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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 2004 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 ______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ______ No X
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 - 11,824,287 shares outstanding as of October
31, 2004
Part I - Financial Information
Item 1 - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
(Debtor and Debtors-In-Possession as of October 26, 2004)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2004 2003
-------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 57,595 $ 160,644
Receivables, net of allowance for doubtful accounts
(2004 - $1,099; 2003 - $1,388) 120,904 118,745
Inventories, net 51,476 47,604
Prepaid expenses and other current assets 38,834 21,406
-------------- -------------
Total current assets 268,809 348,399
Property and equipment:
Flight equipment 328,266 324,697
Facilities and ground equipment 148,974 142,032
-------------- -------------
477,240 466,729
Accumulated depreciation (241,911) (213,247)
-------------- -------------
235,329 253,482
Restricted cash 31,881 48,301
Goodwill 14,887 14,887
Prepaid aircraft rent 131,112 144,088
Investment in BATA 13,167 14,672
Deposits and other assets 49,974 46,158
-------------- -------------
Total assets $ 745,159 $ 869,987
============== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
$ 157,696 $ -
Long-term debt in default 13,675 51,645
Current maturities of long-term debt 21,786 25,327
Accounts payable 105,398 102,831
Air traffic liabilities 155,849 154,689
-------------- -------------
Accrued expenses 454,404 334,492
Total current liabilities
Long-term debt, less current maturities and long-term debt in default 293,877 443,051
Deferred gains from sale and leaseback of aircraft 52,537 55,392
Other deferred items 89,704 51,822
Mandatorily redeemable preferred stock; authorized and issued 500 shares 50,000 56,330
-------------- -------------
Total liabilities 940,522 941,087
Commitments and contingencies
Convertible redeemable preferred stock; authorized and issued 300 shares 30,375 32,907
Shareholders' deficit:
Preferred stock; authorized 9,999,200 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,535,727 - 2004; 13,476,193 - 2003 66,233 65,711
Treasury stock; 1,711,440 shares - 2004; 1,711,440 shares - 2003 (24,778) (24,778)
Additional paid-in capital 17,945 18,163
Accumulated deficit (285,138) (163,103)
-------------- -------------
Total shareholders' deficit (225,738) (104,007)
-------------- -------------
Total liabilities and shareholders' deficit $ 745,159 $ 869,987
============== =============
See accompanying notes.
2
ATA HOLDINGS CORP. AND SUBSIDIARIES
(Debtor and Debtors-In-Possession as of October 26, 2004)
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Scheduled service $ 285,978 $ 293,549 $ 863,895 $ 816,326
Charter 96,219 78,536 260,585 285,393
Ground package 3,074 2,857 10,947 11,333
Other 15,948 12,761 43,899 36,402
-------------- -------------- -------------- --------------
Total operating revenues 401,219 387,703 1,179,326 1,149,454
-------------- -------------- -------------- --------------
Operating expenses:
Salaries, wages and benefits 106,349 100,195 321,411 293,348
Fuel and oil 96,931 65,215 265,058 208,388
Aircraft rentals 62,981 57,086 182,361 168,420
Handling, landing and navigation fees 29,847 25,111 93,300 86,567
Aircraft maintenance, materials and
repairs 19,673 10,834 59,087 35,064
Crew and other employee travel 15,835 16,041 45,819 47,884
Other selling expenses 13,487 13,155 40,046 37,997
Depreciation and amortization 13,023 14,095 39,473 43,084
Passenger service 11,181 10,221 32,614 31,226
Advertising 9,364 8,290 29,591 28,595
Commissions 7,096 5,962 19,592 16,202
Facilities and other rentals 6,765 6,221 19,878 17,842
Insurance 5,980 6,390 17,456 21,251
Ground package cost 2,586 2,315 9,157 9,305
U.S. Government Funds - - - (37,156)
Other 16,299 17,106 53,535 54,506
-------------- -------------- -------------- --------------
Total operating expenses 417,397 358,237 1,228,378 1,062,523
-------------- -------------- -------------- --------------
Operating income (loss) (16,178) 29,466 (49,052) 86,931
Other income (expense):
Interest income 668 674 1,743 2,185
Interest expense (15,071) (14,345) (45,501) (39,986)
Loss on extinguishment of debt - - (27,314) -
Other (323) (761) (786) (1,773)
-------------- -------------- -------------- --------------
Other expense (14,726) (14,432) (71,858) (39,574)
-------------- -------------- -------------- --------------
Income (loss) before income taxes (30,904) 15,034 (120,910) 47,357
Income taxes - 7,311 - 7,311
-------------- -------------- -------------- --------------
Net income (loss) (30,904) 7,723 (120,910) 40,046
Preferred stock dividends (375) (1,149) (1,125) (4,009)
-------------- -------------- -------------- --------------
Income (loss) available to common shareholders $ (31,279) $ 6,574 $ (122,035) $ 36,037
============== ============== ============== ==============
Basic earnings per common share:
Average shares outstanding 11,824,144 11,773,901 11,823,595 11,767,836
Net income (loss) per share $ (2.65) $ 0.56 $ (10.32) $ 3.06
============== ============== ============== ==============
Diluted earnings per common share:
Average shares outstanding 11,824,144 14,647,294 11,823,595 14,336,591
Net income (loss) per share $ (2.65) $ 0.53 $ (10.32) $ 2.65
============== ============== ============== ==============
See accompanying notes.
3
ATA HOLDINGS CORP. AND SUBSIDIARIES
(Debtor and Debtors-In-Possession as of October 26, 2004)
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
(Dollars in thousands)
Convertible
Redeemable Additional Total
Preferred Common Treasury Paid-in Accumulated Shareholders'
Stock Stock Stock Capital Deficit Deficit
------- ------- --------- --------- ---------- ------------
Balance as of December 31, 2003 $32,907 $65,711 $ (24,778) $ 18,163 $ (163,103) $ (104,007)
Net loss - - - - (64,344) (64,344)
Stock options exercised - 525 - (225) - 300
Preferred stock dividends (2,907) - - - (375) (375)
------- ------- --------- --------- ---------- ------------
Balance as of March 31, 2004 $30,000 $66,236 $ (24,778) $ 17,938 $ (227,822) $ (168,426)
======= ======= ========= ========= ========== ============
Net loss - - - - (25,662) (25,662)
Preferred stock dividends - - - - (375) (375)
------- ------- --------- --------- ---------- ------------
Balance as of June 30, 2004 $30,000 $66,236 $ (24,778) $ 17,938 $ (253,859) $ (194,463)
======= ======= ========= ========= ========== ============
Net loss - - - - (30,904) (30,904)
Stock options exercised - (3) - 7 - 4
Accrued preferred stock
dividends 375 - - - (375) (375)
------- ------- --------- --------- ---------- ------------
Balance as of September 30, 2004 $30,375 $66,233 $ (24,778) $ 17,945 $ (285,138) $ (225,738)
======= ======= ========= ========= ========== ============
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
(Debtor and Debtors-In-Possession as of October 26, 2004)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
2004 2003
------------ -----------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) $ (120,910) $ 40,046
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 39,473 43,084
Loss on extinguishment of debt 27,314 -
Other non-cash items 12,267 30,725
Changes in operating assets and liabilities:
U.S. Government grant receivable - 6,158
Other receivables (2,159) (17,751)
Inventories (6,109) 1,335
Prepaid expenses (12,719) 11,611
Accounts payable (3,541) (9,055)
Air traffic liabilities 2,567 13,035
Accrued expenses 11,734 (3,718)
Other deferred items 20,000 -
------------ -----------
Net cash provided by (used in) operating activities (32,083) 115,470
------------ -----------
Investing activities:
Aircraft pre-delivery deposits - 16,582
Capital expenditures (21,381) (36,178)
Noncurrent prepaid aircraft rent 12,976 (84,740)
(Additions) reductions to other assets (8,136) 3,843
Proceeds from sales of property and equipment 323 217
------------ -----------
Net cash (used in) investing activities (16,218) (100,276)
------------ -----------
Financing activities:
Proceeds from long-term debt 1,500 5,729
Payments of preferred dividends (9,987) -
Payments on short-term debt - (8,384)
Payments on long-term debt and exchange offers (58,277) (5,820)
Decrease (increase) in restricted cash 11,712 (10,157)
Proceeds from stock options exercises 304 210
------------ -----------
Net cash (used in) financing activities (54,748) (18,422)
------------ -----------
Decrease in cash and cash equivalents (103,049) (3,228)
Cash and cash equivalents, beginning of period 160,644 200,160
------------ -----------
Cash and cash equivalents, end of period $ 57,595 $ 196,932
============ ===========
Supplemental disclosures:
Cash payments (receipts) for:
Interest $ 41,011 $ 36,187
Income tax refunds (4,018) (13,985)
Financing and investing activities not affecting cash:
Accrued capitalized interest $ 524 $ 107
Accrued preferred stock dividends 375 4,009
Additional new notes 12,991 -
See accompanying notes.
5
ATA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Debtor and Debtors-In-Possession as of October 26, 2004)
1. The Company and the Chapter 11 Filing
As a result of the continuing financial difficulties previously reported by
ATA Holdings Corp. (the "Company") as well as factors adversely affecting
the airline industry generally, on October 26, 2004 (the "Petition Date"),
the Company, and seven of its subsidiaries including ATA Airlines, Inc.
