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, 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 October 31, 2000, there were 13,862,538 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended September 30, 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 9
------- ---------------------------------------------------
Operationsand Financial Condition
---------------------------------
PART II - OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures 19
------- ----------------------------------------
about Market Risk
------------------
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 Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Passenger service................................. $117,364 $106,251 $329,610 $303,156
Cargo............................................. 2,570 2,776 8,068 8,702
Other............................................. 7,093 6,810 21,931 20,521
-------- -------- -------- --------
Total operating revenues....................... 127,027 115,837 359,609 332,379
-------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits...................... 39,477 31,868 111,772 93,099
Aircraft fuel and oil............................. 24,439 14,307 65,300 36,547
Commissions ...................................... 6,629 8,190 19,038 23,571
Dining services................................... 6,711 6,138 18,607 17,573
Station rental, landing and other fees............ 8,255 7,558 25,264 22,855
Aircraft maintenance materials and repairs........ 12,557 11,392 39,070 33,292
Depreciation and amortization..................... 4,245 3,359 12,245 9,452
Aircraft rentals.................................. 6,081 4,675 18,324 14,213
Other............................................. 12,162 10,856 32,740 32,214
-------- -------- -------- --------
Total operating expenses....................... 120,556 98,343 342,360 282,816
-------- -------- -------- --------
Operating income.................................... 6,471 17,494 17,249 49,563
-------- -------- -------- --------
Other income (expense):
Interest income................................... 471 266 1,437 668
Interest expense.................................. (65) (67) (196) (204)
Other............................................. (20) 102 (95) 29
-------- -------- -------- --------
Total other income (expense)................... 386 301 1,146 493
-------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting changes....................... 6,857 17,795 18,395 50,056
Provision for income taxes.......................... 2,540 6,673 6,801 18,771
-------- -------- -------- --------
Income before cumulative effect of
accounting changes................................. 4,317 11,122 11,594 31,285
Cumulative effect of accounting changes,
net of applicable income taxes..................... - - (4,713) -
-------- -------- -------- --------
Net income.......................................... $ 4,317 $ 11,122 $ 6,881 $ 31,285
-------- -------- -------- --------
Income per common share - basic:
Income before cumulative effect of
accounting changes............................... $ 0.31 $ 0.79 $ 0.83 $ 2.21
Cumulative effect of accounting changes, net...... - - (0.34) -
-------- -------- -------- --------
Net income.......................................... $ 0.31 $ 0.79 $ 0.49 $ 2.21
-------- -------- -------- --------
Income per common share - diluted:
Income before cumulative effect of
accounting changes............................... $ 0.31 $ 0.78 $ 0.82 $ 2.19
Cumulative effect of accounting changes, net...... - - (0.33) -
-------- -------- -------- --------
Net income.......................................... $ 0.31 $ 0.78 $ 0.49 $ 2.19
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Part I Item 1. - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 24,120 $ 16,049
Accounts receivable: less allowance for
doubtful accounts of $125 and $166 at
September 30, 2000 and December 31, 1999,
respectively...... ............................... 8,269 10,237
Inventories........................................ 8,863 7,270
Prepaid expenses................................... 4,650 4,645
Deferred income taxes.............................. 8,167 4,687
-------- --------
Total current assets............................. 54,069 42,888
Property and equipment, at cost...................... 333,447 308,418
Less accumulated depreciation...................... 101,612 96,969
-------- --------
Net property and equipment........................... 231,835 211,449
Landing slots and leasehold rights, net.............. 3,972 4,244
Purchase deposits on flight equipment................ 2,450 2,000
Other assets......................................... 3,726 3,248
-------- --------
Total assets......................................... $296,052 $263,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 6,952 $ 4,796
Income taxes payable............................... 1,458 -
Air traffic liability.............................. 58,141 36,428
Scheduled maintenance expense...................... 5,525 3,897
Frequent Flyer awards.............................. 2,148 4,001
Accrued liabilities................................ 30,560 30,820
-------- --------
Total current liabilities........................ 104,784 79,942
Long-term debt....................................... 2,937 3,068
Deferred income taxes................................ 16,753 14,283
Noncurrent scheduled maintenance expense............. 9,479 16,991
Accrued pension and other postretirement benefits.... 11,055 9,115
Deferred Frequent Flyer partner liability............ 7,215 -
Other noncurrent liabilities......................... 6,208 6,891
-------- --------
Total liabilities.................................... 158,431 130,290
-------- --------
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 September 30, 2000 and 14,543,231 shares
at December 31, 1999 ............................. 145 145
Additional paid-in capital......................... 11,608 11,147
Treasury stock, at cost, 628,493 shares at
September 30, 2000 and 531,104 shares
at December 31, 1999.............................. (14,012) (10,752)
Retained earnings.................................. 139,880 132,999
-------- --------
Total shareholders' equity........................... 137,621 133,539
-------- --------
Total liabilities and shareholders' equity........... $263,829 $296,052
======== ========
See notes to consolidated financial statements.
