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 June 30, 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 - 11,765,553 shares outstanding as of July 31,
2003.
PART I - Financial Information
Item I - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 185,982 $ 200,160
Aircraft pre-delivery deposits 8,394 16,768
Receivables, net of allowance for doubtful accounts
(2003 - $1,258; 2002 - $2,375) 94,613 86,377
Inventories, net 49,404 51,233
Prepaid expenses and other current assets 36,495 39,214
------------- -------------
Total current assets 374,888 393,752
Property and equipment:
Flight equipment 323,599 312,652
Facilities and ground equipment 137,571 134,355
------------- -------------
461,170 447,007
Accumulated depreciation (194,030) (181,380)
------------- -------------
267,140 265,627
Restricted cash 38,570 30,360
Goodwill 14,887 14,887
Assets held for sale 4,857 5,090
Prepaid aircraft rent 132,710 68,828
Investment in BATA, LLC 24,117 22,968
Deposits and other assets 40,099 46,624
------------- -------------
Total assets $ 897,268 $ 848,136
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 24,874 $ 14,191
Short-term debt 4,197 8,384
Accounts payable 22,413 23,688
Air traffic liabilities 109,528 94,693
Accrued expenses 162,109 160,924
------------- -------------
Total current liabilities 323,121 301,880
Long-term debt, less current maturities 478,777 486,853
Deferred gains from sale and leaseback of aircraft 53,491 54,889
Other deferred items 47,080 42,038
------------- -------------
Total liabilities 902,469 885,660
Commitments and Contingencies
Redeemable preferred stock; authorized and issued 800 shares 85,345 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 and 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 (149,432) (178,895)
------------- -------------
Total shareholders' deficit (90,546) (120,009)
------------- -------------
Total liabilities and shareholders' deficit $ 897,268 $ 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Scheduled service $ 278,009 $ 224,515 $ 522,777 $ 432,798
Charter 94,550 73,667 206,857 170,513
Ground package 3,265 9,731 8,476 24,977
Other 12,298 10,628 23,641 20,823
---------- ---------- ---------- ----------
Total operating revenues 388,122 318,541 761,751 649,111
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 98,875 91,701 193,153 169,688
Fuel and oil 68,081 51,151 143,173 98,394
Aircraft rentals 56,065 45,033 111,334 84,487
Handling, landing and navigation fees 31,399 28,450 61,456 56,130
Crew and other employee travel 16,856 13,578 31,843 27,448
Depreciation and amortization 13,796 22,718 28,989 41,408
Other selling expenses 13,085 11,376 24,842 22,359
Passenger service 10,756 9,531 21,005 19,298
Aircraft maintenance, materials and repairs 10,751 14,660 24,230 26,080
Advertising 10,030 11,296 20,305 20,628
Insurance 7,526 7,936 14,861 15,671
Facilities and other rentals 5,797 5,753 11,621 11,198
Commissions 4,214 5,002 10,240 14,125
Ground package cost 2,786 7,726 6,990 20,075
Aircraft impairments and retirements - 17,241 - 17,241
U.S. Government funds (37,156) 15,210 (37,156) 15,210
Other 19,316 19,472 37,400 38,906
---------- ---------- ---------- ----------
Total operating expenses 332,177 377,834 704,286 698,346
---------- ---------- ---------- ----------
Operating income (loss) 55,945 (59,293) 57,465 (49,235)
Other income (expense):
Interest income 705 823 1,511 1,512
Interest expense (12,959) (10,012) (25,641) (18,250)
Other (376) (501) (1,012) (368)
---------- ---------- ---------- ----------
Other expense (12,630) (9,690) (25,142) (17,106)
---------- ---------- ---------- ----------
Income (loss) before income taxes 43,315 (68,983) 32,323 (66,341)
Income taxes (credits) - (13,585) - (12,823)
---------- ---------- ---------- ----------
Net income (loss) 43,315 (55,398) 32,323 (53,518)
Preferred stock dividends (2,485) (2,485) (2,860) (2,860)
---------- ---------- ---------- ----------
Income (loss) available to common shareholders $ 40,830 $ (57,883) $ 29,463 $ (56,378)
========== ========== ========== ==========
Basic earnings per common share:
Average shares outstanding 11,764,753 11,752,957 11,764,753 11,658,184
Net income (loss) per share $ 3.47 $ (4.92) $ 2.50 $ (4.84)
========== ========== ========== ==========
Diluted earnings per common share:
Average shares outstanding 15,351,387 11,752,957 15,351,387 11,658,184
Net income (loss) per share $ 2.68 $ (4.92) $ 1.97 $ (4.84)
========== ========== ========== ==========
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)
========= ======== ========= ======== ========== ==========
Net income - - - - 43,315 43,315
Accrued preferred stock dividends 2,485 - - - (2,485) (2,485)
-------- -------- --------- -------- ---------- ----------
Balance, June 30, 2003 $ 85,345 $ 65,290 $ (24,778) $ 18,374 $ (149,432) $ (90,546)
========= ========= ========= ======== ========== ==========
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
2003 2002
--------- ---------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) $ 32,323 $ (53,518)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 28,989 41,408
Aircraft impairments and retirements - 17,241
Deferred income taxes - (3,633)
Other non-cash items 4,969 15,073
Changes in operating assets and liabilities:
U.S. Government grant receivable 6,158 15,210
Other receivables (14,394) (10,342)
Inventories (151) (7,653)
Prepaid expenses 2,719 (12,192)
Accounts payable (1,275) 9,209
Air traffic liabilities 14,835 7,074
Accrued expenses 2,551 1,363
--------- ---------
Net cash provided by operating activities 76,724 19,240
--------- ---------
Investing activities:
Aircraft pre-delivery deposits 8,374 43,898
Capital expenditures (29,523) (43,283)
Noncurrent prepaid aircraft rent (63,882) (21,926)
Investment in BATA, LLC - 18,632
Reductions to other assets 4,909 96
Proceeds from sales of property and equipment 171 286
--------- ---------
Net cash used in investing activities (79,951) (2,297)
--------- ---------
Financing activities:
Preferred stock dividends - (2,860)
Proceeds from sale/leaseback transactions - 2,794
Payments on short-term debt (4,187) (20,680)
Proceeds from long-term debt 5,729 194,491
Payments on long-term debt (4,283) (222,031)
Increase in restricted cash (8,210) -
Proceeds from stock options exercises - 449
Purchase of treasury stock - (10)
--------- ---------
Net cash used in financing activities (10,951) (47,847)
--------- ---------
Decrease in cash and cash equivalents (14,178) (30,904)
Cash and cash equivalents, beginning of period 200,160 184,439
--------- ---------
Cash and cash equivalents, end of period $ 185,982 $ 153,535
========= =========
Supplemental disclosures:
Cash payments for:
Interest $ 22,999 $ 22,148
Income taxes (refunds) $ (16,711) $ 3,132
Financing and investing activities not affecting cash:
Accrued capitalized interest $ 752 $ (6,239)
Accrued preferred stock dividends $ 2,860 $ -
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 June 30, 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 six months ended June 30, 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 Financial
Accounting Standards Board ("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.
