credits to participating partners such as credit card companies, hotels and
car rental agencies. Under the new accounting method, a portion of the
revenue from the sale of Frequent Flyer mileage credits is deferred and
recognized when transportation is provided to the passenger. The Company
believes the new method appropriately matches revenues with the period in
which services are provided.
Effective first quarter 2000, the Company also changed its accounting
policy associated with major maintenance on airframes: in conjunction with
the Company's efforts to divide major maintenance events into smaller, more
frequent events, the Company will expense airframe
6
<PAGE>
maintenance costs as they are incurred. In the past, major airframe costs
were either (1) accrued to expense on the basis of estimated future costs
and estimated flight hours between major maintenance events, or (2)
capitalized when incurred and amortized on the basis of estimated flight
hours until the next major maintenance event. Costs associated with major
maintenance on aircraft engines will continue to use the deferral or
accrual method.
The pro forma results, assuming that accounting changes were applied
retroactively, are shown below (in thousands, except per share data):
<TABLE>
Three months ended June 30, 1999 (unaudited)
<CAPTION>
As Previously
Pro Forma Reported
--------- --------
<S> <C> <C>
Income before cumulative effect of accounting changes................... $13,060 $13,060
Earnings per common share............................................... $.92 $.92
Earnings per common share assuming dilution............................. $.91 $.91
Net income.............................................................. $11,983 $13,060
Earnings per common share............................................... $.85 $.92
Earnings per common share assuming dilution............................. $.84 $.91
</TABLE>
<TABLE>
Six months ended June 30, 1999 (unaudited)
<CAPTION>
As Previously
Pro Forma Reported
--------- --------
<S> <C> <C>
Income before cumulative effect of accounting changes................... $20,163 $20,163
Earnings per common share............................................... $1.43 $1.43
Earnings per common share assuming dilution............................. $1.41 $1.41
Net income.............................................................. $19,809 $20,163
Earnings per common share............................................... $1.40 $1.43
Earnings per common share assuming dilution............................. $1.39 $1.41
</TABLE>
5. Segment Reporting
Midwest Express Airlines, Inc. ("Midwest Express") and Astral Aviation,
Inc., doing business as Skyway Airlines, The Midwest Express Connection
("Astral"), 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, 1999. Financial information for the three months and six
months ended June 30 on the two operating segments, Midwest Express and
Astral, follows (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 (unaudited)
-------------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues.................. $111,107 $15,830 ($1,119) $125,818
Operating income.................... 12,913 492 ---- 13,405
Depreciation and amortization....... 3,757 331 ---- 4,088
Interest income..................... 742 172 (172) 742
Interest expense.................... 237 ---- (172) 65
Income before income taxes.......... 13,361 664 ---- 14,025
Provision for income taxes.......... 4,940 245 ---- 5,185
Total assets........................ 272,174 26,021 (11,136) 287,059
Capital expenditures................ 11,768 588 ---- 12,356
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 (unaudited)
-------------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues.................. $106,930 $11,670 ($938) $117,662
Operating income.................... 19,477 1,327 ---- 20,804
Depreciation and amortization....... 2,924 200 ---- 3,124
Interest income..................... 195 150 (150) 195
Interest expense.................... 218 ---- (150) 68
Income before income taxes.......... 19,419 1,477 ---- 20,896
Provision for income taxes.......... 7,282 554 ---- 7,836
Total assets........................ 241,813 21,950 (12,784) 250,979
Capital expenditures................ 8,429 401 ---- 8,830
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 (unaudited)
-----------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues.................. $205,618 $28,974 ($2,010) $232,582
Operating income (loss)............. 12,099 (1,321) ---- 10,778
Depreciation and amortization....... 7,350 651 ---- 8,001
Interest income..................... 966 318 (318) 966
Interest expense.................... 449 ---- (318) 131
Income(loss) before income taxes
