Components of accumulated other comprehensive loss as of June 30, 2005 and December 31, 2004 consist of the following:
| | | | |
| | | June 30, | | December 31, | |
| | | 2005 | | 2004 | |
| | | | | | |
| Accumulated other comprehensive loss: | | | | | | | |
Net loss on settled treasury locks, net of tax and amortization | | $ | (4,325 | ) | $ | (1,761 | ) |
| Net unrealized loss on unsettled treasury locks, net of tax | | | | | | (2,407 | ) |
| Total accumulated other comprehensive loss | | $ | (4,325 | ) | $ | (4,168 | ) |
4. Stock Compensation
The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options. No compensation expense is recorded for stock options issued to employees and non-employee directors with exercise prices equal to or greater than the fair value of the common stock on the grant date. Warrants issued to non-employees are accounted for under SFAS No. 123, Accounting for Stock-Based Compensation, at fair value on the measurement date.
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation, requires disclosing the effects on net income and net income per share under the fair value method for all outstanding and unvested stock awards, as if the fair value based method had been applied to all outstanding and unvested stock awards in each period. The amounts are as follows:
| | Three Months Ended | Six Months Ended |
| | June 30, | June 30, |
| | 2005 | 2004 | 2005 | 2004 |
| | | | | |
| Net income, as reported | $ 13,396 | $7,234 | $28,220 | $15,513 |
| | | | | |
| Add: Stock-based employee compensation expense determined under the intrinsic value based method, net of tax | 32 | 32 | 65 | 65 |
| Deduct: Stock-based employee compensation expense determined under the fair value based method, net of tax | (466) | (67) | (932) | (115) |
| Pro forma net income | $ 12,962 | $ 7,199 | $27,353 | $15,463 |
| Pro forma net income | | | | |
per share: | | | | |
Basic | $0.40 | $0.32 | $0.88 | $0.73 |
Diluted | $0.39 | $0.31 | $0.86 | $0.71 |
The fair value of options granted were estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: 0% to 3% dividend yield; risk-free interest rates ranging from 2.0% to 6.7%; volatility of 40% to 50%; and an expected life of 4 to 6.5 years. The pro forma amounts are not representative of the effects on reported earnings for future years.
In December 2004, SFAS No. 123(R), Share-Based Payment, a replacement of SFAS No. 123, Accounting for Stock-Based Compensation, and a rescission of APB Opinion No. 25, Accounting for Stock Issued to Employees, was issued. This statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based upon the grant date fair value of the equity or liability issued. In addition, liability awards will be remeasured each reporting period and compensation costs will be recognized over the period that an employee provides service in exchange for the award. In April 2005, the Securities and Exchange Commission announced the effective date of SFAS No. 123(R) will be suspended until January 1, 2006 for calendar year companies. SFAS 123(R) provides for multiple transition methods, and the Company is still evaluating potential methods for adoption. The Company has not yet completed its assessment of the impact of this statement on its financial condition and results of operations.
5. Net Income per Share
Net income per share is based on the weighted average number of shares outstanding during the period. The following is a reconciliation of the weighted average common shares for the basic and diluted per share computations:
| | | | | | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | | | | | | | |
| Weighted-average common shares outstanding for basic net income per share | | �� | 32,482,867 | | | 22,317,363 | | | 31,141,596 | | | 21,158,682 | |
| | | | | | | | | | | | | | |
| Effect of dilutive employee stock options and warrants | | | 858,450 | | | 737,747 | | | 763,917 | | | 559,695 | |
| | | | | | | | | | | | | | |
| Adjusted weighted-average common shares outstanding and assumed conversions for diluted net income per share | | | 33,341,317 | | | 23,055,110 | | | 31,905,513 | | | 21,718,377 | |
Employee stock options and warrants of 720,000 for the three months ended June 30, 2004, and 1,816,620 and 3,000,000 for the six months ended June 30, 2005 and 2004, respectively, are not included in the calculation of diluted net income per share due to their anti-dilutive impact.
6. Debt
During the six months ended June 30, 2005, the Company acquired thirteen aircraft, of which ten were debt-financed and three were lease-financed, one under a capital lease and two under operating leases. The debt was obtained from a bank and the aircraft manufacturer for fifteen year terms at interest rates ranging from 6.11% to 6.76%. The total debt incurred for the ten aircraft and the capital lease for the one aircraft was $203,160.
