1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12649
AMERICA WEST HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0847214
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
111 WEST RIO SALADO PARKWAY, TEMPE, ARIZONA 85281
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (480) 693-0800
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER 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 XX NO
---- ----
THE COMPANY HAS 1,100,000 SHARES OF CLASS A COMMON STOCK AND 36,873,120, SHARES
OF CLASS B COMMON STOCK OUTSTANDING AS OF APRIL 30, 1999.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICA WEST HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 242,558 $ 108,360
Short-term investments .......................................................... 9,286 27,485
Accounts receivable, net ........................................................ 107,639 96,381
Expendable spare parts and supplies, net ........................................ 33,341 31,147
Prepaid expenses ................................................................ 56,227 38,730
---------- ----------
Total current assets ........................................................ 449,051 302,103
---------- ----------
Property and equipment:
Flight equipment ................................................................ 966,294 931,134
Other property and equipment .................................................... 164,826 157,718
Equipment purchase deposits ..................................................... 83,649 83,649
---------- ----------
1,214,769 1,172,501
Less accumulated depreciation and amortization .................................. 448,088 410,461
---------- ----------
Net property and equipment ................................................. 766,681 762,040
---------- ----------
Other assets:
Restricted cash ................................................................. 36,164 35,262
Reorganization value in excess of amounts allocable to
identifiable assets, net .................................................... 331,398 336,772
Deferred income taxes ........................................................... 28,054 28,054
Other assets, net ............................................................... 62,835 60,799
---------- ----------
Total other assets .......................................................... 458,451 460,887
---------- ----------
$1,674,183 $1,525,030
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
3
AMERICA WEST HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................... $ 172,794 $ 80,439
Accounts payable ............................................... 108,167 112,563
Air traffic liability .......................................... 248,419 209,525
Accrued compensation and vacation benefits ..................... 43,261 48,338
Accrued taxes .................................................. 44,587 43,489
Other accrued liabilities ...................................... 51,398 40,905
----------- -----------
Total current liabilities .................................. 668,626 535,259
----------- -----------
Long-term debt, less current maturities ............................ 203,508 207,906
Deferred credits and other liabilities ............................. 110,996 112,407
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 48,800,000
shares; no shares issued ................................... -- --
Class A common stock, $.01 par value. Authorized
1,200,000 shares; issued and outstanding 1,100,000 shares at
March 31, 1999 and December 31, 1998 ....................... 11 11
Class B common stock, $.01 par value. Authorized
100,000,000 shares; issued 45,310,997
shares at March 31, 1999 and 45,280,199 shares at
December 31, 1998 .......................................... 453 453
Additional paid-in capital ..................................... 555,481 556,508
Retained earnings .............................................. 279,617 253,678
----------- -----------
835,562 810,650
Less: Cost of Class B Common Stock in treasury, 7,566,095
shares in 1999 and 7,388,095 shares in 1998 ................ (144,509) (141,192)
----------- -----------
Total stockholders' equity ................................. 691,053 669,458
----------- -----------
$ 1,674,183 $ 1,525,030
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
4
AMERICA WEST HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
Operating revenues:
Passenger ................................. $ 478,622 $ 443,792
Cargo ..................................... 10,728 12,605
Other ..................................... 17,005 14,507
TLC net revenues .......................... 13,271 12,312
--------- ---------
Total operating revenues .............. 519,626 483,216
--------- ---------
Operating expenses:
Salaries and related costs ................ 118,061 106,116
Aircraft rents ............................ 65,525 58,745
Other rents and landing fees .............. 29,261 29,458
Aircraft fuel ............................. 44,363 50,284
Agency commissions ........................ 29,692 31,617
Aircraft maintenance materials and repairs 48,686 42,428
Depreciation and amortization ............. 11,675 12,298
Amortization of excess reorganization value 4,974 4,974
TLC expenses .............................. 10,460 9,849
Other ..................................... 106,214 88,040
--------- ---------
Total operating expenses .............. 468,911 433,809
--------- ---------
Operating income .............................. 50,715 49,407
--------- ---------
Nonoperating income (expenses):
Interest income ........................... 2,902 3,000
Interest expense, net ..................... (6,262) (7,735)
Other, net ................................ (618) (416)
--------- ---------
Total nonoperating expenses, net ...... (3,978) (5,151)
--------- ---------
Income before income taxes .................... 46,737 44,256
--------- ---------
Income taxes .................................. 20,798 19,118
--------- ---------
Net income .................................... $ 25,939 $ 25,138
========= =========
Earnings per share:
Basic ..................................... $ 0.67 $ 0.57
========= =========
Diluted ................................... $ 0.63 $ 0.53
========= =========
Shares used for computation:
Basic ..................................... 38,996 44,001
========= =========
Diluted ................................... 41,116 47,856
========= =========
See accompanying notes to condensed consolidated financial statements.