and cumulative effect............ 12,540 (1,002) ---- 11,538
Provision for income taxes (credit). 4,637 (376) ---- 4,261
Cumulative effect of accounting
changes, net........................ (4,713) ---- ---- (4,713)
Total assets........................ 272,174 26,021 (11,136) 287,059
Capital expenditures................ 20,221 1,278 ---- 21,499
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 (unaudited)
-----------------------------------------
Midwest Express Astral Elimination Consolidation
--------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues.................. $196,770 $21,562 ($1,789) $216,543
Operating income.................... 30,673 1,396 ---- 32,069
Depreciation and amortization....... 5,694 399 ---- 6,093
Interest income..................... 402 282 (282) 402
Interest expense.................... 419 ---- (282) 137
Income before income taxes.......... 30,583 1,678 ---- 32,261
Provision for income taxes.......... 11,469 629 ---- 12,098
Total assets........................ 241,813 21,950 (12,784) 250,979
Capital expenditures................ 33,969 1,198 ---- 35,167
</TABLE>
8
<PAGE>
Part I Item 2.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
Overview
--------
The Company's 2000 second quarter operating income was $13.4 million, a decrease
of $7.4 million from the second quarter 1999. Net income decreased by $4.2
million, or 32.3%, to $8.8 million. For the first six months of 2000, operating
income was $10.8 million, a decrease of $21.3 million from 1999. Year-to-date
net income decreased from $20.2 million to $2.5 million. Year-to-date diluted
earnings per share were $.18, a $1.23 decrease versus 1999 net income per
diluted share of $1.41.
The Company's total revenue in the second quarter increased $8.2 million, or
6.9%, relative to the second quarter 1999. The increase in revenue was
substantially attributable to a 6.0% increase in revenue yield as a result of
the implementation of the ticket fuel surcharge on February 1, 2000.
Traffic, as measured by scheduled service revenue passenger miles ("RPM"),
increased 1.4% in the second quarter while scheduled service capacity increased
4.7%. Capacity at Astral Aviation increased 51.7% as five regional jets were in
service compared with none in second quarter 1999. Capacity at Midwest Express
increased 2.1% due to the addition of two MD-80 aircraft in scheduled service.
Capacity at both operating units was constrained by a shortage of pilots and an
increase in weather cancellations, which resulted in abnormally low aircraft
utilization. While both airlines have been able to hire sufficient numbers of
pilots, both have experienced problems in training pilots needed to support the
Company's growth plan and to comply with the Federal Aviation Administration
("FAA") mandated pilot rest/reserve rules. Traffic increased 38.2% at Astral and
decreased .1% at Midwest Express. Capacity and traffic were adversely affected
by a high number of flight cancellations in the quarter. Astral canceled 684
flights, approximately 300 due to weather and approximately 245 due to crew
shortages. Midwest Express canceled 438 flights, approximately 194 due to
weather.
The Company's operating costs increased by $15.6 million, or 16.1%, in the
second quarter. On a cost per available seat mile basis, costs increased 9.7% at
Midwest Express (1.2% excluding the impact of higher fuel prices) and decreased
1.8% at Astral. Higher fuel prices caused costs to increase $8.2 million, as
into-plane costs per gallon increased 66.6%. Unit costs also increased due to
lower aircraft utilization. In addition, the Company's labor costs increased
14.0% primarily due to the addition of maintenance and flight operations
employees. Pilot costs increased due to increased wages associated with their
new contract and the implementation of the new FAA-mandated interpretation of
crew rest/reserve rules. Additional detail on cost changes is included in
subsequent sections.
9
<PAGE>
Operating Statistics
---------------------
The following table provides select operating statistics for Midwest Express and
Astral.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
% %
2000 1999 Change 2000 1999 Change
--------- --------- ------ --------- --------- ------
Midwest Express Operations
--------------------------
<S> <C> <C> <C> <C> <C> <C>
Origin & Destination Passengers 538,535 543,446 -0.9 999,201 986,036 1.3
Revenue Passenger Miles (000s) 516,489 517,112 -0.1 964,283 944,461 2.1
Scheduled Service Available Seat Miles (000s) 778,172 761,802 2.1 1,529,439 1,467,037 4.3
Total Available Seat Miles (000s) 785,744 767,378 2.4 1,546,568 1,481,225 4.4
Load Factor (%) 66.4% 67.9% -1.5 pts. 63.0% 64.4% -1.4 pts.
