<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to _________
Commission File No: 0-26914
AirTran Holdings, Inc.
(Exact name of registrant as specified in its charter)
Nevada 58-2189551
------ -----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard, Orlando, Florida 32827
-----------------------------------------------
(Address of principal executive offices) (Zip code)
(407) 251-5600
--------------
(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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 3, 1998, there were 64,894,807 shares of Common Stock of the
Registrant outstanding.
<PAGE>
AIRTRAN HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and December 31, 1997
Consolidated Statements of Operations - Three months ended September
30, 1998 and 1997; Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows - Nine months ended September 30,
1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
AIRTRAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
- ----------- ------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 34,516 $ 86,025
Restricted cash 8,197 5,965
Accounts receivable, less allowance of $378 and $1,354 at
September 30, 1998 and December 31, 1997, respectively 17,836 5,660
Income tax receivable - 8,862
Inventory, less allowance for obsolescence of $3,572 and $1,325
at September 30, 1998 and December 31, 1997, respectively 11,830 11,650
Prepaid expenses 1,761 2,811
Other current assets 2,641 3,079
-------- --------
Total current assets 76,781 124,052
Property and equipment:
Flight equipment 304,707 264,082
Other property and equipment 23,339 22,805
Less: Accumulated depreciation (91,670) (74,643)
-------- --------
236,376 212,244
Purchase deposits for flight equipment 36,175 22,101
-------- --------
272,551 234,345
Cost in excess of net assets acquired 56,375 57,776
Debt issuance costs 7,696 9,863
Other assets 10,413 7,828
-------- --------
Total assets $423,816 $433,864
======== ========
See accompanying notes to consolidated financial statements. (Continued)
</TABLE>
3
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ ------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,308 $ 12,215
Accrued liabilities 53,614 61,574
Air traffic liability 23,677 14,916
Current portion of long-term debt 9,612 9,461
-------- --------
Total current liabilities 98,211 98,166
Long-term debt, less current portion 239,487 241,251
-------- --------
Total liabilities 337,698 339,417
Stockholders' equity:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.001 par value per share, 1,000,000,000
shares authorized, and 64,888,498 and 64,312,207 shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 65 64
Additional paid-in capital 146,814 144,937
Accumulated deficit (60,761) (50,554)
-------- --------
Total stockholders' equity 86,118 94,447
-------- --------
Total liabilities and stockholders' equity $423,816 $433,864
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 110,575 $ 53,570 $ 319,856 $ 133,878
Cargo 740 582 2,302 1,709
Other 3,745 2,261 11,431 5,514
----------- ----------- ----------- -----------
Total operating revenues 115,060 56,413 333,589 141,101
Operating expenses and other, net:
Flight operations 13,642 5,094 36,744 13,998
Aircraft fuel 19,321 13,522 55,112 33,373
Maintenance 27,716 16,266 66,252 40,906
Station operations 22,589 12,857 63,447 35,343
Passenger services 5,886 2,552 15,261 6,370
Marketing and advertising 4,021 2,888 13,925 8,115
Sales and reservations 15,119 4,544 42,573 11,345
General and administration 4,660 3,129 13,349 9,272
Depreciation 7,109 8,261 20,337 20,508
Loss (gain) on disposal of property 316 (225) 361 (274)
Rebranding expenses - 325 - 325
Shutdown and other non-recurring - - - 9,338
----------- ----------- ----------- -----------
Total operating expenses 120,379 69,213 327,361 188,619
----------- ----------- ----------- -----------
Operating income (loss) (5,319) (12,800) 6,228 (47,518)
Interest (income) expense:
Interest income (779) (1,644) (2,683) (4,913)
Interest expense 6,367 7,131 19,118 19,854
----------- ----------- ----------- -----------
Interest expense, net 5,588 5,487 16,435 14,941
----------- ----------- ----------- -----------
Loss before income taxes (10,907) (18,287) (10,207) (62,459)
Income tax benefit (14) (3,675) - (20,114)
----------- ----------- ----------- -----------
Net loss $ (10,893) $ (14,612) $ (10,207) $ (42,345)
=========== =========== =========== ===========
Basic loss per share $(0.17) $(0.27) $(0.16) $(0.77)
=========== =========== =========== ===========
Diluted loss per share $(0.17) $(0.27) $(0.16) $(0.77)
=========== =========== =========== ===========
Weighted average number of shares
outstanding (basic and diluted) 64,688,200 54,984,451 64,549,539 54,922,522
