<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[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 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
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(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
---- ----
As of October 31, 2000, there were 65,823,359 shares of common stock of the
registrant outstanding.
<PAGE>
AIRTRAN HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Statements of Operations
- Quarter and nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
- September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
- Nine months ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risks 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AirTran Holdings, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended For the nine months ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $156,807 $119,676 $441,556 $370,636
Cargo 904 933 2,977 2,899
Other 3,748 22,874 10,103 29,836
-------- -------- -------- --------
Total operating revenues 161,459 143,483 454,636 403,371
Operating expenses:
Salaries, wages and benefits 35,423 30,358 101,690 87,408
Aircraft fuel 37,189 18,888 96,361 50,237
Maintenance, materials and repairs 20,959 20,114 55,504 69,278
Distribution 10,009 9,191 29,400 28,595
Landing fees and other rents 6,661 6,531 20,400 19,542
Marketing and advertising 4,396 3,113 13,440 13,120
Aircraft rent 4,007 1,262 9,000 3,908
Depreciation 5,906 8,790 16,129 24,433
Other operating 19,806 15,666 52,148 46,824
-------- -------- -------- --------
Total operating expenses 144,356 113,913 394,072 343,345
-------- -------- -------- --------
Operating income 17,103 29,570 60,564 60,026
Interest (income) expense:
Interest income (1,654) (763) (3,908) (1,688)
Interest expense 9,518 6,218 28,618 18,120
-------- -------- -------- --------
Interest expense, net 7,864 5,455 24,710 16,432
-------- -------- -------- --------
Income before income taxes 9,239 24,115 35,854 43,594
Income tax expense 348 948 1,473 2,414
-------- -------- -------- --------
Net income $ 8,891 $ 23,167 $ 34,381 $ 41,180
======== ======== ======== ========
Basic earnings per share $ 0.14 $ 0.36 $ 0.52 $ 0.63
======== ======== ======== ========
Diluted earnings per share $ 0.13 $ 0.34 $ 0.50 $ 0.60
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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AirTran Holdings, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 83,834 $ 58,102
Restricted cash 28,624 18,069
Accounts receivable, less allowance of $1,208 and $927 at
September 30, 2000 and December 31, 1999, respectively 12,625 7,599
Inventory 7,366 5,816
Prepaid expenses 12,200 14,058
-------- --------
Total current assets 144,649 103,644
Property and equipment:
Flight equipment 265,802 244,662
Less: Accumulated depreciation (17,492) (4,973)
-------- --------
248,310 239,689
Purchase deposits for flight equipment 26,194 22,562
Other property and equipment 26,493 24,914
Less: Accumulated depreciation (15,426) (13,436)
-------- --------
11,067 11,478
-------- --------
285,571 273,729
Other assets:
Intangibles resulting from business acquisition 14,474 15,628
Trademarks and trade names 22,609 23,234
Unexpended debt proceeds - restricted - 39,232
Debt issuance costs 5,975 5,733
Other assets 9,897 5,814
-------- --------
Total assets $483,175 $467,014
======== ========
See accompanying notes to condensed consolidated financial statements. (Continued)
</TABLE>
4
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AirTran Holdings, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accounts payable $ 2,874 $ 10,410
Accrued liabilities 75,565 57,456
Air traffic liability 41,362 23,491
Current portion of long-term debt 236,526 19,569
---------- ---------
Total current liabilities 356,327 110,926
Long-term debt, less current portion 132,131 396,119
Stockholders' equity (deficit):
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 65,801,260 and 65,698,424 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 66 66
Additional paid-in capital 150,953 150,589
Accumulated deficit (156,302) (190,686)
---------- ---------
Total stockholders' equity (deficit) (5,283) (40,031)
---------- ---------
Total liabilities and stockholders' equity (deficit) $ 483,175 $ 467,014
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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AirTran Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 34,381 $ 41,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,495 25,443
Provisions for uncollectible accounts 3,465 3,501
Deferred income taxes 736 1,536
Changes in current operating assets and liabilities:
Restricted cash (10,555) (11,955)
Accounts receivable (8,491) (37,081)