Revenue Yield $0.194 $0.187 4.1 $0.190 $0.186 2.3
Revenue per scheduled service ASMs (1) $0.134 $0.132 1.4 $0.125 $0.125 -0.2
Cost per total ASM $0.125 $0.114 9.7 $0.125 $0.112 11.6
Average Passenger Trip Length 959.1 951.5 0.8 965.1 957.8 0.8
Number of Flights 11,214 11,617 -3.5 22,007 22,415 -1.8
Into-plane Fuel Cost per Gallon $0.894 $0.534 67.3 $0.897 $0.519 72.8
Full-time Equivalent Employees at End of Period 2,664 2,301 15.8 2,664 2,301 15.8
Aircraft in Service at End of Period 32 30 6.7 32 30 6.7
<CAPTION>
Astral Aviation Operations
--------------------------
<S> <C> <C> <C> <C> <C> <C>
Origin & Destination Passengers 116,159 93,205 24.6 213,203 173,050 23.2
Revenue Passenger Miles (000s) 29,467 21,329 38.2 53,228 39,470 34.9
Scheduled Service Available Seat Miles (000s) 62,606 41,283 51.7 119,122 80,362 48.2
Total Available Seat Miles (000s) 62,606 41,443 51.1 119,147 80,662 47.7
Load Factor (%) 47.1% 51.7% -4.6 pts. 44.7% 49.1% -4.4 pts.
Revenue Yield $0.535 $0.542 -1.3 $0.542 $0.541 0.1
Revenue per scheduled service ASMs (1) $0.253 $0.281 -10.2 $0.243 $0.267 -9.1
Cost per total ASM $0.245 $0.250 -1.8 $0.254 $0.250 1.7
Average Passenger Trip Length 253.7 228.8 10.9 249.7 228.1 9.4
Number of Flights 13,067 11,148 17.2 25,088 21,591 16.2
Into-plane Fuel Cost per Gallon $0.975 $0.643 51.6 $0.988 $0.600 64.7
Full-time Equivalent Employees at End of Period 462 370 24.7 462 370 24.7
Aircraft in Service at End of Period 20 15 33.3 20 15 33.3
</TABLE>
(1) Passenger, cargo and other transport-related revenue divided by
scheduled service ASMs.
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 in service are excluded from the aircraft in service
statistics. Numbers in this table may not be recomputed due to
rounding.
10
<PAGE>
The following table provides operating revenues and expenses for the Company
expressed in 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,
-------------------------- ------------------------
2000 1999 2000 1999
--------------------- -------------------- -------------------- ---------------------
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 $0.137 92.2% $0.134 91.8% $0.128 91.2% $0.126 90.9%
Cargo $0.003 2.1% $0.004 2.5% $0.003 2.4% $0.004 2.7%
Other $0.008 5.7% $0.008 5.7% $0.009 6.4% $0.009 6.4%
------ ------ ------ ------ ------ ------ ------ ------
Total operating revenues $0.148 100.0% $0.145 100.0% $0.140 100.0% $0.139 100.0%
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Salaries, wages and benefits $0.043 29.2% $0.040 27.4% $0.043 31.1% $0.039 28.3%
Aircraft fuel and oil $0.025 16.6% $0.015 10.1% $0.025 17.6% $0.014 10.3%
Commissions $0.008 5.2% $0.010 7.1% $0.008 5.3% $0.010 7.1%
Dining services $0.008 5.1% $0.008 5.3% $0.007 5.1% $0.007 5.3%
Station rental, landing and
other fees $0.010 6.5% $0.009 6.2% $0.010 7.3% $0.010 7.1%
Aircraft maintenance $0.017 11.6% $0.014 9.8% $0.016 11.4% $0.014 10.1%
materials/repairs
Depreciation and amortization $0.005 3.2% $0.004 2.7% $0.005 3.4% $0.004 2.8%
Aircraft rentals $0.007 4.8% $0.006 4.0% $0.007 5.3% $0.006 4.4%
Other $0.010 7.1% $0.014 9.9% $0.012 8.9% $0.014 9.9%
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses $0.133 89.3% $0.120 82.3% $0.133 95.4% $0.118 85.2%
====== ====== ====== ====== ====== ====== ====== ======
Total ASMs (000s) 848,350 808,821 1,665,715 1,561,887
</TABLE>
Note: Numbers in this table cannot be recalculated due to rounding.
