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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 2003 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From _______ to _______
Commission file number 000-21642
ATA HOLDINGS CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
(Address of principal executive offices) (Zip Code)
(317) 247-4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,764,753 shares outstanding as of April 30,
2003
PART I - Financial Information
Item I - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2003 2002
------------ --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 160,581 $ 200,160
Aircraft pre-delivery deposits 16,768 16,768
Receivables, net of allowance for doubtful accounts
(2003 - $2,450; 2002 - $2,375) 93,696 86,377
Inventories, net 49,992 51,233
Prepaid expenses and other current assets 41,483 39,214
------------ --------------
Total current assets 362,520 393,752
Property and equipment:
Flight equipment 319,726 312,652
Facilities and ground equipment 136,102 134,355
------------ --------------
455,828 447,007
Accumulated depreciation (193,752) (181,380)
------------ --------------
262,076 265,627
Restricted cash 37,654 30,360
Goodwill 14,887 14,887
Assets held for sale 4,983 5,090
Prepaid aircraft rent 116,289 68,828
Investment in BATA, LLC 23,128 22,968
Deposits and other assets 40,845 46,624
------------ --------------
Total assets $ 862,382 $ 848,136
============ ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 18,188 $ 14,191
Short-term debt 8,384 8,384
Accounts payable 28,742 23,688
Air traffic liabilities 100,799 94,693
Accrued expenses 176,538 160,924
------------ --------------
Total current liabilities 332,651 301,880
Long-term debt, less current maturities 482,809 486,853
Deferred gains from sale and leaseback of aircraft 53,215 54,889
Other deferred items 42,223 42,038
------------ --------------
Total liabilities 910,898 885,660
Commitments and Contingencies
Redeemable preferred stock; authorized and issued 800 shares 82,860 82,485
Shareholders' deficit:
Preferred stock; authorized 9,999,200 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,476,193 - 2003; 13,476,193 - 2002 65,290 65,290
Treasury stock; 1,711,440 shares - 2003; 1,711,440
shares - 2002 (24,778) (24,778)
Additional paid-in capital 18,374 18,374
Retained deficit (190,262) (178,895)
------------ --------------
Total shareholders' deficit (131,376) (120,009)
------------ --------------
Total liabilities and shareholders' deficit $ 862,382 $ 848,136
============ ==============
See accompanying notes.
2
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended March 31,
2003 2002
------------ -----------
(Unaudited) (Unaudited)
Operating revenues:
Scheduled service $ 244,768 $ 208,283
Charter 112,307 96,846
Ground package 5,211 15,246
Other 11,343 10,195
------------ -----------
Total operating revenues 373,629 330,570
------------ -----------
Operating expenses:
Salaries, wages and benefits 94,278 77,987
Fuel and oil 75,092 47,243
Aircraft rentals 55,269 39,454
Handling, landing and navigation fees 30,057 27,680
Depreciation and amortization 15,193 18,690
Crew and other employee travel 14,987 13,870
Aircraft maintenance, materials and repairs 13,479 11,420
Other selling expenses 11,757 10,983
Advertising 10,275 9,332
Passenger service 10,249 9,767
Insurance 7,335 7,735
Commissions 6,026 9,123
Facilities and other rentals 5,824 5,445
Ground package cost 4,204 12,349
Other 18,084 19,434
------------ -----------
Total operating expenses 372,109 320,512
------------ -----------
Operating income 1,520 10,058
Other income (expense):
Interest income 806 689
Interest expense (12,682) (8,238)
Other (636) 133
------------ -----------
Other expense (12,512) (7,416)
------------ -----------
Income (loss) before income taxes (10,992) 2,642
Income taxes - 762
----------- -----------
Net income (loss) (10,992) 1,880
Preferred stock dividends (375) (375)
------------ -----------
Income (loss) available to common shareholders $ (11,367) $ 1,505
============ ===========
Basic earnings per common share:
Average shares outstanding 11,764,753 11,562,357
Net income (loss) per share $ (0.97) $ 0.13
============ ===========
Diluted earnings per common share:
Average shares outstanding 11,764,753 12,043,058
Net income (loss) per share $ (0.97) $ 0.12
============ ===========
See accompanying notes.
3
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' DEFICIT
(Dollars in thousands)
Redeemable Additional Total
Preferred Common Treasury Paid-in Retained Shareholders'
Stock Stock Stock Capital Deficit Deficit
-------- -------- --------- -------- ---------- ----------
Balance, December 31, 2002 $ 82,485 $ 65,290 $ (24,778) $ 18,374 $ (178,895) $ (120,009)
-------- -------- --------- -------- ---------- ----------
Net loss - - - - (10,992) (10,992)
Accrued preferred stock dividends 375 - - - (375) (375)
-------- -------- --------- -------- ---------- ----------
Balance, March 31, 2003 $ 82,860 $ 65,290 $ (24,778) $ 18,374 $ (190,262) $ (131,376)
======== ======== ========= ======== ========== ===========
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
2003 2002
------------ ----------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) $ (10,992) $ 1,880
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization. 15,193 18,690
Deferred income taxes - 736
Other non-cash items 759 7,172
Changes in operating assets and liabilities:
U.S. Government grant receivable 6,158 -
Other receivables (13,477) (24,574)
Inventories 332 (2,519)
Prepaid expenses (2,269) (5,470)
Accounts payable 5,054 3,148
Air traffic liabilities 6,106 14,655
Accrued expenses 14,109 4,489
------------ ----------
Net cash provided by operating activities 20,973 18,207
------------ ----------
Investing activities:
Aircraft pre-delivery deposits - 21,837
Capital expenditures (10,147) (145,413)
Noncurrent prepaid aircraft rent (47,461) (27,767)
Additions to other assets 4,998 6,373
Proceeds from sales of property and equipment 68 84
------------ ----------
Net cash used in investing activities (52,542) (144,886)
------------ ----------
Financing activities:
Preferred stock dividends - (375)
Payments on short-term debt - (10,850)
Proceeds from long-term debt 1,768 140,910
Payments on long-term debt (2,484) (49,893)
Increase in restricted cash (7,294) -
Proceeds from stock options exercises - 153
------------ ----------
Net cash provided by (used in) financing activities (8,010) 79,945
------------ ----------
Decrease in cash and cash equivalents (39,579) (46,734)
Cash and cash equivalents, beginning of period 200,160 184,439
------------ ----------
Cash and cash equivalents, end of period $ 160,581 $ 137,705
============ ==========
Supplemental disclosures:
Cash payments for:
Interest $ 12,896 $ 11,831
Income taxes (refunds) $ (16,745) $ 3,016
Financing and investing activities not affecting cash:
Accrued capitalized interest $ 940 $ (3,813)
See accompanying notes.
5
ATA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Stock Based Compensation
The accompanying consolidated financial statements of ATA Holdings Corp.,
formerly Amtran, Inc., and subsidiaries (the "Company") have been prepared
in accordance with instructions for reporting interim financial information
on Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles
generally accepted in the United States ("GAAP"). For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
The consolidated financial statements for the quarters ended March 31, 2003
and 2002 reflect, in the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash
flows for such periods. Results for the three months ended March 31, 2003
are not necessarily indicative of results to be expected for the full
fiscal year ending December 31, 2003.