Prepaid expenses and deposits (6,574) (993)
Accounts payable and accrued liabilities (1,621) 9,318
Deferred gains resulting from sale of aircraft (5,412) -
Air traffic liability 17,871 17,399
-------- -------
Net cash flows provided by operating activities 53,119 48,348
Investing activities:
Purchases of property and equipment (132,420) (62,788)
Refund of aircraft purchase deposits - 4,227
Restricted funds used for aircraft purchases 39,232 -
Proceeds from disposal of equipment - 678
-------- -------
Net cash flows used for investing activities (93,188) (57,883)
Financing activities:
Issuance of long-term debt 20,472 33,729
Payments of long-term debt (67,674) (6,482)
Proceeds from sale and leaseback transactions 112,639 -
Proceeds from sale of common stock 364 1,175
-------- -------
Net cash flows provided by financing activities 65,801 28,422
-------- -------
Net increase in cash and cash equivalents 25,732 18,887
Cash and cash equivalents at beginning of period 58,102 10,882
-------- -------
Cash and cash equivalents at end of period $ 83,834 $ 29,769
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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AirTran Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the financial position of AirTran Holdings,
Inc. and its wholly owned subsidiaries (collectively, the "Company" or
"AirTran") as of September 30, 2000 and the results of operations and cash flows
for the periods presented. 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
reports on 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, 1999, as amended. The results of operations for the quarter and
nine month periods ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full fiscal year.
2. Reclassifications
Certain amounts in the 1999 condensed consolidated financial statements have
been reclassified to conform to the current presentation.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
For the quarter ended For the nine months ended
September 30, September 30,
----------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 8,891 $23,167 $34,381 $41,180
======= ======= ======= =======
Denominator:
Basic earnings per share - weighted
average shares 65,757 65,123 65,735 64,998
Effect of dilutive stock options 3,290 4,016 3,274 3,479
------- ------- ------- -------
Diluted earnings per share - weighted
average shares and assumed conversions 69,047 69,139 69,009 68,477
======= ======= ======= =======
Basic earnings per share $ 0.14 $ 0.36 $ 0.52 $ 0.63
======= ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.34 $ 0.50 $ 0.60
======= ======= ======= =======
</TABLE>
7
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4. Fuel Price Risk Management
The Company has entered into fuel hedging contracts to protect against increases
in jet fuel prices. The change in market value of such agreements has a high
correlation to the price changes of the fuel being hedged. Periodic settlements
under the agreements are recognized as a component of fuel expense when the
underlying fuel being hedged is used. Gains and losses on the agreements would
be recognized immediately should the changes in the market value of the
agreements cease to have a high correlation to the price changes of the fuel
being hedged. At September 30, 2000, the Company had three fuel hedging
agreements with a broker-dealer on approximately 97.0 million gallons of fuel
products, which represent approximately 35% of its current fuel needs through
March 2001 and approximately 15% of its current fuel needs from April 2001
through September 2004. The fair value of the Company's fuel hedging agreements
at September 30, 2000, representing the amount the Company would receive upon
termination of the agreements, totaled approximately $7.0 million. A default by
the broker-dealer to an agreement would expose the Company to potential fuel
price risk on the remaining fuel purchases in that the Company would be required
to purchase fuel at the current fuel price rather than according to the hedging
contract. The Company does not enter into fuel hedging contracts for trading
purposes.
On October 26, 2000, the Company announced that it had entered into a fuel
hedging agreement covering an additional 15 percent of its estimated fuel
consumption for the first quarter of 2001. When combined with previously placed
hedge positions, the Company will have hedged approximately 50% of its current
fuel needs through the first quarter 2001 at a price no higher than $29 per
barrel of crude oil.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No.
133 is currently being evaluated and its impact on the Company's consolidated
financial statements has not been determined.