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $(10,207) $(42,345)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 21,174 23,356
Provisions for uncollectible accounts 4,906 2,181
Loss (gain) from disposal of assets 361 (274)
Deferred income taxes - (14,982)
Changes in current operating assets and liabilities:
Restricted cash (2,232) -
Accounts receivable (8,220) (2,941)
Notes receivable - (12,700)
Other current assets 258 (2,129)
Prepaid expenses and deposits (1,535) 7,378
Accounts payable and accrued liabilities (8,867) 10,718
Air traffic liability 8,761 5,099
Income tax payable - 22,943
-------- --------
Net cash flows provided by (used for) operating activities 4,399 (3,696)
Investing activities:
Purchases of property and equipment (56,328) (17,358)
Proceeds from disposal of equipment 155 3,217
-------- --------
Net cash flows used for investing activities (56,173) (14,141)
Financing activities:
Issuance of long-term debt 6,100 72,418
Payments of long-term debt (7,713) (81,748)
Proceeds from sale of common stock 1,878 364
-------- --------
Net cash flows provided by (used for) financing activities 265 (8,966)
-------- --------
Net decrease in cash and cash equivalents (51,509) (26,803)
Cash and cash equivalents at beginning of period 86,025 150,013
-------- --------
Cash and cash equivalents at end of period $ 34,516 $123,210
======== ========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 10,360 $ 14,720
======== ========
Income taxes refunded $ 9,686 $ 26,906
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
AIRTRAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, consolidated interim
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of September 30, 1998 and December 31, 1997, the
results of operations for the three and nine month periods ended September 30,
1998 and 1997, and cash flows for the nine month periods ended September 30,
1998 and 1997. Certain information and footnote disclosures normally included
in the annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for Form 10-Q.
It is suggested that these unaudited interim financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for the three and nine month periods ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
fiscal year.
B. RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the current year presentation.
C. NET LOSS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effect of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
D. FREQUENT FLYER PROGRAM
The Company established its A-Plus Rewards frequent flyer program in the first
quarter of 1998. The Company accrues the estimated incremental cost of
providing free travel awards earned under its A-Plus Rewards frequent flyer
program when free travel awards are redeemed.
E. DEPRECIATION
Depreciation is calculated on a straight-line basis to estimated salvage values
over estimated depreciable lives. These estimates are periodically reviewed for
reasonableness and revised if necessary. Effective January 1, 1998, the Company
revised its estimated salvage values and useful lives on certain of its DC-
7
<PAGE>
9 aircraft related equipment as follows:
Prior years' Current Prior years' Current
Salvage Value Salvage Value Useful Life Useful Life
-------------- -------------- ------------ -----------
Airframes 10% 40% 10-12 years 10-12 years
Engines 10% 10% 3 years 10-12 years
Aircraft parts 5-50% 5% 3 years fleet life
The revised salvage value of the Company's DC-9 fleet ranges from approximately
$434,000 to $2,614,000 per aircraft. The effect of this change for the quarter
and nine months ended September 30, 1998 was to increase income by approximately
$3 million or $0.05 per share on a diluted basis and $9 million or $0.14 per
share on a diluted basis, respectively. These estimates more accurately reflect
management's expectations of estimated fair values at the anticipated dates of
disposal.
F. MAINTENANCE ACCRUALS
At December 31, 1997, the Company had accrued the estimated costs to reactivate
certain aircraft. During the quarter ended June 30, 1998, the reactivation of
these aircraft were completed and the costs associated therewith were finalized.
The remaining maintenance accrual was therefore revised based on this additional
information and $3 million was reversed into income, increasing income for the
nine months ended September 30, 1998, by approximately $3 million or $0.05 per
share on a diluted basis.
G. COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Company has a commitment to purchase 50 Boeing
717-200 aircraft. In addition, the Company intends to purchase hushkits for
installation on Stage 2 aircraft to meet Stage 3 noise requirements.
