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 September 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 November 01, 2001, there were 43,910,540 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, September 30,
2000 2001
(In thousands except for share and per share (Unaudited)
data)
Assets
Current:
Cash and cash equivalents $ 86,117 $ 118,710
Short term investments 35,100 40,655
Accounts receivable, net 29,052 16,132
Expendable parts and fuel inventory, 6,188 10,756
net
Prepaid expenses and other current 8,055 22,593
assets
Deferred tax asset 13,973 6,672
Total current assets 178,485 215,518
Property and equipment at cost, net of
accumulated depreciation and amortization 142,840 168,906
Intangible assets, net of accumulated
amortization 2,045 1,963
Debt issuance costs, net of accumulated 2,912 3,486
amortization
Aircraft deposits 46,420 38,610
Other assets 9,998 4,375
Total assets $ 382,700 $ 432,858
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 19,724 $ 22,341
Current portion of long-term debt 4,344 4,689
Current portion of capital lease
obligations 1,512 1,335
Accrued liabilities 53,044 65,301
Accrued aircraft early retirement
charge 27,843 1,038
Total current liabilities 106,467 94,704
Long-term debt, less current portion 63,080 59,822
Capital lease obligations, less current
portion 4,009 2,551
Deferred tax liability 18,934 23,075
Deferred credits, net 22,037 40,150
Total liabilities 214,527 220,302
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 141,000,000; shares
issued 47,704,720 and 48,956,872
respectively; shares outstanding 954 979
42,658,388 and 43,910,540 respectively
Additional paid-in capital 117,284 126,318
Less: Common stock in treasury, at cost,
5,046,332 shares (35,303) (35,303)
Retained earnings 85,238 120,562
Total stockholders' equity 168,173 212,556
Total liabilities and $ 382,700 $ 432,858
stockholders' equity
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
(In thousands, except for per share data) 2000 2001
Operating revenues:
Passenger $ 112,749 $ 146,766
Other 2,607 885
Total operating revenues 115,356 147,651
Operating expenses:
Salaries and related costs 28,370 40,376
Aircraft fuel 16,720 23,469
Aircraft maintenance and materials 9,286 12,365
Aircraft rentals 15,435 23,730
Traffic commissions and related fees 15,577 4,141
Facility rents and landing fees 5,274 8,416
Depreciation and amortization 2,901 4,082
Other 10,882 15,177
Aircraft early retirement charge 8,686 -
Total operating expenses 113,131 131,756
Operating income 2,225 15,895
Other income (expense):
Interest income 1,284 1,665
Interest expense (1,316 (1,163)
Government compensation - 4,633
Other, net (54) 401
Total other income (expense) (86) 5,536
Income before income tax provision 2,139 21,431
Income tax provision (benefit) (527) 8,680
Net income $ 2,666 $ 12,751
Income per share:
Basic:
Net income $0.06 $0.29
Diluted:
Net income $0.06 $0.28
Weighted average shares outstanding:
-Basic 42,144 43,775
-Diluted 43,864 45,426
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
(In thousands, except for per share data) 2000 2001
Operating revenues:
Passenger $ 317,664 $ 423,635
Other 6,523 3,691
Total operating revenues 324,187 427,326
Operating expenses:
Salaries and related costs 78,808 117,170
Aircraft fuel 43,321 66,092
Aircraft maintenance and materials 26,294 35,739
Aircraft rentals 42,208 65,675
Traffic commissions and related fees 44,554 12,038
Facility rents and landing fees 14,371 23,286
Depreciation and amortization 8,130 11,257
Other 30,420 43,826
Aircraft early retirement charge 8,686 -
Total operating expenses 296,792 375,083
Operating income 27,395 52,243
Other income (expense):
Interest income 3,408 5,691
Interest expense (4,733) (3,650)
Government compensation - 4,633
Other, net (224) 318
Total other income (expense) (1,549) 6,992
Income before income tax provision 25,846 59,235
Income tax provision 8,871 23,910
Net income $ 16,975 $ 35,325
Income per share:
Basic:
Net income $0.43 $0.82
Diluted:
Net income $0.40 $0.78
Weighted average shares outstanding:
-Basic 39,392 43,235
-Diluted 43,452 45,030
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(In thousands) 2000 2001
Cash flows from operating activities:
Net income $ 16,975 $ 35,325
Adjustments to reconcile net income to
net cash used in
operating activities:
Depreciation and amortization 8,461 11,425
Loss on disposal of assets 120 147
Amortization of deferred credits (1,159) (2,649)
Capitalized interest (net) (1,576) (1,303)
Other 239 1,995
Changes in operating assets and
liabilities:
Accounts receivable (6,907) 16,732
Expendable parts and fuel inventory (2,673) (4,873)
Prepaid expenses and other current assets (8,501) (8,565)
Accounts payable 10,795 8,487
Accrued liabilities 12,655 (1,381)
Accrued aircraft early retirement costs 8,160 -
Net cash provided by operating activities 36,589 55,340
Cash flows from investing activities:
Purchases of property and equipment (15,110) (27,874)
Purchases of short term investments (60,290) (69,715)
Sales of short term investments 44,850 64,160
Refunds of aircraft deposits 6,600 13,600
Payments of aircraft deposits and other (16,430) (6,000)
Net cash used in investing activities (40,380) (25,829)
Cash flows from financing activities:
Payments of long-term debt (3,471) (2,914)
Payments of capital lease obligations (1,259) (1,634)
Deferred financing costs and other (80) (49)
Purchase of treasury stock (1,196) -
Proceeds from exercise of stock options 1,949 7,679
Net cash (used in) provided by financing
activities (4,057) 3,082
Net (decrease) increase in cash and cash
equivalents (7,848) 32,593
Cash and cash equivalents, beginning of period 39,897 86,117
Cash and cash equivalents, end of period $ 32,049 $ 118,710
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. Effective July 1, 2001, ACJet and ACA agreed to a
Plan of Reorganization whereby the business operations of ACJet were
transferred and combined with the operations of ACA. 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
provides airline service. The information furnished in these unaudited
condensed consolidated financial statements reflect 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 nine 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 period 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
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
occurred at the same time as closing of the proposed United/US Airways
merger, was effectively terminated.
