United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003.
[ ] 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant (based on closing price of shares of Common
Stock on the NASDAQ National Market on June 30, 2003) was approximately $25.8
million.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practical date.
Common Stock, Without Par Value - 11,823,864 shares outstanding as of February
29, 2004.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the ATA Holdings Corp. Proxy Statement to be filed within 120 days
after the close of the last fiscal year are incorporated by reference into Part
III.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 2003
ATA HOLDINGS CORP. AND SUBSIDIARIES
Page #
PART I
Item 1. Business..................................................3
Item 2. Properties...............................................10
Item 3. Legal Proceedings........................................12
Item 4. Submission of Matters to a Vote of Security Holders......12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters..................................13
Item 6. Selected Consolidated Financial Data.....................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................15
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk.....................................................43
Item 8. Financial Statements and Supplementary Data..............45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................76
Item 9a. Controls and Procedures..................................76
PART III
Item 10. Directors and Officers of the Registrant.................77
Item 11. Executive Compensation...................................77
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................77
Item 13. Certain Relationships and Related Transactions...........77
Item 14. Principal Accountant Fees and Services...................77
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................78
Item 15d. Valuation and Qualifying Accounts..........................80
2
PART I
Item 1. Business
Company Overview
ATA Holdings Corp. (the "Company") owns ATA Airlines, Inc. ("ATA"), the tenth
largest passenger airline in the United States, based upon 2003 capacity and
traffic. The Company is a leading provider of low-cost scheduled airline
services, is the largest commercial charter airline in the United States based
upon revenues for the twelve months ended September 30, 2003, and is one of the
largest providers of passenger airline services to the U.S. military, based upon
2003 revenue. The Company was incorporated in Indiana in 1984.
The following table summarizes the Company's revenue sources for the periods
indicated:
Year Ended December 31,
2003 2002 2001 2000 1999
--------- -------- --------- ---------- ---------
(Dollars in millions)
Scheduled Service $ 1,085.4 $ 886.6 $ 820.7 $ 753.3 $ 624.6
--------- -------- --------- ---------- ---------
Military Charter 296.9 177.9 167.5 188.6 126.2
Commercial Charter 69.3 131.3 192.2 246.7 263.8
--------- -------- --------- ---------- ---------
Total Charter Service 366.2 309.2 359.7 435.3 390.0
--------- -------- --------- ---------- ---------
Other 66.9 81.6 95.1 103.0 107.8
--------- -------- --------- ---------- ---------
Total $ 1,518.5 $1,277.4 $ 1,275.5 $ 1,291.6 $ 1,122.4
========= ======== ========= ========== =========
Percentage of Consolidated Revenues:
Scheduled Service 71.5% 69.4% 64.3% 58.3% 55.7%
Military Charter 19.6% 13.9% 13.1% 14.6% 11.2%
Commercial Charter 4.6% 10.3% 15.1% 19.1% 23.5%
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be a leading carrier in those markets. The Company
currently provides scheduled service primarily from its gateway cities of
Chicago-Midway and Indianapolis to popular vacation and business destinations
such as 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, Newark, Charlotte and
Pittsburgh. The Company also provides transpacific service between the Western
United States and Hawaii. The Company had provided transcontinental service
between San Francisco and New Jersey beginning in October 2003, but that service
ended in March 2004.
The Company owns all of the issued and outstanding stock of Chicago Express
Airlines, Inc. ("Chicago Express"), which currently operates a fleet of 17 SAAB
340B 34-seat propeller aircraft and provides commuter passenger scheduled
service between Chicago-Midway and the cities of Indianapolis, Cedar Rapids,
Dayton, Des Moines, Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline,
Toledo, South Bend and Springfield. The Company has subsequently announced that
effective May 31, 2004 it will end service to Cedar Rapids and Lexington, and it
will begin service to Ft. Wayne on June 1.
Included in the Company's jet scheduled service are bulk-seat sales agreements
with tour operators. Under these arrangements, a tour operator purchases a large
portion of the seats on an aircraft and assumes responsibility for distribution
of those seats. The Company sells the remaining seats through its own scheduled
service distribution network. Under bulk-seat sales arrangements, the Company is
obligated to provide transportation to the tour operators' customers even in the
event of non-payment to the Company by tour operators. To reduce its credit
exposure under these arrangements, the Company requires a letter of credit or
prepayment of a portion of the contract price.
3
Military/Government Charter Service
The Company has provided passenger airline services to the U.S. military since
1983 and is currently one of the largest commercial airline providers of these
services. The Company believes that because these operations are generally less
seasonal than scheduled service, and because the military contract provides full
reimbursement for actual fuel expenses, they have a stabilizing impact on the
Company's operating margins. The U.S. Government awards one-year contracts for
its military charter business and pre-negotiates contract prices for each type
of aircraft that a carrier makes available. Each contract year extends from
October 1 through September 30. The Company primarily uses its fleet of four
Lockheed L-1011-500 aircraft and two Lockheed L-1011-50 and 100 aircraft to
support this military business since these aircraft have a range and seating
configuration preferred by the military. It is expected that one L-1011 aircraft
will be retired from service in the second half of 2004. The Company also uses
several Boeing 757 aircraft in its military charter services, and expects to add
several more Boeing 757 aircraft to its military business in 2004.
The Company is subject to biennial inspections by the U.S. Department of Defense
as a condition of retaining its eligibility to perform military charter flights.
The last such inspection was successfully completed in November 2003.
Commercial Charter Service
The Company provides commercial passenger charter airline services, primarily
through U.S. tour operators. The most significant portion of commercial charter
revenue in recent years has been derived from contracts with tour operators for
repetitive, leisure-oriented round-trip patterns, operating over varying periods
of time. Under such contracts, the tour operator pays a fixed price for use of
the aircraft and assumes responsibility and risk for the actual sale of the
available aircraft seats. Under most of its contracts with tour operators, the
Company passes through some increases in fuel costs from a contracted price. The
Company is required to absorb increases in fuel costs that occur within 14 days
of flight time.
Beginning in 2001, commercial charter revenue has declined significantly,
primarily due to the retirement of certain Lockheed L-1011 and Boeing 727-200
aircraft that the Company had traditionally used in commercial charter flying.
The Company's replacement fleets of new Boeing 737-800 and 757-300 aircraft are
economically disadvantaged when used in the lower-utilization charter business
due to their higher fixed-ownership cost. In addition, decreases in general
airline fare levels throughout the United States since 2000 have reduced the
opportunity to operate commercial charter flights profitably. Consequently, the
Company expects future commercial charter revenue to continue to represent a
declining percentage of total revenue.
Industry Overview and Recent Developments
The terrorist attacks of September 11, 2001, and generally weak economic
conditions of the past several years have adversely affected the Company and the
airline industry. The industry as a whole, and the Company, suffered very
significant financial losses in the years ended December 31, 2002, and 2001.
While the Company realized net income for the year ended December 31, 2003, that
net income was favorably impacted by the Company's receipt in the second quarter
of 2003 of $37.2 million in U.S. Government funds in conjunction with the
Emergency Wartime Supplemental Appropriations Act ("Supplemental Act"). The
Supplemental Act was signed into law in April 2003, and made available $2.3
billion in reimbursements to U.S. air carriers for expenses incurred and revenue
foregone related to federally mandated enhanced aviation security subsequent to
September 11, 2001.
During 2002, two major air carriers, US Airways Group and UAL Corporation, filed
for reorganization under Chapter 11 of the United States Bankruptcy Code. US
Airways Group emerged from bankruptcy protection in March 2003. Historically,
air carriers involved in reorganizations have substantially reduced their fares,
which could reduce airline yields further from current levels. Certain air
carriers have sought to reduce financial losses, at least partially, by reducing
their seat capacity. As this has been accomplished by eliminating aircraft from
operating fleets, the fair value of aircraft, including aircraft owned by the
Company, has been adversely affected. The Company has recorded substantial
charges to earnings resulting from fleet retirements and impairments over the
past three years. However, during this period, the Company has substantially
replaced its fleet of aging aircraft with new fuel-efficient Boeing aircraft.
4
In addition to the funds received in the second quarter of 2003, the Company has
benefited from some of the U.S. Government's other initiatives for assisting the
airline industry. Most significant to the Company was the Air Transportation
Safety and System Stabilization Act ("Act") passed in 2001, which provided for,
among other things, up to $5.0 billion in compensation to U.S. airlines and air
cargo carriers for direct and incremental losses resulting from the September
11, 2001 terrorist attacks and the availability of up to $10.0 billion in U.S.
Government guarantees of certain loans made to air carriers, which are
administered by the newly established Air Transportation Stabilization Board
("ATSB"). The Company received $50.1 million of U.S. Government grant
compensation under the Act, of which the final payment of $6.2 million was
received in the first quarter of 2003. The Company also obtained a $168.0
million secured term loan in November 2002, of which $148.5 million is
guaranteed by the ATSB. See "Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements - Note 6 - Debt" and "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 10 -
Shareholders' Deficit" for additional information about the ATSB loan.
The terrorist attacks of September 11, 2001 and the generally weak economy have
also had a negative impact on the Company's liquidity. The Company's new Boeing
aircraft are all leased and have higher fixed-ownership costs than the older
fleets that they replaced. The terms of many of these aircraft operating leases
were determined before September 11, 2001, and were structured to require
significant cash payments in the first few years of each lease in order to
reduce the total rental cost over the related lease terms. Consequently, the
Company made large cash lease payments on many of its aircraft in the year ended
December 31, 2003, which resulted in a substantial use of the Company's cash. As
of December 31, 2003, the Company was also scheduled to repay the $175 million
outstanding principal of its 10 1/2% Senior Notes ("2004 Notes") in August 2004
and the $125 million outstanding principal of its 9 5/8% Senior Notes ("2005
Notes" and, together with the 2004 Notes, "Existing Notes") in December 2005.
On January 30, 2004, the Company successfully completed exchange offers and
issued new Senior Notes due 2009 ("2009 Notes") and cash consideration for
certain of its 2004 Notes and issued new Senior Notes due 2010 ("2010 Notes"
and, together with the 2009 Notes, "New Notes") and cash consideration for
certain of its 2005 Notes. In completing the exchange offers, the Company
accepted $260.3 million of Existing Notes tendered for exchange, issuing $163.1
million in aggregate principal amount of 2009 Notes and delivering $7.8 million
in cash in exchange for $155.3 million in aggregate principal amount of 2004
Notes tendered, and issuing $110.2 million in aggregate principal amount of 2010
Notes and delivering $5.2 million in cash in exchange for $105.0 million in
aggregate principal amount of 2005 Notes. In addition to the New Notes issued,
$19.7 million in aggregate principal amount of the 2004 Notes and $20.0 million
in aggregate principal amount of the 2005 Notes remain outstanding after the
completion of the exchange offers. In connection with the exchange offers, the
Company also obtained the consent of the holders of the Existing Notes to amend
or eliminate all of the restrictive operating covenants and certain default
provisions of the indentures governing the Existing Notes. See "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 6 - Debt" for additional information about the exchange offers.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, Boeing Capital Services
Corporation ("BCSC"), General Electric Capital Aviation Services ("GECAS") and
International Lease Finance Corporation ("ILFC"). The effect of the lease
amendments was to delay the payment of portions of the amounts due under those
operating leases primarily between June 30, 2003, and March 31, 2005 and to
extend the leases generally for two years. Most of the payments delayed during
this time period will be subsequently paid at various times throughout the
remaining life of the leases.
5
The Company received a refund of $29.8 million on January 30, 2004 related to
payments made in 2003 under the original terms of certain retroactively amended
leases. The amendments will also result in approximately $69.6 million in lower
cash payments during 2004 under these operating leases, as compared to payments
which would have been due under the original terms. See "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 7 -
Lease Commitments" for additional information about the Company's operating
leases.
While the Company expects that adverse industry conditions are likely to
continue throughout 2004, the Company's management believes that with the
completion of the exchange offers and operating lease amendments the Company has
a viable plan to provide sufficient cash to fund operations for the next 12
months. The Company's plan continues to require focused marketing efforts on
those businesses and markets where the Company believes it can be a leading
provider and the implementation of additional cost-saving initiatives the
Company believes will maintain its low-cost advantage. Although the Company
believes the assumptions underlying its 2004 financial projections are
reasonable, there are significant risks that could cause the Company's 2004
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain consequences of the major airline bankruptcies, the
possibility of other airline bankruptcy filings and the ongoing geopolitical
impact of the conflicts in the Middle East.
Company Strategy
The Company intends to combat the adverse industry conditions by enhancing its
position as a leading provider of passenger airline services in selected markets
where it can capitalize on its competitive strengths. The key components of this
strategy are:
Participate in Markets Where It Can Be a Leader
The Company generally focuses onmarkets where it can be a leading provider of
airline services. In scheduled service, the Company concentrates on routes where
it can be the number one or number two carrier. The Company achieves this result
principally through nonstop schedules, value-oriented pricing, focused marketing
efforts and certain airport and aircraft advantages. The Company is a leading
provider of commercial and military charter services in large part because of
its variety of aircraft types, superior operational performance and its
worldwide service capability. The Company intends to expand its operations
selectively in areas where it believes it can achieve satisfactory financial
returns.
Maintain Low-Cost Position and Maximize Aircraft Utilization
For 2003, 2002 and 2001, the Company's consolidated operating cost per available
seat mile ("CASM") of 6.82(cent), 8.17(cent) and 8.45(cent), respectively, was
one of the lowest among large U.S. passenger airlines. The Company believes that
its lower costs provide a significant competitive advantage. Supplementing the
Company's cost-control initiatives is the enhancement of aircraft utilization,
or the average number of hours flown per aircraft per day. This strategy has
become increasingly important with the delivery of many new aircraft in the last
several years.
Competition
The Company's products and services encounter varying degrees of competition in
the markets it serves.
Competition for Scheduled Services
In scheduled service, the Company competes both against the large U.S. scheduled
service airlines and against smaller regional or start-up airlines. Competition
is generally on the basis of price, schedule and frequency, quality of service
and convenience.
The Company believes that it has significant competitive advantages in each of
its primary markets.
6
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 67.1% of the Company's total scheduled service
capacity in 2003. The Company is the number one carrier in terms of market
share, based upon third quarter 2003 origin and destination revenue
passengers, on 18 of the 24 nonstop jet routes it serves from
Chicago-Midway. The Company believes its service at this gateway would be
difficult to replicate because of limited airport capacity. This
competitive position is enhanced by the customer convenience of
Chicago-Midway's proximity to downtown Chicago. The Company also enjoys a
strong competitive position relative to the entire Chicago metropolitan
area.
o Indianapolis represented approximately 13.3% of the Company's total
scheduled service capacity in 2003. The Company believes that it benefits
from being perceived as the hometown airline. The Company is the number one
provider in terms of market share, based upon third quarter 2003 origin and
destination revenue passengers, in seven of its nine jet routes from
Indianapolis. In Indianapolis, the Company operates Ambassadair Travel
Club, Inc. ("Ambassadair"), the nation's largest travel club, with
approximately 32,000 individual or family memberships, providing the
Company with another local marketing advantage.
o Hawaii represented approximately 12.9% of the Company's total scheduled
service capacity in 2003. A majority of the Company's capacity in the
Hawaiian market is contracted to the nation's largest independent Hawaiian
tour operator, which assumes capacity, yield and most fuel-price risk. The
Company believes it is the lowest-cost provider of scheduled service
between the western United States and Hawaii, which is critical in this
price-sensitive, predominantly leisure market.
Competition for Military/Government Charter Services
The Company competes for military and other government charters primarily with
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier makes
available for use to the military, among other factors.
Competition for Commercial Charter Services
In the commercial charter market, the Company competes both against the major
U.S. scheduled airlines and against small U.S. charter airlines. The scheduled
carriers compete with the Company's commercial charter operations by wholesaling
discounted seats on scheduled flights to tour operators, promoting packaged
tours to travel agents for sale to retail customers and selling discounted,
airfare-only products to the public.
Flight Operations and Aircraft Maintenance
Worldwide flight operations are planned and controlled by the Company's Flight
Operations group based in Indianapolis, Indiana, which is staffed on a 24-hour
basis, seven days a week. Logistical support necessary for extended operations
away from the Company's fixed bases is coordinated through its global
communications network. The Company has the ability to dispatch maintenance and
operational personnel and equipment as necessary to support temporary operations
around the world.
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This facility is an FAA-certificated repair station and
has the capability to perform routine and non-routine maintenance on the
Company's aircraft. The Company also has a maintenance facility at
Chicago-Midway Airport, which is used to provide line maintenance for the Boeing
757-200, Boeing 757-300 and Boeing 737-800 fleets. The Company has approximately
1,000 employees supporting its aircraft maintenance operations and currently
maintains 17 permanent maintenance facilities, including its Indianapolis and
Chicago facilities.
7
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 29.0%, 29.4%, and 32.0%, respectively, of consolidated revenues in
2003, 2002 and 2001. The Company occasionally enters into fuel-hedging contracts
to reduce volatility of fuel prices for a portion of its scheduled service fuel
needs. However, the Company did not enter into any fuel-hedging contracts in
2003 and as of December 31, 2003, the Company had no outstanding fuel hedge
contracts.
Insurance
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers'
compensation.
Immediately following the September 11, 2001 terrorist attacks, the Company's
aviation insurers, and other air carriers' aviation insurers, reduced the
maximum amount of liability insurance coverage for losses related to persons
other than passengers and employees, resulting from acts of terrorism, war,
hijacking or other similar perils (war-risk coverage) and significantly
increased their premiums for this reduced coverage. Pursuant to the Air
Transportation Safety and System Stabilization Act ("Act") and other enabling
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, which will continue through 2004. It
is anticipated that after this date, a commercial product for war-risk coverage
will become available, but the Company expects that it may incur significant
additional costs for this coverage.
Employees
As of December 31, 2003, the Company had approximately 7,900 full-time and
part-time employees, approximately 2,900 of whom were represented under
collective bargaining agreements. The Company's flight attendants are
represented by the Association of Flight Attendants ("AFA"). The current
collective bargaining agreement with the AFA will become subject to amendment,
but will not expire, in October 2004. The Company's cockpit crews are
represented by the Air Line Pilots Association ("ALPA"). The current collective
bargaining agreement with the ALPA will become subject to amendment, but will
not expire, in June 2006. The Company's flight dispatchers are represented by
the Transport Workers Union ("TWU"). The current collective agreement with the
TWU will become subject to amendment, but will not expire, in August 2004. The
Company's ramp service agents elected to be represented by the International
Association of Machinists ("IAM") in February 2001. The Company began
negotiations with the IAM in May 2001, but no collective bargaining agreement
has been finalized. In February 2002, the Company's aircraft mechanics elected
to be represented by the Aircraft Mechanics Fraternal Association ("AMFA"). The
Company began negotiations with the AMFA in October 2002, but no collective
bargaining agreement has been finalized. While the Company believes that
relations with its employees are good, any prolonged dispute with employees,
whether or not represented by a union, could have an adverse impact on the
Company's operations.
Regulation
The Company is subject to a wide range of governmental regulation, including
that of the Department of Transportation ("DOT") and the Federal Aviation
Administration ("FAA").
The DOT principally regulates economic matters affecting air service, including
air carrier certification and fitness; insurance; leasing arrangements;
allocation of route rights and authorization of proposed scheduled and charter
operations; allocation of landing slots and departing slots; consumer
protection; and competitive practices. The FAA primarily regulates flight
operations, especially matters affecting air safety, including airworthiness
requirements for each type of aircraft and crew certification. The FAA requires
each carrier to obtain an operating certificate and operations specifications
authorizing the carrier to fly to specific airports using specified equipment.
8
In 2001, the Aviation and Transportation Security Act ("Aviation Security Act")
was signed into law, creating the Transportation Security Administration ("TSA")
within the DOT and requiring substantially all aspects of civil aviation
passenger security and screening to be placed under federal control in 2002. The
cost of the provisions set forth in the Aviation Security Act are partially
funded by a security fee of $2.50 per passenger enplanement, limited to $5 per
one-way trip and $10 per round-trip. Air carriers, including the Company, began
collecting the fee on ticket sales in February 2002. The Aviation Security Act
is also funded by a separate security infrastructure fee assessed to each air
carrier beginning in the second quarter of 2002. The amount of the air carrier
assessment is payable monthly and is equal to the amount each air carrier spent
on aviation security in 2000. In May 2003, the Company received a refund of
$37.2 million in security fees and infrastructure fees paid prior to that date,
and collection of the security fees was temporarily suspended from June through
September 2003.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company through ATA Cargo, Inc. ("ATA Cargo"). Labor
relations in the air transportation industry are generally regulated under the
Railway Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and labor unions
arising under collective bargaining agreements. The Company is subject to the
jurisdiction of the Federal Communications Commission regarding the utilization
of its radio facilities. In addition, the Immigration and Naturalization
Service, the U.S. Customs Service, and the Animal and Plant Health Inspection
Service of the Department of Agriculture have jurisdiction over inspection of
the Company's aircraft, passengers and cargo to ensure the Company's compliance
with U.S. immigration, customs and import laws. Also, while the Company's
aircraft are in foreign countries, they must comply with the requirements of
similar authorities in those countries. The Commerce Department also regulates
the export and re-export of the Company's U.S.-manufactured aircraft and
equipment.
In addition to various federal regulations, local governments and authorities in
certain markets have adopted regulations governing various aspects of aircraft
operations, including noise abatement, curfews and use of airport facilities.
Many U.S. airports have adopted a Passenger Facility Charge of up to $4.50 that
is collected from each passenger departing from the airport and remitted by the
Company to the applicable airport authority.
Based upon bilateral aviation agreements between the U.S. and other nations,
and, in the absence of such agreements, comity and reciprocity principles, the
Company, as a charter carrier, is generally not restricted as to the frequency
of its flights to and from most foreign destinations. However, these agreements
generally restrict the Company to the carriage of passengers and cargo on
flights which either originate in the U.S. and terminate in a single foreign
nation, or which originate in a single foreign nation and terminate in the U.S.
The civil aeronautics authorities in the relevant countries must generally
specifically approve proposals for any additional charter service. Approval of
such requests is typically based on considerations of comity and reciprocity and
cannot be guaranteed.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier-operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
Environmental Matters
The Company's operations are subject to comprehensive federal, state, and local
laws and regulations relating to pollution and the protection of the
environment, including those governing aircraft noise, the discharge of
pollutants into the air and water, the management and disposal of hazardous
substances and wastes, and the cleanup of contaminated sites. Some of the
Company's operations require environmental permits and controls, and these
permits are subject to modification, renewal and revocation by issuing
authorities. Although the Company believes it is in compliance in all material
respects with applicable environmental laws, the Company could incur substantial
costs, including cleanup costs, fines, civil or criminal penalties, or
third-party property damage or personal injury claims as a result of violations
of, or liabilities under, environmental laws or noncompliance with the
environmental permits required for the Company's operations. In addition, the
adoption of new or more stringent requirements could increase the cost of the
Company's operations, require significant capital expenditures, or result in
material restrictions on the Company's operations.
9
At the Company's aircraft maintenance facilities and the airports the Company
serves, materials are used such as aircraft deicing fluids, fuel, oils and other
materials that are regulated as hazardous under federal, state or local laws.
The Company is required to maintain programs to protect the safety of the
employees who use these materials and to manage and dispose of any wastes
generated by the use of these materials in compliance with applicable laws. The
Environmental Protection Agency regulates operations, including air carrier
operations, which affect the quality of air in the United States, such as the
regulation of the discharge of aircraft emissions exhaust into the environment.
The Company believes it has made all necessary modifications to its operating
fleet to meet fuel-venting requirements and smoke-emissions standards. In
addition, noise generated by aircraft is subject to regulation by the FAA under
the Airport Noise and Capacity Act of 1990 and its implementing regulations. As
a result, the Company has been and may continue to be required to reduce its
hours of operation at particular airports, to install noise abatement equipment
on its aircraft or to change operational procedures during takeoff and landing.
At the present time, the Company believes its airline equipment and scheduled
flights are in material compliance with these and other local noise abatement
requirements, and the Company does not believe any such restrictions will have a
material adverse effect on the Company's business, financial condition or
results of operations.
Item 2. Properties
Aircraft Fleet
At December 31, 2003, ATA and Chicago Express were certified to operate a fleet
of 82 aircraft. The following table summarizes the ownership characteristics of
each aircraft type as of the end of 2003.
Owned (Encumbered- Operating-Lease Operating-Lease
Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-50 and 100 1 - 1 2
Lockheed L-1011-500 4 - - 4
Boeing 737-800 - 18 14 32
Boeing 757-200 - 14 1 15
Boeing 757-300 - 12 - 12
SAAB 340B 2 15 - 17
--------- --------- --------- ---------
TOTAL 7 59 16 82
========= ========= ========= =========
10
Lockheed L-1011-50 and 100 Aircraft
The Company's two Lockheed L-1011-50 and 100 aircraft are wide-body aircraft.
The L-1011-50 has a range of 2,971 nautical miles and the L-1011-100 has a range
of 3,425 nautical miles. These aircraft have a low ownership cost relative to
other wide-body aircraft types. The fleet has an average age of approximately 26
years.
Lockheed L-1011-500 Aircraft
The Company's four Lockheed L-1011-500 aircraft are wide-body aircraft and have
a range of 5,577 nautical miles. These aircraft have a low ownership cost
relative to other wide-body aircraft types. The fleet has an average age of
approximately 22 years.