Commitments for these aircraft and hushkits will result in payments of
approximately $14.4 million in 1998, $187.3 million in 1999, $252.2 million in
2000, $223.4 million in 2001 and $282.6 million in 2002.
A total of approximately 100 claims have been filed against the Company seeking
damages attributable to the deaths of those on Flight 592. The Company's
insurance carrier has assumed defense of these suits under a reservation of
rights against third parties and the Company. The insurance carrier has settled
and paid approximately 80 claims and is pursuing settlements in the balance of
the claims. In the remaining lawsuits, a third party maintenance contractor has
been named as a co-defendant as a result of the role that it played in the
accident. As all claims are handled independently by the Company's insurance
carrier, the Company cannot reasonably estimate the amount of liability which
might finally exist. As a result, no accruals for losses and the related claim
for recovery from the Company's insurance carrier have been reflected in the
Company's financial statements. The Company maintains $750 million of liability
insurance, per occurrence, with a major group of independent insurers that
provides facilities for all forms of aviation insurance for many major airlines.
Although the Company believes, based on the information currently available to
it, that such coverage is sufficient to cover claims arising out of the loss of
Flight 592 and that the insurers have sufficient financial strength to pay
claims, there can be no assurance that the total amount of judgments and
settlements will not exceed the amount of insurance available therefor or that
all damages awarded will be covered by insurance.
8
<PAGE>
In November 1997, the Company filed a suit in the Circuit Court of St. Louis
County, Missouri against a third party maintenance contractor, seeking to hold
it responsible for the accident involving Flight 592. The complaint seeks
indemnification against losses attributable to the lawsuits referred to above
and other damages that the Company suffered as a result of the accident.
In May 1997, the third party maintenance contractor filed a Complaint for
declaratory judgment and other relief against the Company. The action seeks a
determination that the third party maintenance contractor is not liable to the
Company for the accident involving Flight 592 as a result of language contained
in certain of the contracts between the parties and that the Company is liable
to the third party maintenance contractor for damages that it has suffered. The
Company intends to vigorously defend this lawsuit.
Also in May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. The Company does not believe that it is obligated for such amounts
and has filed a motion to dismiss this lawsuit.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
National Transportation Safety Board, the U.S. Attorney's office in Atlanta,
Georgia and Miami, Florida and certain state agencies in Florida. Although the
Company does not believe, based on information currently available to it, that
such investigations and inquiries will result in any finding of criminal
wrongdoing on its part, some of the investigations have not yet been concluded
and the possibility of such a finding cannot be ruled out. The Company may also
be assessed civil penalties in connection with the accident and/or the results
of ensuing investigations. Any such findings or penalties could be material.
Several stockholder class action suits have been filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). Class certification has been granted for all purchasers of stock
in the Company during the period beginning in June 1995 and ending on June 18,
1996. The lawsuits are based on allegedly misleading public statements made by
the Company or failure to disclose material facts in violation of federal
securities laws. The Company denies that it has violated any of its obligations
under the federal securities laws and believes that meritorious defenses exist
in the lawsuits.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit against
the Company in State Court in Tennessee for breach of contract and a declaratory
judgment for an anticipatory breach. The Nashville Airport Authority seeks
damages of approximately $2.6 million. The dispute involves whether the
Company was entitled to exercise a termination right contained in its lease
agreement. Management believes the ultimate resolution will not have a
materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of business. The Company does not believe that any such pending
litigation will have a material adverse effect on its results of operations or
financial condition.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
The following chart indicates the service offered by the Company as of various
dates between January 1, 1997 and September 30, 1998:
Total Number of Number of Number of
Aircraft in Service Flights Per Day Cities Served
As of (1) (1) (1)
- ------------------ ------------------- --------------- -------------
January 1, 1997 15 124 18
March 31, 1997 24 148 21
June 30, 1997 30 184 24
September 30, 1997 31 200 22
December 31, 1997 44 237 43
March 31, 1998 46 249 38
June 30, 1998 51 281 37
September 30, 1998 50 272 30
(1) Includes aircraft operated by and service offered by AirTran Airlines and
AirTran Airways after November 17, 1997.
