SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (703) 650-6000
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
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of August 10, 2001, there were 43,731,040 shares of common stock,
par value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
December 31, June 30,
(In thousands except for share and per share data) 2000 2001
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 86,117 $ 77,510
Short term investments 35,100 58,315
Accounts receivable, net 29,052 15,085
Expendable parts and fuel inventory, net 6,188 9,501
Prepaid expenses and other current assets 8,055 18,692
Deferred tax asset 13,973 2,766
Total current assets 178,485 181,869
Property and equipment at cost, net of
accumulated depreciation and amortization 142,840 159,391
Intangible assets, net of accumulated
amortization 2,045 1,962
Debt issuance costs, net of accumulated
amortization 2,912 3,561
Aircraft deposits 46,420 41,310
Other assets 9,998 4,620
Total assets $ 382,700 $ 392,713
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 19,724 $ 17,398
Current portion of long-term debt 4,344 4,454
Current portion of capital lease obligations 1,512 1,592
Accrued liabilities 53,044 48,792
Accrued aircraft early retirement charge 27,843 1,316
Total current liabilities 106,467 73,552
Long-term debt, less current portion 63,080 61,346
Capital lease obligations, less current portion 4,009 3,197
Deferred tax liability 18,934 22,540
Deferred credits, net 22,037 34,445
Total liabilities 214,527 195,080
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 141,000,000; shares
issued 47,704,720 and 48,699,942
respectively; shares outstanding
42,658,388 and 43,653,610 respectively 954 974
Additional paid-in capital 117,284 124,151
Less: Common stock in treasury, at cost,
5,046,332 shares (35,303) (35,303)
Retained earnings 85,238 107,811
Total stockholders' equity 168,173 197,633
Total liabilities and
stockholders' equity $ 382,700 $ 392,713
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
(In thousands, except for per share data) 2000 2001
Operating revenues:
Passenger $ 114,181 $ 145,172
Other 2,151 1,049
Total operating revenues 116,332 146,221
Operating expenses:
Salaries and related costs 26,181 39,803
Aircraft fuel 13,469 22,166
Aircraft maintenance and materials 8,931 12,217
Aircraft rentals 14,053 21,739
Traffic commissions and related fees 15,733 4,025
Facility rents and landing fees 4,634 7,446
Depreciation and amortization 2,648 3,774
Other 10,054 14,182
Total operating expenses 95,703 125,352
Operating income 20,629 20,869
Other income (expense):
Interest income 1,064 2,155
Interest expense (1,692) (1,222)
Other, net (95) (40)
Total other income (expense) (723) 893
Income before income tax provision 19,906 21,762
Income tax provision 7,877 8,814
Net income $ 12,029 $ 12,948
Income per share:
Basic:
Net income $ 0.31 $ 0.30
Diluted:
Net income $ 0.28 $ 0.29
Weighted average shares outstanding:
-Basic 38,746 43,168
-Diluted 43,542 45,029
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Six months ended June 30,
(In thousands, except for per share data) 2000 2001
Operating revenues:
Passenger $ 204,915 $ 276,868
Other 3,916 2,806
Total operating revenues 208,831 279,674
Operating expenses:
Salaries and related costs 50,440 76,794
Aircraft fuel 26,601 42,623
Aircraft maintenance and materials 17,007 23,374
Aircraft rentals 26,773 41,944
Traffic commissions and related fees 28,977 7,898
Facility rents and landing fees 9,097 14,870
Depreciation and amortization 5,229 7,174
Other 19,538 28,650
Total operating expenses 183,662 243,327
Operating income 25,169 36,347
Other income (expense):
Interest income 2,124 4,025
Interest expense (3,417) (2,487)
Other, net (170) (82)
Total other income (expense) (1,463) 1,456
Income before income tax provision 23,706 37,803
Income tax provision 9,397 15,230
Net income $ 14,309 $ 22,573
Income per share:
Basic:
Net income $ 0.38 $ 0.53
Diluted:
Net income $ 0.34 $ 0.50
Weighted average shares outstanding:
-Basic 38,000 42,961
-Diluted 43,270 44,831
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
(In thousands) 2000 2001
Cash flows from operating activities:
Net income $ 14,309 $ 22,573
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 5,542 7,085
Loss on disposal of assets 50 40
Amortization of deferred credits (748) (1,714)
Capitalized interest (net) (1,181) (739)
Other 676 554
Changes in operating assets and liabilities:
Accounts receivable (10,683) 15,622
Expendable parts and fuel inventory (1,495) (3,528)
Prepaid expenses and other current assets (7,022) (4,625)
Accounts payable 3,353 436
Accrued liabilities 12,066 (13,538)
Net cash provided by operating activities 14,867 22,166
Cash flows from investing activities:
Purchases of property and equipment (7,527) (16,206)
Purchases of short term investments (17,710) (53,815)
Maturities of short term investments 15,050 30,600
Refunds of aircraft deposits 2,800 9,400
Payments of aircraft deposits and other (5,100) (4,500)
Net cash used in investing activities (12,487) (34,521)
Cash flows from financing activities:
Payments of long-term debt (1,947) (1,624)
Payments of capital lease obligations (835) (731)
Deferred financing costs and other 270 (633)
Purchase of treasury stock (1,197) -
Proceeds from exercise of stock options 1,336 6,736
Net cash (used in) provided by financing activities (2,373) 3,748
Net increase (decrease) in cash and cash equivalents 7 (8,607)
Cash and cash equivalents, beginning of period 39,897 86,117
Cash and cash equivalents, end of period $ 39,904 $ 77,510
See accompanying notes to the condensed consolidated financial statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiaries, Atlantic Coast Airlines ("ACA") and
Atlantic Coast Jet, Inc. ("ACJet"), (together, the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in these unaudited
condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments, which are, in the opinion of
management, necessary for a fair presentation of such consolidated
financial statements. Results of operations for the three and six month
periods presented are not necessarily indicative of the results to be
expected for the full year ending December 31, 2001. Certain amounts as
previously reported have been reclassified to conform to the current year
presentation. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
2. OTHER COMMITMENTS
In February 1999, the Company entered into an asset-based lending
agreement with two financial institutions that provided the Company with
a line of credit for up to $35 million depending on the amount of
assigned ticket receivables and the value of certain rotable spare parts.