Boeing 737-800 Aircraft
The Company's 32 Boeing 737-800 aircraft are narrow-body aircraft and have a
range of 2,500 nautical miles. These aircraft have higher ownership costs than
the Company's Lockheed L-1011 fleet but lower operational costs resulting from
reduced fuel consumption and lower maintenance and cockpit crew costs, and
improved operating reliability. The fleet has an average age of approximately 2
years, and the leases on these aircraft have terms that expire between May 2017
and December 2024.
Boeing 757-200 Aircraft
The Company's 15 Boeing 757-200 aircraft are narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft also have higher ownership
costs than the Company's Lockheed L-1011 aircraft, but lower operational costs.
In addition, the Company's Boeing 757-200s have the capacity to operate on
extended flights over water. The fleet has an average age of approximately 5
years, and the leases on these aircraft have terms that expire between April
2008 and May 2022.
Boeing 757-300 Aircraft
The Company's 12 Boeing 757-300 aircraft are narrow-body aircraft and have a
range of 2,700 nautical miles. These aircraft also have higher ownership costs
than the Company's Lockheed L-1011 aircraft but lower operational costs. The
Company's Boeing 757-300s have the capability to operate on extended flights
over water. The fleet has an average age of approximately 2 years, and the
leases on these aircraft have terms that expire on various dates between August
2023 and September 2024.
SAAB 340B Aircraft
The Company's 17 SAAB 340B aircraft are commuter aircraft with twin turboprop
engines. These 34-seat aircraft have an average age of approximately 12.5 years
and the leases on 15 of these aircraft have lease terms that expire between
September 2009 and March 2012.
Ground Properties
The Company leases three adjacent office buildings in Indianapolis consisting of
approximately 136,000 square feet, under leases that expire in 2007. These
buildings are located approximately one mile from the Indianapolis International
Airport terminal and are used as principal business offices and for the
Indianapolis reservations center.
The Company's Maintenance and Operations Center is also located at Indianapolis
International Airport. This 150,000-square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. In addition, the Company
utilizes a 120,000-square-foot office building immediately adjacent to the
Company's Indianapolis Maintenance and Engineering Center which is occupied by
its Maintenance and Engineering office staff along with the Company's flight
operations center.
The Company leases Hangar No. 2 at Chicago's Midway Airport for an initial lease
term expiring in 2005, subject to two five-year renewal options. This property
is used to perform line maintenance on the Company's narrow-body fleets. The
Company also leases an 18,700-square-foot reservation facility located near
Chicago's O'Hare Airport.
11
The Company routinely leases various properties at airports for use by passenger
service, flight operations and maintenance staffs.
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are routine and incidental to the
Company's business. The majority of these lawsuits are covered by insurance. The
Company's management does not expect that the outcome of its current legal
proceedings, individually or collectively, will have a material adverse effect
on the Company's financial condition, results of operations or cash flows. To
the knowledge of management, there are also no material proceedings under
federal or state environmental laws, nor are there any environmental proceedings
brought by a governmental authority involving potential monetary sanctions in
excess of $100,000.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the quarter ended
December 31, 2003.
12
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is quoted on the NASDAQ National Market under the
symbol "ATAH." The Company had 281 and 280 registered shareholders,
respectively, at December 31, 2003 and 2002.
Market Prices of Common Stock
Year Ended December 31, 2003
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 5.98 7.79 10.95 10.45
Low 3.42 3.45 6.07 6.37
Close 3.75 7.36 7.00 9.65
Market Prices of Common Stock
Year Ended December 31, 2002
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 16.30 14.95 7.49 7.17
Low 11.75 6.01 2.72 3.15
Close 14.00 6.86 3.40 4.57
No dividends have been paid on the Company's common stock since becoming
publicly held.
In the last half of 2000, the Company issued and sold 300 shares of Series B
convertible redeemable preferred stock, without par value ("Series B
Preferred"), at a price and liquidation amount of $100,000 per share. The Series
B Preferred is convertible into shares of the Company's common stock at a
conversion rate of 6,381.62 shares of common stock per share of Series B
Preferred at a conversion price of $15.67 per share of common stock, subject to
antidilution adjustments. The Series B Preferred is optionally redeemable by the
Company under certain conditions, but the Company must redeem the Series B
Preferred no later than September 20, 2015. Optional redemption by the Company
may occur at 103.6% of the liquidation amount beginning September 20, 2003,
decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation
amount at the mandatory redemption date of September 20, 2015.
Also, in the last half of 2000, the Company issued and sold 500 shares of Series
A redeemable preferred stock, without par value ("Series A Preferred"), at a
price and liquidation amount of $100,000 per share. The Series A Preferred is
optionally redeemable by the Company under certain conditions, but the Company
must redeem the Series A Preferred in equal semiannual payments beginning
December 28, 2010, and ending December 28, 2015. Optional redemption by the
Company may occur at a redemption premium of 50.0% of the dividend rate
beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend
rate commencing December 28, 2006, and to 0.0% after the seventh year from
issuance.
The issuance and sale of the Series A and Series B Preferred was exempt from
registration requirements under Section 4(2) of the Securities Act of 1933,
which applies to private offerings of securities. The proceeds of the issuances
of the Series A and Series B Preferred were used to finance aircraft
pre-delivery deposits on Boeing 757-300 and Boeing 737-800 aircraft ordered by
the Company and for other corporate purposes. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 11 -
Redeemable Preferred Stock."
13
Item 6. Selected Consolidated Financial Data -(Unaudited)
The unaudited selected consolidated financial data in this table have been
derived from the consolidated financial statements of the Company for the
respective periods presented. The data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere herein.
ATA HOLDINGS CORP.
Five-Year Summary
Year Ended December 31,
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 1,518,533 $ 1,277,370 $ 1,275,484 $ 1,291,553 $ 1,122,366
Operating expenses (1) 1,440,992 1,437,407 1,367,354 1,288,983 1,032,339
Operating income (loss) (1) 77,541 (160,037) (91,870) 2,570 90,027
Income (loss) before taxes 21,745 (194,214) (116,067) (19,931) 77,797
Net income (loss) available to common shareholders(2) 15,792 (174,984) (81,885) (15,699) 47,342
Net income (loss) per share - basic 1.34 (14.94) (7.14) (1.31) 3.86
Net income (loss) per share - diluted 1.27 (14.94) (7.14) (1.31) 3.51
Balance Sheet Data (at end of period):
Property and equipment, net $ 253,482 $ 265,627 $ 314,943 $ 522,119 $ 511,832
Total assets 869,987 848,136 1,002,962 1,032,430 815,281
Total debt 494,696 509,428 497,592 457,949 347,871
Redeemable preferred stock 56,330 52,110 50,000 50,000 -
Convertible redeemable preferred stock 32,907 30,375 30,000 30,000 -
Shareholders' equity (deficit) (104,007) (120,009) 44,132 124,654 151,376
Selected Consolidated Operating Statistics:
Revenue passengers carried (thousands) 11,226.9 10,046.7 8,635.2 8,006.1 7,044.6
Revenue passenger miles (millions) 14,358.7 12,384.2 11,675.7 11,816.8 10,949.0
Available seat miles (millions) 21,125.9 17,600.0 16,187.7 16,390.1 15,082.6
Passenger load factor 68.0% 70.4% 72.1% 72.1% 72.6%
(1) Operating results for the years ended December 31, 2003, 2002 and 2001
include the following items:
2003 2002 2001
---------------------------------
Aircraft impairments and retirements $ (5,288) $ (66,787) $ (118,868)
U.S. Government grants 37,156 (16,221) 66,318
Goodwill impairments - (6,893) -
Special charges - - (21,525)
-------- --------- ----------
Total - income (loss) $ 31,868 $ (89,901) $ (74,075)
======== ========= ==========
For more information on special charges, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year Ended December
31, 2002, Versus Year Ended December 31, 2001 - Special Charges."
14
(2) Preferred stock dividends of $4.6 million, $5.7 million, and $5.6 million
were recorded in 2003, 2002 and 2001, respectively. No common stock dividends
were paid in any period presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of scheduled airline services to leisure and
other value-oriented travelers, and a leading provider of charter services to
the U.S. military. The Company, through its principal subsidiary, ATA, has been
operating for 31 years and is the tenth largest U.S. airline in terms of 2003
capacity and traffic.
In the year ended December 31, 2003, the Company recorded operating income of
$77.5 million, as compared to an operating loss of $160.0 million in the same
period of 2002. In the year ended December 31, 2003, the Company had a net
income available to common shareholders of $15.8 million, as compared to a net
loss available to common shareholders of $175.0 million in 2002. The net income
recorded in 2003 includes $37.2 million received under the Supplemental Act,
which was recorded as a reduction in operating expenses.
Consolidated revenue per available seat mile ("RASM") decreased to 7.19 cents in
the year ended December 31, 2003, as compared to 7.26 cents in 2002. The
decrease in 2003 was mainly due to a weak scheduled service pricing environment
in the first six months of 2003, which was impacted by the war in the Middle
East. In addition, the Company's scheduled service unit revenues were adversely
affected by the Company's capacity growth of 20% between the year ended December
31, 2002 and 2003, due to the addition of new Boeing 737-800 and Boeing 757-300
aircraft to the Company's fleet. The Company was able to utilize some of the
increased capacity in its military charter service in order to meet the
increased flying requirements due to the Civil Reserve Air Fleet ("CRAF")
activation between February and June 2003, which supported Operation Iraqi
Freedom. In 2003, the Company's military charter revenue increased 66.9%, as
compared to 2002. The CRAF program ended on June 18, 2003, and the Company
recorded 19.2% less military revenue for the second half of 2003, as compared to
the first half of 2003.
The Company's unit costs remained among the lowest of major airlines in 2003.
Consolidated cost per available seat mile ("CASM") decreased to 6.82 cents in
the year ended December 31, 2003, as compared to 8.17 cents in 2002. The 2003
CASM amount reflects the benefit from the receipt of $37.2 million, or 0.18
cents per available seat mile ("ASM"), in the year ended December 31, 2003, in
U.S. Government funds from the Supplemental Act; and a charge of $5.3 million,
or 0.03 cents per ASM, for aircraft impairments and retirements. The 2002 CASM
amount reflects a charge of $16.2 million, or 0.09 cents per ASM, in connection
with the expected reduction of U.S. Government compensation under the Act, and a
charge of $66.8 million, or 0.38 cents per ASM, for aircraft impairments and
retirements. The remaining CASM declines in 2003 were mainly due to the
Company's continuing efforts to further reduce operating expenses; the benefits
from increased aircraft, facility and employee utilization; and the cost savings
realized from the addition of its new fleets comprised of Boeing 737-800 and
Boeing 757-300 aircraft. These CASM improvements were achieved despite a 15.9%
increase in the average cost per gallon of jet fuel consumed in 2003, as
compared to 2002. These fuel price increases cost the Company an incremental
$37.7 million in 2003, net of a $7.4 million increase in fuel escalation
revenues. Fuel escalation revenue is recorded when tour operators or the U.S.
Government reimburse the Company for certain fuel cost increases as part of
commercial charter, bulk scheduled service or military/government contracts.
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 ("GAAP"). 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 used
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.
15
Revenue Recognition. Passenger ticket sales are initially recorded as a
component of air traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. Tickets that are sold but not flown
on the scheduled travel date can be exchanged and reused for another flight, up
to a year from the date of sale, or can be refunded if the ticket is sold under
a refundable tariff. A small percentage of tickets (or partially used tickets)
expire unused. The majority of the Company's tickets sold are nonrefundable in
cash, which is the primary source of forfeited tickets. The Company records
estimates of earned revenue in the period tickets are originally sold, for a
percentage of those sales which are expected to expire unused over the period of
ticket validity. These estimates are based upon historical experience over many
years, with particular emphasis given to expiration experience in more recent
years. The Company has consistently applied this accounting method to estimate
revenue from future unused and expired tickets.
Revenue accruals for expired and unused tickets are routinely compared to actual
expired and unused ticket experience to validate the accuracy of the Company's
estimates with respect to forfeited tickets. Accrual adjustments resulting from
these comparisons have not been material to the Company's consolidated revenue.
If, however, customer behavior changes from historical patterns in the manner in
which tickets are purchased and used, it is possible that the Company's revenue
accruals for unused and expired tickets may require material future adjustments
in order to account for those changes in customer behavior.
Impairments of Long-Lived Assets. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144 ("FAS 144"), Accounting for
the Impairment or Disposal of Long-Lived Assets, which superseded FAS 121 ("FAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of. The Company continues to account for aircraft and
related assets that were impaired prior to January 1, 2002, and classified as
held for sale, including the investment in BATA Leasing, LLC ("BATA") under the
provisions of FAS 121, which is required by FAS 144. Both FAS 144 and FAS 121
require that, whenever events and circumstances indicate that the Company may
not be able to recover the net book value of its productive assets, the
undiscounted estimated future cash flows from the expected use of those assets
must be compared to their net book value to determine if impairment is
indicated. FAS 144 and FAS 121 require that assets deemed impaired be written
down to their estimated fair value through a charge to earnings. FAS 144 and FAS
121 state that fair values may be estimated using discounted cash flow analysis
or quoted market prices, together with other available information.
The Company had 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, and both fleets initially became impaired under FAS 121 subsequent to the
terrorist attacks of September 11, 2001. The Company primarily used discounted
cash flow analysis to estimate the fair value of the Lockheed L-1011-50 and 100
fleet and used discounted cash flows and quoted market prices to estimate the
fair value of the Boeing 727-200 fleet.
Beginning in 2002, the Company has performed impairment analyses on the Lockheed
L-1011-500 fleet and related assets in accordance with FAS 144, and has
determined that this fleet is not impaired. The application of FAS 144 and FAS
121 requires the exercise of significant judgment and the preparation of
numerous significant estimates. Although the Company believes that its estimates
with regard to future cash flows are reasonable and based upon all available
information, they require substantial judgments and are based upon material
assumptions about future events. Such estimates are significant in determining
the amount of the impairment charge to be recorded, if any, which could have
been materially different under different sets of assumptions and estimates.
16
Goodwill Accounting. In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001, under which goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. A FAS 142 impairment review involves a two-step process.
Step one compares the fair value of a reporting unit (determined through market
quotes or the present value of estimated future cash flows) 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.
FAS 142 requires companies to perform annual goodwill impairment reviews. The
annual impairment tests are required to be completed in the same fiscal quarter
each year. The Company performed its annual tests in the fourth quarter of both
2002 and 2003. The Company's goodwill relates to ATA Leisure Corp. ("ATALC"),
Chicago Express and ATA Cargo, all of which are subsidiaries that were acquired
in 1999. The Company identified two FAS 142 reporting units for ATALC. The ATALC
brands whose management was outsourced to Mark Travel Corporation ("MTC") in
July 2003 were one reporting unit. The other reporting unit related to the Key
Tours brands ("KTI") that sold Canadian rail packages and ground packages in Las
Vegas. In the 2002 goodwill impairment review, the Company determined that the
goodwill related to Chicago Express, ATA Cargo and the MTC reporting unit was
not impaired. However, the estimated fair value of the KTI reporting unit was
lower than the carrying amount and an impairment loss of $6.9 million, on the
total goodwill balance for KTI, was recorded in the fourth quarter of 2002. As
of December 31, 2003, the Company no longer markets any of the KTI brands. In
the 2003 goodwill impairment review, the Company determined that the goodwill
related to Chicago Express, ATA Cargo and the MTC reporting unit was not
impaired.
All of the Company's fair value estimates 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 additional impairment charges.
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.
Cents per ASM
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Consolidated operating revenues 7.19 7.26 7.88
Consolidated operating expenses:
Salaries, wages and benefits 1.89 2.02 2.01
Fuel and oil 1.31 1.17 1.55
Aircraft rentals 1.07 1.08 0.61
Handling, landing and navigation fees 0.54 0.63 0.55
Crew and other employee travel 0.30 0.31 0.37
Depreciation and amortization 0.27 0.44 0.75
Other selling expenses 0.24 0.25 0.26
Aircraft maintenance, materials and repairs 0.22 0.30 0.38
Passenger service 0.19 0.22 0.27
Advertising 0.18 0.23 0.16
Insurance 0.14 0.19 0.07
Facilities and other rentals 0.11 0.13 0.13
Commissions 0.11 0.13 0.21
Ground package cost 0.06 0.16 0.26
Special charges - - 0.13
Aircraft impairments and retirements 0.03 0.38 0.73
Goodwill impairment - 0.04 -
U.S. Government grant (0.18) 0.09 (0.41)
Other 0.34 0.40 0.42
---- ----- -----
Total consolidated operating expenses 6.82 8.17 8.45
---- ----- -----
Consolidated operating income (loss) 0.37 (0.91) (0.57)
==== ===== =====
ASMs (in thousands) 21,125,905 17,599,968 16,187,687
18
Year Ended December 31, 2003, Versus Year Ended December 31, 2002
Consolidated Flight Operations 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. Data for subservice operations is not included.
Twelve Months Ended December 31,
--------------------------------
2003 2002 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures Jet 79,790 66,903 12,887 19.26
Departures SAAB 52,071 42,105 9,966 23.67
---------- ---------- --------- ------
Total Departures 131,861 109,008 22,853 20.96
---------- ---------- --------- ------
Block Hours Jet 246,951 199,290 47,661 23.92
Block Hours SAAB 51,256 40,008 11,248 28.11
---------- ---------- --------- ------
Total Block Hours 298,207 239,298 58,909 24.62
---------- ---------- --------- ------
RPMs Jet (000s) 14,166,987 12,231,661 1,935,326 15.82
RPMs SAAB (000s) 191,712 152,576 39,136 25.65
---------- ---------- --------- ------
Total RPMs (000s) (a) 14,358,699 12,384,237 1,974,462 15.94
---------- ---------- --------- ------
ASMs Jet (000s) 20,815,681 17,362,835 3,452,846 19.89
ASMs SAAB (000s) 310,224 237,133 73,091 30.82
---------- ---------- --------- ------
Total ASMs (000s) (b) 21,125,905 17,599,968 3,525,937 20.03
---------- ---------- --------- ------
Load Factor Jet 68.06 70.45 (2.39) (3.39)
Load Factor SAAB 61.80 64.34 (2.54) (3.95)
---------- ---------- --------- ------
Total Load Factor (c) 67.97 70.37 (2.40) (3.41)
---------- ---------- --------- ------
Passengers Enplaned Jet 10,138,487 9,139,770 998,717 10.93
Passengers Enplaned SAAB 1,088,388 906,909 181,479 20.01
---------- ---------- --------- ------
Total Passengers Enplaned (d) 11,226,875 10,046,679 1,180,196 11.75
---------- ---------- --------- ------
Revenue $ (000s) 1,518,533 1,277,370 241,163 18.88
RASM in cents (e) 7.19 7.26 (0.07) (0.96)
CASM in cents (f) 6.82 8.17 (1.35) (16.52)
Yield in cents (g) 10.58 10.31 0.27 2.62
Average Aircraft in Service
Lockheed L-1011 7.63 10.54 (2.91) (27.61)
Boeing 737-800 30.68 22.37 8.31 37.15
Boeing 757-200 15.17 15.96 (0.79) (4.95)
Boeing 757-300 10.94 7.96 2.98 37.44
SAAB 340B 16.10 13.33 2.77 20.78
Average Block Hours Flown per day
Lockheed L-1011 7.73 5.86 1.87 31.91
Boeing 737-800 10.60 9.84 0.76 7.72
Boeing 757-200 11.55 10.73 0.82 7.62
Boeing 757-300 10.98 9.82 1.16 11.81
SAAB 340B 8.72 8.22 0.50 6.08
See footnotes (a) through (g) on page 20.
19
(a) 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.
(b) 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.
(c) 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.
(d) 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."
(e) 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 (g) for the definition of yield).
(f) 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.
(g) 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.
Operating Revenues
Total operating revenues in 2003 increased 19.0% to $1.519 billion, as compared
to $1.277 billion in 2002. This increase was due to a $198.8 million increase in
scheduled service revenue, a $119.0 million increase in military/government
charter revenues and a $6.4 million increase in other revenues, partially offset
by a $62.0 million decrease in commercial charter revenues and a $21.0 million
decrease in ground package revenues.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, military/government charter and
commercial charter operations of the Company.
20
Twelve Months Ended December 31,
--------------------------------
2003 2002 Inc (Dec) % Inc (Dec)
---------------------------------------------------------
Scheduled Service
Departures 122,628 98,877 23,751 24.02
Block Hours 258,021 201,077 56,944 28.32
RPMs (000s) (a) 12,079,272 9,911,884 2,167,388 21.87
ASMs (000s) (b) 16,735,500 13,608,326 3,127,174 22.98
Load Factor (c) 72.18 72.84 (0.66) (0.91)
Passengers Enplaned (d) 10,464,348 8,859,044 1,605,304 18.12
Revenue $ (000s) 1,085,420 886,579 198,841 22.43
RASM in cents (e) 6.49 6.51 (0.02) (0.31)
Yield in cents (g) 8.99 8.94 0.05 0.56
Revenue per segment $ (h) 103.73 100.08 3.65 3.65
Military/Government Charter
Departures 5,721 3,650 2,071 56.74
Block Hours 27,689 15,975 11,714 73.33
ASMs (000s) (b) 3,426,275 2,103,874 1,322,401 62.86
Revenue $ (000s) 296,893 177,901 118,992 66.89
RASM in cents (e) 8.67 8.46 0.21 2.48
RASM excluding fuel escalation (j) 8.56 8.48 0.08 0.94
Commercial Charter
Departures 3,473 6,459 (2,986) (46.23)
Block Hours 12,368 22,159 (9,791) (44.19)
ASMs (000s) (b) 949,375 1,875,885 (926,510) (49.39)
Revenue $ (000s) 69,314 131,341 (62,027) (47.23)
RASM in cents (e) 7.30 7.00 0.30 4.29
RASM excluding fuel escalation (i) 6.97 6.89 0.08 1.16
Percentage of Consolidated Revenues:
Scheduled Service 71.5% 69.4% 2.1% 3.03
Military Charter 19.6% 13.9% 5.7% 41.01
Commercial Charter 4.6% 10.3% (5.7%) (55.34)
See footnotes (a) through (g) on page 20.
(h) 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.
(i) 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 RASM calculation, excluding the impact of
fuel reimbursements, is provided as a separate measure of unit revenue changes.
(j) 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 to the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
21
Scheduled Service Revenues. Scheduled service revenues in 2003 increased 22.4%
to $1.085 billion from $886.6 million in 2002. This increase was due primarily
to increases in scheduled service capacity and a small increase in revenue per
segment flown.
Approximately 67.1% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in 2003, as compared
to 71.2% in 2002. The Hawaiian market generated approximately 12.9% of total
scheduled service capacity in 2003, as compared to 13.7% in 2002. Another 13.3%
of total scheduled service capacity was generated in the Indianapolis market in
2003, as compared to 10.5% in 2002.
Although the scheduled service RASM for the entire year 2003 was down only
slightly as compared to 2002, the Company noted significant fluctuations in unit
revenue performance during the course of 2003. Unit revenues in the first
quarter of 2003 were down almost 8%, as compared to the first quarter of 2002.
The Company believes that the first quarter 2003 traffic was significantly
affected by the elevated risk of terrorist attack noted before the beginning of
Operation Iraqi Freedom in February 2003, and by the war itself, which began in
March 2003. Unit revenues in the second quarter of 2003 were down slightly more
than 2%, as compared to the second quarter of 2002, which the Company believes
was affected by the speedy end of the Iraqi invasion and by seasonal spring
travel demand. In the third quarter of 2003, unit revenues were almost 7% higher
than in the third quarter of 2002, which the Company believes reflected a very
strong summer travel season rebound from the first half of 2003. However, in the
fourth quarter of 2003 unit revenues were only slightly higher than in the
fourth quarter of 2002, and the Company noted in particular a decline in
year-over-year RASM performance in November and December of 2003.
This late-2003 scheduled service RASM decline continued into the first quarter
of 2004, with a significant year-over-year decline in unit revenue in January
2004. Although some improvement in RASM was experienced in February and March as
compared to January, the Company expects to report a year-over-year decline in
overall scheduled service unit revenue performance in the first quarter of 2004,
as compared to the first quarter of 2003. The scheduled service revenue
environment is expected to continue to be very volatile and uncertain for the
remainder of 2004, and the Company expects it will be challenged by competitive
price and capacity actions in all of the Company's scheduled service markets for
the remainder of the year.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business in the
future. The Company also anticipates further growth at Chicago-Midway, which
will be accomplished in conjunction with the completion of new terminal and gate
facilities at the Chicago-Midway Airport. Once all construction is complete in
mid-2004, the Company expects to occupy at least 14 jet gates and one commuter
aircraft gate at the new airport concourses, as compared to ten jet gates and
one commuter gate as of December 31, 2003. Also contributing to the growth at
Chicago-Midway is Chicago Express, which has been performing well as a commuter
feeder of passengers to ATA's jet system.
Military/Government Charter Revenues. Military/government charter revenue
increased 66.9% to $296.9 million in 2003 from $177.9 million in 2002. The
increase in military/government charter revenues in 2003 was mainly due to the
activation of CRAF in February 2003, which required ATA to pledge up to 13
aircraft to military/government charter use to support Operation Iraqi Freedom.
The CRAF program allowed the Company to increase its Lockheed L-1011 aircraft
utilization (number of productive hours of flying per aircraft per day) to an
average of 7.7 daily hours in 2003, as compared to 5.9 daily hours in 2002. The
increased utilization allowed the Company to operate its military/government
charter service more efficiently between periods. Although the CRAF program
ended on June 18, 2003, the Company still experienced a high volume of military
flying, recording only 19.2% less revenue for the second half of 2003, as
compared to the first half 2003.
