United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
------------------------- --------------------
Commission file number 000-21642
-----------
ATA HOLDINGS CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
- ----------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
- ----------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(317) 247-4000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 periods 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
----- -----
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,764,753 shares outstanding as of July 31,
2002
PART I - Financial Information
Item I - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2002 2001
------------------- -----------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents....................................... $ 153,535 $ 184,439
Aircraft pre-delivery deposits.................................. 122,379 166,574
Receivables, net of allowance for doubtful accounts
(2002 - $16,640; 2001 - $1,526)................................. 70,178 75,046
Inventories, net 53,665 47,648
Assets held for sale............................................ - 18,600
Prepaid expenses and other current assets....................... 31,663 19,471
------------------- -----------------------
Total current assets................................................. 431,420 511,778
Property and equipment:
Flight equipment................................................ 344,417 327,541
Facilities and ground equipment................................. 128,159 119,975
------------------- -----------------------
472,576 447,516
Accumulated depreciation........................................ (159,637) (132,573)
------------------- -----------------------
312,939 314,943
Goodwill............................................................. 21,780 21,780
Assets held for sale................................................. 9,052 33,159
Prepaid aircraft rent................................................ 71,085 49,159
Investment in BATA, LLC.............................................. 38,289 30,284
Deposits and other assets............................................ 40,651 41,859
------------------- -----------------------
Total assets......................................................... $ 925,216 $ 1,002,962
=================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................. $ 15,868 $ 5,820
Short-term debt.................................................. 97,559 118,239
Accounts payable................................................. 36,157 26,948
Air traffic liabilities.......................................... 108,032 100,958
Accrued expenses................................................. 179,803 177,102
------------------- -----------------------
Total current liabilities............................................ 437,419 429,067
Long-term debt, less current maturities.............................. 335,997 373,533
Deferred income taxes................................................ 10,022 13,655
Deferred gains from sale and leaseback of aircraft................... 52,768 45,815
Other deferred items................................................. 17,630 16,760
------------------- -----------------------
Total liabilities.................................................... 853,836 878,830
Redeemable preferred stock; authorized and issued 800 shares......... 80,000 80,000
Shareholders' equity:
Preferred stock; authorized 9,999,200 shares; none issued........ - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,476,193 - 2002; 13,266,642 - 2001................... 65,290 61,964
Treasury stock; 1,711,440 shares - 2002; 1,710,658 shares - 2001. (24,778) (24,768)
Additional paid-in capital....................................... 10,824 11,534
Other comprehensive income (loss)................................ 333 (687)
Retained deficit................................................. (60,289) (3,911)
------------------- -----------------------
Total shareholders' equity (deficit)................................. (8,620) 44,132
------------------- -----------------------
Total liabilities and shareholders' equity........................... $ 925,216 $ 1,002,962
=================== =======================
See accompanying notes.
2
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Scheduled service.............................. $ 224,515 $ 235,523 $ 432,798 $ 447,554
Charter........................................ 73,667 96,589 170,513 198,974
Ground package................................. 9,731 14,845 24,977 36,476
Other.......................................... 10,628 11,938 20,823 23,376
-------------- -------------- -------------- --------------
Total operating revenues 318,541 358,895 649,111 706,380
-------------- -------------- -------------- --------------
Operating expenses:
Salaries, wages and benefits................... 91,701 83,516 169,688 164,488
Fuel and oil................................... 51,151 68,029 98,394 138,010
Aircraft rentals............................... 45,033 21,406 84,487 41,395
Handling, landing and navigation fees.......... 28,450 24,940 56,130 48,659
Depreciation and amortization.................. 22,718 33,746 41,408 69,244
Aircraft maintenance, materials and repairs.... 14,660 15,974 26,080 35,360
Crew and other employee travel................. 13,578 15,903 27,448 31,606
Other selling expenses......................... 11,376 11,193 22,359 21,947
Advertising.................................... 11,296 6,973 20,628 13,505
Passenger service.............................. 9,531 11,360 19,298 23,111
Ground package cost............................ 7,726 12,044 20,075 30,284
Facilities and other rentals................... 5,753 4,822 11,198 9,323
Commissions.................................... 5,002 10,137 14,125 20,813
Impairment loss................................ 14,812 - 14,812 -
U.S. Government grant.......................... 15,210 - 15,210 -
Other.......................................... 29,837 22,293 57,006 44,310
-------------- -------------- -------------- --------------
Total operating expenses......................... 377,834 342,336 698,346 692,055
-------------- -------------- -------------- --------------
Operating income (loss).......................... (59,293) 16,559 (49,235) 14,325
Other income (expense):
Interest income................................ 823 1,359 1,512 3,090
Interest expense............................... (10,012) (6,951) (18,250) (14,309)
Other.......................................... (501) (236) (368) (68)
-------------- -------------- -------------- --------------
Other expense.................................... (9,690) (5,828) (17,106) (11,287)
-------------- -------------- -------------- --------------
Income (loss) before income taxes................ (68,983) 10,731 (66,341) 3,038
Income taxes (credits)........................... (13,585) 4,200 (12,823) 891
-------------- -------------- -------------- --------------
Net income (loss)................................ (55,398) 6,531 (53,518) 2,147
Preferred stock dividends........................ (2,485) (2,333) (2,860) (2,708)
-------------- -------------- -------------- --------------
Income (loss) available to common shareholders... $ (57,883) $ 4,198 $ (56,378) $ (561)
============== ============== ============== ==============
Basic earnings per common share:
Average shares outstanding....................... 11,752,957 11,427,076 11,658,184 11,403,503
Net income (loss) per share...................... $ (4.92) $ 0.37 $ (4.84) $ (0.05)
============== ============== ============== ==============
Diluted earnings per common share:
Average shares outstanding....................... 11,752,957 13,961,609 11,658,184 11,403,503
Net income (loss) per share...................... $ (4.92) $ 0.33 $ (4.84) $ (0.05)
============== ============== ============== ==============
See accompanying notes.
3
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(Dollars in thousands)
Redeemable Additional Other
Preferred Common Treasury Paid-in Comprehensive Retained
Stock Stock Stock Capital Income (Loss) Deficit Total
--------------- ------------- ------------ --------------- ----------------- ------------ ------------
Balance, December 31, 2001.. $ 80,000 $ 61,964 $ (24,768) $ 11,534 $ (687) $ (3,911) $ 124,132
--------------- ------------- ------------ --------------- ----------------- ------------ ------------
Net income................ - - - - - 1,880 1,880
Net gain on derivative
instruments.............. - - - - 629 - 629
------------------ ----------- ------------
Total comprehensive
income................. - - - - 629 1,880 2,509
------------------ ------------ -----------
Preferred stock dividends. - - - - - (375) (375)
Restricted stock grants... - 10 - 3 - - 13
Stock options exercised... - 291 - (138) - - 153
--------------- ------------- ------------ --------------- ----------------- ------------ ------------
Balance, March 31, 2002..... $ 80,000 $ 62,265 $ (24,768) $ 11,399 $ (58) $ (2,406) $ 126,432
=============== ============= ============ =============== ================= ============ ============
Net loss.................. - - - - - (55,398) (55,398)
Net gain on derivative
instruments.............. - - - - 391 - 391
------------------ ------------ -----------
Total comprehensive
income................. - - - - 391 (55,398) (55,007)
------------------ ------------ -----------
Preferred stock dividends. - - - - - (2,485) (2,485)
Payment of liability
with stock............... - 2,445 - (295) - - 2,150
Restricted stock grants... - 3 (10) 1 - - (6)
Stock options exercised... - 577 - (281) - - 296
--------------- ------------- ------------ --------------- ----------------- ------------ ------------
Balance, June 30, 2002...... $ 80,000 $ 65,290 $ (24,778) $ 10,824 $ 333 $ (60,289) $ 71,380
=============== ============= ============ =============== ================= ============ ============
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
2002 2001
-------------- --------------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss).......................................... $ (53,518) $ 2,147
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization............................ 41,408 69,244
Impairment loss.......................................... 14,812 -
Deferred income taxes (credits).......................... (3,633) 372
Other non-cash items..................................... 17,502 (5,921)
Changes in operating assets and liabilities:
U.S. Government grant receivable......................... 15,210 -
Other receivables........................................ (10,342) 25,619
Inventories.............................................. (7,653) (11,329)
Prepaid expenses......................................... (12,192) 1,966
Accounts payable......................................... 9,209 23,288
Air traffic liabilities.................................. 7,074 263
Accrued expenses......................................... 1,363 4,413
-------------- --------------
Net cash provided by operating activities 19,240 110,062
-------------- --------------
Investing activities:
Aircraft pre-delivery deposits............................. 43,898 (70,873)
Capital expenditures....................................... (43,283) (93,243)
Noncurrent prepaid aircraft rent........................... (21,926) (17,712)
Investment in BATA, LLC.................................... 18,632 18,043
Reductions to other assets................................. 96 319
Proceeds from sales of property and equipment.............. 286 32
-------------- --------------
Net cash used in investing activities (2,297) (163,434)
-------------- --------------
Financing activities:
Preferred stock dividends.................................. (2,860) (2,708)
Proceeds from sale/leaseback transactions.................. 2,794 369
Proceeds from short-term debt.............................. - 55,140
Payments on short-term debt................................ (20,680) (3,773)
Proceeds from long-term debt............................... 194,491 -
Payments on long-term debt................................. (222,031) (2,497)
Proceeds from stock options exercises...................... 449 868
Purchase of treasury stock................................. (10) (204)
-------------- --------------
Net cash provided by (used in) financing activities (47,847) 47,195
-------------- --------------
Decrease in cash and cash equivalents...................... (30,904) (6,177)
Cash and cash equivalents, beginning of period............. 184,439 129,137
-------------- --------------
Cash and cash equivalents, end of period $ 153,535 $ 122,960
============== ==============
Supplemental disclosures:
Cash payments for:
Interest................................................. $ 22,148 $ 21,431
Income taxes (refunds)................................... $ 3,132 $ (5,470)
Financing and investing activities not affecting cash:
Accrued capitalized interest $ (6,239) $ 7,994
See accompanying notes.
5
ATA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of ATA Holdings Corp.,
formerly Amtran, Inc., and subsidiaries (the "Company") have been prepared
in accordance with instructions for reporting interim financial information
on Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles
generally accepted in the United States.
The consolidated financial statements for the quarters ended June 30, 2002
and 2001 reflect, in the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash
flows for such periods. Results for the six months ended June 30, 2002 are
not necessarily indicative of results to be expected for the full fiscal
year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
2. Continuing Effects of September 11, 2001
On September 11, 2001, four commercial aircraft operated by two other U.S.
airlines were hijacked and destroyed in terrorist attacks on the United
States. These attacks resulted in significant loss of life and property
damage in New York City, Washington, D.C. and western Pennsylvania. In
response to these attacks, on September 11 the Federal Aviation
Administration ("FAA") temporarily suspended all commercial flights to,
from and within the United States until September 13. Upon resuming its
pre-attack schedule, the Company experienced significantly lower passenger
traffic and unit revenues than prior to the attacks. In response to this,
the Company reduced its flight schedule by approximately 20%, as compared
to the schedule operated immediately prior to September 11, and furloughed
approximately 1,100 employees by the middle of October. By June 30, 2002,
the Company had recalled approximately 800 of the furloughed employees, and
during the second quarter of 2002 it operated a flight schedule with
approximately the same capacity as the second quarter of 2001.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act ("Act"). The Act
provides for, among other things: (1) $5.0 billion in compensation for
direct losses incurred by all U.S. airlines and air cargo carriers
(collectively, "air carriers") as a result of the closure by the FAA of
U.S. airspace following the September 11 terrorist attacks and for
incremental losses incurred by air carriers through December 31, 2001 as a
direct result of such attacks; (2) subject to certain conditions, the
availability of up to $10.0 billion in U.S. Government guarantees of
certain loans made to air carriers for which credit is not reasonably
available as determined by a newly established Air Transportation
Stabilization Board ("ATSB"); (3) the authority of the Secretary of
Transportation to reimburse air carriers (which authority expired 180 days
after the enactment of the Act) for the increase in the cost of insurance,
with respect to a premium for coverage ending before October 1, 2002,
against loss or damage arising out of any risk from the operation of an
aircraft over the premium in effect for a comparable operation during the
period September 4, 2001 to September 10, 2001; (4) at the discretion of
the Secretary of Transportation, a $100 million limit on the liability of
any air carrier to third parties with respect to acts of terrorism
committed on or to such air carrier during the 180-day period following the
enactment of the Act; (5) the extension of the due date for the payment by
eligible air carriers of certain excise taxes; (6) compensation to
individual claimants who were physically injured or killed as a result of
the terrorist attacks of September 11; and (7) the Secretary of
Transportation to ensure that all communities that had scheduled air
service before September 11, 2001 continue to receive adequate air service.
In addition, the Act provides that, notwithstanding any other provision of
law, liability for all claims, whether for compensatory or punitive
damages, arising from the terrorist-related events of September 11 against
any air carrier shall not be in an amount greater than the limits of the
liability coverage maintained by the air carrier. With respect to the cash
grants of up to $5.0 billion, each qualified air carrier is entitled to
receive the lesser of: (1) its actual direct and incremental losses
incurred between September 11, 2001 and December 31, 2001; or (2) its
proportion of the $5.0 billion of total compensation available to all
qualified air carriers under the Act allocated by August 2001 available
seat miles or ton miles.