With the change in the United Express agreement from a proration-of-
fare/payment in arrears arrangement to a fee-for-service/payment-in-
advance arrangement effective December 1, 2000, the Company's ticket
receivable available for assignment has been reduced to zero. As such,
the available borrowing under the line of credit was limited to the value
of certain rotable spare parts, to a maximum of $8.0 million. On May 2,
2001 the asset-based lending agreement was amended to add an additional
$8.4 million to the borrowing base, collateralized by the value of
certain fixed assets. The line of credit will expire on September 30,
2001, or upon termination of the United Express agreement, whichever is
sooner. The interest rate on this line is LIBOR plus .75% to 1.75%
depending on the Company's fixed charges coverage ratio. There were no
borrowings on the line during 2000 or to date in 2001. The Company has
pledged $15.3 million of this line of credit as collateral for letters of
credit issued on behalf of the Company by a financial institution. This
effectively commits most of the line of credit. The Company has obtained
a commitment from another financial institution for a $25 million credit
facility to replace this existing line of credit on or before September
30, 2001 when the current line expires.
As of June 30, 2001, the Company had firm orders for 50 CRJs in addition
to the 46 previously delivered, and options for 80 additional CRJs. The
Company also had 40 Fairchild Dornier 328JET regional jet aircraft
("328JET") on firm order in addition to the 22 already delivered, and
held options for an additional 83 aircraft. The future delivery schedule
of the remaining 90 firm ordered regional jet aircraft as of June 30,
2001 is as follows: 18 aircraft are scheduled for delivery during the
remainder of 2001, 30 aircraft in 2002, and 42 aircraft in 2003.
On July 27, 2001, UAL Corporation ("UAL") the parent of United, and US
Airways Group, Inc. ("US Airways") announced that they had terminated
their Agreement and Plan of Merger. Due to the termination of this
agreement, the Company's contingent agreement with UAL to acquire-through
subsidiaries-the three regional airlines that are currently wholly-owned
by US Airways, which was contingent upon and would have occured at the
same time as closing of the proposed United/US Airways merger, was
effectively terminated.
3. ADOPTION OF FASB STATEMENT 133
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not
designated as hedging instruments, and for the ineffective portion of a
hedging instrument, the change in fair value will affect current period
earnings.
The Company adopted Statement No. 133 effective January 1, 2001. The
impact of adopting this statement has not had a material impact on the
Company's financial position or results of operations for the first six
months of 2001.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
40.5% and 40.3% for the three months and six months ended June 30, 2001
and 39.6% for the three months and six months ended June 30, 2000.
5. INCOME PER SHARE
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
computed by dividing net income by the weighted average number of common
shares outstanding and common stock equivalents, which consist of shares
subject to stock options computed using the treasury stock method. In
addition, under the if-converted method, dilutive convertible securities
are included in the denominator while related interest expense, net of
tax, for convertible debt is added to the numerator. A reconciliation of
the numerator and denominator used in computing basic and diluted income
per share is as follows:
Three months ended June 30,
(in thousands except for per share data) 2000 2001
Income (basic) $ 12,029 $ 12,948
Interest expense on 7% Convertible Notes, net of
tax effect 208 -
Income (diluted) $ 12,237 $ 12,948
Weighted average shares outstanding (basic) 38,746 43,168
Incremental shares related to stock options 1,666 1,861
Incremental shares related to 7% Convertible Notes 3,130 -
Weighted average shares outstanding (diluted) 43,542 45,029
Six months ended June 30,
(in thousands except for per share data) 2000 2001
Income (basic) $ 14,309 $ 22,573
Interest expense on 7% Convertible Notes, net of
tax effect 416 -
Income (diluted) $ 14,725 $ 22,573
Weighted average shares outstanding (basic) 38,000 42,961
Incremental shares related to stock options 1,502 1,870
Incremental shares related to 7% Convertible Notes 3,768 -
Weighted average shares outstanding (diluted) 43,270 44,831
6. AIRCRAFT EARLY RETIREMENT CHARGE
During 2000, the Company began early retirement of its fleet of 28 leased
19-seat British Aerospace J-32 turboprop ("J-32") aircraft. As of August
1, 2001, 18 J-32s had been removed from service. The remaining 10 J-32s
will be removed from service during the remainder of 2001. The early
retirement of the 28 leased J-32 aircraft resulted in the Company
recording a $29.0 million (pre-tax) restructuring charge during 2000.