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999
--------------------------------
Operating Revenues
------------------
Company operating revenues totaled $125.8 million in the second quarter 2000, an
$8.2 million, or 6.9%, increase over the second quarter 1999. Passenger revenues
accounted for 92.2% of total revenues and increased $8.0 million, or 7.4%, from
1999 to $116.1 million. The increase is primarily attributable to a 6.0%
increase in revenue yield primarily due to the implementation of the ticket fuel
surcharge. The fuel surcharge more than offset over 55% of the higher fuel
prices in second quarter.
Midwest Express passenger revenue increased by $3.8 million, or 4.0%, from 1999
to $100.3 million. This increase was due to a 4.1% increase in revenue yield
primarily due to the fuel surcharge effective with February 1, 2000 ticket
sales. Total capacity, as measured by scheduled service ASMs, increased 2.1% due
to two additional aircraft in scheduled service during the second quarter 2000.
Capacity was constrained by a shortage of trained pilots to support the
Company's growth plan and comply with the revised FAA-mandated rest/reserve
rules, and an increase in flight cancellations primarily due to weather. Load
factor decreased from 67.9% in 1999 to 66.4% in 2000 due to operating larger
aircraft on certain routes, lower volumes on new routes and increased
competition in several markets.
Astral passenger revenue increased $4.2 million, or 36.4%, from 1999 to $15.8
million. Total capacity, as measured by scheduled service ASMs, increased 51.7%
due to the operation of five new regional jets in scheduled service during
second quarter 2000. Traffic, as measured by
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revenue passenger miles, increased 38.2%. Capacity and traffic were adversely
affected by a high number of flight cancellations due to weather and crew
shortages. Load factor decreased from 51.7% in 1999 to 47.1% in 2000. Revenue
yield decreased 1.3% due to the addition of several routes with lower than
average yields. This was partially offset by the fuel surcharge effective with
February 1, 2000 ticket sales.
Midwest Express benefited from increased revenue from charter sales of $.6
million. Partially offsetting that increase were lower mail and freight revenues
as a result of the U.S. Postal Service transporting more mail via dedicated
aircraft and ground transportation.
Operating Expenses
------------------
Second quarter 2000 operating expenses increased by $15.6 million, or 16.1%,
from 1999. The increase was primarily the result of higher fuel prices and
increased labor costs. Decreased aircraft utilization was primarily due to a
shortage of trained pilots. Because of this, Midwest Express operated 3.5% fewer
flights during the quarter, although it had two additional aircraft in service.
Astral had similar issues with higher fuel prices and low regional jet
utilization; the regional jets operated at about 60% utilization, but had the
infrastructure and costs to support full utilization. Pilot turnover at Astral
resulted in a lack of trained instructor pilots and check airmen. Offsetting
higher costs in most categories were lower commission costs, no profit sharing
accrual and a favorable settlement on a Wisconsin sales and use tax dispute.
Cost per total ASM increased 10.7% from 12.0(cent) in 1999 to 13.3(cent) in
2000.