6
The Company believes it is eligible to receive up to $74.0 million in
connection with the Act in compensation for direct and incremental losses
arising from the terrorist attacks of September 11 and the subsequent
decline in demand for air travel, based upon the Company's estimated
maximum allocation calculated from August 2001 available seat miles. In
2001, the Company recorded $66.3 million in U.S. Government grant
compensation, which was comprised of (1) $57.1 million in lost profit
contribution (direct revenues lost, less variable operating expenses
avoided) from planned flights not operated between September 11 and
December 31, and from flights operated during this time period with lower
load factors and unit revenues; (2) certain special charges of $17.8
million, that were deemed directly attributable to the attacks, such as
crew and passenger travel expenses incurred during and shortly after the
FAA mandated shut down, additional advertising expenses incurred as a
direct result of September 11, additional interest expense and letter of
credit fees associated with changes to the Company's debt position due to
September 11, and expenses incurred related to a proposed transaction in
which the Company would have been taken private, which was substantially
complete just prior to September 11, but was subsequently cancelled; less
(3) $8.6 million in expense reductions realized as a direct result of lower
costs incurred by the Company after the September 11 attacks. Excluded from
the amount of grant compensation recorded by the Company were the Company's
non-cash write-down of the Boeing 727-200 aircraft fleet and exit costs
related to rent payments scheduled to continue on certain Boeing 727-200
aircraft after they are removed from service. In 2001, the Company received
$44.5 million in cash compensation under the Act and recorded a receivable
in the amount of $21.8 million for the remaining portion.
In April 2002, the Department of Transportation ("DOT") issued its final
rules and procedures for submitting an application to receive the remaining
funds available under the Act. These final rules and procedures provide
general guidance on what items are reimbursable, but the process offers
each airline the opportunity to present its own arguments concerning the
reimbursement due for special items. The final rules also require certain
agreed upon procedures to be performed on the application by an independent
certified public accountant prior to submission. The Company submitted its
final application, with the accountant's report on agreed upon procedures,
during the second quarter of 2002. Based upon ongoing discussions with the
DOT concerning the Company's application, the Company has determined that a
portion of the receivable recorded in 2001 may not be collected when the
DOT provides its final decision on that application. The Company therefore
recorded a reserve of $15.2 million against the receivable of $21.8 million
in the second quarter of 2002. The reserve recorded by the Company
represents its best current estimate of the amount of receivable to be
collected, but since a final decision by the DOT is still pending, it is
possible that the amount collected will be greater or lesser than the
amount recorded by the Company as of June 30, 2002.
During the second quarter of 2002, the Company submitted an application to
the ATSB for a $165.0 million secured loan, of which 90%, or $148.5 million
would be guaranteed by the Federal Government, as provided by the Act. The
Company believes it meets the qualifications to receive such a loan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for further information.
As a result of the September 11 attacks, the Company's aviation insurers,
and other air carriers' aviation insurers, have significantly reduced the
maximum amount of insurance coverage they will underwrite for liability to
persons other than employees or passengers resulting from acts of
terrorism, war, hijacking or other similar perils (war-risk coverage). In
addition, the Company and other air carriers are being charged
significantly higher premiums for this reduced coverage, as well as other
aviation insurance. Pursuant to the Act and other enabling legislation, the
U.S. Government has issued supplemental war-risk coverage to U.S. air
carriers, including the Company, through August 17, 2002. It is anticipated
that after this date a commercial product for war-risk coverage will become
available, but the Company may incur significant additional costs for this
coverage.
7
3. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended June 30,
2002 2001
------------------ -----------------
Numerator:
Net income (loss) $ (55,398,000) $ 6,531,000
Preferred stock dividends (2,485,000) (2,333,000)
------------------ -----------------
Income (loss) available to common
shareholders $ (57,883,000) $ 4,198,000
------------------ -----------------
Effect of dilutive securities:
Convertible redeemable preferred stock - 375,000
------------------ -----------------
Numerator for diluted earnings per share $ (57,883,000) $ 4,573,000
================== =================
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,752,957 11,427,076
Effect of dilutive securities:
Employee stock options - 620,047
Convertible redeemable preferred stock - 1,914,486
------------------ -----------------
Dilutive potential securities - 2,534,533
------------------ -----------------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,752,957 13,961,609
================== =================
Basic earnings (loss) per share $ (4.92) $ 0.37
================== =================
Diluted earnings (loss) per share $ (4.92) $ 0.33
================== =================
8
Six Months Ended June 30,
2002 2001
------------------ -----------------
Numerator:
Net income (loss) $ (53,518,000) $ 2,147,000
Preferred stock dividends (2,860,000) (2,708,000)
------------------ -----------------
Loss available to common
shareholders $ (56,378,000) (561,000)
------------------ -----------------
Effect of dilutive securities:
Convertible redeemable preferred stock - -
------------------ -----------------
Numerator for diluted earnings per share $ (56,378,000) $ (561,000)
================== =================
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,658,184 11,403,503
Effect of dilutive securities:
Employee stock options - -
Convertible redeemable preferred stock - -
------------------ -----------------
Dilutive potential securities - -
------------------ -----------------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,658,184 11,403,503
================== =================
Basic earnings (loss) per share $ (4.84) $ (0.05)
================== =================
Diluted earnings (loss) per share $ (4.84) $ (0.05)
================== =================
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings per Share," the impact of 1,914,486 shares of redeemable
preferred stock in the three months and six months ended June 30, 2002, has
been excluded from the computation of diluted earnings per share because
their effect would be antidilutive. In addition, the impact of 385,780 and
436,013 employee stock options, respectively, has been excluded from the
computation of diluted earnings per share for the same periods because
their effect would be antidilutive. In comparison, in the six months ended
June 30, 2001 the impact of 1,914,486 shares of redeemable preferred stock
and 515,662 employee stock options has been excluded from the computation
of diluted earnings per share because their effect would be antidilutive.
4. Segment Disclosures
The Company identifies its segments on the basis of similar products and
services. The airline segment derives its revenues primarily from the sale
of scheduled service or charter air transportation. ATA Leisure Corp.
("ATALC") derives its revenues from the sale of vacation packages, which,
in addition to air transportation, include hotels and other ground
arrangements. ATALC purchases air transportation for its vacation packages
from ATA and other airlines.
9
Segment financial data as of and for the three and six months ended June
30, 2002 and 2001 follows:
For the Three Months Ended June 30, 2002
--------------------------------------------------------------------------
Other/
Airline ATALC Eliminations Consolidated
--------------- ---------------- ----------------- ----------------
(In thousands)
Operating revenue (external) $ 286,248 $ 11,143 $ 21,150 $ 318,541
Inter-segment revenue 5,815 305 (6,120) -
Operating expenses (external) 349,106 9,392 19,336 377,834
Inter-segment expenses 1,544 2,564 (4,108) -
Operating income (loss) (58,587) (508) (198) (59,293)
Segment assets (at quarter-end) 1,086,857 181,149 (342,790) 925,216
For the Three Months Ended June 30, 2001
--------------------------------------------------------------------------
Other/
Airline ATALC Eliminations Consolidated
--------------- ---------------- ----------------- ----------------
(In thousands)
Operating revenue (external) $ 320,089 $ 20,572 $ 18,234 $ 358,895
Inter-segment revenue 8,794 525 (9,319) -
Operating expenses (external) 309,989 15,675 16,672 342,336
Inter-segment expenses 1,873 5,370 (7,243) -
Operating income (loss) 17,021 52 (514) 16,559
Segment assets (at quarter-end) 1,250,273 221,708 (365,512) 1,106,469
For the Six Months Ended June 30, 2002
--------------------------------------------------------------------------
Other/
Airline ATALC Eliminations Consolidated
--------------- ---------------- ----------------- ----------------
(In thousands)
Operating revenue (external) $ 573,431 $ 32,405 $ 43,275 $ 649,111
Inter-segment revenue 13,709 732 (14,441) -
Operating expenses (external) 633,580 27,604 37,162 698,346
Inter-segment expenses 3,079 6,305 (9,384) -
Operating income (loss) (49,519) (772) 1,056 (49,235)
Segment assets (at quarter-end) 1,086,857 181,149 (342,790) 925,216
10
For the Six Months Ended June 30, 2001
--------------------------------------------------------------------------
Other/
Airline ATALC Eliminations Consolidated
--------------- ---------------- ----------------- ----------------
(In thousands)
Operating revenue (external) $ 613,312 $ 54,570 $ 38,498 $ 706,380
Inter-segment revenue 24,433 990 (25,423) -
Operating expenses (external) 618,373 39,763 33,919 692,055
Inter-segment expenses 4,455 15,625 (20,080) -
Operating income (loss) 14,917 172 (764) 14,325
Segment assets (at quarter-end) 1,250,273 221,708 (365,512) 1,106,469
5. Commitments and Contingencies
In 2000, the Company entered into a purchase agreement with the Boeing
Company to purchase directly from Boeing 10 new Boeing 757-300s and 20 new
Boeing 737-800s. The Boeing 737-800 aircraft are powered by General
Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by
Rolls-Royce RB211-535 E4C engines. The Company also received purchase
rights for an additional 50 aircraft. The manufacturer's list price is
$73.6 million for each 757-300 and $52.4 million for each 737-800, subject
to escalation. The Company's purchase price for each aircraft is subject to
various discounts. To fulfill its purchase obligations, the Company has
arranged for each of these aircraft, including the engines, to be purchased
by third parties that will, in turn, enter into long-term operating leases
with the Company. As of June 30, 2002, the Company had taken delivery of
eight Boeing 737-800s and eight Boeing 757-300s obtained directly from
Boeing. All remaining aircraft to be purchased directly from Boeing are
scheduled for delivery between August 2002 and August 2004. Aircraft
pre-delivery deposits are required for these purchases, and the Company has
funded these deposits using operating cash and deposit finance facilities.
As of June 30, 2002, the Company had $126.8 million in pre-delivery
deposits outstanding for these aircraft, of which $97.6 million was
provided by deposit finance facilities with various lenders. Upon delivery
of the aircraft, pre-delivery deposits funded with operating cash will be
returned to the Company, and those funded with deposit facilities will be
used to repay those facilities.
In December 2001, the Company entered into an agreement to exercise
purchase rights on two Boeing 757-300 aircraft to be delivered in May and
June 2003. The Company currently has purchase rights remaining for eight
Boeing 757-300 aircraft and 40 Boeing 737-800 aircraft.
The Company has operating lease agreements in place to lease 14 new Boeing
737-800s from International Lease Finance Corporation ("ILFC"). As of June
30, 2002, the Company had taken delivery of 12 Boeing 737-800s that are
being leased from ILFC. The remaining two aircraft under these operating
lease agreements are scheduled for delivery in June 2003 and May 2004.
The Company has an agreement to acquire five additional new Boeing 737-800s
to be financed by operating leases with GE Capital Aviation Services
("GECAS"). As of June 30, 2002, the Company had taken delivery of four
Boeing 737-800 aircraft that are being leased from GECAS. The one remaining
aircraft was delivered in July 2002.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006.
In May 2002, the Company entered into an agreement with AMR Leasing
Corporation to lease six Saab 340B aircraft with an option to lease up to
10 additional aircraft. As of June 30, 2002, the Company had taken delivery
of the first four of these Saab 340B aircraft. The remaining two aircraft
are scheduled for delivery in the third quarter of 2002.
11
In March 2001, the Company entered into a limited liability company
agreement with Boeing Capital Corporation ("BCC") to form BATA Leasing LLC
("BATA") a 50/50 joint venture. Because the Company does not control BATA,
the Company's investment is being accounted for under the equity method.
BATA is expected to remarket the Company's fleet of Boeing 727-200 aircraft
in either passenger or cargo configurations. In exchange for supplying the
aircraft and certain operating services to BATA, the Company has and will
continue to receive both cash and equity in the income or loss of BATA. The
Company transferred 12 Boeing 727-200 aircraft to BATA in 2001. Also in
2001, the Company entered into short-term operating leases with BATA on
nine of the 12 transferred aircraft. As of June 30, 2002, all of the nine
leases had terminated. The Company is subject to lease return conditions on
these nine operating leases upon delivery of any of these aircraft to a
third party by BATA. As of June 30, 2002, a third-party lessee or buyer has
not been identified for any of these aircraft. Management believes it is
reasonably possible that a lessee or buyer will be identified. The Company
estimates that it could incur up to $7.0 million of expense to meet the
return conditions, if all nine of the aircraft were sold or leased by BATA
to third parties. No liability has been recorded for these return
conditions.
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
6. New Accounting Pronouncements
In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets ("FAS 142"), effective for fiscal years beginning after December 15,
2001. The Company's goodwill represents the excess of cost over the fair
value of net assets acquired from several business acquisitions completed
in 1999. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. The Company adopted FAS 142 as of January 1, 2002, and
therefore has not recorded any goodwill amortization in the first six
months of 2002. Prior to 2002, the Company amortized goodwill on a
straight-line basis over 20 years in accordance with Accounting Principles
Board Opinion 17. The Company recorded goodwill amortization expense of
$0.3 million and $0.6 million, respectively, in the three and six month
periods ended June 30, 2001.
As required upon adoption of FAS 142, as of June 30, 2002 the Company had
completed transitional impairment reviews on its goodwill. The Company
determined that no impairment adjustment was required for any of its
goodwill. In accordance with FAS 142, the Company will continue to perform
annual goodwill impairment reviews.
7. Subsequent Events
On July 1, 2002, the Company outsourced the management operations of two of
its ATALC brands, ATA Vacations and Travel Charter International ("TCI"),
to Milwaukee-based The Mark Travel Corporation ("MTC"). MTC will create,
advertise, take reservations and deliver these ATALC brands. MTC will
receive revenue from the ground package sales, and the Company will receive
a royalty fee from MTC. As a result of the outsourcing agreement, the
Company has reduced marketing, product development, reservations and
administrative staff at the ATALC headquarters in Troy, Michigan. The
Company anticipates closing those offices by the end of the third quarter.
Other ATALC products, including Key Tours' Canadian Rail programs and Key
Tours' Las Vegas ground operations, will not be outsourced, but will be
operated out of ATALC's Windsor office. Staffing at the Windsor call center
has also been reduced to reflect the outsourcing of the ATA Vacation and
TCI brands.