6
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 using the fair value
method of FAS 123 follows:
Three Months Ended June 30,
2003 2002
------------------------------
(In thousands, except per share
data)
Net income (loss) available to common
shareholders, as reported $40,830 $(57,883)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related
tax effects 0 (31)
------ -------
Net income (loss) available to common
shareholders, pro forma 40,830 (57,914)
====== =======
Basic income (loss) per share, as
reported 3.47 (4.92)
====== =======
Diluted income (loss) per share, as
reported 2.68 (4.92)
====== =======
Basic income (loss) per share, pro forma 3.47 (4.93)
====== =======
Diluted income (loss) per share, pro forma 2.68 (4.93)
====== =======
Six Months Ended June 30,
2003 2002
------------------------------
(In thousands, except per share
data)
Net income (loss) available to common
shareholders, as reported $29,463 $(56,378)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related
tax effects (10) (80)
------ -------
Net income (loss) available to common
shareholders, pro forma 29,453 (56,458)
====== =======
Basic income (loss) per share, as
reported 2.50 (4.84)
====== =======
Diluted income (loss) per share, as
reported 1.97 (4.84)
====== =======
Basic income (loss) per share, pro forma 2.50 (4.84)
====== =======
Diluted income (loss) per share, pro forma 1.97 (4.84)
====== =======
7
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. While the Company experienced a profit in the second quarter of 2003,
much of that profit resulted from the Company's receipt of $37.2 million in
conjunction with the Emergency Wartime Supplemental Appropriations Act
("Supplemental Act"). The Supplemental Act made available $2.3 billion in
funds to U.S. air carriers for expenses incurred and revenue foregone
related to enhanced aviation security subsequent to September 11, 2001.
During 2002, two major air carriers, US Airways Group, Inc. 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 aircraft
are all leased under operating leases and have higher fixed ownership costs
than the older fleets that they replaced. Certain of these aircraft
operating leases require significant cash payments in the first few years
of the lease. Consequently, the Company made large operating 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.
In addition to the funds received in the second quarter of 2003, the
Company has benefited from certain other 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. 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 consequences 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.
However, the Company is scheduled to make large principal payments on its
8
outstanding senior indebtedness and on its aircraft operating leases in
2004 and 2005. In August 2004, $175 million of the Company's senior notes
are due in full, with another $125 million of senior notes due in December
2005. Although the $175 million notes are properly classified as long-term
debt at June 30, 2003, they will become current in August 2003. The Company
also has substantial fixed payment obligations under aircraft operating
leases in 2003, 2004 and 2005, including cash payments of approximately
$170.9 million in the first quarter of 2004. The Company is currently
unable to obtain any additional financing and does not expect to be able to
do so in the near future. The Company does not anticipate that cash on hand
as of June 30, 2003, together with cash generated by future operating
activities and the return of pre-delivery cash deposits held by the
manufacturers on future aircraft and engine deliveries, will be sufficient
to meet its scheduled aircraft operating lease obligations beginning in
2004 and repay its debt when it matures. On April 10, 2003, Moody's
Investors Service downgraded its ratings of the unsecured debt from "Caa1"
to "Caa3" and indicated that it has a negative outlook for future ratings.
On July 30, 2003, S&P downgraded the Company's corporate credit rating from
"B-" to "CCC" and its senior unsecured debt rating from "CCC" to "CC." The
Company's ratings remain on Credit Watch. The downgrade was based on an
announcement that the Company does not expect to have enough cash to meet
its scheduled aircraft operating lease obligations beginning in 2004 and
repay its debt when it matures and cannot currently obtain additional
financing.
The Company's failure to make scheduled payments of interest or principal
under the outstanding senior notes or to make its scheduled payments under
its aircraft operating leases would constitute an event of default under
many of the agreements governing its indebtedness (including its government
guaranteed loan) due to cross-default provisions. Also, the Company's
government guaranteed loan contains a covenant requiring the Company to
maintain a cash balance of $40 million. Failure to comply with this
covenant would constitute an event of default. In addition, if the Company
fails to pay the principal amounts due under its outstanding senior notes,
the trustee or the holders of at least 25 percent of the principal amount
of those notes would have the option to take legal action against the
Company to accelerate its obligations under the senior notes and collect
the amounts due. If the Company fails to make scheduled payments under the
aircraft operating leases, the lessors may repossess the aircraft subject
to the leases, effectively shutting down its operations. Finally, in such
circumstances the Company's credit card processors may elect to hold back
up to 100 percent of its pre-paid sales, which would aggravate its current
liquidity difficulties.
In an effort to address its current liquidity difficulties, the Company has
entered into discussions with its major lessors to amend the aircraft
operating leases with those lessors to reduce the Company's scheduled cash
payments under those leases in the immediate term and result in a more
constant stream of rental payments due under those leases over the entire
term. In addition, the Company has engaged two investment banks to evaluate
the Company's options with respect to a refinancing or restructuring of its
outstanding senior notes. If the Company is unable to reach a satisfactory
agreement with its aircraft lessors and its creditors, it may be forced to
restructure its debts in bankruptcy.
9
3. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended June 30 ,
2003 2002
------------ -------------
Numerator:
Net income (loss) $ 43,315,000 $ (55,398,000)
Preferred stock dividends (2,485,000) (2,485,000)
------------ -------------
Income (loss) available to common
shareholders - numerator for basic
earnings per share $ 40,830,000 $ (57,883,000)
------------ -------------
Effect of dilutive securities:
Convertible redeemable preferred stock 375,000 -
------------ -------------
Numerator for diluted earnings per share $ 41,205,000 $ (57,883,000)
============ =============
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,764,753 11,752,957
Effect of potential dilutive securities:
Employee stock options - -
Convertible redeemable preferred stock 1,914,486 -
Warrants issued under secured term loan 1,672,148 -
------------ -------------
Denominator for diluted earnings per share
- adjusted weighted average shares 15,351,387 11,752,957
============ =============
Basic income (loss) per share $ 3.47 $ (4.92)
============ =============
Diluted income (loss) per share $ 2.68 $ (4.92)
============ =============
10
Six Months Ended June 30 ,
2003 2002
------------ -------------
Numerator:
Net income (loss) $ 32,323,000 $ (53,518,000)
Preferred stock dividends (2,860,000) (2,860,000)
------------ -------------
Income (loss) available to common
shareholders - numerator for basic
earnings per share $ 29,463,000 $ (56,378,000)
------------ -------------
Effect of dilutive securities:
Convertible redeemable preferred stock 750,000 -
------------ -------------
Numerator for diluted earnings per share $ 30,213,000 $ (56,378,000)
============ =============
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,764,753 11,658,184
Effect of potential dilutive securities:
Employee stock options - -
Convertible redeemable preferred stock 1,914,486 -
Warrants issued under secured term loan 1,672,148 -
------------ -------------
Denominator for diluted earnings per share
- adjusted weighted average shares 15,351,387 11,658,184
============ =============
Basic income (loss) per share $ 2.50 $ (4.84)
============ =============
Diluted income (loss) per share $ 1.97 $ (4.84)
============ =============
In accordance with FASB Statement of Financial Accounting Standards No.
128, Earnings per Share, the impact of 1,914,486 shares of convertible
redeemable preferred stock in the three and six months ended June 30, 2002
has been excluded from the computation of diluted earnings per share
because their effect would be antidilutive. In addition the impact of
385,780 and 436,013 employee stock options, respectively, has been excluded
from the computation of diluted earnings per share for the same periods
because their effect would be antidilutive.