In March 2001, the Company reached agreement with the lessor for the
early return and lease termination of all of the J-32's and as a result
paid a lease termination fee which consisted of $19.1 million in cash,
and the application of $5.2 million in credits due from the lessor. The
Company anticipates that the return of the aircraft will be completed
during 2001 within the time schedule agreed to with the lessor and that
the remainder of the amount accrued for early retirement charges will be
adequate to provide for costs necessary to meet aircraft return
conditions. The Company does not expect to incur any additional charges
against earnings for the early retirement of the J-32 fleet.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Second Quarter Operating Statistics
Increase
Three months ended June 30, 2000 2001 (Decrease)
Revenue passengers carried 946,637 1,284,733 35.7%
Revenue passenger miles ("RPMs") (000's) 311,726 476,849 53.0%
Available seat miles ("ASMs") (000's) 509,970 761,204 49.3%
Passenger load factor 61.1% 62.6% 1.5 pts
Revenue per ASM (cents) 22.4 19.1 (14.7)%
Yield (cents) 36.6 30.4 (16.9)%
Cost per ASM (cents) 18.8 16.5 (12.2)%
Average passenger segment (miles) 329 371 12.8%
Revenue departures (completed) 48,316 58,047 20.1%
Revenue block hours 62,601 79,861 27.6%
Aircraft utilization (block hours) 7.8 8.0 2.6%
Average cost per gallon of fuel (cents) 101.0 105.5 4.5%
Aircraft in service (end of period) 93 113 21.5%
Revenue per departure $ 2,354 $ 2,501 6.2%
Comparison of three months ended June 30, 2001, to three months ended
June 30, 2000.
Results of Operations
Forward Looking Statements
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking
statements are subject to risks, uncertainties, assumptions and other
factors that may cause the actual results of the Company to be materially
different from those reflected in such forward-looking statements.
Factors that could cause the Company's future results to differ
materially from the expectations described here include the ability of
the Company to obtain favorable financing terms for its aircraft, the
ability of the aircraft manufacturers to deliver aircraft on schedule,
unexpected costs in providing scheduled or new service or delays in the
implementation of new service, the ability of the Company to successfully
retire the Company's turboprop fleet, the ability to hire and retain
employees, the weather, the impact of labor issues or strikes at United
Airlines, Inc. or Delta Air Lines, Inc. on those companies' utilization
and support of the Company's operations, airport and airspace congestion,
changes in and satisfaction of regulatory requirements including
requirements relating to fleet expansion, general economic and industry
conditions, and the factors discussed below and in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. The Company
does not intend to update these forward-looking statements prior to its
next required filing with the Securities and Exchange Commission.
General
In the second quarter of 2001, the Company posted net income of
$12.9 million, compared to income of $12.0 million for the second quarter
of 2000. Operating income for the three months ended June 30, 2001 was
$20.9 million as compared to $20.6 million for the three months ended
June 30, 2000. Unit revenues, revenue per ASM ("RASM"), decreased 14.7%
to 19.1 cents, while unit costs, operating cost per ASM ("CASM")
decreased 12.2% to 16.5 cents compared to the second quarter 2000. This
resulted in operating margin decreasing to 14.3% for the second quarter
of 2001 from 17.7% for the second quarter of 2000. Total passengers
increased 35.7% in the second quarter of 2001 to 1,284,733 passengers,
compared to the second quarter of 2000.
Operating Revenues
The Company's operating revenues increased 25.7% to $146.2
million in the second quarter of 2001 compared to $116.3 million in the
second quarter of 2000. The increase resulted from a 49.3% increase in
ASMs to 761,204 in the second quarter of 2001 from 509,970 in the second
quarter of 2000, as well as a 6.2% increase in the revenue per departure
to $2,501 in the second quarter of 2001 from $2,354 in the second quarter
of 2000. Revenues for the second quarter of 2001 were recognized
primarily under fee-for-service agreements as compared to a proration-of-
fare agreement for revenues for the second quarter of 2000. Revenue for
the second quarter 2001 included $1.7 million attributable to routine
subsequent period sampling adjustments to prior billed tickets under the
Company's former proration-of-fare arrangement. The Company anticipates
that it will cease to experience sampling adjustments attributable to its
former proration-of-fare arrangement by the end of this year.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 17 additional 50-seat Canadair Regional Jet
("CRJs"), and the addition of 22 32 seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal from service of 17
British Aerospace J-32 Turboprop ("J-32") aircraft. The Company was
operating 46 CRJs as of June 30, 2001 as compared to 29 as of June 30,
2000. The 22 328JET aircraft were placed in revenue service beginning in
the third quarter of 2000 and continuing through the second quarter of
2001.
Operating Expenses
The Company's operating expenses increased 31.0% in the second
quarter of 2001 compared to the second quarter of 2000 due primarily to:
a 64.6% increase in total fuel costs as a result of a 4.5% increase in
the average price per gallon of jet fuel, coupled with a 23.5% increase
in the average fuel burn rate to 263 gallons per hour; a 49.3% increase
in ASMs; and a 54.7% increase in aircraft rental expense; all partly
offset by a 74.4% decrease in traffic commissions and related fees. The
increase in ASMs, fuel burn rate, and aircraft rental reflects the
addition of 17 CRJs and 22 328JETs into scheduled service, net of the
early retirement of 17 J-32s since the end of the second quarter of 2000.