4
5
AMERICA WEST HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
Net cash provided by operating activities ................... $ 75,723 $ 104,228
Cash flows from investing activities:
Purchases of property and equipment ..................... (43,291) (37,154)
Sales (purchases) of short-term investments ............. 18,199 (14,789)
Equipment purchase deposits and other ................... 3,519 (6,985)
--------- ---------
Net cash used in investing activities ............... (21,573) (58,928)
--------- ---------
Cash flows from financing activities:
Repayment of debt ....................................... (9,883) (36,704)
Proceeds from issuance of debt .......................... 94,274 --
Repurchase of common stock and AWA warrants ............. (4,730) (16,954)
Other ................................................... 387 1,039
--------- ---------
Net cash provided by (used in) financing activities . 80,048 (52,619)
--------- ---------
Net increase (decrease) in cash and cash equivalents ........ 134,198 (7,319)
--------- ---------
Cash and cash equivalents at beginning of period ............ 108,360 172,303
--------- ---------
Cash and cash equivalents at end of period .................. $ 242,558 $ 164,984
========= =========
Cash, cash equivalents and short-term investments at end
of period .............................................. $ 251,844 $ 179,773
========= =========
Cash paid for:
Interest, net of amounts capitalized .................... $ 7,444 $ 9,114
========= =========
Income taxes ............................................ $ 17,903 $ 1,336
========= =========
Non-cash financing activities:
Notes payable issued for equipment purchase deposits .... $ 3,500 $ 3,500
========= =========
Notes payable canceled under the aircraft
purchase agreement ................................. $ -- $ (8,022)
========= =========
Equipment acquired through manufacturer credits ......... $ 500 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
5
6
AMERICA WEST HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of America West Holdings Corporation ("Holdings" or the "Company") and
its wholly-owned subsidiaries, America West Airlines, Inc. ("AWA"), and The
Leisure Company ("TLC"). These statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission and do not
include all information and footnotes required by generally accepted accounting
principles. In the opinion of management, the condensed consolidated financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation. Certain prior year amounts have been
reclassified to conform with current year presentation. The accompanying
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
2. EARNINGS PER SHARE ("EPS")
The following table presents the computation of basic and diluted EPS
in accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share."
Three Months Ended March 31,
1999 1998
----------- -----------
(in thousands of dollars except per share data)
BASIC EARNINGS PER SHARE
Income applicable to common stock .............. $ 25,939 $ 25,138
=========== ===========
Weighted average common shares outstanding ..... 38,996,277 44,001,533
=========== ===========
Basic earnings per share ....................... $ 0.67 $ 0.57
=========== ===========
DILUTED EARNINGS PER SHARE
Income applicable to common stock .............. $ 25,939 $ 25,138
=========== ===========
Share computation:
Weighted average common shares outstanding ... 38,996,277 44,001,533
Assumed exercise of stock options and warrants 2,120,161 3,854,767
----------- -----------
Weighted average common shares
outstanding as adjusted ................ 41,116,438 47,856,300
=========== ===========
Diluted earnings per share ..................... $ 0.63 $ 0.53
=========== ===========
For the three months ended March 31, 1999 and 1998, options for
1,608,383 and 341,689 shares, respectively, are not included in the computation
of diluted EPS because the option exercise prices were greater than the average
market price of common stock for the respective periods.
6
7
AMERICA WEST HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
3. STOCK REPURCHASE PROGRAM
In the first quarter of 1999 the Company repurchased 178,000 shares of
Class B Common Stock on the open market for approximately $3.3 million and AWA
repurchased 177,900 of its publicly traded warrants to purchase common stock of
Holdings for approximately $1.4 million. The equity purchases were made pursuant
to the stock repurchase program encompassing 5.0 million shares of Class B
Common Stock and all outstanding warrants.
In April 1999 the Company repurchased 911,200 shares of Class B Common
Stock for approximately $18.6 million and AWA repurchased 199,500 of its
publicly traded warrants to purchase common stock of Holdings for approximately
$2.0 million.