12
On July 16, 2002, the Company's cockpit crewmembers, who are represented by
the Air Line Pilots Association ("ALPA"), ratified an amended collective
bargaining agreement for which tentative agreement had been reached on June
18, 2002. The amended agreement became effective July 1, 2002. The
agreement came after more than 25 months of negotiations including mediated
talks under the auspices of the National Mediation Board. Of the 823
crewmembers eligible to vote, 95 % participated with 80.2 % casting ballots
in favor of the amended agreement.
On August 5, 2002, the Company announced the resignation of John P. Tague,
who had held the role of President and Chief Executive Officer of the
Company. In addition, the Company announced that, effective immediately, J.
George Mikelsons, the Company's chairman and founder, would assume the role
of President and Chief Executive Officer.
13
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter and Six Months Ended June 30, 2002, Versus Quarter and Six Months Ended
June 30, 2001
Overview
The Company is a leading provider of targeted scheduled airline services and
charter airline services to leisure and other value-oriented travelers, and to
the U.S. military. The Company, through its principal subsidiary, American Trans
Air, Inc. ("ATA"), has been operating for 29 years and is the tenth largest U.S.
airline in terms of 2001 capacity and traffic. ATA provides jet scheduled
service through nonstop and connecting flights from the gateways of
Chicago-Midway and Indianapolis to popular vacation destinations such as Hawaii,
Phoenix, Las Vegas, Florida, California, Mexico and the Caribbean, as well as to
New York's LaGuardia Airport, Philadelphia, Denver, Dallas-Ft. Worth,
Washington, D.C., Boston, Seattle, Minneapolis-St. Paul, and Newark. The
Company's commuter subsidiary Chicago Express Airlines, Inc. ("Chicago Express")
also provides commuter scheduled service between Chicago-Midway and the cities
of Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids, Madison, South
Bend, Springfield, Moline, and Toledo. ATA also provides charter service to
independent tour operators, specialty charter customers and the U.S. military.
In the quarter and six months ended June 30, 2002, the Company recorded an
operating loss of $59.3 million and $49.2 million, respectively, as compared to
operating income of $16.6 million and $14.3 million in the same periods of 2001.
Consolidated yield declined by 11.8% and 10.1%, respectively, in the quarter and
six months ended June 30, 2002, as compared to the same periods of 2001, while
consolidated load factors declined only slightly between years. Weak pricing was
evident in both the scheduled service and commercial charter business units in
2002, and reflects the continuing impacts of severely reduced demand for both
business and leisure air travel subsequent to the terrorist attacks of September
11, 2001. The Company also believes that consumer confidence continues to be
eroded by an unsettled economic climate in the United States, which has placed
further pressure on airline fares, given a relatively unchanged seat capacity
between years in the Company's markets, particularly in the Company's hub city
of Chicago. The Company expects continued weakness in unit revenue throughout
the remainder of 2002, and is particularly concerned about further yield erosion
that likely will occur during the traditionally weak fourth quarter travel
period.
The Company's unit costs remained among the lowest of major airlines in 2002.
Consolidated CASM was 8.89 cents and 8.16 cents, respectively, in the quarter
and six months ended June 30, 2002, as compared to 8.16 cents and 8.33 cents,
respectively, in the comparable periods of 2001. Included in the second quarter
and six months ended June 30, 2002 operating expenses were several special
non-cash charges, including: (1) an unfavorable adjustment to U.S. government
grant revenues of $15.2 million; (2) an additional charge for impairment of the
Company's Boeing 727-200 fleet of $14.8 million; and (3) a charge of $8.4
million to record a signing bonus relating to recently-ratified amendments to
the cockpit crew collective bargaining agreement. After adjusting for these
special items, consolidated CASM was 7.99 cents and 7.71 cents, respectively,
for the quarter and six months ended June 30, 2002. The Company is continuing
its efforts to further reduce its operating costs in the second half of 2002,
and also expects to continue to realize operating cost savings from the ongoing
deliveries of its new fleet of Boeing 737-800 and Boeing 757-300 aircraft, and
ongoing retirements of Lockheed L-1011 aircraft. The Company had retired all of
its Boeing 727-200 aircraft by June 30, 2002.
The Company, however, does not expect that it will be able to fully mitigate the
effects on its results of operations of weak revenues, through cost savings
initiatives. Consequently, the Company expects to incur operating and net losses
for the full year 2002, with individual losses expected in both the third and
fourth quarters.
14
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make judgments and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosures of contingent
assets and liabilities. Certain significant accounting policies applied in the
preparation of the financial statements require management to make difficult,
subjective or complex judgments, and are considered critical accounting policies
by the Company. The Company has identified the following areas as critical
accounting policies.
Goodwill Accounting. In June 2001, the FASB issued new accounting standards
pertaining to goodwill in FAS 142, effective for fiscal years beginning after
December 15, 2001. Under FAS 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. The Company's goodwill is related to its ATALC, ATA Cargo,
Inc. ("ATA Cargo") and Chicago Express subsidiaries acquired in 1999.
FAS 142 requires companies to perform transitional impairment reviews of
goodwill as of the date of adoption of the statement, which was January 1, 2002.
The transitional goodwill impairment test was required to be completed by June
30, 2002, based upon the carrying values and estimated fair values as of January
1, 2002. This test is a two-step process. Step one compares the fair value
(determined through market quotes or the present value of estimated future cash
flows) of a reporting unit with its carrying amount (assets less liabilities,
including goodwill.) If the estimated fair value exceeds the carrying amount,
goodwill of the reporting unit is considered not impaired, and step two of the
impairment test is not necessary. If the carrying amount of a reporting unit
exceeds its estimated fair value, the second step of the goodwill impairment
test is then performed, which compares the implied fair value of the reporting
unit's goodwill (determined in accordance with purchase accounting), with the
carrying amount of the reporting unit's goodwill. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to that excess. If an
impairment loss is recognized, the adjusted carrying amount of the goodwill
becomes the new accounting basis for future impairment tests.
The fair market values of all of the Company's reporting units were estimated
using discounted future cash flows, since market quotes were not readily
available. For Chicago Express and ATA Cargo, future cash flows were estimated
based on historical performance. In both cases, the estimated fair market value
was higher than the carrying amount of the reporting unit, and thus no
impairment was indicated.
The fair market value of ATALC was estimated based on projected future cash
flows from the Key Tours and Key Tours Las Vegas brands, estimated cash flows
from royalties under the new management services contract with MTC, and
incremental cash flows from the increased sale of scheduled service seats to ATA
Vacations customers. Based on this analysis, the estimated fair market value of
ATALC was higher than its carrying amount, and thus no impairment was indicated.
All of the estimates of fair market value for the Company's three reporting
units involved highly subjective judgments on the part of management, including
the amounts of cash flows to be received, their estimated duration, and
perceived risk as reflected in selected discount rates. In some cases, cash
flows were estimated without the benefit of historical data, although historical
data was used where available. Although the Company believes its estimates and
judgments to be reasonable, different assumptions and judgments might have
resulted in the impairment of some or all of the Company's recorded goodwill of
$21.8 million under the transitional testing rules of FAS 142.
15
U. S. Government Grant Reimbursement Accounting. The Air Transportation Safety
and System Stabilization Act passed in response to the September 11, 2001
terrorist attacks provided for, among other things, up to $5.0 billion in
compensation for the direct and incremental losses resulting from the terrorist
attacks incurred by U. S. domestic passenger and cargo airlines from September
11, 2001 through December 31, 2001.
Due to the limited guidance provided by the legislation and the evolving
guidance provided by the interpretive rules of the DOT, the Company has made
subjective and judgmental estimates in calculating and recording the amount of
grant revenue to recognize. In the third and fourth quarters of 2001, the
Company recognized $66.3 million in total grant revenues. As of December 31,
2001, $44.5 million had been received, and $21.8 million was recorded as a
receivable.
In the second quarter of 2002, the DOT issued new guidelines for receiving grant
reimbursement and the Company submitted a final application, accompanied by the
required accountant's report on agreed upon procedures. Based on review of its
application with the DOT, the Company now believes it is probable that a portion
of the receivable recorded in 2001 may not be collected and therefore recorded a
valuation allowance of $15.2 million against the $21.8 million receivable as of
June 30, 2002. It is possible that further material adjustments may be required
in future accounting periods. See "Financial Statements - Notes to Consolidated
Financial Statements - Note 2 - Continuing Effects of September 11, 2001" for
further details.
Fleet Impairment Accounting. The Company adopted FASB Statement of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FAS 144"), which superceded FAS 121 effective January 1,
2002, but the Company continues to account for the fleet and related assets that
were impaired prior to January 1, 2002, under FAS 121, as required by FAS 144.
Fleet impairment accounting is governed by FASB Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of ("FAS 121"). Significant subjective
estimates are required to calculate expected future cash flows and the fair
market values to which asset net book values are compared. The Company has been
performing impairment reviews in accordance with FAS 121 on the Lockheed
L-1011-50 and 100 and the Boeing 727-200 fleets since the end of 2000.
FAS 121 requires that whenever events or circumstances indicate that the Company
may not be able to recover the net book value of its productive assets through
future cash flows, an assessment must be performed of expected future cash
flows, and undiscounted estimated future cash flows must be compared to the net
book value of these productive assets to determine if impairment is indicated.
The application of FAS 121 requires the use of significant judgment and the
preparation of numerous significant estimates. The Company estimated future cash
flows from the productive use of these fleets by estimating the expected net
cash contribution from revenues less operating expenses, and adjusting for
estimated cash outflows for heavy maintenance and estimated cash inflows from
final disposal of the assets. Such estimates were required for up to ten years
into the future. Although the Company believes that its estimates of cash flows
in the application of FAS 121 were reasonable, and were based upon all available
information, including extensive historical cash flow data about the prior use
of these fleets, such estimates nevertheless required substantial judgments and
were based upon material assumptions about future events.
Further significant assumptions were required concerning the estimated fair
market value of both fleets, since FAS 121 specifies that impaired assets be
written down to their estimated fair market value by recording an impairment
charge to earnings. As provided under FAS 121, the Company primarily used
discounted cash flow analysis, together with other available information, to
estimate fair market values. Such estimates were significant in determining the
amount of the impairment charge to be recorded, which could have been materially
different under different sets of assumptions and estimates.
16
As FAS 121 requires the Company to continuously evaluate fair market values of
previously impaired assets, it is possible that future estimates of fair market
value may result in additional material charges to earnings, if those estimates
indicate a material reduction in fair market value as compared to the estimates
made at the end of the second quarter of 2002.
In the fourth quarter of 2001, the Company determined that, in accordance with
FAS 121, the estimated future cash flows expected from the Lockheed L-1011-50
and 100 fleet were less than the net book value of that fleet, including related
rotable parts and inventory. As a result, the Company recorded an asset
impairment charge of $67.8 million. The Company continues to evaluate the
estimated future cash flows expected from this fleet and has taken no additional
impairment charges.
In the third quarter of 2001, following the events of September 11, 2001, the
Company retired most of its Boeing 727-200 fleet earlier than originally
planned. As a result of this, the Company recorded an asset impairment charge of
$35.2 million. The Company continues to evaluate the estimated future cash flows
expected from this fleet, and recorded an additional $9.3 million impairment
charge on the fleet in the fourth quarter of 2001, and an additional $14.8
million impairment charge in the second quarter of 2002. As the Boeing 727-200
aircraft are retired, they are transferred to BATA Leasing LLC, an entity which
intends to re-market these aircraft in either passenger or cargo configurations
by leasing or selling them to third parties. The Company has a 50% ownership
interest in this leasing company, which is reflected as an investment on its
balance sheet. The value of this investment is primarily comprised of the
Company's share of expected future rental revenues from the re-marketed Boeing
727-200 fleet. If the future rental revenues do not reach expected levels or do
not occur in the expected timeframes, the Company could incur additional
impairment charges in the future.
Results of Operations
For the quarter ended June 30, 2002, the Company had an operating loss of $59.3
million, as compared to operating income of $16.6 million in the comparable
quarter of 2001; and the Company had a $57.9 million net loss available to
common shareholders in the second quarter of 2002, as compared to net income
available to common shareholders of $4.2 million in the second quarter of 2001.
Operating revenues decreased 11.3% to $318.5 million in the second quarter of
2002, as compared to $358.9 million in the same period of 2001. Consolidated
revenue per available seat mile ("RASM") decreased 12.3% to 7.50 cents in the
second quarter of 2002, as compared to 8.55 cents in the second quarter of 2001.
Operating expenses increased 10.4% to $377.8 million in the second quarter of
2002, as compared to $342.3 million in the comparable period of 2001.
Consolidated operating cost per available seat mile ("CASM") increased 8.9% to
8.89 cents in the second quarter of 2002, as compared to 8.16 cents in the
second quarter of 2001.
For the six months ended June 30, 2002, the Company had an operating loss of
$49.2 million, as compared to operating income of $14.3 million in the
comparable quarter of 2001; and the Company had a $56.4 million net loss
available to common shareholders in the six months ended June 30, 2002, as
compared to net loss available to common shareholders of $0.6 million in the
same period of 2001.
Operating revenues decreased 8.1% to $649.1 million in the six months ended June
30, 2002, as compared to $706.4 million in the same period of 2001. Consolidated
RASM decreased 10.7% to 7.59 cents in the six months ended June 30, 2002, as
compared to 8.50 cents in the same period of 2001.
Operating expenses increased 0.9% to $698.3 million in the six months ended June
30, 2002, as compared to $692.1 million in the comparable period of 2001.
Consolidated operating CASM decreased 2.0% to 8.16 cents in the six months ended
June 30, 2002, as compared to 8.33 cents in the same period of 2001.
17
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per available seat mile ("ASM").