A summary of operating expenses as a percentage of operating revenues and
cost per ASM for the three months ended June 30, 2000, and 2001 is as
follows:
Three Months ended June 30,
2000 2001
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 22.5% 5.1 27.2% 5.2
Aircraft fuel 11.6% 2.6 15.2% 2.9
Aircraft maintenance and materials 7.7% 1.8 8.3% 1.6
Aircraft rentals 12.1% 2.8 14.9% 2.9
Traffic commissions and related fees 13.5% 3.1 2.7% 0.5
Facility rents and landing fees 4.0% 0.9 5.1% 1.0
Depreciation and amortization 2.3% 0.5 2.6% 0.5
Other 8.6% 2.0 9.7% 1.9
Total 82.3% 18.8 85.7% 16.5
Cost per ASM decreased 12.2% on a year-over-year basis to 16.5
cents during the second quarter of 2001 primarily due to a 49.3% increase
in ASMs and a 74.4% decrease in the year-over-year traffic commissions
and related fees. The decrease in traffic commissions and related fees
reflects the fact that many of these fees are no longer borne by the
Company as a result of the restatement of the United Express agreement,
which went into effect on December 1, 2000. Under the restated
agreement, the Company remains responsible for fees associated with the
major airline Computer Reservation Systems.
Salaries and related costs per ASM increased 2.0% to 5.2 cents
in the second quarter of 2001 compared to 5.1 cents in the second quarter
of 2000. In absolute dollars, salaries and related costs increased 52.0%
from $26.2 million in the second quarter of 2000 to $39.8 million in the
second quarter of 2001. The increase resulted primarily from the addition
of 770 full and part time employees to support the 39 regional jet
aircraft added during 2000 and 2001.
The cost per ASM of aircraft fuel increased to 2.9 cents in the
second quarter of 2001 compared to 2.6 cents in the second quarter of
2000. In absolute dollars, aircraft fuel expense increased 64.6% from
$13.5 million in the second quarter of 2000 to $22.2 million in the
second quarter of 2001. The increased fuel expense resulted from a 4.5%
increase in the average cost per gallon of fuel from $1.01 to $1.06, a
27.6% increase in block hours, and the higher fuel consumption per hour
of regional jet aircraft versus turboprop aircraft which resulted in a
23.5% increase in the system average burn rate (gallons used per block
hour flown).
The cost per ASM of aircraft maintenance and materials
decreased to 1.6 cents in the second quarter of 2001 compared to 1.8
cents in the second quarter of 2000. In absolute dollars, aircraft
maintenance and materials expense increased 36.8% from $8.9 million in
the second quarter of 2000 to $12.2 million in the second quarter of
2001. The increased expense resulted from the increase in the size of the
total fleet, the expiration of manufacturer's warranties on older CRJs,
and the continual increase in the average age of the turboprop fleet.
The cost per ASM of aircraft rentals increased to 2.9 cents in
the second quarter of 2001 compared to 2.8 cents in the second quarter of
2000. In absolute dollars, aircraft rentals increased 54.7% from $14.1
million in the second quarter of 2000 to $21.7 million in the second
quarter of 2001, reflecting the addition of 17 CRJ aircraft and 22 328JET
aircraft since June 30, 2000, net of the removal of 17 J-32 turboprop
aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 0.5 cents for the second quarter of 2001 compared to 3.1
cents for the second quarter of 2000. In absolute dollars, traffic
commissions and related fees decreased 74.4% from $15.7 million in the
second quarter of 2000 to $4.0 million in the second quarter of 2001. As
noted above, the decrease reflects the fact that many of these fees are
no longer borne by the Company as a result of the restatement of the
United Express agreement, which went into effect on December 1, 2000.
Under the restated agreement, the Company continues to be responsible for
fees associated with the major airline Computer Reservation Systems.
The cost per ASM of facility rents and landing fees increased
11.1% from 0.9 cents for the second quarter of 2000 to 1.0 cents for the
second quarter of 2001. In absolute dollars, facility rents and landing
fees increased 60.7% from $4.6 million in the second quarter of 2000 to
$7.4 million in the second quarter of 2001. The increase in absolute
dollars for facility rents and landing fees is a result of a 20.1%
increase in number of departures, the heavier landing weight of the
regional jets, and the lease of the Company's new corporate headquarters
building commencing on December 1, 2000.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for the second quarter of 2001 and the second quarter
of 2000. In absolute dollars, depreciation and amortization increased
42.5% from $2.6 million in the second quarter of 2000 to $3.8 million in
the second quarter of 2001 primarily as a result of additional rotable
spare parts and engines associated with the regional jets.
The cost per ASM of other operating expenses decreased to 1.9
cents in the second quarter of 2001 from 2.0 cents in the second quarter
of 2000. In absolute dollars, other operating expenses increased 41.1%
from $10.1 million in the second quarter of 2000 to $14.2 million in the
second quarter of 2001. The increased costs result primarily from
training expenses for new flight crews to support additional aircraft.