Salaries, wages and benefits increased $4.5 million, or 14.0%. The labor cost
increase reflects the addition of approximately 455 full-time equivalent
employees (363 at Midwest Express and 92 at Astral) since June 30, 1999. Midwest
Express and Astral added employees throughout the organization to support
additional aircraft placed in service and additional destinations. Increased
labor costs were also due to hiring additional mechanics to support growth and
complete aircraft modifications and repairs more efficiently, an increase in the
number of pilots due to new rest/ reserve rules mandated by the FAA, and a wage
increase for Midwest Express pilots associated with their new labor contract
effective March 1, 2000. These increases were partially offset by the lack of a
profit sharing accrual in 2000, which reduced costs by $2.6 million. On a cost
per total ASM basis, labor costs increased 8.7% from 4.0(cent) in 1999 to
4.3(cent) in 2000.
Aircraft fuel and oil and associated taxes increased $9.0 million, or 75.5%, in
second quarter 2000. Into-plane fuel increased 66.6% in 2000, averaging
90.1(cent) per gallon in 2000 versus 54.1(cent) per gallon in 1999 resulting in
an $8.2 million pre-tax price impact. Fuel consumption increased 5.6% in the
quarter, primarily because Astral placed five 328JETs in service. The Company
manages the price risk of fuel primarily by purchasing commodity options that
establish ceiling prices, but the Company did not hedge second quarter 2000 fuel
requirements. Fuel costs in July 2000 trended upward, averaging 95.3(cent) per
gallon.
Commissions decreased by $1.7 million, or 20.8% from 1999. Most of this
reduction was due to a new commission rate structure that reduced base
commissions from 8% to 5% effective October 19, 1999. In addition, in second
quarter 2000, more ticket sales were generated via the Company's reservations
centers, Midwest Express Web site, other travel-related Web sites and ticket
counters.
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Dining services costs increased by $.2 million, or 3.1%, from 1999. The increase
was due to an increase in food and service prices. Dining services costs
decreased 1.7% on a cost per total ASM basis.
Station rental, landing and other fees increased $.9 million, or 13.0%, from
1999. The increase was caused by 17.2% more flight segments at Astral. On a cost
per ASM basis, these costs increased 7.7%.
Maintenance costs increased by $3.0 million, or 26.1%, from 1999. On a cost per
total ASM basis, this category increased 20.3%. Abnormally high engine repair
costs were $2.0 million more than last year.
Depreciation and amortization increased by $1.0 million, or 30.9%, from 1999.
The increase was primarily the result of the depreciation associated with two
additional MD-80 aircraft placed in service, aircraft noise hushkits added to
six DC-9 aircraft in the second half of 1999 and capital spending associated
with the start-up of the regional jet program. Depreciation increased 24.7% on a
cost per total ASM basis due to lower aircraft utilization.
Aircraft rental costs increased by $1.4 million, or 30.1%, from 1999 primarily
as a result of Astral leasing five 328JETs and Midwest Express completing a
sale/leaseback in September 1999 on one MD-80 aircraft.
Other costs decreased $2.7 million, or 23.4%, from 1999. Other operating
expenses consist primarily of advertising and promotion, insurance, property
taxes, consulting services, reservation fees, administration and other items.
The decrease was primarily due to a $2.7 million nonrecurring favorable
settlement of a sales and use tax dispute on meals boarded on aircraft in
Wisconsin. On a cost per total ASM basis, these costs decreased 26.9%.
Provision for Income Taxes
--------------------------
Income tax expense for the second quarter 2000 was $5.2 million, a $2.6 million
decrease from the 1999 provision of $7.8 million. The effective tax rates for
the second quarter of 2000 and 1999 were 37.0% and 37.5%, 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 2000 was $8.8 million, a decrease of $4.3
million from second quarter 1999 net income of $13.1 million. The net income
margin decreased from 11.1% in 1999 to 7.0% in 2000.
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Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
------------------------------
Operating Revenues
------------------
Company operating revenues totaled $232.6 million for the six months ended June
30, 2000, a $16.0 million, or 7.4%, increase over 1999. Passenger revenues
accounted for 91.2% of total revenues and increased $15.3 million, or 7.8%, from
1999 to $212.2 million. The increase was attributable to a 4.2% increase in
revenue yield and a 3.4% increase in passenger volume, as measured by revenue
passenger miles.