On September 28, 2001, the Company entered into an asset-based lending
agreement with a financial institution that provided the Company with a
line of credit for up to $25 million. The new line of credit, which will
expire on October 15, 2003, replaced a previous $35 million line of
credit. The interest rate on this line is LIBOR plus .875% to 1.375%
depending on the Company's fixed charges coverage ratio. 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. The
available borrowing under the line of credit is limited to the value of
the bond letter of credit on the Company's Dulles, Virginia hangar
facility plus the value of 60% of the book value of certain rotable spare
parts. As of September 30, 2001 the amount of available credit under the
line was $9.7 million. As of September 30, 2001 there were no
outstanding borrowings on the $25 million line of credit.
As of September 30, 2001, the Company had firm orders for 45 Canadair
Regional Jets ("CRJs") in addition to the 51 previously delivered, and
options for 80 additional CRJs. The Company also had 35 Fairchild
Dornier 328JET regional jet aircraft ("328JET") on firm order in addition
to the 27 already delivered, and held options for an additional 83
aircraft. The future delivery schedule of the remaining 80 firm ordered
regional jet aircraft as of September 30, 2001 is as follows: 7 aircraft
are scheduled for delivery during the remainder of 2001, 31 aircraft in
2002, and 42 aircraft in 2003.
3. ADOPTION OF FASB STATEMENT 133
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB
issued Statement of Accounting Standard No. 137, which amended Statement
No. 133 to defer the effective date to all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued
Statement of Financial Accounting Standard No. 138, which provided
additional guidance and amendments to Statement No. 133. These
Statements establish accounting and reporting standards for derivative
instruments and all hedging activities. They require 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, as amended by Statement Nos. 137
and 138 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 during the first nine months of 2001.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
40.5% and 40.4% for the three months and nine months ended September 30,
2001 and 34.3% for the nine months ended September 30, 2000. The
Company's 2000 effective tax rate was lowered in the third quarter of
2000 by the receipt of a favorable ruling request which allowed the
Company to obtain additional state tax credits to offset income tax and
the realization of certain tax benefits that were previously reserved.
In total, these tax benefits reduced income tax expense by approximately
$1.4 million for the third quarter 2000. Excluding these non-recurring
items, the effective tax rate for the three months ended September 30,
2000 would have been 40.0%.
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 September 30,
(in thousands except for per share data) 2000 2001
Income (basic) $ 2,666 $ 12,751
Interest expense on 7% Convertible Notes, net of - -
tax effect
Income (diluted) $ 2,666 $ 12,751
Weighted average shares outstanding (basic) 42,144 43,775
Incremental shares related to stock options 1,720 1,651
Weighted average shares outstanding (diluted) 43,864 45,426
Nine months ended September 30,
(in thousands except for per share data) 2000 2001
Income (basic) $ 16,975 $ 35,325
Interest expense on 7% Convertible Notes, net of
tax effect 421 -
Income (diluted) $ 17,396 $ 35,325
Weighted average shares outstanding (basic) 39,392 43,235
Incremental shares related to stock options 1,556 1,795
Incremental shares related to 7% Convertible 2,504 -
Notes
Weighted average shares outstanding (diluted) 43,452 45,030
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
November 1, 2001, 24 J-32s had been removed from service. The remaining
four 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, for its entire J-32 fleet, a $29.0 million (pre-tax)
restructuring charge in the third and fourth quarters of 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.
7. AIR TRANSPORTATION SAFETY AND SYSTEM STABILIZATION ACT
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the "Act"). The Act
provides cash grants to commercial air carriers as compensation: for
direct losses incurred beginning with the terrorist attacks on September
11, 2001 as a result of any FAA mandated ground stop order issued by the
Secretary of Transportation or any subsequent order which continues or
renews such a stoppage; and, for incremental losses incurred during the
period beginning September 11, 2001 and ending December 31, 2001 as a
direct result of such attacks. The Company is entitled to receive cash
grants under these provisions. The exact amount of the Company's
compensation will be based on the lesser of actual losses incurred or a
statutory limit based on the total amount allocable to all airlines.
This amount is not yet determinable because the statutory limit is
subject to information not yet released by the government. The Company
has received $5.7 million in government compensation, which is the
government's estimate of 50% of the Company's allocation based on
preliminary data. Of this amount, the Company has recognized its
estimate of the allowable compensation for the period totaling $4.6
million as non-operating income captioned "government compensation" in
its third quarter financial results. The Company will recognize the
remaining $1.1 million in the fourth quarter along with additional
compensation received from the government. Based on available estimates,
the Company expects to receive another $5.7 million in additional
government compensation, and to record $6.8 million as non-operating
income during the fourth quarter to offset direct and incremental losses
resulting from the attacks. All amounts received as government
compensation are subject to audit and adjustment by the federal
government.