4
<PAGE>
Part I Item 1. - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------
2000 1999
---- ----
Operating activities:
Net income.............................................. $ 6,881 $ 31,285
Items not involving the use of cash:
Cumulative effect of accounting changes, net.......... 4,713 -
Depreciation and amortization......................... 12,245 9,452
Deferred income taxes................................. (1,010) 1,216
Other................................................. 3,882 4,415
Changes in operating assets and liabilities:
Accounts receivable................................... 1,968 1,338
Inventories........................................... (1,593) (2,158)
Prepaid expenses...................................... (5) 1,674
Accounts payable...................................... 2,156 (1,564)
Accrued liabilities................................... 6,763 3,301
Air traffic liability................................. 13,598 10,746
Deferred Frequent Flyer partner revenue............... 849 -
-------- --------
Net cash provided by operating activities............... 50,447 59,705
-------- --------
Investing activities:
Capital expenditures.................................... (39,902) (47,330)
Purchase deposits on flight equipment................... (450) (15,083)
Proceeds from sale of property and equipment............ 282 58
Other................................................... (662) (1,252)
-------- --------
Net cash used in investing activities................... (40,732) (63,607)
-------- --------
Financing activities:
Proceeds from sale and leaseback transactions........... - 15,951
Other................................................... (1,644) 3,756
-------- --------
Net cash (used in) provided by financing
activities............................................. (1,644) 19,707
-------- --------
Net increase in cash and cash equivalents................. 8,071 15,805
Cash and cash equivalents, beginning of period............ 16,049 13,455
-------- --------
Cash and cash equivalents, end of period.................. $ 24,120 $ 29,260
======== ========
Supplemental cash flow information:
Cash paid for:
Income taxes.......................................... $ 1,336* $ 15,686*
Interest.............................................. 196 204
* Included in taxes paid are amounts paid to Kimberly-Clark in accordance
with tax agreement totaling $1,150 in 2000 and $3,251 in 1999.
See notes to consolidated financial statements.
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, 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 nine-month period ended September
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 ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, which amends certain provisions of SFAS No. 133 to
clarify four areas causing difficulty in implementation. The Company is
currently in the process of evaluating the accounting and disclosure
effects of SFAS No. 133 and the corresponding amendments under SFAS No.
138. The Company will adopt SFAS No. 133 and the corresponding amendments
under SFAS No. 138 on January 1, 2001.
3. Reclassifications
Certain reclassifications have been made in prior period financial
statements to conform to the current period'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.