Midwest Express passenger revenue increased by $7.9 million, or 4.5%, from 1999
to $183.4 million. This increase was caused by a 2.3% increase in revenue yield
and a 2.1% increase in passenger volume, as measured by revenue passenger miles.
Total Midwest Express capacity, as measured by scheduled service ASMs, increased
4.3% due to additional aircraft in service during 2000. Capacity was constrained
by a shortage of trained pilots to support the Company's growth plan by
complying with the FAA-mandated rest/reserve rules and by an increase in flight
cancellations primarily due to weather. Load factor decreased from 64.4% in 1999
to 63.0% in 2000 due to lost bookings as a result of competitive pricing, a
potential pilot strike in the first quarter and passenger concerns related to
the Year 2000 rollover.
Astral passenger revenue increased by $7.5 million, or 35.0%, from 1999 to $28.8
million. Traffic increased 34.9% on a 48.2% increase in capacity due to five
regional jets in service in 2000. Load factor decreased from 49.1% in 1999 to
44.7% in 2000. Revenue yield was $.54 in 1999 and 2000.
The Company's revenue from cargo, charter and other services increased $.7
million, or 3.6%, in 2000. Midwest Express benefited from increased revenue from
the charter program and Midwest Express partnership programs. Partially
offsetting this increase were administrative fees, and lower mail and freight
revenue.
Operating Expenses
------------------
2000 operating expenses increased by $37.3 million, or 20.2%, from 1999,
primarily due to expanded operations, higher fuel costs and canceled flights
primarily due to crew shortages and weather. Cost per total ASM increased 12.7%
from 11.8(cent) in 1999 to 13.3(cent) in 2000.
Salaries, wages and benefits increased $11.1 million, or 18.1%, from 1999. On a
cost per total ASM basis, these costs increased 10.7%, from 3.9(cent) in 1999 to
4.3(cent) in 2000. The labor cost increase reflects the addition of
approximately 455 full-time equivalent employees (363 at Midwest Express and 92
at Astral) since June 30, 1999 and increases in labor rates. Midwest Express
added employees throughout the organization to support the aircraft placed in
service. Midwest Express also increased mechanic headcount to support growth and
complete aircraft modifications and repairs more efficiently. Pilot costs
increased at Midwest Express due to a 2.5% contract signing bonus, increased
wage rates associated with the new contract and the implementation of the new
FAA-mandated interpretation of crew rest/reserve rules. This effectively added
18 pilots with no increased flying. These increases were partially offset by the
lack of a profit sharing accrual.
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<PAGE>
Aircraft fuel and oil and associated taxes increased $18.6 million, or 83.7%, in
2000. Into-plane fuel prices increased 72.6% in 2000, averaging 90.5(cent) per
gallon in 2000 versus 52.4(cent) per gallon in 1999. The Company manages the
price risk of fuel primarily by purchasing commodity options that establish
ceiling prices. The Company hedged 25% of first quarter fuel prices but has not
hedged for future fuel requirements.
Commissions decreased by $3.0 million, or 19.3%, and 24.4% on a cost per total
ASM basis versus 1999. The decrease was primarily due to a new commission rate
structure that reduced base commission from 8% to 5% effective October 1, 1999.
In addition, the Company realized savings due to increased travel booked
directly through the reservations centers, Midwest Express Web site, other
travel-related Web sites and ticket counters.
Dining services costs increased by $.5 million, or 4.0%, from 1999. The increase
was primarily due to the 1.3% increase in origin and destination passengers at
Midwest Express and a 1.9% increase in food and services prices.
Station rental, landing and other fees increased by $1.7 million, or 11.2%, from
1999. The increase was caused by 16.2% more flight segments at Astral. On a cost
per ASM basis, these costs increased 4.3%.