22
Commercial Charter Revenues. Commercial charter revenues decreased 47.2% to
$69.3 million in 2003 from $131.3 million in 2002. The majority of the decline
in commercial charter revenues continues to reflect the retirement of certain
Lockheed L-1011 and Boeing 727-200 aircraft in prior years that the Company had
traditionally used in commercial charter flying. Since aircraft utilization 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. In addition, decreases in
general airline fare levels throughout the United States since 2000 have reduced
the opportunity to operate commercial charter flights profitably. Consequently,
the Company expects its commercial charter revenues to continue to decline as
the fleet supporting this business continues to be retired.
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 Ambassadair and ATALC subsidiaries. Ambassadair offers
tour-guide-accompanied vacation packages to its approximately 32,000 individual
and family members.
In 2003, ground package revenues decreased 58.9% to $14.7 million, from $35.7
million in 2002. This decline was due primarily to the Company's July 1, 2002,
outsourcing of the management and marketing of its ATA Vacations and Travel
Charter International brands to MTC. Under that outsourcing agreement, MTC
directly sells ground arrangements to customers who also purchase charter or
scheduled service air transportation from the Company. Therefore, ground package
sales (and related ground package costs) are no longer recorded by the Company
for ATA Vacations and Travel Charter International.
The net fee earned by the Company on these sales through the MTC outsourcing
agreement has been recorded in other revenues since the third quarter of 2002.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with operations of the Company, such as cancellation and
miscellaneous service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 13.7% to $52.2 million in 2003 from $45.9
million in 2002 primarily due to increases in cargo revenue.
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 increased 12.5% to $399.6 million in 2003
from $355.2 million in 2002.
The increases in salaries, wages and benefits between years primarily reflects
the impact of the Company's amended collective bargaining agreement (which was
ratified in July 2002) with the Company's cockpit crewmembers, who are
represented by ALPA. Initial cockpit crewmember contract salary rate increases
became effective July 1, 2002, and cockpit crewmembers received an additional
salary rate increase in July 2003 per this contract. Additionally, the amended
contract provides for expanded defined-contribution benefits for cockpit
crewmembers effective January 1, 2003, which resulted in additional salaries,
wages and benefits expense between periods. The Company expects future salaries,
wages and benefits costs to be significantly increased by the amended cockpit
crewmember contract. The amended contract is expected to increase cockpit
crewmembers' average salaries by approximately 80% over the four-year contract
period, of which 40% was realized between July 2002 and the end of 2003. The
next scheduled rate increase for cockpit crewmembers is July 1, 2004. In
addition, the Company incurred higher salary costs as a result of employing
additional crewmembers and other operations employees to handle its increased
capacity in 2003 as compared to 2002. The Company also incurred increasing costs
in 2003 for employee medical and workers' compensation benefits.
23
Fuel and Oil. Fuel and oil expense increased 33.6% to $276.1 million in 2003, as
compared to $206.6 million in 2002. During 2003, the average cost per gallon of
jet fuel consumed increased by 15.9% compared to 2002, resulting in an increase
in fuel and oil expense of approximately $37.7 million between those periods.
Although jet block hours increased 23.9% in 2003, as compared to 2002, the
Company only consumed 17.5% more gallons of fuel due to the continuing impact of
the Company replacing its aging, less-fuel-efficient Boeing 727-200 and Lockheed
L-1011 aircraft with new Boeing 737-800 and Boeing 757-300 aircraft. The
increase in gallons consumed resulted in an increase in fuel and oil expense of
approximately $34.9 million in 2003, as compared to 2002.
The Company periodically has entered into fuel price hedge contracts to reduce
the risk of fuel rice increases. Although the Company did not have any hedge
contracts in place in 2003, the Company did benefit from fuel reimbursement
clauses and guarantees in its bulk scheduled service, commercial charter and
military/government contracts. The benefit of these price guarantees is
accounted for as revenue when realized. The Company has continued to experience
increases in the cost per gallon of jet fuel in the first quarter of 2004, which
will adversely affect reported earnings for that period, and any future
increases in the cost of fuel may continue to adversely affect the Company's
earnings. See "Item 7a. - Quantitative and Qualitative Disclosures About Market
Risk" for more information.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. Many of the Company's aircraft operating
leases were originally structured to require very significant cash in the early
years of the lease in order to obtain more overall favorable lease rates. The
Company accounts for aircraft rentals expense in equal monthly amounts over the
life of each operating lease because straight-line expense recognition is most
representative of the time pattern from which benefit is derived from use of the
aircraft. The amount of the cash payments in excess of the aircraft rent expense
in these early years has resulted in a significant prepaid aircraft rent amount
on the Company's balance sheet. Aircraft rentals expense in 2003 increased 19.2%
to $226.6 million from $190.1 million in 2002. These increases were mainly
attributable to the delivery of seven leased Boeing 737-800s, three leased
Boeing 757-300s and one leased 757-200 aircraft between late 2002 and December
2003.
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 its 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 3.0% to $113.8 million in
2003, as compared to $110.5 million in 2002. This increase was due to a 21.0%
increase in system-wide jet departures, as compared to 2002, which resulted in
an increase in handling and landing fees of $17.4 million. The Company also
incurred $5.0 million more in navigation fees in 2003, as compared to 2002, due
to the increase in international military/government flying between periods. The
increase was offset by a decrease in the cost of handling per departure due to
the negotiation of more favorable terms in new contracts, resulting in $15.7
million less expense in 2003, as compared to 2002. The Company also operated
relatively fewer flights to higher-cost international destinations in 2003 than
in the prior year. This expense was also favorably affected by the temporary
suspension of the payment of the aviation security infrastructure fee by the
Company from June 1, 2003, to September 30, 2003, pursuant to the Supplemental
Act, which resulted in savings of $1.4 million in 2003.
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 crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
increased 17.0% to $64.1 million in 2003, as compared to $54.8 million in 2002,
primarily due to the increase in military/government flying. Since military
flights often operate to and from points remote from the Company's crew bases,
the Company incurs significant travel expenses on other airlines for positioning
of those crews.
24
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. Depreciation and amortization expense decreased 26.1% to
$56.7 million in 2003, as compared to $76.7 million in 2002.
The decrease in depreciation and amortization expense is mainly attributable to
the L-1011-50 and 100 fleet. The Company retired four of these aircraft from
revenue service in 2002 and four more from revenue service in 2003. In addition,
the Company recorded a reduction in the carrying value of the L-1011-50 and 100
aircraft and related assets in the fourth quarter of 2002, in accordance with
FAS 144. Due to the reduced-cost basis of the remaining assets and the
retirements in 2002 and 2003, the Company recorded $13.8 million less in
depreciation and amortization in 2003, as compared to 2002. The decrease in
depreciation and amortization is also due to fluctuations associated with other
fleet owned airframes and owned engines, along with fluctuations in expenses
related to other property and equipment, none of which are individually
significant.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems, credit card discount expenses
incurred when selling 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 14.4% to $50.2 million in 2003, as compared to $43.9 million in 2002.
The Company experienced increases in all areas of other selling expenses due to
the increase in scheduled service passengers enplaned in 2003 as compared to
2002.
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, Boeing 757-200/300 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 12.6% to $45.7
million in 2003, as compared to $52.3 million in 2002.
In 2004, the Company expects to incur significantly higher costs under its
hourly engine maintenance agreements. These agreements generally provide for the
escalation of hourly rates as the related power plants age, which reflects
higher costs to maintain them. The Company currently expects to incur
approximately $30 million in such higher costs in 2004, as compared to 2003.
The decrease was mainly attributable to the retirement by mid-2002 of the
Company's entire Boeing 727-200 fleet and the retirement of certain Lockheed
L-1011 aircraft, all of which were replaced with new Boeing 737-800 and 757-300
aircraft.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages 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 2003 and 2002, catering represented 82.4% and 82.1%,
respectively, of total passenger service expense.
The total cost of passenger service increased 7.0% to $41.0 million in 2003, as
compared to $38.3 million in 2002. The increase was mainly attributable to an
increase in military/government flying which requires a significantly more
expensive catering product than scheduled service.
25
Advertising. Advertising expense decreased 5.3% to $37.9 million in 2003, as
compared to $40.0 million in 2002. The Company incurs advertising costs
primarily to support single-seat scheduled service sales. The relative decrease
in 2003 is primarily attributable to more sales promotions in 2002 to regain
customers after the September 11, 2001, terrorist attacks. In addition, the
Company placed its creative advertising contract with a new agency in 2003 on
more economical terms than the prior contract.
Insurance. Insurance expense represents the Company's cost of hull and liability
insurance and the costs of general insurance policies held by the Company,
including workers' compensation insurance premiums and claims handling fees. The
total cost of insurance decreased 11.2% to $30.2 million in 2003, as compared to
$34.0 million in 2002. The decrease is mainly attributable to the U.S.
Government providing increased war-risk coverage in 2003. This coverage was
provided at higher rates by the commercial insurance markets in 2002. The
Company also completed the placement of its hull and liability insurance for the
new policy year beginning October 1, 2003, at rates which will be approximately
20% lower as compared to the policy year ended September 30, 2003.
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 7.1% to $24.2 million in 2003, as compared to $22.6 million in
2002. The growth in facilities costs is due to added airport locations in 2003
to support new scheduled service destinations and expanded services at existing
locations.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service and to secure
military/government charter revenues using a teaming arrangement with other
cargo and passenger carriers. Commissions expense decreased 3.9% to $22.4
million in 2003, as compared to $23.3 million in 2002.
Scheduled service commissions decreased $5.8 million between years mainly due to
the elimination of standard travel agency commissions for sales made after March
21, 2002 and the continued increase of ticket purchases made on the Company's
own website at the expense of travel agent sales. The Company continues to pay
special travel agency commissions targeted to specific markets and periods of
the year. In addition, the Company experienced a decrease in commission expense
for ATALC of approximately $3.4 million in 2003, as compared to 2002, which is
consistent with the decrease in related revenue. These decreases were partially
offset by an increase in commission expense of $7.9 million in 2003, as compared
to 2002, attributable to growth in military revenue.
Ground Package Cost. Ground package cost is incurred by the Company through
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair. Ground package cost decreased
56.6% to $12.1 million in 2003, as compared to $27.9 million in 2002,
approximately proportional to the decrease in ground package revenues. See
"Ground Package Revenues" above for an explanation of the decline in both ground
package sales and related costs for the period.
Aircraft Impairments and Retirements. Following the events of September 11,
2001, the airline industry began experiencing excess capacity as consumer demand
for scheduled service declined. At the same time, the Company was taking
delivery of a significant number of new Boeing 737-800 and 757-300 aircraft,
which it planned to utilize in its scheduled service markets. To adjust its
capacity to new market demands, the Company decided to retire its Boeing 727-200
fleet earlier than originally planned. Before September 11, 2001, the Company
had a plan in place to gradually retire these aircraft between mid-2001 and
mid-2002. As the Company retired the Boeing 727-200 aircraft, it contributed
them to BATA to re-market these aircraft to third parties. The Company
accelerated this plan by retiring certain individual aircraft earlier than
planned and the Company retired all of these aircraft from service by May 31,
2002. In accordance with FAS 121, the Company recorded an impairment charge of
$44.5 million in 2001. In accordance with FAS 121, the Company continues to
monitor current fair market values of previously impaired assets. In 2003, the
Company recorded an additional asset impairment charge of $5.3 million against
its remaining net book value of Boeing 727-200 aircraft, recorded as an
investment in the BATA joint venture, as compared to $35.9 million recorded in
2002. The current estimate of this fleet's fair market value is based on quoted
market prices and estimated salvage values. The carrying amount of one Boeing
727-200 that was not contributed to BATA, with related assets, is classified as
long-term assets held for sale in the accompanying balance sheet in accordance
with FAS 121.
26
Also in 2001, for reasons similar to those described above, the Company retired
certain Lockheed L-1011-50 and 100 aircraft, and determined that the remaining
Lockheed L-1011-50 and 100 fleet and related rotable parts and inventory were
impaired under FAS 121. The Company recorded an impairment charge of $67.8
million relating to this fleet in 2001. In 2002, the Company retired three owned
L-1011-50 aircraft by removing them from revenue service, which resulted in a
charge of $9.0 million, and recorded an additional asset impairment charge of
$7.6 million against its remaining net book value of Lockheed L-1011-50 and 100
aircraft and related parts. No such charges were recorded in 2003. In accordance
with FAS 144, the Company continues to monitor the fair market values of these
assets.
The Company estimates this fleet's fair market value using discounted cash flow
analysis. The carrying amount of these assets is classified as assets held for
use and appears in the property and equipment section of the accompanying
consolidated balance sheets, since the Company is still flying certain of these
aircraft. The assets are being depreciated in conjunction with the planned fleet
retirement schedule.
In 2002, the Company recorded a charge of $14.2 million related to the
retirement of one owned L-1011-500 aircraft. As a result, the Company began
evaluating that fleet and related parts and inventory for impairment under FAS
144. Through 2003, the Company's analysis continues to show the fleet
unimpaired.
The following tables summarize the Company's aircraft impairments and
retirements expense in 2003 and 2002:
2003 2002
----------------
Boeing 727-200 impairment charge $ 5,288 $ 35,871
Lockheed L-1011-50 and 100 impairment charge - 7,638
Lockheed L-1011-50 retirement - 9,029
Lockheed L-1011-500 retirement - 14,249
-------- --------
Aircraft impairments and retirements $ 5,288 $ 66,787
======== ========
Goodwill Impairment. The Company began annual goodwill impairment reviews under
FAS 142 in 2002. In accordance with FAS 142, the Company determined that no
goodwill impairment had occurred in 2003.
U.S Government Grants. On April 16, 2003, President Bush signed into law the
Supplemental Act, which made available $2.3 billion in reimbursement to U.S. air
carriers for expenses incurred and revenue foregone related to enhanced aviation
security subsequent to September 11, 2001. Pursuant to this legislation, the
Company received $37.2 million in cash in May 2003, which was recorded as a
credit to operating expenses.
After the terrorist attacks of September 11, 2001, the Air Transportation Safety
and System Stabilization Act ("Act") was passed, which provided for, among other
things, up to $5.0 billion in compensation to U.S. carriers for direct and
incremental losses resulting from the September 11, 2001, terrorist attacks. The
Company had recorded $66.3 million in U.S. Government grant compensation as of
December 31, 2001, based on guidance available from the DOT at the time of
identifying those expenses it deemed reimbursable. As of December 31, 2001, the
Company had received $44.5 million in cash under the Act and had a receivable of
$21.8 million for the remaining amount. Throughout 2002, the Company discussed
the reimbursement with the DOT, and, as a result of those discussions, the
Company recorded a reserve of approximately $15.2 million against its receivable
in the second quarter of 2002. The Company subsequently finalized its discussion
with the DOT in the first quarter of 2003 and received the final cash
compensation of $6.2 million under the Act.
27
The Company does not expect to receive any further material compensatory funds
from the U.S. Government.
Interest Income and Expense. Interest expense in 2003 increased to $56.3
million, as compared to $35.7 million in 2002. The Company recorded $12.1
million in interest expense in 2003 related to the secured term loan acquired in
November 2002. In accordance with Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity ("FAS 150"), the Company reclassified its Series A
Preferred as a liability on the Company's balance sheet beginning July 1, 2003,
and the related dividends of $2.1 million recognized thereafter were recorded as
interest expense.
Income Tax Expense. The Company recorded $1.3 million in income tax expense in
2003 applicable to $21.7 million in pre-tax income, while in 2002, the Company
recorded income tax benefit of $25.0 million applicable to $194.2 million in
pre-tax loss. The effective tax rates applicable to 2003 and 2002 were 6.0% and
12.8%, respectively.
As of December 31, 2003, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under GAAP that net deferred
tax assets should be fully reserved if it is more likely than not that they will
not be realized through carrybacks or other strategies, the Company recorded a
full valuation allowance against its net deferred tax asset of $33.5 million.
The Company utilized a portion of its net operating loss carryovers to offset
taxable income in 2003. As a result, in 2003 the Company paid $0.4 million
alternative minimum tax and recorded this as a current tax expense, together
with $0.9 million in state and local income taxes.
Year Ended December 31, 2002, Versus Year Ended December 31, 2001
Consolidated Flight Operations 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.
28
Twelve Months Ended December 31,
--------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------
Departures Jet 66,903 56,962 9,941 17.45
Departures SAAB 42,105 26,836 15,269 56.90
---------- ---------- --------- ------
Total Departures 109,008 83,798 25,210 30.08
---------- ---------- --------- ------
Block Hours Jet 199,290 172,207 27,083 15.73
Block Hours SAAB 40,008 24,836 15,172 61.09
---------- ---------- --------- ------
Total Block Hours 239,298 197,043 42,255 21.44
---------- ---------- --------- ------
RPMs Jet (000s) 12,231,661 11,581,733 649,928 5.61
RPMs SAAB (000s) 152,576 94,009 58,567 62.30
---------- ---------- --------- ------
Total RPMs (000s) (a) 12,384,237 11,675,742 708,495 6.07
---------- ---------- --------- ------
ASMs Jet (000s) 17,362,835 16,041,928 1,320,907 8.23
ASMs SAAB (000s) 237,133 145,759 91,374 62.69
---------- ---------- --------- ------
Total ASMs (000s) (b) 17,599,968 16,187,687 1,412,281 8.72
---------- ---------- --------- ------
Load Factor Jet 70.45 72.20 (1.75) (2.42)
Load Factor SAAB 64.34 64.50 (0.16) (0.25)
---------- ---------- --------- ------
Total Load Factor (c) 70.37 72.13 (1.76) (2.44)
---------- ---------- --------- ------
Passengers Enplaned Jet 9,139,770 8,058,886 1,080,884 13.41
Passengers Enplaned SAAB 906,909 576,339 330,570 57.36
---------- ---------- --------- ------
Total Passengers Enplaned (d) 10,046,679 8,635,225 1,411,454 16.35
---------- ---------- --------- ------
Revenue $ (000s) 1,277,370 1,275,484 1,886 0.15
RASM in cents (e) 7.26 7.88 (0.62) (7.87)
CASM in cents (f) 8.17 8.45 (0.28) (3.31)
Yield in cents (g) 10.31 10.92 (0.61) (5.59)
Average Aircraft in Service
Lockheed L-1011 10.54 15.67 (5.13) (32.74)
Boeing 737-800 22.37 5.78 16.59 287.02
Boeing 757-200 15.96 15.04 0.92 6.12
Boeing 757-300 7.96 3.08 4.88 158.44
SAAB 340B 13.33 8.33 5.00 60.02
Average Block Hours Flown per day
Lockheed L-1011 5.86 6.65 (0.79) (11.88)
Boeing 737-800 9.84 5.95 3.89 65.38
Boeing 757-200 10.73 11.28 (0.55) (4.88)
Boeing 757-300 9.82 5.06 4.76 94.07
SAAB 340B 8.22 8.17 0.05 0.61
See footnotes (a) through (g) on page 20.
Operating Revenues
Total operating revenues in 2002 increased 0.2% to $1.277 billion, as compared
to $1.275 billion in 2001. This increase was due to a $65.9 million increase in
scheduled service revenue, a $10.4 million increase in military/government
charter revenues and a $3.0 million increase in other revenues, partially offset
by a $60.9 million decrease in commercial charter revenues and a $16.5 million
decrease in ground package revenues.
29
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, commercial charter and
military/government charter operations of the Company. Data for subservice
operations is not included.
Twelve Months Ended December 31,
--------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
--------------------------------------------------------
Scheduled Service
Departures 98,877 72,787 26,090 35.84
Block Hours 201,077 156,331 44,746 28.62
RPMs (000s) (a) 9,911,884 8,694,323 1,217,561 14.00
ASMs (000s) (b) 13,608,326 11,443,304 2,165,022 18.92
Load Factor (c) 72.84 75.98 (3.14) (4.13)
Passengers Enplaned (d) 8,859,044 7,279,489 1,579,555 21.70
Revenue $ (000s) 886,579 820,666 65,913 8.03
RASM in cents (e) 6.51 7.17 (0.66) (9.21)
Yield in cents (g) 8.94 9.44 (0.50) (5.30)
Revenue per segment $ (h) 100.08 112.74 (12.66) (11.23)
Commercial Charter
Departures 6,459 7,293 (834) (11.44)
Block Hours 22,159 24,495 (2,336) (9.54)
ASMs (000s) (b) 1,875,885 2,588,780 (712,895) (27.54)
Revenue $ (000s) 131,341 192,246 (60,905) (31.68)
RASM in cents (e) 7.00 7.43 (0.43) (5.79)
RASM excluding fuel escalation (i) 6.89 7.13 (0.24) (3.37)
Military/Government Charter
Departures 3,650 3,702 (52) (1.40)
Block Hours 15,975 16,159 (184) (1.14)
ASMs (000s) (b) 2,103,874 2,147,248 (43,374) (2.02)
Revenue $ (000s) 177,901 167,524 10,377 6.19
RASM in cents (e) 8.46 7.80 0.66 8.46
RASM excluding fuel escalation (j) 8.48 7.58 0.90 11.87
Percentage of Consolidated Revenues:
Scheduled Service 69.4% 64.3% 5.1% 7.93
Commercial Charter 10.3% 15.1% (4.8%) (31.79)
Military Charter 13.9% 13.1% 0.8% 6.11
See footnotes (a) through (j) on pages 20 - 21.
Scheduled Service Revenues. Scheduled service revenues increased 8.0% in 2002 to
$886.6 million from $820.7 million in 2001. Scheduled service revenues comprised
69.4% of consolidated revenues in 2002, as compared to 64.3% in 2001. While
total scheduled service revenues and ASMs increased, scheduled service RASM
declined 9.2% from 7.17 cents in 2001 to 6.51 cents in 2002. The declining unit
revenues experienced by the Company were a result of continuing overcapacity in
the airline industry. Customer demand declined abruptly immediately after the
terrorist attacks of September 11, 2001, and demand has also been lowered by a
slowing pace of economic activity in the United States.
Scheduled service departures grew 35.8% in 2002, compared to the ASM growth of
18.9%. This reflects the growth of the Chicago Express SAAB 340B fleet from 11
aircraft as of December 31, 2001, to 17 aircraft as of December 31, 2002. The
additional SAAB aircraft generated significantly more departures, but because
the aircraft accommodates only 34 passengers and operates on short stage length
flights, the increase in ASMs was not as great as departures.
30
Approximately 71.2% of the Company's scheduled service capacity was generated by
the Chicago-Midway market in 2002, as compared to 66.8% in 2001. The Hawaiian
market generated approximately 13.7% of total scheduled service capacity in
2002, as compared to 18.6% in 2001. Another 10.5% of total scheduled service
capacity was generated in the Indianapolis market in 2002, as compared to 9.2%
in 2001. The Company operated 152 peak daily jet and commuter departures from
Chicago-Midway and served 41 destinations on a nonstop basis in 2002, as
compared to 109 peak daily jet and commuter departures and 28 nonstop
destinations in 2001.
The Company's declining capacity in the Hawaiian market was primarily
attributable to the transition to the smaller 247-seat Boeing 757-300 aircraft
from the wide-body Lockheed L-1011 aircraft for certain West Coast-Hawaii routes
beginning in mid-2002. The Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. From June to September 2002, the
Company operated seasonal service to Lihue from Los Angeles and San Francisco.
The Company's growth in the Indianapolis market was primarily attributable to
the addition of limited jet service between Indianapolis and Chicago-Midway in
the second quarter of 2002, and the addition of nonstop service to New York
LaGuardia and Phoenix beginning in the third quarter of 2002.
Commercial Charter Revenues. Commercial charter revenues decreased 31.7% to
$131.3 million in 2002 from $192.2 million in 2001. Commercial charter revenues
accounted for 10.3% of consolidated revenues in 2002, as compared to 15.1% in
2001. The majority of the decline in commercial charter revenues was due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying.
The decrease in commercial charter RASM in 2002, as compared to 2001, was due to
the same economic and geopolitical factors which have reduced scheduled service
unit revenues between years. The Company currently expects that commercial
charter will represent a less significant source of future revenues, especially
after the end of 2003 when a contract with a major customer expires.
Military/Government Charter Revenues. Military/government charter revenue
increased 6.2% to $177.9 million in 2002 from $167.5 million in 2001.
Military/government charter revenue accounted for 13.9% of consolidated revenues
in 2002, as compared to 13.1% in 2001.
The increase in revenue and RASM for military/government charter revenues in
2002 was due primarily to rate increases awarded for the contract year ended
September 30, 2002, based upon cost data submitted to the U.S. military by the
Company and other air carriers providing these services. The Company earned
$175.6 million in the contract year ended September 30, 2002, a 10.2% increase
as compared to $159.3 million earned in the preceding contract year ended
September 30, 2001.
Ground Package Revenues. In 2002, ground package revenues decreased 31.6% to
$35.7 million, as compared to $52.2 million in 2001. This decline in ground
package sales (and related ground package costs) is primarily due to the
Company's July 1, 2002, outsourcing of the management and marketing of its ATA
Vacations and Travel Charter International brands to MTC.
Other Revenues. Other revenues increased 7.0% to $45.9 million in 2002, as
compared to $42.9 million in 2001, primarily due to an increase in cancellation
and administrative fee revenues.
31
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits expense in 2002
increased 9.2% to $355.2 million, as compared to $325.2 million in 2001.
The increase in salaries, wages and benefits primarily reflects the impact of
the Company's amended collective bargaining agreement with the Company's cockpit
crewmembers, who are represented by ALPA. The Company recorded $9.9 million in
2002 for a signing bonus as provided by the amended contract. Cockpit crewmember
contract rate increases became effective July 1, 2002. The Company also incurred
increasing costs in 2002 for employee medical and workers' compensation
benefits.