6
<PAGE>
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 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):
Three months ended September 30, 1999 (unaudited)
As Previously
Pro Forma Reported
--------- -------------
Income before cumulative effect of
accounting changes............................. $11,122 $11,122
Earnings per common share....................... $.79 $.79
Earnings per common share assuming dilution..... $.78 $.78
Net income...................................... $10,767 $11,122
Earnings per common share....................... $.76 $.79
Earnings per common share assuming dilution..... $.75 $.78
Nine months ended September 30, 1999 (unaudited)
As Previously
Pro Forma Reported
--------- -------------
Income before cumulative effect of
accounting changes............................. $31,285 $31,285
Earnings per common share....................... $2.21 $2.21
Earnings per common share assuming dilution..... $2.19 $2.19
Net income...................................... $30,575 $31,285
Earnings per common share....................... $2.16 $2.21
Earnings per common share assuming dilution..... $2.14 $2.19
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 nine
months ended September 30 on the two operating segments, Midwest Express
and Astral, follows (in thousands):
7
<PAGE>
Three Months Ended September 30, 2000 (unaudited)
Midwest
Express Astral Elimination Consolidation
------- ------ ----------- -------------
Operating revenues............. $112,583 $15,653 ($1,209) $127,027
Operating income (loss)........ 7,055 (584) ---- 6,471
Depreciation and amortization.. 3,897 348 ---- 4,245
Interest income................ 471 167 (167) 471
Interest expense............... 232 ---- (167) 65
Income (loss) before income
taxes......................... 7,273 (416) ---- 6,857
Provision for income taxes
(credit)...................... 2,694 (154) ---- 2,540
Total assets................... 281,662 25,592 (11,202) 296,052
Capital expenditures........... 17,863 540 ---- 18,403
Three Months Ended September 30, 1999 (unaudited)
Midwest
Express Astral Elimination Consolidation
------- ------ ----------- -------------
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........... 10,499 1,664 ---- 12,163
Nine Months Ended September 30, 2000 (unaudited)
Midwest
Express Astral Elimination Consolidation
------- ------ ----------- -------------
Operating revenues............. $318,202 $44,627 ($3,220) $359,609
Operating income (loss)........ 19,153 (1,904) ---- 17,249
Depreciation and amortization.. 11,246 999 ---- 12,245
Interest income................ 1,437 485 (485) 1,437
Interest expense............... 681 ---- (485) 196
Income (loss) before income
taxes and cumulative effect... 19,814 (1,419) ---- 18,395
Provision for income taxes
(credit)...................... 7,331 (530) ---- 6,801
Cumulative effect of
accounting changes, net....... (4,713) ---- ---- (4,713)
Total assets................... 281,662 25,592 (11,202) 296,052
Capital expenditures........... 38,084 1,818 ---- 39,902
Nine Months Ended September 30, 1999 (unaudited)
Midwest
Express Astral Elimination Consolidation
------- ------ ----------- -------------
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........... 44,468 2,862 ---- 47,330
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 third quarter 2000 operating income was $6.5 million, a decrease
of $11.0 million, or 63.0% from the third quarter 1999. Net income decreased
$6.8 million, or 61.2%, to $4.3 million. For the first nine months of 2000,
operating income was $17.2 million, a decrease of $32.3 million, or 65.2% from
1999. Year-to-date net income decreased $24.4 million, or 78.0% to $6.9 million.
Year-to-date diluted earnings per share were $.49, a $1.70 decrease versus 1999
net income per diluted share of $2.19.
The Company's total revenue in the third quarter increased $11.2 million, or
9.7%, from the third quarter 1999. The increase in revenue was attributable to
an increase in revenue yield as a result of the implementation of the ticket
fuel surcharge on February 1, 2000 and additional passenger volume at Astral.
Traffic, as measured by scheduled service revenue passenger miles ("RPM"),
increased 1.3% in the third quarter while scheduled service capacity increased
6.3%. Capacity at Astral increased 53.7% due to the addition of five new
regional jets in scheduled service. Capacity at Midwest Express increased 3.8%
due to the addition of two MD-80 aircraft in scheduled service. Capacity at both
operating units was constrained by a shortage of trained pilots to support the
Company's growth plan and an increase in flight 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
quickly enough to support the Company's growth plan and to comply with the
Federal Aviation Administration ("FAA") mandated pilot rest/reserve rules.
Traffic increased 42.6% at Astral and decreased .3% at Midwest Express.
The Company's operating costs increased by $22.2 million, or 22.6%, in the third
quarter. On a cost per available seat mile basis, costs increased 13.8% at
Midwest Express (5.8% excluding the impact of higher fuel prices) and increased
2.6% at Astral (decreased 2.5% excluding the impact of higher fuel prices).
Higher fuel prices caused the Company's costs to increase $9.1 million, as
into-plane costs per gallon increased 60.0%. The $10 fuel surcharge implemented
in February 2000 offset approximately 50% of the higher fuel prices in third
quarter. Unit costs also increased due to lower aircraft utilization. In
addition, the Company's labor costs increased 23.9% primarily due to the
addition of maintenance and flight operations employees hired to support full
aircraft utilization. Pilot costs increased due to increased wages associated
with a new five-year 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>
<TABLE>
Operating Statistics
The following table provides select operating statistics for Midwest Express and Astral.
