<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 June 30, 2000.
[ ] 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.
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(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
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(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 July 31, 2000, there were 65,733,538 shares of Common Stock of the
Registrant outstanding.
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AIRTRAN HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three months ended
June 30, 2000 and 1999; Six months ended June 30, 2000 and 1999
Condensed Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
------- --------------------
<TABLE>
<CAPTION>
AirTran Holdings, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 156,214 $ 135,947 $ 284,749 $ 250,960
Cargo 985 819 2,073 1,966
Other 3,570 3,249 6,355 6,962
--------- --------- --------- ---------
Total operating revenues 160,769 140,015 293,177 259,888
Operating expenses:
Salaries, wages and benefits 33,500 28,908 66,267 57,050
Aircraft fuel 30,152 17,588 59,172 31,349
Maintenance, materials and repairs 19,023 24,407 34,546 49,164
Distribution 10,597 10,604 19,391 19,404
Landing fees and other rents 6,707 6,824 13,739 13,011
Marketing and advertising 4,535 4,390 9,044 10,007
Aircraft rent 3,095 1,305 4,992 2,646
Depreciation 5,125 8,299 10,223 15,643
Other operating 16,413 16,235 32,343 31,158
--------- --------- --------- ---------
Total operating expenses 129,147 118,560 249,717 229,432
--------- --------- --------- ---------
Operating income 31,622 21,455 43,460 30,456
Interest (income) expense:
Interest income (1,235) (503) (2,254) (925)
Interest expense 9,269 5,938 19,099 11,902
--------- --------- --------- ---------
Interest expense, net 8,034 5,435 16,845 10,977
--------- --------- --------- ---------
Income before income taxes 23,588 16,020 26,615 19,479
Income tax expense 1,000 1,061 1,125 1,466
--------- --------- --------- ---------
Net income $ 22,588 $ 14,959 $ 25,490 $ 18,013
========= ========= ========= =========
Basic earnings per share $ 0.34 $ 0.23 $ 0.39 $ 0.28
========= ========= ========= =========
Diluted earnings per share $ 0.33 $ 0.22 $ 0.37 $ 0.26
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AirTran Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
------ ----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67,324 $ 58,102
Restricted cash 29,492 18,069
Accounts receivable, less allowance of $877 and $927 at
June 30, 2000 and December 31, 1999, respectively 10,432 7,599
Inventory, less allowance for obsolescence of $2,472 and $2,260
at June 30, 2000 and December 31, 1999, respectively 8,581 5,816
Prepaid expenses 11,920 14,058
--------- ---------
Total current assets 127,749 103,644
Property and equipment:
Flight equipment 254,860 244,662
Less: Accumulated depreciation (12,840) (4,973)
--------- ---------
242,020 239,689
Purchase deposits for flight equipment 26,194 22,562
Other property and equipment 26,437 24,914
Less: Accumulated depreciation (14,835) (13,436)
--------- ---------
11,602 11,478
--------- ---------
279,816 273,729
Other assets:
Intangibles resulting from business acquisition 14,772 15,628
Trademarks and trade names 22,817 23,234
Unexpended debt proceeds -- 39,232
Debt issuance costs 6,591 5,733
Other assets 8,880 5,814
--------- ---------
Total assets $ 460,625 $ 467,014
========= =========
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
4
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AirTran Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity (Deficit) 2000 1999
---------------------------------------------- ----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 7,261 $ 10,410
Accrued liabilities 57,742 57,456
Air traffic liability 40,436 23,491
Current portion of long-term debt 237,342 19,569
--------- ---------
Total current liabilities 342,781 110,926
Long-term debt, less current portion 132,248 396,119
Stockholders' equity (deficit):
Preferred stock, $.01 par value per share, 5,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.001 par value per share, 1,000,000
shares authorized, and 65,734 and 65,698 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 66 66
Additional paid-in capital 150,724 150,589
Accumulated deficit (165,194) (190,686)
--------- ---------
Total stockholders' equity (deficit) (14,404) (40,031)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 460,625 $ 467,014
========= =========
</TABLE>
See accompanying notes to 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 six months ended
June 30,
-----------------------------
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 25,490 $ 18,013
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,797 17,452
Provisions for uncollectible accounts 1,588 2,882
Deferred income taxes 575 --
Changes in current operating assets and liabilities:
Restricted cash (11,423) (11,121)
Accounts receivable (4,421) (11,546)
Prepaid expenses and deposits (5,246) 1,259
Accounts payable and accrued liabilities (2,861) 14,128
Deferred gains resulting from sale of aircraft (5,901) --
Air traffic liability 16,945 15,737
-------- --------
Net cash flows provided by operating activities 26,543 46,804
Investing activities:
Purchases of property and equipment (79,165) (19,858)
Refund of aircraft purchase deposits -- 4,227
Restricted funds for aircraft purchases 39,232 --
Proceeds from disposal of equipment -- 678