Fuel and Oil. Fuel and oil expense decreased 17.8% to $206.6 million in 2002, as
compared to $251.3 million in 2001. Although total jet block hours increased
15.7% in 2002, as compared to 2001, the Company consumed 8.9% fewer gallons of
jet fuel for flying operations. 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 retired from revenue service. The
decrease in fuel burn, due to the new aircraft, resulted in a decrease in fuel
and oil expense of approximately $25.0 million. Also contributing to the decline
in fuel expense was the decrease in the Company's average cost per gallon of jet
fuel consumed of 7.9%, resulting in an additional savings in fuel and oil
expense of approximately $18.1 million.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. During 2002, the Company recorded gains of
$0.5 million on these hedge contacts, as compared to losses of $2.6 million in
2001. As of December 31, 2002, the Company had no outstanding fuel hedge
agreements.
Aircraft Rentals. Aircraft rentals expense in 2002 increased 92.0% to $190.1
million from $99.0 million in 2001. The increase was mainly attributable to the
delivery of 30 leased Boeing 737-800 and 10 leased Boeing 757-300 aircraft
between May 2001 and December 2002.
Handling, Landing and Navigation Fees. Handling, landing and navigation fees
increased by 24.6% to $110.5 million in 2002, as compared to $88.7 million in
2001. The increase in handling, landing and navigation fees between years was
primarily due to a 17.5% increase in system-wide jet departures. The Company
also incurred approximately $5.7 million in additional airport security costs
associated with increased security requirements implemented after the terrorist
attacks on September 11, 2001.
Crew and Other Employee Travel. The cost of crew and other employee travel
decreased 7.6% to $54.8 million in 2002, as compared to $59.3 million in 2001.
This decrease was mainly due to the decrease in military and charter flights
between years, which often operate to and from points remote from the Company's
crew bases including international destinations, thus requiring significant
positioning expenditures for crewmembers on other airlines and higher hotel
costs. The decrease also reflects a decline in non-crew employee travel in 2002,
as compared to 2001, due to the Company's cost-cutting initiatives.
Depreciation and Amortization. Depreciation and amortization expense decreased
36.8% to $76.7 million in 2002, as compared to $121.3 million in the 2001.
In 2001 and 2002, the Company retired eight Lockheed L-1011-50 aircraft from
revenue service. During the fourth quarter of 2001, the Company also determined
that the remaining fleet of Lockheed L-1011-50 and 100 aircraft, rotable parts
and inventory was impaired. These assets were classified as held for use in
accordance with FAS 121, requiring them to be recorded on the balance sheet at
their estimated fair value at the time of impairment, which is the new asset
basis to be depreciated over their estimated remaining useful lives. The Company
recorded a further reduction in the carrying value of these assets in 2002. Due
to the reduced cost basis of these assets, the Company recorded $17.6 million
less depreciation and amortization expense for this fleet in 2002, as compared
to 2001.
32
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, and these aircraft were determined to be impaired under FAS
121. Boeing 727-200 aircraft not already transferred to BATA, a 50/50 joint
venture with Boeing Capital Corporation - Equipment Leasing Corporation
("BCC-ELC"), 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 held for sale. As a result, depreciation
expense on the Boeing 727-200 fleet decreased by $28.9 million in 2002, as
compared to 2001.
Partially offsetting these decreases were increased amortization of capitalized
engine and airframe overhauls on the Lockheed L-1011-500 fleet and increases in
depreciation and amortization expense associated with other fleet rotable parts,
owned engines 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 was
individually significant.
Other Selling Expenses. Other selling expenses increased 5.5% to $43.9 million
in 2002, as compared to $41.6 million in 2001. This increase is primarily the
result of a greater portion of the Company's sales being made on credit cards
and higher CRS fees.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and
repairs expense decreased 14.8% to $52.3 million in 2002, as compared to $61.4
million in 2001.
The decline in maintenance, materials and repairs expense in 2002, as compared
to 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 2002,
the Company placed 23 Boeing 727-200 aircraft into BATA and retired eight
Lockheed L-1011-50 aircraft prior to the due dates of heavy maintenance visits.
Maintenance, materials and repairs expense associated with these two fleets
decreased $20.1 million in 2002, as compared to 2001.
This decline in maintenance, materials and repairs was partially offset by an
increase in the cost of the hourly engine maintenance agreement for the
Company's growing fleet of SAAB 340B propeller aircraft operated by Chicago
Express. In addition, the Company entered into an hourly engine maintenance
agreement for the Boeing 757-200 fleet in 2002, which resulted in an increase in
maintenance, materials and repair expense between years.
Passenger Service. For 2002 and 2001, catering represented 82.1% and 74.4%,
respectively, of total passenger service expense.
The total cost of passenger service decreased 12.8% to $38.3 million in 2002, as
compared to $43.9 million in 2001. Approximately $7.4 million of the decrease is
attributable to catering expense, primarily because in 2002 the Company boarded
a higher ratio of scheduled service passengers to charter passengers than in
2001. Scheduled service passengers are provided a significantly less expensive
catering service than is provided to commercial charter and military passengers.
In addition, in 2002 the Company introduced round-trip catering for flights
originating in Chicago-Midway to reduce catering service charges. In 2002, as
compared to 2001, the Company also incurred approximately $4.8 million less
expense for mishandled baggage and passenger inconvenience due to significantly
fewer flight delays and cancellations in 2002.
Advertising. Advertising expense increased 51.5% to $40.0 million in 2002, as
compared to $26.4 million in 2001. The increase in advertising was primarily
attributable to the promotion of the new scheduled service destinations added in
2002 and the promotion of low fares in a market that had less demand for air
service. 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, which included a new advertising campaign
identifying the Company as "An Honestly Different Airline."
33
Insurance. The total cost of insurance increased 217.8% to $34.0 million in
2002, as compared to $10.7 million in 2001. Liability insurance increased $14.8
million in 2002, as compared to 2001. Immediately following the September 11,
2001, terrorist attacks, the Company's insurer reduced the maximum amount of
insurance coverage they would underwrite for liability to persons other than
employees or passengers resulting from acts of terrorism, war, hijacking, or
other similar perils (war-risk coverage) and significantly increased their
premiums for this reduced coverage. Pursuant to the Air Transportation Safety
and System Stabilization Act and other enabling legislation, the U.S. Government
has issued supplemental war-risk coverage to U.S. air carriers, including the
Company.
Hull insurance increased $5.1 million in 2002, as compared to 2001. The increase
is mainly attributable to the increase in the Company's hull value between
periods due to the addition of the new Boeing 737-800 and Boeing 757-300
aircraft. The increase is also attributable to an increase in premium rates
following the September 11, 2001 terrorist attacks. Expenses related to the
Company's general insurance policies increased $3.4 million in 2002, as compared
to 2001, due primarily to an increase in workers' compensation premiums and
claims handling fees between periods, and general increases in other
miscellaneous policies between years.
Facilities and Other Rentals. The cost of facilities and other rentals increased
11.9% to $22.6 million in 2002, as compared to $20.2 million in 2001. Growth in
facilities costs between periods was primarily attributable to facilities at
airport locations required to support new scheduled service destinations added
in late 2001 and 2002, and expanded services at existing destinations.
Commissions. Commissions expense decreased 33.0% to $23.3 million in 2002, as
compared to $34.8 million in 2001.
The Company experienced a decrease in commissions of $3.8 million in 2002, as
compared to 2001, attributable to commissions paid to travel agents by ATALC,
which is consistent with the decrease in related revenue. In addition, scheduled
service commissions decreased $9.0 million in 2002 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.
Ground Package Cost. Ground package cost decreased 33.9% to $27.9 million in
2002, as compared to $42.2 million in 2001, approximately proportional to the
decrease in ground package revenues. See the "Ground Package Revenues" section
above for an explanation of the decline in both ground package sales and related
costs.
Special Charges. Special charges represent direct expenses which, due to the
events of September 11, 2001, were considered unusual in nature under the
provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and the Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). Special
charges in 2001 were $21.5 million, while no expenses were classified as special
charges in 2002. The 2001 special charges were comprised primarily of costs
associated with the decision shortly after September 11, 2001 to remove early
from service the Company's Boeing 727-200 fleet, some of which were leased;
costs associated with the Company's proposed transaction in which ATA Holdings
Corp. would have been taken private, which was substantially complete just prior
to September 11, 2001 attacks, as a result of which the Company lost financing;
and expenses directly associated with the FAA's temporarily-mandated suspension
of commercial flights on September 11, 2001, and for several days thereafter.
Also classified as special charges were increased hull and liability insurance
costs; additional advertising expense incurred as a direct result of September
11, 2001; interest expense related to debt incurred under the Company's credit
facility to provide operating cash after September 11, 2001; and other expenses
not individually significant. The special charges for 2001 are summarized in the
following table:
34
Amount
(in thousands)
--------------
Boeing 727-200 exit costs $ 3,764
Privatization costs 3,313
Costs due to FAA mandated suspension of flights 929
Increased hull and liability insurance costs 2,964
Increased advertising costs 6,316
Increased interest expense 762
Other expenses 3,477
--------
Total Special Charges for 2001 $ 21,525
========
By December 31, 2002, all but an immaterial amount of these special charges had
been paid.
Aircraft Impairments and Retirements. Aircraft impairment and retirement costs
decreased 43.8% to $66.8 million in 2002, as compared to $118.9 million in 2001.
The following table summarizes the Company's aircraft impairments and
retirements in 2002 and 2001:
2002 2001
----------------
Boeing 727-200 impairment charge $ 35,871 $ 44,484
Lockheed L-1011-50 and 100 impairment charge 7,638 67,820
Lockheed L-1011-50 retirements 9,029 6,564
Lockheed L-1011-500 retirement 14,249 -
-------- ---------
Aircraft impairments and retirements $ 66,787 $ 118,868
======== =========
Goodwill Impairment. In accordance with FAS 142, the Company determined that the
fair value of the KTI brands was lower than the carrying amount and a goodwill
impairment loss of $6.9 million was recorded in the fourth quarter of 2002.
U.S Government Grants. The Company had recorded $66.3 million in U. S.
Government grant compensation as of December 31, 2001. This estimate was based
on guidance available from the DOT at the time for identifying those expenses it
deemed reimbursable. Throughout 2002, the Company discussed the calculation with
the DOT, and, as of December 31, 2002, had reversed approximately $16.2 million
of the accrued government reimbursement to revise its estimate of total U.S.
Government grant compensation to $50.1 million. In early 2003, the Company
received the last cash installment of grant reimbursement from the U.S.
Government, consistent with that estimate.
Interest Income and Expense. Interest expense in 2002 increased to $35.7
million, as compared to $30.1 million in 2001. The Company incurred $1.7 million
in 2002 in interest expense relating to the $168.0 million guaranteed loan
funded in November 2002. No such financing was in place in 2001. The Company
also capitalized $3.4 million less interest in 2002, as compared to 2001,
associated with new aircraft pre-delivery deposit requirements.
35
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $2.8 million in 2002, as compared to
$5.3 million in 2001. The decrease in interest income between years is primarily
due to a decline in the average interest rate earned.
Income Tax Expense. In 2002, the Company recorded an income tax credit of $25.0
million applicable to $194.2 million in pre-tax loss, while in 2001 the Company
recorded an income tax credit of $39.8 million applicable to $116.1 million in
pre-tax loss. The effective tax rate applicable to 2002 was 12.8%, as compared
to 34.2% in 2001.
As of December 31, 2002, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under accounting principles
generally accepted in the United States that net deferred tax assets should be
fully reserved if it is more likely than not that they will not be realized
through carrybacks or other tax strategies, the Company has recorded a full
valuation allowance against its net deferred asset of $43.3 million. This
allowance adjustment, included in income tax expense, resulted in an effective
tax rate of 12.8% for a tax credit applicable to the loss incurred in 2002. As
of December 31, 2002, the Company had recorded an income tax refund receivable
of $15.8 million using a five-year carryback of alternative minimum tax
operating losses from 1997 to 2001. Payment for this refund was received in
March 2003.
Liquidity and Capital Resources
The Company ended 2003 with unrestricted cash of $160.6 million and a restricted
cash balance of $48.3 million, primarily securing letters of credit. In
addition, $57.5 million of cash on advanced ticket sales had been withheld by
the Company's bank card processor and was recorded as a receivable on the
Company's balance sheet as of December 31, 2003. The Company had $4.6 million in
aircraft pre-delivery deposits at the end of 2003. The Company had no revolving
credit facility and had no funds available through other unused financing
options.
Due to lower scheduled service revenues and higher fuel prices incurred in the
first quarter of 2004 than expected, and due to the significance of cash
required in the first quarter of 2004 to meet scheduled aircraft lease payments,
the Company expects to report less unrestricted cash on hand at March 31, 2004
than it reported at December 31, 2003.
Cash Flows. In 2003, net cash provided by operating activities was $93.8
million, as compared to net cash used in operating activities in 2002 of $59.0
million and net cash provided by operating activities of $144.4 million in 2001.
The change in cash provided by or used in operating activities between 2003 and
2002 primarily resulted from an increase in earnings, the receipt of $37.2
million under the Supplemental Act in May 2003, and favorable changes in
operating assets and liabilities, including the receipt of a $15.8 million
federal income tax refund in March 2003.
Net cash used in investing activities was $98.7 million in 2003, while net cash
provided by investing activities was $88.9 million and net cash used in
investing activities was $129.8 million, respectively, in the years ended
December 31, 2002 and 2001. Such amounts included an increase in non-current
prepaid aircraft rent of $75.3 million in 2003, as compared to $12.3 million and
$17.2 million in 2002 and 2001, respectively, reflecting significant cash rents
paid in 2003 for prior aircraft deliveries. In 2003 and 2002, respectively, the
Company had $16.6 million and $149.5 million of net aircraft pre-delivery
deposits returned upon delivery of the related aircraft. In contrast, in 2001,
the Company paid $30.8 million in net aircraft pre-delivery deposits. In
addition, the Company had capital expenditures totaling $42.5 million, $59.3
million and $119.8 million in 2003, 2002 and 2001, respectively. The declining
trend in capital expenditures is due primarily to the replacement of older
aircraft with new aircraft, which require less maintenance-related capital
spending than the aging fleets they replaced.
36
Net cash used in financing activities was $34.6 million in 2003, while net cash
used in financing activities was $14.2 million, and net cash provided by
financing activities was $40.7 million, for the years ended December 31, 2002
and 2001, respectively. In all years, borrowings and repayments on short-term
and long-term debt impacted cash used in or provided by financing activities. In
2003 and 2002, respectively, the Company made net repayments of $8.4 million and
$109.9 million on pre-delivery deposit facilities related to deposits returned
on aircraft deliveries, net of borrowings. In 2001, the Company had net
borrowings of $28.4 million under these facilities. In 2002, the Company
obtained $168.0 million under a federally guaranteed loan. In 2002 and 2001, the
Company borrowed and repaid $192.5 million and $153.4 million in temporary debt,
respectively, related to the purchase of certain Boeing 737-800 and Boeing
757-300 aircraft. The Company provided $17.9 million to collateralize additional
letters of credit which was recorded as an increase in restricted cash in 2003.
Bond Exchange and Lease Amendments
The terrorist attacks of September 11, 2001, and the generally weak economy have
had a negative impact on the Company's liquidity. The Company's new Boeing
aircraft are all leased and have higher fixed ownership costs than the older
fleets that they replaced. The terms of many of these aircraft operating leases
were determined before September 11, 2001, and were structured to require
significant cash payments in the first few years of each lease in order to
reduce the total rental cost over the related lease terms. Consequently, the
Company made large cash lease payments on many of its aircraft in the year ended
December 31, 2003, which resulted in a substantial use of the Company's cash. As
of December 31, 2003, the Company was also scheduled to repay its 2004 Notes in
August 2004 and its 2005 Notes in December 2005.
On January 30, 2004, the Company successfully completed exchange offers and
issued 2009 Notes and cash consideration for certain of its 2004 Notes and
issued 2010 Notes and cash consideration for certain of its 2005 Notes. In
completing the exchange offers, the Company accepted $260.3 million of Existing
Notes tendered for exchange, issuing $163.1 million in aggregate principal
amount of 2009 Notes and delivering $7.8 million in cash in exchange for $155.3
million in aggregate principal amount of 2004 Notes tendered, and issuing $110.2
million in aggregate principal amount of 2010 Notes and delivering $5.2 million
in cash in exchange for $105.0 million in aggregate principal amount of 2005
Notes. In addition to the New Notes issued, $19.7 million in aggregate principal
amount of the 2004 Notes and $20.0 million in aggregate principal amount of the
2005 Notes remain outstanding after the completion of the exchange offers. In
connection with the exchange offers, the Company also obtained the consent of
the holders of the Existing Notes to amend or eliminate all of the restrictive
operating covenants and certain default provisions of the indentures governing
the Existing Notes. See "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 6 - Debt" for additional information
about the exchange offers.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, BCSC, GECAS and ILFC.
The effect of the lease amendments was to delay the payment of portions of the
amounts due under those operating leases primarily between June 30, 2003 and
March 31, 2005 and to extend the leases generally for two years. Most of the
payments delayed during this time period will be subsequently paid at various
times throughout the remaining life of the leases. The Company received a refund
of $29.8 million on January 30, 2004 related to payments made in 2003 under the
original terms of certain retroactively amended leases. The amendments will also
result in approximately $69.6 million in lower cash payments during 2004 under
these operating leases, as compared to payments which would have been due under
the original lease terms. See "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 7 - Lease Commitments" for
additional information about the Company's operating leases.
37
The table below summarizes the significant items that will affect liquidity in
the year ending December 31, 2004, as a result of the exchange offers and
operating lease amendments in addition to deferring $155.3 million dollars of
the senior indebtedness previously due in August 2004:
Cash savings (outflows)
(in thousands)
--------------
Refund of certain 2003 aircraft operating lease payments $ 29,806
Reduction in aircraft operating lease payments in 2004 69,546
Payment of cash consideration for 2004 Notes (7,765)
Payment of cash consideration for 2005 Notes (5,250)
Payment of preferred dividends accrued at December 31, 2003 (9,237)
Payment of fees related to exchange offers and lease amendments in 2004 (7,777)
Additional interest costs related to Exchange Offers (12,910)
---------
Total Net Cash Savings $ 56,413
=========
While the Company expects that adverse industry conditions are likely to
continue throughout 2004, the Company's management believes, that with the
completion of the exchange offers and operating lease amendments, the Company
has a viable plan to provide sufficient cash to fund operations for the next 12
months. The Company's plan continues to require focused marketing efforts on
those businesses and markets where the Company believes it can be a leading
provider, and the implementation of additional cost-saving initiatives the
Company believes will maintain its low-cost advantage. Although the Company
believes the assumptions underlying its 2004 financial projections are
reasonable, there are significant risks that could cause the Company's 2004
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain consequences of the major airline bankruptcies, the
possibility of other airline bankruptcy filings and the ongoing geopolitical
impacts of the conflicts in the Middle East.
Debt and Operating Lease Cash Payment Obligations. The Company is required to
make cash payments in the future on debt obligations and operating leases.
Although the Company is obligated on a number of long-term operating leases,
which are not recorded on the balance sheet under GAAP, the Company has no
off-balance sheet debt and does not guarantee the debt of any other party. The
following table summarizes the Company's contractual debt principal payments and
operating lease obligations after giving effect to the exchange offers and
operating lease amendments and the effect such obligations are expected to have
on its liquidity and cash flows in future periods.
Cash Payments Currently Scheduled
---------------------------------
2007- After
Total 2004 2005 2006 2008 2008
----- ---- ---- ---- ---- ----
(in thousands)
Current and long-term debt $ 526,076 $ 66,355 $ 70,712 $ 30,456 $ 81,180 $ 277,373
Lease obligations (1) 3,879,581 207,303 266,017 316,285 627,993 2,461,983
Expected future lease obligations (2) 642,224 3,101 18,893 42,527 94,323 483,380
Redeemable preferred stock (3) 50,000 - - - - 50,000
----------- --------- --------- --------- --------- -----------
Total contractual cash obligations $ 5,097,881 $ 276,759 $ 355,622 $ 389,268 $ 803,496 $ 3,272,736
=========== ========= ========= ========= ========= ===========
38
(1) 2004 lease obligations include a refund of approximately $29.8 million
related to lease payments made in 2003 due to completion of the lease amendments
on January 30, 2004. For further discussion, see "Financial Statements - Notes
to Consolidated Financial Statements - Note 2 - State of the Industry and Its
Effects on the Company."
(2) Represents estimated payments on nine new Boeing 737-800 aircraft the
Company is committed to taking delivery of in 2004 and 2005, and four spare
engines the Company is committed to taking delivery of in 2005 through 2008. The
Company intends to finance these aircraft and engines with operating leases.
However, no such leases are in place as of December 31, 2003, as the Company has
not received the aircraft and engines. Payments for expected future lease
obligations were estimated using leases for comparable aircraft and engines
currently in place. For further discussion, see "Financial Statements - Notes to
Consolidated Financial Statements - Note 13 - Commitments and Contingencies."
(3) Represents the mandatory redemption of the 500 shares of Series A Preferred
in equal semiannual installments between 2010 and 2015. Amount excludes the
mandatory redemption of the 300 shares of Series B convertible preferred stock
in 2015, as these shares can be converted into common stock at any time up to
the mandatory redemption date.
Aircraft and Fleet Transactions. The Company has a purchase agreement with
Boeing to purchase directly from Boeing seven new Boeing 737-800s, which are
currently scheduled for delivery between July 2005 and December 2005. These
aircraft are powered by General Electric CFM56-7B27 engines. The manufacturer's
list price is $52.4 million for each 737-800, subject to escalation. The
Company's purchase price for each aircraft is subject to various discounts.
According to a 2004 amendment to the purchase agreement with Boeing, if the
Company does not have permanent financing for these aircraft suitable to the
Company, and does not have suitable pre-delivery deposit financing, and if
Boeing does not elect to provide such financing suitable to the Company, these
deliveries can be delayed for one year periods annually for up to five years.
Aircraft pre-delivery deposits are required for these aircraft, and the Company
has historically funded these deposits for past aircraft deliveries using
operating cash and pre-delivery deposit finance facilities. The Company can
provide no assurance that it will be able to secure pre-delivery deposit finance
facilities or permanent financing for any future aircraft purchases. As of
December 31, 2003, the Company had $4.6 million in long-term pre-delivery
deposits outstanding for future aircraft deliveries which were funded with
operating cash. Upon delivery of the aircraft, pre-delivery deposits funded with
operating cash are expected to be returned to the Company. As of December 31,
2003, the Company also has purchase rights with Boeing for 40 Boeing 737-800
aircraft.
The Company has an agreement to lease one additional Boeing 737-800 under an
operating lease from ILFC, which is currently scheduled for delivery in May
2004.
The Company also has an agreement with GECAS to lease one additional Boeing
737-800 currently scheduled for delivery in November 2004.
The Company has an agreement with General Electric to purchase four spare
engines CFM56-7B27 engines, which are currently scheduled for delivery between
2005 and 2008.
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. The Company took delivery of all six SAAB 340B aircraft under this
agreement in 2002.
The Company has a limited liability agreement with BCC-ELC forming BATA, a 50/50
joint venture. BATA is remarketing the Company's fleet of Boeing 727-200
aircraft in cargo configurations. In exchange for supplying the aircraft and
certain operating services to BATA, the Company has and expects to continue to
receive both cash and equity in the income or loss of BATA. As of December 31,
2003, the Company had transferred 23 of its fleet of Boeing 727-200 aircraft to
BATA.
39
Significant Financings. In November 2002, the Company obtained a $168.0 million
secured term loan, of which $148.5 million is guaranteed by the ATSB. Interest
is payable monthly at LIBOR plus a margin. Guarantee fees payable quarterly were
5.5% of the outstanding guaranteed principal balance in 2003, escalating to 9.5%
on the outstanding guaranteed principal balance in 2004 through 2008. The net
proceeds of the term loan were approximately $164.8 million, after deducting
issuance costs. The Company used a portion of the net proceeds to repay
borrowings on its existing revolving bank credit facility and to collateralize
new letters of credit, previously secured by the bank facility. The additional
secured term loan proceeds of approximately $104.7 million were used for general
corporate purposes.
The secured term loan is subject to certain restrictive covenants and is
collateralized primarily by certain receivables, aircraft, spare engines, and
rotable parts. The receivables had a carrying amount of approximately $39.3
million as of December 31, 2003. The aircraft, spare engines and parts consist
of two Lockheed L-1011-500 aircraft, one Lockheed L-1011-50 aircraft, two Saab
340B aircraft, 24 Rolls-Royce RB211 spare engines and Boeing 757-200, Boeing
757-300 and Boeing 737-800 rotable parts, which had a combined carrying amount
of approximately $67.5 million as of December 31, 2003.
In conjunction with obtaining the secured term loan, the Company issued a
warrant to the Federal Government to purchase up to 1,478,059 shares of its
common stock, and additional warrants to other loan participants to purchase up
to 194,089 shares of its common stock, in each case at an exercise price of
$3.53 per share over a term of ten years. The Company allocated $7.4 million to
the total value of warrants issued giving rise to a discount on the loan. (See
"Financial Statements - Notes to Consolidated Financial Statements - Note 10 -
Shareholders' Deficit.") The amortization of the discount resulted in an
increase in the effective rate of interest on the secured term loan, which was
3.4% as of December 31, 2003 and 3.2% as of December 31, 2002.
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 2003, the Company processed approximately $753.8 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. As of December 31, 2003, the bank had withheld $57.5
million in cash. As of December 31, 2002, the bank had withheld $30.0 million in
cash. The deposits as of December 31, 2003, and December 31, 2002 constituted
approximately 100% and 60%, respectively, of the Company's total future
obligations to provide services purchased by charges to MasterCard or Visa card
accounts as of those dates. 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 90 days' notice, as does the bank. 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 24 months from the date of termination.