In addition to the Compensation described above, the Act: provides U.S.
air carriers with the option to purchase certain war risk liability
insurance from the United States government on an interim basis at rates
that are more favorable than those available from the private market;
authorizes the federal government to reimburse air carriers for the
increased cost of war risk insurance premiums as a result of the
terrorist attacks of September 11, 2001; and, authorizes the federal
government, pursuant to new regulations to provide loan guarantees to air
carriers in the aggregate amount of $10 billion. The Company has
purchased certain war risk insurance through the government as provided
under the Act. The Company has also applied for reimbursement of
increased insurance costs under the Act although the amount of actual
recovery is uncertain and is likely to cover only a small portion of the
increased costs. Finally, with respect to federal loan guarantees, the
Company is evaluating the terms and conditions imposed by the government
and has not yet determined whether to make application for any such
facility.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third Quarter Operating Statistics (excluding the aircraft early
retirement charge)
Increase
Three months ended September 30, 2000 2001 (Decrease)
Revenue passengers carried 997,444 1,326,042 32.9%
Revenue passenger miles ("RPMs")(000's) 339,563 502,932 48.1%
Available seat miles ("ASMs") (000's) 577,798 843,777 46.0%
Passenger load factor 58.8% 59.6% 0.8 pts
Revenue per ASM (cents) 19.5 17.4 (10.8)%
Yield (cents) 33.2 29.2 (12.0)%
Cost per ASM (cents) (1) 18.1 15.6 (13.8)%
Average passenger segment (miles) 340 379 11.5%
Revenue departures (completed) 53,914 60,451 12.1%
Revenue block hours 67,053 85,414 27.4%
Aircraft utilization (block hours) 8.4 8.1 (3.6)%
Average cost per gallon of fuel (cents) 110.6 101.1 (8.6)%
Aircraft in service (end of period) 95 116 22.1%
Operating margin 9.5% 10.8% 1.3 pts
Revenue per departure $2,230 $2,428 8.9%
(1)"Cost per ASM (cents)" excludes the aircraft early retirement charge.
Comparison of three months ended September 30, 2001, to three months
ended September 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 costs and
other effects of enhanced security measures and other possible FAA
orders, airport closures and military call-ups, changes in levels of
service agreed to by the Company with its code share partners due to
market conditions, the ability of United Airlines, Inc. and Delta Air
Lines, Inc. to manage their operations and cash flow and to continue to
utilize and pay for scheduled service, increased cost and reduced
availability of insurance, changes in existing service, final calculation
and auditing of government compensation, the ability of the Company to
obtain financing for its aircraft, the ability of the aircraft
manufacturers to perform their obligations under contracts with the
Company, unexpected costs in providing scheduled or new service or delays
in the implementation of new service, the ability of the Company to
successfully retire its turboprop fleet, the ability to hire and retain
employees, adverse weather conditions, the impact of labor issues or
strikes at United or Delta 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, flight reallocations, potential service disruptions
due to new airport procedures, 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 third quarter of 2001, the Company posted net income of
$12.8 million, compared to income of $2.7 million for the third quarter
of 2000. Operating income for the three months ended September 30, 2001
was $15.9 million as compared to $2.2 million for the three months ended
September 30, 2000. Unit revenues, revenue per ASM ("RASM"), decreased
10.8% to 17.4 cents, while unit costs, operating cost per ASM ("CASM")
excluding last year's aircraft early retirement charge, decreased 13.8%
to 15.6 cents compared to the third quarter 2000. This resulted in
operating margin increasing to 10.8% for the third quarter of 2001 from
9.5% for the third quarter of 2000. Total passengers increased 32.9% in
the third quarter of 2001 to 1,326,042 passengers, compared to the third
quarter of 2000.
Results for the third quarter of 2001 include special pre-tax
government compensation of $4.6 million arising from the Air
Transportation Safety and System Stabilization Act, which President Bush
signed into law on September 22, 2001. This Act provides cash grants to
commercial air carriers as compensation for direct and incremental losses
resulting from the attacks of September 11, 2001 and incurred from that
date through December 31, 2001. Excluding this special compensation,
third quarter 2001 net income was $10.0 million.
Results for the third quarter of 2000 include an operating
charge of $8.7 million related to the early retirement of seven leased
British Aerospace 19 seat Jetstream 32 turboprop aircraft ("J32") and a
one time tax benefit of $1.4 million. Excluding these special items, the
company would have reported third quarter operating income of $10.9
million and net income of $6.5 million.