4. Commitments and Contingencies
The Company has purchase agreements with the Boeing Company to purchase
directly from Boeing one new Boeing 757-300 and seven new Boeing 737-800s,
which are currently scheduled for delivery between July 2003 and August
2005. 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 June 30, 2003, the Company
had $12.8 million in pre-delivery deposits outstanding for future aircraft
deliveries, of which $4.2 million was provided by a deposit finance
facility. Upon delivery of the aircraft, pre-delivery deposits funded with
11
operating cash will be returned to the Company, and those funded with the
deposit facility will be used to repay that facility. As of June 30, 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 two additional Boeing 737-800s
under operating leases from a third party lessor, which are currently
scheduled for delivery in November 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 2005 and 2008.
The Company intends to finance all future aircraft and engine deliveries
under purchase agreements 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 10 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 $ 12,614
2004 5,884
2005 14,024
2006 49,971
2007 52,214
Thereafter 596,090
--------------
$ 730,797
==============
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 have 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 June 30, 2003, as management does not believe it is
probable that it will be paid.
12
In the Company's aircraft financing agreements, the Company typically
indemnifies the financing parties, trustees acting on their behalf and
other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the
aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnified parties, except for
their gross negligence or willful misconduct. The Company expects that it
would be covered by insurance (subject to deductibles) for most tort
liabilities and related indemnities under these aircraft leases. 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 six months of 2003, the Company continued
to record a full valuation allowance against its net deferred tax asset
under the same presumption. The partial reversal of the valuation
allowance, recorded in income tax expense, resulted in no tax expense being
realized on the Company's pre-tax income in the first six months of 2003.
6. Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. The provisions of FIN 46 must be applied
immediately to variable interest entities created after January 31, 2003.
The provisions must be applied to variable interest entities that existed
prior to February 1, 2003 by the first interim period beginning after June
15, 2003. The related disclosure requirements are effective immediately.
Although the Company does not expect this interpretation to have a material
impact on the Company, it is continuing to evaluate its interest in other
entities in accordance with this complex interpretation.
On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("FAS 150"). FAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. FAS 150 must be applied
immediately to instruments entered into or modified after May 31, 2003 and
applied to previously existing instruments as of the beginning of the first
interim financial reporting period beginning after June 15, 2003.
As a result of FAS 150, the Company will classify its 500 shares of Series
A redeemable preferred stock, which are valued at $54.2 million as of June
30, 2003, as a liability on the Company's balance sheet beginning July 1,
2003. The Company's 300 shares of Series B convertible redeemable preferred
stock, which are valued at $31.1 million as of June 30, 2003, will remain
classified between liabilities and equity on the Company's balance sheet.
13
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter and Six Months Ended June 30, 2003, Versus Quarter and Six Months Ended
June 30, 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, Charlotte and Pittsburgh. 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 quarter and six months ended June 30, 2003, the Company recorded
operating income of $55.9 million and $57.5 million, respectively, as compared
to an operating loss of $59.3 million and $49.2 million in the same periods of
2002. In the quarter and six months ended June 30, 2003, the Company had a net
income of $43.3 million and $32.3 million, respectively, as compared to a net
loss of $55.4 million and $53.5 million in the same periods of 2002. The net
income recorded in the second quarter and first six months of 2003 includes
$37.2 million received under the Supplemental Act, which was recorded as a
reduction in operating expenses.
Consolidated revenue per available seat mile ("RASM") decreased to 7.23 cents
and 7.15 cents, respectively, in the quarter and six months ended June 30, 2003,
as compared to 7.50 cents and 7.59 cents, respectively, in the comparable
periods of 2002. These decreases were mainly due to a weak scheduled service
pricing environment in the first six months of 2003, which was impacted by the
war in the Middle East and a continuing weakened economy. In addition, the
Company's scheduled service unit revenues were adversely affected by the
Company's aggressive capacity growth between the six month periods ended June
30, 2003 and 2002 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 supported Operation Iraqi Freedom. In the first six
months of 2003, the Company's military charter revenue increased 97.8%, as
compared to the first six months of 2002. The CRAF program ended on June 18,
2003, and the Company expects its military/government charter revenues to return
to 2002 levels for the remainder of 2003.
The Company's unit costs remained among the lowest of major airlines in the
first six months of 2003. Consolidated cost per available seat mile ("CASM")
decreased to 6.19 cents and 6.61 cents, respectively, in the quarter and six
months ended June 30, 2003, as compared to 8.89 cents and 8.16 cents,
respectively, in the comparable periods of 2002. These 2003 CASM amounts reflect
the impact of the receipt of $37.2 million, or 0.69 cents and 0.35 cents in the
quarter and six months ended June 30, 2003, in U.S. Government funds from the
Supplemental Act in the second quarter of 2003. The 2002 CASM amounts reflect
the impact of $15.2 million, or 0.36 cents and 0.18 cents in the quarter and six
months ended June 30, 2002, charged to U.S. Government funds as a reserve in
connection with the potential reversal of anticipated U.S. Government
compensation, and $17.2 million, or 0.41 cents and 0.20 cents in the quarter and
six months ended June 30, 2002, of aircraft impairments and retirements charges.
The CASM declines were 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. These CASM declines
were achieved despite a 9.0% and a 24.1% increase in the average cost per gallon
of jet fuel consumed in the second quarter and first six months of 2003,
respectively, as compared to the same periods of 2002. These increases cost the
Company an incremental $5.5 million and $22.6 million in the second quarter and
first six months of 2003, respectively, net of a $1.3 million and $6.6 million
14
increase in fuel escalation revenues, respectively.
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
consequences 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.
Results of Operations
For the quarter ended June 30, 2003, the Company had operating income of $55.9
million, as compared to an operating loss of $59.3 million in the same period of
2002. The Company had a net income of $43.3 million in the second quarter of
2003, as compared to a net loss of $55.4 million in the same period of 2002.
Operating revenues increased 21.9% to $388.1 million in the second quarter of
2003, as compared to $318.5 million in the same period of 2002. Consolidated
RASM decreased 3.60% to 7.23 cents in the second quarter of 2003, as compared to
7.50 cents in the second quarter of 2002. Scheduled service revenues increased
$53.5 million between periods, or 23.8%, while charter revenues increased $20.9
million between periods, or 28.4%. Military/government charter operations
increased in the second 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 second quarter of 2003.
Operating expenses decreased 12.1% to $332.2 million in the second quarter of
2003, as compared to $377.8 million in the same period of 2002. Consolidated
CASM decreased 30.4% to 6.19 cents in the second quarter of 2003, as compared to
8.89 cents in the second quarter of 2002. Operating expenses for the second
quarter of 2003 reflect the receipt of $37.2 million in U.S. Government funds
from the Supplemental Act, which was recorded as a reduction to operating
expenses.
For the six months ended June 30, 2003, the Company had operating income of
$57.5 million, as compared to an operating loss of $49.2 million in the same
period of 2002. The Company had a net income of $32.3 million in the first six
months of 2003, as compared to a net loss of $53.5 million in the same period of
2002.
Operating revenues increased 17.4% to $761.8 million in the first six months of
2003, as compared to $649.1 million in the same period of 2002. Consolidated
RASM decreased 5.8% to 7.15 cents in the first six months of 2003, as compared
to 7.59 cents in the first six months of 2002. Scheduled service revenues
increased $90.0 million between years, or 20.8%, while charter revenues
increased $36.3 million between years, or 21.3%. Military/government charter
operations increased in the first six months 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 six months of 2003.