-------- --------
Net cash flows used for investing activities (39,933) (14,953)
Financing activities:
Issuance of long-term debt 20,574 --
Payments of long-term debt (66,671) (4,330)
Proceeds from sale and leaseback transactions 68,575 --
Proceeds from sale of common stock 134 210
-------- --------
Net cash flows provided by (used for) financing activities 22,612 (4,120)
-------- --------
Net increase in cash and cash equivalents 9,222 27,731
Cash and cash equivalents at beginning of period 58,102 10,882
-------- --------
Cash and cash equivalents at end of period $ 67,324 $ 38,613
======== ========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 16,881 $ 9,780
======== ========
Cash paid for income taxes $ 750 $ 120
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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AirTran Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Basis of Presentation
In the opinion of management, the accompanying unaudited, consolidated interim
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the Company's financial position as of June
30, 2000, the results of operations for the three and six month periods ended
June 30, 2000 and 1999, and cash flows for the six month periods ended June 30,
2000 and 1999. 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, 1999. The
results of operations for the three and six month periods ended June 30, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year.
B. Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to the current presentation.
C. 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 three months ended For the six months ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $22,588 $14,959 $25,490 $18,013
======= ======= ======= =======
Denominator:
Basic earnings per share - weighted
average shares 65,733 64,957 65,724 64,936
Effect of dilutive stock options 3,253 3,608 3,266 3,211
------- ------- ------- -------
Diluted earnings per share - weighted
average shares and assumed conversions 68,986 68,565 68,990 68,147
======= ======= ======= =======
Basic earnings per share $ 0.34 $ 0.23 $ 0.39 $ 0.28
======= ======= ======= =======
Diluted earnings per share $ 0.33 $ 0.22 $ 0.37 $ 0.26
======= ======= ======= =======
</TABLE>
7
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D. Fuel Price Risk Management
The Company enters into fixed rate swap contracts to protect against increases
in jet fuel prices. Under the swap agreements, the Company receives or makes
payments based on the difference between a fixed price and a variable price for
certain fuel commodities. The change in market value of such agreements has a
high correlation to the price changes of the fuel being hedged. Gains or losses
on the fuel hedging agreements are recognized as a component of fuel expense
when the underlying fuel being hedged is used. Gains and losses on the fuel
hedging 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 June 30, 2000, the Company had one fuel
hedging agreement with a broker-dealer on approximately 88.7 million gallons of
fuel products, which represents 15% of its expected fuel needs through September
2004. The fair value of the Company's fuel hedging agreement at June 30, 2000,
representing the amount the Company would receive upon termination of this
agreement, totaled $3.3 million. If in the future, a fuel swap agreement were
terminated, any resulting gain or loss would be deferred and amortized to fuel
expense over the remaining life of the agreement. A default by the broker-dealer
to the swap 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 at the swap agreement exchange rate.
The Company does not enter into fuel swap contracts for trading purposes.
E. Aircraft Purchase Commitments
During the second quarter of 2000, the Company revised significantly 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 and one in the second
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 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). 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 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 B717 in May 2000 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
8
<PAGE>
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 proceeds were used to purchase the first ten B717
aircraft. 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 sold two of such B717 aircraft pursuant to a sale and
leaseback transaction utilizing leveraged lease debt from EETCs.
Under the terms of its purchase contract with Boeing, the Company is required to
make progress payments to Boeing. The Company paid Boeing $8 million in April
2000 and no further payments are scheduled to be made until January 2001.
F. Long-term Debt
The entire principal amount of the Senior Notes ($150.0 million) and 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.
G. Income Taxes
The Company's effective tax rate was 4.2% and 6.6% for the second quarter of
2000 and 1999, respectively, and 4.2% and 7.5% for the six months ended June 30,
2000 and 1999, respectively. These rates result from the expected utilization of
a portion of the Company's $108 million net operating loss ("NOL") carryforwards
offset in part by the application of the tax benefit related to the realization
of a portion of the Airways NOL carryforwards to goodwill. The Company has not
recognized any benefit from the use beyond the second 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.