As a result of the foregoing changes in operating expenses and
a 49.3% increase in ASMs, total cost per ASM decreased to 16.5 cents in
the second quarter of 2001 compared to 18.8 cents in the second quarter
of 2000. In absolute dollars, total operating expenses increased 31.0%
from $95.7 million in the second quarter of 2000 to $125.4 million in the
second quarter of 2001.
The Company's effective tax rate for federal and state income
taxes was 40.5% in the second quarter of 2001 compared to 39.6% for the
second quarter of 2000. This increase is primarily due to increased
flying in 2001 in states with higher state tax rates.
Six Months Operating Statistics
Increase
Six months ended June 30, 2000 2001 (Decrease)
Revenue passengers carried 1,712,566 2,222,431 29.8%
Revenue passenger miles ("RPMs") (000's) 559,331 816,481 46.0%
Available seat miles ("ASMs") (000's) 992,802 1,450,744 46.1%
Passenger load factor 56.3% 56.3% 0.0 pts
Revenue per ASM (cents) 20.6 19.1 (7.3)%
Yield (cents) 36.6 33.9 (7.4)%
Cost per ASM (cents) 18.5 16.8 (9.2)%
Average passenger segment (miles) 327 367 12.2%
Revenue departures (completed) 94,953 111,192 17.1%
Revenue block hours 122,697 153,677 25.2%
Aircraft utilization (block hours) 7.9 7.8 (1.3)%
Average cost per gallon of fuel (cents) 103.3 106.9 3.5%
Aircraft in service (end of period) 93 113 21.5%
Revenue per departure $ 2,155 $ 2,494 15.7%
Comparison of six months ended June 30, 2001, to six months ended June
30, 2000.
Results of Operations
General
In the first half of 2001, the Company posted net income of
$22.6 million compared to net income of $14.3 million for the first half
of 2000. Operating income for the six months ended June 30, 2001 was
$36.3 million compared to $25.2 million for the same period for 2000.
Unit revenues, RASM, decreased 7.3% period over period to 19.1 cents,
while unit costs, CASM, decreased 9.2% period over period to 16.8 cents.
This resulted in the operating margin increasing to 13.0% for the first
half of 2001 from 12.1% for the first half of 2000.
Operating Revenues
The Company's operating revenues increased 33.9% to $279.7
million in the first half of 2001 compared to $208.8 million in the first
half of 2000. The increase resulted from a 46.1% increase in ASMs to
1,450,744 for the six months ended June 30, 2001, as well as a 15.7%
increase in revenue per departure to $2,494. Revenues in the first half
of 2001 were recognized primarily under fee-for-service agreements as
compared to a proration-of-fare agreement for revenues for the first six
months of 2000. Revenue for the first half of 2001 included $1.3 million
attributable to routine subsequent period sampling adjustments to prior
billed tickets under the Company's former proration-of-fare arrangement.
The Company anticipates that it will cease to experience revenue
adjustments attributable to its former proration-of-fare arrangements by
the end of this year.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing the CRJ aircraft and the addition to revenue
service of the 328JET aircraft. The Company was operating 46 CRJs and 22
328JET aircraft as of June 30, 2001 as compared to 29 CRJs as of June 30,
2000. The longer stage length of the regional jet aircraft results in
the average aircraft stage length for the first half of 2001 increasing
15.8% over the first half of 2000 to 323 miles.
Operating Expenses
The Company's operating expenses increased 32.5% in the first
half of 2001 compared to the first half of 2000 due primarily to: a 60.2%
increase in total fuel costs as a result of a 3.5% increase in the
average price per gallon of jet fuel, coupled with a 23.3% increase in
the average fuel burn rate to 259 gallons per hour; a 46.1% increase in
ASMs; a 29.8% increase in passengers carried; and a 56.7% increase in
aircraft rental expense; all offset partly by a 72.7% decrease in traffic
commissions and related fees. The increase in ASMs, passengers and burn
rate reflects the addition of 17 CRJs and 22 328JET aircraft into
scheduled service since June 30, 2000, net of the early retirement of 17
J-32s. A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the six months ended June 30, 2000, and
2001 is as follows:
Six Months ended June 30,
2000 2001
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 24.2% 5.1 27.5% 5.3
Aircraft fuel 12.7% 2.7 15.2% 2.9
Aircraft maintenance and materials 8.1% 1.7 8.4% 1.6
Aircraft rentals 12.8% 2.7 15.0% 2.9
Traffic commissions and related fees 13.9% 2.9 2.8% 0.6
Facility rents and landing fees 4.4% 0.9 5.3% 1.0
Depreciation and amortization 2.5% 0.5 2.6% 0.5
Other 9.3% 2.0 10.2% 2.0
Total 87.9% 18.5 87.0% 16.8
Cost per ASM decreased 9.2% to 16.8 cents during the first half
of 2001 compared to 18.5 cents during the first half of 2000 primarily due
to a 46.1% increase in ASMs and a 72.7% decrease in the year-over-year
traffic commissions and related fees. As noted above, the decrease reflects
the fact that many of these fees are no longer borne by the Company as a
result of the restatement of the United Express agreement, which went
into effect on December 1, 2000. Under the restated agreement, the
Company continues to be responsible for fees associated with the major
airline Computer Reservation Systems.