Operating Revenues
The Company's operating revenues increased 28.0% to $147.7
million in the third quarter of 2001 compared to $115.4 million in the
third quarter of 2000. The increase resulted from a 46.0% increase in
ASMs to 843,777 in the third quarter of 2001 from 577,798 in the third
quarter of 2000, as well as a 8.9% increase in the revenue per departure
to $2,428 in the third quarter of 2001 from $2,230 in the third quarter
of 2000. Revenues for the third quarter of 2001 were recognized under
fee-for-service agreements as compared to a combination of a proration-of-
fare agreement and a fee-for-service agreement for revenues for the third
quarter of 2000. The Company estimates that for the quarter it lost $11.5
million in revenue as a result of the FAA mandated ground stop and
subsequent reduction in flying implemented by its code share partners.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 18 additional 50-seat Canadair Regional Jet
("CRJs"), and the addition of 18 32 seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal from service of 16
British Aerospace J-32 Turboprop ("J-32") aircraft. The Company was
operating 51 CRJs and 27 328JETs as of September 30, 2001 as compared to
33 CRJs and 9 328JETs as of September 30, 2000.
Operating Expenses
Excluding the aircraft early retirement charge in 2000, the
Company's operating expenses increased 26.1% in the third quarter of 2001
compared to the third quarter of 2000. The Company estimates that it
reduced operating expenses approximately $6.9 million as a result of the
FAA mandated ground stop, subsequent reduction in flying requested by its
code sharing partners, and other cost reduction initiatives implemented
post September 11, 2001. A summary of operating expenses as a percentage
of operating revenues and cost per ASM for the three months ended
September 30, 2000, and 2001 is as follows:
Three Months ended September 30,
2000 2001
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM g
Revenues (cents) Revenues (cents)
Salaries and related costs 24.6% 4.9 27.3% 4.8
Aircraft fuel 14.5% 2.9 15.9% 2.8
Aircraft maintenance and 8.1% 1.6 8.4% 1.4
materials
Aircraft rentals 13.4% 2.7 16.1% 2.8
Traffic commissions and related 13.5% 2.7 2.8% 0.5
fees
Facility rents and landing fees 4.6% 0.9 5.7% 1.0
Depreciation and amortization 2.5% 0.5 2.7% 0.5
Other 9.4% 1.9 10.3% 1.8
Total 90.6% 18.1 89.2% 15.6
Excluding the aircraft early retirement charge in 2000, cost
per ASM decreased 13.8% on a year-over-year basis to 15.6 cents during
the third quarter of 2001 primarily due to a 46.0% increase in ASMs and a
73.4% 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 decreased 2.0% to 4.8 cents
in the third quarter of 2001 compared to 4.9 cents in the third quarter
of 2000. In absolute dollars, salaries and related costs increased 42.3%
from $28.4 million in the third quarter of 2000 to $40.4 million in the
third quarter of 2001. The increase resulted primarily from the addition
of 717 full and part time employees to support the 36 regional jet
aircraft added since September 30, 2000, offset by a $1.6 million profit
sharing accrual reversal in the third quarter arising from the suspension
effective September 1, 2001 of the Company's employee incentive plans.
The cost per ASM of aircraft fuel decreased to 2.8 cents in the
third quarter of 2001 compared to 2.9 cents in the third quarter of 2000.
In absolute dollars, aircraft fuel expense increased 40.4% from $16.7
million in the third quarter of 2000 to $23.5 million in the third
quarter of 2001. The increased fuel expense resulted from a 8.6%
decrease in the average cost per gallon of fuel from $1.11 in the third
quarter of 2000 to $1.01 in the third quarter of 2001, a 27.4% increase
in block hours, and the higher fuel consumption per hour of regional jet
aircraft versus turboprop aircraft which resulted in a 20.9% increase in
the system average burn rate (gallons used per block hour flown).
The cost per ASM of aircraft maintenance and materials
decreased to 1.4 cents in the third quarter of 2001 compared to 1.6 cents
in the third quarter of 2000. In absolute dollars, aircraft maintenance
and materials expense increased 33.2% from $9.3 million in the third
quarter of 2000 to $12.4 million in the third 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 J-41 fleet.
The cost per ASM of aircraft rentals increased to 2.8 cents in
the third quarter of 2001 compared to 2.7 cents in the third quarter of
2000. In absolute dollars, aircraft rentals increased 53.7% from $15.4
million in the third quarter of 2000 to $23.7 million in the third
quarter of 2001, reflecting the addition of 18 CRJ aircraft and 18 328JET
aircraft since September 30, 2000, net of the removal of 16 J-32
turboprop aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 0.5 cents for the third quarter of 2001 compared to 2.7
cents for the third quarter of 2000. In absolute dollars, traffic
commissions and related fees decreased 73.4% from $15.6 million in the
third quarter of 2000 to $4.1 million in the third 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 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
from 0.9 cents for the third quarter of 2000 to 1.0 cents for the third
quarter of 2001. In absolute dollars, facility rents and landing fees
increased 59.6% from $5.3 million in the third quarter of 2000 to $8.4
million in the third quarter of 2001. The increase in absolute dollars
for facility rents and landing fees is a result of a 12.1% 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 third quarter of 2001 and the third quarter of
2000. In absolute dollars, depreciation and amortization increased 40.7%
from $2.9 million in the third quarter of 2000 to $4.1 million in the
third quarter of 2001 primarily as a result of additional rotable spare
parts and engines associated with the growing fleet of regional jets.
The cost per ASM of other operating expenses decreased to 1.8
cents in the third quarter of 2001 from 1.9 cents in the third quarter of
2000. In absolute dollars, other operating expenses increased 39.5% from
$10.9 million in the third quarter of 2000 to $15.2 million in the third
quarter of 2001. The increased costs result primarily from training
expenses and crew accommodation costs for new flight crews to support
additional aircraft and stations.