("ATA") and Chicago Express Airlines, Inc. ("Chicago Express")
(collectively, the "Debtors"), filed voluntary petitions for relief (the
"Filing") under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of Indiana (the "Bankruptcy
Court"). As of the date of the Filing the Company's unrestricted cash
balance was approximately $53.8 million. The Filing followed the Company's
failure to meet its September 30, 2004, trailing-twelve-months earnings
before interest, taxes, depreciation, amortization and aircraft rent
("EBITDAR") to fixed charges ratio covenant under its secured term loan,
which is partially guaranteed by the Air Transportation Stabilization Board
("ATSB"), and identical covenants in its Union Planters Bank mortgage note
payable agreements. Also, the Company defaulted under its Fleet Capital
Corporation note payable agreements that contain cross-default provisions
to uncured events of default on other indebtedness agreements of the
Company. These obligations have been classified as current liabilities on
the Company's consolidated balance sheet as of September 30, 2004. The
Filing triggered defaults on substantially all debt and lease obligations
of the Debtors. Subject to certain exceptions under the Bankruptcy Code,
the Filing automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions against the Debtors
or their property to recover on, collect or secure a claim arising prior to
the Petition Date. For example, creditor actions to obtain possession of
property from the Debtors, or to create, perfect or enforce any lien
against the property of the Debtors, or to collect on or otherwise exercise
rights or remedies with respect to a pre-petition claim, are enjoined
unless and until the Bankruptcy Court lifts the automatic stay.
On October 29, 2004 the Bankruptcy Court entered an interim order which
permits the Company to operate by utilizing the unrestricted cash, eligible
accounts receivable and other collateral pledged to secure the Company's
secured term loan, a significant portion of which is guaranteed by the
ATSB. The interim order has the effect of giving the ATSB a replacement
lien on unrestricted cash and certain other assets generated after the
Filing. This interim order has been extended for successive short periods,
and requires compliance by the Company with certain terms, such as the
maintenance of minimum cash collateral balances and periodic reporting
requirements. Future renewals cannot be assured, and a failure to renew
this arrangement would be material and adverse to the Company's ability to
reorganize under Chapter 11 of the U. S. Bankruptcy Code.
Notwithstanding the above general discussion of the automatic stay, the
Debtors' right to retain and operate certain aircraft, aircraft engines and
other equipment defined in section 1110 of the Bankruptcy Code that are
leased or subject to a security interest or conditional sale contract are
specifically governed by section 1110 of the Bankruptcy Code. That section
provides, in relevant part, that unless the Debtors, within 60 days after
the Petition Date (the "Section 1110 Deadline") or December 24, 2004, agree
to perform obligations under the lease, security agreement, or conditional
sale contract and cure all defaults there under (other than defaults
constituting a breach of provisions relating to the filing of the Chapter
11 cases, the Debtors' insolvency or other financial condition of the
Debtors) within the time specified in section 1110, the right of the
lessor, secured party or conditional vendor to take possession of such
equipment in compliance with the provisions of the lease, security
agreement, or conditional sale contract and to enforce any of its other
rights or remedies under such lease, security agreement, or conditional
sale contract is not limited or otherwise affected by the automatic stay,
by any other provision of the Bankruptcy Code, or by any power of the
Bankruptcy Court. The provisions of section 1110 may materially impact the
Debtors' options with respect to development of a plan of reorganization.
6
The Debtors have the exclusive right for 120 days after the Petition Date
to file a plan of reorganization and, if they do so, 60 additional days to
obtain necessary acceptances of their plan. These periods may be extended
by the Bankruptcy Court for cause. If the Debtors' exclusivity period
lapses, any party in interest may file a plan of reorganization for any of
the Debtors. In addition to being voted on by holders of impaired claims
and equity interests, a plan of reorganization must satisfy certain
requirements of the Bankruptcy Code and must be approved, or confirmed, by
the Bankruptcy Court in order to become effective. A plan has been accepted
by holders of claims against and equity interests in the Debtors if (1) at
least one-half in number and two-thirds in dollar amount of claims actually
voting in each impaired class of claims have voted to accept the plan and
(2) at least two-thirds in amount of equity interests actually voting in
each impaired class of equity interests have voted to accept the plan.
Under certain circumstances set forth in the provisions of section 1129(b)
of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if
such plan has not been accepted by all impaired classes of claims and
equity interests. A class of claims or equity interests that does not
receive or retain any property under the plan on account of such claims or
interests is deemed to have voted to reject the plan. The precise
requirements and evidentiary showing for confirming a plan notwithstanding
its rejection by one or more impaired classes of claims or equity interests
depends upon a number of factors, including the status and seniority of the
claims or equity interests in the rejecting class, i.e., secured claims or
unsecured claims, subordinated or senior claims, preferred or common stock.
As required by the Bankruptcy Code, the United States Trustee has appointed
an official committee of unsecured creditors (the "Official Committee").
The Official Committee and its legal representatives have a right to be
heard on all matters that come before the Bankruptcy Court. There can be no
assurance that the Official Committee will support the Debtors' positions
in the reorganization cases or any plan of reorganization, once proposed,
and disagreements between the Debtors and the Official Committee could
protract the reorganization cases, could negatively impact the Debtors'
ability to operate during the Chapter 11 cases, and could delay the
Debtors' emergence from Chapter 11.
The disposition of assets and liquidation or sales of liabilities in the
Chapter 11 cases are subject to significant uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy
Code, and subject to the Bankruptcy Court approval or otherwise as
permitted in the normal course of business, the Debtors may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the attached consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in these consolidated financial
statements, which do not give effect to any adjustments to the carrying
value or amounts of liabilities that might result as a consequence of
confirmation of a plan of reorganization.
Although the Debtors expect to develop a reorganization plan for emergence
from Chapter 11 in 2005, there can be no assurance that a reorganization
plan will be proposed by the Debtors or confirmed by the Bankruptcy Court,
or that any such plan will be consummated. The Company has incurred and
will continue to incur significant costs associated with the
reorganization. The amount of these costs, which are being expensed as
incurred, are expected to significantly affect its results of operations.
For additional information regarding the Filing and material developments
in the Chapter 11 cases, see "Note 10 - Other Subsequent Events."
7
2. Basis of Presentation and Stock Based Compensation
The accompanying consolidated financial statements of 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, 2003.
The consolidated financial statements for the periods ended September 30,
2004 and 2003 are presented prior to the adoption of the American Institute
of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP
90-7") and 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 periods ended September 30, 2004
are not necessarily indicative of results to be expected for the full
fiscal year ending December 31, 2004. On October 26, 2004, the Debtors
filed voluntary petitions for relief under Chapter 11 of the Bankruptcy
Code (see "Note 1 - The Company and the Chapter 11 Filing" and "Note 10 -
Other Subsequent Events"). SOP 90-7, which is applicable to companies in
Chapter 11, generally does not require filers to change the manner in which
their financial statements are prepared. However, it does require that the
financial statements for periods subsequent to the filing of the Chapter 11
petition distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business.
The Company's revenues, expenses (including professional fees), realized
gains and losses, and provisions for losses that can be directly associated
with the reorganization and restructuring of the business must be reported
separately as reorganization items in the consolidated statements of
operations beginning in the quarter ending December 31, 2004. The
consolidated balance sheet must distinguish pre-petition liabilities
subject to compromise from both those pre-petition liabilities that are not
subject to compromise and from post-petition liabilities. Liabilities that
may be affected by the reorganization plan must be reported at the amounts
expected to be allowed, even if they may be settled for lesser amounts. In
addition, cash used or provided by reorganization items must be disclosed
separately in the consolidated statement of cash flows.
The Company adopted SOP 90-7 effective on the Petition Date and will
segregate those items as outlined above in financial statements issued for
all reporting periods subsequent to the Petition Date.
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.
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 total pro forma stock-based employee compensation
expense determined under fair value based method, net of related tax
effects, is immaterial for the quarter and nine months periods ended
September 30, 2004 and 2003, and has no effect on basic or diluted earnings
per share for these periods.
8
3. Cost Structure Reduction Initiatives
In the first nine months of 2004, the Company took significant steps to
address its liquidity problems created by the economic conditions the
Company has faced since 2001. On January 30, 2004, the Company completed
exchange offers and issued Senior Notes due 2009 ("2009 Notes") and cash
consideration for certain of its $175 million 10 1/2% Senior Notes due in
August 2004 ("2004 Notes") and issued Senior Notes due 2010 ("2010 Notes"
and, together with the 2009 Notes, "New Notes") and cash consideration for
certain of its $125 million 9 5/8% Senior Notes due in December 2005 ("2005
Notes", and together with the 2004 Notes, "Existing Notes"). In completing
the exchange offers, the Company accepted $260.3 million of Existing Notes
tendered for exchange, issuing $163.1 million in aggregate principal amount
of 2009 Notes and delivering $7.8 million in cash in exchange for $155.3
million in aggregate principal amount of 2004 Notes tendered, and issuing
$110.2 million in aggregate principal amount of 2010 Notes and delivering
$5.2 million in cash in exchange for $105.0 million in aggregate principal
amount of 2005 Notes. In addition to the New Notes issued, $19.7 million in
aggregate principal amount of the 2004 Notes and $20.0 million in aggregate
principal amount of the 2005 Notes remained outstanding after the
completion of the exchange offers. The remaining 2004 Notes were
subsequently paid on August 1, 2004. In connection with the exchange
offers, the Company also obtained the consent of the holders of the
Existing Notes to amend or eliminate certain of the restrictive operating
covenants and certain default provisions of the indentures governing the
Existing Notes. In accordance with FASB Emerging Issues Task Force Issue
No. 96-19, Debtor's Accounting for Modification or Exchange of Debt Terms
("EITF 96-19"), the Company recorded a non-operating loss on extinguishment
of debt of $27.3 million in the first quarter of 2004. The loss is
primarily related to the accounting for the $13 million cash consideration
paid at closing of the exchange offers and the $13 million of incremental
notes issued during the exchange offers. In accordance with EITF 96-19, the
New Notes are recorded in the Company's balance sheet at fair value at the
date of the exchange offers, which closely approximated their face value.