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
% %
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Midwest Express Operations
Origin & Destination Passengers 544,491 551,727 -1.3 1,543,692 1,537,763 0.4
Revenue Passenger Miles (000s) 519,403 521,222 -0.3 1,483,686 1,465,682 1.2
Scheduled Service Available Seat Miles (000s) 795,170 766,277 3.8 2,324,609 2,233,314 4.1
Total Available Seat Miles (000s) 803,351 769,658 4.4 2,349,919 2,250,883 4.4
Load Factor (%) 65.3% 68.0% -2.7 pts. 63.8% 65.6% -1.8 pts.
Revenue Yield $0.196 $0.182 7.5 $0.192 $0.185 4.1
Revenue per Scheduled Service ASMs (1) $0.133 $0.129 2.8 $0.128 $0.127 0.9
Cost per Total ASM $0.131 $0.115 13.8 $0.127 $0.113 12.4
Average Passenger Trip Length 953.9 944.7 1.0 961.1 953.1 0.8
Number of Flights 11,796 11,635 1.4 33,803 34,050 -0.7
Into-plane Fuel Cost per Gallon $1.024 $0.637 60.8 $0.941 $0.560 68.1
Full-time Equivalent Employees at End of Period 2,752 2,360 16.6 2,752 2,360 16.6
Aircraft in Service at End of Period 33 31 6.5 33 31 6.5
Astral Aviation Operations
Origin & Destination Passengers 118,997 94,710 25.6 332,200 267,760 24.1
Revenue Passenger Miles (000s) 30,170 21,153 42.6 83,399 60,622 37.6
Scheduled Service Available Seat Miles (000s) 63,320 41,205 53.7 182,442 121,566 50.1
Total Available Seat Miles (000s) 63,341 41,340 53.2 182,488 122,001 49.6
Load Factor (%) 47.6% 51.3% -3.7 pts. 45.7% 49.9% -4.2 pts.
Revenue Yield $0.517 $0.530 -2.5 $0.533 $0.537 -0.9
Revenue per Scheduled Service ASMs (1) $0.247 $0.274 -9.7 $0.244 $0.269 -9.3
Cost per Total ASM $0.256 $0.250 2.6 $0.255 $0.250 2.0
Average Passenger Trip Length 253.5 223.3 13.5 251.1 226.4 10.9
Number of Flights 13,057 11,209 16.5 38,145 32,800 16.3
Into-plane Fuel Cost per Gallon $1.119 $0.776 44.2 $1.033 $0.659 56.7
Full-time Equivalent Employees at End of Period 498 368 35.3 498 368 35.3
Aircraft in Service at End of Period 20 15 33.3 20 15 33.3
(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.
</TABLE>
10
<PAGE>
<TABLE>
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:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 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
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Passenger service $0.136 92.4% $0.131 91.7% $0.130 91.7% $0.128 91.2%
Cargo $0.003 2.0% $0.003 2.4% $0.003 2.2% $0.004 2.6%
Other $0.008 5.6% $0.008 5.9% $0.009 6.1% $0.009 6.2%
------- ------ ------- ------ --------- ------ --------- ------
Total operating revenues $0.147 100.0% $0.143 100.0% $0.142 100.0% $0.140 100.0%
------- ------ ------- ------ --------- ------ --------- ------
Operating expenses:
Salaries, wages and benefits $0.045 31.1% $0.039 27.5% $0.044 31.1% $0.039 28.0%
Aircraft fuel and oil $0.028 19.2% $0.018 12.4% $0.026 18.1% $0.015 11.0%
Commissions $0.008 5.2% $0.010 7.1% $0.008 5.3% $0.010 7.1%
Dining services $0.008 5.3% $0.008 5.3% $0.007 5.2% $0.007 5.3%
Station rental, landing and other
fees $0.010 6.5% $0.009 6.5% $0.010 7.0% $0.010 6.9%
Aircraft maintenance
materials/repairs $0.014 9.9% $0.014 9.8% $0.015 10.9% $0.014 10.0%
Depreciation and amortization $0.005 3.3% $0.004 2.9% $0.005 3.4% $0.004 2.8%
Aircraft rentals $0.007 4.8% $0.006 4.0% $0.007 5.1% $0.006 4.3%
Other $0.014 9.6% $0.013 9.4% $0.013 9.1% $0.014 9.7%
------- ------ ------- ------ --------- ------ --------- ------
Total operating expenses $0.139 94.9% $0.121 84.9% $0.135 95.2% $0.119 85.1%
======= ====== ======= ====== ========= ====== ========= ======
Total ASMs (000s) 866,692 810,998 2,532,407 2,372,884
Note: Numbers in this table may not be recalculated due to rounding.