During 1996, the Company adopted the disclosure provisions of FASB
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123") with respect to its stock options. As
permitted by FAS 123, the Company has elected to continue to account for
employee stock options following the intrinsic value method of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") and related interpretations. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
The Company has not granted options since the year ended December 31, 2001.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3
years). The Company's pro forma information follows:
Three Months Ended March 31,
2003 2002
-------------------------------------
(In thousands, except per share data)
Net income (loss) available to common shareholders,
as reported $ (11,367) 1,505
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects (10) (43)
--------- --------
Net income (loss) available to common shareholders,
pro forma (11,377) 1,462
========= ========
Basic income (loss) per share, as reported (0.97) 0.13
========= ========
Diluted income (loss) per share, as reported (0.97) 0.12
========= ========
Basic income (loss) per share, pro forma (0.97) 0.13
========= ========
Diluted income (loss) per share, pro forma (0.97) 0.12
========= ========
6
2. State of the Industry and the Company
On September 11, 2001, four commercial aircraft operated by two other U.S.
airlines were hijacked and destroyed in terrorist attacks on the United
States. These attacks resulted in significant loss of life and property
damage. The terrorist attacks and generally weak economic conditions have
adversely affected the Company and the airline industry. The industry as a
whole, and the Company, suffered very significant financial losses in the
years ended December 31, 2002 and 2001 and three months ended March 31,
2003. During 2002, two major air carriers, US Airways Group and UAL
Corporation, filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Historically, air carriers involved in reorganizations
have substantially reduced their fares, which could reduce airline yields
further from current levels. Certain air carriers are seeking to recover
from financial losses, at least partially, by reducing their seat capacity.
As this is accomplished by eliminating aircraft from operating fleets, the
market value of aircraft may be adversely affected. The Company recorded
substantial charges to earnings resulting from fleet retirements and
impairments in the years ended December 31, 2002 and 2001. However, during
the same period the Company substantially replaced its fleet of aging
aircraft with new fuel-efficient Boeing aircraft. These new Boeing aricraft
are all leased under operating leases and have higher fixed ownership costs
than the older fleets that they replaced. Certain of these aircraft leases
require significant cash payments in the first few years of the lease.
Consequently, the Company made large lease payments on these aircraft in
the first quarter of 2003, which caused a substantial decrease in the
Company's cash balance from December 31, 2002 to March 31, 2003. In
addition, since all of these aircraft are leased, the Company has pledged
receivables and other assets to secure its debt, leaving the Company with
few unencumbered assets. Since September 11, 2001, the industry and the
Company have also been adversely impacted by substantially higher insurance
costs, passenger security costs, and the war in Iraq.
The Company has benefited from some of the U.S. Government's initiatives
for assisting the airline industry. Most significant to the Company was the
Air Transportation Safety and System Stabilization Act ("Act") passed in
2001, which provided for, among other things, up to $5.0 billion in
before-tax compensation to U.S. airlines and air cargo carriers for direct
and incremental losses resulting from the September 11, 2001 terrorist
attacks, and the availability of up to $10.0 billion in U.S. Government
guarantees of certain loans made to air carriers, which are administered by
the newly-established Air Transportation Stabilization Board ("ATSB"). The
Company received $50.1 million of U.S. Government grant compensation under
the Act, of which the final payment of $6.2 million was received in the
first quarter of 2003. The Company also obtained a $168.0 million secured
term loan in November 2002, of which $148.5 million is guaranteed by the
ATSB.
While it is expected that adverse industry conditions are likely to
continue throughout the remainder of 2003, the Company's management
believes it has a viable plan to ensure sufficient cash to fund operations
during 2003. In addition to the assistance the Company received in the form
of U.S. Government grant compensation, the secured term loan and the
additional aid expected from the Emergency Wartime Supplemental
Appropriations Act (see "Note 6 - Subsequent Events"), the plan calls for
focusing marketing efforts on those routes where the Company believes it
can be a leading provider and implementing a number of cost-saving
initiatives the Company believes will enhance its low-cost advantage.
Although the Company believes the assumptions underlying its full-year 2003
financial projections are reasonable, there are significant risks which
could cause the Company's 2003 financial performance to be different than
projected. These risks relate primarily to further declines in demand for
air travel, further increases in fuel prices, the uncertain outcome of the
two major airline bankruptcies filed in 2002, the possibility of other
airline bankruptcy filings, and the ongoing geopolitical impacts of the
conflicts in the Middle East. Furthermore, the Company is scheduled to make
large payments of principal on its outstanding senior indebtedness and on
its aircraft operating leases in 2004 and 2005. Given the current operating
environment, the Company is uncertain that it will be able to make those
payments as they come due. The Company is currently exploring options to
address this issue.
7
3. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31 ,
2003 2002
--------------- ------------
Numerator:
Net income (loss) $ (10,992,000) $ 1,880,000
Preferred stock dividends (375,000) (375,000)
Income (loss) available to common --------------- ------------
shareholders - numerator for basic and
diluted earnings per share $ (11,367,000) $ 1,505,000
=============== ============
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,764,753 11,562,357
Effect of potential dilutive securities:
Employee stock options - 480,701
--------------- ------------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,764,753 12,043,058
=============== ============
Basic income (loss) per share $ (0.97) $ 0.13
=============== ============
Diluted income (loss) per share $ (0.97) $ 0.12
=============== ============
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings per Share," the impact of 1,914,486 shares of
convertible redeemable preferred stock in the three months ended March 31,
2003 and 2002 has been excluded from the computation of diluted earnings
per share because their effect would be antidilutive. In addition, for
March 31, 2003, the impact of 1,672,148 incremental shares from the assumed
exercise of warrants issued in conjunction with the secured term loan the
Company obtained in November 2002 were not included in the computation of
diluted earnings per share because their effect would be antidilutive.
4. Commitments and Contingencies
The Company has purchase agreements with the Boeing Company to purchase
directly from Boeing two new Boeing 757-300s and seven new Boeing 737-800s,
which are currently scheduled for delivery between May 2003 and December
2004. The Boeing 737-800 aircraft are powered by General Electric
CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by
Rolls-Royce RB211-535 E4C engines. The manufacturer's list price is $73.6
million for each 757-300 and $52.4 million for each 737-800, subject to
escalation. The Company's purchase price for each aircraft is subject to
various discounts. To fulfill its purchase obligations, the Company has
arranged for each of these aircraft, including the engines, to be purchased
by third parties that will, in turn, enter into long-term operating leases
with the Company. Aircraft pre-delivery deposits are required for these
purchases, and the Company has funded these deposits using operating cash
and short-term deposit finance facilities. As of March 31, 2003, the
Company had $21.2 million in pre-delivery deposits outstanding for future
aircraft deliveries, of which $8.4 million was provided by a deposit
finance facility. Upon delivery of the aircraft, pre-delivery deposits
funded with operating cash will be returned to the Company, and those
funded with the deposit facility will be used to repay that facility. As of
8
March 31, 2003, the Company also has purchase rights for eight Boeing
757-300 aircraft and 40 Boeing 737-800 aircraft directly from Boeing.
The Company has agreements in place to lease three additional Boeing
737-800s under operating leases from a third party lessor, which are
currently scheduled for delivery between June 2003 and the end of 2005.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006.
The Company intends to finance all of these future aircraft and engine
deliveries with operating leases. The Company has estimated the amount of
payments for these expected future lease obligations, using the terms of
leases for comparable aircraft currently in place. The estimated future
payments for these 12 future aircraft deliveries, which do not include
obligations for leases currently in place, are shown in the following
table:
Expected
Future
Lease
Obligations
--------------
(in thousands)
2003 $ 5,155
2004 33,716
2005 56,755
2006 64,369
2007 59,738
Thereafter 658,180
----------
$ 877,913
==========
In 2001, the Company entered into short-term operating leases with BATA
Leasing LLC ("BATA"), a 50/50 joint venture with Boeing Capital Corporation
("BCC"), to lease back nine Boeing 727-200 aircraft which had been
previously contributed to the joint venture by the Company, all of which
leases had been terminated. The Company is subject to lease return
conditions on these nine former operating leases, upon BATA's delivery by
lease or sale of any aircraft subject to the operating leases to a
third-party. On January 31, 2003, BATA entered into a lease agreement with
a third-party lessee on one of the nine aircraft. The return conditions set
forth in the short-term operating lease were satisfied by the completion of
a cargo conversion, without incurring additional expense on the airframe or
engines. Management believes it is reasonably possible that a lessee or
buyer will be identified for the remaining eight aircraft. The Company
estimates that it could incur approximately $6.0 million of expense to meet
the return conditions, if all eight of the aircraft were leased by BATA to
third parties. If the aircraft are leased as cargo carriers, it is likely
the lease return conditions will be satisfied by completing the cargo
conversion on the aircraft. No liability has been recorded for these return
conditions as of March 31, 2003, as management does not believe it is
probable that it will be paid.