40
On October 10, 2003, the Company amended its agreement with its credit card
processing bank to reflect an extension for the processing and collection of
sales charged on MasterCard and Visa cards until December 31, 2004. In order to
secure this extension, the Company agreed to increase the amount of pre-paid
sales that the bank holds on deposit from 60% to 100%. The effect of increasing
this percentage was to reduce the Company's cash balance by approximately $23.0
million between September 30, 2003, and December 31, 2003, as compared to what
the Company estimates its cash balance would have been with a 60% holdback of
prepaid sales.
On March 1, 2004, the Company amended its agreement with its credit card
processing bank to reflect a further extension for the processing of sales
charges on MasterCard and Visa cards until March 31, 2005. The credit card
processing bank agreed to reduce the holdback percentage for sales for future
travel to 75% effective with the execution of the amendment. The effect of
decreasing the holdback percentage from 100% to 75% increased the Company's cash
balance by approximately $21 million based on the holdback balance at March 1,
2004. The amended agreement provides quarterly financial covenants under which
the Company may maintain a holdback at 75% or 50% of sales for future travel,
but at no time during the life of the amendment will the holdback be lower than
50% of sales for future travel. However, the Company can provide no assurances
that it will be able to maintain the percentage of holdback below 100% in future
periods under this amendment.
Although the Company continues to process significant dollar amounts of ticket
sales using credit cards other than MasterCard and Visa, as of December 31,
2003, no cash deposit requirements had been implemented by the issuers or
processors of those cards.
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 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.
The Company has also historically provided both escrow arrangements and a surety
bond to the DOT, but most recently has used a surety bond to meet its DOT
charter obligations. Prior to the terrorist attacks of September 11, 2001, the
Company had provided a letter of credit of $1.5 million as security to its
surety bond issuer for its total estimated surety bond obligations, including
the DOT charter obligations. 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 at that date. The Company's
letter of credit was adjusted accordingly, and the Company has been subject to
further adjustments of its letter of credit, based upon further revisions to the
estimated liability for total surety bonds outstanding. The cash pledged to
secure the Company's letter of credit is included in restricted cash on the
accompanying balance sheets. On December 15, 2003, upon cancellation of the DOT
charter obligation surety bond by the issuer, the Company entered into an escrow
arrangement which requires the Company to place advance receipts for certain
charter flights into escrow until the flight operates. Once the flight occurs
the Company is paid from the escrow account those advance deposits specific to
that completed flight. As of December 31, 2003, the Company has $6.9 million in
advance charter receipts deposited in escrow, which was included in restricted
cash on the Company's balance sheet as of that date. As of December 31, 2003,
the Company also continued to maintain a letter of credit for $15.2 million
securing the DOT charter obligations surety bond, pending formal release from
those obligations of the issuer of the surety bond by the DOT. This release was
provided by the DOT in February 2004, and the letter of credit was subsequently
cancelled, and the restricted cash securing that letter of credit was returned
to the Company.
As of December 31, 2003, the Company's restricted cash pledged to secure its
letters of credit for all surety bonds, including its DOT charter obligations,
was $41.4 million, and cash deposited in escrow for DOT charter obligations
totaled $6.9 million.
41
Future Accounting Changes
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). The FASB amended FIN 46 in December 2003.
FIN 46, as amended, requires that companies ("primary beneficiaries") that
absorb a majority of a variable interest entity's ("VIE") losses, or receive a
majority of a VIEs residual returns, consolidate the entity. The accounting
provisions of FIN 46 are required to be applied to VIEs within the first quarter
ending after March 15, 2004. The related disclosure requirements were effective
upon issuance of FIN 46. The Company does not expect FIN 46 to have a material
impact on the Company.
The Company has identified BATA as a VIE under FIN 46 in which the Company has a
significant variable interest. The Company has determined that it is not the
primary beneficiary of BATA under FIN 46 and is not required to consolidate
BATA. As of December 31, 2003, the investment in BATA on the Company's
consolidated balance sheet was $14.7 million.
See "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 19 - Recently Issued Accounting Pronouncements" for
a discussion of recently issued accounting pronouncements impacting the Company.
Forward-Looking Information and Risk Factors
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 threat of future terrorist attacks;
o labor costs;
o aviation fuel costs;
o competitive pressures on schedules and pricing;
o weather conditions;
o governmental legislation and regulation;
o consumer perceptions of the Company's products;
o demand for air transportation overall and specifically in markets in
which the Company operates;
o higher costs associated with new security directives;
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; and
o other risks and uncertainties listed from time to time in reports the
Company periodically files with the Securities and Exchange Commission
("SEC").
42
The Company is under no obligation to update, and will not undertake to update,
its forward-looking statements to reflect future events or changes in
circumstances.
Related Party Transactions
For information on the Company's related party transactions see "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 18 - Related Party Transactions."
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain market risks, including commodity price risk
resulting from aircraft fuel price fluctuations and interest rate risk. The
adverse effects of potential changes in these market risks are discussed below.
The sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management might take to mitigate the adverse impact of such changes on
the Company. See the notes to consolidated financial statements for a
description of the Company's accounting policies and other information related
to these financial instruments.
Aircraft Fuel Prices. The Company's results of operations are significantly
impacted by changes in the price of aircraft fuel. During 2003, aircraft fuel
accounted for approximately 19.2% of the Company's operating expenses, as
compared to 14.4% in 2002. The Company obtains fuel price fluctuation protection
from escalation clauses in certain commercial charter, military charter and bulk
scheduled service. During 2002 and 2001, the Company entered into fuel hedge
contracts to reduce the volatility of fuel prices, using heating oil swap
agreements. Using these contracts, the Company hedged approximately 12% and 30%
of its total gallons consumed in 2002 and 2001, respectively. As of December 31,
2003, the Company had no outstanding fuel hedge agreements.
Market risk is estimated as a hypothetical 10% increase in the December 31,
2003, cost per gallon of fuel. Based on projected 2004 fuel usage, excluding
anticipated protection from escalation clauses, such a change would result in an
increase in aircraft fuel expense of approximately $26.5 million. As of December
31, 2002, that risk was $19.4 million.
Interest Rates. The Company's results of operations are affected by fluctuations
in market interest rates. As of December 31, 2003, the majority of the Company's
variable-rate debt was comprised of approximately $161.0 million of
variable-rate debt through the secured term loan. As of December 31, 2002, the
majority of the Company's variable-rate debt was comprised of approximately
$168.0 million and $8.4 million, respectively, of variable-rate debt through the
secured term loan and debt funding aircraft pre-delivery deposits. If interest
rates average 100 basis points more on variable-rate debt in 2004, as compared
to 2003 average rates, the Company's interest expense would increase by
approximately $1.6 million. In comparison, if interest rates averaged 100 basis
points more on variable-rate debt in 2003, as compared to 2002 average rates,
the Company's interest expense would have increased by approximately $1.8
million.
As of December 31, 2003 and 2002, the majority of the Company's fixed-rate debt
was comprised of unsecured debt with a carrying value of $300.0 million. Based
upon a calculation of discounted future cash flows using current incremental
borrowing rates as of the end of the year for similar types of instruments, the
fair value as of December 31, 2003, of this fixed-rate debt is estimated to be
approximately $306.0 million. After giving effect to the exchange offers that
were completed on January 30, 2004, the fair value of this fixed-rated debt
including the additional notes is estimated to be approximately $406.0 million.
See "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 2 - State of the Industry and Its Effect on the
Company" for additional information on the exchange offers. Market risk,
estimated as the potential increase in fair value resulting from a hypothetical
100 basis point decrease in market interest rates, was approximately $10.0
million as of December 31, 2003. As of December 31, 2002, that risk was
approximately $32.5 million.
43
In 2003, the average rate for the Company's short-term investments was less than
one percent. If average short-term interest rates decreased to zero percent, the
Company's interest income from short-term investments would have decreased by
approximately $1.4 million as of December 31, 2003. In comparison, the Company
estimated that if average short-term interest rates decreased by 100 basis
points as compared to 2002 average rates, the Company's interest income from
short-term investments would have decreased by approximately $2.0 million as of
December 31, 2002.
All estimated changes in interest income and expense are determined by
considering the impact of hypothetical changes in interest rates on the
Company's debt and cash balances at December 31, 2003 and 2002.
44
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
ATA Holdings Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ATA Holdings
Corp. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in preferred stock and
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule listed in the index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATA Holdings Corp.
and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
As discussed in Note 17 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
ERNST & YOUNG LLP
Indianapolis, Indiana
January 30, 2004, except for Note 21, as to which the date is March 1, 2004
45
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 160,644 $ 200,160
Aircraft pre-delivery deposits - 16,768
Receivables, net of allowance for doubtful accounts
(2003 - $1,388; 2002 - $2,375) 118,745 86,377
Inventories, net 47,604 51,233
Prepaid expenses and other current assets 21,406 39,214
------------------- ----------------------
Total current assets 348,399 393,752
Property and equipment:
Flight equipment 324,697 312,652
Facilities and ground equipment 142,032 134,355
------------------- ----------------------
466,729 447,007
Accumulated depreciation (213,247) (181,380)
------------------- ----------------------
253,482 265,627
Restricted cash 48,301 30,360
Goodwill 14,887 14,887
Prepaid aircraft rent 144,088 68,828
Investment in BATA 14,672 22,968
Deposits and other assets 46,158 51,714
------------------- ----------------------
Total assets $ 869,987 $ 848,136
=================== ======================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 51,645 $ 14,191
Short-term debt - 8,384
Accounts payable 25,327 23,688
Air traffic liabilities 102,831 94,693
Accrued expenses 154,689 160,924
------------------- ----------------------
Total current liabilities 334,492 301,880
Long-term debt, less current maturities 443,051 486,853
Deferred gains from sale and leaseback of aircraft 55,392 54,889
Other deferred items 51,822 42,038
Redeemable preferred stock; authorized and issued 500 shares 56,330 -
------------------- ----------------------
Total liabilities 941,087 885,660
Commitments and contingencies
Convertible redeemable preferred stock; authorized and issued 300
shares 32,907 30,375
Redeemable preferred stock; authorized and issued 500 shares - 52,110
Shareholders' deficit:
Preferred stock; authorized 9,999,200 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,502,593 - 2003; 13,476,193 - 2002 65,711 65,290
Treasury stock; 1,711,440 shares - 2003; 1,711,440 shares - 2002 (24,778) (24,778)
Additional paid-in capital 18,163 18,374
Accumulated deficit (163,103) (178,895)
------------------- ----------------------
Total shareholders' deficit (104,007) (120,009)
------------------- ----------------------
Total liabilities and shareholders' deficit $ 869,987 $ 848,136
=================== ======================
See accompanying notes.
46
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
2003 2002 2001
Operating revenues:
Scheduled service $ 1,085,420 $ 886,579 $ 820,666
Charter 366,207 309,242 359,770
Ground package 14,682 35,687 52,182
Other 52,224 45,862 42,866
----------- ----------- ----------
Total operating revenues 1,518,533 1,277,370 1,275,484
----------- ----------- ----------
Operating expenses:
Salaries, wages and benefits 399,622 355,201 325,153
Fuel and oil 276,057 206,574 251,333
Aircraft rentals 226,559 190,148 98,988
Handling, landing and navigation fees 113,781 110,528 88,653
Crew and other employee travel 64,055 54,774 59,278
Depreciation and amortization 56,729 76,727 121,327
Other selling expenses 50,150 43,934 41,601
Aircraft maintenance, materials and repairs 45,741 52,254 61,394
Passenger service 41,000 38,345 43,856
Advertising 37,932 40,028 26,421
Insurance 30,214 33,981 10,675
Facilities and other rentals 24,162 22,624 20,241
Commissions 22,445 23,326 34,789
Ground package cost 12,089 27,882 42,160
Special charges - - 21,525
Aircraft impairments and retirements 5,288 66,787 118,868
Goodwill impairment - 6,893 -
U.S. Government grants (37,156) 16,221 (66,318)
Other 72,324 71,180 67,410
----------- ----------- ----------
Total operating expenses 1,440,992 1,437,407 1,367,354
----------- ----------- ----------
Operating income (loss) 77,541 (160,037) (91,870)
Other income (expense):
Interest income 2,878 2,829 5,331
Interest expense (56,324) (35,746) (30,082)
Other (2,350) (1,260) 554
----------- ----------- ----------
Other expense (55,796) (34,177) (24,197)
----------- ----------- ----------
Income (loss) before income taxes 21,745 (194,214) (116,067)
Income taxes (credits) 1,311 (24,950) (39,750)
----------- ----------- ----------
Net income (loss) 20,434 (169,264) (76,317)
Preferred stock dividends (4,642) (5,720) (5,568)
----------- ----------- ----------
Income (loss) available to common shareholders $ 15,792 $ (174,984) $ (81,885)
=========== =========== ==========
Basic earnings per common share:
Average shares outstanding 11,773,713 11,711,906 11,464,125
Net income (loss) per common share $ 1.34 $ (14.94) $ (7.14)
=========== =========== ==========
Diluted earnings per common share:
Average shares outstanding 14,468,836 11,711,906 11,464,125
Net income (loss) per common share $ 1.27 $ (14.94) $ (7.14)
=========== =========== ==========
See accompanying notes.
47
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Redeemable Additional Other Retained Total
Preferred Common Treasury Paid-in Comprehensive Earnings Shareholders'
Stock Stock Stock Capital Income (Deficit) Equity (Deficit)
----- ----- ----- ------- ------ --------- ----------------
Balance as of December 31, 2000 $80,000 $59,012 $ (24,564) $ 12,232 $ - $ 77,974 $ 124,654
======= ======= ========= ========= ======= ======== ============
Net loss - - - - - (76,317) (76,317)
Net loss on derivative
instruments, net of tax - - - - (687) - (687)
------- -------- ------------
Total comprehensive loss - - - - (687) (76,317) (77,004)
------- -------- ------------
Preferred dividends - - - - - (5,568) (5,568)
Restricted stock grants - 40 (8) 10 - - 42
Stock options exercised - 2,912 - (1,242) - - 1,670
Purchase of treasury stock - - (196) - - - (196)
Disqualifying disposition of
stock - - - 534 - - 534
------- ------- --------- --------- ------- -------- ------------
Balance as of December 31, 2001 80,000 61,964 (24,768) 11,534 (687) (3,911) 44,132
======= ======= ========= ========= ======== ======== ============
Net loss - - - - - (169,264) (169,264)
Net gain on derivative
instruments, net of tax - - - - 687 - 687
------- -------- ------------
Total comprehensive loss - - - - 687 (169,264) (168,577)
------- -------- ------------
Preferred dividends paid - - - - - (3,235) (3,235)
Restricted stock grants - 13 (10) 4 - - 7
Payment of liability with stock - 2,445 - (295) - - 2,150
Stock options exercised - 868 - (419) - - 449
Warrants issued with ATSB loan - - - 7,424 - - 7,424
Disqualifying disposition of
stock - - - 126 - - 126
Accrued preferred stock
dividends 2,485 - - - - (2,485) (2,485)
------- ------- --------- --------- ------- -------- ------------
Balance as of December 31, 2002 82,485 65,290 (24,778) 18,374 - (178,895) (120,009)
======= ======= ========= ========= ======== ======== ============
Net income - - - - - 20,434 20,434
Stock options exercised - 421 - (211) - - 210
Reclassification to long-term
debt (54,220)
Accrued preferred stock
dividends 4,642 - - - - (4,642) (4,642)
------- ------- --------- --------- ------- -------- ------------
Balance as of December 31, 2003 $32,907 $65,711 $ (24,778) $ 18,163 $ - $ (163,103) $ (104,007)
======= ======= ========= ========= ======== ======== ============
See accompanying notes.
48
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2003 2002 2001
----------------------------------------
Operating activities:
Net income (loss) $ 20,434 $ (169,264) $ (76,317)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 56,729 76,727 121,327
Aircraft impairments and retirements 5,288 66,787 118,868
Goodwill impairments - 6,893 -
Deferred income tax credit - (8,697) (40,848)
Other non-cash items 31,686 39,817 1,843
Changes in operating assets and liabilities:
U.S. Government grant receivable 6,158 16,221 (21,861)
Other receivables (38,526) (27,552) 3,420
Inventories 38 (7,411) (11,586)
Prepaid expenses and other current assets 17,808 (24,701) 5,940
Accounts payable 1,639 (3,260) 16,882
Air traffic liabilities 8,138 (6,265) (6,092)
Accrued expenses (15,613) (18,309) 32,848
--------- ---------- ---------
Net cash provided by (used in) operating activities 93,779 (59,014) 144,424
--------- ---------- ---------
Investing activities:
Aircraft pre-delivery deposits 16,582 149,510 (30,781)
Capital expenditures (42,534) (59,346) (119,798)
Noncurrent prepaid aircraft rent (75,260) (12,304) (17,180)
Investment in BATA - 18,632 27,343
(Additions) reductions to other assets 2,206 (7,985) 10,474
Proceeds from sales of property and equipment 312 424 151
--------- ---------- ---------
Net cash provided by (used in) investing activities (98,694) 88,931 (129,791)
--------- ---------- ---------
Financing activities:
Preferred stock dividends - (3,235) (5,568)
Proceeds from sale/leaseback transactions - 2,253 5,229
Proceeds from short-term debt - 56,858 71,537
Payments on short-term debt (8,384) (167,839) (44,123)
Proceeds from long-term debt 5,729 363,040 219,422
Payments on long-term debt (14,215) (235,352) (207,294)
Increase in restricted cash (17,941) (30,360) -
Proceeds from stock option exercises 210 449 1,670
Purchase of treasury stock - (10) (204)
--------- ---------- ---------
Net cash provided by (used in) financing activities (34,601) (14,196) 40,669
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents (39,516) 15,721 55,302
Cash and cash equivalents, beginning of period 200,160 184,439 129,137
--------- ---------- ---------
Cash and cash equivalents, end of period $ 160,644 $ 200,160 $ 184,439
========= ========== =========
Supplemental disclosures:
Cash payments for:
Interest $ 47,088 $ 42,102 $ 44,839
Income taxes (refunds), net $ (10,992) $ 1,572 $ (9,721)
Financing and investing activities not affecting cash:
Accrued capitalized interest $ 343 $ (10,487) $ 7,465
Notes payable $ - $ 2,427 $ -
Issuance of warrants $ - $ 7,424 $ -
Accrued preferred stock dividends $ 4,642 $ 2,485 $ -
See accompanying notes.
49
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Business Description
The consolidated financial statements include the accounts of ATA Holdings
Corp., formerly Amtran Inc. (the "Company"), and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
The Company operates principally in one business segment through ATA Airlines,
Inc., formerly American Trans Air, Inc. ("ATA"), its principal subsidiary, which
accounts for approximately 90% of the Company's operating revenues. ATA is a
U.S.-certificated air carrier providing domestic and international charter and
scheduled passenger air services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are carried at cost, which approximates market, and are
primarily comprised of money market funds and investments in U.S. Treasury
repurchase agreements. For additional information, see "Note 3 - Cash and Cash
Equivalents."
Inventories
Inventories consist primarily of expendable aircraft spare parts, fuel and other
supplies. Aircraft parts inventories are stated at cost and are reduced by an
allowance for obsolescence. The obsolescence allowance is provided by amortizing
the cost of the aircraft parts inventory, net of an estimated residual value,
over the related fleet's estimated useful service life. The obsolescence
allowance at December 31, 2003 and 2002 was $21.2 million and $14.7 million,
respectively. Inventories are charged to expense when consumed.
Investment in BATA Leasing, LLC
The Company has a limited liability agreement with Boeing Capital Corporation -
Equipment Leasing Corporation forming BATA Leasing LLC ("BATA"), a 50/50 joint
venture. Because the Company does not control BATA, the Company's investment is
accounted for under the equity method of accounting. BATA is remarketing the
Company's fleet of Boeing 727-200 aircraft in cargo configurations. In exchange
for supplying the aircraft and certain operating services to BATA, the Company
has and expects to continue to receive both cash and its share of the income or
loss of BATA. As of December 31, 2003, the Company transferred 23 of its fleet
of Boeing 727-200 aircraft to BATA.
Travel Awards Program
The Company instituted a travel award program in October 2002, which allows
customers to earn points for travel purchased on ATA. Once they accumulate to
certain values, the points can be redeemed for free future travel on ATA. The
Company records a liability based on the estimated incremental cost of providing
travel when the customer has earned points which can be redeemed for the lowest
award level. The liability is relieved as customers complete travel for free
trips or when unused points or awards expire. The liability was $0.7 million and
$0.1 million at December 31, 2003 and 2002, respectively.
50
Prepaid Aircraft Rent
The Company's operating leases require periodic cash payments that vary in
amount and frequency. Many of the Company's aircraft operating leases were
originally structured to require very significant cash in the early years of the
lease in order to obtain more overall favorable lease rates. The Company
accounts for aircraft rentals expense in equal monthly amounts over the term of
each operating lease because straight-line expense recognition is most
representative of the time pattern from which benefit from use of the aircraft
is derived. The amount of the cash payments in excess of the aircraft rent
expense in these early years has created a significant prepaid aircraft rent
amount on the Company's balance sheet. See "Note 2 - State of the Industry and
Its Effect on the Company" with respect to renegotiation of aircraft lease terms
as of January 30, 2004.
Revenue Recognition
Revenues are recognized when air transportation or other services are provided.
Customer flight deposits and unused passenger tickets sold are included in air
traffic liability. As is customary within the industry, the Company performs
periodic evaluations of this estimated liability, and any resulting adjustments,
which can be significant, are included in the results of operations for the
periods in which the evaluations are completed.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the transportation
is provided and the related revenue is recognized. The amount of passenger
traffic commissions paid in advance and not yet recognized as expense is
included in prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
Property and Equipment
Property and equipment are recorded at cost and are depreciated to residual
values over their estimated useful service lives using the straight-line method.
The estimated useful service lives for the principal depreciable asset
classifications are as follows:
51
Asset Estimated Useful Service Life
- ---------------------------------------------------------------------------------
Aircraft and related equipment
Lockheed L-1011 (Series 50 and 100) Depreciating to individual aircraft retirement date
(2004) (See "Note 16 - Fleet Impairment.")
Lockheed L-1011 (Series 500) Depreciating to common retirement date of December 2010
Boeing 737-800 All aircraft are subject to operating leases
Boeing 757-200 All aircraft are subject to operating leases
Boeing 757-300 All aircraft are subject to operating leases
SAAB 340B 15 years
Major rotable parts, avionics and assemblies Life of equipment or lease to which applicable
(generally ranging from 5-18 years)
Improvements to leased flight equipment Period of benefit or term of lease
Other property and equipment 3-7 years
Aircraft Lease Return Conditions
The Company finances substantially all of its of aircraft through leases
accounted for as operating leases. Many of these leases require that the
airframes and engines be in a specified maintenance condition upon their return
to the lessor at the end of the lease. If these return conditions are not met by
the Company, the leases generally require financial compensation to the lessor.
When an operating lease is within five years of its initial termination date,
the Company accrues ratably over that five years, if estimable, the total costs
that will be incurred by the Company to render the aircraft in a suitable return
condition per the contract.
Airframe and Engine Overhauls
The Company has entered into engine manufacturers' maintenance agreements for
engines which power the Boeing 737-800, Boeing 757-200, Boeing 757-300 and SAAB
340B fleets, which provide for the Company to pay a monthly fee per engine
flight hour in exchange for major overhaul and maintenance of those engines. The
Company expenses the cost per flight hour under these agreements as incurred.
The cost of engine overhauls for remaining fleet types, and the cost of airframe
overhauls for all fleet types other than the SAAB 340B, are capitalized when
performed and amortized over estimated useful lives based upon usage, or to
earlier fleet or aircraft retirement dates, for both owned and leased aircraft.
This accounting treatment was also applied to Boeing 757-200 engine overhauls
completed prior to October 2001, the effective date of the engine manufacturers'
maintenance agreement for this fleet. Airframe overhauls for SAAB 340B aircraft
are expensed as incurred.
52
Aircraft Pre-Delivery Deposits
Advance payments for future aircraft deliveries scheduled within the next 12
months are classified as current aircraft pre-delivery deposits in the
accompanying consolidated balance sheets, as the aircraft will be acquired and
paid for by third parties who will lease them to the Company. Advance payments
for future aircraft deliveries not scheduled within the next 12 months are
classified as deposits and other assets. As of December 31, 2003 and 2002,
deposits and other assets included advanced payments for future aircraft and
engine deliveries totaling $4.6 million and $4.4 million, respectively.
Restricted Cash
Restricted cash consists of deposits held to secure outstanding stand-by letters
of credit currently provided by the Company. Also included is cash received as
prepayment for certain charter flights paid into an escrow account until the
future flight occurs. While the existing letters of credit mature within the
next 12 months, management believes it is likely that the letters of credit will
be renewed and has classified the restricted cash as a long-term asset on the
consolidated balance sheets.
Intangible Assets
Goodwill, which represents the excess of cost over fair value of net assets
acquired, was amortized on a straight-line basis over 20 years, until January 1,
2002, when the Company adopted FASB Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). The Company now
annually tests for impairment goodwill and other intangible assets deemed to
have indefinite lives. The Company's policy is to record an impairment charge
when it is determined that an asset's carrying value may not be recoverable.