H. Subsequent Events
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".
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
------- Results of Operations
---------------------------------------------------------------
Results of Operations
For the three months and six months ended June 30, 2000 and 1999
The following is a table of selected operational statistics and financial data
for the three months and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue passengers 1,962,710 1,763,275 3,554,093 3,262,861
Revenue passenger miles (1) (000) 1,066,990 941,616 1,922,386 1,752,706
Available seat miles (2) (000) 1,465,605 1,398,639 2,803,657 2,734,550
Passenger load factor (3) 72.8 % 67.3 % 68.6 % 64.1 %
Break-even load factor (4) 61.8 % 59.4 % 62.2 % 59.1 %
Average yield per revenue passenger mile (5) 14.64 c 14.44 c 14.81 c 14.32 c
Passenger revenue per available seat mile (6) 10.66 c 9.72 c 10.16 c 9.18 c
Operating cost per available seat mile (7) 8.81 c 8.48 c 8.91 c 8.39 c
Average stage length (miles) 538 530 535 528
Average cost of aircraft fuel per gallon 85.55 c 49.69 c 87.86 c 45.97 c
Average daily utilization (hours) (8) 10:23 9:19 10:08 9:07
Number of aircraft in fleet at end of period 50 49 50 49
</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 that is 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.
(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.
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Operating expenses per available seat mile:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------ % ----------------------- %
2000 1999 Change 2000 1999 Change
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Salaries, wages and benefits 2.28 c 2.07 c 10.1% 2.37 c 2.09 c 13.4%
Aircraft fuel 2.06 1.26 63.5% 2.11 1.14 85.1%
Maintenance, materials
and repairs 1.30 1.75 -25.7% 1.23 1.80 -31.7%
Distribution 0.72 0.76 -5.3% 0.69 0.71 -2.8%
Landing fees and other rents 0.46 0.49 -6.1% 0.49 0.47 4.3%
Marketing and advertising 0.31 0.31 0.0% 0.32 0.37 -13.5%
Aircraft rent 0.21 0.09 133.3% 0.18 0.10 80.0%
Depreciation 0.35 0.59 -40.7% 0.37 0.57 -35.1%
Other operating 1.12 1.16 -3.4% 1.15 1.14 0.9%
----------- ----------- ---------- ----------
Total operating expenses 8.81 c 8.48 c 3.9% 8.91 c 8.39 c 6.2%
----------- ----------- ---------- ----------
</TABLE>
Quarter ended June 30, 2000 Compared to the Quarter ended June 30, 1999
Summary
The Company recorded net income of $22.6 million for the three months ended June
30, 2000 compared to $15.0 million for the three months ended June 30, 1999.
Operating income increased $10.1 million to $31.6 million for the three months
ended June 30, 2000, from $21.5 million in 1999.
Operating Revenues
Passenger revenues increased by 14.9% or $20.3 million primarily due to an 11.3%
increase in enplaned passengers and a 1.4% 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. The
Company has implemented yield management strategies and a published pricing
strategy. The Company will continue to offer assigned seating, a frequent flier
program and business class seating.
Yield (the average amount a passenger pays to fly one mile) increased by 1.4% to
14.6 cents, which increased revenue by $2.0 million over the second 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 125.4 million or 13.3% on
a capacity increase, or available seat miles (ASMs), of 4.8% or 67.0 million.
The increase in load factor of 5.5 points increased passenger revenue by $11.2
million from the same period in 1999. However, the Company continues to
experience aggressive competition that could negatively impact future loads and
yields.
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<PAGE>
Cargo and other revenue increased 12.0% or $0.5 million due to an increase in
U.S. Mail capacity and passenger service fees.
Operating Expenses
Operating expenses increased $10.6 million or 8.9% compared to the second
quarter of 1999. Operating cost per ASM increased 3.9% to 8.8 cents from 8.5
cents a year ago primarily as a result of increased fuel costs and salaries,
wages and benefits. Salaries, wages and benefits increased $4.6 million or 15.9%
due primarily to contractual labor rate and seniority increases negotiated in
1998 between the Company and its three major union represented labor groups and
an increase in overall headcount. Aircraft fuel increased year-over-year by
$12.6 million or 71.4% primarily due to a 72.2% increase in average fuel prices
partially offset by a 0.4% decrease in fuel consumption. Maintenance, materials
and repairs decreased 22.1% or $5.4 million due to six fewer engine overhauls
being performed as required under the Company's regular maintenance schedule
compared to second quarter 1999. Marketing and advertising increased $0.1
million or 3.3% compared to the second quarter of 1999. Aircraft rent expenses
rose $1.8 million or 137.2% due to the sale and leaseback of seven DC-9 aircraft
in December 1999 and the sale and leaseback of three B717 aircraft in 2000.