Chautauqua Airlines, Inc.'s (“Chautauqua”) (a subsidiary of the Company) debt agreements with a bank contain restrictive covenants that require, among other things, that Chautauqua maintain a certain fixed charge coverage ratio and a debt to earnings leverage ratio. The Company was in compliance with the covenants at June 30, 2005. The balance of debt with the bank as of June 30, 2005 and December 31, 2004 of $2,945 and $3,212, respectively, are classified within the current portion of long-term debt.
7. Commitments and Contingencies
The Company’s aircraft commitments under its code share agreements and firm orders and options with the aircraft manufacturer are shown below as of June 30, 2005:
| | Commitments as of |
| | June 30, 2005 |
| | | | |
Aircraft Commitments per Code Share Agreements: | Delta | United | Total |
| ERJ 170 | 15 | 5 | 20 |
Total | 15 | 5 | 20 |
| | | | |
| | Commitments as of |
| | June 30, 2005 |
| | | | |
| | Firm | | |
Aircraft Orders with Aircraft Manufacturer: | Orders | Options | Total |
| ERJ 145 | 0 | 34 | 34 |
| ERJ 170 | 15 | 61 | 76 |
Total | 15 | 95 | 110 |
On June 22, 2005, the Company amended its code-share agreements with United increasing the ERJ-170 fleet by five aircraft and removing two ERJ-145 aircraft from service. The five additional aircraft will be placed in service by December 31, 2005. The ERJ-145 aircraft will be removed from service and added to the Company’s charter operations beginning November 1, 2005.
On March 15, 2005, the Company and Wexford Capital LLC entered into an omnibus investment agreement, (the “Investment Agreement”) with US Airways Group, Inc. and US Airways. The Investment Agreement includes provisions for the affirmation of an amended Chautauqua code-share agreement, a potential new jet service agreement for the operation of ERJ-170 and ERJ-190 aircraft, a conditional $125,000 equity commitment and up to $110,000 in asset related financing. The Bankruptcy Court approved the agreement on March 31, 2005.
On June 23, 2005, the Company received notification from US Airways Group, Inc., that it will not be requested to make the $125,000 equity investment but US Airways notified the Company that it will exercise its right to receive up to $110,000 in asset related financing in connection with its reorganization plan. At closing, on September 21 and 22, 2005, the Company paid approximately $89,800 in cash primarily for aircraft and related equipment and take-off and landing slots and assumed aircraft related debt of approximately $169,000. In addition, the Company will assume fifteen operating lease obligations. The Company plans to complete the purchase of other ERJ-170 assets from US Airways, including a flight simulator and spare parts, before December 31, 2005 for approximately $10,000.
In January 2005, the Company and Delta Air Lines, Inc. (“Delta”) entered into a code-share agreement whereby the Company will operate 16 ERJ-170s for Delta.
In 2004, Republic Airline Inc. ("Republic Airline") (a subsidiary of the Company) applied for an operating certificate. This certificate is required before Republic Airline can commence flying. In October, 2004, in order to accommodate American with respect to its scope restrictions, the Company agreed to modify its Agreement with American to preclude the continued use of larger regional jets on its Chautauqua Airlines Air Carrier Operating Certificate. The Company also agreed to pay American an aggregate of approximately $500 through February 19, 2005, in connection with its operation of ERJ-170 aircraft for United through Chautauqua instead of Republic Airline. Approximately $291 of this amount was paid in 2004. Additionally, the Company paid $39 per day to American for each day Chautauqua operated any ERJ-170 aircraft after April 21, 2005 through September 2005. In October 2005, the ERJ-170 aircraft commenced flying on Republic Airline's operating certificate. The Company paid penalties of $6,150 in 2005. Also, as agreed with American, Chautauqua can fly no more than 18 ERJ-170 aircraft.
During the three and six months ended June 30, 2005, respectively, the Company made aircraft deposits in accordance with the aircraft commitments of $2,634 and $20,982. The aircraft deposits are included in Other Assets. All payments were made from cash generated from operations and proceeds from the common stock offering.
8. Equity Transactions
In February 2005, the Company completed a follow-on public stock offering and issued 6,900,000 shares of common stock at $12.50 per share. The net proceeds provided by the follow-on offering were approximately $80,857. In July 2005, the Company completed a follow-on public stock offering and issued 8,912,500 shares of common stock at $12.60 per share. The net proceeds provided by the follow-on offering were approximately $105,000.
9. Subsequent Events
On June 23, 2005, the Company received notification from US Airways Group, Inc. that it will not be requested to make the $125,000 equity investment but US Airways notified the Company that it will exercise its right to receive up to $110,000 in asset related financing in connection with its reorganization plan. At closing, in September 2005, the Company paid $89,800 in cash primarily for aircraft and take-off and landing slots, and assumed aircraft related debt of approximately $169,000. In addition, the Company will assume operating lease obligations for 15 aircraft. The Company plans to complete the purchase of other ERJ-170 assets from US Airways, including a flight simulator and spare parts, before December 31, 2005 for approximately $10,000.