As a result of the foregoing changes in operating expenses and
a 46.0% increase in ASMs, total cost per ASM decreased to 15.6 cents in
the third quarter of 2001 compared to 18.1 cents in the third quarter of
2000 (excluding the aircraft early retirement charge). In absolute
dollars, total operating expenses, excluding the $8.7 million operating
charge for the retirement of seven J32 turboprop aircraft in the third
quarter of 2000, increased 26.1% from $104.4 million in the third quarter
of 2000 to $131.8 million in the third quarter of 2001.
The Company's statutory tax rate for federal and state income
taxes was 40.5% in the third quarter of 2001. This compares with a
statutory tax rate for federal and state income taxes of 40% for the
third quarter of 2000, offset by a tax benefit due to a favorable state
income tax ruling request, and the realization of certain tax benefits
that were previously reserved resulting in a net tax benefit for the
third quarter of 2000.
Nine Months Operating Statistics (excluding the aircraft early retirement
charge)
Increase
Nine months ended September 30, 2000 2001 (Decrease)
Revenue passengers carried 2,710,010 3,548,473 30.9%
Revenue passenger miles ("RPMs")(000's) 898,894 1,319,413 46.8%
Available seat miles ("ASMs") (000's) 1,570,600 2,294,521 46.1%
Passenger load factor 57.2% 57.5% 0.3 pts
Revenue per ASM (cents) 20.2 18.5 (8.4)%
Yield (cents) 35.3 32.1 (9.1)%
Cost per ASM (cents) (1) 18.3 16.3 (10.9)%
Average passenger segment (miles) 332 372 12.0%
Revenue departures (completed) 145,607 171,643 17.9%
Revenue block hours 189,750 239,091 26.0%
Aircraft utilization (block hours) 8.7 7.9 (9.2)%
Average cost per gallon of fuel (cents) 106.0 104.8 (1.1)%
Aircraft in service (end of period) 95 116 22.1%
Operating margin 11.1% 12.2% 1.1 pts
Revenue per departure $2,181 $2,471 13.3%
(1) "Cost per ASM (cents)" excludes the aircraft early retirement charge.
Comparison of nine months ended September 30, 2001, to nine months ended
September 30, 2000.
Results of Operations
General
In the first nine months of 2001, the Company posted net income
of $35.3 million compared to net income of $17.0 million for the first
nine months of 2000. Operating income for the nine months ended
September 30, 2001 was $52.2 million compared to $27.4 million for the
same period in 2000. Unit revenues, RASM, decreased 8.4% period over
period to 18.5 cents, while unit costs, CASM, excluding last year's
aircraft early retirement charge, decreased 10.9% period over period to
16.3 cents (excluding the aircraft early retirement charge in the third
quarter of 2000). This resulted in the operating margin increasing to
12.2% for the first nine months of 2001 from 11.1% for the first nine
months of 2000.
Results for the nine months ended September 30, 2001 include
special pre-tax government compensation of $4.6 million arising from the
Air Transportation Safety and System Stabilization Act, which President
Bush signed into law on September 22, 2001. This Act provides cash
grants to commercial air carriers as compensation for direct and
incremental losses resulting from the attacks and incurred during the
period September 11 through December 31, 2001. Excluding this special
compensation, net income for the first nine months of 2001 was $32.6
million.
Results for the nine months ended September 30, 2000 include an
operating charge of $8.7 million related to the early retirement of seven
leased J32 turboprop aircraft, and a one-time tax benefit of $1.4
million. Excluding these special items, results for the nine months
ended September 30, 2000 would have been operating income of $36.1
million and net income of $20.7 million.
Operating Revenues
The Company's operating revenues increased 31.8% to $427.3
million in the first nine months of 2001 compared to $324.2 million in
the first nine months of 2000. The increase resulted from a 46.1%
increase in ASMs to 2,294,521 for the nine months ended September 30,
2001, as well as a 13.3% increase in revenue per departure to $2,471.
Revenues in the first nine months of 2001 were recognized primarily under
fee-for-service agreements as compared to a combination of a proration-of-
fare agreement and a fee-for-service agreement for revenues for the first
nine months of 2000. Revenue for the first nine months 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 51 CRJs and 27
328JET aircraft as of September 30, 2001 as compared to 33 CRJs and 9
328JETs as of September 30, 2000. The longer stage length of the
regional jet aircraft results in the average aircraft stage length for
the first nine months of 2001 increasing 15.5% over the first nine months
of 2000 to 328 miles.
Operating Expenses
Excluding the aircraft early retirement charge in 2000, the
Company's operating expenses increased 30.2% in the first nine months of
2001 compared to the first nine months of 2000. A summary of operating
expenses as a percentage of operating revenues and cost per ASM for the
nine months ended September 30, 2000, and 2001 is as follows:
Nine Months ended September 30,
2000 2001
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 24.3% 5.0 27.4% 5.1
Aircraft fuel 13.4% 2.8 15.5% 2.9
Aircraft maintenance and 8.1% 1.7 8.4% 1.5
materials
Aircraft rentals 13.0% 2.7 15.4% 2.9
Traffic commissions and related 13.7% 2.8 2.8% 0.5
fees
Facility rents and landing fees 4.4% 0.9 5.4% 1.0
Depreciation and amortization 2.5% 0.5 2.6% 0.5
Other 9.4% 1.9 10.3% 1.9
Total 88.8% 18.3 87.8% 16.3
Cost per ASM decreased 10.9% to 16.3 cents during the first
nine months of 2001 compared to 18.3 cents during the first nine months
of 2000 primarily due to a 46.1% increase in ASMs and a 73.0% 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 2.0% to 5.1 cents
in the first nine months of 2001 compared to 5.0 cents for the first nine
months of 2000. In absolute dollars, salaries and related costs
increased 48.7% from $78.8 million in the first nine months of 2000 to
$117.2 million in the first nine months of 2001. The increase resulted
primarily from the addition of 717 full and part time employees to
support the 36 regional jet aircraft added since September 30, 2000.