Financial Instruments
The carrying amounts of cash equivalents, receivables and variable-rate debt
approximate fair value. For additional information, see "Note 6 - Debt." The
fair value of fixed-rate debt, including current maturities, is estimated using
discounted cash flow analysis based on the Company's current incremental rates
for similar types of borrowing arrangements. The carrying value of the Company's
unsecured senior notes of $300 million had an aggregate estimated fair value of
$261.0 million and $124.5 million based upon dealer-quoted prices at December
31, 2003, and December 31, 2002, respectively. After giving effect to the
exchange offers on January 30, 2004, the carrying value of the Company's
unsecured senior notes had an aggregate estimated fair value of $304.6 million
based upon dealer quoted prices. See "Note 2 - State of the Industry and Its
Effect on the Company" for additional information on the exchange offers.
Advertising
The Company expenses advertising costs in the period incurred.
Special Charges
Special charges represent direct expenses which, due to the events of September
11, 2001, were considered unusual in nature under the provisions of APB Opinion
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and the Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"). Special charges in 2001 were
$21.5 million, while no expenses were classified as special charges in 2002 or
2003. The 2001 special charges were comprised primarily of costs associated with
the decision shortly after September 11, 2001 to remove early from service the
Company's Boeing 727-200 fleet, some of which were leased; costs associated with
the Company's proposed transaction in which ATA Holdings Corp. would have been
taken private, which was substantially complete just prior to the September 11,
2001 terrorist attacks, as a result of which the Company lost financing; and
expenses directly associated with the FAA's temporarily-mandated suspension of
commercial flights on September 11, 2001, and for several days thereafter. Also
classified as special charges were increased hull and liability insurance costs;
additional advertising expense incurred as a direct result of September 11,
2001; interest expense related to debt incurred under the Company's credit
facility to provide operating cash after September 11, 2001; and other expenses
not individually significant. The special charges for 2001 are summarized in the
following table:
53
Amount
(in thousands)
--------------
Boeing 727-200 exit costs $ 3,764
Privatization costs 3,313
Costs due to FAA-mandated suspension of flights 929
Increased hull and liability insurance costs 2,964
Increased advertising costs 6,316
Increased interest expense 762
Other expenses 3,477
--------
Total Special Charges for 2001 $ 21,525
========
Stock Based Compensation
During 1996, the Company adopted the disclosure provisions of FASB Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS 123"), with respect to its stock options. As permitted by FAS 123, the
Company has elected to continue to account for employee stock options following
the intrinsic value method of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
There were no options granted by the Company in the years ended December 31,
2003 and 2002. The weighted-average fair value of options granted during 2001 is
estimated at $5.44 on the grant date. These estimates were made using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 2001: risk-free interest rate of 3.59%; expected market price
volatility of 0.62; weighted-average expected option life of 1.04 years;
estimated forfeitures of 10.8%; and no dividends.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models use highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employees' stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period (1 to 3 years). The
Company's pro forma information follows:
54
2003 2002 2001
-----------------------------------------
(In thousands, except per share data)
Net income (loss) available to common shareholders
as reported $ 15,792 $ (174,984) $ (81,885)
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects (17) (140) (1,188)
--------- ----------- ----------
Net income (loss) available to common shareholders
pro forma $ 15,775 $ (175,124) $ (83,073)
Basic income (loss) per share as reported $ 1.34 $ (14.94) $ (7.14)
Basic income (loss) per share pro forma $ 1.34 $ (14.95) $ (7.25)
Diluted income (loss) per share as reported $ 1.27 $ (14.94) $ (7.14)
Diluted income (loss) per share pro forma $ 1.27 $ (14.95) $ (7.25)
2. State of the Industry and Its Effect on the Company
The terrorist attacks of September 11, 2001, and generally weak economic
conditions of the past several years have adversely affected the Company and the
airline industry. The industry as a whole, and the Company, suffered very
significant financial losses in the years ended December 31, 2002, and 2001.
While the Company realized net income for the year ended December 31, 2003, that
net income was favorably impacted by the Company's receipt in the second quarter
of 2003 of $37.2 million in U.S. Government funds in conjunction with the
Emergency Wartime Supplemental Appropriations Act ("Supplemental Act"). The
Supplemental Act was signed into law in April 2003, and made available $2.3
billion in reimbursements to U.S. air carriers for expenses incurred and revenue
foregone related to federally mandated enhanced aviation security subsequent to
September 11, 2001.
During 2002, two major air carriers, US Airways Group and UAL Corporation, filed
for reorganization under Chapter 11 of the United States Bankruptcy Code. US
Airways Group emerged from bankruptcy protection in March 2003. Historically,
air carriers involved in reorganizations have substantially reduced their fares,
which could reduce airline yields further from current levels. Certain air
carriers have sought to reduce financial losses, at least partially, by reducing
their seat capacity. As this has been accomplished by eliminating aircraft from
operating fleets, the fair value of aircraft, including aircraft owned by the
Company, has been adversely affected. The Company has recorded substantial
charges to earnings resulting from fleet retirements and impairments over the
past three years. However, during this period the Company has substantially
replaced its fleet of aging aircraft with new fuel-efficient Boeing aircraft.
In addition to the funds received in the second quarter of 2003, the Company has
benefited from some of the U.S. Government's other initiatives for assisting the
airline industry. Most significant to the Company was the Air Transportation
Safety and System Stabilization Act ("Act") passed in 2001, which provided for,
among other things, up to $5.0 billion in compensation to U.S. airlines and air
cargo carriers for direct and incremental losses resulting from the September
11, 2001 terrorist attacks and the availability of up to $10.0 billion in U.S.
Government guarantees of certain loans made to air carriers, which are
administered by the newly established Air Transportation Stabilization Board
("ATSB"). The Company received $50.1 million of U.S. Government grant
compensation under the Act, of which the final payment of $6.2 million was
received in the first quarter of 2003. The Company also obtained a $168.0
million secured term loan in November 2002, of which $148.5 million is
guaranteed by the ATSB. See "Note 6 - Debt" and "Note 10 - Shareholder's
Deficit" for additional information about the ATSB loan.
55
The terrorist attacks of September 11, 2001 and the generally weak economy have
also had a negative impact on the Company's liquidity. The Company's new Boeing
aircraft are all leased and have higher fixed-ownership costs than the older
fleets that they replaced. The terms of many of these aircraft operating leases
were determined before September 11, 2001, and were structured to require
significant cash payments in the first few years of each lease in order to
reduce the total rental cost over the related lease terms. Consequently, the
Company made large cash lease payments on many of its aircraft in the year ended
December 31, 2003, which resulted in a substantial use of the Company's cash. As
of December 31, 2003, the Company was also scheduled to repay the $175 million
outstanding principal of its 10 1/2 % Senior Notes ("2004 Notes") in August 2004
and the $125 million outstanding principal of its 9 5/8% Senior Notes ( "2005
Notes" and, together with the 2004 Notes, "Existing Notes") in December 2005.
On January 30, 2004, the Company successfully completed exchange offers and
issued Senior Notes due 2009 ("2009 Notes") and cash consideration for certain
of its 2004 Notes and issued Senior Notes due 2010 ("2010 Notes" and, together
with the 2009 Notes, "New Notes") and cash consideration for certain of its 2005
Notes. In completing the exchange offers, the Company accepted $260.3 million of
Existing Notes tendered for exchange, issuing $163.1 million in aggregate
principal amount of 2009 Notes and delivering $7.8 million in cash in exchange
for $155.3 million in aggregate principal amount of 2004 Notes tendered, and
issuing $110.2 million in aggregate principal amount of 2010 Notes and
delivering $5.2 million in cash in exchange for $105.0 million in aggregate
principal amount of 2005 Notes. In addition to the New Notes issued, $19.7
million in aggregate principal amount of the 2004 Notes and $20.0 million in
aggregate principal amount of the 2005 Notes remain outstanding after the
completion of the exchange offers. In connection with the exchange offers, the
Company also obtained the consent of the holders of the Existing Notes to amend
or eliminate all of the restrictive operating covenants and certain default
provisions of the indentures governing the Existing Notes. See "Note 6 - Debt"
for additional information about the exchange offers.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, Boeing Capital Services
Corporation ("BCSC"), General Electric Capital Aviation Services ("GECAS") and
International Lease Finance Corporation ("ILFC"). The effect of the lease
amendments was to delay the payment of portions of the amounts due under those
operating leases primarily between June 30, 2003 and March 31, 2005 and to
extend the leases generally for two years. Most of the payments delayed during
this time period will be subsequently paid at various times throughout the
remaining life of the leases. The Company received a refund of $29.8 million on
January 30, 2004 related to payments made in 2003 under the original terms of
certain retroactively amended leases. The amendments will also result in
approximately $69.6 million in lower cash payments during 2004 under these
operating leases, as compared to payments which would have been due under the
original lease terms. See "Note 7 - Lease Commitments" for additional
information about the Company's operating leases.
While the Company expects that adverse industry conditions are likely to
continue throughout 2004, the Company's management believes that, with the
completion of the exchange offers and operating lease amendments, the Company
has a viable plan to provide sufficient cash to fund operations for the next 12
months. The Company's plan continues to require focused marketing efforts on
those businesses and markets where the Company believes it can be a leading
provider, and the implementation of additional cost-saving initiatives the
Company believes will maintain its low-cost advantage. Although the Company
believes the assumptions underlying its 2004 financial projections are
reasonable, there are significant risks that could cause the Company's 2004
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain consequences of the major airline bankruptcies, the
possibility of other airline bankruptcy filings and the ongoing geopolitical
impacts of the conflicts in the Middle East.
56
3. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
December 31,
2003 2002
---------------------
(in thousands)
Cash and money market funds $ 158,100 $ 176,404
U.S. Treasury repurchase agreements 2,544 23,756
---------- ---------
$ 160,644 $ 200,160
========== =========
4. Property and Equipment
The Company's property and equipment consist of the following:
December 31,
2003 2002
---------------------
(in thousands)
Flight equipment, including airframes, engines and other $ 324,697 $ 312,652
Less accumulated depreciation (112,912) (94,173)
---------- ----------
211,785 218,479
---------- ----------
Facilities and ground equipment 142,032 134,355
Less accumulated depreciation (100,335) (87,207)
---------- ----------
41,697 47,148
---------- ----------
$ 253,482 $ 265,627
========== ==========
Depreciation and amortization expense was $56.7 million, $76.7 million and
$121.3 million for 2003, 2002 and 2001, respectively.
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2003 2002
---------------------
(in thousands)
Accrued salaries $ 12,990 $ 18,543
Accrued vacation pay 19,899 17,543
Other accrued expenses (individually less than 5% of total current liabilities) 121,800 124,838
--------- ---------
$ 154,689 $ 160,924
========= =========
57
6. Debt
Debt consists of the following:
December 31,
2003 2002
-------------------------
(in thousands)
Partially guaranteed term loan, variable rate of LIBOR plus a margin, $ 161,000 $ 168,000
averaging 2.2% in 2003 and 2.8% in 2002, payable in varying
installments from November 2003 through November 2008
Unamortized discount on partially guaranteed term loan (5,350) (7,400)
Unsecured Senior Notes, fixed rate of 10.5%, partially refinanced in 175,000 175,000
2004
Unsecured Senior Notes, fixed rate of 9.625%, partially refinanced in 125,000 125,000
2004
Secured note payable to institutional lender, variable rate of LIBOR 5,975 7,675
plus 2.0%, averaging 3.5% in 2003 and 5.0% in 2002, payable in varying
installments through October 2005
Secured note payable to institutional lender, variable rate of LIBOR 4,983 6,683
plus 2.0%, averaging 3.5% in 2003 and 5.0% in 2002, payable in varying
installments through March 2005
Mortgage note payable to institutional lender, fixed rate of 8.75%, 8,322 9,080
payable in varying installments through June 2014
Mortgage note payable to institutional lender, fixed rate of 8.30%, 6,260 6,915
payable in varying installments through June 2014
City of Chicago variable rate (averaging 1.7% in 2003 and 1.5% in 2002) 6,000 6,000
special facility revenue bonds, payable in December 2020
City of Chicago construction financing agreement, rate averaging 5.75%, 5,673 -
payable monthly
Aircraft pre-delivery deposit finance facilities - 8,384
Other 1,833 4,091
---------- ----------
494,696 509,428
Less current maturities and short-term debt 51,645 22,575
---------- ----------
$ 443,051 $ 486,853
========== ==========
58
In November 2002, the Company obtained a $168.0 million secured term loan, of
which $148.5 million is guaranteed by the ATSB. Interest is payable monthly at
LIBOR plus a margin. Guarantee fees payable quarterly were 5.5% of the
outstanding guaranteed principal balance in 2003, escalating to 9.5% on the
outstanding guaranteed principal balance in 2004 through 2008. The net proceeds
of the term loan were approximately $164.8 million, after deducting issuance
costs. The Company used a portion of the net proceeds to repay borrowings on its
existing revolving bank credit facility and to collateralize new letters of
credit, previously secured by the bank facility. The additional secured term
loan proceeds of approximately $104.7 million were used for general corporate
purposes. The secured term loan is subject to certain restrictive covenants and
is collateralized primarily by certain receivables, aircraft, spare engines, and
rotable parts. The receivables had a carrying amount of approximately $39.3
million as of December 31, 2003. The aircraft, spare engines and parts consist
of two Lockheed L-1011-500 aircraft, one Lockheed L-1011-50 aircraft, two Saab
340B aircraft, 24 Rolls-Royce RB211 spare engines and Boeing 757-200, Boeing
757-300 and Boeing 737-800 rotable parts, which had a combined carrying amount
of approximately $67.5 million as of December 31, 2003. In conjunction with
obtaining the secured term loan, the Company issued a warrant to the Federal
Government to purchase up to 1,478,059 shares of its common stock, and
additional warrants to other loan participants to purchase up to 194,089 shares
of its common stock, in each case at an exercise price of $3.53 per share over a
term of ten years. The Company allocated $7.4 million to the total value of
warrants issued, accounted for as a discount on the loan. (See "Note 10 -
Shareholders' Deficit.") The amortization of the discount resulted in an
increase in the effective rate of interest on the secured term loan, which was
3.4% as of December 31, 2003 and 3.2% as of December 31, 2002.
In July 1997, the Company sold $100.0 million principal amount of 10.5%
unsecured senior notes. The Company sold an additional $75.0 million principal
amount of these notes in December 1999. Interest on these notes is payable on
February 1 and August 1 of each year. In completing the exchange offers on
January 30, 2004, the Company issued $163.1 million in aggregate principal
amount of 2009 Notes and delivered $7.8 million in cash in exchange for $155.3
million in aggregate principal amount of 2004 Notes tendered. The 2009 Notes
mature February 1, 2009, with a payment of $7.8 million due on August 1, 2005,
bearing interest at 13% through July 31, 2006 and 14% thereafter through
maturity. The $19.7 million principal amount of the original notes remained
outstanding after the exchange and is due according to the original terms in
August 2004. In accordance with FASB Statement of Financial Accounting Standards
No. 6 ("FAS 6"), Classification of Short Term Obligations Expected to be
Refinanced, since the agreement was entered into prior to the balance sheet
being issued, the $155.3 million of tendered notes has been reclassified as
non-current as of December 31, 2003. See "Note 2 - State of the Industry and Its
Effect on the Company" for additional information on the exchange of the notes.
In December 1998, the Company sold $125.0 million principal amount of 9.625%
unsecured senior notes. Interest on these notes is payable on June 15 and
December 15 of each year. In completing the exchange offers on January 30, 2004,
the Company issued $110.2 million in aggregate principal amount of 2010 Notes
and delivered $5.2 million in cash in exchange for $105.0 million in aggregate
principal amount of the 2005 Notes tendered. The 2010 Notes mature June 15,
2010, with a payment of $5.3 million due on June 15, 2005, bearing interest at
12 1/8% through June 14, 2006 and 13 1/8% thereafter through maturity. The $20.0
million principal amount of the original notes remained outstanding after the
exchange and is due according to the original terms in December 2005. See "Note
2 - State of the Industry and Its Effect on the Company" for additional
information on the exchange of the notes.
In June 1999, the Company obtained an $8.0 million loan at 8.30% secured by a
15-year mortgage on the new Maintenance and Operations Center. This building has
a carrying amount of $7.6 million as of December 31, 2003.
In March and October 2000, the Company issued two $11.5 million variable rate
five-year notes, each collateralized by one Lockheed L-1011-500 aircraft. The
related aircraft have a combined carrying amount of $19.9 million as of December
31, 2003.
In September 2000, the Company obtained a $10.0 million, 14-year loan at 8.75%,
secured by a mortgage on its maintenance facility at the Indianapolis
International Airport. The building has a carrying amount of $8.0 million as of
December 31, 2003.
59
In March 2003, the Company entered into an agreement with the City of Chicago
who agreed to lend the Company up to $8.9 million for construction costs for a
gate extension at Midway Airport. As of
December 31, 2003, the Company had borrowed $5.7 million under this agreement.
The interest rate for this loan averaged 5.75% in 2003.
The unsecured senior notes, guaranteed term loan and other loans secured by
certain collateral are subject to restrictive covenants, including, among other
things, limitations on: the incurrence of additional indebtedness; new aircraft
acquisitions; the payment of dividends; certain transactions with shareholders
and affiliates; and the creation of liens on or other transactions involving
certain assets. In addition, certain covenants require minimum cash balances and
specified financial ratios to be maintained. The guaranteed term loan and
certain other loans contain cross-default provisions.
The guaranteed term loan has three financial covenants that the Company is
required or soon will be required to meet. The first covenant currently requires
the Company to maintain a minimum unrestricted cash balance of $40 million at
all times. The second covenant, which is measured quarterly, becomes effective
September 30, 2004, and will require the Company to maintain a ratio of at least
1.00 of consolidated earnings before interest, taxes, depreciation,
amortization, and aircraft rent ("EBITDAR") to consolidated fixed charges, as
defined in the agreement. The third covenant, which is also measured quarterly
and becomes effective March 31, 2005, will require the Company to maintain a
ratio less than 7.00 of consolidated indebtedness, as defined in the agreement,
to EBITDAR.
Future maturities of long-term debt are as follows as of December 31, 2003 and
as adjusted to reflect the issuance of the New Notes:
Unamortized Total Debt
Cash Obligations at Discount at per Balance Sheet Total Debt,
December 31, 2003 December 31, 2003 December 31, 2003 As Adjusted
----------------- ----------------- ----------------- -----------
(in thousands)
2004 $ 53,340 $ (1,695) $ 51,645 $ 64,660
2005 57,697 (1,399) 56,298 69,313
2006 30,456 (1,094) 29,362 29,362
2007 30,008 (776) 29,232 29,232
2008 51,172 (386) 50,786 50,786
Thereafter 277,373 - 277,373 277,373
---------- -------- ---------- ---------
$ 500,046 $ (5,350) $ 494,696 $ 520,726
========== ======== ========== =========
Interest capitalized in connection with long-term asset purchase agreements and
construction projects was $2.8 million, $7.8 million and $29.0 million in 2003,
2002 and 2001, respectively. The capitalized interest includes $1.9 million,
$1.4 million and $14.7 million in 2003, 2002 and 2001, respectively, of interest
paid to Boeing upon delivery of certain Boeing 737-800 and Boeing 757-300
aircraft in lieu of the Company making additional pre-delivery deposits, as
allowed by the purchase agreement.
60
7. Lease Commitments
At December 31, 2003, the Company had the following operating aircraft leases:
Total Leased Lease Expirations Lease Terms
------------ ----------------- -----------
Lockheed L-1011-100 1 2005 60 months
Boeing 727-200 (1) 1 2004 72 months
Boeing 757-200 (2) 16 Between 2008 and 2022 1 to 22 years
Boeing 757-300 12 2023 and 2024 22 years
Boeing 737-800 32 Between 2017 and 2024 15 to 22 years
SAAB 340B 15 2009 and 2012 9.5 years
Engines - Lockheed L-1011-500 6 2006 and 2007 7 years
Engines - Boeing 757-200 5 Between 2008 and 2011 9 to 15 years
Engines - Boeing 757-300 2 2024 22.5 years
Engines - Boeing 737-800 2 2021 20 years
(1) As of December 31, 2003, this aircraft has been retired from revenue
service, but the Company remains obligated on the lease. Accordingly, the
Company has accrued the remaining rent payments due to the lessor.
(2) As of December 31, 2003, one newly delivered 757-200 aircraft was not yet on
the Company's operating certificate.
The Company is responsible for all maintenance costs on these aircraft and
engines, and it must meet specified airframe and engine return conditions upon
lease expiration.
As of December 31, 2003, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance facilities
and certain ground equipment, with lease terms that vary from 2 to 45 years and
expire at various dates through 2040. The lease agreements relating to the
ground facilities, which are primarily owned by governmental units or
authorities, generally do not provide for transfer of ownership, nor do they
contain options to purchase.
The Company leases its headquarters facility from the Indianapolis Airport
Authority under an operating lease agreement, which expired in December 2002.
The Company exercised an option to extend the lease another five years. The
Company is responsible for maintenance, taxes, insurance and other expenses
incidental to the operation of the facilities.
On January 30, 2004, the Company completed amendments of certain aircraft
operating leases that were entered into in 2001, 2002 and 2003 with BCSC, GECAS
and ILFC. The effect of the lease amendments was to delay the payment of
portions of the amounts due under those operating leases primarily between June
30, 2003, and March 31, 2005. The payments delayed during this time period will
be subsequently paid at various times throughout the remaining life of the
leases. See "Note 2 - State of the Industry and Its Effects on the Company" for
further information on the lease amendments. After giving effect to these
amendments, the Company's future minimum lease payments at December 31, 2003,
for noncancelable operating leases with initial terms of more than one year are
as follows:
61
Facilities
Flight and Ground
Equipment Equipment Total
----------------------------------------------
(in thousands)
2004 (1) $ 194,730 $ 12,573 $ 207,303
2005 255,832 10,185 266,017
2006 307,166 9,119 316,285
2007 308,887 9,270 318,157
2008 302,942 6,894 309,836
Thereafter 2,440,899 21,084 2,461,983
----------- ---------- -----------
$ 3,810,456 $ 69,125 $ 3,879,581
=========== ========== ===========
(1) 2004 lease obligations include a refund of approximately $29.8 million
related to lease payments made in 2003 due to completion of certain retroactive
lease amendments on January 30, 2004. For further discussion, see "Note 2 -
State of the Industry and Its Effects on the Company."
Rental expense for all operating leases in 2003, 2002 and 2001 was $250.7
million, $212.8 million and $119.2 million, respectively.
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 because straight-line
expense recognition is most representative of the time pattern from which
benefit from use of the aircraft is derived. Forty-nine of the Company's
aircraft operating leases were originally structured to require very significant
cash in the early years of the lease in order to obtain more overall favorable
lease rates. The amount of the cash payments in excess of the aircraft rent
expense in these early years has created a significant prepaid aircraft rent
amount on the Company's balance sheet. The portion of the prepaid aircraft rent
that will be utilized in the next twelve months is recorded as short-term
prepaid expense while the remainder is recorded as long-term prepaid aircraft
rent. Twenty-four of the Company's aircraft operating leases require more
significant cash payments later in the lease term resulting in an accrued
liability for aircraft rents on the Company's balance sheet. The portion of the
accrued liability that will be paid in the next twelve months is recorded as
short- term accrued expenses while the remainder is recorded as long-term
deferred items. Two of the Company's aircraft operating leases were structured
whereby monthly cash rents and monthly book rents are equal. The table below
summarizes the prepaid and accrued aircraft rents for 2003 and 2002 that result
from this straight-line expense recognition as reported under the following
captions on the Company's balance sheet:
62
December 31,
2003 2002
---- ----
(In thousands)
Assets:
Prepaid expenses and other current assets (short-term) $ 3,879 $ 2,280
Prepaid aircraft rent (long-term) 144,088 68,828
--------- --------
Total prepaid aircraft rent $ 147,967 $ 71,108
========= ========
Liabilities:
Accrued expenses (short-term) $ 11,529 $ 2,151
Other deferred items (long-term) 27,976 20,105
--------- --------
Total accrued aircraft rent $ 39,505 $ 22,256
========= ========
On January 30, 2004, the Company received a refund of $29.8 million related to
payments made in 2003 under the original terms of certain retroactively amended
leases. For further discussion, see "Note 2 - State of the Industry and Its
Effects on the Company."
8. Income Taxes
The provision for income tax expense (credit) consisted of the following:
December 31,
2003 2002 2001
-------------------------------------
(In thousands)
Federal:
Current $ 418 $ (15,743) $ 4,070
Deferred - (6,888) (40,546)
------- ---------- ---------
418 (22,631) (36,476)
State:
Current 893 306 510
Deferred - (2,625) (3,784)
------- ---------- ---------
893 (2,319) (3,274)
------- ---------- ---------
Income tax expense (credit) $ 1,311 $ (24,950) $ (39,750)
======= ========== =========
The income tax expense (credit) differed from the amount obtained by applying
the statutory federal income tax rate to income (loss) before income taxes as
follows:
63
December 31,
2003 2002 2001
--------------------------------------
(In thousands)
Federal income tax (credit) at statutory rate $ 7,611 $ (67,975) $ (40,626)
State income tax (credit) net of federal benefit 580 (4,108) (2,328)
Non-deductible expenses 3,031 2,393 2,041
Valuation allowance (9,871) 43,324 -
Other, net (40) 1,416 1,163
---------- ----------- ----------
Income tax expense (credit) $ 1,311 $ (24,950) $ (39,750)
========== =========== ==========
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax liability and asset components are as follows:
December 31,
2003 2002
(In thousands)
Deferred tax liabilities:
Property and equipment $ 22,325 $ 15,353
----------- ----------
Deferred tax liabilities 22,325 15,353
----------- ----------
Deferred tax assets:
Tax benefit of net operating loss carryforwards 29,554 40,766
Alternative minimum tax and other tax credit carryforwards 1,689 1,261
Vacation pay accrual 7,418 6,526
Deferred rent expense 7,549 3,985
Other deductible temporary differences 9,568 6,139
----------- ----------
Deferred tax assets 55,778 58,677
----------- ----------
Valuation allowance (33,453) (43,324)
----------- ----------
Net deferred tax asset $ - $ -
=========== ==========
As of December 31, 2003 and 2002, the Company had incurred a three-year
cumulative loss. Because of this cumulative loss and the presumption under
accounting principles generally accepted in the United States that net deferred
tax assets should be fully reserved if it is more likely than not that they will
not be realized through carrybacks or other tax strategies, the Company recorded
a full valuation allowance against its net deferred asset of $33.5 million at
December 31, 2003 and $43.3 million at December 31, 2002.