5. Aircraft Purchase Commitments
During the second quarter of 2000, the Company revised significantly its
contracts with Boeing related to the purchase and financing of its fleet of
Boeing 717 aircraft. The revised contract provides for a delivery schedule as
follows: 2000 (eight aircraft - two delivered in the first quarter, one in the
second quarter, two in the third quarter and three to be delivered in the fourth
quarter), 2001 (twelve aircraft), 2002 (twelve aircraft), and 2003 (ten
aircraft). The Company and Boeing also recharacterized the 50 option aircraft to
provide for 25 options, 20 purchase rights, and five rolling options. The
options, purchase rights, and rolling options, to the extent exercised, would
provide for delivery to the Company of all of the B717 aircraft on or before
September 30, 2005. Prior to this revision, the Company had committed to
purchase 50 B717 aircraft (ten of which had been purchased as of March 31, 2000)
during the following years: 1999 (eight aircraft), 2000 (eight aircraft), 2001
(sixteen aircraft), and 2002 (eighteen aircraft). In addition to the scheduled
deliveries described above, the contract had also provided for 50 option
aircraft, which, if exercised, would have been available for delivery between
January 2003 and January 2005.
In related transactions, the Company announced that it has modified its
financing support commitments with Boeing. Such modified financing commitments
include a commitment by Boeing and Rolls-Royce to provide or arrange lease
financing for up to 20 B717 aircraft (the "Lease Financing Commitment"). The
Lease Financing Commitment expires in December 2002. As of September 30, 2000,
the Company entered into sale and leaseback transactions with an affiliate of
8
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Boeing for the Company's eleventh, twelfth and thirteenth B717s in accordance
with the terms thereof.
To the extent the Company does not utilize the Lease Financing Commitment (or
such commitment is unavailable because of expiry or otherwise), the Company will
be required to obtain a portion of the B717 financing from sources other than
Boeing. The Company believes that with the support to be provided by Boeing
(from the Lease Financing Commitment and other provisions of the B717 purchase
agreement), aircraft-related debt financing should be available when needed.
However, there can be no assurance that the Company will be able to secure
financing on terms attractive to the Company, if at all. To the extent the
Company cannot secure acceptable financing, it may be required to modify its
aircraft acquisition plans or to incur financing costs higher than anticipated.
The first ten Boeing 717 aircraft were financed by the execution of a private
placement of $178.9 million of enhanced equipment trust certificates ("EETCs")
in November 1999. The blended interest rate for the EETCs is 10.63% per annum
and the EETCs are payable in installments from April 17, 2000, through April 17,
2017. In March 2000, the Company completed a sale and leaseback transaction for
two of the ten owned B717 aircraft.
Under the terms of its purchase contract with Boeing, the Company is required to
make progress payments to Boeing. The Company made payments of $8.0 million
during the nine months ended September 30, 2000, with no further payments
scheduled for the remainder of 2000. We are presently scheduled to make
progress payments of $6.9 million and $12.5 million in 2001 and 2002,
respectively.
6. Long-term Debt
The entire principal amount of AirTran Airways, Inc.'s, a wholly-owned
subsidiary of the Company, 10 1/4% Senior Notes ($150.0 million) and 10 1/2%
Senior Secured Notes ($80.0 million) will become due on April 15, 2001. The
Company does not expect to generate sufficient cash flow from operations to
repay all $230.0 million of such debt by its due date. Accordingly, the Company
will need to refinance all or a portion of the outstanding debt through
additional equity or debt offerings or a combination thereof. The ability to
refinance this debt depends on future performance and financial results. Such
results are subject to general economic, financial, competitive, legislative,
regulatory and other factors that are, to some extent, beyond the Company's
control.
On October 30, 2000, the Company announced that it had commenced a cash tender
offer as part of its plans to refinance the Senior Notes and the Senior Secured
Notes. On November 10, 2000, the Company announced that it was terminating the
tender offer in conjunction with receiving a firm commitment from Boeing Capital
Services Corporation to provide financing to the Company that, when consummated
and combined with internally generated funds, will be sufficient to retire at
scheduled maturity the outstanding Senior Notes and Senior Secured Notes.
7. Income Taxes
The Company's effective tax rate was 3.8% and 3.9% for the third quarter of 2000
and 1999,
9
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respectively, and 4.1% and 5.5% for the nine months ended September 30, 2000 and
1999, respectively. The differences between our effective tax rates and
statutory rates result from the expected utilization of a portion of the
Company's net operating loss ("NOL") carryforwards ($108 million as of December
31, 1999) offset in part by the application of the tax benefit related to the
realization of a portion of the Airways Corporation NOL carryforwards to
goodwill. The Company has not recognized any benefit from the use beyond the
third quarter of 2000 of NOL carryforwards because management's evaluation of
all the available evidence in assessing the realizability of tax benefits of
such loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize such tax benefits currently.