10
<PAGE>
Quarter over quarter comparison:
- --------------------------------
<TABLE>
<CAPTION>
Three months ended September 30, 1998 Three months ended September 30, 1997
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
------------- ------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(000) (000)
OPERATING REVENUES $115,060 100.0% $ 0.082 $ 56,413 100.0% $ 0.066
EXPENSES
Flight Operations 13,642 11.9% 0.010 5,094 9.0% 0.006
Aircraft Fuel 19,321 16.8% 0.014 13,522 24.0% 0.016
Maintenance 27,716 24.1% 0.020 16,266 28.8% 0.019
Station Operations 22,589 19.6% 0.016 12,857 22.8% 0.015
Passenger Services 5,886 5.1% 0.004 2,552 4.5% 0.003
Marketing and Advertising 4,021 3.5% 0.003 2,888 5.1% 0.003
Sales and Reservations 15,119 13.1% 0.011 4,544 8.1% 0.005
General and Administrative 4,660 4.1% 0.003 3,129 5.5% 0.004
Depreciation 7,109 6.2% 0.005 8,261 14.6% 0.010
Loss (gain) on disposal of property 316 0.3% - (225) (0.4)% -
Rebranding - - - 325 0.6% -
-------- ------- -------- -------
Total operating
expenses and other, net 120,379 104.7% 0.086 69,213 122.6% 0.081
Interest expense, net 5,588 4.9% 0.004 5,487 9.7% 0.006
-------- ------- -------- -------
Income (loss) before income taxes $(10,907) (9.6%) $(0.008) $(18,287) (32.3%) $(0.021)
======== ======= ======== =======
</TABLE>
Total operating revenues for the quarter ended September 30, 1998 increased
104.0% to $115,060,000 as compared to $56,413,000 for the quarter ended
September 30, 1997. The Company's ASMs, load factors and average fares for the
third quarter 1998 were 1.4 billion, 59.9% and $78.04, respectively, as compared
to 853 million, 51.6% and $62.39, respectively, for the same period of 1997.
Capacity increased due to the increased number of flights per day, the number of
cities served, along with an increase of 19 operating aircraft in the third
quarter of 1998, partially as a result of the Company's acquisition of Airways
Corporation in November 1997 as compared to the same period of 1997. In the
third quarter of 1998, as compared to the same period of 1997, the Company has
focused its efforts on attracting more business travelers and has also
implemented several initiatives to enhance revenue, including a frequent flyer
program, business class seating and an automated revenue management system.
These efforts have resulted in increased demand and yield. However, the Company
is currently experiencing aggressive, competitive pricing strategies that did
negatively affect revenues during the third quarter of 1998. Continued
aggressive competition could negatively impact future periods as well.
Flight operations expenses include direct aircraft operating costs, hull
insurance and pilot compensation. Flight operations expenses increased in the
third quarter of 1998 due to a 64.9% increase in ASMs and an increase in cost
per ASM. Flight operations expenses increased on a per ASM basis for the
quarter ended September 30, 1998 primarily due to a 10% wage increase during
April of 1998 and premium compensation paid as a result of pilot shortages.
Aircraft fuel, on a per ASM basis, declined primarily due to a drop in the
Company's average fuel cost
11
<PAGE>
per gallon to $0.56 for the third quarter of 1998 from $0.67 for the same period
of 1997. Actual aircraft fuel expense increased due to a 73% increase in
consumption.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance. Expenses for engine
overhaul and certain scheduled heavy maintenance procedures are expensed as
incurred and are included in this cost. Overall, maintenance expenses for the
quarter ended September 30, 1998 increased due to a 64.9% increase in ASMs as
compared to the same period of last year. The slight increase on a per ASM
basis was due to higher engine overhaul costs.
Station operations expense includes all expenses incurred at the airports, as
well as station operations administration and liability insurance. Station
operations expenses were slightly higher, on a per ASM basis, for the third
quarter of 1998 than the third quarter of 1997 due to a 17% wage increase.