The cost per ASM of aircraft fuel increased 3.6% to 2.9 cents
for the first nine months of 2001 as compared to 2.8 cents for the first
nine months of 2000. In absolute dollars, aircraft fuel expense
increased 52.6% from $43.3 million in the first nine months of 2000 to
$66.1 million in the first nine months of 2001. The increased fuel
expense resulted from the 1.1% decrease in the average cost per gallon of
fuel from $1.06 to $1.05, a 26.0% increase in block hours, and the higher
fuel consumption per hour of regional jet aircraft versus turboprop
aircraft which resulted in a 22.7% increase in the system average burn
rate.
The cost per ASM of aircraft maintenance and materials
decreased 11.8% to 1.5 cents in the first nine months of 2001 compared to
1.7 cents in the first nine months of 2000. In absolute dollars, aircraft
maintenance and materials expense increased 35.9% from $26.3 million in
the first nine months of 2000 to $35.7 million in the first nine months
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 increase in the average age of the J-41 fleet.
The cost per ASM of aircraft rentals increased to 2.9 cents for
the first nine months of 2001 compared to 2.7 cents for the first nine
months of 2000. In absolute dollars, aircraft rental expense increased
55.6% to $65.7 million. The increase reflects the addition of 18 CRJs
and 18 328JET aircraft into scheduled service since September 30, 2000,
net of the early retirement of 16 J-32s.
The cost per ASM of traffic commissions and related fees
decreased to 0.5 cents in the first nine months of 2001 compared to 2.8
cents in the first nine months of 2000. In absolute dollars, traffic
commissions and related fees decreased 73.0%, from $44.6 million in the
first nine months of 2000 to $12.0 million in the first nine months 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 nine months of 2000 to 1.0 cents for
the first nine months of 2001. In absolute dollars, facility rents and
landing fees increased 62.0% from $14.4 million in the first nine months
of 2000 to $23.3 million in the first nine months of 2001. The increased
costs result primarily from a 17.9% 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 38.5% from $8.1 million in the first nine months of 2000 to
$11.3 million in the first nine months of 2001 primarily as a result of
additional rotable spare parts and engines associated with the additional
regional jets.
The cost per ASM of other operating expenses remained the same
at 1.9 cents in the first nine months of 2001 and 2000. In absolute
dollars, other operating expenses increased 44.1% from $30.4 million in
the first nine months of 2000 to $43.8 million in the first nine months
of 2001. The increased costs result primarily from training expenses and
crew accommodation costs for new flight crews to support additional
aircraft and stations.
As a result of the foregoing changes in operating expenses, and
a 46.1% increase in ASMs, total cost per ASM decreased to 16.3 cents in
the first nine months of 2001 compared to 18.3 cents in the first nine
months of 2000 (excluding the aircraft early retirement charge). In
absolute dollars, total operating expenses, excluding the $8.7 million
operating charge for the retirement of seven J32 turboprop aircraft in
2000, increased 30.2% from $288.1 million in the first nine months of
2000 to $375.1 million in the first nine months of 2001.
The Company's combined effective tax rate for state and federal
taxes during the first nine months of 2001 was approximately 40.4% as
compared to 34.3% for the first nine months of 2000. This increase is
due primarily to a net tax benefit realized due to a favorable state
income tax ruling request, and the realization of certain tax benefits
that were previously reserved, in the third quarter of 2000.
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.
Demand for air travel after the terrorist attacks of September
11, 2001 has decreased dramatically. As a result, the Company's United
Express scheduled level of operations for the fourth quarter 2001 has
been reduced by United Airlines. For October, November, and December,
the Company expects for its United Express operation, to fly 6%, 14% and
4% fewer departures, respectively, than pre-September 11th forecasts for
these same months. The Company's Delta Connection level of operations is
expected to remain at pre-September 11th levels throughout the fourth
quarter of 2001.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the "Act"). The Act
provides cash grants to commercial air carriers as compensation: for
direct losses incurred beginning with the terrorist attacks on September
11, 2001 as a result of any FAA mandated ground stop order issued by the
Secretary of Transportation or any subsequent order which continues or
renews such a stoppage; and, for incremental losses incurred during the
period beginning September 11, 2001 and ending December 31, 2001 as a
direct result of such attacks. The Company is entitled to receive cash
grants under these provisions. The exact amount of the Company's
compensation will be based on the lesser of actual losses incurred or a
statutory limit based on the total amount allocable to all airlines.
This amount is not yet determinable because the statutory limit is
subject to information not yet released by the government. The Company
has received $5.7 million in government compensation, which is the
government's estimate of 50% of the Company's allocation based on
preliminary data. Of this amount, the Company has recognized its
estimate of the allowable compensation for the period totaling $4.6
million as non-operating income captioned "government compensation" in
its third quarter financial results. The Company will recognize the
remaining $1.1 million in the fourth quarter along with additional
compensation received from the government. Based on available estimates,
the Company expects to receive another $5.7 million in additional
government compensation, and to record $6.8 million as non-operating
income during the fourth quarter to offset direct and incremental losses
resulting from the attacks. All amounts received as government
compensation are subject to audit and adjustment by the federal
government.