In July 2005, the Company completed a follow-on public stock offering and issued 8,912,500 shares of common stock at $12.60 per share. The net proceeds provided by the follow-on offering were approximately $105,000.
In August 2005, the Company’s flight attendants ratified a new four year collective bargaining agreement.
In August 2005, Republic Airline received its FAA Operating Certificate and began revenue service for US Airways on September 1, 2005, operating 72 seat ERJ-170 aircraft.
On September 26, 2005, Chautauqua Airlines completed the transfer of its last ERJ-170 aircraft to Shuttle America. Accordingly, payments made to American Airlines as a result of Chautauqua’s operating of these aircraft have ceased.
In September 2005, Delta filed a petition for Chapter 11 bankruptcy protection. In addition, US Airways emerged from Chapter 11 bankruptcy protection.
10. Restatement
Subsequent to the issuance of the Company’s condensed consolidated financial statements for the three and six month periods ended June 30, 2005, the Company’s management determined that certain reimbursable pass-through costs incurred by the Company under its American and Delta code-share agreements that were previously recorded at the assumed rates under the fixed fee code-share agreements should be recorded at actual amounts incurred. As a result of this misstatement, passenger revenues, aircraft fuel expense, landing fees expense, aircraft and engine rent expense, and insurance and taxes expense have been restated from amounts previously reported. The restatements have no effect on previously reported operating income, income before income taxes, net income, and earnings per share, net cash flows, or the Company’s financial condition. The result of the restatement is as follows:
| | | | |
| For the three months ended: | | | | June 30, 2004 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total operating revenues | | | 153,876 | | | 178,279 | | | 120,257 | | | 131,704 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Insurance and taxes | | | | | | | | | | | | | |
| Total operating expenses | | $ | 188,845 | | $ | 213,248 | | $ | 139,019 | | $ | 150,466 | |
| For the six months ended: | | | | June 30, 2004 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total operating revenues | | | 305,675 | | | 351,498 | | | 231,147 | | | 252,948 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Insurance and taxes | | | | | | | | | | | | | |
| Total operating expenses | | $ | 377,183 | | $ | 423,006 | | $ | 270,550 | | $ | 292,351 | |
The accompanying management’s discussion and analysis of financial condition and results of operations gives effect to the restatement of the condensed consolidated financial statements for the three months and six ended June 30, 2005 and 2004 as discussed in Note 10 to the Company’s condensed consolidated financial statements in Item 1 of Form 10-Q/A for the three and six months ending June 30, 2005.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. The Company may, from time to time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements encompass the Company’s beliefs, expectations, hopes or intentions regarding future events. Words such as "expects," "intends," "believes," "anticipates," "should," "likely" and similar expressions identify forward-looking statements. All forward-looking statements included in this release are made as of the date hereof and are based on information available to the Company as of such date. The Company assumes no obligation to update any forward-looking statement. Actual results may vary, and may vary materially, from those anticipated, estimated, projected or expected for a number of reasons, including, among others, the risks discussed in our Annual Report on Form 10-K as amended and our other filings made with the Securities and Exchange Commission, which discussions are incorporated into this Quarterly Report on Form 10-Q/A by reference. As used herein, "unit cost" means operating cost per Available Seat Mile (ASM).
Overview
We are a holding company that operates Chautauqua Airlines, Inc., Republic Airline Inc. and Shuttle America. As of June 30, 2005, we offered scheduled passenger service on over 800 flights daily to 82 cities in 32 states, Canada and the Bahamas pursuant to code-share agreements with American, US Airways Inc. , Delta Air Lines and United Airlines Inc. Currently, we provide our four partners with regional service, operating as US Airways Express, AmericanConnection, Delta Connection or United Express, including service out of their hubs and focus cities in Boston, Chicago, Fort Lauderdale, Indianapolis, New York, Orlando, Philadelphia, Pittsburgh, Washington, D.C. and St. Louis.
Chautauqua Airlines is our regional jet platform for flying the 37 to 50 seat ERJ-145 family of aircraft. Shuttle America, which we acquired from an affiliate of our majority stockholder on May 6, 2005, currently operates 70-seat ERJ-170 aircraft. Shuttle America also currently operates 11 Saab 340 aircraft under a fixed-fee agreement with United that expires December 31, 2005. Republic Airline became certified to operate the ERJ-170 family of aircraft in September 2005. We currently have 18 ERJ-170 aircraft at Chautauqua which were transitioned to Shuttle America and Republic Airline in September.