In the Company's aircraft financing agreements, the Company typically
indemnifies the financing parties, trustees acting on their behalf and
other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the
aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnified parties, except for
their gross negligence or willful misconduct. The Company expects that it
would be covered by insurance (subject to deductibles) for most tort
9
liabilities and related indemnities under these aircraft leases. The
Company cannot determine its maximum exposure related to these indemnities.
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
5. Income Taxes
As of December 31, 2002, the Company had incurred a three-year cumulative
loss. Because of this cumulative loss and the presumption under GAAP that
net deferred tax assets should be fully reserved if it is more likely than
not that they will not be realized through carrybacks or other strategies,
the Company had recorded a full valuation allowance against its net
deferred tax asset. In the first quarter of 2003, the Company continued to
record a full valuation allowance against its net deferred tax asset under
the same presumption. This valuation allowance, recorded in income tax
expense, resulted in no tax benefit being realized on the Company's first
quarter loss in 2003.
6. Subsequent Events
On April 16, 2003, President Bush signed into law the Emergency Wartime
Supplemental Appropriations Act ("Supplemental Act"). The Supplemental Act
makes available $2.3 billion in reimbursement to U.S. air carriers for
expenses incurred and revenue foregone related to enhanced aviation
security subsequent to September 11, 2001. The Company currently estimates
that it may receive up to $31.0 million in cash reimbursements, based upon
the eligibility requirements set forth in the Supplemental Act. The Company
anticipates it will receive payment of funds due in the second quarter of
2003.
In addition, the Supplemental Act temporarily suspends the payment of the
aviation security infrastructure fee by the Company from June 1, 2003 to
September 30, 2003, which will save the Company approximately $1.4 million.
The Supplemental Act also suspends the collection and payment of the
September 11 security fee for tickets sold between June 1, 2003 to
September 30, 2003.
10
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended March 31, 2003, Versus Quarter Ended March 31, 2002
Overview
The Company is a leading provider of scheduled airline services to leisure and
other value-oriented travelers, and a leading provider of charter services to
the U.S. military. The Company, through its principal subsidiary, ATA Airlines,
Inc. ("ATA"), formerly American Trans Air, Inc., has been operating for 30 years
and is the tenth largest U.S. airline in terms of 2002 capacity and traffic. ATA
provides jet scheduled service through nonstop and connecting flights from the
gateways of Chicago-Midway and Indianapolis to popular vacation destinations
such as Hawaii, Phoenix, Las Vegas, Florida, California, Mexico and the
Caribbean, as well as to New York's LaGuardia Airport, Philadelphia, Denver,
Dallas-Ft. Worth, Washington, D.C., Boston, Seattle, Minneapolis-St. Paul,
Newark and Charlotte. The Company's commuter subsidiary Chicago Express
Airlines, Inc. ("Chicago Express") provides commuter scheduled service between
Chicago-Midway and the cities of Indianapolis, Cedar Rapids, Dayton, Des Moines,
Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline, South Bend,
Springfield and Toledo. ATA also provides charter service to independent tour
operators, specialty charter customers and the U.S. military.
In the three months ended March 31, 2003, the Company recorded operating income
of $1.5 million, as compared to operating income of $10.1 million in the same
period of 2002. The Company had a net loss of $11.0 million in the three months
ended March 31, 2003, as compared to a net income of $1.8 million in the same
period of 2002.
Consolidated revenue per available seat mile ("RASM") decreased 7.9% to 7.07
cents in the first quarter of 2003, as compared to 7.68 cents in the first
quarter of 2002. This decline was mainly due to a weak scheduled service pricing
environment in the first quarter of 2003, which was impacted by the war in the
Middle East and a continuing weakened economy. In addition, the Company's
scheduled service revenues were adversely affected by the timing of the Easter
holiday from the first quarter in 2002 to the second quarter in 2003, and the
Company's aggressive capacity growth between periods due to the addition of new
Boeing 737-800 and Boeing 757-300 aircraft to the Company's fleet. The Company
was able to utilize some of the increased capacity in its military charter
service in order to meet the increased flying requirements of the Civil Reserve
Air Fleet ("CRAF") activation in February 2003, which has supported Operation
Iraqi Freedom. In the first quarter of 2003, the Company's military charter
revenue increased 118.3%, as compared to the first quarter of 2002.
The Company's unit costs remained among the lowest of major airlines in the
first quarter of 2003. Consolidated cost per available seat mile ("CASM")
decreased 5.4% to 7.04 cents in the first quarter of 2003, as compared to 7.44
cents in the first quarter of 2002. This decline is mainly due to the Company's
continuing efforts to further reduce operating expenses; the benefits from
increased aircraft and crew utilization; and the cost savings realized from the
addition of its new fleets comprised of Boeing 737-800 and Boeing 757-300
aircraft. This CASM decline was achieved despite a 41.6% increase in the average
cost per gallon of jet fuel consumed in the first quarter of 2003, as compared
to the same period of 2002, which cost the Company an incremental $17.1 million
in the first quarter of 2003, net of a $5.3 million increase in fuel escalation
revenue between periods.
For the 2003 fiscal year, the Company currently expects that it may earn an
operating profit. However, significant uncertainties continue to exist with
respect to unit revenues and fuel prices, both of which may be adversely
affected by geopolitical and economic events, including the uncertain outcome of
the two major airline bankruptcies filed in 2002 and the continuation of
conflict in the Middle East, which are not within the Company's direct control.
Therefore, the Company can provide no assurance that it will earn an operating
profit in 2003.
Critical Accounting Policies
Please refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
11
Results of Operations
For the quarter ended March 31, 2003, the Company had operating income of $1.5
million, as compared to operating income of $10.1 million in the comparable
quarter of 2002. The Company had a net loss of $11.0 million in the three months
ended March 31, 2003 as compared to a net income of $1.8 million in the same
period of 2002.
Operating revenues increased 13.0% to $373.6 million in the first quarter of
2003, as compared to $330.6 million in the same period of 2002. Consolidated
RASM decreased 7.9% to 7.07 cents in the first quarter of 2003, as compared to
7.68 cents in the first quarter of 2002. Scheduled service revenues increased
$36.5 million between periods, or 17.5%, while charter revenues increased $15.5
million between periods, or 16.0%. Military/government charter operations
increased in the first quarter of 2003 as a result of the war in the Middle
East. Scheduled service unit revenues reflected weakness in both load factors
and yields in the first quarter of 2003.
Operating expenses increased 16.1% to $372.1 million in the first quarter of
2003, as compared to $320.5 million in the comparable period of 2002.
Consolidated CASM decreased 5.4% to 7.04 cents in the first quarter of 2003, as
compared to 7.44 cents in the first quarter of 2002.
12
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per available seat mile ("ASM").