4. BORROWING UNDER CREDIT FACILITY
On February 19, 1999 AWA borrowed $94.3 million, the total amount then
available under its senior secured revolving credit facility, to provide
additional liquidity in the event of service disruptions related to the
Company's contract negotiations with its flight attendants. On March 20, 1999
the Company reported that it had reached a tentative agreement with the
Association of Flight Attendants ("AFA") on a five-year collective bargaining
agreement. On April 30, 1999 the AFA announced that AWA's flight attendants had
ratified the agreement. (See Other Information - "Labor Relations" in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations.) AWA repaid this amount on April 19, 1999 in accordance with the
terms of the credit facility.
5. SEGMENT DISCLOSURES
In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which established standards for the
way public business enterprises report information about operating segments in
annual and interim financial statements. Generally, financial information is
required to be reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments. It also
established standards for related disclosures about products and services,
geographic areas, and major customers.
Segment reporting financial data as of and for the three months ended
March 31, 1999 and 1998 follows (in thousands of dollars):
March 31, 1999
--------------
Other/
AWA TLC Eliminations Total
---------- ---------- ------------ ----------
Operating revenue .................... $ 506,462 $ 13,271 $ (107) $ 519,626
Depreciation and amortization ........ 11,675 430 (430) 11,675
Amortization of reorganization value . 4,974 399 (399) 4,974
Operating income ..................... 48,889 2,811 (985) 50,715
Capital expenditures ................. 43,159 132 -- 43,291
Segment assets ....................... 1,731,288 70,320 (127,425) 1,674,183
7
8
AMERICA WEST HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
March 31, 1998
--------------
Other/
AWA TLC Eliminations Total
---------- ---------- ------------ ----------
Operating revenue........................ $ 470,953 $ 12,312 $ (49) $ 483,216
Depreciation and amortization............ 12,298 123 (123) 12,298
Amortization of reorganization value..... 4,974 399 (399) 4,974
Operating income ........................ 47,823 2,463 (879) 49,407
Capital expenditures..................... 36,681 473 - 37,154
Segment assets........................... 1,619,018 76,237 (69,389) 1,625,866
6. INTEREST IN ACQUISITION OR BUSINESS COMBINATION
On January 20, 1999 the Company announced that it had been contacted by
a number of airlines expressing interest in possible transactions ranging from a
strategic alliance to a merger or similar business combination. On February 22,
1999 the Company announced that it had terminated consideration of all such
unsolicited expressions of interest in the Company.
8
9
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Holdings is the parent company of AWA and TLC. AWA is the ninth largest
commercial airline carrier in the United States serving 57 destinations in the
U.S., Canada and Mexico. TLC arranges and sells leisure travel products that may
include airfare, hotel accommodations, ground transportation and a variety of
other travel options. The business of TLC commenced as a subsidiary of Holdings
in January 1998. Holdings' primary business activity is ownership of all the
capital stock of AWA and TLC.
RESULTS OF OPERATIONS
With commencement of TLC operations, Holdings' operations consist of
two distinct lines of business for financial reporting purposes. Management
believes that a discussion of each of these business lines is appropriate to
obtain an understanding of the Company's results of operations.
SUMMARY
Holdings earned record consolidated net income of $25.9 million in the
first quarter of 1999, a 3.2% increase over the first quarter 1998's previous
record consolidated net income of $25.1 million. Diluted earnings per share for
the first quarter of 1999 were a record $0.63 compared to $0.53 in last year's
first quarter. Consolidated income tax expense for financial reporting purposes
was $20.8 million for the 1999 first quarter compared to $19.1 million in the
first quarter of 1998.
AWA
The following discussion provides an analysis of AWA's results of
operations for the first quarter of 1999 and material changes compared to the
first quarter of 1998.
9
10
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
America West Airlines, Inc.