As a result of the Filing, the Company is in default under the terms of the
agreements of its unsecured senior notes. Subject to certain exceptions
under the Bankruptcy Code, the Filing provides an automatic stay against
the continuation of any judicial or administrative proceedings or other
actions against the Debtors or their property to recover on, collect or
secure a claim arising prior to the Petition Date until the Bankruptcy
Court lifts the stay.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, Boeing Capital
Services Corporation ("BCSC"), General Electric Capital Aviation Services
("GECAS") and International Lease Finance Corporation ("ILFC"). The
original terms of many of these aircraft operating leases were determined
before September 11, 2001, and many were structured to require significant
cash payments in the first few years of each lease in order to reduce the
total rental cost over the entire lease terms. The effect of the lease
amendments was to delay the payment of portions of the amounts due under
those operating leases, primarily between September 30, 2003 and March 31,
2005, and to extend the leases generally for two years. Most of the
payments delayed during this time period are to be subsequently paid at
various times throughout the remaining life of the leases. The Company
received a refund of $29.8 million on January 30, 2004 related to payments
made in 2003 under the original terms of certain retroactively amended
leases. The amendments will also result in approximately $69.6 million in
lower cash payments during 2004 , substantially all of which had been
realized as of September 30, 2004, under these operating leases, as
compared to payments that would have been due under the original lease
terms.
In addition to the bond exchange and lease restructurings, the Company
implemented other initiatives in 2004, including amending the collective
bargaining agreement with its cockpit crewmembers to forego scheduled pay
increases, implementing pay reductions for certain of its non-crewmember
employees, and eliminating other jobs where appropriate.
9
4. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended September 30,
2004 2003
--------------- ------------
Numerator:
Net income (loss) $ (30,904,000) $ 7,723,000
Preferred stock dividends (375,000) (1,149,000)
--------------- ------------
Income (loss) available to common
shareholders - numerator for basic
earnings per share $ (31,279,000) $ 6,574,000
--------------- ------------
Effect of dilutive securities:
Convertible redeemable preferred stock $ - $ 1,149,000
--------------- ------------
Numerator for diluted earnings per share $ (31,279,000) $ 7,723,000
=============== ============
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,824,144 11,773,901
Effect of potential dilutive securities:
Employee stock options - 4,323
Convertible redeemable preferred stock - 1,914,486
Warrants issued under secured term loan - 954,584
--------------- ------------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,824,144 14,647,294
=============== ============
Basic income (loss) per share $ (2.65) $ 0.56
=============== ============
Diluted income (loss) per share $ (2.65) $ 0.53
=============== ============
10
Nine Months Ended September 30 ,
2004 2003
------------------------- ------------------
Numerator:
Net income (loss) $ (120,910,000) $ 40,046,000
Preferred stock dividends (1,125,000) (4,009,000)
------------------------- ------------------
Income (loss) available to common
shareholders - numerator for basic
earnings per share $ (122,035,000) $ 36,037,000
------------------------- ------------------
Effect of dilutive securities:
Convertible redeemable preferred stock - $ 1,899,000
------------------------- ------------------
Numerator for diluted earnings per share $ (122,035,000) $ 37,936,000
========================= ==================
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,823,595 11,767,836
Effect of potential dilutive securities:
Convertible redeemable preferred stock - 1,914,486
Warrants issued under secured term loan - 654,269
------------------------- ------------------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,823,595 14,336,591
========================= ==================
Basic income (loss) per share $ (10.32) $ 3.06
========================= ==================
Diluted income (loss) per share $ (10.32) $ 2.65
========================= ==================
In accordance with FASB Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), the impact of 1,914,486 shares of
convertible redeemable preferred stock in the three and nine months ended
September 30, 2004 has been excluded from the computation of diluted
earnings per share because their effect would be antidilutive. Also, the
impact of 777,802 incremental shares from the assumed exercise of warrants
issued in conjunction with the secured term loan the Company obtained in
November 2002 were not included in the computation of diluted earnings per
share for the nine months ended September 30, 2004, because their effect
would be antidilutive. In addition, the impact of 112 employee stock
options has been excluded from the computation of diluted earnings per
share for the nine months ended September 30, 2004, because their effect
would be antidilutive.
5. Commitments and Contingencies
The following commitments and contingencies are as of September 30, 2004.
The effect of the Filing and subsequent reorganization plan on these
commitments and contingencies is not yet known.
11
The Company has a purchase agreement with the Boeing Company ("Boeing") to
purchase seven new Boeing 737-800s, which are currently scheduled for
delivery between July 2007 and December 2007. These aircraft are powered by
General Electric CFM56-7B27 engines. The manufacturer's list price is $52.4
million for each 737-800, subject to escalation. The Company's purchase
price for each aircraft is subject to various discounts. According to a
2004 amendment to the purchase agreement with Boeing, if the Company does
not have permanent financing for these aircraft suitable to the Company and
does not have suitable pre-delivery deposit financing, and if Boeing does
not elect to provide such financing acceptable to the Company, these
deliveries can be delayed for one year periods annually through December
31, 2010. Aircraft pre-delivery deposits are required for these aircraft,
and the Company has historically funded these deposits for past aircraft
deliveries using operating cash and pre-delivery deposit financing
facilities. The Company can provide no assurance that it will be able to
secure pre-delivery deposit financing facilities or permanent financing for
any future aircraft purchases. As of September 30, 2004, the Company had
$4.9 million in long-term pre-delivery deposits outstanding for the seven
future aircraft deliveries, which were funded with operating cash. In the
event of delivery and financing of the aircraft, pre-delivery deposits
funded with operating cash are contractually scheduled to be returned to
the Company. As of September 30, 2004, the Company also has purchase rights
with Boeing for 40 Boeing 737-800 aircraft.
The Company also has commitments to take delivery of four spare engines,
all of which are currently scheduled for delivery between 2005 and 2008.
The Company intends to finance all future aircraft and engine deliveries
with leases accounted for as operating leases.
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.
In January 2002, the Company entered into an agreement (the "Lease") to
lease land from the City of Chicago (the "City"), which had been purchased
by the City with Chicago Midway Airport Revenue Bonds ("MARB's"). The
Company also entered into a redevelopment agreement (the "Agreement") with
the City in January 2002 to develop real estate on the property. As part of
the Agreement, the City agreed to pay for the debt service on the MARB's
from the incremental tax revenue expected to be generated from the real
estate developments. Under the Agreement, if the incremental tax revenue is
insufficient to fund the MARB's debt service, the City has the right to
require the Company to provide those funds as additional rent under the
lease. The total amount of the debt service, including interest, from 2006
through 2021 is approximately $27.2 million. The Company is continuing to
work with the City to find alternate uses for the property.
The Company has received $5.1 million in grants from the State of Illinois
to assist with costs related to site development and construction of a
training center on the land leased from the City (the "Project"). As of
September 30, 2004, $5.7 million has been spent on costs related to the
Project. In addition to requiring completion of the Project, the grants
require the Company to achieve certain employment levels in the State of
Illinois by December 31, 2005. In the event that the Project is not
completed or the employment levels are not achieved as stipulated in the
grant, the State of Illinois has the right to seek recovery of all the
funds received by the Company under the grant. The Company is uncertain
whether it can achieve the required employment levels by December 31, 2005.
The Company is working with the State of Illinois to determine the
appropriate course of action due to the Company's Filing.
6. Income Taxes
As of December 31, 2003, 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 recorded a full valuation allowance against its net deferred
tax asset. In the first nine months of 2004, the Company continued to
record a full valuation allowance against its net deferred tax asset under
the same presumption. This valuation allowance resulted in no tax benefit
being recognized in the Company's first nine months of 2004.
12
7. Prepaid and Accrued Aircraft Rent
The Company's operating leases, including those leases amended on January
30, 2004, 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 because straight-line expense
recognition is most representative of the time pattern from which benefit
from use of the aircraft is derived. Forty-nine of the Company's aircraft
operating leases were structured to require significant cash in the early
years of the lease in order to obtain more overall favorable lease rates.
The amount of the cash payments in excess of the aircraft rent expense in
these early years has created a significant prepaid aircraft rent amount on
the Company's balance sheet. The portion of the prepaid aircraft rent that
will be amortized in the next twelve months is recorded as short-term
prepaid expense while the remainder is recorded as long-term prepaid
aircraft rent. Twenty-four of the Company's aircraft operating leases
require more significant cash payments later in the lease term resulting in
an accrued liability for aircraft rents on the Company's balance sheet. The
portion of the accrued liability that will be paid in the next twelve
months is recorded as short-term accrued expenses while the remainder is
recorded as long-term deferred items. Two of the Company's aircraft
operating leases were structured whereby monthly cash rents and monthly
book rents are equal. The table below summarizes the prepaid and accrued
aircraft rents as of September 30, 2004 and December 31, 2003 that result
from this straight-line expense recognition as reported under the following
captions on the Company's balance sheet and does not give any effect to the
potential future impact of the Filing.