Operating expenses increased 0.9% to $704.3 million in the first six months of
2003, as compared to $698.3 million in the same period of 2002. Consolidated
CASM decreased 19.0% to 6.61 cents in the first six months of 2003, as compared
to 8.16 cents in the same period of 2002. Operating expenses for the first six
months of 2003 reflect the receipt of $37.2 million in U.S. Government funds
from the Supplemental Act, which was recorded as a reduction to operating
expenses.
15
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 Cents per ASM
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
--------------------------- -------------------------
Consolidated operating revenues: 7.23 7.50 7.15 7.59
Consolidated operating expenses:
Salaries, wages and benefits 1.84 2.16 1.81 1.98
Fuel and oil 1.27 1.20 1.34 1.15
Aircraft rentals 1.04 1.06 1.04 0.99
Handling, landing and navigation fees 0.58 0.67 0.58 0.66
Crew and other employee travel 0.31 0.32 0.30 0.32
Depreciation and amortization 0.26 0.53 0.27 0.48
Other selling expenses 0.24 0.27 0.23 0.26
Passenger service 0.20 0.22 0.20 0.23
Aircraft maintenance, materials and repairs 0.20 0.34 0.23 0.30
Advertising 0.19 0.27 0.19 0.24
Insurance 0.14 0.19 0.14 0.18
Facilities and other rentals 0.11 0.14 0.11 0.13
Commissions 0.08 0.12 0.10 0.17
Ground package cost 0.05 0.18 0.07 0.23
Aircraft impairments and retirements - 0.41 - 0.20
U.S. Government funds (0.69) 0.36 (0.35) 0.18
Other 0.37 0.45 0.35 0.46
--------- --------- ---------- ---------
Total consolidated operating expenses 6.19 8.89 6.61 8.16
--------- --------- ---------- ---------
Consolidated operating income 1.04 (1.39) 0.54 (0.57)
========= ========= ========== =========
ASMs (in thousands) 5,370,153 4,249,829 10,654,863 8,556,259
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.
16
Three Months Ended June 30,
2003 2002 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------------
Departures Jet 19,786 16,055 3,731 23.24
Departures SAAB 13,084 8,996 4,088 45.44
----------------------------------------------------------------
Total Departures 32,870 25,051 7,819 31.21
----------------------------------------------------------------
Block Hours Jet 61,716 47,677 14,039 29.45
Block Hours SAAB 12,797 8,415 4,382 52.07
----------------------------------------------------------------
Total Block Hours 74,513 56,092 18,421 32.84
----------------------------------------------------------------
RPMs Jet (000s) 3,732,628 3,091,681 640,947 20.73
RPMs SAAB (000s) 51,922 33,795 18,127 53.64
----------------------------------------------------------------
Total RPMs (000s) (a) 3,784,550 3,125,476 659,074 21.09
----------------------------------------------------------------
ASMs Jet (000s) 5,292,058 4,201,657 1,090,401 25.95
ASMs SAAB (000s) 78,095 48,172 29,923 62.12
----------------------------------------------------------------
Total ASMs (000s) (b) 5,370,153 4,249,829 1,120,324 26.36
----------------------------------------------------------------
Load Factor Jet (%) 70.53 73.58 (3.05) (4.15)
Load Factor SAAB (%) 66.49 70.15 (3.66) (5.22)
----------------------------------------------------------------
Total Load Factor (%) (c) 70.47 73.54 (3.07) (4.17)
----------------------------------------------------------------
Passengers Enplaned Jet 2,658,408 2,322,864 335,544 14.45
Passengers Enplaned SAAB 295,799 211,512 84,287 39.85
----------------------------------------------------------------
Total Passengers Enplaned (d) 2,954,207 2,534,376 419,831 16.57
----------------------------------------------------------------
Revenue $ (000s) 388,122 318,541 69,581 21.84
RASM in cents (e) 7.23 7.50 (0.27) (3.60)
CASM in cents (f) 6.19 8.89 (2.70) (30.37)
Yield in cents (g) 10.26 10.19 0.07 0.69
See footnotes (a) through (g) on pages 18-19.
17
Six Months Ended June 30,
2003 2002 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------
Departures Jet 38,980 32,158 6,822 21.21
Departures SAAB 25,797 17,313 8,484 49.00
----------------------------------------------------------------
Total Departures 64,777 49,471 15,306 30.94
----------------------------------------------------------------
Block Hours Jet 122,532 95,252 27,280 28.64
Block Hours SAAB 25,220 16,200 9,020 55.68
----------------------------------------------------------------
Total Block Hours 147,752 111,452 36,300 32.57
----------------------------------------------------------------
RPMs Jet (000s) 7,057,275 6,094,743 962,532 15.79
RPMs SAAB (000s) 97,973 62,407 35,566 56.99
----------------------------------------------------------------
Total RPMs (000s) (a) 7,155,248 6,157,150 998,098 16.21
----------------------------------------------------------------
ASMs Jet (000s) 10,500,361 8,463,484 2,036,877 24.07
ASMs SAAB (000s) 154,502 92,775 61,727 66.53
-----------------------------------------------------------------
Total ASMs (000s) (b) 10,654,863 8,556,259 2,098,604 24.53
-----------------------------------------------------------------
Load Factor Jet (%) 67.21 72.01 (4.80) (6.67)
Load Factor SAAB (%) 63.41 67.27 (3.86) (5.74)
----------------------------------------------------------------
Total Load Factor (%) (c) 67.15 71.96 (4.81) (6.68)
----------------------------------------------------------------
Passengers Enplaned Jet 5,036,086 4,563,890 472,196 10.35
Passengers Enplaned SAAB 557,933 392,501 165,432 42.15
----------------------------------------------------------------
Total Passengers Enplaned (d) 5,594,019 4,956,391 637,628 12.86
----------------------------------------------------------------
Revenue $ (000s) 761,751 649,111 112,640 17.35
RASM in cents (e) 7.15 7.59 (0.44) (5.80)
CASM in cents (f) 6.61 8.16 (1.55) (19.00)
Yield in cents (g) 10.65 10.54 0.11 1.04
See footnotes (d) through (g) on page 19.
(a) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(b) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(c) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because the right to
use an entire aircraft is sold by the Company instead of individual seats. Since
both costs and revenues are largely fixed for these types of charter flights,
changes in load factor have less impact on business unit profitability.
Consolidated load factors and scheduled service load factors for the Company are
18
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.
Operating Revenues
Total operating revenues in the second quarter of 2003 increased 21.9% to $388.1
million, as compared to $318.5 million in the second quarter of 2002; and
operating revenues in the first six months of 2003 increased 17.4% to $761.8
million, as compared to $649.1 million in the same period of 2002.
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.