</TABLE>
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Operating Revenues
The Company's operating revenues totaled $127.0 million in the third quarter
2000, an $11.2 million, or 9.7%, increase over the third quarter 1999. Passenger
revenues accounted for 92.4% of total revenues and increased $11.1 million, or
10.5%, from 1999 to $117.4 million. The increase is primarily attributable to an
increase in revenue yield due to the implementation of a $10 one-way ticket fuel
surcharge in February 2000. The increase in the surcharge to $20 in September
2000 had very little impact in the third quarter. Total revenue also increased
due to higher passenger volume at Astral.
Midwest Express passenger revenue increased by $6.7 million, or 7.1%, from 1999
to $101.8 million. This increase was due to a 7.5% increase in revenue yield
primarily due to the fuel surcharge. Total capacity, as measured by scheduled
service ASMs, increased 3.8% due to two additional MD-80 aircraft in scheduled
service during the third quarter 2000. Capacity at both operating units was
constrained by a shortage of trained pilots to support the Company's growth plan
and by the need to comply with the revised FAA-mandated rest/reserve rules, and
by an increase in flight cancellations. Load factor decreased from 68.0% in 1999
to 65.3% 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 $4.4 million, or 39.0%, from 1999 to $15.6
million. Total
11
<PAGE>
capacity, as measured by scheduled service ASMs, increased 53.7% due to the
operation of five new regional jets in scheduled service during the third
quarter 2000. Traffic, as measured by revenue passenger miles, increased 42.6%.
Capacity and traffic were adversely affected by a high number of flight
cancellations. Load factor decreased from 51.3% in 1999 to 47.6% in 2000.
Revenue yield decreased 2.5% due to the addition of several longer routes with
lower-than-average revenue yield. The average passenger trip increased 30 miles,
or 13.5%. Revenue yield was positively impacted by the fuel surcharge.
Midwest Express benefited from increased revenue from charter sales of $.7
million. Partially offsetting this increase was lower mail and freight revenue
as a result of the U.S. Postal Service transporting more mail via dedicated
aircraft and ground transportation.
Operating Expenses
The Company's third quarter 2000 operating expenses increased by $22.2 million,
or 22.6%, from 1999 to $120.6 million. The increase was primarily the result of
higher fuel prices and increased labor costs. Decreased aircraft utilization in
the third quarter was due to a shortage of trained pilots to support the
Company's growth plan and comply with the revised FAA-mandated rest/reserve
rules. Because of this, Midwest Express operated only 1.4% more 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 70% 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 and no profit sharing accrual. Cost per
total ASM increased 14.7% from 12.1(cent) in 1999 to 13.9(cent) in 2000.
Salaries, wages and benefits increased $7.6 million, or 23.9% to $39.5 million.
The labor cost increase reflects the addition of approximately 522 full-time
equivalent employees (392 at Midwest Express and 130 at Astral) since September
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 $.5
million. On a cost per total ASM basis, labor costs increased 15.9% from
3.9(cent) in 1999 to 4.6(cent) in 2000.
Aircraft fuel and oil prices and associated taxes increased $10.1 million, or
70.8%, in third quarter 2000 to $24.4 million. Into-plane fuel increased 60.0%
in 2000, averaging $1.03 per gallon versus 64.5(cent) per gallon in 1999,
resulting in a $9.1 million pre-tax price impact. Fuel consumption increased
6.9% in the quarter, primarily because Astral placed five new regional jets in
service. The Company has managed to some extent the price risk of fuel primarily
by purchasing commodity options that establish ceiling prices, but did not hedge
third quarter 2000 fuel requirements. Fuel costs in October 2000 trended upward,
averaging $1.17 per gallon. The Company has not hedged prices for future fuel
requirements.