Cents per ASM
Three Months Ended March 31,
2003 2002
----------------------------
Consolidated operating revenues: 7.07 7.68
Consolidated operating expenses:
Salaries, wages and benefits 1.78 1.81
Fuel and oil 1.42 1.10
Aircraft rentals 1.05 0.92
Handling, landing and navigation fees 0.57 0.64
Depreciation and amortization 0.29 0.43
Crew and other employee travel 0.28 0.32
Aircraft maintenance, materials and repairs 0.26 0.26
Other selling expenses 0.22 0.26
Advertising 0.19 0.22
Passenger service 0.19 0.23
Insurance 0.14 0.18
Commissions 0.11 0.21
Facilities and other rentals 0.11 0.13
Ground package cost 0.08 0.29
Other 0.35 0.44
--------- ---------
Total consolidated operating expenses 7.04 7.44
--------- ---------
Consolidated operating income 0.03 0.24
========= =========
ASMs (in thousands) 5,284,710 4,306,430
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200, and Boeing 757-300
aircraft in all of the Company's business units. Data shown for "SAAB"
operations include the operations of SAAB 340B propeller aircraft by Chicago
Express as the ATA Connection.
13
Three Months Ended March 31,
2003 2002 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------------
Departures Jet 19,194 16,103 3,091 19.20
Departures SAAB 12,713 8,317 4,396 52.86
-------------------------------------------------------------------
Total Departures 31,907 24,420 7,487 30.66
-------------------------------------------------------------------
Block Hours Jet 60,816 47,575 13,241 27.83
Block Hours SAAB 12,423 7,785 4,638 59.58
-------------------------------------------------------------------
Total Block Hours 73,239 55,360 17,879 32.30
-------------------------------------------------------------------
RPMs Jet (000s) 3,324,647 3,003,062 321,585 10.71
RPMs SAAB (000s) 46,051 28,612 17,439 60.95
-------------------------------------------------------------------
Total RPMs (000s) (a) 3,370,698 3,031,674 339,024 11.18
-------------------------------------------------------------------
ASMs Jet (000s) 5,208,303 4,261,827 946,476 22.21
ASMs SAAB (000s) 76,407 44,603 31,804 71.30
-------------------------------------------------------------------
Total ASMs (000s) (b) 5,284,710 4,306,430 978,280 22.72
-------------------------------------------------------------------
Load Factor Jet (%) 63.83 70.46 (6.63) (9.41)
Load Factor SAAB (%) 60.27 64.15 (3.88) (6.05)
-------------------------------------------------------------------
Total Load Factor (%) (c) 63.78 70.40 (6.62) (9.40)
-------------------------------------------------------------------
Passengers Enplaned Jet 2,377,678 2,241,026 136,652 6.10
Passengers Enplaned SAAB 262,134 180,989 81,145 44.83
-------------------------------------------------------------------
Total Passengers Enplaned (d) 2,639,812 2,422,015 217,797 8.99
-------------------------------------------------------------------
Revenue $ (000s) 373,629 330,570 43,059 13.03
RASM in cents (e) 7.07 7.68 (0.61) (7.94)
CASM in cents (f) 7.04 7.44 (0.40) (5.38)
Yield in cents (g) 11.08 10.90 0.18 1.65
See footnotes (d) through (g) on page 15.
(a) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(b) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(c) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because the right to
use an entire aircraft is sold by the Company instead of individual seats. Since
14
both costs and revenues are largely fixed for these types of charter flights,
changes in load factor have less impact on business unit profitability.
Consolidated load factors and scheduled service load factors for the Company are
shown in the appropriate tables for industry comparability, but load factors for
individual charter businesses are omitted from applicable tables.
(d) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(e) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (g) below for the definition of yield).
(f) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available seat capacity.
(g) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
right to use an entire aircraft is sold at one time for one price. Consolidated
yields and scheduled service yields are shown in the appropriate tables for
industry comparability, but yields for individual charter businesses are omitted
from applicable tables.
15
Operating Revenues
Total operating revenues in the first quarter of 2003 increased 13.0% to $373.6
million, as compared to $330.6 million in the first quarter of 2002. This
increase was due to a $36.5 million increase in scheduled service revenue, a
$46.7 million increase in military/government charter revenue and a $1.1 million
increase in other revenues, partially offset by a $31.3 million decrease in
commercial charter revenue and a $10.0 million decrease in ground revenue.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, commercial charter and
military/government charter operations of the Company.
Three Months Ended March 31,
----------------------------------------------------------
2003 2002 Inc (Dec) % Inc (Dec)
----------------------------------------------------------
Scheduled Service
Departures 28,906 21,086 7,820 37.09
Block Hours 60,158 42,932 17,226 40.12
RPMs (000's) (a) 2,684,481 2,183,355 501,126 22.95
ASMs (000's) (b) 3,846,332 3,020,520 825,812 27.34
Load Factor (c) 69.79 72.28 (2.49) (3.44)
Passengers Enplaned (d) 2,384,463 1,972,678 411,785 20.87
Revenue 244,768 208,283 36,485 17.52
RASM in cents (e) 6.36 6.90 (0.54) (7.83)
Yield in cents (g) 9.12 9.54 (0.42) (4.40)
Revenue per segment $ (h) 102.65 105.58 (2.93) (2.78)
Commercial Charter
Departures 1,283 2,510 (1,227) (48.88)
Block Hours 4,665 8,695 (4,030) (46.35)
ASMs (000's) (b) 355,289 789,801 (434,512) (55.02)
Revenue 26,112 57,369 (31,257) (54.48)
RASM in cents (e) 7.35 7.26 0.09 1.24
RASM excluding fuel escalation (i) 6.89 7.26 (0.37) (5.10)
Military Charter
Departures 1,718 822 896 109.00
Block Hours 8,416 3,715 4,701 126.54
ASMs (000's) (b) 1,083,089 493,666 589,423 119.40
Revenue 86,195 39,477 46,718 118.34
RASM in cents (e) 7.96 8.00 (0.04) (0.50)
RASM excluding fuel escalation (j) 7.75 8.13 (0.38) (4.67)
Percentage of Consolidated Revenues:
Scheduled Service 65.5% 63.0% 2.5% 3.97
Commercial Charter 7.0% 17.4% (10.4%) (59.77)
Military Charter 23.1% 11.9% 11.2% 94.12
See footnotes (a) through (j) on pages 14-15 and 17.
16
(h) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
(i) Commercial charter contracts generally provide that the tour operator will
reimburse the Company for certain fuel cost increases, which, when earned, are
accounted for as additional revenue. A separate RASM calculation, excluding the
impact of fuel reimbursements, is provided as a separate measure of unit revenue
changes.
(j) Military/government reimbursements to the Company are calculated based upon
a "cost plus" formula, including an assumed average fuel price for each contract
year. If actual fuel prices differ from the contract rate, revenues are adjusted
up or down to neutralize the impact of the change on the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
Scheduled Service Revenues. Scheduled service revenues in the first quarter of
2003 increased 17.5% to $244.8 million from $208.3 million in the first quarter
of 2002. As scheduled service capacity increased in 2003 from 2002, both load
factor and yield declined. The Company continued to see a decline in the demand
for its services in the first quarter of 2003, as the war in the Middle East
began and the pace of the economic activity in the United States remained slow.
The Company also believes that its unit revenues were adversely affected by its
own rapid growth in total seat capacity, and by aggressive pricing of competing
carriers in Chicago and other of the Company's significant scheduled service
markets.
Scheduled service departures grew 37.1% in the first quarter of 2003, compared
to the ASM growth of 27.3%. This reflects the growth of the Chicago Express SAAB
340B fleet from 11 aircraft as of March 31, 2002 to 17 aircraft as of March 31,
2003. The additional SAAB aircraft generated significantly more departures, but
because the aircraft seats only 34 passengers and operates on short stage length
flights, the increase in ASMs was not as great as the increase in departures.