September 30, December 31,
2004 2003
----------------- ----------------
(In thousands)
Assets:
Prepaid expenses and other current assets (short-term) $ 2,294 $ 3,879
Prepaid aircraft rent (long-term) 131,112 144,088
----------------- ----------------
Total prepaid aircraft rent $ 133,406 $ 147,967
================= ================
Liabilities:
Accrued expenses (short-term) $ 645 $ 11,529
Other deferred items (long-term) 49,377 27,976
----------------- ----------------
Total accrued aircraft rent $ 50,022 $ 39,505
================= ================
13
8. Dividends
In 2000, the Company issued and sold 300 shares of Series B convertible
redeemable preferred stock, without par value ("Series B Preferred"), at a
price of $100,000 per share. The Company must redeem the Series B Preferred
no later than September 20, 2015. The purchaser of the Series B Preferred
is entitled to cumulative quarterly dividends at an annual rate of 5.0% on
the liquidation amount ($100,000 per share) of the Series B Preferred. The
annual rate is subject to an increase to 8.44% on the liquidation amount
($100,000 per share) if the Company fails to pay any quarterly dividend
within ten days of the due date. Once dividends in arrears have been paid
in full, the rate returns to the original annual rate of 5.0%. The
mandatorily redeemable Series B Preferred is classified between liabilities
and equity on the Company's accompanying balance sheets because it is
convertible into the Company's common stock. The dividends related to the
Series B Preferred are recorded below net income or loss on the Company's
statement of operations.
Also, in 2000, the Company issued and sold 500 shares of Series A
mandatorily redeemable preferred stock, without par value ("Series A
Preferred"), at a price of $100,000 per share. The purchaser of the Series
A Preferred is entitled to cumulative semiannual dividends at an annual
rate of 8.44% on the liquidation amount ($100,000 per share) of the Series
A Preferred. As of July 1, 2003, per the provisions of FASB Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("FAS
150"), the Series A Preferred is classified as a liability on the Company's
accompanying balance sheets because it is mandatorily redeemable and not
convertible, and the dividends related to the Series A Preferred are
classified as interest expense on the Company's statement of operations.
Prior to and as of December 31, 2003, the Company's unsecured senior note
indentures contained certain restricted payment covenants, which limited
the Company's ability to pay preferred stock dividends. At the end of the
third quarter of 2002, those covenants no longer permitted payment of
preferred dividends. The Company accrued preferred dividends at the
appropriate rates plus interest for the payments due between December 15,
2002 and December 31, 2003. In January 2004, as a result of completion of
the exchange offers, the senior note restricted payment covenants with
respect to payment of preferred dividends were removed. In addition, the
restricted payment covenants in the Senior Note indentures for the 2009
Notes and 2010 Notes permit the Company to pay preferred stock dividends.
Concurrently with the completion of the exchange offers on January 30,
2004, the Company paid all accrued preferred stock dividends in arrears of
$9.2 million. As of September 30, 2004, the Company had paid all dividends
due to the Series A Preferred, and accrued, but did not pay , $375,000 in
preferred stock dividends due to the Series B Preferred. Subject to certain
exceptions under the Bankruptcy Code, the Filing provides an automatic stay
against the continuation of any judicial or administrative proceedings or
other actions against the Debtors or their property to recover on, collect
or secure a claim arising prior to the Petition Date until the Bankruptcy
Court lifts the stay.
9. Management Changes
On October 19, 2004, the Company appointed David M. Wing as its Executive
Vice President and Chief Financial Officer. Mr. Wing had previously served
in this role from March 2003 until June 2004. The Company also appointed
Gilbert F. Viets as its Executive Vice President and Chief Restructuring
Officer. Mr. Viets served as Executive Vice President and Chief Financial
Officer from June 2004 to October 2004. Mr. Viets will continue to serve on
the Company's Board of Directors.
10. Other Subsequent Events
On November 5, 2004, the Company's common stock was delisted from the
Nasdaq National Market. The common stock trades in the over-the-counter
market under the symbol "ATAHQ." The value of the Company's common stock is
highly speculative. The Company urges that appropriate caution be exercised
with respect to existing and future investments in any liabilities and/or
securities of the Company or the other Debtors.
14
On November 16, 2004, the Company and ATA entered into an Asset Acquisition
Agreement with AirTran Airways, Inc. ("AirTran Airways"), by which AirTran
Airways has agreed to acquire assets and assume liabilities relating to
ATA's operations at Chicago-Midway Airport (the "AirTran Transaction".)
The agreement also provides for assignment to AirTran Airways of leases at
airports served by ATA from Chicago-Midway, excluding Indianapolis
International Airport and certain other airports which ATA expects to serve
following its reorganization. AirTran Airways also has an option to
purchase or assume leases for ground support and related equipment of ATA
at Chicago-Midway and the other airports whose leases are assumed. The
parties expect the closing will occur on or before December 23, 2004.
The purchase price, excluding amounts to be paid for purchased equipment
and assumed leases, is approximately $90 million, subject to adjustment.
The purchase price will be paid as follows: approximately $42 million to
the Company and approximately $7 million to the City of Chicago at closing;
approximately $12 million to the Company on January 11, 2005; and
approximately $7 million to the Company on April 1, 2005. In addition, up
to a total of $22 million will be paid to the Company from closing through
December 31, 2012 depending upon the frequency of certain AirTran Airways'
flights to and from Chicago-Midway.
ATA expects to maintain its current domestic flight service levels at
Chicago-Midway through January 11, 2005 and, subject to certain
contingencies, to make available to AirTran Airways up to twelve of ATA's
Boeing 737-800 aircraft on a "wet lease" basis for varying periods of time
through approximately June 4, 2005. ATA also expects to continue to serve
international destinations from Chicago-Midway.
In addition, the parties intend to negotiate a number of agreements for an
expanded relationship between them, including joint code sharing and joint
marketing arrangements, an arrangement by which Chicago Express Airlines,
Inc., a subsidiary of the Company, would support AirTran Airways'
Chicago-Midway operations, and agreements by which the parties would
support each other's operations at certain airports. In addition, the
agreement contemplates that the parties will negotiate an agreement for the
assumption by AirTran Airways of responsibility for passenger tickets
previously sold by ATA for air travel to or from Chicago-Midway.
Any closing of the AirTran Transaction is subject to a number of
conditions, including approvals by the Bankruptcy Court, the City of
Chicago, the Federal Aviation Administration ("FAA") and other affected
regulatory authorities. In addition, it is possible that the Company will
receive superior proposals to acquire all or part of the assets that are
subject to the AirTran Transaction pursuant to Bid Procedures approved by
the Bankruptcy Court on November 19, 2004. Other parties have indicated to
the Bankruptcy Court that they intend to submit bids to purchase all or a
portion of the Company's assets by December 13, 2004. The AirTran
Transaction provides for the payment to AirTran Airways of a termination
fee of approximately $3.25 million or reimbursement of its expenses up to
$1 million if the agreement is terminated under certain circumstances,
including, among others, the transfer of one or more of the assets and
leases related to ATA's Chicago-Midway operations to a third party or the
sale or merger of the Company or ATA with a third party.
On November 17, 2004, ATA closed a transaction (the "Financing
Transaction") with the Indiana Transportation Finance Authority ("ITFA")
that will provide ATA with over $15 million of debtor-in-possession ("DIP")
financing as it continues to negotiate a restructuring of its operations
with lessors, creditors and other affected parties. Under this agreement,
ATA received $15 million on November 17, 2004. The Company and ATA are
currently operating as debtors-in-possession in jointly administered
Chapter 11 cases pending in Indianapolis.
15
Under the Financing Transaction, ATA sold property consisting primarily of
aircraft parts, free and clear of any liens to the ITFA. The ITFA in turn
leased that property to the IAA and the IAA subleased the property to ATA.
ATA is obligated to repurchase the property upon the earlier to occur of
the closing of the AirTran Transaction or an alternative transaction (as
defined in the Bid Procedures discussed above), or February 15, 2005. As
part of the repurchase of the property, ATA will reimburse the ITFA for
interest on the funds it provided which carry interest at a variable rate,
currently equal to approximately 3% per annum.
As part of the Financing Transaction, ATA has committed to continue to
operate from its headquarters in Indianapolis, maintain substantial hub
operations at Indianapolis International Airport, provide passenger service
to destinations in Indiana and continue to employ a substantial number of
Indianapolis-based employees. A breach of these covenants would likely
require ATA to pay an additional fee of $1.5 million to the IAA.
The Financing Transaction was approved by the Bankruptcy Court on November
16, 2004.
16
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Quarter and Nine Months Ended September 30, 2004, Versus Quarter and Nine Months
Ended September 30, 2003
Overview
On October 26, 2004,the Company, and seven of its subsidiaries including ATA and
Chicago Express filed voluntary petitions for relief under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of
Indiana. In connection with this Filing, the Company is developing a plan of
reorganization to address its debt and other obligations and to lower its cost
structure, while operating in the normal course of business. On November 16,
2004, the Company and ATA entered into an asset acquisition agreement with
AirTran Airways providing for the sale or transfer of assets and assumption of
liabilities relating to ATA's operations at Chicago-Midway Airport. The
agreement with AirTran Airways is subject to several conditions, including
approval of the Bankruptcy Court, the City of Chicago, the FAA and other
affected regulatory authorities. On November 17, 2004, ATA closed a
debtor-in-possession financing arrangement with the ITFA and the IAA providing
over $15 million of debtor-in-possession financing as the Company continues to
negotiate a restructuring of its operations with lessors, creditors and other
affected parties. For further information on the Chapter 11 filing and related
developments, see "Notes to Consolidated Financial Statements - Note 1 - The
Company and the Chapter 11 Filing" and "Note 10 - Other Subsequent Events."