10
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Item 2. Management's Discussion and Analysis of Financial Condition
------- -------------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations
For the quarter and nine months ended September 30, 2000 and 1999
The following is a table of selected operational statistics and financial data
for the quarters and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue passengers 2,029,035 1,598,238 5,583,128 4,861,099
Revenue passenger miles (thousands) (1) 1,110,576 865,395 3,032,962 2,618,101
Available seat miles (thousands) (2) 1,512,847 1,351,894 4,316,504 4,086,444
Passenger load factor (3) 73.4% 64.0% 70.3% 64.1%
Break-even load factor (4) 69.1% 61.6% 64.6% 59.9%
Average yield per revenue passenger mile (cents) (5) 14.12 13.83 14.56 14.16
Passenger revenue per available seat mile (cents) (6) 10.37 8.85 10.23 9.07
Operating cost per available seat mile (cents) (7) 9.54 8.43 9.13 8.40
Average stage length (miles) 533 529 534 529
Average cost of aircraft fuel per gallon (cents) 103.40 54.92 93.27 48.97
Average daily utilization (hours:minutes) (8) 10:24 9:18 10:12 9:06
Number of aircraft in fleet at end of period 52 48 52 48
</TABLE>
(1) The number of scheduled revenue miles flown by passengers.
(2) The number of seats available for passengers multiplied by the number of
scheduled miles each seat is flown.
(3) The percentage of aircraft seating capacity utilized is calculated by
dividing revenue passenger miles by available seat miles.
(4) The percentage of seats that must be occupied by revenue passengers in
order for the Company to break even on a pre-tax income basis, excluding
nonrecurring items.
(5) The average amount one passenger pays to fly one mile.
(6) Passenger revenue divided by available seat miles.
(7) Operating expenses divided by available seat miles.
(8) The average number of hours per day that an aircraft flown in revenue
service is operated.
11
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The following is a table of the Company's operating expenses per available seat
mile, excluding nonrecurring items, for the quarters and nine months ended
September 30, 2000 and 1999 (in cents, except percent change):
<TABLE>
<CAPTION>
For the quarter For the nine months
ended September 30, % ended September 30, %
------------------- -------------------
2000 1999 Change 2000 1999 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Salaries, wages and benefits 2.34 2.25 4.0% 2.36 2.14 10.3%
Aircraft fuel 2.46 1.40 75.7% 2.23 1.23 81.3%
Maintenance, materials
and repairs 1.39 1.49 -6.7% 1.29 1.70 -24.1%
Distribution 0.66 0.68 -2.9% 0.68 0.70 -2.9%
Landing fees and other rents 0.44 0.48 -8.3% 0.47 0.48 -2.1%
Marketing and advertising 0.29 0.23 26.1% 0.31 0.32 -3.1%
Aircraft rent 0.26 0.10 160.0% 0.21 0.09 133.3%
Depreciation 0.39 0.65 -40.0% 0.37 0.60 -38.3%
Other operating 1.31 1.15 13.9% 1.21 1.14 6.1%
----- ----- ----- -----
Total operating expenses 9.54 8.43 13.2% 9.13 8.40 8.7%
----- ----- ----- -----
</TABLE>
Quarter ended September 30, 2000
compared to the
Quarter ended September 30, 1999
Summary
The Company recorded net income of $8.9 million for the quarter ended September
30, 2000 compared to $23.2 million for the quarter ended September 30, 1999.
Operating income was $17.1 million for the third quarter of 2000 compared to
$29.6 million in the third quarter of 1999. The quarter ended September 30,
1999 included a nonrecurring gain of $19.6 million due to the settlement of
litigation.
Operating Revenues
Passenger revenues increased by 31.0%, or $37.1 million, primarily due to a
27.0% increase in enplaned passengers and a 2.1% increase in passenger yield.
These increases are attributable to a favorable pricing environment, strong
economic conditions and the Company's initiatives to increase passenger revenue.
As part of these initiatives, the Company has implemented yield management
strategies and offers assigned seating, a frequent flier program and a business
class product.