Cents per ASM Cents per ASM
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------------------------------------ -----------------------------------
Consolidated operating revenues: 7.50 8.55 7.59 8.50
Consolidated operating expenses:
Salaries, wages and benefits 2.16 1.99 1.98 1.98
Fuel and oil 1.20 1.62 1.15 1.66
Aircraft rentals 1.06 0.51 0.99 0.50
Handling, landing and navigation fees 0.67 0.59 0.66 0.59
Depreciation and amortization 0.53 0.80 0.48 0.83
Aircraft maintenance, materials and repairs 0.34 0.38 0.30 0.43
Crew and other employee travel 0.32 0.38 0.32 0.38
Other selling expenses 0.27 0.27 0.26 0.27
Advertising 0.27 0.17 0.24 0.16
Passenger service 0.22 0.27 0.23 0.28
Ground package cost 0.18 0.29 0.23 0.36
Facilities and other rentals 0.14 0.12 0.13 0.11
Commissions 0.12 0.24 0.17 0.25
Impairment loss 0.35 - 0.17 -
U.S. Government grant 0.36 - 0.18 -
Other 0.70 0.53 0.67 0.53
---- ---- ---- ----
Total consolidated operating expenses 8.89 8.16 8.16 8.33
---- ---- ---- ----
Consolidated operating income (loss) (1.39) 0.39 (0.57) 0.17
====== ==== ====== ====
ASMs (in thousands) 4,249,829 4,196,738 8,556,259 8,310,993
18
The following table sets forth, for the periods indicated, operating revenues
and expenses for each reportable segment, in thousands of dollars, and expressed
as cents per ASM.
Three Months Ended June 30,
2002 2001 Inc (Dec)
--------------------------------------------------
Airline and Other
Operating revenue (000s) $ 307,093 $ 337,798 $ (30,705)
RASM (cents) 7.23 8.05 (0.82)
Operating expenses (000s) $ 365,878 $ 321,291 $ 44,587
CASM (cents) 8.61 7.66 0.95
Adjusted CASM (cents) Note 1 7.90 7.66 0.24
ATALC
Operating revenue (000s) $ 11,448 $ 21,097 $ (9,649)
RASM (cents) 0.27 0.50 (0.23)
Operating expenses (000s) $ 11,956 $ 21,045 $ (9,089)
CASM (cents) 0.28 0.50 (0.22)
Six Months Ended June 30,
2002 2001 Inc (Dec)
--------------------------------------------------
Airline and Other
Operating revenue (000s) $ 615,974 $ 650,820 $ (34,846)
RASM (cents) 7.20 7.83 (0.63)
Operating expenses (000s) $ 664,437 $ 636,667 $ 27,770
CASM (cents) 7.77 7.66 0.11
Adjusted CASM (cents) Note 1 7.42 7.66 (0.24)
ATALC
Operating revenue (000s) $ 33,137 $ 55,560 $ (22,423)
RASM (cents) 0.39 0.67 (0.28)
Operating expenses (000s) $ 33,909 $ 55,388 $ (21,479)
CASM (cents) 0.39 0.67 (0.28)
Note 1 - Airline adjusted CASM excludes impairment loss and U.S. Government
grant compensation from operating expenses in 2002.
19
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200, and Boeing 757-300
aircraft in all of the Company's business units. Data shown for "Saab"
operations include the operations of Saab 340B propeller aircraft by Chicago
Express as the ATA Connection.
Three Months Ended June 30,
---------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------
Departures Jet 16,055 14,928 1,127 7.55
Departures Saab 8,996 6,349 2,647 41.69
---------------------------------------------------------------------------
Total Departures (a) 25,051 21,277 3,774 17.74
---------------------------------------------------------------------------
Block Hours Jet 47,677 45,087 2,590 5.74
Block Hours Saab 8,415 5,779 2,636 45.61
---------------------------------------------------------------------------
Total Block Hours (b) 56,092 50,866 5,226 10.27
---------------------------------------------------------------------------
RPMs Jet (000s) 3,091,681 3,083,775 7,906 0.26
RPMs Saab (000s) 33,795 23,978 9,817 40.94
---------------------------------------------------------------------------
Total RPMs (000s) (c) 3,125,476 3,107,753 17,723 0.57
---------------------------------------------------------------------------
ASMs Jet (000s) 4,201,657 4,162,629 39,028 0.94
ASMs Saab (000s) 48,172 34,109 14,063 41.23
---------------------------------------------------------------------------
Total ASMs (000s) (d) 4,249,829 4,196,738 53,091 1.27
---------------------------------------------------------------------------
Load Factor Jet (%) 73.58 74.08 (0.50) (0.67)
Load Factor Saab (%) 70.15 70.30 (0.15) (0.21)
---------------------------------------------------------------------------
Total Load Factor (%) (e) 73.54 74.05 (0.51) (0.69)
---------------------------------------------------------------------------
Passengers Enplaned Jet 2,322,864 2,223,168 99,696 4.48
Passengers Enplaned Saab 211,512 146,355 65,157 44.52
---------------------------------------------------------------------------
Total Passengers Enplaned (f) 2,534,376 2,369,523 164,853 6.96
---------------------------------------------------------------------------
Revenue $ (000s) 318,541 358,895 (40,354) (11.24)
RASM in cents (g) 7.50 8.55 (1.05) (12.28)
CASM in cents (h) 8.89 8.16 0.73 8.95
Yield in cents (i) 10.19 11.55 (1.36) (11.77)
See footnotes (a) through (i) on page 21-22.
20
Six Months Ended June 30,
---------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------
Departures Jet 32,158 29,696 2,462 8.29
Departures Saab 17,313 11,933 5,380 45.09
---------------------------------------------------------------------------
Total Departures (a) 49,471 41,629 7,842 18.84
---------------------------------------------------------------------------
Block Hours Jet 95,252 90,096 5,156 5.72
Block Hours Saab 16,200 10,970 5,230 47.68
---------------------------------------------------------------------------
Total Block Hours (b) 111,452 101,066 10,386 10.28
---------------------------------------------------------------------------
RPMs Jet (000s) 6,094,743 5,983,367 111,376 1.86
RPMs Saab (000s) 62,407 45,966 16,441 35.77
---------------------------------------------------------------------------
Total RPMs (000s) (c) 6,157,150 6,029,333 127,817 2.12
---------------------------------------------------------------------------
ASMs Jet (000s) 8,463,484 8,245,822 217,662 2.64
ASMs Saab (000s) 92,775 65,171 27,604 42.36
---------------------------------------------------------------------------
Total ASMs (000s) (d) 8,556,259 8,310,993 245,266 2.95
---------------------------------------------------------------------------
Load Factor Jet (%) 72.01 72.56 (0.55) (0.76)
Load Factor Saab (%) 67.27 70.53 (3.26) (4.62)
---------------------------------------------------------------------------
Total Load Factor (%) (e) 71.96 72.55 (0.59) (0.81)
---------------------------------------------------------------------------
Passengers Enplaned Jet 4,563,890 4,325,424 238,466 5.51
Passengers Enplaned Saab 392,501 278,149 114,352 41.11
---------------------------------------------------------------------------
Total Passengers Enplaned (f) 4,956,391 4,603,573 352,818 7.66
---------------------------------------------------------------------------
Revenue $ (000s) 649,111 706,380 (57,269) (8.11)
RASM in cents (g) 7.59 8.50 (0.91) (10.71)
CASM in cents (h) 8.16 8.33 (0.17) (2.04)
Yield in cents (i) 10.54 11.72 (1.18) (10.07)
See footnotes (d) through (i) on page 22.
(a) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(b) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(c) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
21
(d) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(e) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because an entire
aircraft is sold by the Company instead of individual seats. Since both costs
and revenues are largely fixed for these types of charter flights, changes in
load factor have less impact on business unit profitability. Consolidated load
factors and scheduled service load factors for the Company are shown in the
appropriate tables for industry comparability, but load factors for individual
charter businesses are omitted from applicable tables.
(f) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(g) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (i) below for the definition of yield).
(h) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available seat capacity.
(i) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
entire aircraft is sold at one time for one price. Consolidated yields and
scheduled service yields are shown in the appropriate tables for industry
comparability, but yields for individual charter businesses are omitted from
applicable tables.
22
Operating Revenues
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200,
and Boeing 757-300 aircraft in scheduled service. Data shown for "Saab"
operations include the operations of Saab 340B propeller aircraft by Chicago
Express as the ATA Connection.
Three Months Ended June 30,
---------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------
Departures Jet 13,558 11,830 1,728 14.61
Departures Saab 8,996 6,349 2,647 41.69
---------------------------------------------------------------------------
Total Departures (a) 22,554 18,179 4,375 24.07
---------------------------------------------------------------------------
Block Hours Jet 38,448 34,162 4,286 12.55
Block Hours Saab 8,415 5,779 2,636 45.61
---------------------------------------------------------------------------
Total Block Hours (b) 46,863 39,941 6,922 17.33
---------------------------------------------------------------------------
RPMs Jet (000s) 2,487,735 2,327,205 160,530 6.90
RPMs Saab (000s) 33,795 23,978 9,817 40.94
---------------------------------------------------------------------------
Total RPMs (000s) (c) 2,521,530 2,351,183 170,347 7.25
---------------------------------------------------------------------------
ASMs Jet (000s) 3,246,584 2,921,718 324,866 11.12
ASMs Saab (000s) 48,172 34,109 14,063 41.23
---------------------------------------------------------------------------
Total ASMs (000s) (d) 3,294,756 2,955,827 338,929 11.47
---------------------------------------------------------------------------
Load Factor Jet (%) 76.63 79.65 (3.02) (3.79)
Load Factor Saab (%) 70.15 70.30 (0.15) (0.21)
---------------------------------------------------------------------------
Total Load Factor (%) (e) 76.53 79.54 (3.01) (3.78)
---------------------------------------------------------------------------
Passengers Enplaned Jet 2,030,360 1,810,709 219,651 12.13
Passengers Enplaned Saab 211,512 146,355 65,157 44.52
---------------------------------------------------------------------------
Total Passengers Enplaned (f) 2,241,872 1,957,064 284,808 14.55
---------------------------------------------------------------------------
Revenue $ (000s) 224,515 235,523 (11,008) (4.67)
RASM in cents (g) 6.81 7.97 (1.16) (14.55)
Yield in cents (i) 8.90 10.02 (1.12) (11.18)
Revenue per segment $ (j) 100.15 120.35 (20.20) (16.78)
See footnotes (a) through (i) on pages 21-22.
(j) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
23
Six Months Ended June 30,
---------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------
Departures Jet 26,327 23,411 2,916 12.46
Departures Saab 17,313 11,933 5,380 45.09
---------------------------------------------------------------------------
Total Departures (a) 43,640 35,344 8,296 23.47
---------------------------------------------------------------------------
Block Hours Jet 73,595 67,519 6,076 9.00
Block Hours Saab 16,200 10,970 5,230 47.68
---------------------------------------------------------------------------
Total Block Hours (b) 89,795 78,489 11,306 14.40
---------------------------------------------------------------------------
RPMs Jet (000s) 4,642,478 4,414,819 227,659 5.16
RPMs Saab (000s) 62,407 45,966 16,441 35.77
---------------------------------------------------------------------------
Total RPMs (000s) (c) 4,704,885 4,460,785 244,100 5.47
---------------------------------------------------------------------------
ASMs Jet (000s) 6,222,501 5,707,467 515,034 9.02
ASMs Saab (000s) 92,775 65,171 27,604 42.36
---------------------------------------------------------------------------
Total ASMs (000s) (d) 6,315,276 5,772,638 542,638 9.40
---------------------------------------------------------------------------
Load Factor Jet (%) 74.61 77.35 (2.74) (3.54)
Load Factor Saab (%) 67.27 70.53 (3.26) (4.62)
---------------------------------------------------------------------------
Total Load Factor (%) (e) 74.50 77.27 (2.77) (3.58)
---------------------------------------------------------------------------
Passengers Enplaned Jet 3,822,049 3,499,095 322,954 9.23
Passengers Enplaned Saab 392,501 278,149 114,352 41.11
---------------------------------------------------------------------------
Total Passengers Enplaned (f) 4,214,550 3,777,244 437,306 11.58
---------------------------------------------------------------------------
Revenue $ (000s) 432,798 447,554 (14,756) (3.30)
RASM in cents (g) 6.85 7.75 (0.90) (11.61)
Yield in cents (i) 9.20 10.03 (0.83) (8.28)
Revenue per segment $ (j) 102.69 118.49 (15.80) (13.33)
See footnotes (a) through (i) on pages 21-22.
See footnote (j) on pages 23.
Scheduled service revenues in the second quarter of 2002 decreased 4.7% to
$224.5 million from $235.5 million in the second quarter of 2001; and scheduled
service revenues in the six months ended 2002 decreased 3.3% to $432.8 million
from $447.6 million in the same period of 2001. Scheduled service revenues
comprised 70.5% and 66.7%, respectively, of consolidated revenues in the quarter
and six months ended June 30, 2002, as compared to 65.6% and 63.4%,
respectively, of consolidated revenues in the same periods of 2001. While the
Company's capacity in 2002 has increased from 2001, both load factor and yield
have declined from the prior year.
24
The Company's second quarter 2002 scheduled service at Chicago-Midway accounted
for approximately 71.8% of scheduled service ASMs and 87.5% of scheduled service
departures, as compared to 65.4% and 85.9%, respectively, in the second quarter
of 2001. In the first quarter of 2002, the Company began nonstop international
service to Aruba, Cancun, Grand Cayman and Guadalajara. In the third and fourth
quarters of 2001, the Company began operating nonstop between Chicago-Midway and
the cities of Newark and Miami. The Company has further announced nonstop
service from Chicago-Midway to Charlotte, North Carolina beginning in the third
quarter of 2002 and nonstop service to San Jose, California, Montego Bay,
Jamaica and Puerto Vallarta, Mexico beginning in the fourth quarter of 2002.
Chicago Express operates, as of June 30, 2002, 15 34-seat Saab 340B aircraft
between Chicago-Midway and the cities of Indianapolis, Milwaukee, Des Moines,
Dayton, Grand Rapids, Madison, Moline, Springfield, South Bend and Toledo.