Maintenance costs increased by $4.6 million, or 21.1%, from 1999. Aircraft
maintenance costs increased 13.5% on a unit cost basis. The increase was
attributable to higher-than-expected costs for engine repairs,
higher-than-expected costs associated with material aircraft component repairs
and higher use of contract labor.
Depreciation and amortization increased by $1.9 million, or 31.3%, from 1999.
The increase from second quarter 1999 was primarily the result of the
depreciation associated with two additional MD-80 aircraft placed into service,
aircraft noise hushkits and capital spending associated with the start-up of the
regional jet program.
Aircraft rental costs increased by $2.7 million, or 28.4%, from 1999 primarily
as a result of Astral leasing five 328JETs and Midwest Express completing a
sale/leaseback in September 1999 on one MD-80 aircraft.
Other operating expenses decreased by $.8 million, or 3.7%, from 1999. The
decrease was primarily due to a nonrecurring $2.7 million favorable settlement
of a sales and use tax dispute on meals boarded on aircraft in Wisconsin. The
decrease was partially offset by cost increases in Frequent Flyer expenses,
professional and financial services, travel and entertainment, flight training,
property taxes, advertising and legal services. On a cost per ASM basis, these
costs decreased 9.7%.
Provision for Income Taxes
--------------------------
Income tax expense for the first six months of 2000 was $4.3 million, a decrease
of $7.8 million from 1999. The effective tax rates for the first six months 2000
and 1999 were 37.0% and 37.5%, respectively.
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Cumulative Effect of Accounting Changes
---------------------------------------
The Company's cumulative effect of accounting changes, net of applicable tax,
totaled ($4.7) million. The charge was ($7.8) million, net of tax, for a change
in accounting methods for Frequent Flyer partner miles, partially offset by a
$3.1 million, net of tax, adjustment for major airframe maintenance due to the
Company's planned transition to divide major events into smaller, more frequent
events, and to expense airframe maintenance costs as they are incurred.
Net Income
----------
Net income for the first six months was $2.6 million, a decrease of $17.6
million from 1999. The net income margin decreased to 1.1% in 2000 from 9.3% in
1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $25.9 million at June 30, 2000,
compared to $16.0 million at December 31, 1999. Net cash provided by operating
activities totaled $33.2 million for the six months ended June 30, 2000. Net
cash used in investing activities totaled $22.6 million, due to capital
expenditures of $22.3 million, including $.8 million of purchase deposits on
flight equipment.
As of June 30, 2000, the Company had a working capital deficit of $44.5 million
versus a $37.1 million deficit on December 31, 1999. 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 revenue 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 June 30, 2000, 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
totaling approximately $9.7 million that reduce the amount of available credit.
The letters of credit are used to support financing on the Company's maintenance
facility and for various other purposes. The Kimberly-Clark credit facility
expires in September 2000.
Capital spending totaled $22.3 million, including $.8 million of purchase
deposits on flight equipment for the six months ended June 30, 2000. Capital
expenditures primarily consisted of spending for the construction of the
Company's new training facility, aircraft refurbishment costs for two of the
recently acquired MD-80 aircraft, engine overhauls, spare parts, and spending
for refurbishment and equipment for the Kansas City call center. The Company
anticipates full-year capital spending to be approximately $50 million in 2000,
$21 million of which is associated with the acquisition and refurbishment of
MD-80 aircraft.
During 1997, the Company executed definitive purchase documents to acquire eight
previously owned McDonnell Douglas MD-80 series aircraft. The Company financed
eight deliveries and refurbishment costs for the seven aircraft presently in
service, primarily using internal cash flow. A sale-leaseback was completed for
one MD-80 in September 1999.
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As of June 30, 2000, leases relating to three of Midwest Express' jet aircraft
are guaranteed by Kimberly-Clark. The Company pays Kimberly-Clark a guarantee
fee equal to 1.25% annually of the outstanding lease commitments. Kimberly-Clark
will continue to guarantee the leases for the three aircraft until the
expiration of their initial lease terms. The first of these jet aircraft leases
expires in 2001.