On June 23, 2005, the Company received notification from US Airways Group that it will not be requested to make the $125 million equity investment but US Airways notified the Company that it will exercise its right to receive up to $110 million in asset related financing in connection with its reorganization plan. On September 21 and 22, 2005, the Company paid approximately $89.8 million in cash primarily for aircraft and take-off and landing slots and assumed aircraft related debt of approximately $169 million. In addition, the Company will assume operating lease obligations. The Company plans to complete the purchase of other ERJ-170 assets from US Airways, including a flight simulator and spare parts before December 31, 2005 for approximately $10 million. The Company will transition these 28 aircraft from US Airways to Republic Airlines.
We have long-term, fixed-fee regional jet code-share agreements with each of our partners that are subject to our maintaining specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our partners' two-letter flight designation codes to identify our flights and fares in our partners' computer reservation systems, to paint our aircraft in the style of our partners, to use their service marks and to market ourselves as a carrier for our partners. In addition, in connection with a marketing agreement among Delta, Continental Airlines and Northwest Airlines, certain of the routes that we fly using Delta's flight designator code are also flown under Continental's or Northwest's designator codes. Our fixed-fee agreements have reduced our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our partners and reduce the cost of our services to our partners.
Certain Statistical Information
| | Operating Expenses per ASM in cents |
| | Three Months Ended June 30, | Six Months Ended June 30, |
| | 2005 | 2004 | 2005 | 2004 |
| | | | | |
| Wages and benefits | 2.21 | 2.44 | 2.22 | 2.47 |
| Aircraft fuel | 3.97 | 3.35 | 4.26 | 3.26 |
| Landing fees | 0.49 | 0.52 | 0.49 | 0.52 |
| Aircraft and engine rent | 1.22 | 1.61 | 1.25 | 1.63 |
| Maintenance and repair | 1.22 | 1.66 | 1.25 | 1.58 |
| Insurance and taxes | 0.27 | 0.32 | 0.27 | 0.30 |
| Depreciation and amortization | 0.92 | 0.71 | 0.93 | 0.69 |
| Other | 1.04 | 1.17 | 1.00 | 1.10 |
| Total operating expenses | 11.34 | 11.78 | 11.67 | 11.55 |
| | | | | |
| Interest expense | 0.86 | 0.54 | 0.87 | 0.57 |
| | | | | |
| Total operating expenses and interest expense | 12.20 | 12.32 | 12.54 | 12.12 |
The following table sets forth the major operational statistics and the percentage-of-change for the periods identified below:
| | Three Months Ended June 30, | Six Months Ended June 30, |
| | | Increase/ | | | Increase/ | |
| | | (Decrease) | | | (Decrease) | |
| | 2005 | 2004-2005 | 2004 | 2005 | 2004-2005 | 2004 |
| | | | | | | |
| Revenue passengers | 2,346,187 | 36.9% | 1,713,179 | 4,383,566 | 41.3% | 3,103,237 |
| Revenue passenger miles (1) | 1,128,722,290 | 45.1% | 777,980,136 | 2,090,408,622 | 47.2% | 1,419,928,971 |
| Available seat miles (2) | 1,573,119,964 | 40.7% | 1,118,304,943 | 3,012,765,717 | 37.6% | 2,189,059,798 |
| Passenger load factor (3) | 71.8% | 2.2pp | 69.6% | 69.4% | 4.5pp | 64.9% |
| Cost per available seat mile (cents) (4) | 12.20 | (1.0%) | 12.32 | 12.54 | (3.5%) | 12.12 |
| Average price per gallon of fuel (5) | $1.86 | 50.0% | $1.24 | $1.77 | 46.3% | $1.21 |
| Fuel gallons consumed | 33,606,222 | 11.2% | 30,208,157 | 72,490,521 | 23.2% | 58,860,032 |
| Block hours (6) | 115,257 | 26.5% | 91,146 | 224,606 | 26.3% | 177,903 |
| Average length of aircraft flight miles | 470 | 5.9% | 444 | 468 | 4.5% | 448 |
| Average daily utilization of each aircraft (hours) (7) | 10.6 | 5.0% | 10.1 | 10.7 | 7.0% | 10.0 |
| Actual aircraft in service at end of the period | 135 | 25.0% | 108 | 135 | 25.0% | 108 |
| (1) Revenue passenger miles are the number of scheduled miles flown by revenue passengers. |
| (2) Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. |
| (3) Revenue passenger miles divided by available seat miles. |
| (4) Total operating and interest expenses divided by available seat miles. |
| (5) Cost of aircraft fuel, including fuel taxes and into-plane fees. |
| (6) Hours from takeoff to landing, including taxi time. |
| (7) Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival). |
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
Operating revenue in 2005 increased by 41.7%, or $62.8 million, to $213.2 million in 2005 compared to $150.5 million in 2004. The increase was due to the additional regional jets added to the fixed-fee flying. Thirty-six additional regional jets were placed into fixed-fee service since June 30, 2004. Thirty-one were added for United and five were added for Delta. Also, we transitioned 9 turboprops to United under a fixed-fee code-share agreement in June 2004, and eliminated all pro-rate turboprop operations with US Airways by September 2004.