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses. Passenger services expenses remained
relatively constant as a percentage of revenue and on a per ASM basis from the
third quarter of 1998 as compared to the third quarter of 1997. During October
1998, the Company ratified a labor contract with the Association of Flight
Attendants (AFA) which included a 10% wage increase effective October 1, 1998.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
remained relatively constant on a per ASM basis from the third quarter of 1998
as compared to the third quarter of 1997. However, actual costs increased due
to increased advertising efforts to stimulate revenues in light of aggressive
competitive pressures.
Sales and reservations expenses include all of the costs related to recording a
sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees, ARC
processing fees and travel agency commissions. Sales and reservations expenses,
as a percentage of revenue, increased in the third quarter of 1998 as compared
to the third quarter of 1997 due primarily to the fact that the Company joined
the Airline Reporting Corporation (ARC) in September 1997 to process all of its
ARC member travel agency bookings.
General and administrative expenses include the wages and benefits for the
Company's executive officers and various other administrative personnel. Also
included are costs for legal expenses, accounting and other miscellaneous
expenses. General and administrative costs for the third quarter of 1998 were
lower, on a per ASM basis, as compared to the third quarter of 1997 due to the
increased service levels during the third quarter of 1998 which resulted in
improved economies of scale.
Depreciation expense includes depreciation on aircraft and ground equipment.
Depreciation expense for the quarter ended September 30, 1998 was lower than the
quarter ended September 30, 1997 due to the change in estimated salvage values
and estimated useful lives as discussed in Note E in the notes to the
consolidated financial statements above, offset by an increase due to returning
aircraft to operations previously classified as assets held for sale.
Interest expense, net for the quarter ended September 30, 1998 increased over
the quarter ended September 30, 1997 due to an increase in the average debt
balance outstanding and decreasing cash balances. This increase was offset by
an increase in capitalized interest on advance purchase deposits for the new
Boeing 717-200 fleet.
12
<PAGE>
Year to date over year to date comparison:
- ------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30, 1998 Nine months ended September 30, 1997
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(000) (000)
OPERATING REVENUES $333,589 100.0% $ 0.081 $141,101 100.0% $ 0.068
EXPENSES
Flight Operations 36,744 11.0% 0.009 13,998 9.9% 0.007
Aircraft Fuel 55,112 16.5% 0.013 33,373 23.7% 0.016
Maintenance 66,252 19.9% 0.016 40,906 29.0% 0.020
Station Operations 63,447 19.0% 0.015 35,343 25.0% 0.017
Passenger Services 15,261 4.6% 0.004 6,370 4.5% 0.003
Marketing and Advertising 13,925 4.2% 0.003 8,115 5.8% 0.004
Sales and Reservations 42,573 12.8% 0.010 11,345 8.0% 0.005
General and Administrative 13,349 4.0% 0.003 9,272 6.6% 0.004
Depreciation 20,337 6.1% 0.005 20,508 14.5% 0.010
Loss (gain) on disposal of property 361 0.1% - (274) (0.2%) -
Rebranding - - - 325 0.2% -
Shutdown and other
nonrecurring expenses - - - 9,338 6.6% 0.005
-------- ------- -------- -------
Total operating
expenses and other, net 327,361 98.2% 0.078 188,619 133.6% 0.091
Interest expense, net 16,435 4.9% 0.004 14,941 10.6% 0.007
-------- ------- -------- -------
Income (loss) before income taxes $(10,207) (3.1%) $(0.002) $(62,459) (44.2%) $(0.030)
======== ======= ======== =======
</TABLE>
Total operating revenues for the nine months ended September 30, 1998 increased
136.4% to $333,589,000 as compared to $141,101,000 for the nine months ended
September 30, 1997. The Company's ASMs, load factors and average fares for the
first nine months of 1998 were 4.1 billion, 60.4% and $79.06, respectively, as
compared to 2.1 billion, 53.3% and $60.68, respectively, for the same period of
1997. Capacity increased due to the increased number of flights per day,
increased number of cities served, and an increase of 19 operating aircraft
during the nine months ended September 30, 1998, partially as a result of the
Company's acquisition of Airways Corporation in November 1997, as compared to
the same period of 1997. In the first nine months of 1998, as compared to the
same period of 1997, the Company has focused its efforts on attracting more
business travelers and has also implemented several initiatives to enhance
revenue, including a frequent flyer program, business class seating and an
automated revenue management system. These efforts have resulted in increased
demand and yield. However, the Company is currently experiencing aggressive,
competitive pricing strategies that could negatively impact future loads and
yields.