Statements of Income
(in thousands)
(Unaudited)
3 Months Ended 3 Months Ended Percent
March 31, 1999 March 31, 1998 Change
-------------- -------------- -------
Operating revenues:
Passenger ................................. $ 478,622 $ 443,792 7.8
Cargo ..................................... 10,728 12,605 (14.9)
Other ..................................... 17,112 14,556 17.6
--------- --------- ------
Total operating revenues .................. 506,462 470,953 7.5
--------- --------- ------
Operating expenses:
Salaries and related costs ................ 117,555 105,584 11.3
Aircraft rents ............................ 65,525 58,745 11.5
Other rents and landing fees .............. 29,261 29,458 (0.7)
Aircraft fuel ............................. 44,363 50,284 (11.8)
Agency commissions ........................ 29,692 31,617 (6.1)
Aircraft maintenance materials and repairs 48,686 42,428 14.7
Depreciation and amortization ............. 11,675 12,298 (5.1)
Amortization of excess reorganization value 4,974 4,974 --
Other ..................................... 105,842 87,742 20.6
--------- --------- ------
Total operating expenses .................. 457,573 423,130 8.1
--------- --------- ------
Operating income .......................... 48,889 47,823 2.2
--------- --------- ------
Nonoperating income (expenses):
Interest income ........................... 4,513 5,045 (10.5)
Interest expense .......................... (8,020) (9,672) (17.1)
Other, net ................................ (591) (264) n/a
--------- --------- ------
Total nonoperating expenses, net .......... (4,098) (4,891) (16.2)
--------- --------- ------
Income before income taxes .................... $ 44,791 $ 42,932 4.3
========= ========= ======
10
11
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
The table below sets forth selected operating data for AWA.
Three Months Percent
Ended March 31, Change
1999 1998 1999-1998
------- ------- ---------
Aircraft (end of period).................................. 112 103 8.7
Average daily aircraft utilization (hours)................ 11.9 12.3 (3.3)
Available seat miles (in millions)........................ 6,298 5,846 7.7
Block hours (in thousands)................................ 119,634 113,202 5.7
Average stage length (miles).............................. 857 802 6.9
Average passenger journey (miles)......................... 1,283 1,109 15.7
Revenue passenger miles (in millions)..................... 4,030 3,636 10.8
Load factor (percent)..................................... 64.0 62.2 1.8 points
Passenger enplanements (in thousands)..................... 4,263 4,149 2.7
Yield per revenue passenger mile (cents).................. 11.88 12.20 (2.6)
Revenue per available seat mile:
Passenger (cents)...................................... 7.60 7.59 0.1
Total (cents).......................................... 8.04 8.06 (0.2)
Fuel consumption (gallons in millions).................... 99.5 93.1 6.9
Fuel price (cents per gallon)............................. 44.58 53.99 (17.4)
Average number of full-time equivalent employees.......... 11,092 10,345 7.2
The table below sets forth the major components of operating cost per
available seat mile ("CASM") for AWA.
Three Months Percent
Ended March 31, Change
1999 1998 1999-1998
------ ------ ---------
(in cents)
Salaries and related costs ................................ 1.87 1.81 3.4
Aircraft rents ............................................ 1.04 1.00 3.5
Other rents and landing fees .............................. .47 .50 (7.8)
Aircraft fuel ............................................. .70 .86 (18.1)
Agency commissions ........................................ .47 .54 (12.8)
Aircraft maintenance materials and repairs ................ .77 .73 6.5
Depreciation and amortization ............................. .19 .21 (11.9)
Amortization of excess reorganization value ............... .08 .09 (7.2)
Other ..................................................... 1.68 1.50 12.0
---- ----
7.27 7.24 0.4
==== ====
For the three months ended March 31, 1999 AWA realized operating income
of $48.9 million, a 2.2% increase over the $47.8 million operating income
recognized in last year's quarter. Income before income taxes for the three
month period in 1999 was $44.8 million compared to $42.9 million in 1998.
11
12
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
Total operating revenues for the 1999 first quarter were a record
$506.5 million. Passenger revenues were $478.6 million for the three months
ended March 31, 1999, an increase of $34.8 million or 7.8% from first quarter
1998. A 10.8% increase in revenue passenger miles ("RPMs") more than offset a
7.7% increase in capacity as measured by available seat miles ("ASMs"),
resulting in a 1.8 point increase in load factor (the percentage of available
seats that are filled with revenue passengers). Revenue per passenger mile
("yield") decreased 2.6% to 11.88 cents, driven largely by the 6.9% increase in
stage length. Passenger revenue per available seat mile ("RASM") for the quarter
increased slightly to 7.60 cents, despite the increased stage length. Cargo and
other revenues increased 2.5% to 27.8 million for the first quarter of 1999.