Chicago Express has announced service beginning in the third and fourth quarters
of 2002 between Chicago-Midway and the cities of Flint, Michigan, Cedar Rapids,
Iowa and Lexington, Kentucky. Chicago Express will add two additional Saab 340B
aircraft to its fleet in the second half of 2002 to accommodate flights to these
new locations.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business throughout
2002 and beyond. Chicago Express has been performing well as a feeder of
passengers to the jet system, so the Company intends to continue expanding
Chicago Express and will increase its fleet of Saab 340B aircraft from 11 to 17
aircraft during 2002. The Company operated 125 peak daily jet and commuter
departures from Chicago-Midway and served 34 destinations on a nonstop basis in
the second quarter of 2002, as compared to 97 peak daily jet and commuter
departures and 28 nonstop destinations in the second quarter of 2001.
The Company's anticipated growth at Chicago-Midway will be accomplished in
conjunction with the completion of new terminal and gate facilities at the
Chicago-Midway Airport. In March 2001, the Company occupied 24 newly constructed
ticketing and passenger check-in spaces in the new terminal, an increase from 16
ticketing and passenger check-in spaces previously occupied. Once all
construction is complete in 2004, the Company expects to occupy at least 12 jet
gates and one commuter aircraft gate at the new airport concourses. One new gate
was occupied in October 2001, and the Company moved to seven additional new
gates in the first quarter of 2002. The five remaining gates are expected to be
available for use by the Company in 2004. The construction of a Federal
Inspection Service ("FIS") facility at Chicago-Midway was completed in the first
quarter of 2002, and the opening of this facility allowed the Company to begin
nonstop international services from Chicago-Midway in the first quarter of 2002,
as noted above. The Company plans to continue to add new nonstop jet service to
international destinations using this customs facility at Chicago-Midway
Airport.
The Company's Hawaii service accounted for 14.0% of scheduled service ASMs and
3.3% of scheduled service departures in the second quarter of 2002, as compared
to 20.2% and 4.3%, respectively, in the second quarter of 2001. The Company
provided nonstop services in both periods from Los Angeles, Phoenix and San
Francisco to both Honolulu and Maui, with connecting service between Honolulu
and Maui. In June 2002, the Company began service to Lihue from Los Angeles and
San Francisco. The Company provides these services through a marketing alliance
with the largest independent tour operator serving leisure travelers to Hawaii
from the United States. The Company distributes the remaining seats on these
flights through normal scheduled service distribution channels.
The Company's Indianapolis service accounted for 9.1% of scheduled service ASMs
and 5.9% of scheduled service departures in the second quarter of 2002, as
compared to 8.7% and 6.8%, respectively, in the second quarter of 2001. In both
quarters, the Company operated nonstop to Cancun, Ft. Lauderdale, Ft. Myers, Las
Vegas, Los Angeles, Orlando, St. Petersburg, San Francisco and Sarasota. The
Company also began limited jet service, in the second quarter of 2002, between
Indianapolis and Chicago-Midway, with continuing service to Seattle, and has
announced nonstop service to New York LaGuardia and Phoenix from Indianapolis
beginning in the third quarter of 2002. The Company has served Indianapolis for
29 years through the Ambassadair Travel Club, and in scheduled service since
1986.
25
The Company continuously evaluates the profitability of its scheduled service
markets and expects to adjust its schedule and flight frequencies from time to
time. The Company increased capacity in its scheduled service network in 2002 as
it continues to accept new aircraft deliveries. However, the Company's unit
revenue fell, due primarily to lower yields. The Company cannot predict when
year-over-year unit revenue growth will resume in its scheduled service
business.
Commercial Charter Revenues. The Company's commercial charter revenues are
derived principally from independent tour operators and specialty charter
customers. The Company's commercial charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Commercial charter revenues accounted for 9.5% and 13.5%, respectively of
consolidated revenues in the quarter and six months ended June 30, 2002, as
compared to 15.0% and 16.5%, respectively in the comparable periods of 2001.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
Three Months Ended June 30,
--------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------------
Departures (a) 1,590 2,105 (515) (24.47)
Block Hours (b) 5,366 6,745 (1,379) (20.44)
RPMs (000s) (c) 349,164 504,126 (154,962) (30.74)
ASMs (000s) (d) 441,036 662,190 (221,154) (33.40)
Passengers Enplaned (f) 224,655 346,394 (121,739) (35.14)
Revenue $ (000s) 30,125 53,815 (23,690) (44.02)
RASM in cents (g) 6.83 8.13 (1.30) (15.99)
RASM excluding fuel escalation in cents (k) 6.70 7.77 (1.07) (13.77)
Six Months Ended June 30,
--------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------------
Departures (a) 4,100 4,414 (314) (7.11)
Block Hours (b) 14,061 14,595 (534) (3.66)
RPMs (000s) (c) 982,042 1,080,590 (98,548) (9.12)
ASMs (000s) (d) 1,230,837 1,440,962 (210,125) (14.58)
Passengers Enplaned (f) 626,028 702,036 (76,008) (10.83)
Revenue $ (000s) 87,494 116,795 (29,301) (25.09)
RASM in cents (g) 7.11 8.11 (1.00) (12.33)
RASM excluding fuel escalation in cents (k) 7.06 7.68 (0.62) (8.07)
See footnotes (a) through (g) on pages 21-22.
(k) Commercial charter contracts generally provide that the tour operator will
reimburse the Company for certain fuel cost increases, which, when earned, are
accounted for as additional revenue. A separate RASM calculation, excluding the
impact of fuel reimbursements, is provided as a separate measure of unit revenue
changes.
26
The majority of the decline in commercial charter revenues in the second quarter
and six months ended June 30, 2002, as compared to the same periods of 2001, was
principally due to the retirement of certain Lockheed L-1011 and Boeing 727-200
aircraft that the Company has traditionally used in commercial charter flying.
Since aircraft utilization (number of productive hours of flying per aircraft
each month) is typically much lower for commercial charter, as compared to
scheduled service flying, the Company's replacement fleets of new Boeing 737-800
and Boeing 757-300 aircraft are economically disadvantaged when used in the
charter business, because of their higher fixed-ownership cost. Consequently,
the Company expects its commercial charter revenues to continue to decline
throughout the remainder of 2002 as the fleet supporting this business continues
to shrink through aircraft retirements.
The Company operates in two principal components of the commercial charter
business, known as "track charter" and "specialty charter." The larger track
charter business component is generally comprised of low frequency but
repetitive domestic and international flights between city pairs, which support
high passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts. Track charter accounted for approximately
$23.4 million and $68.1 million, respectively, in revenues in the quarter and
six months ended June 30, 2002, as compared to $45.1 million and $90.7 million,
respectively, in the comparable periods of 2001.
Specialty charter (including incentive travel programs) is a product which is
designed to meet the unique requirements of the customer and is a business
characterized by lower frequency of operation and by greater variation in city
pairs served than the track charter business. Specialty charter includes such
diverse contracts as flying university alumni to football games, transporting
political candidates on campaign trips and moving NASA space shuttle ground
crews to alternate landing sites. Specialty charter accounted for approximately
$2.6 million and $6.7 million, respectively, in revenues in the quarter and six
months ended June 30, 2002, as compared to $2.3 million and $9.5 million,
respectively, in the comparable periods of 2001.
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government flight operations of the Company.
Three Months Ended June 30,
--------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------------
Departures (a) 902 992 (90) (9.07)
Block Hours (b) 3,842 4,176 (334) (8.00)
RPMs (000s) (c) 252,956 251,993 963 0.38
ASMs (000s) (d) 510,425 578,012 (67,587) (11.69)
Passengers Enplaned (f) 67,457 65,835 1,622 2.46
Revenue $ (000s) 43,542 42,774 768 1.80
RASM in cents (g) 8.53 7.40 1.13 15.27
RASM excluding fuel escalation in cents (l) 8.53 7.07 1.46 20.65
27
Six Months Ended June 30,
--------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------------
Departures (a) 1,724 1,855 (131) (7.06)
Block Hours (b) 7,557 7,925 (368) (4.64)
RPMs (000s) (c) 467,564 482,756 (15,192) (3.15)
ASMs (000s) (d) 1,004,091 1,089,038 (84,947) (7.80)
Passengers Enplaned (f) 115,240 122,858 (7,618) (6.20)
Revenue $ (000s) 83,019 82,179 840 1.02
RASM in cents (g) 8.27 7.55 0.72 9.54
RASM excluding fuel escalation in cents (l) 8.34 7.22 1.12 15.51
See footnotes (a) through (g) on pages 21-22.
(l) Military/government reimbursements to the Company are calculated based upon
a "cost plus" formula, including an assumed average fuel price for each contract
year. If actual fuel prices differ from the contract rate, revenues are adjusted
up or down to neutralize the impact of the change on the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
The Company participates in two related military/government charter programs
known as "fixed-award" and "short-term expansion." Pursuant to the U.S.
military's fixed-award system, each participating airline is awarded certain
"mobilization value points" based upon the number and type of aircraft made
available by that airline for military flying. In order to increase the number
of points awarded, the Company has traditionally participated in contractor
teaming arrangements with other airlines. Under these arrangements, the team has
a greater likelihood of receiving fixed-award business and, to the extent that
the award includes passenger transport, the opportunity for the Company to
operate this flying is enhanced since the Company represents a majority of the
passenger transport capacity of the team. As part of its participation in this
teaming arrangement, the Company pays a commission to the team, which passes
that revenue on to all team members based upon their mobilization points. All
airlines participating in the fixed-award business contract annually with the
U.S. military from October 1 to the following September 30. For each contract
year, reimbursement rates are determined for all aircraft types and mission
categories based upon operating cost data submitted by the participating
airlines. These contracts generally are not subject to renegotiation once they
become effective.
Short-term expansion business is awarded by the U.S. military first on a pro
rata basis to those carriers who have been provided fixed-award business and
then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (i) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (ii) the percentage of
passenger capacity of the Company with respect to its own team; (iii) the amount
of fixed-award and expansion flying required by the U.S. military in each
contract year; and (iv) the availability of the Company's aircraft to accept and
fly expansion awards. The Company earned $159.3 million in military/government
charter revenues in the contract year ended September 30, 2001.
The increase in RASM for military/government charter revenues in the quarter and
six months ended June 30, 2002, as compared to the same periods of 2001, was due
primarily to rate increases awarded for the current contract year ending
September 30, 2002, based upon cost data submitted to the U.S. military by the
Company and other air carriers providing these services and the mix of aircraft
flown. The Company has renewed its U.S. military contract for the fiscal year
beginning October 1, 2002, and has obtained an average rate nearly flat compared
to the current contract year. The Company expects the volume of military flying
to be higher than in the contract year ended September 30, 2002, but due to the
small rate increases expects military/government charter RASM in the contract
year beginning October 1, 2002 to be only slightly higher than the current
contract year.
28
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its ATALC subsidiary and to its Ambassadair club members.
Ambassadair Travel Club offers tour-guide-accompanied vacation packages to its
approximately 33,000 individual and family members annually. ATALC offers
numerous ground accommodations to the general public in many areas of the United
States, Mexico and the Caribbean. These packages are marketed through travel
agents, as well as directly by the Company.
In the second quarter of 2002, ground package revenues decreased 34.5% to $9.7
million, as compared to $14.8 million in the second quarter of 2001, and in the
six months ended June 30, 2002, ground package revenues decreased 31.5% to $25.0
million, as compared to $36.5 million in the same period of 2001. The number of
ground packages sold and the average revenue earned by the Company for a ground
package sale are a function of the seasonal mix of vacation destinations served,
the quality and types of ground accommodations offered and general competitive
conditions in the Company's markets, all of which can change from period to
period.
The Company experienced declines in ground package sales (and related ground
package costs) for all of its leisure travel brands in the first six months of
2002, as compared to the first six months of 2001, primarily due to the reduced
demand for leisure travel subsequent to the terrorist attacks of September 11,
2001. Effective July 1, 2002, the Company outsourced its ATA Vacations and
Travel Charter, International brands to MTC. Under that outsourcing agreement,
MTC will directly sell ground arrangements to customers who also purchase
charter or scheduled service air transportation from the Company. Therefore, the
Company anticipates that ground package sales (and related ground package costs)
will continue to experience significant year-over-year declines in the second
half of 2002, as these sales will no longer be recorded by the Company for ATA
Vacations and Travel Charter, International.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled, charter and ground package operations of the
Company, such as cancellation and miscellaneous service fees, Ambassadair Travel
Club membership dues and cargo revenue. Other revenues decreased 10.9% to $10.6
million in the second quarter of 2002, as compared to $11.9 million in the
second quarter of 2001, and decreased 11.1% to $20.8 million in the six months
ended June 30, 2002, as compared to $23.4 million in the same period of 2001.
Although certain administrative fee revenue increased between periods, most
other revenues declined in association with the ongoing diminished travel demand
subsequent to the terrorist attacks of September 11, 2001.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in the second quarter of 2002 increased
9.8% to $91.7 million, as compared to $83.5 million in the second quarter of
2001, and in the six months ended June 30, 2002, increased 3.2% to $169.7
million, as compared to $164.5 million in the same period of 2001.
29
The increase in salaries, wages and benefits in the second quarter of 2002, as
compared to the second quarter of 2001, is primarily due to the Company
recording $8.4 million in the second quarter of 2002 for a signing bonus as
provided by the recently-ratified amended cockpit crewmember contract.
In the quarter and six months ended June 30, 2002, as compared to the same
periods of 2001, the Company's average headcount was lower due to the continuing
impact of some furloughs from late 2001, except for Chicago Express headcount,
which increased in association with both schedule and fleet expansion. However,
these headcount savings were offset by increasing costs for employee benefits,
primarily for health insurance and workers' compensation.