Approximately 71.3% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in the first quarter
of 2003, as compared to 70.7% in the first quarter of 2002. The Hawaiian market
generated approximately 11.3% of total scheduled service capacity in the first
quarter of 2003, as compared to 11.5% in the first quarter of 2002. Another
12.6% of total scheduled service capacity was generated in the Indianapolis
market in the first quarter of 2003, as compared to 10.2% in the first quarter
of 2002.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business in the
future. The Company also anticipates further growth at Chicago-Midway, which
will be accomplished in conjunction with the completion of new terminal and gate
facilities at the Chicago-Midway Airport. Once all construction is complete in
2004, the Company expects to occupy at least 14 jet gates and one commuter
aircraft gate at the new airport concourses, as compared to eight jet gates and
one commuter gate as of March 31, 2003. A Federal Inspection Service ("FIS")
facility was also completed at Chicago-Midway in the first quarter of 2002,
which allowed the Company to begin nonstop international services from
Chicago-Midway to Mexico and Caribbean destinations. Also contributing to the
growth at Chicago-Midway is Chicago Express, which has been performing well as a
commuter feeder of passengers to ATA's jet system. The Company operated 157 peak
daily jet and commuter departures from Chicago-Midway and served 41 destinations
on a nonstop basis in the first quarter of 2003, as compared to 112 peak daily
jet and commuter departures and 32 nonstop destinations in the first quarter of
2002.
In the Hawaiian market, the Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui.
The Company's growth in the Indianapolis market is primarily attributable to the
addition of limited jet service between Indianapolis and Chicago-Midway in the
second quarter of 2002, and the addition of nonstop service to New
York-LaGuardia and Phoenix beginning in the third quarter of 2002.
17
Commercial Charter Revenues. Commercial charter revenues decreased 54.5% to
$26.1 million in the first quarter of 2003 from $57.4 million in the first
quarter of 2002.
The majority of the decline in commercial charter revenues was due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying. Since aircraft
utilization (number of productive hours of flying per aircraft each month) is
typically much lower for commercial charter, as compared to scheduled service
flying, the Company's replacement fleets of new Boeing 737-800 and Boeing
757-300 aircraft are economically disadvantaged when used in the charter
business, because of their higher fixed-ownership cost. Consequently, the
Company expects its commercial charter revenues to continue to decline as the
fleet supporting this business continues to shrink as a result of aircraft
retirements.
Military/Government Charter Revenues. Military/government charter revenue
increased 118.3% to $86.2 million in the first quarter of 2003 from $39.5
million in the first quarter of 2002.
The increase in revenue for military/government charter revenues in the first
quarter of 2003 was mainly due to the activation of Civil Reserve Air Fleet
("CRAF"), which required ATA to pledge up to 13 aircraft to military/government
charter use to support Operation Iraqi Freedom. The CRAF program allowed the
Company to increase its Lockheed L-1011 aircraft utilization, which averaged 7.8
daily hours of utilization in the first quarter of 2003, as compared to 5.8
daily hours of utilization in the first quarter of 2002. The increased
utilization allowed the Company to operate its military/government charter
service more efficiently between periods. The Company continued to experience
increased military/government activity in April 2003 due to CRAF. However, the
Company is uncertain that this level of military/government charter activity
will continue throughout 2003.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair and ATA Leisure Corp. ("ATALC") subsidiaries.
Ambassadair Travel Club offers tour-guide-accompanied vacation packages to its
approximately 31,000 individual and family members. ATALC offers numerous ground
accommodations to the general public, which are marketed through travel agents
as well as directly by the Company.
In the first quarter of 2003, ground package revenues decreased 65.8% to $5.2
million, as compared to $15.2 million in the same period of 2002. This decline
in ground package sales (and related ground package costs) is primarily due to
the Company's July 1, 2002 outsourcing of the management and marketing of its
ATA Vacations and Travel Charter International brands to Mark Travel Corporation
("MTC"). Under that outsourcing agreement, MTC directly sells ground
arrangements to customers who also purchase charter or scheduled service air
transportation from the Company. Therefore, ground package sales (and related
ground package costs) are no longer recorded by the Company for ATA Vacations
and Travel Charter International.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with operations of the Company, such as cancellation and
miscellaneous service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 10.8% to $11.3 million in the first quarter of
2003, as compared to $10.2 million in the same period of 2002.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in the first quarter of 2003 increased
20.9% to $94.3 million, as compared to $78.0 million in the same period of 2002.
18
The increase in salaries, wages and benefits primarily reflects the impact of
the Company's amended collective bargaining agreement, which was ratified in
July 2002, with the Company's cockpit crewmembers, who are represented by Air
Line Pilots Association ("ALPA"). Cockpit crewmember contract salary rate
increases became effective July 1, 2002. Additionally, the amended contract
provides for expanded defined-contribution retirement benefits for cockpit
crewmembers effective January 1, 2003, which resulted in additional salaries,
wages and benefits expense between periods. The Company also incurred increasing
costs in the first quarter of 2003 for employee medical and workers'
compensation benefits. The Company expects future salaries, wages and benefits
costs to be significantly increased by the amended cockpit crewmember contract.
The amended contract is expected to increase cockpit crewmembers' average
salaries by approximately 80% over the four-year contract period.
Fuel and Oil. Fuel and oil expense increased 59.1% to $75.1 million in the first
quarter of 2003, as compared to $47.2 million in the same period of 2002.
Although jet block hours increased 27.8% in the first quarter of 2003, as
compared to the same period of 2002, the Company only consumed 13.7% more
gallons of fuel, due to the Company continuing to replace its aging, less-fuel
efficient Boeing 727-200 and Lockheed L-1011 aircraft with new Boeing 737-800
and Boeing 757-300 aircraft. The increase in gallons consumed resulted in an
increase in fuel and oil expense of approximately $6.0 million.
During the first quarter of 2003, the average cost per gallon of jet fuel
consumed increased by 41.6% to $1.09 in the first quarter of 2003, as compared
to $0.77 in the first quarter of 2002, resulting in an increase in fuel and oil
expense of approximately $22.4 million.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. During the first quarter of 2002, the
Company recorded losses of $0.4 million on these hedge contacts. The Company did
not have any hedge contracts in place in the first quarter of 2003. Although the
Company did not have any hedge contracts in place, the Company did benefit from
fuel reimbursement clauses and guarantees in its bulk scheduled service,
commercial charter and military/government contracts in the first quarter of
2003. The benefit of these price guarantees was accounted for as revenue.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. The Company accounts for aircraft rentals
expense in equal monthly amounts over the life of each operating lease. Aircraft
rentals expense in the first quarter of 2003 increased 40.0% to $55.3 million
from $39.5 million in 2002. This increase was mainly attributable to the
delivery of 16 leased Boeing 737-800 and five leased Boeing 757-300 aircraft
between periods.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 8.7% to $30.1 million in the
first quarter of 2003, as compared to $27.7 million in the same period of 2002.
The increase in handling, landing and navigation fees between periods was
primarily due to a 19.2% increase in system-wide jet departures, which resulted
in an increase in handling, landing and navigation fees of $5.6 million. This
increase was partially offset by a decrease in the cost of handling per
departure due to the negotiation of favorable terms in new contracts, resulting
in $3.9 million less expense in the first quarter of 2003 as compared to the
same period of 2002. The Company also experienced increased de-icing costs in
the first quarter of 2003 due to inclement weather, and higher airport security
costs associated with increased security requirements implemented after the
terrorist attacks on September 11, 2001.
19
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, leasehold improvements and
rotable parts for all fleet types, together with other property and equipment
owned by the Company. Depreciation and amortization expense decreased 18.7% to
$15.2 million in the first quarter of 2003, as compared to $18.7 million in the
first quarter of 2002.