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Commissions decreased by $1.6 million, or 19.1%, from 1999 to $6.6 million. 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 third
quarter 2000 more ticket sales were generated via the Company's reservations
centers, Midwest Express Web site (www.midwestexpress.com), other travel-related
Web sites and ticket counters. Commission expense decreased 24.3% on a cost per
total ASM basis.
Dining services costs increased by $.6 million, or 9.3%, from 1999 to $6.7
million. The increase was primarily due to an increase in food prices. Dining
services costs increased 2.3% on a cost per total ASM basis.
Station rental, landing and other fees increased $.7 million, or 9.2%, from 1999
to $8.3 million. The increase was primarily caused by 16.5% more flight segments
at Astral and higher airport fees. On a cost per total ASM basis, these costs
increased 2.2%.
Maintenance costs increased by $1.2 million, or 10.2%, from 1999 to $12.6
million. On a cost per total ASM basis, this category increased 3.1%. The
increase was caused by higher-than-expected costs associated with maintenance
contract labor and higher aircraft component repair costs.
Depreciation and amortization increased by $.9 million, or 26.4%, from 1999 to
$4.2 million. 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 Astral regional jet program.
Depreciation increased 18.3% 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 new regional jets and Midwest Express
completing a sale/leaseback on one MD-80 aircraft in September 1999. On a cost
per total ASM basis, these costs increased 21.7%.
Other costs increased $1.3 million, or 12.0%, from 1999 to $12.2 million. Other
operating expenses consist primarily of advertising and promotion, insurance,
property taxes, consulting services, reservation fees, administration and other
items. The increase was primarily due to increased costs in flight training,
crew hotel costs, software, telephone and communications, and property taxes. On
a cost per total ASM basis, these costs increased 4.8%.
Provision for Income Taxes
Income tax expense for the third quarter 2000 was $2.5 million, a $4.1 million
decrease from the 1999 provision of $6.6 million. The effective tax rates for
the third 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 in 1996 as if they were payable to taxing
authorities.
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Net Income
Net income for the third quarter 2000 was $4.3 million, a decrease of $6.8
million from third quarter 1999 net income of $11.1 million. The net income
margin decreased from 9.6% in 1999 to 3.4% in 2000.
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Operating Revenues
The Company's operating revenues totaled $359.6 million for the nine months
ended September 30, 2000, a $27.2 million, or 8.2%, increase over 1999.
Passenger revenues accounted for 91.7% of total revenues and increased $26.5
million, or 8.7%, from 1999 to $329.6 million. The increase was primarily
attributable to a 5.9% increase in revenue yield and a 2.7% increase in
passenger volume, as measured by revenue passenger miles.
Midwest Express passenger revenue increased by $14.6 million, or 5.4%, from 1999
to $285.2 million. This increase was caused by a 4.1% increase in revenue yield
and a 1.2% increase in passenger volume, as measured by revenue passenger miles.
Total Midwest Express capacity, as measured by scheduled service ASMs, increased
4.1% 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
compliance with the FAA-mandated rest/reserve rules, and by an increase in
flight cancellations. Load factor decreased from 65.6% in 1999 to 63.8% in 2000
due to lost bookings as a result of competitive pricing, operating larger
aircraft on certain routes, lower volume on new routes, a potential pilot strike
in the first quarter, and passenger concerns related to the Year 2000 rollover.
Astral passenger revenue increased by $11.8 million, or 36.4%, from 1999 to
$44.4 million. Traffic increased 37.6% on a 50.1% increase in capacity due to
five new regional jets in service in 2000. Load factor decreased from 49.9% in
1999 to 45.7% in 2000. Revenue yield decreased from $.54 in 1999 to $.53 in
2000.
The Company's revenue from cargo, charter and other services increased $.8
million, or 2.7%, in 2000. Midwest Express benefited from increased revenue from
the charter program. Partially offsetting this increase was lower mail and
freight revenue.
Operating Expenses
The Company's 2000 operating expenses increased by $59.5 million, or 21.1%, from
1999, primarily due to expanded operations and higher fuel costs. Offsetting
higher costs in most categories were lower commission costs and no profit
sharing accrual. Cost per total ASM increased 13.4% from 11.9(cent) in 1999 to
13.5(cent) in 2000.