In addition to the Compensation described above, the Act:
provides U.S. air carriers with the option to purchase certain war risk
liability insurance from the United States government on an interim basis
at rates that are more favorable than those available from the private
market; authorizes the federal government to reimburse air carriers for
the increased cost of war risk insurance premiums as a result of the
terrorist attacks of September 11, 2001; and, authorizes the federal
government, pursuant to new regulations to provide loan guarantees to air
carriers in the aggregate amount of $10 billion. The Company has
purchased certain war risk insurance through the government as provided
under the Act. The Company has also applied for reimbursement of
increased insurance costs under the Act although the amount of actual
recovery is uncertain and is likely to cover only a small portion of the
increased costs. Finally, with respect to federal loan guarantees, the
Company is evaluating the terms and conditions imposed by the government
and has not yet determined whether to make application for any such
facility.
Following the attacks, the aviation insurance industry imposed
a worldwide surcharge on aviation insurance rates as well as a reduction
in coverage for certain war risks. In response to the reduction in
coverage, the Air Transportation Safety and System Stabilization Act
provided U.S. air carriers with the option to purchase certain war risk
liability insurance from the United States government on an interim basis
at rates that are more favorable than those available from the private
market. The Company has purchased this coverage through January 11,
2002. For the fourth quarter of 2001, the Company estimates that its
insurance costs will be approximately $2.3 million or 225% greater than
what they would have been prior to the terrorist attacks. The airline
and insurance industries, together with the United States and other
governments, are continuing to evaluate both the cost and coverage of
aviation insurance.
The Company's agreements with its code share partners allow for
the re-setting of fee-for-service rates annually based on the Company's
planned level of operations for the coming year. The Company previously
agreed on fee-per-departure rates with United for 2001, and recently
reached an agreement with Delta finalizing revenue for the period January
1, 2001 to September 30, 2001, and on a process for determining revenue
for the remainder of 2001. The Company has agreed with Delta that the
Company's revenue for its Delta Connection operations for the full year
2001 will be based on fixed amounts for initial pilot training
expenses, reimbursement of all other costs based on actual costs
incurred, plus a contracted margin, and incentive compensation tied to
operating performance. The final agreement with Delta on rates
applicable for all of 2001 does not materially differ from rate estimates
used by the Company for periods prior to this agreement. The Company and
Delta have agreed to return to a fee-per-block hour rate arrangement
effective January 1, 2002.
Rates to be established for 2002 for both United Express and
Delta Connection service will be dependent on costs and levels of
operations. The Company's level of operations for the Company's aircraft
for 2002 have not yet been finalized with either United or Delta. The
Company expects that any major changes in aircraft utilization and costs
resulting from the aftermath of the September 11th attacks will be
incorporated into the 2002 business plan and therefore will be reflected
in the annual rate-setting process.
As a result of the attacks, the Company has taken steps to
reduce certain costs and capital expenditures. These include: voluntary
reduction in executive pay, discontinuation of bonus programs for all
employees, a freeze on merit increases, the suspension of hiring for all
non-operational positions, a 12% reduction in force of corporate and
administrative staffing, and the deferral of all non-essential capital
spending. The Company continues to monitor the effectiveness of these
actions and has no planned timeline to reverse any of these steps.
As of November 1, 2001, the Company was operating a fleet of
117 aircraft comprised of 55 CRJs, 27 328JETs, 31 British Aerospace J-41s
("J-41s") and four J-32s. For the remainder of 2001, the Company expects
to take delivery of two more CRJs and one additional 328JET and remove
the remaining four J-32's from service. For 2002, the Company expects to
take delivery of 31 additional CRJ and 328JET aircraft.
The Company currently plans to retire 14 J-41 turboprop
aircraft in 2002 and 17 in 2003 (of which five are owned) in conjunction
with deliveries of additional regional jets in 2003. The Company has
long-term lease commitments for 26 of its J41 turboprop aircraft, and
anticipates recognizing, upon adoption of a formal retirement plan, a
restructuring charge for the early retirement of the J-41 turboprop
aircraft. The non-discounted future minimum lease payments under non-
cancelable operating leases for the J-41 fleet as of November 1, 2001 is
$83.6 million and the book value of the five owned J-41 aircraft as of
November 1, 2001 is $18.6 million. The amount of the charge will be
determined once a formalized plan of restructuring is approved by the
Company's board of directors. The actual amount of the restructuring
charge will be reduced by the fair market value of the J-41 aircraft.
The restructuring charge will also reflect certain cash and non-cash
charges with respect to aircraft return conditions. The Company has an
agreement with one of the manufacturers of its regional jets for the
manufacturer to bear responsibility for re-marketing the J-41 aircraft
and making the Company whole for any difference between re-marketing
lease payments received, if any, and lease payment obligations of the
Company. For the owned aircraft, this same manufacturer has committed to
purchase the aircraft from the Company at their book value at the time of
retirement. This support will not affect the amount of the restructuring
charge but will offset the cash effect of any shortfall in lease value,
with the result that the restructuring charge is not anticipated to
materially affect cash flows so long as the manufacturer is able to
fulfill its obligations. The Company believes that the re-marketing value
of turboprop aircraft has decreased materially since the attacks of
September 11th.