19
Three Months Ended June 30,
2003 2002 Inc (Dec) % Inc (Dec)
----------------------------------------------------------
Scheduled Service
Departures 30,344 22,554 7,790 34.54
Block Hours 63,530 46,863 16,667 35.57
RPMs (000's) (a) 3,191,216 2,521,530 669,686 26.56
ASMs (000's) (b) 4,172,529 3,294,756 877,773 26.64
Load Factor (c) 76.48 76.53 (0.05) (0.07)
Passengers Enplaned (d) 2,753,353 2,241,872 511,481 22.81
Revenue 278,009 224,515 53,494 23.83
RASM in cents (e) 6.66 6.81 (0.15) (2.20)
Yield in cents (g) 8.71 8.90 (0.19) (2.13)
Revenue per segment $ (h) 100.97 100.15 0.82 0.82
Military Charter
Departures 1,602 902 700 77.61
Block Hours 7,707 3,842 3,865 100.60
ASMs (000's) (b) 947,338 510,425 436,913 85.60
Revenue 78,020 43,542 34,478 79.18
RASM in cents (e) 8.24 8.53 (0.29) (3.40)
RASM excluding fuel escalation (j) 8.21 8.53 (0.32) (3.75)
Commercial Charter
Departures 915 1,590 (675) (42.45)
Block Hours 3,255 5,366 (2,111) (39.34)
ASMs (000's) (b) 248,534 441,036 (192,502) (43.65)
Revenue 16,530 30,125 (13,595) (45.13)
RASM in cents (e) 6.65 6.83 (0.18) (2.64)
RASM excluding fuel escalation (i) 6.32 6.70 (0.38) (5.67)
Percentage of Consolidated Revenues:
Scheduled Service 71.6% 70.5% 1.1% 1.56
Commercial Charter 4.3% 9.5% (5.2%) (54.74)
Military Charter 20.1% 13.7% 6.4% 46.72
See footnotes (a) through (j) on pages 18-19 and 21.
20
Six Months Ended June 30,
2003 2002 Inc (Dec) % Inc (Dec)
----------------------------------------------------------
Scheduled Service
Departures 59,250 43,640 15,610 35.77
Block Hours 123,688 89,795 33,893 37.74
RPMs (000's) (a) 5,875,697 4,704,885 1,170,812 24.89
ASMs (000's) (b) 8,018,861 6,315,276 1,703,585 26.98
Load Factor (c) 73.27 74.50 (1.23) (1.65)
Passengers Enplaned (d) 5,137,816 4,214,550 923,266 21.91
Revenue 522,777 432,798 89,979 20.79
RASM in cents (e) 6.52 6.85 (0.33) (4.82)
Yield in cents (g) 8.90 9.20 (0.30) (3.26)
Revenue per segment $ (h) 101.75 102.69 (0.94) (0.92)
Military Charter
Departures 3,320 1,724 1,596 92.58
Block Hours 16,123 7,557 8,566 113.35
ASMs (000's) (b) 2,030,427 1,004,091 1,026,336 102.22
Revenue 164,215 83,019 81,196 97.80
RASM in cents (e) 8.09 8.27 (0.18) (2.18)
RASM excluding fuel escalation (j) 7.96 8.34 (0.38) (4.56)
Commercial Charter
Departures 2,198 4,100 (1,902) (46.39)
Block Hours 7,920 14,061 (6,141) (43.67)
ASMs (000's) (b) 603,823 1,230,837 (627,014) (50.94)
Revenue 42,642 87,494 (44,852) (51.26)
RASM in cents (e) 7.06 7.11 (0.05) (0.70)
RASM excluding fuel escalation (i) 6.66 7.06 (0.40) (5.67)
Percentage of Consolidated Revenues:
Scheduled Service 68.6% 66.7% 1.9% 2.85
Commercial Charter 5.6% 13.5% (7.9%) (58.52)
Military Charter 21.6% 12.8% 8.8% 68.75
See footnotes (a) through (g) on pages 18-19.
(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. RASM excluding fuel escalation depicts RASM without the impact of fuel
volatility.
(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
21
adjustments. RASM excluding fuel escalation depicts RASM without the impact of
fuel volatility.
Scheduled Service Revenues. Scheduled service revenues in the second quarter of
2003 increased 23.8% to $278.0 million from $224.5 million in the second quarter
of 2002, and scheduled service revenues in the six months ended June 30, 2003
increased 20.8% to $522.8 million from $432.8 million in the same period 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 load
factor and yield in the second quarter and first six months of 2003, as the war
in the Middle East continued 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 34.5% in the second quarter of 2003, compared
to the ASM growth of 26.6%. This reflects the growth of the Chicago Express SAAB
340B fleet from 15 aircraft as of June 30, 2002 to 17 aircraft as of June 30,
2003. The additional SAAB aircraft generated 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 65.7% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in the second
quarter of 2003, as compared to 71.8% in the second quarter of 2002. The
Hawaiian market generated approximately 13.4% of total scheduled service
capacity in the second quarter of 2003, as compared to 14.0% in the second
quarter of 2002. Another 13.5% of total scheduled service capacity was generated
in the Indianapolis market in the second quarter of 2003, as compared to 9.1% in
the second 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 ten jet gates and
one commuter gate as of June 30, 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 154 peak
daily jet and commuter departures from Chicago-Midway and served 39 destinations
on a nonstop basis in the second quarter of 2003, as compared to 125 peak daily
jet and commuter departures and 34 nonstop destinations in the second quarter of
2002.
In the Hawaiian market, the Company provided nonstop service in both years from
Los Angeles, Phoenix and San Francisco to Honolulu, Maui and Lihue.
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, the addition of nonstop service to New York-LaGuardia
and Phoenix beginning in the third quarter of 2002, and the addition of nonstop
service to San Francisco in the second quarter of 2003.
Military/Government Charter Revenues. Military/government charter revenue
increased 79.3% to $78.0 million in the second quarter of 2003 from $43.5
million in the second quarter of 2002, and in the six months ended June 30,
2003, military/government charter revenue increased 97.8% to $164.2 million from
$83.0 million in the same period of 2002.
22
The increase in revenue for military/government charter revenues in the first
six months of 2003 was mainly due to the activation of Civil Reserve Air Fleet
("CRAF") in February 2003, which required ATA to pledge up to 13 aircraft to
military/government charter use to support Operation Iraqi Freedom. The CRAF
program allowed the Company to increase its Lockheed L-1011 aircraft
utilization, which averaged 7.1 daily hours of utilization in the first six
months of 2003, as compared to 5.1 daily hours of utilization in the same period
of 2002. The increased utilization allowed the Company to operate its
military/government charter service more efficiently between periods. The CRAF
program ended on June 18, 2003, and the Company expects its military/government
charter revenues to return to 2002 levels for the remainder of 2003.
Commercial Charter Revenues. Commercial charter revenues decreased 45.2% to
$16.5 million in the second quarter of 2003 from $30.1 million in the second
quarter of 2002, and in the six months ended June 30, 2003, commercial charter
revenue decreased 51.3% to $42.6 million from $87.5 million in the same period
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.
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 Travel Club Inc. ("Ambassadair") and ATA Leisure Corp.
("ATALC") subsidiaries. Ambassadair offers tour-guide-accompanied vacation
packages to its approximately 31,100 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 second quarter of 2003, ground package revenues decreased 66.0% to $3.3
million, as compared to $9.7 million in the second quarter of 2002, and in the
six months ended June 30, 2003, ground package revenues decreased 66.0% to $8.5
million from $25.0 million in the same period of 2002. These declines in ground
package sales (and related ground package costs) are 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 16.0% to $12.3 million in the second quarter
of 2003 from $10.6 million in the second quarter of 2002, and in the six months
ended June 30, 2003, other revenues increased 13.5% to $23.6 million, as
compared to $20.8 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.
23
Salaries, wages and benefits expense increased 7.9% to $98.9 million in the
second quarter of 2003 from $91.7 million in the second quarter of 2002, and in
the six months ended June 30, 2003, salaries, wages and benefits expense
increased 13.8% to $193.2 million, as compared to $169.7 million in the same
period of 2002.