Salaries and related costs per ASM increased 3.9% to 5.3 cents
in the first half of 2001 compared to 5.1 cents for the first half of
2000. In absolute dollars, salaries and related costs increased 52.3%
from $50.4 million in the first half of 2000 to $76.8 million in the
first half of 2001. The increase resulted primarily from the addition of
770 full and part time employees to support the 39 regional jet aircraft
added in 2000 and 2001.
The cost per ASM of aircraft fuel increased 7.4% to 2.9 cents
for the first half of 2001 as compared to 2.7 cents for the first half of
2000. In absolute dollars, aircraft fuel expense increased 60.2% from
$26.6 million in the first half of 2000 to $42.6 million in the first
half of 2001. The increased fuel expense resulted from the 3.5% increase
in the average cost per gallon of fuel from $1.03 to $1.07, a 25.2%
increase in block hours, and the higher fuel consumption per hour of
regional jet aircraft versus turboprop aircraft which resulted in a 23.3%
increase in the system average burn rate.
The cost per ASM of aircraft maintenance and materials
decreased 5.9% to 1.6 cents in the first half of 2001 compared to 1.7
cents in the first half of 2000. In absolute dollars, aircraft
maintenance and materials expense increased 37.4% from $17.0 million in
the first half of 2000 to $23.4 million in the first half of 2001. The
increased expense resulted from the increase in the size of the total
fleet, the expiration of manufacturer's warranties on older CRJs, and the
continual increase in the average age of the turboprop fleet.
The cost per ASM of aircraft rentals increased to 2.9 cents for
the first half of 2001 compared to 2.7 cents for the first half of 2000.
In absolute dollars, aircraft rental expense increased 56.7% to $41.9
million. The increase reflects the addition of 17 CRJs and 22 328JET
aircraft into scheduled service since June 30, 2000, net of the early
retirement of 17 J-32s.
The cost per ASM of traffic commissions and related fees
decreased to 0.6 cents in the first half of 2001 compared to 2.9 cents in
the first half of 2000. In absolute dollars, traffic commissions and
related fees decreased 72.7%, from $29 million in the first half of 2000
to $7.9 million in the first half of 2001. Many of these fees are no
longer borne by the Company as a result of the restatement of the United
Express agreement, which went into effect on December 1, 2000. Under the
restated agreement, the Company is now only responsible for fees
associated with the major airline Computer Reservation Systems.
The cost per ASM of facility rents and landing fees increased
11.1%, from 0.9 cents in the first half of 2000 to 1.0 cents for the
first half of 2001. In absolute dollars, facility rents and landing fees
increased 63.5% from $9.1 million in the first half of 2000 to $14.9
million in the first half of 2001. The increased costs result primarily
from a 17.1% increase in the number of departures, the heavier landing
weight of the regional jets, and the lease of the Company's new corporate
headquarters building commencing on December 1, 2000.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents. In absolute dollars, depreciation and amortization
increased 37.2% from $5.2 million in the first half of 2000 to $7.2
million in the first half of 2001 primarily as a result of additional
rotable spare parts and engines associated with the regional jets.
The cost per ASM of other operating expenses remained the same
at 2.0 cents in the first half of 2001 and 2000. In absolute dollars,
other operating expenses increased 46.6% from $19.5 million in the first
half of 2000 to $28.6 million in the first half of 2001. The increased
costs result primarily from training expenses for new flight crews to
support additional aircraft.
As a result of the foregoing changes in operating expenses, and
a 46.1% increase in ASMs, total cost per ASM decreased to 16.8 cents in
the first half of 2001 compared to 18.5 cents in the first half of 2000.
In absolute dollars, total operating expenses increased 32.5% from $183.7
million in the first half of 2000 to $243.3 million in the first half of
2001.
The Company's combined effective tax rate for state and federal
taxes during the first half of 2001 was approximately 40.3% as compared
to 39.6% for the first half of 2000. This increase is due primarily to
increased flying into states with higher state tax rates.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth in the MD&A section
under Forward Looking Statements.
As of August 1, 2001, the Company was operating a fleet of 116
aircraft comprised of 51 CRJs, 24 328JETs, 31 British Aerospace J-41s ("J-
41's') and 10 J-32s. The Company does not expect to incur any additional
charges against earnings for the early retirement in 2001 of the
remaining 10 J-32 aircraft in the fleet.
The Company expects to early retire the 31 29 seat J-41 turboprop
aircraft from its fleet beginning in 2002. The Company has long-term
lease commitments for most of these aircraft, and anticipates that the
retirement will result in a substantial charge to earnings as aircraft
are retired or upon adoption of a formal plan of retirement. The amount
of the charge, which is not presently determinable, will depend on the
difference between the Company's lease commitments and market values of
the aircraft at the time. The Company has made arrangements with an
aircraft manufacturer to substantially offset the cash effect of any such
shortfall.
As of August 1, 2001, the Company had firm orders for 45 CRJs
in addition to the 51 previously delivered, and options for an additional
80 CRJs. The Company also had firm orders for 38 328JETS in addition to
the 24 previously delivered, and options for an additional 83 328JETs.
The continued delivery of these additional jet aircraft into the United
Express and Delta Connection programs will expand the Company's business
into new markets and increase capacity in existing markets.