The Company expects future salaries, wages and benefits costs to be
significantly impacted by the ratified amended cockpit crewmember contract. The
amended contract is expected to increase cockpit crewmembers' average wage by
approximately 80% over the four year contract period. The amended contract also
is expected to increase per diem rates paid to cockpit crewmembers
substantially. As stipulated in the flight attendants' collective bargaining
agreement, the Company must also pay these amended per diem rates to the flight
attendant group. Additionally, the amended contract provides for expanded
retirement benefits for cockpit crewmembers. Although their existing 401(k)
employer match will be capped in future years, a defined contribution plan has
been established for cockpit crewmembers. Certain insurance benefits for cockpit
crewmembers have also been enhanced as a result of the amended contract. The
Company expects to begin realizing much of the economic impact of the amended
contract in the third quarter of 2002.
Fuel and Oil. Fuel and oil expense decreased 24.7% to $51.2 million in the
second quarter of 2002, as compared to $68.0 million in the same period of 2001,
and decreased 28.7% to $98.4 million in the six months ended June 30, 2002, as
compared to $138.0 million in the same period of 2001.
Total jet block hours increased 5.7%, in both the quarter and six months ended
June 30, 2002, as compared to the same periods of 2001. Despite this increase,
the Company consumed 17.8% and 14.6% fewer gallons of jet fuel for flying
operations, respectively, between the quarter and six-month periods ended June
30, 2002 and 2001, which resulted in a decrease in fuel expense of approximately
$12.5 million and $20.5 million, respectively. This decrease was primarily due
to the addition of Boeing 737-800 and Boeing 757-300 aircraft to the Company's
fleet beginning in May 2001. These aircraft replaced certain less-fuel-efficient
Boeing 727-200 and Lockheed L-1011 aircraft, which were subsequently retired
from service.
During the quarter and six months ended June 30, 2002, the Company's average
cost per gallon of jet fuel consumed decreased by 11.8% and 18.3%, respectively,
as compared to the same periods of 2001, resulting in a decrease in fuel and oil
expense of approximately $6.7 million and $21.4 million, respectively, between
those periods.
The Company has entered into several fuel price hedge contracts to reduce the
risk of fuel price fluctuations. No material gains or losses were recorded in
any period. As of June 30, 2002, the Company had entered into swap agreements
for approximately 10.3 million gallons of heating oil for future delivery
between July 2002 and September 2002, which represents approximately 17.1% of
total expected fuel consumption in the third quarter of 2002. See "Item III -
Quantitative and Qualitative Disclosures About Market Risk."
30
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. The Company accounts for aircraft rentals
expense in equal monthly amounts over the life of each operating lease. As of
June 30, 2002 and 2001, the Company had recorded $71.1 million and $49.2
million, respectively, of prepaid aircraft rent under its operating leases.
Aircraft rentals expense for the second quarter of 2002 increased 110.3% to
$45.0 million from $21.4 million in the second quarter of 2001, and increased
104.1% to $84.5 million in the six months ended June 30, 2002, as compared to
$41.4 million in the same period of 2001. The increase was mainly attributable
to the delivery of 24 leased Boeing 737-800 and eight leased Boeing 757-300
aircraft between May 2001 and June 2002, which resulted in an increase in rental
expense of $24.8 million and $44.6 million, respectively, in the quarter and six
months ended June 30, 2002, as compared to the same periods of 2001. The Company
took delivery of one additional Boeing 757-200 aircraft financed under an
operating lease in December 2001 resulting in a increase of $1.1 million and
$2.2 million, respectively, in expense in the quarter and six months ended June
30, 2002, as compared to the same periods of 2001. The Company also renegotiated
an existing lease on one Boeing 757-200 aircraft, which resulted in a decrease
of $0.4 million and $1.2 million, respectively, in rental expense in the quarter
and six months ended June 30, 2002, as compared to the same periods of 2001. The
Company also terminated operating leases on several Boeing 727-200 aircraft with
BATA, and incurred no 2002 rental expense on other Boeing 727-200 aircraft which
were removed from revenue service in late 2001.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses it's own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 14.5% to $28.5 million in the
second quarter of 2002, as compared to $24.9 million in the second quarter of
2001, and increased by 15.2% to $56.1 million in the six months ended June 30,
2002, as compared to $48.7 million in the same period of 2001. The increase in
handling, landing and navigation fees between the second quarters of 2002 and
2001 and the six months ended June 30, 2002 and 2001, was partly due to an
increase in system-wide jet departures, which increased by 7.5% between the
second quarters of 2002 and 2001 to 16,055 from 14,928, and which increased by
8.3% between the six months ended June 30, 2002 and 2001 to 32,158 from 29,696.
The Company's average cost to handle its aircraft increased in 2002, as compared
to 2001, primarily due to higher costs incurred for airport security as a result
of the terrorist attacks on September 11, 2001.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, leasehold improvements and
rotable parts for all fleet types, together with other property and equipment
owned by the Company. Amortization is primarily the periodic expensing of
capitalized airframe and engine overhauls for all fleet types on a
units-of-production basis using aircraft flight hours and cycles (landings) as
the units of measure. Depreciation and amortization expense decreased 32.6% to
$22.7 million in the second quarter of 2002, as compared to $33.7 million in the
second quarter of 2001, and decreased 40.2% to $41.4 million in the six months
ended June 30, 2002, as compared to $69.2 million in the same period of 2001.
During the first nine months of 2001, the Company depreciated the Lockheed
L-1011-50 and 100 fleet assuming a common retirement date of 2004. However in
2001, the Company retired three Lockheed L-1011-50 aircraft from revenue service
early, immediately preceding their next heavy maintenance check. During the
fourth quarter of 2001, the Company also determined that the remaining ten
Lockheed L-1011-50 and 100 aircraft, rotable parts and inventory were impaired.
These assets were subsequently classified as held for use in accordance with FAS
121, requiring them to be recorded on the balance sheet at their estimated fair
market value at the time of impairment, which is the new asset basis to be
depreciated over their estimated remaining useful lives. Due primarily to the
reduced cost basis of the remaining ten aircraft, and the retirement of three
aircraft in 2001 and three aircraft in the first half of 2002, the Company
recorded $4.3 million and $9.7 million, respectively, less depreciation and
amortization expense for this fleet in the quarter and six months ended June 30,
2002, as compared to the same periods of 2001.
31
Immediately following the terrorist attacks of September 11, the Company
accelerated the planned retirement of its Boeing 727-200 fleet, with most
aircraft being retired from revenue service by the end of 2001, although some
aircraft were used for charter service through May 2002. As a result, these
aircraft were determined to be impaired under FAS 121. Boeing 727-200 aircraft
not already transferred to BATA have been classified in the accompanying balance
sheets as assets held for sale. In accordance with FAS 121, depreciation expense
was not recorded after the fleet was deemed impaired, and will not be recorded
in future accounting periods. As a result, the Company did not record any
depreciation expense on the Boeing 727-200 fleet in the quarter and six months
ended June 30, 2002, which resulted in a decrease of $10.2 million and $20.9
million, respectively, in depreciation and amortization expense in the quarter
and six months ended June 30, 2002, as compared to the same periods of 2001.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these early engine failures increased $0.8
million and decreased $1.8 million, respectively, in the quarter and six months
ended June 30, 2002, as compared to the same periods of 2001. When these early
engine failures can be economically repaired, the related repairs are charged to
aircraft maintenance, materials and repairs expense.
Amortization of capitalized engine and airframe overhauls on the Lockheed
L-1011-500 fleet increased $1.0 million and $1.7 million, respectively, in the
quarter and six months ended June 30, 2002, as compared to the same periods of
2001, after including amortization of related manufacturer's credits. The fleet
is relatively new to the Company and only began requiring overhauls in late
2000.
Depreciation and amortization expense also increased $1.7 million and $2.9
million, respectively, in the quarter and six months ended June 30, 2002, as
compared to the same periods of 2001, due to fluctuations associated with other
fleet rotable parts, owned engines, goodwill amortization and the provision for
inventory obsolescence, along with fluctuations in expenses related to furniture
and fixtures, computer hardware and software, and debt issue costs between
periods, none of which are individually significant.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities, and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800 and Saab 340B power plants. These agreements provide for
the Company to pay monthly fees based on a specified rate per engine flight
hour, in exchange for major engine overhauls and maintenance. Aircraft
maintenance, materials and repairs expense decreased 8.1% to $14.7 million in
the second quarter of 2002, as compared to $16.0 million in the second quarter
of 2001, and decreased 26.3% to $26.1 million in the six months ended June 30,
2002, as compared to $35.4 million in the same period of 2001.
The decline in maintenance, material and repairs expense in the second quarter
and six months ended June 30, 2002, as compared to the same periods of 2001, was
primarily attributable to a decrease in materials consumed and components
repaired related to maintenance on the Company's aging fleets of Lockheed
L-1011-50 and 100 and Boeing 727-200 aircraft. During 2001 and the first half of
2002, the Company placed 20 Boeing 727-200 aircraft into BATA, and retired six
Lockheed L-1011-50 and 100 aircraft prior to the due dates of heavy maintenance
visits. The Company expects maintenance, materials and repairs expense to
continue to decline in future quarters as its older fleets of aircraft continue
to be replaced by newer and more technologically advanced twin-engine aircraft
with lower maintenance needs.
32
This decline in maintenance, materials and repairs was partially offset by an
increase in return conditions expense of $0.5 million and $2.5 million in the
second quarter and six months ended June 30, 2002, as compared to the same
months of 2001. In 2001, the Company recorded a decrease in maintenance,
materials and repairs expense due to a negotiated elimination of return
condition requirements on one Lockheed L-1011 aircraft. A similar adjustment was
not made in the comparable periods of 2002.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crew members incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
decreased 14.5% to $13.6 million in the second quarter of 2002, as compared to
$15.9 million in the second quarter of 2001, and decreased 13.3% to $27.4
million in the six months ended June 30, 2002, as compared to $31.6 million in
the same period of 2001. These decreases were mainly due to the Company
benefiting from lower hotel rates which became available after the September 11
terrorist attacks. The average hotel cost per full-time-equivalent crew member
decreased 18.8% in the second quarter of 2002 and 20.5% in the first six months
of 2002, as compared to the same periods of 2001. The decreases also reflect a
decline in non-crew member employee travel in the first half of 2002, as
compared to the first half of 2001, due to the Company's cost-cutting
initiatives implemented after the September 11 terrorist attacks.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems ("CRS"), credit card discount
expenses incurred when selling single seats and ground packages to customers
using credit cards for payment, and toll-free telephone services provided to
single-seat and vacation package customers who contact the Company directly to
book reservations. Other selling expenses increased 1.8% to $11.4 million in the
second quarter of 2002, as compared to $11.2 million in the second quarter of
2001, and increased 2.3% to $22.4 million in the six months ended June 30, 2002,
as compared to $21.9 million in the same period of 2001.
Approximately $0.2 million of this increase in the second quarter and $0.8
million in the first six months of 2002 resulted from an increase in CRS fees.
This increase resulted partially from the growth in single-seat sales volumes
between periods and because of an annual increase in segment fee rates charged
by CRS systems. For the six-month period ended June 30, 2002, this increase was
partially offset by a decrease of $0.3 million for 800 service related to both a
rate decrease and fewer calls received due to improved operational performance.
Advertising. Advertising expense increased 61.4% to $11.3 million in the second
quarter of 2002, as compared to $7.0 million in the second quarter of 2001, and
increased 52.6% to $20.6 million in the six months ended June 30, 2002, as
compared to $13.5 million in the same period of 2001. The Company incurs
advertising costs primarily to support single-seat scheduled service sales and
the sale of air-and-ground packages. The increase in advertising was primarily
attributable to the promotion of the new scheduled service destinations added in
the first six months of 2002 and the promotion of low fares as compared to the
competition. The Company also increased advertising in an effort to increase
consumer preference for the Company's enhanced product, especially in its
important Chicago-Midway hub.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For the second quarter of
2002 and 2001, catering represented 81.8% and 73.8%, respectively, of total
passenger service expense, while catering represented 79.5% and 72.6%,
respectively, of total passenger service expense for the six month periods ended
June 30, 2002 and 2001.
33
The total cost of passenger service decreased 16.7% to $9.5 million in the
second quarter of 2002, as compared to $11.4 million in the second quarter of
2001 and decreased 16.5% to $19.3 million in the six months ended June 30, 2002,
as compared to $23.1 million in the same period of 2001. The Company experienced
a decrease of approximately 14.2% and 16.2%, respectively, in the average unit
cost of catering each passenger between the quarter and six months ended June
30, 2002, and comparable periods of 2001, primarily because in the first two
quarters of 2002 the Company boarded a higher ratio of scheduled service
passengers to charter passengers than in the same periods of 2001; scheduled
service passengers are provided a significantly less expensive catering service
than is provided to commercial charter and military passengers. In addition, the
Company introduced round-trip catering for flights originating in Chicago-Midway
to reduce catering service charges in the quarter and six months ended June 30,
2002. These differences resulted in a price-and-business-mix decrease of $1.0
million and $2.4 million, respectively, in catering expense between the quarter
and six months ended June 30, 2002, and the comparable periods of 2001. Total
jet passengers boarded increased 4.5% and 5.5%, respectively, between the same
time periods, resulting in approximately $0.4 million and $0.9 million,
respectively, in higher volume-related catering expenses between the same sets
of comparative periods. In the quarter and six months ended June 30, 2002, as
compared to the same periods of 2001, the Company also incurred approximately
$1.4 million and $2.3 million, respectively, less expense for mishandled baggage
and passenger inconvenience, due to significantly fewer flight delays and
cancellations in 2002.