Salaries, wages and benefits increased $18.7 million, or 20.1%, from 1999 to
$111.8 million. On a cost per total ASM basis, these costs increased 12.5%, from
3.9(cent) in 1999 to 4.4(cent) in 2000. The
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labor cost increase reflects the addition of approximately 522 full-time
equivalent employees (392 at Midwest Express and 130 at Astral) since September
30, 1999 and increases in labor rates. Midwest Express added employees
throughout the organization to support the aircraft placed in service. Midwest
Express also added mechanics to support growth and complete aircraft
modifications and repairs more efficiently. Pilot costs at Midwest Express
increased 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, which effectively added 18 pilots
with no increased flying. These increases were partially offset by a reduction
in the profit sharing accrual.
Aircraft fuel and oil and associated taxes increased $28.8 million, or 78.7%, in
2000 to $65.3 million. Into-plane fuel prices increased 67.7% in 2000, averaging
94.9(cent) per gallon in 2000 versus 56.6(cent) per gallon in 1999. The Company
has managed to some extent the price risk of fuel primarily by purchasing
commodity options that establish ceiling prices. The Company hedged 25% of first
quarter 2000 fuel prices but has not hedged future fuel requirements.
Commissions decreased by $4.5 million, or 19.2%, and 24.3% 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 its reservations centers, Midwest Express Web site, other
travel-related Web sites and ticket counters.
Dining services costs increased by $1.0 million, or 5.9%, from 1999 to $18.6
million. The increase was primarily due to a 4.8% increase in food and services
prices, and a .4% increase in origin and destination passengers at Midwest
Express.
Station rental, landing and other fees increased by $2.4 million, or 10.5%, from
1999 to $25.3 million. The increase was caused by 16.3% more flight segments at
Astral and higher airport costs throughout the system. On a cost per ASM basis,
these costs increased 3.6%.
Maintenance costs increased by $5.8 million, or 17.3%, from 1999 to $39.1
million. Aircraft maintenance costs increased 10.0% on cost per total ASM 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 $2.8 million, or 29.5%, from 1999 to
$12.2 million. The increase from third 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 $4.1 million, or 28.9%, from 1999 primarily
as a result of Astral leasing five new regional jets and Midwest Express
completing a sale/leaseback on one MD-80 aircraft in September 1999.
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Other operating expenses increased by $.5 million, or 1.6%, from 1999. The
increase was due to cost increases in flight training, Frequent Flyer program
expenses, professional and financial services, crew hotels, property taxes,
charters, advertising and legal services. The increase was mostly offset by a
nonrecurring $2.7 million favorable settlement of a sales and use tax dispute on
meals boarded on aircraft in Wisconsin. On a cost per ASM basis, these costs
decreased 4.8%.
Provision for Income Taxes
The Company's income tax expense for the first nine months of 2000 was $6.8
million, a decrease of $12.0 million from 1999. The effective tax rates for the
first nine months 2000 and 1999 were 37.0% and 37.5%, respectively.
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 transition dividing major events into smaller, more frequent events,
and to expense airframe maintenance costs as they are incurred.
Net Income
The Company's net income for the first nine months was $6.9 million, a decrease
of $24.4 million from 1999. The net income margin decreased to 1.9% in 2000 from
9.4% in 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $24.1 million at September 30,
2000, compared with $16.0 million at December 31, 1999. Net cash provided by
operating activities totaled $50.4 million for the nine months ended September
30, 2000. Net cash used in investing activities totaled $40.7 million, due to
capital expenditures of $40.4 million, including $.5 million of purchase
deposits on flight equipment.
As of September 30, 2000, the Company had a working capital deficit of $50.7
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 September 30, 2000, the Company's $55.0 million revolving bank credit
facility has not been used except for letters of credit totaling approximately
$9.5 million that reduces 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 Company's $20.0 million secondary revolving credit
facility with Kimberly-Clark expired in September 2000 and will not be renewed.
Capital spending totaled $40.4 million, including $.5 million of purchase
deposits on flight equipment for the nine months ended September 30, 2000.
Capital expenditures primarily consisted of spending for the construction of the
Company's new training facility, aircraft refurbishment costs for three of the
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recently acquired MD-80 aircraft, engine overhauls, spare aircraft parts, and
spending for refurbishment and equipment for the Kansas City Call Center. The
Company anticipates full-year capital spending to be approximately $55 million
in 2000, $21 million of which is associated with the acquisition and
refurbishment of MD-80 aircraft and $11 million for the acquisition of a sixth
regional jet.