The five Fairchild Aerospace 328JET aircraft were financed via operating leases
over a period of 16.5 years.
The Company's Board of Directors has authorized a $30.0 million share repurchase
program. As of June 30, 2000, the Company has purchased a total of 642,825
shares of common stock at a cost of $13.0 million.
The Company believes its existing cash and cash equivalents, cash flow from
operations, funds available from credit facilities and available long-term
financing for the acquisition of jet aircraft will be adequate to meet its
current and anticipated working capital requirements and capital expenditures.
17
<PAGE>
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. In the
following discussion and elsewhere in this report, statements containing the
words such as expects, anticipate, believe, estimate, goal, objective, or
similar words are intended to identify forward looking statements. 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, competitive developments and interest rates. 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 - Two MD-80 series aircraft the Company agreed to purchase in
1997 were received in the fourth quarter 1999. One entered service in July 2000
and the other is expected to enter service in the fourth quarter 2000. In
November 1999, the Company signed a purchase agreement to acquire four MD-80
series aircraft operated by Scandinavian Airlines System. Delivery of the
aircraft is expected 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 this
project, including aircraft refurbishment, modification and support equipment,
will cost $50 million. These aircraft will be used to increase capacity on the
Company's high-traffic routes and expand service in existing and new markets.
Regional Jet Aircraft - The Company plans to acquire five 32-passenger Fairchild
Dornier 328JETs in 2001, with the first aircraft entering revenue service in
February 2001, and five additional regional jets beginning in 2003. These
aircraft will be operated by Astral. The estimated cost of these 10 aircraft
will total approximately $115 million. The Company holds options to acquire five
additional regional jet aircraft.
Labor Relations - In April 1999, Midwest Express flight attendants elected the
Association of Flight Attendants, AFL-CIO, a labor union, for representation in
collective bargaining. Negotiations began in January 2000.
Pension Plan - In 1999, Midwest Express approved a plan to terminate the
qualified defined benefit plan that covers substantially all Midwest Express
employees on March 31, 2000. This is subject to approval by Pension Benefit
Guaranty Corporation (PBGC), the federal agency responsible for supervising
pension plan terminations.
Effective April 1, 2000, the Company began making monthly contributions to a
money purchase plan for substantially all Midwest Express employees. The monthly
contributions are primarily based on employee compensation and employee age.
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<PAGE>
Fuel Prices - Fuel prices continue to be high. In third quarter 1999, the
Company's into-plane fuel costs averaged approximately 64.5(cent) per gallon
versus the current cost of over 90(cent) per gallon. In third quarter 2000, the
Company expects approximately $6 million unfavorable price variance at current
pricing but expects to offset about 60% of the unfavorable fuel price variance
by the ticket fuel surcharge.
Capacity Growth - Full-year third quarter 2000 capacity is expected to increase
about 5% over 1999 and fiscal-year 2000 capacity is expected to increase
approximately 9% over fiscal-year 1999.
In 2001, capacity is expected to increase approximately 20%. This capacity
growth is expected to come from improved aircraft utilization and additional
aircraft in the Company's fleet.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------ ----------------------------------------------------------
There have been no material changes in the Company's market risk since December
31, 1999.
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 26, 2000, the
following individuals were elected to the Board of Directors:
Authority Granted Authority Withheld
----------------- ------------------
Brenda F. Skelton 12,982,649 78,050
Samuel K. Skinner 13,000,993 59,706
Richard H. Sonnentag 13,002,159 58,540
The terms of office for the following directors continued after the Company's
Annual Meeting: John F. Bergstrom, Frederick P. Stratton, Jr., John W. Weekly,
Timothy E. Hoeksema, Ulice Payne, Jr., James G. Grosklaus, and David H. Treitel.
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
(a) Exhibits
--------
(27) Financial Data Shedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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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, 2000 By /s/ Timothy E. Hoeksema
------------------- ---------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 2000 By /s/ Robert S. Bahlman
------------------- ----------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
21