Ground Package Cost. Ground package cost is incurred by the Company with hotels,
car rental companies, cruise lines and similar vendors who provide ground and
cruise accommodations to Ambassadair and ATALC customers. Ground package cost
decreased 35.8% to $7.7 million in the second quarter of 2002, as compared to
$12.0 million in the second quarter of 2001, and decreased 33.7% to $20.1
million in the six months ended June 30, 2002, as compared to $30.3 million in
the same period of 2001. Ground package costs vary based on the mix of vacation
destinations served, the quality and types of ground accommodations offered, and
general competitive conditions in the Company's markets, all of which factors
can change from period to period. Ground package costs between years decreased
in approximate proportion to the decrease in ground package revenues.
The Company experienced declines in ground package sales (and related ground
package costs) for all of its leisure travel brands in the first six months of
2002, as compared to the first six months of 2001, primarily due to the reduced
demand for leisure travel subsequent to the terrorist attacks of September 11,
2001. Effective July 1, 2002, the Company outsourced its ATA Vacations and
Travel Charter, International brands to MTC. Under that outsourcing agreement,
MTC will directly sell ground arrangements to customers who also purchase
charter or scheduled service air transportation from the Company. Therefore, the
Company anticipates that ground package sales (and related ground package costs)
will continue to experience significant year-over-year declines in the second
half of 2002, as these sales will no longer be recorded by the Company for ATA
Vacations and Travel Charter, International.
Facilities and Other Rentals. Facilities and other rentals include the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facilities and other
rentals increased 20.8% to $5.8 million in the second quarter of 2002, as
compared to $4.8 million in the second quarter of 2001, and increased 20.4% to
$11.2 million in the six months ended June 30, 2002, as compared to $9.3 million
in the same period of 2001. Growth in facilities costs between periods was
primarily attributable to the need to provide facilities at airport locations to
support new scheduled service destinations added in the last six months of 2001
and the first six months of 2002, and expanded services at existing
destinations, including the new Chicago-Midway terminal which opened in March
2001.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense decreased 50.5% to $5.0 million in the second
quarter of 2002, as compared to $10.1 million in the second quarter of 2001, and
decreased 32.2% to $14.1 million in the six months ended June 30, 2002, as
compared to $20.8 million in the same period of 2001.
The Company experienced a decrease in commissions of $1.1 million and $2.6
million, respectively, in the quarter and six months ended June 30, 2002,
attributable to commissions paid to travel agents by ATALC, which is consistent
with the decrease in related revenue. In addition, scheduled service commissions
decreased $3.6 million and $3.8 million, respectively, in the quarter and six
months ended June 30, 2002, primarily due to the elimination of standard travel
agency commissions for sales made after March 21, 2002. The Company continues to
pay special travel agency commissions targeted to specific markets and periods
of the year.
34
Impairment Loss. Following the events of September 11, 2001, the Company decided
to retire its Boeing 727-200 fleet earlier than originally planned. Most of the
aircraft were retired from revenue service in the fourth quarter of 2001,
although some were used for charter service through the first five months of
2002. In accordance with FAS 121, the Company determined in 2001 that the
estimated future undiscounted cash flows expected to be generated by the Boeing
727-200s were less than the net book value of these aircraft and the related
rotable parts and inventory. Therefore, an impairment change was recorded in
2001.
In accordance with FAS 121, the Company continues to re-evaluate current fair
market values of previously impaired assets. In the second quarter of 2002, the
Company determined that an additional asset impairment charge of $14.8 million
should be recorded for its remaining net book value of Boeing 727-200 aircraft,
including those recorded as an investment in the BATA joint venture.
Significant assumptions were required concerning the estimated fair market value
of the fleet, since FAS 121 specifies that impaired assets be written down to
their estimated fair market value by recording an impairment charge to earnings.
As provided under FAS 121, the Company primarily used discounted cash flow
analysis, together with other available information, to estimate fair market
values. Such estimates were significant in determining the amount of the
impairment charge to be recorded in 2002, which could have been materially
different under different sets of assumptions and estimates. As FAS 121 requires
the Company to continuously evaluate fair market values of previously impaired
assets, it is possible that future estimates of fair market value may result in
additional material charges to earnings, if those estimates indicate a material
reduction in fair market value as compared to the estimates made on June 30,
2002.
U.S Government Grant. As a result of the terrorist attacks of September 11,
President Bush signed into law the Air Transportation Safety and System
Stabilization Act ("Act"). The Act, among other things, provided $5.0 billion in
compensation for the direct losses incurred by all U.S. airlines and air cargo
carriers as a result of the closure by the FAA of U.S. airspace following the
September 11 terrorist attacks and for incremental losses incurred by air
carriers through December 31, 2001. Each qualified air carrier is entitled to
receive the lesser of: (1) its actual direct and incremental losses incurred
between September 11, 2001 and December 31, 2001 or (2) its proportion of the
$5.0 billion of total compensation available to all qualified air carriers under
the Act allocated based on August 2001 available seat miles or ton miles.
The Company believes it is eligible to receive up to approximately $74.0 million
in connection with the Act, based on the Company's allocation calculated from
August 2001 available seat miles. In 2001, the Company calculated its direct and
incremental losses to be $66.3 million, and recorded that amount as U.S.
Government Grant compensation. The $66.3 million was comprised of lost profit
contribution and certain special charges deemed directly attributable to the
terrorist attacks, partially offset by expense reductions as a direct result of
lower costs incurred by the Company after the attacks. The Company received
$44.5 million in cash compensation under the Act in 2001, and recorded a
receivable for the remaining amount of $21.8 million.
The DOT issued revised guidelines for compensation in April 2002, and the
Company completed and submitted its third application, in the second quarter of
2002. The Company continues to review its application with the DOT. Based on
these discussions with the DOT, the Company has determined that a portion of the
receivable recorded in 2001 may not be collected when the DOT provides its final
ruling of what qualifies as reimbursable. The Company recorded a reserve of
$15.2 million against the receivable in the second quarter of 2002.
35
Other Operating Expenses. Other operating expenses increased 33.6% to $29.8
million in the second quarter of 2002, as compared to $22.3 million in the
second quarter of 2001, and increased 28.7% to $57.0 million in the six months
ended June 30, 2002, as compared to $44.3 million in the same period of 2001.
The Company recorded $5.2 million and $10.4 million more hull and liability
insurance, respectively, in the quarter and six months ended June 30, 2002, as
compared to the same periods of 2001, due to the increase in base rates and the
addition of surcharges to cover third-party damages after the September 11
terrorist attacks.
Interest Income and Expense. Interest expense in the quarter and six months
ended June 30, 2002 increased to $10.0 million and $18.3 million, respectively,
as compared to $7.0 million and $14.3 million, respectively, in the same periods
of 2001. The Company incurred $2.0 million and $2.6 million, respectively, in
the quarter and six months ended June 30, 2002, in interest expense relating to
three Boeing 757-300 aircraft and one Boeing 737-800 aircraft which were
temporarily financed with bridge debt. No such financing was in place in the
first six months of 2001. The Boeing 737-800 was refinanced with an operating
lease at the end of the first quarter of 2002 and the three Boeing 757-300s were
refinanced with operating leases at the end of the second quarter of 2002. The
Company also capitalized interest of $0.9 million and $1.1 million less,
respectively, between the quarters and six months ended June 30, 2002 and 2001,
associated with its funding of the aircraft pre-delivery deposit requirements.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $0.8 million and $1.5 million,
respectively, in interest income in the quarter and six months ended June 30,
2002, as compared to $1.4 million and $3.1 million, respectively, in the same
periods of 2001. The decrease in interest income between periods is primarily
due to a decline in the interest rate earned.
Income Tax Expense. In the quarter and six months ended June 30, 2002 the
Company recorded an income tax credit of $13.6 million and $12.8 million,
respectively, applicable to $69.0 million and $66.3 million, respectively, in
pre-tax loss for those periods, while in the quarter and six months ended June
30, 2001 the Company recorded income tax expense of $4.2 million and $0.9
million, respectively, applicable to $10.7 million and $3.0 million,
respectively, in pre-tax income for those periods. The effective tax rate
applicable to the quarter and six months ended June 30, 2002 were 19.7% and
19.3%, respectively, as compared to 39.1% and 29.3%, respectively, in the same
periods of 2001.
In the second quarter of 2002, the Company announced that it expects to incur a
loss for the full year. When combined with annual losses reported in 2000 and
2001, this three-year cumulative loss creates a presumption under accounting
principles generally accepted in the United States that net deferred tax assets
should be fully reserved, if their recovery cannot be reasonably assured through
carry-backs or other tax strategies. As of June 30, 2002 the Company projects
that it will have a net deferred tax asset of $41.0 million as of the end of
2002, and that it can be reasonably assured of recovering $18.4 million of that
deferred tax asset in cash refunds in 2003, using a five-year carry-back of
expected 2002 alternative minimum tax net operating loss to the years 1997
through 2001. Therefore, the Company has determined that a full reserve of the
remaining net deferred tax asset of $22.6 million is required, by adjusting the
Company's effective tax rate for 2002 prospectively from the second quarter.
This reserve adjustment included in income tax expense resulted in an effective
tax rate of 19.3% for tax credits applicable to losses incurred in the second
quarter of 2002.
Liquidity and Capital Resources
Cash Flows. In the six months ended June 30, 2002 and 2001, net cash provided by
operating activities was $19.2 million and $110.1 million, respectively. The
decrease in cash provided by operating activities between periods was primarily
due to a decrease in earnings, and lower depreciation and amortization expense
due to the retirement and impairment write-down of certain Boeing 727-200 and
Lockheed L-1011-50 and 100 aircraft in the second half of 2001. This decrease
was partially offset by a non-cash impairment write-down on the Boeing 727-200
fleet recorded in the second quarter of 2002. In addition, the decrease resulted
from changes in operating assets and liabilities, most significantly in accounts
receivable, which resulted primarily from an increase in credit card reserves.
For additional details with respect to credit card reserves see "- Card
Agreement".
36
Net cash used in investing activities was $2.3 million and $163.4 million,
respectively, in the six-month periods ended June 30, 2002 and 2001. Such
amounts primarily included capital expenditures totaling $43.3 million and $93.2
million, respectively. The decline in capital expenditures is primarily due to
fewer engine overhauls in the first six months of 2002 as compared to the same
period of 2001 on the Lockheed L1011-500 and the Boeing 727-200 fleets, the
purchase of three Boeing 727-200 aircraft off lease in 2001, which did not occur
in 2002, and declining capitalized interest as more aircraft deliveries were
completed. Also contributing to the decrease in net cash used in investing
activities is the progress in aircraft deliveries. In the first six months of
2002 as new aircraft were delivered, the Company was refunded through operating
leases $43.9 million of aircraft pre-delivery deposits, net of new deposits made
for future deliveries. In contrast, the Company paid $70.9 million of
pre-delivery deposit payments in the first six months of 2001.
Net cash used by financing activities was $47.8 million in the six months ended
June 30, 2002, while net cash provided by financing activities was $47.2 million
in the six months ended June 30, 2001. In the first six months of 2002, the
Company borrowed and repaid $192.5 million in temporary financing related to the
purchase of one Boeing 737-800 and three Boeing 757-300 aircraft. All four
aircraft were subsequently financed through operating leases. In the first six
months of 2002, the Company repaid $20.7 million in short term debt which had
financed pre-delivery deposits on certain aircraft delivered during that period.
In addition, in the six months ended June 30, 2002, the Company made net
payments of $25.0 million on its revolving credit facility. In the six months
ended June 30, 2001, the Company received $48.1 million in net proceeds from
short-term debt which financed certain pre-delivery deposits on aircraft.
The Company presently expects that cash generated by operations, together with
available borrowings under collateralized credit facilities, the return of
pre-delivery deposits held by the manufacturers on future aircraft and engine
deliveries, the receipt of additional U.S. Government grant compensation and the
receipt of funds from a pending government-guaranteed secured term loan the
Company is seeking, will be sufficient to fund operations during the next 12
months. If the Company does not obtain this loan, or the existing credit
facility is not extended past its current expiration date of January 2, 2003,
the Company will pursue other sources to fund operations during the next 12
months. For additional details with respect to the grant from the U.S.
Government, see "Financial Statements - Notes to Consolidated Financial
Statements - Note 2 - Continuing Effects of September 11, 2001."
Debt and Operating Lease Cash Payment Obligations. The Company is required to
make cash payments in the future on debt obligations and operating leases. The
Company's operating leases require periodic cash payments that vary in amount
and frequency. The Company accounts for aircraft rentals expense in equal
monthly amounts over the life of each operating lease. Although the Company is
obligated on a number of long-term operating leases which are not recorded on
the balance sheet under accounting principles generally accepted in the United
States, the Company has no off-balance sheet debt and, with the exception of
insignificant amounts not requiring disclosure, does not guarantee the debt of
any other party. The following table summarizes the Company's contractual debt
and operating lease obligations at June 30, 2002, and the effect such
obligations are expected to have on its liquidity and cash flows in future
periods.
37
Cash Payments Currently Scheduled
----------------------------------------------------------------------------------
Total 3Qtr-4Qtr 2003 2005 After
As of 6/30/02 2002 -2004 -2006 2006
----------- ----------- ---------- --------- -----------
(in thousands)
Current and long-term debt $ 449,424 $ 100,789 $ 194,729 $ 135,640 $ 18,266
Lease obligations 3,202,821 88,791 491,253 448,067 2,174,710
----------- ----------- ---------- --------- -----------
Total contractual cash obligations $ 3,652,245 $ 189,580 $ 685,982 $ 583,707 $ 2,192,976
=========== =========== ========== ========= ===========
In addition, the Company is committed to taking future delivery of 19 new Boeing
757-300 and Boeing 737-800 aircraft, as well as four spare engines. The amounts
relating to these aircraft and engines are not included in the table. The
Company intends to finance these aircraft and engines with operating leases.