12
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Yield, representing the average amount a passenger pays to fly one mile,
increased by 2.1% to 14.1 cents, which increased revenue by $2.5 million over
the third quarter of 1999. Yield increased over last year due in part to a 3.2%
higher average fare. Traffic, or revenue passenger miles (RPMs), increased
245.2 million, or 28.3%, on a capacity increase, or available seat miles (ASMs),
of 11.9%, or 161.0 million. Passenger load factor increased 9.4 points leading
to increased passenger revenue of $17.6 million during the quarter.
Notwithstanding the improved yield and load factor, the Company continues to
experience aggressive competition that could negatively impact its results in
the future.
Operating Expenses
Operating expenses increased $30.4 million, or 26.7%, compared to the third
quarter of 1999. Operating cost per ASM increased 13.2% to 9.54 cents from 8.43
cents a year ago primarily as a result of contractual wage increases and higher
fuel costs. Salaries, wages and benefits increased $5.1 million or 16.7% due
primarily to increased wage rates and additional staffing related to the
delivery of thirteen B717 aircraft. Aircraft fuel increased year over year by
$18.3 million, or 96.9%, primarily due to an 88.3% increase in average fuel
prices and a 4.6% increase in fuel consumption related to the additional
aircraft in the Company's fleet. Maintenance, materials and repairs increased
4.2%, or $0.8 million, due to four additional engine overhauls in the third
quarter of 2000 partially offset by two fewer heavy maintenance checks on DC-9
aircraft performed in accordance with the Company's maintenance schedule.
Distribution costs, which includes commissions and other fees, increased by $0.8
million, or 8.9%, as the increase in commissionable sales was partially offset
by a rate reduction from 8% to 5% implemented during the fourth quarter of 1999.
Marketing and advertising expenses increased $1.3 million, or 41.2%, compared to
the third quarter of 1999 due to increased radio and print advertising.
Aircraft rent expenses rose $2.7 million, or 217.5%, due to the sale and
leaseback of seven DC-9 aircraft in December 1999, two B717 aircraft in the
first quarter 2000 and the lease financing of three additional B717 aircraft in
2000. Depreciation expense decreased 32.8%, or $2.9 million, primarily due to
the reduction in book value of the Company's DC-9 fleet as a result of the
impairment loss recorded in 1999 and the sale and leaseback of seven DC-9
aircraft, offset by the acquisition of eight B717 aircraft in the third and
fourth quarters of 1999. Other operating expenses increased $4.1 million, or
26.4%, primarily as a result of increased passenger related expenses associated
with the greater number of passengers enplaned.
Non-operating Expenses
Interest expense, net, increased 44.2%, or $2.4 million, compared to the third
quarter of 1999. The increase is primarily due to the debt financing of eight
B717 aircraft utilizing the proceeds from the EETCs in the third and fourth
quarters of 1999.
13
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Net Operating Loss Carryforwards
The effective tax rate was 3.8% and 3.9% for the third quarter of 2000 and 1999,
respectively. The differences between our effective tax rates and statutory
rates result from the expected utilization of a portion of the Company's NOL
carryforwards ($108 million as of December 31, 1999) offset in part by the
application of the tax benefit related to the realization of a portion of the
Airways Corporation NOL carryforwards to goodwill. No benefit from the use
beyond third quarter 2000 of NOL carryforwards has been recognized because
management's evaluation of all the available evidence in assessing the
realizability of tax benefits of such loss carryforwards indicates that the
underlying assumptions of future profitable operations contain risks that do not
provide sufficient assurance to recognize such tax benefits currently.
Nine Months ended September 30, 2000
compared to the
Nine Months ended September 30, 1999
Summary
The Company recorded net income of $34.4 million for the nine months ended
September 30, 2000 compared to $41.2 million for the nine months ended September
30, 1999. Operating income was $60.6 million for the nine months ended
September 30, 2000 compared to $60.0 million during the same period in 1999.
The nine months ended September 30, 1999 included a nonrecurring gain of $19.6
million due to the settlement of litigation.
Operating Revenues
Passenger revenues increased by 19.1%, or $70.9 million, primarily due to
increased demand in both the business and leisure market segments. Business
class load factors were up significantly from the 1999 period as the percentage
of business class seats occupied rose to 57.9% from 51.5%. Adjustments in
pricing and inventory strategies also resulted in gains of 14.3% in leisure
traffic.