Flight operations expenses increased on a per ASM basis for the nine months
ended September 30, 1998 primarily due to a 10% wage increase during April of
1998 and premium compensation paid as a result of pilot shortages. Overall,
flight operations expenses increased for the first nine months of 1998
reflecting the 98.6% increase in ASMs.
13
<PAGE>
Aircraft fuel, on a per ASM basis, declined primarily due to a drop in the
Company's average fuel cost per gallon to $0.56 for the nine months ended
September 30, 1998 from $0.69 for the same period of 1997.
Maintenance expense for the nine months ended September 30, 1998 increased
primarily due to the introduction of 19 additional aircraft since September 30,
1997. On a per ASM basis, however, maintenance costs decreased primarily due to
the reactivation of 8 aircraft during the nine months ended September 30, 1998,
as compared to 15 aircraft reactivations during the same period of 1997.
Station operations expenses were lower, on a per ASM basis, for the nine months
ended September 30, 1998 than the nine months ended September 30, 1997 due to
inefficiencies incurred during 1997 relating to restarting operations on a
limited basis, slightly offset by wage increases given during the nine months
ended September 30, 1998.
Passenger services expenses remained constant as a percentage of revenue and on
a per ASM basis for the nine months ended September 30, 1998 as compared to the
same period of last year. Overall, passenger services expenses increased for
the first nine months of 1998 reflecting the 98.6% increase in ASMs.
Marketing and advertising expenses remained relatively constant on a per ASM
basis for the nine months ended September 30, 1998 as compared to the same
period of last year.
Sales and reservations expenses, as a percentage of revenue and on a per ASM
basis, increased for the nine months ended September 30, 1998 as compared to the
same period of last year primarily due to the fact that the Company joined the
Airline Reporting Corporation (ARC) in September 1997 to process all of its ARC
member travel agency bookings.
General and administrative costs for the nine months ended September 30, 1998
were lower, on a per ASM basis, as compared to the nine months ended September
30, 1997 due to the increased service levels during 1998 over which to spread
these costs.
Depreciation expense for the nine months ended September 30, 1998 was lower than
the nine months ended September 30, 1997 due to the change in estimated salvage
values and estimated useful lives as discussed in Note E in the notes to the
consolidated financial statements above, offset by an increase due to returning
aircraft to operations previously classified as assets held for sale.
Interest expense, net for the nine months ended September 30, 1998 increased
over the nine months ended September 30, 1997 due to an increase in the average
debt balance outstanding and decreasing cash balances. These items were offset
by an increase in capitalized interest on advance purchase deposits for the new
Boeing 717-200 fleet.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities.
The Company's internal computer software and computerized operating systems were
developed in conjunction with the commencement of the Company's business in 1993
and were designed to take into consideration the Year 2000 issue. Additionally,
the Company has implemented a Year 2000 compliance program to ensure that the
Company's computer systems and applications will perform properly beyond 1999.
In addition to the internal review, the Company has received assurance from its
14
<PAGE>
significant computer system vendors that their applications are Year 2000
compliant. Other, minor, embedded technology assets are expected to be
compliant by June 1999. Maintenance or modification costs associated with making
changes, if needed, will be expensed as incurred.
The Company's business relies on government agencies and other third parties
(e.g., Department of Transportation, Federal Aviation Administration, airport
authorities, data suppliers). The ability of third parties upon whom the Company
relies to adequately address their Year 2000 issues is outside the Company's
control. However, the Company is coordinating efforts with these parties to
minimize the extent to which its business will be vulnerable to their failure to
remediate their own year 2000 issues.
The Company has not yet completed all necessary phases of the Year 2000 program.
In the event that the Company does not complete any additional phases or outside
vendors and third parties are not Year 2000 compliant by December 31, 1999, the
most reasonable worst case scenario would be a reduction or suspension of
operations which could have a material impact on the Company's business or
consolidated financial statements. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The Company could be subject to litigation for computer systems
failure, for example, equipment shutdown or failure to properly date business
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company is evaluating the need for a contingency plan in the event any third
parties cannot demonstrate to the Company, on a timely basis, its Year 2000
compliance. There can be no assurance that the systems of the third parties will
be modified on a timely basis.