Depreciation expense decreased 38.2% or $3.2 million primarily due to the
reduction in depreciable 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. Other operating
expenses increased $0.2 million due to increases in B717 training expenses and
aircraft ground handling expenses offset by decreases in passenger
interrupted trip expenses due to the airline's improved operations.
Non-operating Expenses
Interest expense, net, increased 47.8% or $2.6 million compared to the three
months ended June 30, 1999. The increase is due to the issuance of $178.9
million of enhanced equipment trust certificates ("EETCs") in the fourth quarter
of 1999. Capitalized interest during the quarter was $1.0 million compared to
$1.1 million during the same quarter of 1999.
The effective tax rate was 4.2% and 6.6% for the second quarter of 2000 and
1999, respectively. The 2000 rate results from the expected utilization of a
portion of the Company's $108 million net operating loss ("NOL") carryforwards
offset in part by the application of the tax benefit related to the realization
of a portion of the Airways NOL carryforward to goodwill. No benefit from the
use beyond second 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.
Six Months ended June 30, 2000 Compared to the Six Months ended June 30, 1999
Summary
The Company recorded net income of $25.5 million for the six months ended June
30, 2000 compared to net income of $18.0 million for the six months ended June
30, 1999. Operating income
12
<PAGE>
increased $13.0 million to $43.5 million for the six months ended June 30, 2000,
from $30.5 million during the same period in 1999.
Operating Revenues
Passenger revenues increased by 13.5% or $33.8 million primarily due to
increased demand in both the business and leisure market segments. Business
class load factors were up significantly versus last year as the percentage of
business class seats occupied rose to 59.9% from 50.5% in 1999. Adjustments in
pricing and inventory strategies also led to large gains in leisure traffic.
The Company increased its yield (the average amount a passenger pays to fly one
mile) to 14.8 cents, a 3.4% increase over the first six months of 1999. The
Company's traffic, or revenue passenger miles (RPMs), increased 169.7 million or
9.7% on a capacity increase, or available seat miles (ASMs), of 2.5% or 69.1
million. Demand has outpaced capacity, which has resulted in higher load
factors. Passenger load factor increased by 4.5 points, from 64.1% to 68.6% for
the six months ended June 30, 1999 and 2000, respectively. There can be no
assurance that these revenue improvements can be maintained as the Company
expands in the future.
Operating Expenses
Operating expenses increased $20.3 million or 8.8% compared to the six months
ended June 30, 1999. The Company's operating cost per ASM increased 6.2% to 8.91
cents from 8.39 cents a year ago primarily due to increased expenses for
aircraft fuel and salaries, wages and benefits. Salaries, wages and benefits
increased $9.2 million or 16.2% due primarily to contractual labor rate and
seniority increases negotiated in 1998 between the Company and its three major
union represented labor groups. Aircraft fuel increased year-over-year by $27.8
million or 88.8% primarily due to a 91.1% increase in the average fuel prices
partially offset by a 1.2% decrease in fuel consumption. The 29.7% or $14.6
million decrease in maintenance, materials and repairs stems from five fewer
airframe checks and fourteen fewer engine overhauls being performed as required
under the Company's regular maintenance schedule. Distribution costs, which
includes commissions and other fees, were flat year-over-year as the increase in
commissionable sales was offset by a rate reduction from 8% to 5% implemented
during the fourth quarter of 1999. Landing fees and other rents rose 5.6% or
$0.7 million compared to the first six months of 1999 due to rate increases from
airports systemwide, and a 1.4% increase in the number of landings. Marketing
and advertising expenses declined 9.6%, or $1.0 million, from the first six
months of 1999 to the first six months 2000 primarily as a result of reduced
print and radio advertising during the first quarter of 2000. Aircraft rent
increased $2.3 million or 88.7% from the first six months of 1999 to the first
six months of 2000 due to the sale and leaseback of seven DC-9 aircraft in
December 1999 and the sale and leaseback of three B717 aircraft. Depreciation
expense decreased 34.6% or $5.4 million primarily because of the reduction in
the depreciable 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 2000. Other operating expenses
increased $1.2 million due to increases in B717 training expenses and aircraft
ground handling expenses offset by a decreases in passenger interrupted trip
expenses due to the airline's improved operations and decreased bad debt expense
resulting from improved controls to limit credit card chargebacks.