The Company increased its yield to 14.6 cents, a 2.8% increase over the first
nine months of 1999. The Company's traffic, or RPMs, increased 414.9 million, or
15.8%, on a capacity increase, or ASMs, of 5.6%, or 230.1 million. As a result,
demand outpaced capacity resulting in an increase in the load factor of 6.2
points, from 64.1% to 70.3% on a year over year basis.
Operating Expenses
Operating expenses increased $50.7 million, or 14.8%, compared to the nine
months ended September 30, 1999. Operating cost per ASM increased 8.7% to 9.13
cents from 8.40 cents a year ago primarily as a result of contractual wage
increases and higher fuel costs. Salaries, wages and benefits increased $14.3
million or 16.3% due primarily to increased wage rates and additional staffing
related to the delivery of thirteen B717 aircraft. Aircraft fuel increased year
over year by $46.1 million, or 91.8%, primarily due to a 90.5% increase in
average fuel prices and a 0.7% increase in fuel consumption related to the
additional aircraft in the Company's fleet. Maintenance, materials
14
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and repairs decreased $13.8 million, or 19.9%, primarily from six fewer airframe
checks and ten fewer engine overhauls during the nine months ended September 30,
2000, performed in accordance with the Company's maintenance schedule.
Distribution costs, which includes commissions and other fees, increased by $0.8
million, or 2.8%, as the increase in commissionable sales was partially offset
by a rate reduction from 8% to 5% implemented during the fourth quarter of 1999.
Landing fees and other rents rose 4.4%, or $0.9 million, compared to the first
nine months of 1999 due to rate increases from airports systemwide, and a 9.8%
increase in the number of landings. Aircraft rent expense rose $5.1 million, or
130.3%, due to the sale and leaseback of seven DC-9 aircraft in December 1999,
two B717 aircraft in the first quarter 2000 and lease financing of three
additional B717 aircraft in 2000. Depreciation expense decreased 34.0%, or $8.3
million, primarily due to the reduction in book value of the Company's DC-9
fleet as a result of the impairment loss recorded in 1999 and the sale and
leaseback of aircraft, offset by the acquisition of eight B717 aircraft in the
third and fourth quarters of 1999. Other operating expenses increased $5.3
million, or 11.4%, primarily as a result of increased passenger related expenses
associated with the greater number of passengers enplaned.
Non-operating Expenses
Interest expense, net, increased by $8.3 million, or 50.3%, from the first nine
months of 1999. The increase is primarily due to the debt financing of eight
B717 aircraft utilizing the proceeds from the issuance of EETCs in the third and
fourth quarters of 1999. Interest income increased $2.2 million as a result of
higher cash balances and higher interest rates.
Net Operating Loss Carryforwards
The effective tax rate was 4.1% and 5.5% for the nine months ended September 30,
2000 and 1999, respectively. The differences between our effective tax rates
and statutory rates result from the expected utilization of a portion of the
Company's NOL carryforwards ($108 million as of December 31, 1999) offset in
part by the application of the tax benefit related to the realization of a
portion of the Airways Corporation NOL carryforwards to goodwill. No benefit
from the use beyond third quarter 2000 of NOL carryforwards has been recognized
because management's evaluation of all the available evidence in assessing the
realizability of tax benefits of such loss carryforwards indicates that the
underlying assumptions of future profitable operations contain risks that do not
provide sufficient assurance to recognize such tax benefits currently.
Liquidity and Capital Resources
The Company relies primarily on operating cash flows to provide working capital.
Presently, the Company has no lines of credit or other credit facilities. As of
September 30, 2000, cash and cash equivalents totaled $83.8 million compared to
$58.1 million at December 31, 1999. The Company had a working capital deficit
of $211.7 million at September 30, 2000 compared to a working capital deficit of
$7.3 million at December 31, 1999. The working capital deficit as of September
30, 2000, is attributable to the classification as current liabilities of the
Company's $230 million of debt due in April 2001. Working capital requirements
must be satisfied through cash provided by operating activities, from external
capital sources or from the sale of assets. Substantial portions of the
Company's assets have been pledged to secure various issues of its outstanding
indebtedness. To
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the extent that the pledged assets are sold, the applicable financing agreements
generally require the sales proceeds to be applied to repay the corresponding
indebtedness. To the extent that access to capital is constrained, the Company
may not be able to make certain capital expenditures or to continue to implement
certain other aspects of its strategic plan, and may therefore be unable to
achieve the full benefits expected therefrom. Based on the continued favorable
economic conditions of the U.S. airline industry, the Company expects to be able
to generate positive working capital through its operations; however, it cannot
predict whether these economic trends and conditions will continue, or the
effects of competition or other factors, such as increased fuel prices, that are
beyond its control.