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, has been
operating for 31 years and is the tenth largest U.S. airline in terms of 2003
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 provides commuter scheduled service between
Chicago-Midway and the cities of Indianapolis, Dayton, Des Moines, Flint, Fort
Wayne, Grand Rapids, 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 nine months ended September 30, 2004, the Company recorded an
operating loss of $16.2 million and $49.1 million, respectively, as compared to
an operating income of $29.5 million and $86.9 million in the same periods of
2003. In the quarter and nine months ended September 30, 2004, the Company had a
loss available to common shareholders of $31.3 million and $122.0 million,
respectively, as compared to income available to common shareholders of $6.6
million and $36.0 million in the same periods of 2003. The loss available to
common shareholders for the first nine months of 2004 includes a non-operating
charge of $27.3 million related to a loss on extinguishment of debt from the
exchange offers completed on January 30, 2004. The first nine months of 2003
results include $37.2 million received from the U.S. Government for a
reimbursement of expenses incurred and revenue foregone related to enhanced
aviation security after September 11, 2001, which was recorded as a reduction in
operating expenses. See "Notes to Consolidated Financial Statements - Note 3 -
Cost Structure Reduction Initiatives" for additional information on the exchange
offers.
17
Consolidated revenue per available seat mile ("RASM") decreased to 7.42 cents
and 7.24 cents, respectively, in the third quarter and first nine months of
2004, as compared to 7.46 cents and 7.25 cents, respectively, in the comparable
periods of 2003. In the first nine months of 2004, the Company's scheduled
service revenues were adversely affected by the industry's added capacity, which
especially impacted the Company's transcontinental and other east-west markets
in early 2004. As a result, the Company cancelled some of its east-west routes
beginning in March and April 2004 while continuing to review its other scheduled
service markets. In addition, in the first nine months of 2004 the Company
continued to be challenged by competitive pricing which included extraordinary
fare discounting by several airlines. The Company's third quarter 2004 scheduled
service revenues were also adversely impacted by the hurricanes in Florida.
Military/government revenue increased in the three and nine month ended
September 30, 2004, as compared to the same periods of 2003, mainly due to an
increase in fuel escalation revenue as a result of the increasing cost of fuel.
In the third quarter of 2004, military/government revenue increased due to
higher military block hours operated, as compared to the same period of 2003.
The Company's unit costs remained among the lowest of major airlines in the
third quarter and first nine months of 2004. Consolidated cost per available
seat mile ("CASM") increased to 7.72 cents and 7.54 cents, respectively, in the
quarter and nine months ended September 30, 2004, as compared to 6.90 cents and
6.70 cents, respectively, in the comparable periods of 2003. The 2003 nine
months CASM amount reflects the benefit from the receipt of $37.2 million, or
0.23 cents, in U.S. Government funds received in the second quarter of 2003. The
Company's 2004 CASM was adversely affected by a 39.1% and 22.4% increase in the
average cost per gallon of fuel in the third quarter and first nine months of
2004, as compared to the same periods of 2003. In addition, the Company
experienced higher maintenance costs in the first nine months of 2004 as a
result of a contractual rate increase in the hourly engine maintenance
agreements for the Company's fleets of Boeing 757-200, Boeing 757-300 and Boeing
737-800 aircraft. Personnel costs also increased in 2004, due primarily to
contractual rate increases for cockpit crew received in July 2003 and the
continuing increase in benefits costs experienced by the Company.
Critical Accounting Policies
Please refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. See "Notes to Consolidated Financial Statements - Note 2 -
Basis of Presentation and Stock Based Compensation" with regard to the future
adoption of SOP 90-7, which is applicable to companies in Chapter 11
reorganization.
Results of Operations
Operating revenues increased 3.5% to $401.2 million in the third quarter of
2004, as compared to $387.7 million in the same period of 2003, and increased
2.6% to $1.179 billion in the first nine months of 2004, as compared to $1.149
billion in the same period of 2003. Consolidated RASM decreased 0.5% to 7.42
cents and 0.1% to 7.24 cents in the third quarter and first nine months of 2004,
respectively, as compared to 7.46 cents and 7.25 cents in the third quarter and
first nine months of 2003. Scheduled service revenues decreased $7.6 million
between the third quarters of 2003 and 2004, or 2.6%, while charter revenues
increased $17.7 million or 22.5% between the same periods. Scheduled service
revenues increased $47.6 million between the first nine months of 2003 and 2004,
or 5.8%, while charter revenues decreased $24.8 million or 8.7% between the same
periods.
Operating expenses increased 16.5% to $417.4 million in the third quarter of
2004, as compared to $358.2 million in the comparable period of 2003, and
increased 15.5% to $1.228 billion in the first nine months of 2004, as compared
to $1.063 billion in the same period of 2003. Consolidated CASM increased 11.9%
to 7.72 cents in the third quarter of 2004, as compared to 6.90 cents in the
third quarter of 2003, and increased 12.5% to 7.54 cents in the first nine
months of 2004, as compared to 6.70 cents in the same period of 2003. Operating
expenses were primarily impacted by the increasing cost of fuel, which resulted
in a CASM increase of 0.53 cents and 0.32 cents in the third quarter and first
nine months, respectively. In addition, operating expenses for the first nine
months of 2003 benefited from the receipt of $37.2 million in U.S. Government
funds for the reimbursement of expenses incurred and revenue foregone related to
enhanced aviation security after September 11, 2001, which was recorded as a
reduction to operating expenses.
18
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 September 30, Nine Months Ended September 30,
2004 2003 2004 2003
--------- --------- ---------- ----------
Consolidated operating revenues: 7.42 7.46 7.24 7.25
Consolidated operating expenses:
Salaries, wages and benefits 1.97 1.93 1.97 1.85
Fuel and oil 1.79 1.26 1.63 1.31
Aircraft rentals 1.17 1.10 1.12 1.06
Handling, landing and navigation fees 0.55 0.48 0.57 0.55
Aircraft maintenance, materials and repairs 0.36 0.21 0.36 0.22
Crew and other employee travel 0.29 0.31 0.28 0.30
Other selling expenses 0.25 0.25 0.25 0.24
Depreciation and amortization 0.24 0.27 0.24 0.27
Passenger service 0.21 0.20 0.20 0.20
Advertising 0.17 0.16 0.18 0.18
Commissions 0.13 0.11 0.12 0.10
Facilities and other rentals 0.13 0.12 0.12 0.11
Insurance 0.11 0.12 0.11 0.13
Ground package cost 0.05 0.05 0.06 0.06
U.S. Government Funds - - - (0.23)
Other 0.30 0.33 0.33 0.35
--------- --------- ---------- ----------
Total consolidated operating expenses 7.72 6.90 7.54 6.70
--------- --------- ---------- ----------
Consolidated operating income (loss) (0.30) 0.56 (0.30) 0.55
========= ========= ========== ==========
ASMs (in thousands) 5,405,354 5,193,885 16,298,636 15,848,748
Consolidated Flight Operating and Financial Data
The following tables set 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 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. Data for subservice operations, which is insignificant, is not
included.
19
Three Months Ended September 30,
----------------------------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
----------------------------------------------------------------------------
Departures Jet 21,304 19,939 1,365 6.85
Departures SAAB 13,443 12,945 498 3.85
--------- --------- ------- ----
Total Departures 34,747 32,884 1,863 5.67
--------- --------- ------- ----
Block Hours Jet 64,561 60,679 3,882 6.40
Block Hours SAAB 12,773 12,789 (16) (0.13)
--------- --------- ------- ----
Total Block Hours 77,334 73,468 3,866 5.26
--------- --------- ------- ----
RPMs Jet (000s) 3,960,047 3,710,311 249,736 6.73
RPMs SAAB (000s) 48,217 46,599 1,618 3.47
--------- --------- ------- ----
Total RPMs (000s) (a) 4,008,264 3,756,910 251,354 6.69
--------- --------- ------- ----
ASMs Jet (000s) 5,330,591 5,117,266 213,325 4.17
ASMs SAAB (000s) 74,763 76,619 (1,856) (2.42)
--------- --------- ------- ----
Total ASMs (000s) (b) 5,405,354 5,193,885 211,469 4.07
--------- --------- ------- ----
Load Factor Jet (%) 74.29 72.51 1.78 2.45
Load Factor SAAB (%) 64.49 60.82 3.67 6.03
--------- --------- ------- ----
Total Load Factor (%) (c) 74.15 72.33 1.82 2.52
--------- --------- ------- ----
Passengers Enplaned Jet 2,811,011 2,631,412 179,599 6.83
Passengers Enplaned SAAB 290,376 264,007 26,369 9.99
--------- --------- ------- ----
Total Passengers Enplaned (d) 3,101,387 2,895,419 205,968 7.11
--------- --------- ------- ----
Revenue $ (000s) 401,219 387,703 13,516 3.49
RASM in cents (e) 7.42 7.46 (0.04) (0.54)
CASM in cents (f) 7.72 6.90 0.82 11.88
Yield in cents (g) 10.01 10.32 (0.31) (3.00)
Average Aircraft in Service
Lockheed L-1011 4.48 4.65 (0.17) (3.66)
Boeing 737-800 31.11 29.59 1.52 5.14
Boeing 757-200 14.59 13.80 0.79 5.72
Boeing 757-300 10.94 11.17 (0.23) (2.06)
SAAB 340B 16.00 16.00 - -
Average Block Hours Flown per day
Lockheed L-1011 11.55 9.83 1.72 17.50
Boeing 737-800 11.35 10.96 0.39 3.56
Boeing 757-200 12.76 12.38 0.38 3.07
Boeing 757-300 10.83 11.27 (0.44) (3.90)
SAAB 340B 8.77 8.79 (0.02) (0.23)
See footnotes (a) through (g) on page 22.