The Company utilized a portion of its net operating loss carryovers to offset
taxable income in 2003. As a result, in 2003 the Company paid $0.4 million in
alternative minimum tax and recorded this as a current tax expense, together
with $0.9 million in state and local income taxes.
Approximately $76.3 million of net operating loss carryover remains as of
December 31, 2003. Its use is limited to future taxable income of the Company.
The carryover will expire starting in 2020.
64
9. Retirement Plan
The Company has a defined contribution 401(k) savings plan which provides for
participation by substantially all the Company's employees immediately upon
hire. The Company has elected to contribute an amount equal to 60.0% in 2003 and
2002, and 55.0% in 2001, of the amount contributed by each participant up to the
first six percent of eligible compensation. Company matching contributions
expensed in 2003, 2002 and 2001 were $6.8 million, $5.2 million and $4.7
million, respectively.
Effective January 1, 2003, the Company implemented a defined contribution plan
for cockpit crewmember employees that will be fully funded by the Company. In
the 2003 plan year, the Company contributed between 4.0% and 6.5% of each
cockpit crewmember's eligible earnings, depending on years of service with the
Company. The contribution percentages increase in future plan years, escalating
to between 5.5% and 12.0% of each cockpit crewmember's eligible earnings in
2006. New cockpit crewmembers are eligible for the plan immediately upon hire.
Contributions vest after five years of service. The contribution expense for
this plan in 2003 was $6.1 million.
10. Shareholders' Deficit
Since 1994, the Company's Board of Directors has approved the repurchase of up
to 1,900,000 shares of the Company's common stock. As of December 31, 2003, the
Company had repurchased 1,711,440 common shares at a cost of $24.8 million.
Currently, the Company is unable to repurchase common stock due to certain debt
covenants under its Senior Note indentures.
The Company's 1993 Incentive Stock Plan for Key Employees ("1993 Plan")
authorizes the grant of options for up to 900,000 shares of the Company's common
stock. The Company's 1996 Incentive Stock Plan for Key Employees ("1996 Plan")
authorizes the grant of options for up to 3,000,000 shares of the Company's
common stock. The Company's 2000 Incentive Stock Plan for Key Employees ("2000
Plan") authorizes the grant of options for up to 3,000,000 shares of the
Company's common stock. Options granted have five- to 10-year terms and
generally vest and become fully exercisable over specified periods of up to
three years of continued employment.
A summary of common stock option changes follows:
65
Number Weighted-Average
of Shares Exercise Price
--------- --------------
Outstanding at December 31, 2000 2,910,473 $ 14.19
--------- -------
Granted 106,600 12.21
Exercised (181,949) 9.18
Canceled (121,075) 21.60
--------- -------
Outstanding at December 31, 2001 2,714,049 14.14
--------- -------
Granted - -
Exercised (54,261) 8.27
Canceled (272,013) 19.13
--------- -------
Outstanding at December 31, 2002 2,387,775 $ 13.71
========= ========
Granted - -
Exercised (26,400) 8.01
Canceled (592,676) 14.88
--------- -------
Outstanding at December 31, 2003 1,768,699 $ 13.40
========= ========
Options exercisable at December 31, 2001 2,528,633 $ 13.80
========= ========
Options exercisable at December 31, 2002 2,329,076 $ 13.69
========= ========
Options exercisable at December 31, 2003 1,761,033 $ 13.40
========= ========
Options outstanding at December 31, 2003, expire from January 2004 to November
2011. A total of 3,084,997 shares are reserved for future grants as of December
31, 2003, under the 1993, 1996 and 2000 Plans. The following table summarizes
information concerning outstanding and exercisable options at December 31, 2003:
Range of Exercise Prices $6 - $8 $9 - $14 $15 - $19 $20 - $27
- --------------------------------------------------------------------------------------------------------------------------------
Options outstanding:
Weighted-Average Remaining Contractual Life 4.1 years 3.5 years 6.0 years 5.0 years
Weighted-Average Exercise Price $ 7.96 $ 9.28 $ 15.64 $ 26.04
Number 150,500 994,924 284,925 338,350
Options exercisable:
Weighted-Average Exercise Price $ 7.96 $ 9.27 $ 15.64 $ 26.06
Number 150,500 988,258 284,925 337,350
In November 2002, in connection with the guaranteed term loan agreement (See
"Note 6 - Debt"), the Company issued 1,478,059 warrants to the Federal
Government and 194,089 warrants to other loan participants.
The warrants provide for the purchase of shares of the Company's common stock at
an exercise price of $3.53 per share for a term of ten years.
66
For accounting purposes, the warrants were valued at $7.4 million, or $4.44 per
share. This estimate was made using the Black-Scholes warrant pricing model with
the following weighted-average assumptions for 2002: risk-free interest rate of
3.32%; expected market price volatility of 0.68; weighted-average expected
warrant life of ten years; and no dividends.
The Black-Scholes warrant valuation model was developed for use in estimating
the fair value of traded warrants, which have no vesting restrictions and are
fully transferable. In addition, warrant valuation models use highly subjective
assumptions, including the expected stock price volatility. Because the
Company's warrants have characteristics significantly different from those of
traded warrants, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its warrants.
As of December 31, 2003, the Company had 6,671,631 common stock shares reserved
for issuance in relation to its outstanding stock options, warrants, and
convertible redeemable preferred stock. See "Note 11 - Redeemable Preferred
Stock" for additional information.
11. Redeemable Preferred Stock
In the last half of 2000, the Company issued and sold 300 shares of Series B
convertible redeemable preferred stock, without par value ("Series B
Preferred"), at a price of $100,000 per share. The purchaser of the Series B
Preferred is entitled to cumulative quarterly dividends at an annual rate of
5.0% on the liquidation amount ($100,000 per share) of the Series B Preferred.
The annual rate is subject to an increase to 8.44% on the liquidation amount
($100,000 per share) if the Company fails to pay any quarterly dividend within
ten days of the due date. Once dividends in arrears have been paid in full, the
rate returns to the original annual rate of 5.0%. The Series B Preferred is
convertible into shares of the Company's common stock at a conversion rate of
6,381.62 shares of common stock per share of Series B Preferred, at a conversion
price of $15.67 per share of common stock, subject to antidilution adjustments.
Shares may be converted into shares of the Company's common stock at any time up
to the mandatory redemption date. The Series B Preferred is optionally
redeemable by the Company under certain conditions, but the Company must redeem
the Series B Preferred no later than September 20, 2015. Optional redemption by
the Company may occur at 103.6% of the liquidation amount beginning September
20, 2003, decreasing 0.3% of the liquidation amount per year to 100.0% of the
liquidation amount, plus cumulative unpaid dividends, if any, at the mandatory
redemption date of September 20, 2015. Shares of Series B Preferred have the
right to vote on or consent to only the following matters (in addition to any
voting rights otherwise required by law): (1) amendments to the Company's
Articles of Incorporation which are adverse to the holders of Series B
Preferred; (2) if six quarterly dividends go unpaid, the owner of Series B
Preferred, together with the owner of Series A Preferred (as defined below) and
the owners of any other preferred stock ranking equal to Series B Preferred,
will be entitled to elect at the next annual shareholders meeting 25% of the
Company's Board of Directors, but no less than two directors; and (3) increases
in the number of authorized shares of Series B Preferred and authorizations of
preferred stock ranking senior to Series B Preferred. Votes will be allocated
among holders of preferred stock based on the percentage owned by each holder of
the total liquidation amount of all series of preferred stock.
67
Also, in the last half of 2000, the Company issued and sold 500 shares of Series
A redeemable preferred stock, without par value ("Series A Preferred"), at a
price of $100,000 per share. The purchaser of the Series A Preferred is entitled
to cumulative semiannual dividends at an annual rate of 8.44% on the liquidation
amount ($100,000 per share) of the Series A Preferred. The Series A Preferred is
optionally redeemable by the Company under certain conditions, but the Company
must redeem the Series A Preferred in equal semiannual payments beginning
December 28, 2010, and ending December 28, 2015. Optional redemption by the
Company may occur at a redemption premium of 50.0% of the dividend rate
beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend
rate commencing December 28, 2006, and to 0.0% after the seventh year after
issuance, plus cumulative unpaid dividends, if any. Shares of Series A Preferred
have the right to vote on or consent to only the following matters (in addition
to any voting rights otherwise required by law): (1) amendments to the Company's
Articles of Incorporation which are adverse to the holders of Series A
Preferred; (2) if three semiannual dividends go unpaid, the owner of Series A
Preferred, together with the owner of Series B Preferred and the owners of any
other preferred stock ranking equal to Series A Preferred, will be entitled to
elect at the next annual shareholders' meeting 25% of the Company's Board of
Directors, but no less than three directors; (3) approval of (a) an acquisition
by the Company or one of its subsidiaries of assets and liabilities from a third
party the net asset value of which equals 10% of the Company's net consolidated
assets in its most recent publicly available balance sheet, or (b) a merger by
the Company or one of its subsidiaries with a third party involving an
acquisition or disposition of more than 10% of the Company's consolidated net
assets in its most recent publicly available balance sheet (other than a
disposition of all the Company's L-1011 or Boeing 727 aircraft) that, in either
case, results in a downgrade of the Company's credit rating by Moody's to "C1"
or by Standard & Poor's to "C+," unless the Company offers to redeem the Series
A Preferred prior to that transaction at a price equal to the liquidation amount
plus accrued and unpaid dividends to the redemption date; and (4) increases in
the number of authorized shares of Series A Preferred and authorizations of
preferred stock ranking senior to Series A Preferred. Votes will be allocated
among holders of preferred stock based on the percentage owned by each holder of
the total liquidation amount of all series of preferred stock. The Company has
the right on any date on which dividends are payable to exchange in whole but
not in part subordinated notes for shares of Series A Preferred; the principal
amount of any exchanged subordinated notes will equal the liquidation amount of
the shares of Series A Preferred, plus any accrued and unpaid dividends.
Prior to and as of December 31, 2003, the Company's unsecured senior notes
indentures relating to the 2004 Notes and 2005 Notes contained certain
restricted payment covenants which limited the Company's ability to pay
preferred stock dividends. At the end of the third quarter of 2002, that
covenant no longer permitted payment of preferred dividends. The Company accrued
preferred dividends at the appropriate rates plus interest for the payments due
between December 15, 2002 and December 31, 2003. In January 2004, as a result of
completion of the exchange offers, the restricted payment covenants for the 2004
Notes and 2005 Notes were removed. In addition, the restricted payment covenants
in the Senior Note indentures for the 2009 Notes and 2010 Notes permits the
Company to pay preferred stock dividends. Concurrently with the completion of
the exchange offers on January 30, 2004, the Company paid all accrued preferred
dividends in arrears, including interest, totaling $9.7 million. See "Note 2 -
State of the Industry and Its Effects on the Company" for more information about
the exchange offer.
68
12. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2003 2002 2001
--------------------------------------------------
Numerator:
Net income (loss) $ 20,434,000 $ (169,264,000) $ (76,317,000)
Preferred stock dividends (4,642,000) (5,720,000) (5,568,000)
------------- --------------- --------------
Income (loss) available to common shareholders -
numerator for basic earnings per share 15,792,000 (174,984,000) (81,885,000)
------------- --------------- --------------
Effect of dilutive securities:
Convertible redeemable preferred stock dividend 2,532,000 - -
------------- --------------- --------------
Numerator for diluted earnings per share $ 18,324,000 $ (174,984,000) $ (81,885,000)
============= =============== ==============
Denominator:
Denominator for basic earnings per share - adjusted
weighted average shares 11,773,713 11,711,906 11,464,125
============= =============== ==============
Effect of dilutive securities:
Employee stock options 119 - -
Warrants 780,518 - -
Convertible redeemable preferred stock 1,914,486 - -
------------- --------------- --------------
Dilutive potential securities 2,695,123 - -
Denominator for diluted earnings per share - adjusted
weighted average shares 14,468,836 11,711,906 11,464,125
============= =============== ==============
Basic income (loss) per share $ 1.34 $ (14.94) $ (7.14)
============= =============== ==============
Diluted income (loss) per share $ 1.27 $ (14.94) $ (7.14)
============= =============== ==============
In accordance with FASB Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," 1,914,486 common stock equivalent shares, upon conversion
of convertible redeemable preferred stock in 2002 and 2001, have been excluded
from the computation of diluted earnings per share because their effect would be
antidilutive. In addition, the impact of 59,400 and 553,025 employee stock
options in 2002 and 2001 was not included in the computation of diluted earnings
per share because their effect would be antidilutive. In 2002, the impact of the
1,002,112 incremental shares from the assumed exercise of warrants issued in
conjunction with the guaranteed term loan were not included in the computation
of diluted earnings per share because their effect would be antidilutive.
69
13. Commitments and Contingencies
The Company has a purchase agreement with the Boeing Company ("Boeing") to
purchase seven new Boeing 737-800s, which are currently scheduled for delivery
between July 2005 and December 2005. These aircraft are powered by General
Electric CFM56-7B27 engines. The manufacturer's list price is $52.4 million for
each 737-800, subject to escalation. The Company's purchase price for each
aircraft is subject to various discounts. According to a 2004 amendment to the
purchase agreement with Boeing, if the Company does not have permanent financing
for these aircraft suitable to the Company and does not have suitable
pre-delivery deposit financing, and if Boeing does not elect to provide such
financing acceptable to the Company, these deliveries can be delayed for one
year periods annually for up to five years. Aircraft pre-delivery deposits are
required for these aircraft, and the Company has historically funded these
deposits for past aircraft deliveries using operating cash and pre-delivery
deposit financing facilities. The Company can provide no assurance that it will
be able to secure pre-delivery deposit financing facilities or permanent
financing for any future aircraft purchases. As of December 31, 2003, the
Company had $4.6 million in long-term pre-delivery deposits outstanding for
future aircraft deliveries which were funded with operating cash. Upon delivery
of the aircraft, pre-delivery deposits funded with operating cash are expected
to be returned to the Company. As of December 31, 2003, the Company also has
purchase rights with Boeing for 40 Boeing 737-800 aircraft.
The Company has an agreement to lease one additional Boeing 737-800 under an
operating lease from ILFC, which is currently scheduled for delivery in May
2004.
The Company has an agreement with GECAS to lease one additional Boeing 737-800
currently scheduled for delivery in November 2004.
The Company has an agreement with General Electric to purchase four CFM56-7827
spare engines, which are currently scheduled for delivery between 2005 and 2008.
The Company intends to finance all future aircraft and engine deliveries under
purchase agreements with leases accounted for as operating leases. The Company
has estimated the amount of payments for these expected future lease
obligations, using the terms of leases for comparable aircraft currently in
place. The estimated future payments for these nine future aircraft deliveries
and four spare engines, which do not include obligations for leases currently in
place, are shown in the following table:
Expected
Future
Lease
Obligations
-----------
(in thousands)
2004 $ 3,101
2005 18,893
2006 42,527
2007 54,507
2008 39,816
Thereafter 483,380
----------
$ 642,224
==========
The Company paid cash consideration of $7.8 million related to the exchange of
the 2004 Notes and $5.2 million related to the exchange of the 2005 Notes upon
the completion of the exchange offers on January 30, 2004. Also, with the
completion of the exchange offers, the Company has additional 2009 Notes of $7.8
million outstanding and additional 2010 Notes of $5.3 million outstanding upon
completion of the exchange offers, which mature in 2005. The cash consideration
paid on January 30, 2004 and the additional notes were not recorded as a
liability on the Company's balance sheet as of December 31, 2003. See "Note 2 -
State of the Industry and Its Effect on the Company" for additional information
on the exchange offers.
70
In the Company's aircraft financing agreements, the Company typically
indemnifies the financing parties, trustees acting on their behalf and other
related parties against liabilities that arise from the manufacture, design,
ownership, financing, use, operation and maintenance of the aircraft and for
tort liability, whether or not these liabilities arise out of or relate to the
negligence of these indemnified parties, except for their gross negligence or
willful misconduct. The Company expects that it would be covered by insurance
(subject to deductibles) for most tort liabilities and related indemnities under
these aircraft leases.
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.
14. Segment Reporting
The Company's revenues are derived principally from the sale of scheduled
service or charter air transportation to customers domiciled in the United
States. The most significant component of the Company's property and equipment
is aircraft and related improvements and parts. All aircraft are registered in
the United States. The Company therefore considers all property and equipment to
be domestic.
The U.S. Government is the only customer that accounted for more than 10.0% of
consolidated revenues. U.S. Government revenues accounted for 19.6%, 13.9% and
13.1% of consolidated revenues for 2003, 2002 and 2001, respectively.
15. Fuel Price Risk Management
During 2002 and 2001, the Company entered into fuel hedge contracts to minimize
the risk of fuel price fluctuations. The Company hedged fuel using heating oil
swap agreements, which establish swap prices for designated periods. The Company
did not enter into any fuel hedge contracts in 2003. The Company accounted for
its fuel hedge contracts in accordance with FASB Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("FAS 133"). FAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. For derivatives that are
hedges, depending on the nature of the hedge, changes in the fair value of the
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
In accordance with FAS 133, the Company accounted for its heating oil swap
agreements as cash flow hedges. All changes in fair value of the heating oil
swap agreements during 2002 and 2001 were effective for purposes of FAS 133, so
valuation changes were recognized throughout these years in other comprehensive
income and were included in earnings as a component of fuel expense only upon
settlement of each agreement. In 2002, the Company recognized hedging gains of
$0.5 million on settled contracts in fuel expense, and, in 2001, the Company
recognized losses on settled contracts of $2.6 million in fuel expense.
16. Fleet Impairment
Effective January 1, 2002, the Company adopted FASB Statement of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FAS 144"), which superseded FASB Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of ("FAS 121"). However, the Company
continues to account for the fleet and related assets that were impaired prior
to January 1, 2002, and classified as held for sale, under FAS 121, as required
by FAS 144.
71
Following the events of September 11, 2001, the airline industry began
experiencing excess capacity as consumer demand for scheduled service declined.
At the same time, the Company was taking delivery of a significant number of new
Boeing 737-800 and 757-300 aircraft, which it planned to utilize in its
scheduled service markets. To adjust its capacity to new market demands, the
Company decided to retire its Boeing 727-200 fleet earlier than originally
planned. Before September 11, 2001, the Company had a plan in place to gradually
retire these aircraft between mid-2001 and mid-2002. The Company accelerated
this plan by retiring certain individual aircraft earlier than planned and the
Company retired all of these aircraft from service by May 31, 2002. As the
Company retired the Boeing 727-200 aircraft, it contributed them to BATA to
re-market these aircraft to third parties. See "Note 1 - Significant Accounting
Policies - Investment in BATA, LLC." In accordance with FAS 121, the Company
recorded an impairment charge of $44.5 million in 2001. In accordance with FAS
121, the Company continues to monitor current fair market values of previously
impaired assets. In 2003, the Company recorded an additional asset impairment
charge of $5.3 million against its remaining net book value of Boeing 727-200
aircraft (recorded as an investment in the BATA joint venture), as compared to
$35.9 million in impairment charges recorded in 2002. The current estimate of
this fleet's fair market value is based on quoted market prices and estimated
salvage values. The carrying amount of one Boeing 727-200 that was not
contributed to BATA, with related assets, is classified as long-term assets held
for sale in the accompanying balance sheet in accordance with FAS 121.
Also in 2001, for reasons similar to those described above, the Company retired
certain Lockheed L-1011-50 and 100 aircraft, and determined that the remaining
Lockheed L-1011-50 and 100 fleet and related rotable parts and inventory were
impaired under FAS 121. The Company recorded an impairment charge of $67.8
million relating to this fleet in 2001. In 2002, the Company retired three owned
L-1011-50 aircraft by removing them from revenue service, which resulted in a
charge of $9.0 million, and recorded an additional asset impairment charge of
$7.6 million against its remaining net book value of Lockheed L-1011-50 and 100
aircraft and related parts. No such charges were recorded in 2003. In accordance
with FAS 144, the Company continues to monitor the fair market values of these
assets. The Company estimates this fleet's fair market value using discounted
cash flow analysis. The carrying amount of these assets is classified as assets
held for use and appears in the property and equipment section of the
accompanying consolidated balance sheets, since the Company is still flying two
of these aircraft. The assets are being depreciated in conjunction with the
planned fleet retirement schedule.
In 2002, the Company recorded a charge of $14.2 million related to the
retirement of one owned L-1011-500 aircraft. As a result, the Company began
evaluating this fleet and related parts and inventory for impairment under FAS
144. Through the end of 2003, the Company concluded from its analysis that this
fleet was unimpaired.
17. Goodwill and Other Intangible Assets
The Company has no material intangible assets other than goodwill. The Company's
goodwill is related to its ATALC, ATA Cargo and Chicago Express subsidiaries,
which were acquired in 1999. Prior to the adoption of FAS 142 by the Company in
the first quarter of 2002, the Company amortized goodwill on a straight-line
basis over 20 years in accordance with APB 17. The Company recorded no goodwill
amortization expense in 2003 and 2002, as provided by FAS 142. The Company
recorded $1.3 million of goodwill amortization in 2001.
As required by FAS 142, the Company performed its goodwill impairment test in
the fourth quarter of 2002. The Company identified two FAS 142 reporting units
for ATALC. The ATALC brands outsourced to MTC were one reporting unit. The other
reporting unit related to the Key Tours brands ("KTI") that sold Canadian rail
packages and ground packages in Las Vegas. In the 2002 goodwill impairment
review, the Company determined that the goodwill related to Chicago Express, ATA
Cargo and the MTC reporting unit was not impaired. However, the estimated fair
value of the KTI reporting unit was lower than the carrying amount, and an
impairment loss of $6.9 million, reflecting the total goodwill balance for KTI,
was recorded in the fourth quarter of 2002. As of December 31, 2003, the Company
has ceased marketing the KTI brands.
72
In accordance with FAS 142, the Company
performed its second annual goodwill impairment test in the fourth quarter of
2003 and determined that the goodwill related to Chicago Express, ATA Cargo and
the MTC reporting unit was not impaired. In both years, the fair values of all
of the Company's reporting units were estimated using discounted future cash
flows since market quotes were not readily available.
18. Related Party Transactions
J. George Mikelsons, the Company's Chairman and Chief Executive Officer, is the
sole owner of Betaco, Inc., a Delaware corporation ("Betaco"). Betaco currently
owns two airplanes, a Cessna Citation II and a Lear Jet, and two helicopters, a
Bell 206B Jet Ranger III and a Bell 206L-3 LongRanger. The two airplanes are
leased or subleased to ATA. The Jet Ranger III and LongRanger helicopters are
leased to ATA ExecuJet, Inc. ("ExecuJet"), a subsidiary of ATA Holdings Corp.
ExecuJet used the Jet Ranger III for third-party charter flying and subleases
the LongRanger to an Indianapolis television station.
The lease for the Cessna Citation currently requires a monthly payment of
$37,500 for a term beginning July 25, 2001, and ending on July 24, 2004. The
lease for the Lear Jet required a monthly payment of $33,600 for a term
beginning December 24, 2001, and ending December 23, 2003. The lease for the
Lear Jet is currently operating on a month-to-month basis and is being
renegotiated. The lease for the JetRanger III currently requires a monthly
payment of $3,500 for a term beginning November 1, 2002, and ending November 1,
2005. The lease for the LongRanger requires a monthly payment of $7,350 for a
term beginning December 11, 2001, and ending October 31, 2005. The Company
believes that the current terms of the leases and subleases with Betaco for this
equipment are no less favorable to the Company than those that could be obtained
from third parties.
Since 1996, the Company and Mr. Mikelsons have had an arrangement pursuant to
which the Company provides certain domestic employees of Mr. Mikelsons with
salary, health insurance and other non-cash benefits. The Company invoiced Mr.
Mikelsons quarterly for the full amount of such benefits. Prior to 2003, the
timing of payments from Mr. Mikelsons to the Company had been inconsistent.
Beginning in 2003, Mr. Mikelsons has reimbursed the Company prior to the date of
each salary payment for these employees.
In 2004, the Company will pay approximately $296,000 in annual compensation,
plus associated non-cash benefits, to six employees who serve as the crew for
one boat owned by Betaco and another company owned by Mr. Mikelsons. In 2003,
the Company paid approximately $258,000 for five employees. Under an agreement
dated as of July 1, 2002, the Company agreed to pay for these employees in
exchange for its use of the boat for business purposes (e.g., the entertainment
of clients, customers and vendors of the Company). To the extent that for any
fiscal year the crew's compensation, plus associated non-cash benefits, exceeds
75% of the amount that would have been charged by an outside third party under a
fair market rental contract for the Company's actual business use of the boat,
Mr. Mikelsons is responsible for paying the difference. In 2003, the Company's
use of the boat resulted in no payments by Mr. Mikelsons to the Company.