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
Air Lines bears such risk for the Company's United Express program. As
such, the Company expects that its results of operations will not be
directly affected by fuel price volatility.
Liquidity and Capital Resources
As of September 30, 2001, the Company had cash, cash
equivalents and short-term investments of $159.4 million and working
capital of $120.8 million compared to $121.2 million and $72.0 million
respectively as of December 31, 2000. During the first nine months of
2001, cash and cash equivalents increased by $32.6 million, reflecting
net cash provided by operating activities of $55.3 million, net cash used
in investing activities of $25.8 million and net cash provided by
financing activities of $3.1 million. The net cash provided by operating
activities is primarily the result of net income for the period of $35.3
million, non-cash depreciation and amortization expenses of $11.4
million, and a $16.7 million decrease in accounts receivable. 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 net cash used in investing activities consisted
primarily of purchases of property and equipment (see Capital Equipment
and Debt Service). 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
On September 28, 2001, the Company entered into an asset-based
lending agreement with a financial institution that provided the Company
with a line of credit for up to $25 million. The new line of credit,
which will expire on October 15, 2003, replaced a previous $35 million
line of credit. The interest rate on this line is LIBOR plus .875% to
1.375% depending on the Company's fixed charges coverage ratio. 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. The available borrowing under the line of credit is limited
to the value of the bond letter of credit on the Company's Dulles,
Virginia hangar facility plus the value of 60% of the book value of
certain rotable spare parts. As of September 30, 2001 the amount of
available credit under the line was $9.7 million. As of September 30,
2001 there were no outstanding borrowings on the $25 million line of
credit.
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 November 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 November 1, 2001, the Company had a total of 41 CRJs on
order from Bombardier, Inc., and held options for 80 additional CRJs. The
Company also had a total of 35 328JETS on order with Fairchild Aerospace
Corporation, and held options for 83 328JETs. Of the 76 firm aircraft
deliveries, 3 are scheduled for the remainder of 2001, 31 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
76 firm ordered aircraft at an approximate capital cost of $1.2 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 November 1, 2001, 24 J-32s had been removed from service. The
remaining four 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.
The Company currently plans to early retire 14 J-41 turboprop
aircraft in 2002. The remaining 17 J-41 turboprop aircraft, including
five owned aircraft, are currently expected to be early retired in 2003
in conjunction with deliveries of additional regional jets in 2003. (See
detailed discussion in the previous Outlook section).
Capital Equipment and Debt Service
Capital expenditures for the first nine months of 2001 were
$27.9 million, compared to $15.1 million for the same period in 2000.
Capital expenditures for 2001 consisted primarily of the purchase of
$19.1 million in rotable spare parts for the regional jet aircraft and
$3.9 million for improvements to aircraft. These improvements include
$872,000 for the addition of smoke detectors to the J-41 aircraft, $1
million in work in process for FAA mandated modifications to the CRJs for
an Electronic Integrated Crew Alerting System ("EICAS"), and $1.5 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 $4.2 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 nine months ended
September 30, 2001 was $4.5 million compared to $4.7 million in the same
period of 2000.
The Company believes that, in the absence of further terrorist
attacks or other unusual circumstances, its cash on hand, cash flow from
operations, cash to be received from the federal government, 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 Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In June 1999, the
FASB issued Statement of Accounting Standard No. 137, which amended
Statement No. 133 to defer the effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued Statement of Financial Accounting Standard No. 138, which provided
additional guidance and amendments to Statement No. 133. These
Statements establish accounting and reporting standards for derivative
instruments and all hedging activities. They require 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, as amended by Statement
Nos. 137 and 138 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 during the first nine months of 2001.
On July 5, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 will
be effective for fiscal years beginning after December 15, 2001. The
Company will adopt Statement No. 142 beginning in the first quarter of
2002. The Company anticipates that implementation of SFAS 141 and SFAS
142 will have minimal impact on the Company's financial position or
results of operations.
On October 3, 2001, the Financial Accounting Standards Board
issued FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Statement No. 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Statement No. 144
includes requirements related to the classification of assets as held for
sale, including the establishment of six criteria that must be satisfied
prior to this classification. Statement No. 144 also includes guidance
related to the recognition and calculation of impairment losses for long
lived assets. Statement No. 144 will be effective for fiscal years
beginning after December 15, 2001. The Company will adopt Statement No.
144 beginning in the first quarter of 2002. Statement No. 144 is
projected to have minimal impact on the Company's financial position or
results of operations.
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 September 30, 2001, the Company had no open
hedge transactions.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED SEPTEMBER 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.
None to report.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
10.12(a) Amended and Restated Severance Agreement, dated as of
July 25, 2001, between the Company and Kerry B. Skeen
(replaces previous Exhibit 10.12(a) filed as an Exhibit to
the Amended Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1999, and incorporated by
reference in the Annual Report on Form 10-K file for the
fiscal year ended December 31, 2000; this document is a
management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Form 8-K filed on September 17, 2001 containing an
Operations Update.
Form 8-K filed on October 10, 2001 to announce that
officers of the Company would be making a presentation to
investors and analysts.
Form 8-K filed on October 19, 2001 containing a press
release regarding capacity levels.
Form 8-K filed on November 5, 2001 to announce that
officers 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.
November 07, 2001 By: /S/ Richard J. Surratt
Richard J. Surratt
Senior Vice President, Treasurer, and
Chief Financial Officer