20
Nine Months Ended September 30,
------------------------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------
Departures Jet 64,636 58,919 5,717 9.70
Departures SAAB 39,914 38,742 1,172 3.03
---------- ---------- ------- ----
Total Departures 104,550 97,661 6,889 7.05
---------- ---------- ------- ----
Block Hours Jet 196,987 183,211 13,776 7.52
Block Hours SAAB 38,687 38,009 678 1.78
---------- ---------- ------- ----
Total Block Hours 235,674 221,220 14,454 6.53
---------- ---------- ------- ----
RPMs Jet (000s) 11,234,005 10,767,586 466,419 4.33
RPMs SAAB (000s) 144,091 144,572 (481) (0.33)
---------- ---------- ------- ----
Total RPMs (000s) (a) 11,378,096 10,912,158 465,938 4.27
---------- ---------- ------- ----
ASMs Jet (000s) 16,068,556 15,617,627 450,929 2.89
ASMs SAAB (000s) 230,080 231,121 (1,041) (0.45)
---------- ---------- ------- ----
Total ASMs (000s) (b) 16,298,636 15,848,748 449,888 2.84
---------- ---------- ------- ----
Load Factor Jet (%) 69.91 68.95 0.96 1.39
Load Factor SAAB (%) 62.63 62.55 0.08 0.13
---------- ---------- ------- ----
Total Load Factor (%) (c) 69.81 68.85 0.96 1.39
---------- ---------- ------- ----
Passengers Enplaned Jet 8,189,762 7,667,498 522,264 6.81
Passengers Enplaned SAAB 839,789 821,940 17,849 2.17
---------- ---------- ------- ----
Total Passengers Enplaned (d) 9,026,551 8,489,438 540,113 6.36
---------- ---------- ------- ----
Revenue $ (000s) 1,179,326 1,149,454 29,872 2.60
RASM in cents (e) 7.24 7.25 (0.01) (0.14)
CASM in cents (f) 7.54 6.70 0.84 12.54
Yield in cents (g) 10.36 10.53 (0.17) (1.61)
Average Aircraft in Service
Lockheed L-1011 4.85 6.78 (1.93) (28.47)
Boeing 737-800 31.05 29.32 1.73 5.90
Boeing 757-200 14.61 14.34 0.27 1.88
Boeing 757-300 11.40 10.21 1.19 11.66
SAAB 340B 16.00 16.00 - -
Average Block Hours Flown per day
Lockheed L-1011 10.19 9.00 1.19 13.22
Boeing 737-800 11.44 10.87 0.57 5.24
Boeing 757-200 13.00 12.37 0.63 5.09
Boeing 757-300 11.14 11.16 (0.02) (0.18)
SAAB 340B 8.86 8.70 0.16 1.84
See footnotes (a) through (g) on page 22.
21
(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
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." In the case of commercial charter and military/government charter,
passengers enplaned is less relevant because the right to use an entire aircraft
is sold by the Company instead of individual seats.
(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 third quarter of 2004 increased 3.5% to $401.2
million, as compared to $387.7 million in the third quarter of 2003; and
operating revenues in the first nine months of 2004 increased 2.6% to $1.179
billion, as compared to $1.149 billion in the same period of 2003.
22
The following tables set forth, for the periods indicated, certain key operating
and financial data for the scheduled service, commercial charter and
military/government charter operations of the Company.
Three Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
-----------------------------------------------------------------------------
Scheduled Service
Departures 32,713 30,982 1,731 5.59
Block Hours 68,645 65,248 3,397 5.21
RPMs (000s) (a) 3,448,905 3,258,465 190,440 5.84
ASMs (000s) (b) 4,383,676 4,309,846 73,830 1.71
Load Factor (c) 78.68 75.61 3.07 4.06
Passengers Enplaned (d) 2,974,566 2,736,208 238,358 8.71
Revenue $ (000s) 285,978 293,549 (7,571) (2.58)
RASM in cents (e) 6.52 6.81 (0.29) (4.26)
Yield in cents (g) 8.29 9.01 (0.72) (7.99)
Revenue per segment $ (h) 96.14 107.28 (11.14) (10.38)
Military Charter
Departures 1,656 1,246 410 32.91
Block Hours 7,403 5,957 1,446 24.27
ASMs (000s) (b) 910,129 711,320 198,809 27.95
Revenue $ (000s) 88,419 65,535 22,884 34.92
RASM in cents (e) 9.71 9.21 0.50 5.43
RASM excluding fuel escalation (j) 9.03 9.18 (0.15) (1.63)
Commercial Charter
Departures 332 649 (317) (48.84)
Block Hours 1,115 2,246 (1,131) (50.36)
ASMs (000s) (b) 94,777 171,141 (76,364) (44.62)
Revenue $ (000s) 7,799 13,001 (5,202) (40.01)
RASM in cents (e) 8.23 7.60 0.63 8.29
RASM excluding fuel escalation (i) 7.78 7.38 0.40 5.42
Percentage of Consolidated Revenues:
Scheduled Service 71.3% 75.7% (4.4%) (5.81)
Military Charter 22.0% 16.9% 5.1% 30.18
Commercial Charter 1.9% 3.4% (1.5%) (44.12)
See footnotes (a) through (j) on pages 22 and 24.
23
Nine Months Ended September 30,
--------------------------------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
--------------------------------------------------------------------------------
Scheduled Service
Departures 98,994 90,232 8,762 9.71
Block Hours 211,317 188,936 22,381 11.85
RPMs (000s) (a) 9,930,919 9,134,162 796,757 8.72
ASMs (000s) (b) 13,478,273 12,328,707 1,149,566 9.32
Load Factor (c) 73.68 74.09 (0.41) (0.55)
Passengers Enplaned (d) 8,682,843 7,874,024 808,819 10.27
Revenue $ (000s) 863,895 816,326 47,569 5.83
RASM in cents (e) 6.41 6.62 (0.21) (3.17)
Yield in cents (g) 8.70 8.94 (0.24) (2.68)
Revenue per segment $ (h) 99.49 103.67 (4.18) (4.03)
Military Charter
Departures 4,377 4,566 (189) (4.14)
Block Hours 20,258 22,080 (1,822) (8.25)
ASMs (000s) (b) 2,486,362 2,741,747 (255,385) (9.31)
Revenue $ (000s) 234,679 229,750 4,929 2.15
RASM in cents (e) 9.44 8.38 1.06 12.65
RASM excluding fuel escalation (j) 8.97 8.28 0.69 8.33
Commercial Charter
Departures 1,074 2,847 (1,773) (62.28)
Block Hours 3,773 10,166 (6,393) (62.89)
ASMs (000s) (b) 306,638 774,964 (468,326) (60.43)
Revenue $ (000s) 25,905 55,643 (29,738) (53.44)
RASM in cents (e) 8.45 7.18 1.27 17.69
RASM excluding fuel escalation (i) 8.31 6.82 1.49 21.85
Percentage of Consolidated Revenues:
Scheduled Service 73.3% 71.0% 2.3% 3.24
Military Charter 19.9% 20.0% (0.1%) (0.50)
Commercial Charter 2.2% 4.8% (2.6%) (54.17)
See footnotes (a) through (g) on page 22.
(h) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
(i) Commercial charter contracts generally provide that the tour operator will
reimburse the Company for certain fuel cost increases, which, when earned, are
accounted for as additional revenue. A separate RASM calculation, excluding the
impact of fuel reimbursements, is provided as a separate measure of unit revenue
changes.
(j) Military/government reimbursements to the Company are calculated based upon
a "cost plus" formula, including an assumed average fuel price for each contract
year. If actual fuel prices differ from the contract rate, revenues are adjusted
up or down to neutralize the impact of the change on the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
24
Scheduled Service Revenues. Scheduled service revenues in the third quarter of
2004 decreased 2.6% to $286.0 million from $293.5 million in the third quarter
of 2003, and scheduled service revenues in the nine months ended September 30,
2004 increased 5.8% to $863.9 million from $816.3 million in the same period of
2003. For the three months and nine months ended September 30, 2004, unit
revenues decreased 4.2% and 3.2% and yields decreased 8.0% and 2.7%,
respectively, as compared to the same periods of 2003. During 2004, the Company
continued to experience significant pressure from a competitive pricing
environment including extraordinary fare discounting by several airlines in many
of the scheduled service markets the Company serves. The primary reason for the
competitive pricing environment has been the industry's added capacity, which
especially impacted the Company's transcontinental and other east-west markets
in early 2004. As a result, the Company cancelled some of its east-west routes
beginning in March and April 2004 while continuing to review its other scheduled
service markets. In addition, the Company's third quarter 2004 revenues were
adversely impacted by the hurricanes in Florida.
Approximately 63.2% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in the third quarter
of 2004, as compared to 65.1% in the third quarter of 2003. The Hawaiian market
generated approximately 15.7% of total scheduled service capacity in the third
quarter of 2004, as compared to 14.9% in the third quarter of 2003. Another
13.0% of total scheduled service capacity was generated in the Indianapolis
market in the third quarter of 2004, as compared to 13.0% in the third quarter
of 2003.
The Company operated 168 peak daily jet and commuter departures from
Chicago-Midway and served 37 destinations on a nonstop basis in the third
quarter of 2004, as compared to 157 peak daily jet and commuter departures and
37 nonstop destinations in the third quarter of 2003.
Military/Government Charter Revenues. Military/government charter revenue
increased 35.0% to $88.4 million in the third quarter of 2004 from $65.5 million
in the third quarter of 2003, and in the nine months ended September 30, 2004,
military/government charter revenue increased 2.2% to $234.7 million from $229.7
million in the same period of 2003.