The increases in salaries, wages and benefits between the quarters and six
months ended June 30, 2002 and 2003 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. In accordance with the amended agreement, the
Company recorded an $8.4 million signing bonus in the second quarter of 2002,
which is reflected in the lower growth rate in salaries, wages and benefits
between quarters. The Company also incurred increasing costs in the second
quarter and first six months 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 33.0% to $68.1 million in the
second quarter of 2003, as compared to $51.2 million in the same period of 2002,
and increased 45.5% to $143.2 million in the six months ended June 30, 2003, as
compared to $98.4 million in the same period of 2002.
Although jet block hours increased 29.5% and 28.6% in the second quarter and
first six months of 2003, as compared to the same periods of 2002, the Company
only consumed 22.7% and 18.1%, respectively, 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 $10.8 million and $16.8 million in the second quarter of 2003
and first six months of 2003, respectively.
During the quarter and six months ended June 30, 2003, the average cost per
gallon of jet fuel consumed increased by 9.0% and 24.1%, respectively, compared
to the same periods of 2002, resulting in an increase in fuel and oil expense of
approximately $6.8 million and $29.3 million, respectively, between those
periods.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. During the first half of 2002, the Company
recorded losses of $0.3 million on these hedge contacts. The Company did not
have any hedge contracts in place in the first half 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 half of 2003.
The benefit of these price guarantees was accounted for as revenue.
Although the cost per gallon of jet fuel declined in the second quarter of 2003
as compared to the first quarter of 2003, any future increases in the cost of
fuel will adversely affect the Company.
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 second quarter of 2003 increased 24.7% to $56.1 million
from $45.0 million in the second quarter of 2002, and increased 31.7% to $111.3
million in the six months ended June 30, 2003, as compared to $84.5 million in
the same period of 2002. These increases were mainly attributable to the
delivery of 9 leased Boeing 737-800 and 3 leased Boeing 757-300 aircraft between
June 2002 and June 30, 2003.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
24
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 10.2% to $31.4 million in the
second quarter of 2003, as compared to $28.5 million in the same period of 2002,
and increased by 9.6% to $61.5 million in the six months ended June 30, 2003, as
compared to $56.1 million in the same period of 2002. The increases in handling,
landing and navigation fees was primarily due to a 23.2% and a 21.2% increase in
system-wide jet departures in the second quarter and first six months of 2003,
as compared to the same periods of 2002, which resulted in an increase in
handling and landing fees of $ 4.7 million and $9.2 million, respectively. The
Company also incurred $2.5 million and $3.6 million more in navigation fees in
the second quarter and first six months of 2003, as compared to the same periods
of 2002, due to the increase in military/government flying between periods.
These increases were partially offset by a decrease in the cost of handling per
departure due to the negotiation of favorable terms in new contracts, resulting
in $2.6 million and $6.5 million less expense in the second quarter and first
six months of 2003, respectively, as compared to the same periods of 2002. The
increases were also partially offset by the temporary suspension of the payment
of the aviation security infrastructure fee by the Company from June 1, 2003 to
September 30, 2003, pursuant to the Supplemental Act. In the second quarter and
six months ended June 30, 2003, the Company saved $0.4 million in security
infrastructure fees forgone. The Company anticipates saving approximately $1.1
million more in the third quarter of 2003 due to the suspension of this fee.
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 24.3% to $16.9 million in the second quarter of 2003, as compared to
$13.6 million in the second quarter of 2002, and increased 16.1% to $31.8
million in the six months ended June 30, 2003, as compared to $27.4 million in
the same period of 2002. The Company also incurred higher hotel and positioning
costs in the second quarter and first six months of 2003, due to the increase in
military flying. Since military flights often operate to and from points remote
from the Company's crew bases, the Company incurs significant travel expenses on
other airlines. The increases are also due to an increase in crew per diem of
nearly $1.3 million and $2.3 million in the second quarter and first six months
of 2003, respectively, as compared to the same periods 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.
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 39.2% to
$13.8 million in the second quarter of 2003, as compared to $22.7 million in the
second quarter of 2002, and decreased 30.0% to $29.0 million in the six months
ended June 30, 2003, as compared to $41.4 million in the same period of 2002.
The decrease in depreciation and amortization expense is mainly attributable to
the L-1011-50 and 100 fleet. The Company retired four of these aircraft from
revenue service in 2002, and three more from revenue service in 2003. In
addition, the Company recorded a reduction in the carrying value of the
L-1011-50 and 100 aircraft and related assets in the fourth quarter of 2002, in
accordance with FASB Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). Due
to the reduced cost basis of the remaining assets and the retirements in 2002
and 2003, the Company recorded $4.8 million and $7.7 million less in
depreciation in the second quarter of 2003 and first six months of 2003, as
compared to the same periods 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
25
contact the Company directly to book reservations. Other selling expenses
increased 14.9% to $13.1 million in the second quarter of 2003, as compared to
$11.4 million in the second quarter of 2002, and increased 10.7% to $24.8
million in the six months ended June 30, 2003, as compared to $22.4 million in
the same period in 2002. The Company experienced increases in all areas of other
selling expenses due to the increase in scheduled service passengers enplaned
between both periods of 2003 as compared to the comparable 2002 periods.
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 second quarters of 2003 and 2002, catering represented
83.0% and 81.8%, respectively, of total passenger service expense, while
catering represented 82.1% and 79.5%, respectively, of total passenger service
expense for the six month periods ended June 30, 2003 and 2002.
The total cost of passenger service increased 13.7% to $10.8 million in the
second quarter of 2003, as compared to $9.5 million in the second quarter of
2002, and increased 8.8% to $21.0 million in the six months ended June 30, 2003,
as compared to $19.3 million in the same period of 2002. These increases are
mainly attributable to the increase in military flying in the second quarter and
first six months of 2003, as compared to the same periods of 2002, as a higher
quality catering product is offered on military flights.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities, and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200/300 and SAAB 340B power plants. These
agreements provide for the Company to pay monthly fees based on a specified rate
per engine flight hour, in exchange for major engine overhauls and maintenance.
Aircraft maintenance, materials and repairs expense decreased 26.5% to $10.8
million in the second quarter of 2003, as compared to $14.7 million in the
second quarter of 2002, and decreased 7.3% to $24.2 million in the six months
ended June 30, 2003, as compared to $26.1 million in the same period of 2002.
The decreases in maintenance, materials and repairs were primarily attributable
to the retirement of the Company's aging Boeing 727-200 fleet and the set-down
of certain L-1011 aircraft, which were replaced with new Boeing 737-800 and
757-300 aircraft. The decrease is also attributable to the renegotiation of the
rates on hourly engine maintenance agreements on the Boeing 737-800 fleet
effective April 1, 2003. These decreases were partially offset by the addition
of an hourly engine maintenance agreement for the Boeing 757-200 fleet in the
fourth quarter of 2002.
Advertising. Advertising expense decreased 11.5% to $10.0 million in the second
quarter of 2003, as compared to $11.3 million in the second quarter of 2002, and
decreased 1.5% to $20.3 million in the six months ended June 30, 2003, as
compared to $20.6 million in the same period of 2002. The Company incurs
advertising costs primarily to support single-seat scheduled service sales.
These decreases are primarily attributable to more sales promotions in the first
six months of 2002 to regain customers after the September 11, 2001 terrorist
attacks.
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 5.1% to $7.5 million in the second quarter of
2003, as compared to $7.9 million in the second quarter of 2002, and decreased
5.1% to $14.9 million in the six months ended June 30, 2003, as compared to
$15.7 million in the same period of 2002. These decreases are 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.