13
<PAGE>
Non-operating Expenses
Interest expense, net, rose by $5.9 million from the first six months of 1999 to
the first six months of 2000. Interest income increased $1.3 million as a result
of higher cash balances and higher interest rates. Interest expense was $7.2
million higher due to the issuance of $178.9 million of EETCs in the fourth
quarter of 1999.
The Company's effective tax rate was 4.2% and 7.5% for the six months ended June
30, 2000 and 1999, respectively. These rates result from the expected
utilization of a portion of the Company's $108 million net operating loss
("NOL") carryforwards 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 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.
Liquidity and Capital Resources
The Company relies primarily on operating cash flows to provide working capital.
It has no lines of credit or other credit facilities. As of June 30, 2000, cash
and cash equivalents totaled $67.3 million compared to $58.1 million at December
31, 1999. The Company had a working capital deficit of $215.0 million at June
30, 2000 compared to a working capital deficit of $7.3 million at December 31,
1999. The working capital deficit as of June 30, 2000, is attributable to the
classification as current liabilities of the Company's $230 million of senior
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 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 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
current favorable 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 June 30, 2000, cash and cash equivalents increased from December 31, 1999
by $9.2 million. During the six months ended June 30, 2000, operating activities
generated $26.5 million in cash, investing activities used cash of $39.9 million
primarily related to the purchase of three B717 aircraft offset by the use of
the remaining prefunded proceeds of the EETCs, and Financing activities provided
cash of $22.6 million in connection with the sale and leaseback of three B717
aircraft offset by the related long-term debt payments.
As of June 30, 2000, the operating fleet consisted of 35 DC-9 aircraft, four
B737 aircraft and eleven B717 aircraft. Five leased B737 aircraft were returned
to lessors and, in addition to seven DC-9
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aircraft sold and leased back (which remain in the operating fleet), six Stage
II DC-9 aircraft and one grounded B737 aircraft were sold during 1999.
During the second quarter of 2000, the Company revised significantly 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 and one in the second
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 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). 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 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 B717 in May 2000 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 proceeds were used to purchase the first ten B717
aircraft. 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 sold two of such B717 aircraft pursuant to a sale and
leaseback transaction utilizing leveraged lease debt from EETCs.
Under the terms of its purchase contract with Boeing, the Company is required to
make progress payments to Boeing. The Company paid Boeing $8 million in April
2000 and no further payments are scheduled to be made until January 2001.
The entire principal amount of the Senior Notes ($150.0 million) and 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
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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.
Due to the competitive nature of the airline industry, in the event of any
further increases in the price of jet fuel, there is no assurance that increased
fuel costs can be passed on to customers by increasing fares.
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.
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; and
. results of pending litigation or investigations.
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; and
. changing business strategy 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 elsewhere in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
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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.
Item 3. Quantitative and Qualitative Market Risk
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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 of June 30, 2000, the Company has hedged approximately 15% of its
projected fuel requirements for the remainder of 2000.
There have been no significant developments with respect to derivatives or
exposure to market risk since the disclosure in the Company's Annual Report on
Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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Of the numerous lawsuits that were filed against the Company seeking damages
attributable to those on Flight 592, two remaining cases are being pursued in
state courts in Florida and Texas. The Company believes that the $750 million
coverage available with respect to these claims will be sufficient to cover all
claims arising from the accident, which occurred in May 1996. As all claims are
handled independently by the Company's insurance carrier, the Company cannot
reasonably estimate the amount of liability that may 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.
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.
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.
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Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits:
(27) Financial Data Schedule.
(b) The following Current Reports on Form 8-K have been filed by the Company:
Form 8-K dated May 15, 2000 to report that the Company amended its Boeing
717 aircraft purchase agreement with the Boeing Company
Form 8-K dated July 12, 2000 to report second quarter earnings
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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: August 14, 2000 /s/ Stanley J. Gadek
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Stanley J. Gadek
Chief Financial Officer,
Principal Accounting Officer
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