As of December 31, 2003, Mr. Mikelsons owes $668,029 to the Company pursuant to
the arrangements relating to the domestic employees and the crew. In 2002, the
Company has also paid Mr. Mikelsons a total of $120,000 in connection with use
of the boat by ATA prior to the July 1, 2002, agreement. While there have been
other business uses of the boat by the Company, Mr. Mikelsons has determined not
to seek reimbursement for them.
73
19. Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). The FASB amended FIN 46 in December 2003.
FIN 46, as amended, requires that companies ("primary beneficiaries") that
absorb a majority of a variable interest entity's ("VIE") losses, or receive a
majority of a VIE residual returns, consolidate the entity. The accounting
provisions of FIN 46 are required to be applied to VIE within the first quarter
ending after March 15, 2004. The related disclosure requirements were effective
upon issuance of FIN 46. The Company does not expect FIN 46 to have a material
impact on the Company.
The Company has identified BATA as a VIE under FIN 46 in which the Company has a
significant variable interest. The Company has determined that it is not the
primary beneficiary of BATA under FIN 46 and is not required to consolidate
BATA. As of December 31, 2003, the Investment in BATA on the consolidated
balance sheet was $14.7 million.
On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("FAS 150"). FAS 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. FAS 150 is required to be applied immediately to instruments entered
into or modified after May 31, 2003 and applied to previously existing
instruments as of the beginning of the first interim financial reporting period
beginning after June 15, 2003.
According to the provisions of FAS 150, the Company reclassified its 500 shares
of Series A Preferred as a liability on the Company's balance sheet effective
July 1, 2003. Per FAS 150, the Series A Preferred has not been reclassified on
the balance sheet as of December 31, 2002. Also effective July 1, 2003,
dividends accrued or paid to the owners of Series A redeemable preferred stock
are classified as interest expense on the Company's consolidated statement of
operations. FAS 150 does not modify accounting standards applicable to the
Company's 300 shares of Series B Preferred.
20. Subsidiary Guarantees
ATA Holdings Corp. has issued unsecured senior note indentures which are fully
and unconditionally and jointly and severally guaranteed on an unsecured basis
by the following subsidiaries: ATA, Ambassadair Travel Club Inc., ATALC, Amber
Travel Inc., American Trans Air Training Corporation, ExecuJet, Chicago Express
and ATA Cargo. The subsidiary guarantors are 100%-owned subsidiaries. ATA
Holdings Corp. has no independent assets or operations and the guarantor
subsidiaries generated 99.8% and 100.0% of the consolidated revenues and net
profits of the Company, respectively, for the years ended December 31, 2002 and
2003. Therefore, condensed consolidating financial information is not presented.
21. Subsequent Event
On March 1, 2004, the Company amended its agreement with its credit card
processing bank to reflect a further extension for the processing of sales
charges on MasterCard and Visa cards until March 31, 2005. The credit card
processing bank agreed to reduce the holdback percentage for sales for future
travel to 75% effective with the execution of the amendment. The effect of
decreasing the holdback percentage from 100% to 75% increased the Company's cash
balance by approximately $21 million based on the holdback balance at March 1,
2004. The amended agreement provides quarterly financial covenants under which
the Company may maintain a holdback at 75% or 50% of sales for future travel,
but at no time during the life of the amendment will the holdback be lower than
50% of sales for future travel. However, the Company can provide no assurances
that it will be able to maintain the percentage of holdback below 100% in future
periods under this amendment.
74
22. Selected Supplemental Quarterly Data (Unaudited)
Financial Statements and Supplementary Data
ATA Holdings Corp. and Subsidiaries
2003 Quarterly Financial Summary
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 3/31 6/30 (1) 9/30 12/31 (1)
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 373,629 $ 388,122 $ 387,703 $ 369,079
Operating expenses 372,109 332,177 358,237 378,469
Operating income (loss) 1,520 55,945 29,466 (9,390)
Other expenses (12,512) (12,630) (14,432) (16,222)
Income (loss) before income taxes (10,992) 43,315 15,034 (25,612)
Income taxes (credits) - - 7,311 (6,000)
Preferred stock dividends 375 2,485 1,149 633
Income (loss) available to common shareholders $ (11,367) $ 40,830 $ 6,574 $ (20,245)
Net income (loss) per common share - basic $ (0.97) $ 3.47 $ 0.56 $ (1.72)
Net income (loss) per common share - diluted $ (0.97) $ 2.93 $ 0.53 $ (1.72)
Financial Statements and Supplementary Data
ATA Holdings Corp. and Subsidiaries
2002 Quarterly Financial Summary
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 3/31 6/30 (1) 9/30 (1) 12/31 (1)
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 330,570 $ 318,541 $ 317,289 $ 310,970
Operating expenses 320,512 377,834 376,933 362,128
Operating income (loss) 10,058 (59,293) (59,644) (51,158)
Other expenses (7,416) (9,690) (7,723) (9,348)
Income (loss) before income taxes 2,642 (68,983) (67,367) (60,506)
Income taxes (credits) 762 (13,585) (6,746) (5,381)
Preferred stock dividends 375 2,485 375 2,485
Income (loss) available to common shareholders $ 1,505 $ (57,883) $ (60,996) $ (57,610)
Net income (loss) per common share - basic $ 0.13 $ (4.92) $ (5.18) $ (4.90)
Net income (loss) per common share - diluted $ 0.12 $ (4.92) $ (5.18) $ (4.90)
(1) Operating results for the years ended December 31, 2003 and 2002 include the
following items:
75
2003
Quarter Ended 3/31 6/30 9/30 12/31 Total
---- ---- ---- ----- -----
Aircraft impairments and retirements $ - $ - $ - $ (5,288) $ (5,288)
U.S. Government grants - 37,156 - - 37,156
---- -------- -------- -------- ---------
Total - income (loss) $ - $ 37,156 $ - $ (5,288) $ 31,868
==== ======== ======== ======== =========
2002
Quarter Ended 3/31 6/30 9/30 12/31 Total
---- ---- ---- ----- -----
Aircraft impairments and retirements $ - $(17,241) $(34,381) $(15,165) $ (66,787)
U.S. Government grants - (15,210) - (1,011) (16,221)
Goodwill impairments - - - (6,893) (6,893)
---- -------- -------- -------- ---------
Total - income (loss) $ - $(32,451) $(34,381) $(23,069) $ (89,901)
==== ======== ======== ======== =========
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change of auditors or disagreements on accounting methods has occurred which
would require disclosure hereunder.
Item 9a. Controls and Procedures
The Company conducted an evaluation (under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act"), as amended, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2003. Based on this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2003, the controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by the Company in
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission.
Since December 31, 2003, there have not been any significant changes in the
internal controls or in other factors that could significantly affect the
internal controls.
76
PART III
Item 10. Directors and Officers of the Registrant
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 10, 2004.
Item 11. Executive Compensation
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 10, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 10, 2004.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 10, 2004.
Item 14. Principal Accountant Fee and Services
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 10, 2004.
77
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the
Company and its subsidiaries are included in Item 8:
o Consolidated Balance Sheets for the years ended December
31, 2003 and 2002
o Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
o Consolidated Statements of Changes in Redeemable
Preferred Stock, Common Stock and Other Shareholders'
Equity (Deficit) for the years ended December 31, 2003,
2002 and 2001 o Consolidated Statementsof Cash Flows for
the years ended December 31, 2003, 2002 and 2001
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following consolidated financial information for the years
2003, 2002 and 2001 is included in Item 15d:
o Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(3) Exhibits
Exhibits are filed as a separate section of this report as set
forth in the Index to Exhibits attached to this report.
(b) Reports on Form 8-K filed during the quarter ending December 31, 2003:
Report filed on October 14, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on October 20, 2003, furnishing items under Item 9.
Regulation FD Disclosure.
Report filed on October 21, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
78
PART IV - Continued
Report filed on October 27, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on November 10, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on November 24, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on December 8, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on December 15, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
Report filed on December 22, 2003, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
(c) Exhibits
See the Index to Exhibits attached to this report.
(d) Financial Statement Schedule
See Schedule II - Valuation and Qualifying Accounts.
79
Item 15d. Valuation and Qualifying Accounts Schedule II
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Additions
---------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts - Deductions - Balance at
Description Period Expenses Describe Describe End of Period
- ----------- ------ -------- -------- -------- -------------
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts 1,191 2,213 - 1,878 (1) 1,526
Allowance for obsolescence - Inventory 13,112 3,481 - 5,688 (2) 10,905
--------- -------- --- -------- ---------
Totals $ 14,303 $ 5,694 $ - $ 7,566 $ 12,431
========= ======== === ======== =========
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts 1,526 2,605 - 1,756 (1) 2,375
Allowance for obsolescence - Inventory 10,905 4,258 - 433 (2) 14,730
Valuation allowance for net deferred tax asset - 43,324 - - 43,324
--------- -------- --- -------- ---------
Totals $ 12,431 $ 50,187 $ - $ 2,189 $ 60,429
========= ======== === ======== =========
Year ended December 31, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts 2,375 1,383 - 2,370 (1) 1,388
Allowance for obsolescence - Inventory 14,730 6,493 - - 21,223
Valuation allowance for net deferred tax asset 43,324 - - 9,871 (3) 33,453
--------- -------- --- -------- ---------
Totals $ 60,429 $ 7,876 $ - $ 12,241 $ 56,064
========= ======== === ======== =========
(1) Uncollectible accounts written off, net of recoveries.
(2) Reduction of obsolescence allowance in 2001 of $5.4 million resulted from the FAS 121 impairment write-down of Lockheed
L-1011-50 and 100 inventory and Boeing 727-200 inventory. The reduction in 2002 , and the remainder of the 2001 reduction in
obsolescence allowance, related to inventory items transferred to flight equipment or sold.
(3) The net reduction in the valuation allowance is primarily related to the utilization of net operating losses in 2003.
80
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: March 30, 2004 by /s/ J. George Mikelsons
J. George Mikelsons
Chairman and Chief Executive Officer
On behalf of the Registrant and as Director
Date: March 30, 2004 /s/ James W. Hlavacek
James W. Hlavacek
Vice Chairman
Director
Date: March 30, 2004 /s/ David M. Wing
David M. Wing
Executive Vice President and
Chief Financial Officer
Director
Date: March 30, 2004 /s/ Robert A. Abel
Robert A. Abel
Director
Date: March 30, 2004 /s/ Claude E. Willis
Claude E.Willis
Director
Date: March 30, 2004 /s/ Andrejs P. Stipnieks
Andrejs P. Stipnieks
Director
Date: March 30, 2004 /s/ Gilbert F. Viets
Gilbert F. Viets
Director
Index to Exhibits
Exhibit No.
2.1 Agreement and Plan of Merger between INDUS Acquisition Company and Amtran,
Inc. (incorporated by reference to Annex A to the Preliminary Proxy
Statement on Schedule 14A filed by Amtran, Inc. on June 29, 2001).
3(i)(a) Restated Articles of Incorporation of Amtran, Inc. (incorporated by
reference to Exhibit 3(a) to Amtran, Inc.'s Registration Statement on S-1
dated March 16, 1993, File No. 33-59630).
3(i)(b) Articles of Amendment to the Restated Articles of Incorporation adopted
as of September 19, 2000 (incorporated by reference to Exhibit 3(i)(b) to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
3(i)(c) Articles of Amendment to the Restated Articles of Incorporation adopted
as of December 28, 2000 (incorporated by reference to Exhibit 3(i)(c) to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
3(ii)Bylaws of Amtran, Inc., as amended (incorporated by reference to Exhibit
3(b) to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993,
File No. 33-59630).
4.1 Indenture dated as of July 24, 1997, by and among Amtran, Inc., as issuer,
American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations,
Inc., Amber Travel, Inc., American Trans Air Training Corporation, American
Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, as guarantors,
and First Security Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.1 to Amtran, Inc.'s Registration Statement on S-4 dated October
6, 1997, File No. 333-37283).
4.2 Indenture dated as of December 11, 1998, by and among Amtran, Inc., as
issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA
Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, as guarantors, and First Security Bank, N.A., as trustee
(incorporated by reference to Exhibit 4.4 to Amtran, Inc.'s Registration
Statement on S-3 dated August 26, 1998, File No. 333-52655).
4.3 First Supplemental Indenture dated as of December 11, 1998, by and among
Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club,
Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, as guarantors, and First Security Bank, N.A., as trustee, to
the Indenture dated as of December 11, 1998 (incorporated by reference to
Exhibit 4.4 to Amtran, Inc.'s Registration Statement on S-3 dated August
26, 1998, File No. 333-52655).
4.4 First Supplemental Indenture dated as of December 21, 1999, by and among
Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club,
Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, Chicago Express Airlines, Inc., as guarantors, and First
Security Bank, N.A., as trustee, to the Indenture dated as of July 24, 1997
(incorporated by reference to Exhibit 4.1 to Amtran, Inc.'s Registration
Statement on S-4 dated January 25, 2000, File No. 333-95371).
4.5 Indenture relating to Senior Notes due 2009 dated as of January 30, 2004,
among ATA Holdings Corp., as issuer, ATA Airlines, Inc., Ambassadair Travel
Club, Inc., ATA Leisure Corp., Amber Travel, Inc., American Trans Air
Training Corporation, American Trans Air ExecuJet, Inc., ATA Cargo, Inc.
and Chicago Express Airlines, Inc., as guarantors, and Wells Fargo Bank
Northwest, National Association, as trustee (Incorporated by reference to
Exhibit 4.1 to ATA Holding Corp.'s Registration Statement on Form S-4 dated
February 13, 2004, File No. 333-112827).
4.6 Indenture relating to Senior Notes due 2010 dated as of January 30, 2004,
among ATA Holdings Corp., as issuer, ATA Airlines, Inc., Ambassadair Travel
Club, Inc., ATA Leisure Corp., Amber Travel, Inc., American Trans Air
Training Corporation, American Trans Air ExecuJet, Inc., ATA Cargo, Inc.
and Chicago Express Airlines, Inc., as guarantors, and Wells Fargo Bank
Northwest, National Association, as trustee (Incorporated by reference to
Exhibit 4.2 to ATA Holding Corp.'s Registration Statement on Form S-4 dated
February 13, 2004, File No. 333-112827).
4.7 Second Supplemental Indenture relating to 10 1/2% Senior Notes due 2004
dated as of January 30, 2004, among ATA Holdings Corp., as issuer, ATA
Airlines, Inc., Ambassadair Travel Club, Inc., ATA Leisure Corp., Amber
Travel, Inc., American Trans Air Training Corporation, American Trans Air
ExecuJet, Inc., ATA Cargo, Inc. and Chicago Express Airlines, Inc., as
guarantors, and Wells Fargo Bank Northwest, National Association, as
trustee (Incorporated by reference to Exhibit 4.3 to ATA Holding Corp.'s
Registration Statement on Form S-4 dated February 13, 2004, File No.
333-112827).
4.8 Second Supplemental Indenture relating to 9 5/8% 2005 notes due 2004 dated
as of January 21, 2004, among ATA Holdings Corp., as issuer, ATA Airlines,
Inc., Ambassadair Travel Club, Inc., ATA Leisure Corp., Amber Travel, Inc.,
American Trans Air Training Corporation, American Trans Air ExecuJet, Inc.,
ATA Cargo, Inc. and Chicago Express Airlines, Inc., as guarantors, and
Wells Fargo Bank Northwest, National Association, as trustee (Incorporated
by reference to Exhibit 4.4 to ATA Holding Corp.'s Registration Statement
on Form S-4 dated February 13, 2004, File No. 333-112827).
4.9 Third Supplemental Indenture relating to 9 5/8% Senior Notes due 2005 dated
as of January 30, 2004, among ATA Holdings Corp., as issuer, ATA Airlines,
Inc., Ambassadair Travel Club, Inc., ATA Leisure Corp., Amber Travel, Inc.,
American Trans Air Training Corporation, American Trans Air ExecuJet, Inc.,
ATA Cargo, Inc. and Chicago Express Airlines, Inc., as guarantors, and
Wells Fargo Bank Northwest, National Association, as trustee (Incorporated
by reference to Exhibit 4.5 to ATA Holding Corp.'s Registration Statement
on Form S-4 dated February 13, 2004, File No. 333-112827).
4.10 Registration Rights Agreement dated as of January 30, 2004, among ATA
Holdings Corp., as issuer, ATA Airlines, Inc., Ambassadair Travel Club,
Inc., ATA Leisure Corp., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc., ATA Cargo, Inc. and Chicago
Express Airlines, Inc., as guarantors, and Wells Fargo Bank Northwest,
National Association, as trustee (Incorporated by reference to Exhibit 4.6
to ATA Holding Corp.'s Registration Statement on Form S-4 dated February
13, 2004, File No. 333-112827).
4.11 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 2002-1A Pass
Through Trust and the issuance of 8.328% Initial American Trans Air 2002-1A
Pass Through Certificates and 8.328% Exchange American Trans Air 2002-1A
Pass Through Certificates (incorporated by reference to Exhibit 4.5 to ATA
Holdings Corp.'s Registration Statement on Form S-4 dated November 22,
2002, File No. 333-101423).
4.12 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 2002-1B Pass
Through Trust and the issuance 10.699% Initial American Trans Air 2002-1 B
Pass Through Certificates and 10.699% Exchange American Trans Air 2002-1B
Pass Through Certificates (incorporated by reference to Exhibit 4.6 to ATA
Holdings Corp.'s Registration Statement on Form S-4 dated November 22,
2002, File No. 333-101423).
4.13 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1G-O Pass Through
Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-O Pass
Through Trust Certificates and 8.039% Exchange American Trans Air 2000-1G-O
Pass Through Certificates (incorporated by reference to Exhibit 4.5 to
Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File
No. 333-43606).
4.14 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1G-S Pass Through
Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-S Pass
Through Certificates and 8.039% Exchange American Trans Air 2000-1G-S Pass
Through Certificates (incorporated by reference to Exhibit 4.6 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.15 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1C-O Pass Through
Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-O Pass
Through Certificates and 9.644% Exchange American Trans Air 2000-1C-O Pass
Through Certificates (incorporated by reference to Exhibit 4.7 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.16 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1C-S Pass Through
Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-S Pass
Through Certificates and 9.644% Exchange American Trans Air 2000-1C-S Pass
Through Certificates (incorporated by reference to Exhibit 4.8 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.17 Purchase and Investor Rights Agreement dated as of December 13, 2000,
between Amtran, Inc. and Boeing Capital Corporation. (incorporated by
reference to Exhibit 4.9 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.18 Purchase and Investor Rights Agreement dated as of September 19, 2000,
between Amtran, Inc. and International Lease Finance Corporation.
(incorporated by reference to Exhibit 4.10 to Amtran, Inc.'s Annual Report
on 10-K dated April 2, 2001, File No. 000-21642).
4.19 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1A Pass
Through Trust and the issuance of 7.37% American Trans Air 1996-1A Pass
Through Trust Certificates (incorporated by reference to Exhibit 4.11 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.20 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1B Pass
Through Trust and the issuance of 7.64% American Trans Air 1996-1B Pass
Through Trust Certificates (incorporated by reference to Exhibit 4.12 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.21 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1C Pass
Through Trust and the issuance of 7.82% American Trans Air 1996-1C Pass
Through Trust Certificates (incorporated by reference to Exhibit 4.13 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.22 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1A-O
Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-O
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.14
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.23 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1A-S
Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-S
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.15
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.24 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1B-O
Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-O
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.16
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.25 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1B-S
Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-S
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.17
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.26 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1C-O
Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-O
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.18
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.27 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1C-S
Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-S
Pass Through Trust Certificates (incorporated by reference to Exhibit 4.19
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.28 Form of Common Stock Certificate of Amtran, Inc. (incorporated by reference
to Exhibit 4 to Amtran, Inc.'s Registration Statement on S-1 dated March
16, 1993, File No. 33-59630).
4.29 Form of Series A1 Preferred Stock Certificate of Amtran, Inc. (incorporated
by reference to Exhibit 4.21 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.30 Form of Series B Preferred Stock Certificate of Amtran, Inc. (incorporated
by reference to Exhibit 4.22 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.31 Form of 1996 Class A American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.11).
4.32 Form of 1996 Class B American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.12).
4.33 Form of 1996 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.13).
4.34 Form of 1997 Class A American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.14).
4.35 Form of 1997 Class B American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.16).
4.36 Form of 1997 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.18).
4.37 Form of 2000 Class G American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.5).
4.38 Form of 2000 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.7).
4.39 Amtran, Inc. hereby agrees to furnish to the Commission, upon request,
copies of certain additional instruments relating to long-term debt of the
kind described in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 1993 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Exhibit 10(r)(r) to Amtran,
Inc.'s Registration Statement on S-1 dated March 16, 1993, File No.
33-59630).
10.2 1996 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Amtran, Inc.'s Registration
Statement on S-8 dated June 20, 1997, File No. 333-29715).
10.3 2000 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Exhibit A to Amtran, Inc.'s
Proxy Statement dated April 5, 2000).
10.4 Stock Option Plan for Non-Employee Directors (incorporated by reference to
Appendix A to Amtran, Inc.'s Proxy Statement dated April 15, 1994).
10.5 Aircraft General Terms Agreement dated as of June 30, 2000, between The
Boeing Company ("Boeing") and American Trans Air, Inc.; Purchase Agreement
Number 2285 dated as of June 30, 2000, between Boeing and American Trans
Air, Inc.; Purchase Agreement Number 2262 dated as of June 30, 2000,
between Boeing and American Trans Air, Inc. (incorporated by reference to
Exhibit 10.5 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001,
File No. 000-21642). *
10.6(a) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(a) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(b) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(b) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(c) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(c) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(d) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(d) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(e) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(e) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(f) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(f) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(g) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(g) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(h) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(h) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(i) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(i) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(j) Aircraft Lease Agreement dated as of September 20, 2000, between
Amtran, Inc. and International Lease Finance Corporation (incorporated by
reference to Exhibit 10.6(j) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(k) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(k) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(l) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(l) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(m) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(m) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.6(n) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation (incorporated by reference
to Exhibit 10.6(n) to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.7 Aircraft Financing Agreement dated as of December 6, 2000, between Amtran,
Inc. and General Electric Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001,
File No. 000-21642). *
10.8 Limited Liability Company Agreement dated as of March 13, 2001, between
Amtran, Inc. and Boeing Capital Corporation to form BATA Leasing LLC.
(incorporated by reference to Exhibit 10.1.1 to Amtran, Inc.'s Quarterly
Annual Report on 10-Q dated May 15, 2001, File No. 000-21642). *
10.9 Purchase and Voting Agreement dated as of May 16, 2001, between Amtran,
Inc., and ILFC (incorporated by reference to Exhibit 99.2 to the 8-K dated
May 16, 2001).
10.10Commitment Letter dated June 18, 2001, from Salomon Smith Barney Inc., and
Citicorp USA, Inc. to Amtran, Inc. (incorporated by reference to Exhibit 2
to the Schedule 13D filed by Amtran, Inc., J. George Mikelsons and INDUS
Acquisition Company on June 21, 2001).
10.11$168,000,000 Loan Agreement dated as of November 30, 2002, among American
Trans Air, Inc., as Borrower, ATA Holdings Corp., as Parent, GOVCO
Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate
Tranche A Lender, Citicorp North America, Inc., as GOVCO Administrative
Agent, Citibank, N.A., as Tranche B Lender, BearingPoint, Inc., as Loan
Administrator, Citibank, N.A., as Collateral Agent, Citibank, N.A., as
Agent, and the Air Transportation Stabilization Board. (incorporated by
reference to Exhibit 10.11 to ATA Holdings Corp. Annual Report on 10-K
dated March 31, 2003, File No. 000-21642).*
10.11(a) Consent, Waiver and Amendment dated as of January 29, 2004, to the
$168,000,000 Loan Agreement dated as of November 30, 2002, among American
Trans Air, Inc., as Borrower, ATA Holdings Corp., as Parent, GOVCO
Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate
Tranche A Lender, Citicorp North America, Inc., as GOVCO Administrative
Agent, Citibank, N.A., as Tranche B Lender, BearingPoint, Inc., as Loan
Administrator, Citibank, N.A., as Collateral Agent, Citibank, N.A., as
Agent, and the Air Transportation Stabilization Board. (incorporated by
reference to Exhibit 10.11 to ATA Holdings Corp. Registration of Securities
on Form S-4 dated February 13, 2004, File No. 333-112827).
10.12Mortgage and Security Agreement dated as of November 20, 2002, made by
American Trans Air, Inc. in favor of Citibank, N.A., as the Collateral
Agent. (incorporated by reference to Exhibit 10.12 to ATA Holdings Corp.
Annual Report on 10-K dated March 31, 2003, File No. 000-21642).
14 Code of Ethics. The Company has adopted a code of ethics which applies to
all of its Board members and employees including the principal executive
officer, principal financial officer and controller. The code of ethics can
be reviewed at ata.com, the Company's internet website.
21 Subsidiaries of ATA Holdings Corp.
23 Consent of Independent Auditors.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Portions of these exhibits have been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-52655) of ATA Holdings Corp. and Subsidiaries and in the related
Prospectus, in the Registration Statement (Form S-8 No. 33-65708) pertaining to
the 1993 Incentive Stock Plan for Key Employees of ATA Holdings Corp. and
Subsidiaries and in the Registration Statement (Form S-3 No. 333-86791) of ATA
Holdings Corp. and Subsidiaries and in the related Prospectus of our report
dated January30, 2004, except for Note 21, as to which the date is March 1,
2004, with respect to the consolidated financial statements and schedule of ATA
Holdings Corp. and Subsidiaries, included in the Annual Report (Form 10-K) for
the year ended December 31, 2003.
ERNST & YOUNG LLP
Indianapolis, Indiana
March 26, 2004