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,
26
regional sales offices and general offices. The cost of facilities and other
rentals was $5.8 million in the second quarter of 2003, as compared to $5.8
million in the second quarter of 2002, and increased 3.6% to $11.6 million in
the six months ended June 30, 2003, as compared to $11.2 million in the same
period 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.
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 16.0% to $4.2 million in the second
quarter of 2003, as compared to $5.0 million in the second quarter of 2002, and
decreased 27.7% to $10.2 million in the six months ended June 30, 2003, as
compared to $14.1 million in the same period of 2002. The decrease is primarily
attributable to the elimination of standard travel agency commissions for sales
made after March 21, 2002. The Company continues to pay special travel agency
commissions targeted to specific markets and periods of the year.
Ground Package Cost. Ground package cost 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 63.6% to $2.8 million in the second quarter of 2003, as
compared to $7.7 million in the second quarter of 2002, approximately
proportional to the decrease in ground package revenues, and decreased 65.2% to
$7.0 million in the six months ended June 30, 2003, as compared to $20.1 million
in the same period of 2002. See the "Ground Package Revenues" section above for
an explanation of the decline in both ground package sales and related costs.
Aircraft Impairments and Retirements. Following the events of September 11,
2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned. All of the aircraft were retired from service by May 31,
2002. In accordance with FASB Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("FAS 121"), the Company recorded an impairment charge
in 2001. In accordance with FAS 121, the Company continues to re-evaluate
current fair market values of previously impaired assets. In the second quarter
of 2002, the Company recorded an additional asset impairment charge of $14.8
million against its remaining net book value of Boeing 727-200 aircraft,
including those recorded as an investment in the BATA joint venture.
In addition, in the second quarter of 2002, the Company retired one L-1011-50
aircraft, which resulted in a charge of $2.4 million. This charge was included
as part of aircraft impairments and retirements.
U.S. Government funds. On April 16, 2003, President Bush signed into law the
Emergency Wartime Supplemental Appropriations Act, which made available $2.3
billion in reimbursement to U.S. air carriers for expenses incurred and revenue
foregone related to enhanced aviation security subsequent to September 11, 2001.
Pursuant to this legislation, the Company received $37.2 million in May 2003,
which was recorded as U.S. Government funds in the second quarter of 2003. The
Company does not expect to receive any further material compensatory funds from
the U.S. Government.
After the terrorist attacks of September 11, 2001, the Air Transportation Safety
and System Stabilization Act ("Act") was passed, which provided for, among other
things, up to $5.0 billion in compensation to U.S. carriers for direct and
incremental losses resulting for the September 11, 2001 terrorist attacks. The
Company had recorded $66.3 million in U.S. Government grant compensation as of
December 31, 2001, based on guidance available from the Department of
Transportation ("DOT") at the time of identifying those expenses it deemed
reimbursable. As of December 31, 2001, the Company had received $44.5 million in
cash under the Act, and had a receivable of $21.8 million for the remaining
amount. Throughout 2002, the Company discussed the calculation with the DOT, and
as a result of those discussions, the Company recorded a reserve of
approximately $15.2 million against its receivable in the second quarter of
2002. The Company subsequently finalized its discussion with the DOT in the
first quarter of 2003 and received the final cash compensation of $6.2 million.
27
Other Operating Expenses. Other operating expenses decreased 1.0% to $19.3
million in the second quarter of 2003, as compared to $19.5 million in the
second quarter of 2002, and decreased 3.9% to $37.4 million in the six months
ended June 30, 2003, as compared to $38.9 million in the same period of 2002.
These decreases were 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 and the six months
ended June 30, 2003 increased to $13.0 million and $25.6 million, respectively,
as compared to $10.0 million and $18.3 million, respectively, in the same
periods of 2002. The Company recorded $3.4 million and $6.9 million in interest
expense in the quarter and the six months ended June 30, 2003 related to the
$168 million secured term loan acquired in November 2002. The Company also
capitalized interest of $0.6 million and $1.5 million less in the second quarter
and first six months of 2003, as compared to the same periods of 2002, since
there were fewer aircraft pre-delivery deposits outstanding for future aircraft
deliveries in 2003.
Income Taxes. The Company did not record any income tax expense in the second
quarter or first six months ended June 30, 2003 applicable to $43.3 million and
$32.3 million, respectively, in pre-tax income for those periods. In comparison,
in the quarter and six months ended June 30, 2002, the Company recorded income
tax credit of $13.6 million and $12.8 million, respectively, applicable to $69.0
million and $66.3 million, respectively, in pre-tax loss for those periods. The
effective tax rates applicable to the quarter and six months ended June 30, 2002
were 19.7% and 19.3%, respectively.
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 six
months of 2003, the income tax expense recorded on the Company's pre-tax income
was offset by the reversal of a portion of the valuation allowance that was
previously recorded against its net deferred tax asset.
Liquidity and Capital Resources
Since 2001, the profitability and financial results of airlines serving the
Company's markets have been materially and adversely affected by the current
economic downturn which has reduced the demand for business and leisure travel.
These difficult economic conditions were exacerbated significantly by the
terrorist attacks of September 11, 2001 whose continuing effects have further
reduced demand for airline services and have increased costs for security
measures, fuel and insurance. As result of these factors, the Company and the
airline industry as a whole suffered significant financial losses in 2002 and
2001.
The Company has experienced significantly reduced revenue per passenger as the
result of increased public fears of future terrorist attacks, recent fears of
communicable diseases, the conflict in the Middle East and continuing
recessionary economic conditions, higher operating costs as the result of
increased insurance premiums, increased passenger security requirements,
compliance with other new regulations and higher fuel prices and increased fare
discounting and other competitive pressures from its competitors, most of which
are larger and better capitalized than the Company. At June 30, 2003, the
Company had approximately $507.8 million of outstanding debt. As of June 30,
2003, the Company faces scheduled principal and operating lease payments of
$143.8 million in the remainder of 2003, $499.1 million in 2004 and $452.1
million in 2005. Due to its weakened financial condition, the Company is
currently unable to obtain additional financing and does not expect to be able
to do so in the near future. The Company does not anticipate that cash on hand
as of June 30, 2003, together with cash generated by future operating activities
and the return of pre-delivery cash deposits held by the manufacturers on future
aircraft and engine deliveries, will be sufficient to meet its scheduled
aircraft operating lease obligations beginning in 2004 and repay its debt when
it matures. As a result of the foregoing, the Company is currently experiencing
liquidity difficulties that if not addressed may lead to an inability to meet
its obligations in the future.
28
Cash Flows. In the six months ended June 30, 2003, net cash provided by
operating activities was $76.7 million, as compared to $19.2 million for the
same period of 2002. The increase in cash provided by operating activities
between periods was mainly attributable to the receipt of $37.2 million under
the Supplemental Act in May 2003 and favorable changes in operating assets and
liabilities.
Net cash used in investing activities was $80.0 million in the first six months
of 2003, while net cash used in investing activities was $2.3 million in the
six-month period ended June 30, 2002. Such amounts included capital expenditures
totaling $29.5 million in the first six months of 2003, as compared to $43.3
million in the same period of 2002. The Company had $8.4 million in aircraft
pre-delivery deposits returned in the first six months of 2003. In comparison,
the Company had $43.9 million of net aircraft pre-delivery deposits returned in
the first six months of 2002. Non-current prepaid aircraft rent increased $63.9
million in the first six months of 2003 as compared to $21.9 million in the same
period of 2002, reflecting additional cash rents paid in the first six months of
2003 on aircraft deliveries made throughout 2002.