The total cost, including internal labor, of the Company's Year 2000 project is
currently estimated at less than $500,000 and will be funded through cash from
operations. The cost of the Company's Year 2000 project and the date on which
the Company believes it will be completed are based on management's best
estimates and include assumptions regarding third-party modification plans.
However, due primarily to the potential impact of third-party modification
plans, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company relies primarily on its operating cash flow to provide working
capital. The Company has no lines of credit or other facilities. As of
September 30, 1998, the Company had cash and cash equivalents of $34.5 million
compared to $86.0 million at December 31, 1997 and a working capital deficit of
$21.4 million as compared to working capital of $25.9 million at December 31,
1997.
For the nine months ended September 30, 1998, operating activities provided $4.4
million in cash flow. Investing activities used $56.2 million as a result of
the acquisition of spare engines and Boeing 717-200 advance purchase deposits.
Financing activities provided $0.3 million as a result of obtaining $6.1 million
in financing for the purchase of spare engines and $1.9 million provided by the
exercise of stock options. These proceeds were offset by $7.7 million in debt
payments.
As of September 30, 1998, the Company's operating fleet consisted of 40
McDonnell Douglas DC-9-30 aircraft and 10 Boeing 737-200 aircraft. The Company
currently leases one DC-9-30 aircraft to another carrier.
The Company has contracted with Boeing (successor to McDonnell Douglas) for the
purchase of 50 Boeing 717-200 aircraft, at a cost of approximately $1.0 billion
(subject to adjustments for inflation), for delivery in 1999 to 2002. During
the third quarter of 1998 the Company reached an agreement with Boeing to defer
the remaining progress payments until the first delivery which is expected in
July 1999. There can be no assurance that cash provided by operations will be
sufficient to meet the progress payments for the Boeing 717-200's beginning
again after July 1999. If the Company exercises its option to acquire up to an
additional 50 Boeing 717-200 aircraft, additional payments could be required
beginning in June 1999. The Company expects to finance at least 80% of the cost
of each of these aircraft. Although Boeing has agreed to provide assistance
with respect to the financing of aircraft to be acquired, the Company will be
required to obtain the financing from other sources. The Company believes that
with the assistance to be provided by Boeing, aircraft related debt financing
should be available when needed. There is no assurance that the Company will be
able to obtain sufficient financing on attractive terms. If it is unable to do
so, the Company could be required to modify its aircraft acquisition plans or to
incur higher than anticipated financing costs, which could have a material
adverse effect on the Company's results of operations and cash flows.
The Company's compliance with Stage 3 noise requirements will require
substantial additional capital expenditures by December 31, 1999. By December
31, 1998, 75% of the Company's aircraft must be brought into compliance with
Stage 3 requirements and by December 31, 1999, full compliance is required. The
Company intends to meet its Stage 3 noise requirement obligations by installing
hush kits on Stage 2 aircraft or disposing of Stage 2 aircraft and by acquiring
or leasing Stage 3 aircraft. The Company expects that FAA certified hush kits
will cost approximately $39.8 million for its remaining non-hushed DC-9-30 and
737-200 aircraft. Any disposition of Stage 2 aircraft would reduce this
obligation. There can be no assurance that cash provided by operations will be
sufficient to meet the capital requirements to finance the remaining hushkits
required for Stage 3 compliance.