During the first and second quarters of 2000, Atlantic Coast
Jet ("ACJet") was engaged in pre-operating activities related to the
start up of its Delta Connection operations. An operating certificate
was subsequently approved and issued by the Federal Aviation
Administration ("FAA"), and ACJet commenced revenue service in the third
quarter of 2000. ACJet and ACA agreed to a Plan of Reorganization
effective July 1, 2001 whereby the business operations of ACJet were
transferred and combined with the operations of ACA. The Company does
not anticipate any charges against earnings related to this transaction.
As a result of this transaction, the Company now operates both its United
Express and its Delta Connection programs through ACA, and ACJet no
longer actively conducts airline service.
Under the Company's United Express agreement, United pays the
Company an agreed amount per departure, and under the Company's Delta
Connection agreement, Delta pays the Company an agreed amount per block
hour flown, both regardless of passenger revenue, and both with
additional incentive payments based on operational performance. Both
agreements provide that the rates will be adjusted from time to time to
reflect changes in costs. During the first quarter of 2001, the Company
and United established rates to be in effect for the Company's United
Express flights throughout 2001 and continues to reconcile amounts
payable under the poration of fare agreement which was in effect with
United before the current agreement was restated. For Delta Connection
flights, the Company and Delta continue to evaluate operating history for
this new service being provided by the Company, and rates presently being
utilized for 2001 are consistent with those rates that were agreed to and
used in 2000 and may be subject to adjustment.
On July 27, 2001, UAL Corporation ("UAL") the parent of United,
and US Airways Group, Inc. ("US Airways") announced that they had
terminated their Agreement and Plan of Merger. Due to the termination of
this agreement, the Company's contingent agreement with UAL to acquire
the three regional airlines that are currently wholly-owned by US Airways
was effectively terminated.
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program. As
such, the Company expects that its results of operations will no longer
be directly affected by fuel price volatility.
Liquidity and Capital Resources
As of June 30, 2001, the Company had cash, cash equivalents and
short-term investments of $135.8 million and working capital of $108.3
million compared to $121.2 million and $72.0 million respectively as of
December 31, 2000. During the first six months of 2001, cash and cash
equivalents decreased by $8.6 million, reflecting net cash provided by
operating activities of $22.2 million, net cash used in investing
activities of $34.5 million and net cash provided by financing activities
of $3.7 million. The net cash provided by operating activities is
primarily the result of net income for the period of $22.6 million, non-
cash depreciation and amortization expenses of $7.1 million, and a $15.6
million decrease in accounts receivable, offset by a $13.5 million
decrease in accrued liabilities. The decrease in accounts receivable is
primarily the result of the new United agreement under which the Company
receives payment in advance instead of in arrears. The decrease in
accrued liabilities is primarily the result of paying the lessor the
lease termination fee relating to the J-32 turboprop early retirement.
(See "Aircraft", below.) The net cash used in investing activities
consisted primarily of purchases of property and equipment and purchases
of short-term investments. Financing activities consisted primarily of
payments on long-term debt and capital lease obligations offset by the
proceeds from the exercise of stock options.
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with two financial institutions that provided the
Company with a line of credit for up to $35 million depending on the
amount of assigned ticket receivables and the value of certain rotable
spare parts. With the change in the United Express agreement from a
proration-of-fare/payment in arrears arrangement to a fee-for-
service/payment-in-advance arrangement effective December 1, 2000, the
Company's ticket receivable available for assignment has been reduced to
zero. As such, the available borrowing under the line of credit was
limited to the value of certain rotable spare parts, to a maximum of $8.0
million. On May 2, 2001 the asset-based lending agreement was amended to
add an additional $8.4 million to the borrowing base, collateralized by
the value of certain fixed assets. The line of credit will expire on
September 30, 2001, or upon termination of the United Express agreement,
whichever is sooner. The interest rate on this line is LIBOR plus .75%
to 1.75% depending on the Company's fixed charges coverage ratio. There
were no borrowings on the line during 2000 or to date in 2001. As of
August 1, 2001, the Company has pledged $15.3 million of this line of
credit as collateral for letters of credit issued on behalf of the
Company by a financial institution. This effectively commits most of the
line of credit. The Company has obtained a commitment from another
financial institution for a $25 million credit facility to replace this
existing line of credit on or before September 30, 2001 when the current
line expires.
Other Commitments
The Company's Board of Directors has approved the purchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of August 1, 2001 the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. None of these shares were purchased in 2001. The
Company has approximately $21.6 million remaining of the $40 million
authorization.
Aircraft
As of August 1, 2001, the Company had a total of 45 CRJs on
order from Bombardier, Inc., and held options for 80 additional CRJs. The
Company also had a total of 38 328JETS on order with Fairchild Aerospace
Corporation, and held options for 83 328JETs. Of the 83 firm aircraft
deliveries, 11 are scheduled for the remainder of 2001, 30 are scheduled
for 2002, and 42 are scheduled for 2003. The Company is obligated to
purchase and finance (including the possible use of leveraged leases) the
83 firm ordered aircraft at an approximate capital cost of $1.4 billion.
The Company anticipates leasing all of its remaining year 2001 aircraft
deliveries on terms similar to previously delivered CRJ and 328JET
aircraft.