Operating expenses increased $34.4 million in the first quarter of 1999
or 8.1% as compared to the 1998 first quarter, while ASMs increased 7.7%. As a
result, CASM increased 0.4% to 7.27 cents in the first quarter of 1999 from 7.24
cents for the comparable 1998 period. Significant changes in the components of
CASM are explained as follows:
- - Salaries and related costs per ASM increased 3.4%. The contract with
International Brotherhood of Teamsters, covering the airlines mechanics,
which was signed in October 1998 and included higher wage rates, together
with longevity-related salary level increases required by the pilot
contract, contributed to higher salary expenses in 1999.
- - Aircraft rent expense per ASM increased 3.5% due to the net addition of
nine leased aircraft to the fleet during the 1999 quarter as compared to
1998.
- - Other rents and landing fees expense per ASM decreased 7.8% in the first
quarter of 1999 as fewer spare parts were on loan from other airlines and
landings were relatively flat quarter-over-quarter while ASMs increased
7.7%.
- - Aircraft fuel expense per ASM decreased 18.1% due to a 17.4% decrease in
the average price paid by AWA per gallon of fuel to 44.58 cents in the 1999
quarter from 53.99 cents in 1998.
- - Agency commissions expense per ASM decreased 12.8% as the cost reduction
associated with the institution of the $50 commission cap implemented on
May 1, 1998 more than offset the effects of higher passenger revenues in
the 1999 first quarter.
- - Aircraft maintenance materials and repairs expense per ASM increased 6.5%
due primarily to an increase in capitalized maintenance amortization
expense of $7.2 million for the first quarter of 1999 when compared to the
1998 first quarter.
- - Depreciation and amortization expense per ASM decreased 11.9% due primarily
to the increase in the average depreciable life of certain owned Boeing
737-200 aircraft that will be modified to meet the Federal Aviation
Administration's ("FAA") Stage III noise reduction requirements, which
reduced depreciation expense in the 1999 first quarter by $2.0 million.
- - Amortization of excess reorganization value expense per ASM decreased 7.2%
due to the 7.7% increase in ASMs.
12
13
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
- - Other operating expenses per ASM increased 12.0% to 1.68 cents from 1.50
cents primarily due to the effect in the first quarter 1999 of non-salary
related Year 2000 costs ($6.4 million), information systems-related
contract labor ($1.6 million) and higher catering costs ($1.8 million).
Net nonoperating expenses decreased $0.8 million to $4.1 million in the
first quarter of 1999 from $4.9 million in 1998. Nonoperating expenses in the
first quarter of 1999 included $0.7 million of interest expense associated with
AWA's $94.3 million borrowing under its revolving credit facility on February
19, 1999. (See Note 4. "Borrowing Under Credit Facility" in Notes to Condensed
Consolidated Financial Statements.) AWA also earned $0.5 million of interest
income as the borrowing proceeds were invested in cash equivalents. Excluding
these amounts as well as $1.7 million of interest income and $1.7 million of
interest expense associated with inter-company notes, the quarter-over-quarter
change was primarily due to a net decrease in interest expense as average
outstanding debt, excluding the $94.3 million, was $15.8 million lower in the
first quarter of 1999 as compared to 1998.
13
14
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
TLC
TLC's statement of income for the three months ended March 31, 1999
includes the results of The Vacation Store ("TVS"), a national leisure travel
retail distributor acquired in November 1998. TVS specializes in the marketing,
packaging and retail distribution of cruise and resort vacations. The
acquisition of TVS adds an established retail network to TLC's largely wholesale
travel product line. The following discussion provides an analysis of TLC's
results of operations and reasons for material changes therein.
The Leisure Company
Statements of Income
(in thousands)
(unaudited)
Three Months Ended Three Months Ended Percent
March 31, 1999 March 31,1998 Change
------------------ ------------------ -------
Operating revenues .................. $ 46,059 $ 42,960 7.2
Cost of goods sold .................. 32,788 30,648 7.0
-------- --------
Net revenues ........................ 13,271 12,312 7.8
Total operating expenses ............ 10,460 9,849 6.2
-------- --------
Operating income .................... 2,811 2,463 14.1
-------- --------
Nonoperating income (expenses), net . 127 (139) n.m.