Aircraft and Fleet Transactions. In 2000, the Company entered into a purchase
agreement with the Boeing Company to purchase directly from Boeing 10 new Boeing
757-300s and 20 new Boeing 737-800s. The Boeing 737-800 aircraft are powered by
General Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered
by Rolls-Royce RB211-535 E4C engines. The Company also received purchase rights
for an additional 50 aircraft. The manufacturer's list price is $73.6 million
for each 757-300 and $52.4 million for each 737-800, subject to escalation. The
Company's purchase price for each aircraft is subject to various discounts. To
fulfill its purchase obligations, the Company has arranged for each of these
aircraft, including the engines, to be purchased by third parties that will, in
turn, enter into long-term operating leases with the Company. As of June 30,
2002, the Company had taken delivery of eight Boeing 737-800s and eight Boeing
757-300s obtained directly from Boeing. All remaining aircraft to be purchased
directly from Boeing are scheduled for delivery between August 2002 and August
2004. Aircraft pre-delivery deposits are required for these purchases, and the
Company has funded these deposits using operating cash and primarily short-term
deposit finance facilities. As of June 30, 2002, the Company had $126.8 million
in pre-delivery deposits outstanding for these aircraft, of which $97.6 million
was provided by deposit finance facilities with various lenders. Upon delivery
of the aircraft, pre-delivery deposits funded with operating cash will be
returned to the Company, and those funded with deposit facilities will be used
to repay those facilities.
In December 2001, the Company entered into an agreement to exercise purchase
rights on two Boeing 757-300 aircraft to be delivered in May and June 2003. The
Company has purchase rights remaining for eight Boeing 757-300 aircraft and 40
Boeing 737-800 aircraft.
The Company has operating lease agreements in place to lease 14 new Boeing
737-800s from ILFC. As of June 30, 2002, the Company had taken delivery of 12
Boeing 737-800s that are being leased from ILFC. The remaining aircraft under
these operating lease agreements are scheduled for delivery in June 2003 and May
2004.
The Company has an agreement to acquire five additional new Boeing 737-800s to
be financed by operating leases with GECAS. As of June 30, 2002, the Company had
taken delivery of four Boeing 737-800 aircraft that are being leased from GECAS.
The one remaining aircraft was delivered in July 2002.
Although the Company typically finances aircraft with long-term operating
leases, it has a bridge financing facility which provides for maximum borrowings
of $400.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300
aircraft. Borrowings under the facility bear interest, at the option of ATA, at
LIBOR plus a margin, which depends on the percentage of the purchase price
borrowed and whether the borrowing matures 18 or 24 months after the aircraft
delivery date. On January 31, February 28, March 26, and April 2, 2002, the
Company borrowed $37.6 million, $51.6 million, $51.7 million and $51.6 million,
respectively, under this bridge facility, for the purchase of one Boeing 737-800
aircraft and three Boeing 757-300 aircraft. As of June 30, 2002, these
borrowings were repaid in full, while the related aircraft were financed under
long-term operating leases.
38
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006. The Company has
acquired two spare Rolls Royce engines, one of which was delivered in 2001, and
the other in June 2002.
In May 2002, the Company entered into an agreement with AMR Leasing Corporation
to lease six Saab 340B aircraft, with options to lease up to 10 additional
aircraft. As of June 30, 2002, the Company had taken delivery of four Saab 340B
aircraft under this agreement. The remaining two aircraft are scheduled for
delivery in the third quarter of 2002.
In March 2001, the Company entered into a limited liability company agreement
with BCC to form BATA, a 50/50 joint venture. Because the Company does not
control BATA, the Company's investment is being accounted for under the equity
method. BATA is expected to remarket the Company's fleet of Boeing 727-200
aircraft in either passenger or cargo configurations. In exchange for supplying
the aircraft and certain operating services to BATA, the Company has and will
continue to receive both cash and equity in the income or loss of BATA. The
Company transferred 12 Boeing 727-200 aircraft to BATA in 2001, and transferred
eight of the remaining 12 Boeing 727-200 aircraft to BATA in June 2002.
Significant Financings. As of December 31, 2001, the Company's revolving bank
credit facility provided for maximum borrowings of $100.0 million, including up
to $50.0 million for stand-by letters of credit. In March 2002, the Company
amended the credit facility to reduce the maximum borrowings to $75.0 million,
declining to $60.0 million as of June 30, 2002, and to modify certain financial
covenants. The amended facility matures January 2, 2003, and borrowings under
the facility bear interest, at the option of ATA, at either LIBOR plus a margin
or the agent bank's prime rate. This facility is currently collateralized by
nine Lockheed L-1011-50 and L-1011-100 aircraft and engines, three Lockheed
L-1011-500 aircraft and engines, two Saab 340B aircraft, certain rotable parts
and eligible receivables. The facility agreement provides that in the event of a
material adverse occurrence, the lenders can elect not to fund any additional
borrowings, and can require repayment of any outstanding balance immediately. No
such determination was made relative to the terrorist attacks on September 11,
2001. As of June 30, 2002, the Company had borrowings of $10.0 million against
the facility, and had outstanding letters of credit of $49.3 million secured by
the facility. As of June 30, 2002, the bank has assigned a collateral borrowing
base of $64.7 million to the various aircraft and parts securing the bank credit
facility, which is less than their book value.
In September 2000, the Company issued and sold 300 shares of Series B
convertible redeemable preferred stock, without par value. In December 2000, the
Company issued and sold 500 shares of Series A redeemable preferred stock,
without par value. The proceeds from the issuance and sale of the Series B and
the Series A preferred stock were used for aircraft pre-delivery deposits and
general corporate purposes.
In December 2000, the Company entered into three finance facilities with Banca
Commerciale Italiana, GE Capital Aviation Services, Inc., and Rolls-Royce plc.,
to fund pre-delivery deposits on new Boeing 757-300 and Boeing 737-800 aircraft.
These facilities provide for up to $173.2 million in pre-delivery deposit
funding, and as of June 30, 2002, the Company had borrowed $97.6 million against
these three facilities. All of this debt has been classified as short-term in
the accompanying balance sheets because it will be repaid through the return of
related pre-delivery deposits through lease financing of aircraft scheduled for
delivery within the next 12 months. Interest on these facilities is payable
monthly.
39
Federally Guaranteed Loan. The Company is seeking a $165.0 million secured term
loan that would replace the existing credit facility. The Company has filed an
application with the ATSB for a $148.5 million Federal guarantee of that loan.
The loan would be secured with collateral similar to that securing the current
credit facility, plus some additional equipment and receivables. The loan
interest rate is expected to be variable, based on LIBOR, and the loan is
expected to have a term of six years. In addition to interest on the loan, the
Company expects to be required to pay to the Federal Government certain
guarantee fees, based on the outstanding loan balance. The Company also expects
the loan to be subject to certain restrictive covenants, and the Federal
Government may require an equity stake in the Company.
Card Agreement. The Company accepts charges to most major credit and debit cards
("cards") as payment from its customers. Approximately 90% of scheduled service
and vacation package sales are purchased using these cards.
More than half of these card sales are made using MasterCard or Visa cards. The
Company maintains an agreement with a bank for the processing and collection of
charges to these cards. Under this agreement, a sale is normally charged to the
purchaser's card account and is paid to the Company in cash within a few days of
the date of purchase, although the Company may provide the purchased services
days, weeks or months later. In 2001, the Company processed approximately $535
million in MasterCard and Visa charges under its merchant processing agreement.
On September 21, 2001, the bank notified the Company that it had determined that
the terrorist attacks of September 11, 2001, the ensuing grounding of commercial
flights by the FAA, and the significant uncertainty about the level of future
air travel entitled the bank to retain cash collected by it on processed card
charges as a deposit, up to 100% of the full dollar amount of purchased services
to be provided at a future date. If the Company fails to perform pre-paid
services which are purchased by a charge to a card, the purchaser may be
entitled to obtain a refund which, if not paid by the Company, is the obligation
of the bank. The deposit secures this potential obligation of the bank to make
such refunds.
The bank exercised its right to withhold distributions beginning shortly after
its notice to the Company. It subsequently agreed to accept a letter of credit
as security for this potential liability. As of December 31, 2001, the bank had
withheld $3.1 million in cash with an additional $20.0 million secured by a
letter of credit provided on behalf of the Company by the Company's senior
lenders under its revolving bank facility. As of June 30, 2002, the bank had
withheld $11.8 million in cash, and $20.0 million was secured by the letter of
credit. The deposits and letter of credit as of June 30, 2002 and December 31,
2001 constituted approximately 60% of the Company's total future obligations to
provide services purchased by charges to card accounts as of those dates. The
bank has agreed to a 60% deposit, with that percentage being subject to increase
up to 100% at any time at the sole discretion of the bank. A deposit of 100% of
this obligation would have resulted in the additional retention of $15.4 million
by the bank at December 31, 2001, and $27.2 million at June 30, 2002. The bank's
right to maintain a deposit does not terminate unless, in its reasonable
judgment and at its sole discretion, it determines that a deposit is no longer
required.
The Company has the right to terminate its agreement with the bank upon
providing appropriate notice. In the event of such termination, the bank may
retain a deposit equal to the amount of purchased services not yet performed,
for up to 16 months from the date of termination.
Surety Bonds. The Company has historically provided surety bonds to airport
authorities and selected other parties, to secure the Company's obligation to
these parties. The DOT also requires the Company to provide a surety bond or an
escrow to secure potential refund claims of charter customers who have made
prepayments to the Company for future transportation. One issuer currently
provides all surety bonds issued on behalf of the Company.
40
Prior to the terrorist attacks of September 11, the Company had provided a
letter of credit of $1.5 million as security to the issuer for its total
estimated surety bond obligations, which were $20.9 million at August 31, 2001.
Effective October 5, 2001, the issuer required the Company to increase its
letter of credit to 50% of its estimated surety bond liability. Effective
January 16, 2002, the issuer implemented a requirement for the Company's letter
of credit to secure 100% of estimated surety bond obligations, which totaled
$19.8 million. The Company's letter of credit was adjusted accordingly, and the
Company is subject to future adjustments of its letter of credit based upon
further revisions to the estimated liability for total surety bonds outstanding.
As of June 30, 2002, the letter of credit requirement remained at $19.8 million.
The Company has the right to replace the issuer with one or more alternative
issuers of surety bonds, although the Company can provide no assurance that it
will be able to secure more favorable terms from other issuers.
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes forward-looking information which
can be identified by forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "anticipates," or the negative thereof, or other
variations in comparable terminology. Such forward-looking information is based
upon management's current knowledge of factors affecting the Company's business.
The differences between expected outcomes and actual results can be material,
depending upon the circumstances. Where the Company expresses an expectation or
belief as to future results in any forward-looking information, such expectation
or belief is expressed in good faith and is believed to have a reasonable basis.
The Company can provide no assurance that the statement of expectation or belief
will result or will be achieved or accomplished.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to be materially different. Such
factors include, but are not limited to, the following:
o economic conditions;
o labor costs;
o aviation fuel costs;
o competitive pressures on pricing;
o weather conditions;
o governmental legislation and regulation;
o consumer perceptions of the Company's products;
o demand for air transportation in markets in which the Company operates; and
o other risks and uncertainties listed from time to time in reports the Company
periodically file with the SEC.
In addition, there are risk factors that relate specifically to the September
11, 2001 terrorist attacks that may cause actual results to be materially
different from those expected. These factors include, but are not limited to,
the following:
o the adverse impact of the terrorist attacks on the economy in general;
o the likelihood of a further decline in air travel because of the attacks and
as a result of a reduction in the airline industry's operations;
o higher costs associated with new security directives and potential new
regulatory initiatives;
o higher costs for insurance and the continued availability of such insurance;
o the Company's ability to raise additional financing, and to refinance existing
borrowings upon maturity;
o declines in the value of the Company's aircraft, as these may result in lower
collateral value and additional impairment charges;
41
o the extent of benefits paid to the Company under the Act, including challenges
to and interpretations or amendments of the Act or associated regulations; and
o the impact on the Company's ability to operate as planned, including its
ability to retain key employees.
The Company does not undertake to update the forward-looking statements to
reflect future events or circumstances.
42
PART I - Financial Information
Item III - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided
in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of ATA
Holdings Corp's Annual Report on Form 10-K for the year 2001, except as
discussed below.
During the first six months of 2002, the Company entered into additional heating
oil swap agreements to further minimize the risk of jet fuel price fluctuations.
As of June 30, 2002, the Company had outstanding fuel hedge agreements totaling
10.3 million gallons, or 17.1% of the Company's projected aircraft fuel
requirements for the third quarter of 2002.
The following table depicts the estimated fair values the Company would pay on
June 30, 2002 had the contracts been terminated on that date, based on a
comparison of the average contract rate to the estimated forward prices of
heating oil as of June 30, 2002.
Estimated Fair
Notional Amount Average Contract Rate Values
(in Gallons) per Gallon (Pay)/Receive
---------------------------------------------------------------
Swap Contracts - Heating Oil 10,250,000 $0.6445 $412,425
43
PART II - Other Information
Item I - Legal Proceedings
None
Item II - Changes in Securities
None
Item III - Defaults Upon Senior Securities
None
Item IV - Submission of Matters to a Vote of Security Holders
None
Item V - Other information
None
Item VI - Exhibits and Reports on Form 8-K
(a) Exhibits are filed as a separate section of this report as set forth in the
Index to Exhibits attached to this report.
(b) Report filed on April 24, 2002, furnishing items under Item 7. Financial
Statements and Exhibits and Item 9. Regulation FD Disclosure.
Report filed on May 20, 2002, furnishing items under Item 9. Regulation FD
Disclosure.
Report filed on June 5, 2002, furnishing items under Item 7. Financial
Statements and Exhibits and Item 9. Regulation FD Disclosure.
44
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.
ATA Holdings Corp.
------------------------------------
(Registrant)
Date August 14, 2002 by /s/ Kenneth K. Wolff
---------------- ------------------------------------
Kenneth K. Wolff
Executive Vice President and Chief Financial Officer
On behalf of the Registrant
Index to Exhibits
Exhibit No.
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002