During 2000, the Company began early retirement of its fleet of
28 leased 19-seat British Aerospace J-32 turboprop ("J-32") aircraft. As
of August 1, 2001, 18 J-32s had been removed from service. The remaining
10 J-32s will be removed from service during the remainder of 2001. The
early retirement of the 28 leased J-32 aircraft resulted in the Company
recording a $29.0 million (pre-tax) restructuring charge during 2000.
In March 2001, the Company reached agreement with the lessor for the
early return and lease termination of all of the J-32's and as a result
paid a lease termination fee which consisted of $19.1 million in cash,
and the application of $5.2 million in credits due from the lessor. The
Company anticipates that the return of the aircraft will be completed
during 2001 within the time schedule agreed to with the lessor and that
the remainder of the amount accrued for early retirement charges will be
adequate to provide for costs necessary to meet aircraft return
conditions. The Company does not expect to incur any additional charges
against earnings for the early retirement of the J-32 fleet.
Capital Equipment and Debt Service
Capital expenditures for the first six months of 2001 were
$16.2 million, compared to $7.5 million for the same period in 2000.
Capital expenditures for 2001 consisted primarily of the purchase of
$12.8 million in rotable spare parts for the regional jet aircraft and
$3.1 million for improvements to aircraft. These improvements include
$872,000 for the addition of smoke detectors to the J-41 aircraft,
$735,000 in work in process for FAA mandated modifications to the CRJs
for an Electronic Integrated Crew Alerting System ("EICAS"), and $1.1
million in work in process for a Telelink dispatch system. Other capital
expenditures included facility leasehold improvements, ground equipment,
and computer and office equipment. For the remainder of 2001, the
Company anticipates spending approximately $9.2 million for rotable spare
parts related to the regional jet and J-41 aircraft, ground service
equipment, facilities, computers and software.
Debt service including capital leases for the six months ended
June 30, 2001 was $2.4 million compared to $2.8 million in the same
period of 2000.
The Company believes that, in the absence of unusual
circumstances, its cash on hand, cash flow from operations, and other
available financing, will be sufficient to meet its working capital
needs, capital expenditures, and debt service requirements for the next
twelve months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not
designated as hedging instruments, and for the ineffective portion of a
hedging instrument, the change in fair value will affect current period
earnings.
The Company adopted Statement No. 133 effective January 1,
2001. The impact of adopting this statement has not had a material
impact on the Company's financial position or results of operations for
the first six months of 2001.
On July 5, 2001, the Financial Accounting Standards Board
approved Financial Accounting Standard No. 141, "Business Combinations"
("SFAS 141"), and Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the accounting
for acquisitions of businesses and is effective for acquisitions
occurring on or after July 1, 2001. SFAS 142 includes requirements to
test goodwill and indefinite life intangible assets for impairment rather
than amortize them. SFAS 142 will be effective for fiscal years beginning
after December 15, 2001. The Company will adopt SFAS 141 beginning in the
first quarter of 2002. The financial statement impact has not yet been
determined.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk arises from changes in
interest rates. The Company's exposure to market risk associated with
changes in interest rates relates to the Company's commitment to acquire
regional jets. From time to time the Company has entered into put and
call contracts designed to limit the Company's exposure to interest rate
changes until permanent financing is secured upon delivery of the
regional jet aircraft. At December 31, 2000 the Company had one interest
rate hedge transaction open with a notional value of $8.5 million. The
Company settled this contract on January 3, 2001 by paying the
counterparty $722,000. As of June 30, 2001, the Company had no open
hedge transactions.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED JUNE 30, 2001
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA civil
action proceedings, all of which are incidental to its business, and none
of which the Company believes are likely to have a material effect on the
Company's financial position.
ITEM 2. Changes in Securities.
Following approval by the Company's stockholders at its May 30, 2001
annual meeting, the Company's Certificate of Incorporation was amended to
increase the authorized shares of common stock from 65,000,000 to
141,000,000.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held in
Herndon, Virginia on May 30, 2001. Of the 43,362,360 shares of common
stock outstanding and entitled to vote on the record date, 38,829,120
were present by proxy. Those shares were voted on the matters before the
meeting as follows:
1. Election of Directors For Withheld
Kerry B. Skeen 38,807,697 21,423
Thomas J. Moore 38,808,318 20,802
C. Edward Acker 29,469,739 9,359,381
Robert E. Buchanan 38,807,677 21,443
Susan MacGregor Coughlin 38,805,963 23,157
Daniel L. McGinnis 38,807,427 21,693
James C. Miller III 38,807,173 21,947
Judy Shelton 38,804,973 24,147
John M. Sullivan 38,780,375 48,745
2. To approve amendment to the Company's Certificate of Incorporation
to increase the Company's authorized shares to 141,000,000.
For Against Abstain
33,579,432 5,224,025 25,663
3. To ratify appointment of KPMG LLP as the Company's independent
auditors for the current year.
For Against Abstain
38,555,009 256,885 17,226
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Certificate of Incorporation of the Company.
(b) Reports on Form 8-K
Form 8-K filed on June 1, 2001 to announce that an officer
of the Company would be making a presentation to investors
and analysts.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
August 14, 2001 By: /S/ Richard J. Surratt
Richard J. Surratt
Senior Vice President, Treasurer, and
Chief Financial Officer