As of September 30, 2000, cash and cash equivalents increased from December 31,
1999 by $25.7 million. During the nine months ended September 30, 2000,
operating activities generated $54.9 million in cash, investing activities used
cash of $50.9 million primarily related to the purchase of five B717 aircraft
offset by the use of the remaining prefunded proceeds of the EETCs, and
financing activities provided cash of $21.7 million in connection with the sale
and leaseback of five B717 aircraft offset by the related long-term debt
payments.
As of September 30, 2000, the operating fleet consisted of 35 DC-9 aircraft,
four B737 aircraft and thirteen B717 aircraft. During 1999, five leased B737
aircraft were returned to lessors, seven DC-9 aircraft were sold and leased back
(which remain in the operating fleet), and six DC-9 aircraft and one B737
aircraft were sold.
During the second quarter of 2000, the Company revised its contracts with Boeing
relating to the purchase and financing of its fleet of B717 aircraft. The
revised contract provides for a delivery schedule as follows: 2000 (eight
aircraft - two delivered in the first quarter, one in the second quarter, two in
the third quarter and three to be delivered in the fourth quarter of 2000), 2001
(twelve aircraft), 2002 (twelve aircraft), and 2003 (ten aircraft). The Company
and Boeing also recharacterized the 50 option aircraft to provide for 25
options, 20 purchase rights, and five rolling options. The options, purchase
rights, and rolling options, to the extent exercised, would provide for delivery
to the Company of all the B717 aircraft on or before September 30, 2005. Prior
to this revision, the Company had committed to purchase 50 B717 aircraft (ten of
which had been purchased as of March 31, 2000) during the following years: 1999
(eight aircraft), 2000 (eight aircraft), 2001 (16 aircraft), and 2002 (18
aircraft). In addition to the scheduled deliveries described above, the
contract had also provided for 50 option aircraft, which, if exercised, would
have been available for delivery between January 2003 and January 2005.
In related transactions, the Company announced that it has modified its
financing support commitments with Boeing. Such modified financing commitments
include a commitment by Boeing and Rolls-Royce (the engine manufacturer for the
B717 aircraft) to provide or arrange lease financing for up to 20 Boeing 717
aircraft (the "Lease Financing Commitment"). The financing commitment expires
in December 2002. The Company entered into a sale and leaseback transaction
with an affiliate of Boeing for the Company's eleventh, twelfth, and thirteenth
B717s in May, July and September 2000, respectively, in accordance with the
terms thereof.
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To the extent the Company does not utilize the Lease Financing Commitment (or
such commitment is unavailable because of expiry or otherwise), the Company will
be required to obtain a portion of the B717 financing from sources other than
Boeing. The Company believes that with the support to be provided by Boeing
(from the Lease Financing Commitment and other provisions of the B717 purchase
agreement), aircraft-related debt financing should be available when needed.
However, there can be no assurance that the Company will be able to secure
financing on terms attractive to the Company, if at all. To the extent the
Company cannot secure acceptable financing, it may be required to modify its
aircraft acquisition plans or to incur financing costs higher than anticipated.
The first ten Boeing 717 aircraft were financed by the execution of a private
placement of $178.9 million of EETCs in November 1999. The blended interest
rate for the EETCs is 10.63% per annum and the EETCs are payable in installments
from April 17, 2000, through April 17, 2017. In March 2000, the Company
completed a sale and leaseback transaction for two of the ten owned B717
aircraft reducing the outstanding principal amount of the EETCs to $137.2
million.