The statements that are contained in this Report that are not historical facts
are "forward-looking statements" which can be identified by the use of forward-
looking terminology such as "expects," "intends," "believes" or the negative
thereof or other variations thereon or comparable terminology. Management wishes
to caution the reader of the forward-looking statements, such as the Company's
ability to become Year 2000 compliant and the timing and cost thereof, the
Company's ability to finance the acquisition of aircraft and hushkits, the
adequacy of the Company's insurance coverage, results of
16
<PAGE>
pending litigation or investigations and other statements contained in this
Report regarding matters that are not historical facts, are only estimates or
predictions. No assurance can be given that future results will be achieved;
actual events or results may differ materially as a result of risks facing the
Company or actual events differing from the assumptions underlying such
statements. Such risks and assumptions include, but are not limited to, consumer
demand and acceptance of services offered by the Company, the Company's ability
to achieve and maintain acceptable cost levels, fare levels and actions by
competitors, regulatory matters, general economic conditions and results of
litigation. Additional information concerning factors that could cause actual
results to vary materially from the future results indicated, expressed or
implied in such forward-looking statements is contained in the Company's Form
10-K for the year ended December 31, 1997. All forward looking statements made
in connection with this Report are expressly qualified in their entirety by
these cautionary statements. The Company disclaims any obligation to update or
correct any of its forward-looking statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- --------------------------
Several stockholder class action suits have been filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). The consolidated lawsuit is based on allegedly misleading public
statements made by the Company or omission to disclose material facts in
violation of federal securities laws. Class certification has been granted for
all purchasers of stock in the Company during the period beginning in June 1995
and ending on June 18, 1996. These suits have been consolidated into a single
action (In re ValuJet, Inc.). Discovery under the lawsuit is expected to
-------------------
continue into 1999. Although the Company denies that it has violated any of its
obligations under the federal securities laws, there can be no assurance that
the Company will not sustain material liability under such or related lawsuits.
Numerous lawsuits have been filed against the Company seeking damages
attributable to the deaths of those on Flight 592. Approximately 100 such
lawsuits have been filed against the Company. Most of the cases were initially
removed to the federal court. That court, however, remanded the majority of the
actions to the state courts from which they originated and retained jurisdiction
over only seven cases. As a consequence, most of the cases are proceeding in
state courts in Florida, Georgia, Texas and Missouri. The Company's insurance
carrier has assumed defense of all of these suits under a reservation of rights
against third parties and the Company and has settled and paid approximately 80
claims as of October 31, 1998, and is pursuing settlements in the balance of the
claims. In the remaining lawsuits, SabreTech has been named as a co-defendant
as a result of the role that it played in the accident. The Company maintains a
$750 million policy of liability insurance per occurrence. The Company believes
that the coverage will be sufficient to cover all claims arising from the
accident.
In November 1997, the Company filed a suit in the Circuit Court of St. Louis
County, Missouri against SabreTech and its parent corporation (Sabreliner
Corporation), seeking to hold SabreTech responsible for the accident involving
Flight 592. SabreTech is the maintenance contractor who delivered oxygen
generators without safety caps and in a mislabeled box for shipment aboard
Flight 592. The oxygen generators are believed to have caused or contributed to
the fire which resulted in the accident. The complaint seeks indemnification
against losses attributable to the lawsuits referred to above and other damages
that the Company suffered as a result of the accident.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against the
17
<PAGE>
Company. The action seeks a determination that SabreTech is not liable to the
Company for the accident involving Flight 592 as a result of language contained
in certain of the contracts between the parties and that the Company is liable
to SabreTech for damages that it has suffered. The Company intends to vigorously
defend this lawsuit.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit against
the Company in State Court in Tennessee for breach of contract and a declaratory
judgment for an anticipatory breach. The Nashville Airport Authority seeks
damages of approximately $2.6 million. The dispute involves whether the
Company was entitled to exercise a termination right contained in its lease
agreement.
In May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. The Company does not believe that it is obligated for such amounts
and has filed a motion to dismiss this lawsuit.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of its business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
NTSB, the U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and
certain state agencies in Florida. Although the Company does not believe, based
on information currently available to it, that such investigations and inquiries
will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a finding
cannot be ruled out. The Company may also be assessed civil penalties in
connection with the accident and/or the results of ensuing investigations. Any
such findings or penalties could be material. In addition, it is possible that
the Company could be indirectly affected by negative publicity related to
charges of wrongdoing, if any, against others acting on behalf of the Company at
the time of the accident.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRTRAN HOLDINGS, INC.
Date: November 11, 1998 /s/ D. Joseph Corr
---------------------
D. Joseph Corr
President and Chief Executive Officer
Date: November 11, 1998 /s/ David W. Lancelot
-------------------------
David W. Lancelot
Vice President, Controller
and Chief Accounting Officer
19
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