-------- --------
Income before income taxes .......... $ 2,938 $ 2,324 26.4
======== ========
TLC's income before income taxes for the 1999 first quarter was $2.9
million, up $0.6 million when compared to the first quarter of 1998. Operating
revenues increased $3.1 million in the 1999 quarter as compared to 1998 due
primarily to the acquisition of TVS. TVS had operating revenues of $7.4 million,
which more than offset a $4.3 million decrease in TLC's wholesale vacation
package revenues. AWA's improving yield profile continued to result in less
reliance on wholesale vacation package traffic and therefore lower volumes for
TLC. Cost of goods sold was $32.8 million in first quarter 1999, an increase of
$2.1 million from first quarter 1998. Lower passenger volumes reduced the cost
of wholesale vacation packages by $4.2 million while the cost of retail packages
sold by TVS was $6.3 million. In total, net revenues increased by $1.0 million.
Total operating expenses increased $0.6 million due primarily to the acquisition
of TVS.
14
15
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash and cash equivalents and short-term investments at
March 31, 1999 totaled $251.8 million. This amount includes $94.3 million AWA
had drawn under its revolving credit facility, which was invested in cash
equivalents (see Note 4, "Borrowing Under Credit Facility" in Notes to Condensed
Consolidated Financial Statements). Excluding the $94.3 million, unrestricted
cash and cash equivalents and short-term investments increased $21.7 million to
$157.5 million at March 31, 1999 from $135.8 million at December 31, 1998. Net
cash provided by operating activities decreased to $75.7 million for the quarter
ended March 31, 1999 from $104.2 million in first quarter 1998 due principally
to the period-over-period change in air traffic liability, which grew 18.6% in
the 1999 period as compared to 45.8% in the 1998 period. Net cash used in
investing activities decreased to $21.6 million for the 1999 period from $58.9
million for the 1998 period. This decrease was primarily due to the sales of
short-term investments totaling $18.2 million in the 1999 period as compared to
purchases of $14.8 million of short-term investments in 1998. Net cash provided
by financing activities was $80.0 million for the 1999 first quarter as compared
to $52.6 million used in financing activities in the 1998 period. The 1999
period included the above mentioned $94.3 million borrowing under AWA's
revolving credit facility offset in part by $9.9 million of debt repayments and
purchases of common stock and AWA warrants totaling $4.7 million. In first
quarter 1998 AWA repaid $30 million of revolving credit facility debt and the
Company repurchased $17.0 million of common stock and AWA warrants.
Operating with a working capital deficiency is common in the airline
industry as tickets sold for transportation which have not yet been provided are
classified as a current liability while the related income-producing assets, the
aircraft, are classified as non-current. The Company's working capital
deficiency at March 31, 1999 was $219.6 million.
Long-term debt maturities through 2001 consist primarily of principal
amortization of notes payable secured by certain of AWA's aircraft and, in 1999,
the $94.3 million borrowing under the revolving credit facility. Such maturities
are $172.8 million, $19.9 million and $19.8 million, respectively, for the
remainder of 1999, 2000 and 2001. On April 19, 1999 AWA repaid the $94.3 million
in accordance with the terms of the credit facility. Management expects to fund
the remaining long-term debt maturities with cash from operations or by
refinancing the underlying obligations, subject to availability and market
conditions.
At March 31, 1999 AWA had a commitment to AVSA S.A.R.L., an affiliate
of Airbus Industrie ("AVSA"), to purchase a total of 27 Airbus aircraft, with 12
remaining to be delivered in 1999. AWA also has an option to purchase 47 more
Airbus aircraft of which seven are subject to reconfirmation by AWA. The
aggregate net cost of firm commitments remaining under the aircraft order is
approximately $1.0 billion based on a 3.5 percent annual price escalation. A
default by AWA under the AVSA purchase commitment could have a material adverse
effect on AWA.
In October 1998, America West Airlines 1998-1 Pass Through Trusts
issued $190.5 million in Pass Through Trust Certificates in connection with the
financing of six Airbus A319 aircraft and two Airbus A320 aircraft to be
purchased from AVSA. The Pass Through Trust Certificates are not direct
obligations of or guaranteed by Holdings and AWA. The combined effective
interest rate on the financing is 6.99%. Three Airbus A319 aircraft that are the
subject of this financing were delivered in 1998. One Airbus A320 aircraft was
delivered in the first quarter of 1999 and the remaining aircraft will be
delivered through July 1999.
AWA has also arranged for financing from AVSA for approximately
two-thirds of the firm commitment to purchase aircraft from AVSA. AWA intends to
seek additional financing (which may include public debt financing or private
financing) in the future when and as appropriate. There can be no assurance that
sufficient funding will be obtained for all aircraft.