Under the terms of its purchase contract with Boeing, the Company is required to
make progress payments to Boeing. The Company made payments of $8.0 million
during the nine months ended September 30, 2000, with no further payments
scheduled for the remainder of 2000. We are presently scheduled to make
progress payments to Boeing of $6.9 million and $12.5 million in 2001 and 2002,
respectively.
The entire principal amount of the Senior Notes and Senior Secured Notes will
become due on April 15, 2001. The Company does not expect to generate sufficient
cash flow from operations to repay all $230.0 million of such debt by its due
date. Accordingly, the Company will need to refinance all or a portion of the
outstanding debt through additional equity or debt offerings or a combination
thereof. The ability to refinance this debt depends on future performance and
financial results. Such results are subject to general economic, financial,
competitive, legislative, regulatory and other factors that are, to some extent,
beyond the Company's control.
On October 30, 2000, the Company announced that it had commenced a cash tender
offer as part of its plans to refinance the Senior Notes and the Senior Secured
Notes. On November 10, 2000, the Company announced that it was terminating the
tender offer in conjunction with receiving a firm commitment from Boeing Capital
Services Corporation to provide financing to the Company that, when consummated
and combined with internally generated funds, will be sufficient to retire at
scheduled maturity the outstanding Senior Notes and Senior Secured Notes.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No.
133 is currently being evaluated and its impact on the Company's consolidated
financial statements has not been determined.
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Forward-Looking Statements
The statements 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," "will" or the
negative thereof or other variations of these terms or comparable terminology.
The Company cautions readers that the forward-looking statements contained in
this Report are only estimates or predictions and are not historical facts.
Such statements include, but are not limited to:
. performance in future periods;
. ability to maintain profitability and to generate working capital from
operations;
. ability to take delivery of and to finance aircraft;
. the adequacy of the Company's insurance coverage
. results of pending litigation or investigations; and
. ability to refinance Senior Notes and Senior Secured Notes.
No assurance can be given that future results will be achieved and 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; commodity prices
. changing business strategy and results of litigation; and
. ability to refinance Senior Notes and Senior Secured Notes.
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 Annual Report on Form
10-K for the year ended December 31, 1999, as amended.
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.
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Item 3. Quantitative and Qualitative Market Risk
------- ----------------------------------------
For discussion of certain market risks related to the Company, see Part I, Item
7A "Quantitative and Qualitative Disclosures about Market Risks", in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, as amended. As of September 30, 2000, the Company hedged approximately
35% of its current fuel needs through March 2001 and approximately 15% of its
current fuel needs from April 2001 through September 2004.
On October 26, 2000, the Company announced that it had entered into a fuel
hedging agreement covering an additional 15 percent of its estimated fuel
consumption for the first quarter of 2001. When combined with previously placed
hedge positions, the Company will have hedged approximately 50% of its current
fuel needs through the first quarter 2001 at a price no higher than $29 per
barrel of crude oil.
There have been no other significant developments with respect to derivatives or
exposure to market risk since the disclosure in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, as amended.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
All of the lawsuits filed against the Company seeking damages attributable to
those on Flight 592 have been settled, with one case in the final stages of
documentation of the settlement. The Company does not believe final settlement
of the aforementioned case will have a material adverse effect on its results of
operations or financial condition.
On October 1, 1999, the Company filed suit in the Superior Court of Gwinnett
County, Georgia, against United States Aviation Underwriters, Inc. and United
States Aviation Insurance Group for declaratory relief and damages based on
claims of breach of contract and tortious breach of covenant of good faith and
fair dealing for matters involving litigation related to Flight 592.
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.
Item 5. Other Information
--------------------------
Stock Exchange Listing
On July 14, 2000, the Company moved the listing of its securities from the
NASDAQ National Market to the American Stock Exchange ("AMEX"). As of such
date, the Company's common stock began trading on AMEX utilizing the ticker
symbol "AAI".
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
27 Financial Data Schedule as of September 30, 2000 (for SEC use only)
(b) The following Current Reports on Form 8-K have been filed by the Company:
Date of Report Subject of Report
July 12, 2000 Press release announcing financial results for the
quarter and six months ended June 30, 2000, and selected
operating and financial statistics for the same periods.
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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 13, 2000 /s/ Stanley J. Gadek
---------------------------------
Stanley J. Gadek
Chief Financial Officer
(Principal Accounting Officer)
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