Net cash used in financing activities was $11.0 million in the six months ended
June 30, 2003, while net cash used in financing activities was $47.8 million in
the six months ended June 30, 2002. In the first six months of 2003, the Company
recorded $8.2 million in restricted cash to collateralize additional letters of
credit. In the first half of 2003, the Company repaid $4.2 million in
pre-delivery deposit facilities related to deposits returned on aircraft
deliveries, as compared to $20.7 million in the first half of 2002. In addition,
in the first six months of 2002, the Company borrowed and repaid $192.5 million
in temporary bridge debt related to the purchase of certain Boeing 737-800
aircraft and Boeing 757-300 aircraft. These aircraft were subsequently financed
through operating leases in the second quarter of 2002.
The Company presently expects that cash on hand at June 30, 2003, together with
cash generated by future operations 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. The Company also has substantial fixed
payment obligations under aircraft operating leases in 2004 and 2005, including
a cash payment of approximately $170.9 million in the first quarter of 2004. The
Company is currently unable to obtain any additional financing and does not
expect to be able to do so in the near future. The Company does not anticipate
that cash on hand as of June 30, 2003, together with cash generated by future
operating activities and the return of pre-delivery cash deposits held by the
manufacturers on future aircraft and engine deliveries, will be sufficient to
meet its scheduled aircraft operating lease obligations beginning in 2004 and
repay its debt when it matures.
The Company's failure to make scheduled payments of interest or principal under
the outstanding senior notes or to make its scheduled payments under the
aircraft operating leases would constitute an event of default under many of the
agreements governing its indebtedness (including its government guaranteed loan)
due to cross-default provisions. Also, the Company's government guaranteed loan
contains a covenant requiring the Company to maintain a cash balance of $40
million. Failure to comply with this covenant would constitute an event of
default. In addition, if the Company fails to pay the principal amounts due
under its outstanding senior notes, the trustee or the holders of at least 25
percent of the principal amount of those notes would have the option to take
legal action against the Company to accelerate its obligations under the senior
notes and collect the amounts due. If the Company fails to make scheduled
payments under the aircraft operating leases, the lessors may repossess the
aircraft subject to the leases, effectively shutting down its operations.
Finally, in such circumstances the Company's credit card processors may elect to
hold back up to 100 percent of its pre-paid sales, which would aggravate its
current liquidity difficulties.
In an effort to address its current liquidity difficulties, the Company has
entered into discussions with its major lessors to amend the aircraft operating
leases with those lessors to reduce the Company's scheduled cash payments under
those leases in the immediate term and result in a more constant stream of
rental payments due under those leases over the entire term. In addition, the
29
Company has engaged two investment banks to evaluate the Company's options with
respect to a refinancing or restructuring of its outstanding senior notes. If
the Company is unable to reach a satisfactory agreement with its aircraft
lessors and its creditors, it may be forced to restructure its debts in
bankruptcy.
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 global uncertainties, including political unrest; (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; (8) the Company's ability to retain its management and other
employees in light of current industry conditions; and (9) the threat of future
terrorist attacks.
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, including
its subsidiaries. The following table summarizes the Company's contractual debt
and operating lease obligations as of June 30, 2003, and the effect such
obligations are expected to have on its liquidity and cash flows in future
periods.
Cash Payments Currently Scheduled
---------------------------------
Total 3 Qtr- 4 Qtr 2004 2006 After
As of 6/30/03 2003 -2005 -2007 2007
------------- ---- ----- ----- ----
(in thousands)
Current and long-term debt (2) $ 514,137 $ 14,134 $371,492 $ 60,477 $ 68,034
Lease obligations 3,577,021 117,058 559,777 539,590 2,360,596
Expected future lease obligations (1) 730,797 12,614 19,908 102,185 596,090
---------- -------- ------- -------- ----------
Total contractual cash obligations $4,821,955 $143,806 $951,177 $702,252 $3,024,720
========== ======== ======== ======== ==========
(1) Represents estimated payments on 10 new Boeing 757-300 and Boeing 737-800
aircraft the Company is committed to taking delivery of in 2003 through 2005, as
well as four spare engines the Company is committed to taking delivery of in
2005 through 2008. The Company intends to finance these aircraft and engines
with operating leases. However, no such leases are in place as of June 30, 2003,
as the Company has not received the aircraft and engines. Payments for expected
future lease obligations were derived using leases for comparable aircraft
currently in place. For further discussion, see "Financial Statements - Notes to
Consolidated Financial Statements - Note 4 - 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 one new Boeing 757-300 and seven
new Boeing 737-800s, which are currently scheduled for delivery between July
2003 and August 2005. The Boeing 737-800 aircraft are powered by General
Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by
30
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 June 30, 2003, the Company had $12.8 million in pre-delivery
deposits outstanding for future aircraft deliveries, of which $4.2 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 June 30, 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 two additional Boeing 737-800s
under operating leases from a third-party lessor, which are currently scheduled
for delivery in November 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 2005 and 2008.
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. In the first six months of 2002, the Company borrowed
$192.5 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 six months 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 June 30, 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.
31
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
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 June 30, 2003 is $6.3 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 Federal Aviation Administration, 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 June 30, 2003, the bank had withheld $39.7
million in cash. As of December 31, 2002, the bank had withheld $30.0 million in
cash. The deposits as of June 30, 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. That percentage is
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 $26.5 million by the bank at June
30, 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.
The Company's agreement with the bank expires on December 31, 2003, subject to
automatic renewals for one-year terms, unless either party gives notice of an
intent not to renew 90 days prior to the expiration date. However, the Company
can give no assurance that this agreement will be renewed or that the Company
will be able to enter into a new agreement with another bank on comparable terms
or at all.
Although the Company continues to process significant dollar amounts of ticket
sales using credit cards other than MasterCard and Visa, as of June 30, 2003, no
cash deposit requirements had been implemented by the issuers or processors of
those cards.
Surety Bonds. The Company has historically provided surety bonds to airport
authorities and selected other parties, to secure the Company's obligation to
these parties. The DOT 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
32
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
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 June 30, 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 June 30, 2003, the Company's
secured letters of credit, including the letter of credit securing the DOT
surety bond obligations discussed above, totaled $38.6 million. The funds
collateralizing these letters of credit is shown as restricted cash on the
balance sheet as of June 30, 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 threat of future terrorist attacks;
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;
o other risks and uncertainties listed from time to time in reports the
Company periodically files with the Securities and Exchange Commission
("SEC"); and
33
o ability to renegotiate operating leases.
The Company does not undertake to update the forward-looking statements to
reflect future events or circumstances.
34
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.
35
PART I - Financial Information
Item IV - Controls and Procedures
As of the end of the period covered by 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-15e and
15d-15e) 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 SEC rules and forms.
There have been no significant changes in the Company's internal control over
financial reporting or in other factors that could significantly affect the
Company's internal control over financial reporting, subsequent to the date of
the evaluation.
36
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 May 22, 2003, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on May 23, 2003, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on June 06, 2003, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on July 17, 2003, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on July 28, 2003, furnishing items under Item 9.
Regulation FD Disclosure.
Report filed on July 29, 2003, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
37
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 August 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.
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002