15
16
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
As of March 31, 1999, AWA's fleet consisted of 112 aircraft of which 11
aircraft met the FAA's Stage II (but not Stage III) noise reduction requirements
and must be retired or significantly modified prior to the year 2000. AWA
intends to outfit seven aircraft with hush kits to comply with Stage III
requirements. The remaining four non-compliant aircraft will be retired.
Capital expenditures for the quarters ended March 31, 1999 and 1998
were approximately $43.3 million and $37.2 million, respectively. Included in
these amounts are capital expenditures for capitalized maintenance of
approximately $27.4 million for the first quarter of 1999 and $16.7 million for
the first quarter of 1998.
Certain of Holdings' and AWA's long-term debt agreements contain
minimum cash balance requirements, leverage ratios, coverage ratios and other
financial covenants with which Holdings and AWA were in compliance at March 31,
1999.
OTHER INFORMATION
LABOR RELATIONS
On March 20, 1999 the Company reported that it had reached a tentative
agreement with the AFA, which represents AWA's approximately 2,150 flight
attendants, on a five-year collective bargaining agreement. On April 30, 1999
the AFA announced that AWA's flight attendants had ratified the agreement with
83% of the votes cast for ratification. On March 22, 1999 the Company announced
that based on the terms of this agreement and estimates of fuel prices at that
time, it expected AWA's 1999 CASM to increase approximately 1% compared to 1998.
In October 1998 the Transportation Workers Union ("TWU") filed an
application with the National Mediation Board ("NMB") seeking certification as
the bargaining representative for AWA's approximately 2,000 fleet service
workers. An election on this application was authorized by the NMB. In January
1999 the NMB advised that 53 percent of eligible voters cast ballots in favor of
representation by the TWU. The Company has challenged the results of that
election based on allegations of misconduct by union organizers. Despite finding
evidence of union misconduct, on April 13, 1999 the NMB issued a decision
certifying the TWU as bargaining representative for the fleet service employees.
The Company cannot predict the form of this future collective bargaining
agreement and therefore the effect, if any, on AWA's operations or financial
performance.
16
17
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
YEAR 2000 COMPLIANCE PROGRAM AND RISKS
The Year 2000 issue results from computer programs being written using
two digits rather than four to define the applicable year. As a consequence,
time-sensitive computer equipment and software may recognize a date using "00"
as the year 1900 rather than the year 2000. Many of the Company's systems,
including information and computer systems and automated equipment, will be
affected by the Year 2000 issue. The Company is also heavily reliant on the
FAA's management of the nation's air traffic control system, local authorities'
management of the airports at which AWA operates, and vendors to provide goods
(fuel, catering, etc.), services (telecommunications, data networks, satellites,
etc.) and data (frequent flyer partnerships, alliances, etc.)
The Company has underway a Year 2000 Project (the "Project" or "Year
2000 Project") to identify the programs and infrastructure that could be
affected by the Year 2000 issue and is implementing a plan to resolve the
problems identified on a timely basis. The Project requires the Company to
devote a considerable amount of internal resources and hire substantial external
resources to assist with the implementation and monitoring of the Project, and
will require the replacement of certain equipment and modification of certain
software.
The Company believes that its Year 2000 Project will be completed prior
to any currently anticipated significant impact on the Company arising from the
Year 2000 issue. The Project is divided into three main sections, including
information technology ("IT") systems, embedded systems and third party
compliance. The five phases of the IT and embedded systems sections include
inventory, assessment, renovation, user testing and implementation. The
inventory and assessment phases of the IT systems are substantially completed
and the remaining phases of the IT systems are expected to be completed in the
second quarter of 1999. The inventory phase of the embedded systems is
substantially completed and the remaining phases are underway and are expected
to be completed during the second and third quarters of 1999.
The Company currently estimates that the total cost of its Year 2000
Project will be approximately $48 million, which will be funded from operating
cash flows. These costs exclude approximately $7 million of normal system
software and equipment upgrades and replacements which the Company anticipated
incurring in the ordinary course of business regardless of the Year 2000 issue.
As of March 31, 1999 the Company had incurred approximately $21 million of
non-capital expenditures in connection with the Year 2000 Project. The Company
expects that approximately $39 million of the costs have been or will be
expensed as incurred and the Company has had or will have approximately $9
million of capital expenditures.