The decrease in depreciation and amortization expense is mainly attributable to
the L-1011-50 and 100 fleet. The Company retired four L-1011-50 aircraft from
revenue service in 2002. In addition, the Company recorded a reduction in the
carrying value of the L-1011-50 and 100 aircraft and related assets in the
fourth quarter of 2002, in accordance with FAS 144. Due to the reduced cost
basis of the remaining assets and the retirements in 2002, the Company recorded
$3.2 million less in depreciation in the first quarter of 2003, as compared to
the same period of 2002.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
increased 7.9% to $15.0 million in the first quarter of 2003, as compared to
$13.9 million in the first quarter of 2002. This increase in the first quarter
of 2003 is mainly due to an increase in crew per diem of nearly $1.1 million as
compared to the same period of 2002. The amended cockpit crewmember contract
substantially increased per diem rates paid to cockpit crewmembers. As
stipulated in the flight attendants' collective bargaining agreement, the
Company must also pay these amended per diem rates to the flight attendant
group.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities, and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200/300 and SAAB 340B power plants. These
agreements provide for the Company to pay monthly fees based on a specified rate
per engine flight hour, in exchange for major engine overhauls and maintenance.
Aircraft maintenance, materials and repairs expense increased 18.4% to $13.5
million in the first quarter of 2003, as compared to $11.4 million in the first
quarter of 2002.
The increase in maintenance, materials and repairs was mainly due to an increase
in the cost of the hourly engine maintenance agreement for the Company's growing
fleet of Boeing 737-800 aircraft and the Company's growing fleet of SAAB 340B
propeller aircraft operated by Chicago Express. In addition, the Company entered
into an hourly engine maintenance agreement for the Boeing 757-200 fleet in the
fourth quarter of 2002, which resulted in an increase in aircraft maintenance,
materials and repairs expense in the first quarter of 2003, as compared to the
first quarter of 2002.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems, credit card discount expenses
incurred when selling to customers using credit cards for payment, and toll-free
telephone services provided to single-seat and vacation package customers who
contact the Company directly to book reservations. Other selling expenses
increased 7.3% to $11.8 million in the first quarter of 2003, as compared to
$11.0 million in the same period of 2002. The Company experienced increases in
all areas of other selling expenses due to the increase in scheduled service
passengers enplaned between periods.
Advertising. Advertising expense increased 10.8% to $10.3 million in the first
quarter of 2003, as compared to $9.3 million in the same period of 2002. The
Company incurs advertising costs primarily to support single-seat scheduled
service sales. The Company continues to increase advertising in an effort to
increase consumer preference for the Company's enhanced product, especially in
its important Chicago-Midway hub, which includes an advertising campaign
identifying the Company as "An Honestly Different Airline."
20
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and the
cost of onboard entertainment programs, together with certain costs incurred for
mishandled baggage and passengers inconvenienced due to flight delays or
cancellations. For the first quarters of 2003 and 2002, catering represented
81.1% and 77.3%, respectively, of total passenger service expense.
The total cost of passenger service increased 4.1% to $10.2 million in the first
quarter of 2003, as compared to $9.8 million in the first quarter of 2002. This
increase is mainly attributable to a 7.2% increase in scheduled service
passengers boarded between periods.
Insurance. Insurance expense represents the Company's cost of hull and liability
insurance and the costs of general insurance policies held by the Company,
including workers' compensation insurance premiums and claims handling fees. The
total cost of insurance decreased 5.2% to $7.3 million in the first quarter of
2003, as compared to $7.7 million in the first quarter of 2002. The decrease is
mainly attributable to the U.S. Government providing increased war-risk coverage
in 2003. This coverage was provided at higher rates by the commercial insurance
markets in 2002.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense decreased 34.1% to $6.0 million in the first
quarter of 2003, as compared to $9.1 million in the first quarter of 2002.
The Company experienced a decrease in commissions of $3.5 million in the first
quarter of 2003, as compared to the first quarter of 2002, attributable to
scheduled service commissions due to the elimination of standard travel agency
commissions for sales made after March 21, 2002. The Company continues to pay
special travel agency commissions targeted to specific markets and periods of
the year. In addition, commissions paid to travel agents by ATALC decreased $1.8
million in the first quarter of 2003, as compared to the first quarter of 2002,
which is consistent with the decrease in related revenue. These decreases were
partially offset by an increase in military/government charter commissions of
$2.4 million, which is consistent with the increase in related revenue.
Facilities and Other Rentals. Facilities and other rentals include the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facilities and other
rentals increased 7.4% to $5.8 million in the first quarter of 2003, as compared
to $5.4 million in the first quarter of 2002. Growth in facilities costs between
periods was primarily attributable to facilities at airport locations required
to support new scheduled service destinations added in both years, and rate
increases at some existing locations.
Ground Package Cost. Ground package cost is incurred by the Company through
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair and ATALC customers. Ground
package cost decreased 65.9% to $4.2 million in the first quarter of 2003, as
compared to $12.3 million in the first quarter of 2002, approximately
proportional to the decrease in ground package revenues. See the "Ground Package
Revenues" section above for an explanation of the decline in both ground package
sales and related costs.
Other Operating Expenses. Other operating expenses decreased 6.7% to $18.1
million in the first quarter of 2003, as compared to $19.4 million in the first
quarter of 2002. This decrease was attributable to various changes in other
expenses comprising this line item, none of which was individually significant.
Interest Income and Expense. Interest expense in the quarter ended March 31,
2003 increased to $12.7 million, as compared to $8.2 million in the same periods
of 2002. The Company recorded $3.5 million in interest expense in the first
quarter of 2003 related to the $168.0 million secured term loan acquired in
November 2002. The Company also capitalized interest of $0.9 million less in the
first quarter of 2003, as compared to the first quarter of 2002, since there
21
were fewer aircraft pre-delivery deposits outstanding for future aircraft
deliveries in the 2003 period.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $0.8 million in interest income in the
first quarter of 2003, as compared to $0.7 million in the same period of 2002.
Income Taxes. The Company did not record any income tax expense or credit in the
first quarter of 2003 applicable to its $11.0 million in pre-tax loss. In
comparison, the Company recorded income tax expense of $0.8 million in the first
quarter of 2002 applicable to its $2.6 million in pre-tax income. The effective
tax rate for the first quarter of 2002 was 28.8%.
As of December 31, 2002, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under GAAP that net deferred
tax assets should be fully reserved if it is more likely than not that they will
not be realized through carrybacks or other strategies, the Company had recorded
a full valuation allowance against its net deferred tax asset. In the first
quarter of 2003, the Company continued to record a full valuation allowance
against its net deferred tax asset under the same presumption. This valuation
allowance, recorded in income tax expense, resulted in no tax benefit being
realized on the Company's first quarter loss in 2003.
Liquidity and Capital Resources
Cash Flows. In the three months ended March 31, 2003, net cash provided by
operating activities was $21.0 million, as compared to $18.2 million for the
same period of 2002. The increase in cash provided by operating activities
between periods primarily resulted from favorable changes in operating assets
and liabilities, partially offset by the net loss in 2003, as compared to the
net profit in 2002.
Net cash used in investing activities was $52.5 million in the first quarter of
2003, as compared to $144.9 million in the same period of 2002. Such amounts
included capital expenditures totaling $10.1 million in the first quarter of
2003, as compared to $145.4 million in the first quarter of 2002. Included in
the 2002 capital expenditures was $114.7 million for the purchase of certain
Boeing 757-300 aircraft financed through bridge debt as of March 31, 2002. These
aircraft were subsequently financed through operating leases in the second
quarter of 2002. In addition, the Company had $21.8 million of net aircraft
pre-delivery deposits returned in the first quarter of 2002 as aircraft were
delivered. There was no change in outstanding aircraft pre-delivery deposits
during the first quarter of 2003. Non-current prepaid aircraft rent increased
more in the first quarter of 2003 as compared to the same period of 2002,
reflecting additional cash rents paid in the first quarter of 2003 on aircraft
deliveries made throughout 2002.