The increase in revenue for military/government charter in the third quarter and
first nine months of 2004 was mainly due to an increase in fuel escalation
revenue as a result of the increased cost of fuel and an increase in block hours
flown in the third quarter of 2004, as compared to the same period of 2003. In
2003, the Company participated in the Civil Reserve Air Fleet ("CRAF"), which
ran from February 18, 2003 to June 18, 2003, requiring ATA to pledge up to 13
aircraft to military/government charter use to support Operation Iraqi Freedom
and allowing the Company to increase its Lockheed L-1011 aircraft utilization
(number of productive hours of flying per day). However, in the third quarter of
2003 following the deactivation of CRAF, the demand for military travel
decreased significantly.
Commercial Charter Revenues. Commercial charter revenues decreased 40.0% to $7.8
million in the third quarter of 2004 from $13.0 million in the third quarter of
2003, and in the nine months ended September 30, 2004, commercial charter
revenue decreased 53.4% to $25.9 million from $55.6 million in the same period
of 2003. The majority of the decline in commercial charter revenues was due to
the retirement of certain Lockheed L-1011 aircraft that the Company has
traditionally used in commercial charter flying. Since aircraft utilization 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.
25
Although commercial charter revenues declined between periods, excluding the
impact of fuel escalation revenue, commercial charter RASM increased 5.4% to
7.78 cents in the third quarter of 2004 from 7.38 cents in the third quarter of
2003 and increased 21.8% to 8.31 cents in the first nine months of 2004 from
6.82 cents in the same period of 2003. The primary reason for the increases is
that the Company flew a higher percentage of specialty charter flights in 2004,
as compared to same periods of 2003. Specialty charter flights, which are
designed to meet the customers' unique scheduling and service needs, produce
higher revenue per ASM than the other charter flights, which are lower-yield
repetitive flights to vacation destinations marketed to tour operators.
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. Currently the Company markets these ground
packages through its subsidiary, Ambassadair Travel Club. Ambassadair offers
tour-guide-accompanied vacation packages to its approximately 31,000 individual
and family members. In the third quarter and nine months ended September 30,
2004, ground package revenues increased 6.9% to $3.1 million and decreased 3.5%
to $10.9 million, as compared to $2.9 million and $11.3 million in the same
periods of 2003. In both periods, the Company realized an increase in
Ambassadair ground revenues, which are impacted by the mix of packages offered.
In the nine months ended September 30, 2004, the Company experienced an
offsetting decrease in ground revenues due to the closure of a small Canadian
tour operator as of July 1, 2003.
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
administration service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 24.2% to $15.9 million in the third quarter of
2004 from $12.8 million in the third quarter of 2003, and in the nine months
ended September 30, 2004, other revenues increased 20.6% to $43.9 million, as
compared to $36.4 million in the same period of 2003, primarily due to increases
in sub-service revenue, cargo revenue and service fees.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in the third quarter of 2004 increased 6.1%
to $106.3 million from $100.2 million in the third quarter of 2003, and in the
nine months ended September 30, 2004, salaries, wages and benefits expense
increased 9.6% to $321.4 million, as compared to $293.3 million in the same
period of 2003.
The increases in salaries, wages and benefits in the third quarter and first
nine months of 2004, as compared to the same periods of 2003, are partially due
to the Company employing additional crewmembers and other operations employees
to handle its increased scheduled service capacity in 2004, as compared to 2003.
The Company also incurred significant increased costs in 2004 for employee
medical and workers' compensation benefits. In addition, the Company's salary
costs increased for the first nine months of 2004, as compared to the same
period of 2003, due to contractual rate increases effective July 1, 2003 for the
Company's cockpit crewmembers.
During the third quarter of 2004, the Company reached an agreement to amend its
contract with its cockpit crewmembers represented by the Air Line Pilots
Association ("ALPA"). Under the amendments, crewmembers will forego contractual
rate increases that otherwise would have become effective July 1, 2004 and July
1, 2005, resulting in savings of approximately $32.5 million. The amendments
include new contractual increases effective July 1, 2006 and July 1, 2007.
The Company also concluded an amendment to its agreement with cabin crewmembers
represented by the Association of Flight Attendants ("AFA") on October 15, 2004.
Under terms of the amended agreement cabin crewmembers will reduce their base
hourly pay rate effective October 15, 2004 by 10% through October 15, 2006,
resulting in savings of approximately $18.6 million over the same time period.
On October 15, 2006, non-amendable rates of pay return to those who were in
force on April 11, 2004.
26
Fuel and Oil. Fuel and oil expense increased 48.6% to $96.9 million in the third
quarter of 2004, as compared to $65.2 million in the same period of 2003, and
increased 27.2% to $265.1 million in the nine months ended September 30, 2004,
as compared to $208.4 million in the same period of 2003.
During the quarter and nine months ended September 30, 2004, the average cost
per gallon of jet fuel consumed increased by 39.1% and 22.4%, respectively,
compared to the same periods of 2003, resulting in an increase in fuel and oil
expense of approximately $26.9 million and $47.8 million, respectively, between
those periods.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. The Company did not have any hedge
contracts in place in the first nine months of 2004 or 2003; however, the
Company did benefit from fuel reimbursement clauses and guarantees in its bulk
scheduled service, commercial charter and military/government contracts in the
third quarter of 2004. The benefit of these price guarantees was accounted for
as revenue and increased 382.4% to $8.2 million for the third quarter of 2004 as
compared to $1.7 million for the same period of 2003, and increased 92.9% to
$16.2 million in the nine months ended September 30, 2004, as compared to $8.4
million in the same period of 2003.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. Many of the Company's aircraft operating
leases were originally structured to require very significant cash payments in
the early years of the lease in order to obtain more overall favorable lease
rates. The Company accounts for aircraft rentals expense in equal monthly
amounts over the life of each operating lease because straight-line expense
recognition is most representative of the time pattern from which benefit is
derived from use of the aircraft. Although the Company restructured many of its
operating leases in January 2004, resulting in significant cash deferrals, the
amount of the cash payments in excess of the aircraft rent expense in these
early years has still resulted in a significant prepaid aircraft rent amount on
the Company's balance sheet. Refer to "Notes to Consolidated Financial
Statements - Note 3 - Cost Structure Reduction Initiatives" and "Notes to
Consolidated Financial Statements - Note 7 -Prepaid and Accrued Aircraft Rent"
for further details.
Aircraft rentals expense in the third quarter of 2004 increased 10.3% to $63.0
million from $57.1 million in the third quarter of 2003, and increased 8.3% to
$182.4 million in the nine months ended September 30, 2004, as compared to
$168.4 million in the same period of 2003. These increases were mainly
attributable to the delivery of three leased Boeing 737-800 aircraft, one leased
Boeing 757-300 aircraft, and one leased 757-200 aircraft between September 2003
and September 2004.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 18.7% to $29.8 million in the
third quarter of 2004, as compared to $25.1 million in the same period of 2003,
and increased by 7.7% to $93.3 million in the nine months ended September 30,
2004, as compared to $86.6 million in the same period of 2003.
The Company experienced a 6.9% and 9.7% increase in system-wide jet departures
between periods, which resulted in an increase of handling, landing and
navigation fees of $3.4 million and $9.9 million in the quarter and nine months
ended September 30, 2004, respectively, as compared to the same periods of 2003.
The Company experienced an increase in security costs of $1.1 million in both
the third quarter and first nine months of 2004, respectively, as compared to
the same periods of 2003, due to the temporary suspension of the aviation
security fee during part of 2003. The Company experienced a decrease in the cost
of handling per departure due to the negotiation of favorable terms in new
contracts, resulting in decreased expenditures of $0.5 million and $6.2 million,
respectively, in the third quarter and first nine months of 2004, as compared to
the same periods of 2003.
27
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, Boeing 757-300 and SAAB 340B power
plants. These agreements provide for the Company to pay monthly fees based on a
specified rate per engine flight hour, in exchange for major engine overhauls
and maintenance. Aircraft maintenance, materials and repairs expense increased
82.4% to $19.7 million in the third quarter of 2004, as compared to $10.8
million in the third quarter of 2003, and increased 68.4% to $59.1 million in
the nine months ended September 30, 2004, as compared to $35.1 million in the
same period of 2003.
The increases in maintenance, materials and repairs expense were mainly due to
contractual rate increases in the cost of the hourly engine maintenance
agreements for the Company's Boeing 757-200, Boeing 757-300 and 737-800 fleets.
The 757-200 and 757-300 rate increases, effective January 1, 2004, resulted in
an increase in aircraft maintenance, materials and repairs expense of $5.9
million and $18.6 million in the third quarter and first nine months of 2004, as
compared to the same periods of 2003. The 737-800 rate increase, effective June
1, 2004, resulted in an increase in aircraft maintenance, materials and repairs
expense of $1.6 million in the third quarter and first nine months of 2004, as
compared with the same periods of 2003. The Company also incurred higher
maintenance, materials and repairs cost in the first nine months of 2004 due to
an increase in the number of airframe maintenance checks, as compared to the
same period of 2003.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost incurred of air transportation, hotels and per diem reimbursements to
cockpit and cabin crewmembers to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
decreased 1.3% to $15.8 million in the third quarter of 2004, as compared to
$16.0 million in the third quarter of 2003, and decreased 4.4% to $45.8 million
in the nine months ended September 30, 2004, as compared to $47.9 million in the
same period of 2003. The Company experienced a decrease in crew and other
employee travel in both periods of 2004, as compared to the same periods of
2003, due to a decrease in crew per diem as a result of negotiated rate
reductions and a decrease in cockpit training, as well as less
military/government departures in the nine months ended September 30, 2004, as
compared to the same period of 2003. As military/government flights operate to
and from points remote from the Company crew bases, the Company incurs
significant travel expenses on other airlines for position of the crews, and
higher hotel costs.