The costs and expected completion date of the Company's Year 2000
Project are based on management's best estimates, and reflect assumptions
regarding the availability and cost of personnel trained in this area, the
compliance plans of third parties and similar uncertainties. However, due to the
complexity and pervasiveness of the Year 2000 issue and in particular the
uncertainty regarding the compliance programs of third parties, no assurance can
be given that these estimates will be achieved, and actual results could differ
materially from those anticipated. If the Company's plan to address the Year
2000 issue is not successfully or timely implemented, the Company may need to
devote more resources to the process and additional costs may be incurred, which
could have a material adverse effect on the Company's financial condition and
results of operations.
17
18
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. While difficult to predict, we speculate that the most reasonably
likely worst case Year 2000 scenario will result from the failure of third
parties, including operators of airports and air traffic control systems, to
resolve their Year 2000 compliance issue. The Company has initiated
communications with such parties and significant suppliers and vendors with
which the Company's systems interface and upon which the Company's business
depends in an effort to reduce any adverse impact of the Year 2000 issue. There
can be no assurance, however, that the systems of such third parties will be
modified on a timely basis and any such failure may have a material adverse
effect on the Company's financial condition and results of operations.
As a component of its Year 2000 Project, the Company is developing a
comprehensive analysis of the operational problems and costs (including loss of
revenues) that would be reasonably likely to result from the failure by the
Company and certain third parties to complete efforts necessary to achieve Year
2000 compliance on a timely basis. The Company is developing contingency plans
designed to enable it to continue operations, consistent with the highest
standards of safety, in the event of any such third party failures.
ADDITIONAL INFORMATION
The air travel business historically fluctuates in response to general
economic conditions. The airline industry is sensitive to changes in economic
conditions that affect business and leisure travel and is highly susceptible to
unforeseen events that result in declines in air travel, such as political
instability, regional hostilities, recession, fuel price escalation, inflation,
adverse weather conditions, labor instability or regulatory oversight. The
Company's results of operations for interim periods are not necessarily
indicative of those for an entire year, because the travel business is subject
to seasonal fluctuations. Due to the greater demand for air and leisure travel
during the summer months, revenues in the airline and leisure travel industries
in the second and third quarters of the year tend to be greater than revenues in
the first and fourth quarters of the year.
This discussion contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate", "estimate", "project", "expect" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key factors that may have a direct
bearing on the Company's results are competitive practices in the airline and
travel industries generally and particularly in the Company's principal markets,
the ability of the Company to meet existing financial obligations in the event
of adverse industry or economic conditions or to obtain additional capital to
fund future commitments and expansion, the Company's relationship with employees
and the terms of future collective bargaining agreements and the impact of
current and future laws and governmental regulations affecting the airline and
travel industries and the Company's operations. For additional discussion of
such risks see "Business - Risk Factors," included in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 which is on file
with the Securities and Exchange Commission. Any forward-looking statements
speak only as of the date such statements are made.
18
19
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
(a) Commodity Price Risk
As of March 31, 1999 the Company had entered into fixed price swap
transactions hedging approximately 43% of its projected 1999 fuel requirements
including 50% related to the second quarter, 35% related to the third quarter
and 37% related to the fourth quarter. The use of such swap transactions in the
Company's fuel hedging program could result in the Company not fully benefiting
from certain declines in jet fuel prices. At March 31, 1999 the Company
estimates that a 10% change in the price per gallon of jet fuel would have
changed the fair value of the existing swap contracts by $5.5 million.
As of May 10, 1999 approximately 46% of AWA's 1999 fuel requirements
are hedged.
(b) Interest Rate Risk
The Company's exposure to interest rate risk relates primarily to its
variable rate long-term debt obligations. At March 31, 1999 the Company's
variable-rate long-term debt obligations represented approximately 16% of its
total long-term debt. If interest rates increased 10% in 1999, the impact on the
Company's results of operations would not be material.
19
20
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
*27.1 Financial Data Schedule - America West Holdings
Corporation.
* Filed herewith.
b. Reports on Form 8-K
None
20
21
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICA WEST HOLDINGS CORPORATION
By /s/ W. Douglas Parker
------------------------------
W. Douglas Parker
Executive Vice President and
Chief Financial Officer
DATED: May 13, 1999
21
22
AMERICA WEST HOLDINGS CORPORATION
MARCH 31, 1999
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
*27.1 Financial Data Schedule - America West Holdings
Corporation.
* Filed herewith.
22