Net cash used in financing activities was $8.0 million in the first quarter of
2003, while net cash provided by financing activities was $79.9 million in the
same period of 2002. In the first quarter of 2003, the Company recorded $7.3
million in restricted cash to collateralize additional letters of credit. In the
first quarter of 2002, the Company borrowed $140.9 million in temporary bridge
debt related to the purchase of certain Boeing 737-800 aircraft and Boeing
757-300 aircraft, of which the Company repaid $37.6 million in that same
quarter. These aircraft were subsequently financed through operating leases in
the second quarter of 2002. In addition, in the first quarter of 2002, the
Company repaid $10.9 million in pre-delivery deposit facilities related to
deposits returned on aircraft deliveries.
The Company presently expects that cash on hand at March 31, 2003, together with
cash generated by future operations, expected reimbursements from the
Supplemental Act, and the return of pre-delivery cash deposits held by the
manufacturers on future aircraft and engine deliveries, will be sufficient to
fund the Company's obligations throughout 2003. However, the Company is
scheduled to make large payments of principal on its outstanding senior
indebtedness in 2004 and 2005. Given the current operating environment, the
22
Company is uncertain that it will be able to make those payments as they come
due. The Company is currently exploring options to address this issue.
The adverse impact of current airline industry conditions on the Company, and
the ongoing sufficiency of its financial resources to absorb that impact, will
depend upon a number of factors, including but not limited to: (1) the Company's
ability to continue to reduce its operating costs and conserve its financial
resources; (2) the pace and extent of seat capacity reductions in the industry,
if any, as these may affect competitive pricing for the Company's services; (3)
the resolution of the conflict in the Middle East; (4) changes in, if any, the
Company's current credit card holdback levels; (5) the number of crew members
who may be called for duty in the United States armed forces, and the resulting
impact on the Company's ability to operate as planned; (6) any further declines
in the values of the aircraft in the Company's fleet, and any aircraft or other
asset impairment charges; (7) the price of jet fuel consumed by the Company; and
(8) the Company's ability to retain its management and other employees in light
of current industry conditions.
Debt and Operating Lease Cash Payment Obligations. The Company is required to
make cash payments in the future on debt obligations and operating leases.
Although the Company is obligated on a number of long-term operating leases
which are not recorded on the balance sheet under GAAP, the Company has no
off-balance sheet debt and, with the exception of insignificant amounts not
requiring disclosure, does not guarantee the debt of any other party. The
following table summarizes the Company's contractual debt and operating lease
obligations as of March 31, 2003, and the effect such obligations are expected
to have on its liquidity and cash flows in future periods.
Cash Payments Currently Scheduled
--------------------------------------------------------------------------------
Total 2 Qtr- 4 Qtr 2004 2006 After
As of 3/31/03 2003 -2005 -2007 2007
------------- ------------- ------------ --------- -----------
(in thousands)
Current and long-term debt (2) $ 516,138 $ 20,040 $ 373,063 $ 60,477 $ 62,558
Lease obligations 3,509,577 168,072 548,597 517,891 2,275,017
Expected future lease obligations (1) 877,913 5,155 90,471 124,107 658,180
----------- --------- ------------ --------- -----------
Total contractual cash obligations $ 4,903,628 $ 193,267 $ 1,012,131 $ 702,475 $ 2,995,755
=========== ========= ============ ========= ===========
(1) Represents estimated payments on 12 new Boeing 757-300 and Boeing 737-800
aircraft the Company is committed to taking delivery of in 2003 and 2004, as
well as four spare engines the Company is committed to taking delivery of in
2003 through 2006. The Company intends to finance these aircraft and engines
with operating leases. However, no such leases are in place as of March 31,
2003, as the Company has not received the aircraft. Payments for expected future
lease obligations were derived using terms of leases for comparable aircraft
currently in place. For further discussion, see "Financial Statements - Notes to
Consolidated Financial Statements - Note 3 - Commitments and Contingencies."
(2) The 2004-2005 amounts reflect anticipated payments of principal on the
Company's two series of outstanding senior notes. A $175 million principal
payment is due on August 1, 2004 and a $125 million principal payment is due on
December 15, 2005.
Aircraft and Fleet Transactions. The Company has purchase agreements with the
Boeing Company to purchase directly from Boeing two new Boeing 757-300s and
seven new Boeing 737-800s, which are currently scheduled for delivery between
May 2003 and December 2004. The Boeing 737-800 aircraft are powered by General
Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by
Rolls-Royce RB211-535 E4C engines. The manufacturer's list price is $73.6
million for each 757-300 and $52.4 million for each 737-800, subject to
escalation. The Company's purchase price for each aircraft is subject to various
discounts. To fulfill its purchase obligations, the Company has arranged for
23
each of these aircraft, including the engines, to be purchased by third parties
that will, in turn, enter into long-term operating leases with the Company.
Aircraft pre-delivery deposits are required for these purchases, and the Company
has funded these deposits using operating cash and short-term deposit finance
facilities. As of March 31, 2003, the Company had $21.2 million in pre-delivery
deposits outstanding for future aircraft deliveries, of which $8.4 million was
provided by a deposit finance facility. Upon delivery of the aircraft,
pre-delivery deposits funded with operating cash will be returned to the
Company, and those funded with the deposit facility will be used to repay that
facility. As of March 31, 2003, the Company also has purchase rights for eight
Boeing 757-300 aircraft and 40 Boeing 737-800 aircraft directly from Boeing.
The Company has agreements in place to lease three additional Boeing 737-800s
under operating leases from a third party lessor, which are currently scheduled
for delivery between June 2003 and the end of 2005.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006.
Although the Company typically finances aircraft with long-term operating
leases, it has a bridge financing facility that provides for maximum borrowings
of $200.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300
aircraft. Borrowings under the facility bear interest, at the option of the
Company, at LIBOR plus a margin, which depends on the percentage of the purchase
price borrowed and whether the borrowing matures 18 or 24 months after the
aircraft delivery date. During the first quarter of 2002, the Company borrowed
$140.9 million under this bridge facility for the purchase of certain Boeing
737-800 and Boeing 757-300 aircraft. As of June 30, 2002, these borrowings were
repaid in full, while the related aircraft were financed under long-term
operating leases. The Company had no borrowings under this facility during the
first quarter of 2003.
In May 2002, the Company entered into an agreement with AMR Leasing Corporation
to lease six SAAB 340B aircraft, with options to lease up to 10 additional
aircraft. The Company took delivery of all six SAAB 340B aircraft under this
agreement in 2002.
In March 2001, the Company entered into a limited liability company agreement
with BCC to form BATA, a 50/50 joint venture. Because the Company does not
control BATA, the Company's investment is being accounted for under the equity
method of accounting. BATA is expected to remarket the Company's fleet of Boeing
727-200 aircraft in either passenger or cargo configurations. In exchange for
supplying the aircraft and certain operating services to BATA, the Company has
and will continue to receive both cash and equity in the income or loss of BATA.
As of March 31, 2003, the Company has transferred 23 of its original fleet of 24
Boeing 727-200 aircraft to BATA.
Significant Financings. In November 2002, the Company obtained a $168.0 million
secured term loan, of which $148.5 million was guaranteed by the Air
Transportation Stabilization Board. The net proceeds of the secured term loan
were approximately $164.8 million, after deducting issuance costs. The Company
used a portion of the net proceeds to repay borrowings on its existing bank
credit facility and to collateralize new letters of credit, previously secured
under the bank facility. The remaining funds were used for general corporate
purposes. Interest is payable monthly at LIBOR plus a margin. Guarantee fees of
5.5% of the outstanding guaranteed principal balance in 2003, with escalation to
9.5% on the outstanding guaranteed principal balance in 2004 through 2008, are
payable quarterly.
The secured term loan is subject to certain restrictive covenants and is
collateralized primarily by certain receivables, certain aircraft, spare
engines, and rotable parts. The aircraft, spare engines and parts consist of
three Lockheed L-1011-500 aircraft, nine Lockheed L-1011-50 and 100 aircraft,
two SAAB 340B aircraft, 24 Rolls Royce RB211 spare engines and Boeing 757-200,
Boeing 757-300 and Boeing 737-800 rotables.