Total operating and interest expenses increased by 39.3% or $54.2 million, to $191.8 million in 2005 compared to $137.7 million in 2004 due to the increase in flight operations. The unit cost on total operating and interest expenses, excluding fuel charges, decreased 8.1% to 8.2¢ in 2005 from 9¢ in 2004. Factors relating to the change in operating expenses are discussed below.
Wages and benefits increased by 27.5%, or $7.5 million, to $34.8 million for 2005 compared to $27.3 million for 2004. The increase was due to a 21% increase in full time equivalent employees to support the increased regional jet operations and annual contractual and merit increases. The cost per available seat mile decreased from 2.4¢ in 2004 to 2.2¢ in 2005.
Aircraft fuel expense increased 66.5%, or $24.9 million, to $62.4 million for 2005 compared to $37.5 million for 2004 due to an 11% increase in fuel consumption and a 50% increase in the average fuel price. The average price per gallon was $1.86 in 2005 and $1.24 in 2004. Beginning in May 2005, we do not record fuel expense and the related revenue reimbursement for US Airways operations because US Airways elected to provide fuel directly for the aircraft that are operated by us for US Airways Express. The unit cost increased to 4.0¢ in 2005 compared to 3.4¢ in 2004.
Landing fees increased by 34.1%, or $2.0 million, to $7.7 million in 2005 compared to $5.8 million in 2004. The increase is due to a 22% increase in departures, and a higher average landing weight, due to the introduction of 24 ERJ-170 aircraft since June 2004. The unit cost remained unchanged at 0.5¢.
Aircraft and engine rent increased by 6.4%, or $1.1 million, to $19.1 million in 2005 compared to $18.0 million in 2004 due to the addition of five leased regional jets since June 2004, partially offset by the return of 10 leased turboprops. The unit cost decrease to 1.2¢ for 2005 compared to 1.6¢ for 2004 is attributable to the increase in capacity from the regional jet operations and because we lease financed only five of the 36 regional jet aircraft added to the fleet since June 30, 2004.
Maintenance and repair expenses increased by 3.9%, or $0.7 million, to $19.2 million in 2005 compared to $18.5 million for 2004. The effect of the increase in regional jet operations was mostly offset by a reduction in maintenance costs on the turboprop aircraft, 10 of which have been returned to the lessor since June 30, 2004. The unit cost decreased from 1.7¢ in 2004 to 1.2¢ in 2005.
Insurance and taxes increased 19.3%, or $0.7 million to $4.2 million in 2005 compared to $3.5 million in 2004 due to a 45% increase in revenue passenger miles, which was partially offset by a decrease in average insurance rates. The unit cost remained unchanged at 0.3¢.
Depreciation and amortization increased 80.5%, or $6.4 million, to $14.4 million in 2005 compared to $8.0 million in 2004 due to additional depreciation on 31 regional jet aircraft purchased since June 30, 2004. Of the 31 regional jets purchased since June 30, 2004, 24 were ERJ-170 regional jets. The cost per available seat mile increased to 0.9¢ in 2005 compared to 0.7¢ in 2004.
Other expenses increased 24.4%, or $3.2 million, to $16.3 million in 2005 from $13.1 million in 2004, primarily due to $2.8 million of payments to American, or 0.2¢ per ASM, related to operating 70-seat regional jets at Chautauqua Airlines. Professional fees increased $1.4 million due to Sarbanes/Oxley consulting fees and additional fees related to the US Airways transaction. Additionally, we incurred higher pilot training costs, and higher crew related and administrative expenses to support the growing regional jet operations. The increases were partially offset with expenses recorded in 2004 for passenger fees and impairment losses relating to the turboprop operations for US Airways which ended in September 2004. The unit cost decreased to 1.0¢ in 2005 compared to 1.2¢ in 2004.