In November 1999, the Company signed a purchase agreement to acquire four MD-80
series aircraft currently operated by Scandinavian Airlines Systems. The Company
financed the first delivery using internal cash flow. The remaining three
aircraft will be delivered in 2001 and financing will be determined at that
time.
As of September 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.
Astral's five new regional Fairchild Dornier 328JET aircraft acquired in 2000
were financed via operating leases over a period of 16.5 years.
The Company's Board of Directors has authorized share repurchase programs
totaling $30.0 million. In the third quarter 2000, the Company acquired 84,626
shares at a cost of $2.0 million. As of September 30, 2000, the Company has
repurchased a total of 727,451 shares of common stock at a cost of $15.0
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.
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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 "expect," "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 that the Company agreed to purchase
in 1997 were received in the fourth quarter 1999. One entered service in July
2000, and the other entered service in October 2000. In November 1999, the
Company signed a purchase agreement to acquire four MD-80 series aircraft
operated by Scandinavian Airlines System ("SAS"). Delivery of these aircraft
began in September 2000 and is expected to continue through November 2001. After
refurbishment and modification, three aircraft are expected to enter scheduled
service in 2001 and the fourth in 2002. The Company expects the SAS project,
including aircraft refurbishment, modification and support equipment, will cost
$50 million. These four 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 currently operates five 32-passenger
Fairchild Dornier 328JETs. The Company was planning to acquire five additional
regional jets in 2001 and more in subsequent years. The Company planned to
acquire the Fairchild Dornier 428JET, which was planned to be a 44-passenger
derivative of the 328JET. Fairchild Dornier canceled its 428JET program in the
third quarter 2000. The Company is currently evaluating alternatives for its
regional jet program in light of this cancellation, including disposal of the
existing fleet of Fairchild Dornier 328JETs and acquisition of a different
regional jet product. The Company intends to continue its regional jet program.
Air Midwest Codeshare - On November 2, 2000 the Company announced an agreement
to codeshare with Air Midwest, a subsidiary of Mesa Air Group. Under the
agreement the Midwest Express code will be placed on Air Midwest flights
operating to and from Kansas City, providing passengers connection service
between Kansas City and 14 Midwestern cities. The codeshare program is expected
to begin in the first quarter of 2001.
Labor Relations - In April 1999, Midwest Express flight attendants elected the
Association of Flight Attendants (AFA), AFL-CIO, a labor union, for
representation in collective bargaining. Negotiations began in January 2000. In
September 2000, AFA requested assistance from the National Mediation Board. The
Company and AFA continue in mediated negotiations.
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Pension Plan - In 1999, Midwest Express approved a plan to terminate on March
31, 2000 the qualified defined benefit plan that covers substantially all
Midwest Express employees. 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 pension plan for substantially all Midwest Express employees. The
monthly contributions are primarily based on employee compensation and employee
age.
Fuel Prices - Fuel prices remain high. In fourth quarter 1999, the Company's
into-plane fuel costs averaged approximately 75(cent) per gallon versus the
October cost of over $1.17 per gallon. In fourth quarter 2000, the Company
expects an unfavorable fuel price variance of approximately $8-9 million at
current pricing, but expects to offset some of the unfavorable variance by the
ticket fuel surcharge. The ticket fuel surcharge is subject to competitive
pressures. The Company has not hedged fuel purchases in the fourth quarter or
beyond.
Capacity Growth - Fourth quarter 2000 capacity is expected to increase 15% over
1999. Fiscal-year 2000 capacity is expected to increase approximately 9% over
fiscal-year 1999.
In 2001, capacity is expected to increase 15 to 20%. This capacity growth is
expected to result from improved aircraft utilization and additional aircraft in
the Company's fleet including the regional jet program as discussed above in
this pending developments section.
PART II - OTHER INFORMATION
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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Seventeenth Amendment to Airline Lease, as amended between
Milwaukee County and Midwest Express, dated June 29, 2000.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
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No reports on Form 8-K were filed during the quarter ended September 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: November 14, 2000 By /s/ Timothy E. Hoeksema
--------------------- ------------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: November 14, 2000 By /s/ Robert S. Bahlman
--------------------- ------------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
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