In conjunction with obtaining the secured term loan, the Company issued a
warrant to the Federal Government to purchase up to 1.5 million shares of its
24
common stock, and additional warrants to other loan participants to purchase up
to 0.2 million shares of its common stock, in each case at an exercise price of
$3.53 per share for a term of ten years. The Company recorded $7.4 million as
the total fair value of warrants issued, which was recorded as unamortized
discount on the secured loan at the date of the loan. The unamortized discount
balance as of March 31, 2003 is $6.8 million.
Card Agreement. The Company accepts charges to most major credit and debit cards
("cards") as payment from its customers. Approximately 90% of scheduled service
and vacation package sales are purchased using these cards.
More than half of these card sales are made using MasterCard or Visa cards. The
Company maintains an agreement with a bank for the processing and collection of
charges to these cards. Under this agreement, a sale is normally charged to the
purchaser's card account and is paid to the Company in cash within a few days of
the date of purchase, although the Company may provide the purchased services
days, weeks or months later. In 2002, the Company processed approximately $633.0
million in MasterCard and Visa charges under its merchant processing agreement.
On September 21, 2001, the bank notified the Company that it had determined that
the terrorist attacks of September 11, 2001, the ensuing grounding of commercial
flights by the FAA, and the significant uncertainty about the level of future
air travel entitled the bank to retain cash collected by it on processed card
charges as a deposit, up to 100% of the full dollar amount of purchased services
to be provided at a future date. If the Company fails to perform pre-paid
services which are purchased by a charge to a card, the purchaser may be
entitled to obtain a refund which, if not paid by the Company, is the obligation
of the bank. The deposit secures this potential obligation of the bank to make
such refunds.
The bank exercised its right to withhold distributions beginning shortly after
its notice to the Company. As of March 31, 2003, the bank had withheld $37.4
million in cash. As of December 31, 2002, the bank had withheld $30.0 million in
cash. The deposits as of March 31, 2003 and December 31, 2002 constituted
approximately 60% of the Company's total future obligations to provide services
purchased by charges to card accounts as of those dates. The bank has
subsequently agreed to a 60% deposit, with that percentage being subject to
increase up to either 75% or 100%, in the event that certain restrictive
covenants are not met. A deposit of 100% of this obligation would have resulted
in the additional retention of $24.9 million by the bank at March 31, 2003 and
$20.0 million at December 31, 2002. The bank's right to maintain a 60% deposit
does not terminate unless, in its reasonable judgment and at its sole
discretion, it determines that a deposit is no longer required.
The Company has the right to terminate its agreement with the bank upon
providing appropriate notice, as does the bank. In the event of such
termination, the bank may retain a deposit equal to the amount of purchased
services not yet performed, for up to 24 months from the date of termination.
Although the Company continues to process significant dollar amounts of ticket
sales using credit cards other than MasterCard and Visa, as of March 31, 2003 no
cash deposit requirements had been implemented by the issuers or processors of
those cards.
Surety Bonds. The Company has historically provided surety bonds to airport
authorities and selected other parties, to secure the Company's obligation to
these parties. The Department of Transportation ("DOT") also requires the
Company to provide a surety bond or an escrow to secure potential refund claims
of charter customers who have made prepayments to the Company for future
transportation. One issuer currently provides all surety bonds issued on behalf
of the Company.
Prior to the terrorist attacks of September 11, 2001, the Company had provided a
letter of credit of $1.5 million as security to the issuer for its total
estimated surety bond obligations, which were $20.9 million at August 31, 2001.
Effective October 5, 2001, the issuer required the Company to increase its
letter of credit to 50% of its estimated surety bond liability. Effective
January 16, 2002, the issuer implemented a requirement for the Company's letter
25
of credit to secure 100% of estimated surety bond obligations, which totaled
$19.8 million. The Company's letter of credit was adjusted accordingly, and the
Company is subject to future adjustments of its letter of credit based upon
further revisions to the estimated liability for total surety bonds outstanding.
As of March 31, 2003, the letter of credit requirement decreased to $15.2
million, reflecting an actual decline in outstanding charter deposit obligations
of the Company. The Company has the right to replace the issuer with one or more
alternative issuers of surety bonds, although the Company can provide no
assurance that it will be able to secure more favorable terms from other
issuers.
In addition, the Company must provide secured letters of credit in satisfaction
for various other regulatory requirements. As of March 31, 2003, the Company's
secured letters of credit, including the letter of credit securing the DOT
surety bond obligations discussed above, totaled $37.7 million. The funds
collateralizing these letters of credit is shown as restricted cash on the
balance sheet as of March 31, 2003.
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes forward-looking information which
can be identified by forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "anticipates," or the negative thereof, or other
variations in comparable terminology. Such forward-looking information is based
upon management's current knowledge of factors affecting the Company's business.
The differences between expected outcomes and actual results can be material,
depending upon the circumstances. Where the Company expresses an expectation or
belief as to future results in any forward-looking information, such expectation
or belief is expressed in good faith and is believed to have a reasonable basis.
The Company can provide no assurance that the statement of expectation or belief
will result or will be achieved or accomplished.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to be materially different. Such
factors include, but are not limited to, the following:
o economic conditions;
o labor costs;
o aviation fuel costs;
o competitive pressures on pricing;
o weather conditions;
o governmental legislation and regulation;
o consumer perceptions of the Company's products;
o demand for air transportation overall, considering the impact of
September 11, 2001, and specifically in markets in which the Company
operates;
o higher costs associated with new security directives;
o higher costs for insurance and the continued availability of such
insurance;
o the Company's ability to raise additional financing, and to refinance
existing borrowings upon maturity;
o declines in the value of the Company's aircraft, as these may result
in lower collateral value and additional impairment charges; and
o other risks and uncertainties listed from time to time in reports the
Company periodically files with the SEC.
The Company does not undertake to update the forward-looking statements to
reflect future events or circumstances.
26
PART I - Financial Information
Item III - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided
in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of ATA
Holdings Corp.'s Annual Report on Form 10-K for the year 2002.
27
PART I - Financial Information
Item IV - Controls and Procedures
Within the 90 days prior to the filing of this report, management, under the
supervision of the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14
and 15d - 14) are effective, in all material respects, in ensuring that the
information required to be disclosed in the reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls, subsequent to the
date of the evaluation.
28
PART II - Other Information
Item I - Legal Proceedings
None
Item II - Changes in Securities
None
Item III - Defaults Upon Senior Securities
None
Item IV - Submission of Matters to a Vote of Security Holders
None
Item V - Other information
None
Item VI - Exhibits and Reports on Form 8-K
(a) Exhibits are filed as a separate section of this report as set forth in the
Index to Exhibits attached to this report.
(b) Report filed on February 4, 2003, furnishing items under Item 9. Regulation
FD Disclosure.
Report filed on February 12, 2003, furnishing items under Item 7. Financial
Statements and Exhibits and Item 9. Regulation FD Disclosure.
Report filed on March 5, 2003, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on March 19, 2003, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on March 21, 2003, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on April 25, 2003, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on April 29, 2003, furnishing items under Item 9. Regulation
FD Disclosure.
Report filed on April 29, 2003, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
29
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATA Holdings Corp.
(Registrant)
Date May 14, 2003 by /s/ David M. Wing
----------------- ----------------------
David M. Wing
Executive Vice President and
Chief Financial Officer
On behalf of the Registrant
Index to Exhibits
Exhibit No.
99.1 CEO Certification Pursuant to Section #302 of the Sarbanes-Oxley Act of
2002
99.2 CFO Certification Pursuant to Section #302 of the Sarbanes-Oxley Act of
2002
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002