Interest expense increased 126.9% or $7.6 million, to $13.6 million in 2005 from $6.0 million in 2004 primarily due to interest on debt related to the purchase of 32 regional jet aircraft since June 30, 2004. The weighted average interest rate increased to 5.5% in 2005 from 4.9% in 2004. The unit cost increased to 0.9¢ in 2005 compared to 0.5¢ in 2004.
We incurred income tax expense of $8.9 million during 2005, compared to $5.6 million in 2004. The effective tax rate for 2005 of 39.9% is higher than the statutory rate due to state income taxes.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Operating revenue in 2005 increased by 44.7%, or $130.7 million, to $423.0 million in 2005 compared to $292.4 million in 2004. The increase was due to the additional regional jets added to the fixed-fee flying. Thirty-six additional regional jets were placed into fixed-fee service since June 30, 2004. Thirty-one were added for United and five were added for Delta. Also, we transitioned 9 turboprops to United under a fixed-fee code-share agreement in June 2004, and eliminated all pro-rate turboprop operations with US Airways by September 2004.
Total operating and interest expenses increased by 42.4% or $112.5 million, to $377.8 million in 2005 compared to $265.3 million in 2004 due to the increase in flight operations. The unit cost on total operating and interest expenses, excluding fuel charges, decreased 6.5% to 8.3¢ in 2005 from 8.9¢ in 2004. Factors relating to the change in operating expenses are discussed below.
Wages and benefits increased by 23.5%, or $12.7 million, to $66.8 million for 2005 compared to $54.1 million for 2004. The increase was due to a 19% increase in full time equivalent employees to support the increased regional jet operations and annual contractual and merit increases. The cost per available seat mile decreased from 2.5¢ in 2004 to 2.2¢ in 2005.
Aircraft fuel expense increased 79.6%, or $56.9 million, to $128.3 million for 2005 compared to $71.4 million for 2004 due to a 23% increase in fuel consumption and a 46.3% increase in the average fuel price. The average price per gallon was $1.77 in 2005 and $1.21 in 2004. Beginning in May 2005, we do not record fuel expense and the related revenue reimbursement for US Airways operations because US Airways elected to provide fuel directly for the aircraft that are operated by us for US Airways Express. The unit cost increased to 4.3¢ in 2005 compared to 3.3¢ in 2004.
Landing fees increased by 30.2%, or $3.4 million, to $14.8 million in 2005 compared to $11.3 million in 2004. The increase is due to a 21% increase in departures, and a higher average landing weight, due to the introduction of 24 ERJ-170 aircraft since June 2004. The unit cost remained unchanged at 0.5¢.
Aircraft and engine rent increased by 5.4%, or $1.9 million, to $37.7 million in 2005 compared to $35.7 million in 2004 due to the addition of 5 leased regional jets since June 2004, partially offset by the return of 10 leased turboprops. The unit cost decrease to 1.3¢ for 2005 compared to 1.6¢ for 2004 is attributable to the increase in capacity from the regional jet operations and because we lease financed only 5 of the 36 aircraft added to the fleet since June 30, 2004.
Maintenance and repair expenses increased by 8.3%, or $2.9 million, to $37.6 million in 2005 compared to $34.7 million for 2004. The effect of the increase in regional jet operations was mostly offset by a reduction in maintenance costs on the turboprop aircraft, 10 of which have been returned to the lessor since June 30, 2004. The unit cost decreased from 1.6¢ in 2004 to 1.3¢ in 2005.
Insurance and taxes increased 24.5%, or $1.6 million to $8.1 million in 2005 compared to $6.5 million in 2004 due to a 47% increase in revenue passenger miles, which was partially offset by a decrease in average insurance rates. The unit cost remained unchanged at 0.3¢.
Depreciation and amortization increased 84.3%, or $12.8 million, to $28.0 million in 2005 compared to $15.2 million in 2004 due to additional depreciation on 31 aircraft purchased since June 30, 2004. Of the 31 regional jets purchased since June 30, 2004, 22 were Embraer 170 regional jets. The cost per available seat mile increased to 0.9¢ in 2005 compared to 0.7¢ in 2004.
Other expenses increased 26.2%, or $6.3 million, to $30.2 million in 2005 from $23.9 million in 2004. We recorded $3.0 million of payments to AMR, or 0.1¢ per ASM, in 2005 related to operating 70-seat regional jets at Chautauqua Airlines. Professional fees increased $2.7 million due to Sarbanes/Oxley consulting fees and expenses related to the US Airways and Shuttle America transactions. Additionally, we incurred higher pilot training costs, and higher crew related and administrative expenses to support the growing regional jet operations. The increases were partially offset with expenses recorded in 2004 for passenger fees and impairment losses relating to the turboprop operations for US Airways which ended in September 2004.The unit cost decreased to 1.0¢ in 2005 compared to 1.1¢ in 2004.
Interest expense increased 112.5% or $13.9 million, to $26.3 million in 2005 from $12.4 million in 2004 primarily due to interest on debt related to the purchase of 32 additional aircraft since June 30, 2004. The weighted average interest rate increased to 5.2% in 2005 from 5.0% in 2004. The unit cost increased to 0.9¢ in 2005 compared to 0.6¢ in 2004.
We incurred income tax expense of $18.4 million during 2005, compared to $11.7 million in 2004. The effective tax rate for 2005 of 39.5% is higher than the statutory rate due to state income taxes.
Liquidity and Capital Resources
Historically, the Company has used internally generated funds, common stock offerings and third-party financing to meet its working capital and capital expenditure requirements. In February 2005, the Company completed a follow-on public common stock offering, which provided approximately $80.8 million, net of offering expenses. In July 2005, the company completed a follow-on public common stock offering which provided approximately $105 million of proceeds, net of offering expenses. As of June 30, 2005, the Company had $127.6 million in cash and $15.4 million available under its revolving credit facility. The credit facility requires Chautauqua to maintain a specified fixed charge coverage ratio and a debt to earnings leverage ratio. The Company was in compliance with the covenants at June 30, 2005. At June 30, 2005, the Company had a working capital surplus of $39.9 million.
During the six months ended June 30, 2005, the Company acquired thirteen aircraft, of which ten were debt-financed and three were lease-financed, one under a capital lease and two under operating leases. The total debt incurred for the ten debt-financed aircraft and the capital lease for one aircraft was $203.4 million.
Net cash from operating activities was $73.8 million for the six months ended June 30, 2005. Net cash from operating activities is primarily net income of $28.2 million, depreciation and amortization of $28.0 million and the change in deferred income taxes of $16.7 million.
Net cash from investing activities was $(42.7) million for the six months ended June 30, 2005. The net cash from investing activities consists of the purchase of ten aircraft, equipment and aircraft deposits for future deliveries.
Net cash from financing activities was $50.2 million for the six months ended June 30, 2005. The net cash from financing activities included $80.8 million net cash proceeds received from a stock offering and scheduled debt payments and payments to the debt sinking fund of $23.0 million.
The Company currently anticipates that its available cash resources, cash generated from operations and anticipated third-party financing arrangements will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next 12 months.
Aircraft Leases and Other Off-Balance Sheet Arrangements
The Company has significant obligations for aircraft that are leased under operating leases and therefore are not reflected as liabilities on its balance sheet. These leases expire between 2009 and 2021. As of June 30, 2005, the Company’s total mandatory payments under operating leases aggregated approximately $829.3 million and total minimum annual aircraft rental payments for the next 12 months under all noncancellable operating leases is approximately $75.0 million.
Other non-cancelable operating leases consist of engines, terminal space, operating facilities and office equipment. The leases expire through 2015. As of June 30, 2005, the Company’s total mandatory payments under other non-cancelable operating leases aggregated approximately $59.2 million. Total minimum annual other rental payments for the next 12 months are approximately $5.8 million.
Purchase Commitments
The Company has substantial commitments for capital expenditures, including for the acquisition of new aircraft. The Company intends to finance these aircraft through long-term loans or lease arrangements, although there can be no assurance the Company will be able to do so.
As of June 30, 2005, the Company had firm orders for 15 regional jets, and a commitment from the aircraft manufacturer and a third party to obtain financing for all 15 of these aircraft. These commitments are subject to customary closing conditions. The aircraft manufacturer’s aggregate current list price of all firm orders for 15 aircraft is $403 million.
On March 15, 2005, the Company and Wexford Capital LLC entered into an omnibus investment agreement (the “Investment Agreement”) with US Airways Group, Inc. and US Airways. The agreement includes provisions for the affirmation of an amended Chautauqua code-share agreement, a potential new jet service agreement with Republic Airline for the operation of ERJ-170 and ERJ-190 aircraft, conditional $125 million dollar equity and up to $110 million in asset related financing. The Bankruptcy Court approved the Investment Agreement on March 31, 2005.
On June 23, 2005, the Company received notification from US Airways Group that it will not be requested to make the $125 million equity investment but US Airways notified the Company that it will exercise its right to receive up to $110 million in asset related financing in connection with its reorganization plan. On September 21 and 22, 2005, the Company paid approximately $89.8 million in cash primarily for aircraft and take-off and landing slots and assumed aircraft related debt of approximately $169 million. In addition, the Company will assume operating lease obligations. The Company plans to complete the purchase of other ERJ-170 assets from US Airways, including a flight simulator and spare parts before December 31, 2005 for approximately $10 million.
In 2004, Republic Airline applied for an operating certificate which it received in September 2005. This certificate is required before Republic Airline can commence flying. In October 2004, in order to accommodate American with respect to its scope restrictions, the Company agreed to modify its code-share agreement with American to preclude the continued use of larger regional jets on its Chautauqua Airlines Air Carrier Operating Certificate. The Company also agreed to pay American an aggregate of approximately $500,000 through February 19, 2005, in connection with its operation of ERJ-170 aircraft for United through Chautauqua instead of Republic Airline. Approximately $291,000 of this amount was paid in 2004. Additionally, the Company paid $39,000 per day to American for each day Chautauqua operated any ERJ-170 aircraft after April 21, 2005 through September 2005. In September 2005, the ERJ-170 aircraft commenced flying on Republic Airline's operating certificate. The Company paid penalties of $6,150,000 in 2005. Also, as agreed with American, Chautauqua can fly no more than 18 ERJ-170 aircraft.
The Company’s commercial commitments at June 30, 2005 include letters of credit totaling $6,687 expiring within one year.
The Company anticipates cash payments for interest for the year ended 2005 to be approximately $67.2 million, and the Company does not anticipate significant tax payments in 2005.
Interest Rates
The Company’s earnings are affected by changes in interest rates due to the amounts of variable rate debt and the amount of cash and securities held. The interest rate applicable to variable rate debt may rise and increase the amount of interest expense. At June 30, 2005, 0.29% of the Company’s total long-term debt was variable rate debt, compared to 0.16% at June 30, 2004. For illustrative purposes only, the Company has estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for both the Company’s variable rate long-term debt and cash and securities. Based on this hypothetical assumption, the Company would have incurred an additional $15 in interest expense for the quarter ended June 30, 2005. As a result of this hypothetical assumption, the Company believes it could fund interest rate increases on its variable rate long-term debt with the increased amounts of interest income. Beginning in April 2004, in anticipation of financing the purchase of regional jet aircraft on firm order with the manufacturer the Company entered into fourteen treasury lock agreements with notional amounts totaling $373,500 and a weighted average interest rate of 4.47% with expiration dates through June 2005. As of June 30, 2005, all of the treasury lock agreements had been settled.
The Company maintains “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective in ensuring that material information is made known to them by others within the Company during the period in which this report was being prepared.
There have been no significant changes in the Company’s internal control over financial reporting that occurred during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
| Item 6. | |
| | (a) | Exhibits |
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| | 10.1 | Amendment No. 5 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated April 30, 2005.* (i) |
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| | 10.2 | Amendment No. 10 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated April 30, 2005.* (i) |
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| | 10.3 | Amendment No. 11 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airways Holdings Inc., dated May 31, 2005.* (i) |
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| | 10.4 | Amended and Restated Chautauqua Jet Service Agreement between US Airways, Inc. and Chautauqua Airlines, Inc. dated April 26, 2005.* (i) |
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| | 31.1 | Certification by Bryan K. Bedford, Chairman of the Board, Chief Executive Officer and President of Republic Airways Holdings Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, in connection with Republic Airways Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
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| | 31.2 | Certification by Robert H. Cooper, Executive Vice President and Chief Financial Officer of Republic Airways Holdings Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, in connection with Republic Airways Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
| | | |
| | 32.1 | Certification by Bryan K. Bedford, Chairman of the Board, Chief Executive Officer and President of Republic Airways Holdings Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with Republic Airways Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
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| | 32.2 | Certification by Robert H. Cooper, Executive Vice President and Chief Financial Officer of Republic Airways Holdings Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with Republic Airways Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
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| | * | A request for confidential treatment was filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Commission as required by Rule 24b-2 of the Commission. |
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| | (i) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
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.
| | REPUBLIC AIRWAYS HOLDINGS INC. |
| | (Registrant) |
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| Dated: November 3, 2005 | By: /s/ Bryan K. Bedford |
| | Bryan K. Bedford |
| | Chairman of the Board, Chief Executive Officer and President |
| | (principal executive officer) |
| | |
| | |
| | |
| Dated: November 3, 2005 | By: /s/ Robert H. Cooper |
| | Robert H. Cooper |
| | Executive Vice President and Chief Financial Officer |
| | (principal financial and accounting officer) |
| | |