As a result of recently agreed contract amendments with the cockpit crewmembers
represented by ALPA, the Company expects a reduction in per diem costs of
approximately $4.2 million for the contract years beginning July 1, 2004 and
July 1, 2005. An associated reduction of approximately $3.2 million is expected
between July 1, 2004 and July 1, 2005 from cabin crewmembers due to stipulations
in their collective bargaining agreement, which link per diem rates to the
cockpit crewmember contract.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems ("CRS"), credit card discount
expenses incurred when selling to customers using credit cards for payment, and
toll-free telephone services provided to customers who contact the Company
directly to book reservations. Other selling expenses increased 2.3% to $13.5
million in the third quarter of 2004, as compared to $13.2 million in the third
quarter of 2003, and increased 5.3% to $40.0 million in the nine months ended
September 30, 2004, as compared to $38.0 million in the same period of 2003. The
Company experienced increases in credit card and CRS fees due to the increase in
scheduled service passengers enplaned in both the third quarter and first nine
months of 2004, as compared to the same periods of 2003. These increases were
partially offset by a decrease in toll-free service costs in both the quarter
and nine months ended September 30, 2004, compared to the same periods of 2003,
due to contractual rate decreases provided by the new service provider.
28
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 7.8% to
$13.0 million in the third quarter of 2004, as compared to $14.1 million in the
third quarter of 2003, and decreased 8.4% to $39.5 million in the nine months
ended September 30, 2004, as compared to $43.1 million in the same period of
2003.
The decrease in depreciation and amortization expense is mainly attributable to
reductions in the L-1011-50 and 100 fleet. The Company retired four L-1011-50
and 100 aircraft from revenue service during the second and third quarters of
2003. Due to these retirements, the Company recorded $1.3 million and $4.8
million less in depreciation in the third quarter and first nine months of 2004,
respectively, as compared to the same periods of 2003.
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 third quarters of 2004 and 2003, catering represented
83.0% and 83.2%, respectively, of total passenger service expense, while
catering represented 81.9% and 82.4%, respectively, of total passenger service
expense for the nine month periods ended September 30, 2004 and 2003.
The total cost of passenger service increased 9.8% to $11.2 million in the third
quarter of 2004, as compared to $10.2 million in the third quarter of 2003, and
increased 4.5% to $32.6 million in the nine months ended September 30, 2004, as
compared to $31.2 million in the same period of 2003. In the three and nine
month periods ended September 30, 2004, the Company experienced an increase in
passenger service expense mainly due the increase in scheduled service
passengers boarded, as compared to the respective periods in 2003.
Advertising. Advertising expense increased 13.3% to $9.4 million in the third
quarter of 2004, as compared to $8.3 million in the same period of 2003, and
increased 3.5% to $29.6 million in the nine months ended September 30, 2004, as
compared to $28.6 million in the same period of 2003. The Company incurs
advertising costs primarily to support single-seat scheduled service sales. In
the third quarter and first nine months of 2004, the Company increased
advertising in an effort to respond to the current competitive pricing
environment.
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 increased 18.3% to $7.1 million in the third
quarter of 2004, as compared to $6.0 million in the third quarter of 2003, and
increased 21.0% to $19.6 million in the nine months ended September 30, 2004 as
compared to $16.2 million in the same period of 2003.
The Company experienced an increase of $1.1 million in military/government
charter commissions during the third quarter of 2004 due to increased revenues
as compared to the prior year. The Company experienced an increase of $4.6
million in military/government charter commissions in the nine months ended
September 30, 2004, as certain CRAF flights in the first nine months of 2003
were exempt from commissions. Substantially all military flights flown in 2004
were commissionable. The Company experienced a decrease in scheduled service
commissions of $1.2 million in the first nine months of 2004, as compared to the
same period of 2003, due to the increasing share of non-commissionable ticket
purchases made on the Company's own website, as compared to the share of
commissionable sales made through travel agents.
Facilities and Other Rentals. Facilities and other rentals include the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facilities and other
rentals increased 9.7% to $6.8 million in the third quarter of 2004, as compared
to $6.2 million in the third quarter of 2003, and increased 11.8% to $19.9
million in the nine months ended September 30, 2004, as compared to $17.8
million in the same period of 2003. The Company experienced cost increases at
certain existing locations due to increased frequency to those destinations.
29
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 6.3% to $6.0 million in the third quarter of
2004, as compared to $6.4 million in the third quarter of 2003, and decreased
17.8% to $17.5 million in the nine months ended September 30, 2004, as compared
to $21.3 million in the same period of 2003. The decreases are mainly
attributable to decreased insurance renewal rates for the Company's hull and
liability insurance for the policy year covering October 2003 through September
2004. The Company has completed the hull and liability insurance placement for
the policy year beginning October 2004, and currently expects a decrease of
approximately $2.0 million as compared to the cost for the prior policy year.
The Federal government has provided the Company and other airlines excess war
risk insurance coverage above $50 million up to $3.0 billion per event. The
Company is covered under this policy through December 2004. If the Federal
government stops providing excess war risk insurance to the Company after 2004,
it is likely that the Company's war risk insurance expense will increase, as the
premiums charged by private aviation insurers for this coverage may be higher
than those charged by the government.
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 customers. Ground package cost
increased 13.0% to $2.6 million in the third quarter of 2004, as compared to
$2.3 million in the third quarter of 2003, and decreased 1.1% to $9.2 million in
the nine months ended September 30, 2004, as compared to $9.3 million in the
same period of 2003. See the "Ground Package Revenues" section above for an
explanation of the ground package sales and related costs.
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, and did not receive such reimbursements in 2004.
Other Operating Expenses. Other operating expenses decreased 4.7% to $16.3
million in the third quarter of 2004, as compared to $17.1 million in the third
quarter of 2003, and decreased 1.8% to $53.5 million in the nine months ended
September 30, 2004, as compared to $54.5 million in the same period of 2003.
These decreases were attributable to various changes in other expenses
comprising this line item, none of which were individually significant.
Interest Expense. Interest expense in the quarter and the nine months ended
September 30, 2004 increased to $15.1 million and $45.5 million, respectively,
as compared to $14.3 million and $40.0 million in the same periods of 2003. The
Company recorded $1.8 million and $5.2 million more in interest expense in the
quarter and nine months ended September 30, 2004 as compared to the same period
of 2003, related to its unsecured senior notes restructured in January 2004. The
Company also recorded interest expense of $1.1 million and $3.3 million,
respectively, in the third quarter and first nine months of 2004 related to
dividends on the Series A Preferred. As of July 1, 2003, per the provisions of
FAS 150, the dividends related to the Series A Preferred are classified as
interest expense on the Company's statement of operations.
30
Loss on Extinguishment of Debt. On January 30, 2004, the Company completed
exchange offers and issued 2009 Notes and cash consideration for certain of its
2004 Notes and issued 2010 Notes and cash consideration for certain of its 2005
Notes. The Company accepted $260.3 million of Existing Notes tendered for
exchange, issuing $163.1 million in aggregate principal amount of 2009 Notes and
delivering $7.8 million in cash in exchange for $155.3 million in aggregate
principal amount of 2004 Notes tendered, and issuing $110.2 million in aggregate
principal amount of 2010 Notes and delivering $5.2 million in cash in exchange
for $105.0 million in aggregate principal amount of 2005 Notes. As a result of
this transaction, the Company recorded a non-operating loss on extinguishment of
debt of $27.3 million in accordance with EITF 96-19. The loss mainly relates to
the accounting for the $13 million cash consideration paid at closing of the
exchange offers and the $13 million of incremental notes issued during the
exchange offers. In accordance with EITF 96-19, the New Notes were recorded in
the Company's balance sheet at fair value at the date of the exchange offers,
which approximated their face value.
Income Taxes. The Company did not record any income tax expense or benefit in
the quarter and the nine months ended September 30, 2004 applicable to $30.9
million and $120.9 million, respectively, in pre-tax loss for those periods. In
comparison, the Company recorded $7.3 million in income tax expense in the third
quarter and nine months ended September 30, 2003, applicable to $15.0 million
and $47.4 million, respectively, in pre-tax income for those periods.
As of December 31, 2003, 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 third
quarter of and first nine months of 2004, the Company continued to record a full
valuation allowance against its net deferred tax asset under the same
presumption.
Liquidity and Capital Resources
On October 26, 2004, the Company filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. As of September 30, 2004, the Company
had an unrestricted cash balance of $57.6 million. The effect of the automatic
stay and section 1110 of the Bankruptcy Code have reduced the Company's cash
needs until the Section 1110 Deadline. With the cash resources currently
available to the Company, including the Financing Transaction, the Company
believes that it has sufficient liquidity to continue operations and develop a
plan of reorganization. However, no further assurance can be given as to the
Company's ability to continue as a going concern, both during and after the
Chapter 11 cases, which will depend upon, among other things: the consummation
of the AirTran Transaction or an Alternative Transaction or the availability of
additional DIP financing prior to the Section 1110 Deadline; the development of
a plan of reorganization for a restructured company which can generate
sufficient cash from operations on a sustained basis; the confirmation of a plan
of reorganization under the Bankruptcy Code; and the availability of emergence
financing. The accompanying unaudited consolidated financial statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern. A plan of reorganization could materially change
the amounts currently disclosed in the unaudited consolidated financial
statements.
The potential adverse publicity associated with the Chapter 11 filings and the
resulting uncertainty regarding the Company's future prospects may hinder the
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing and potential
customers; negatively impacting the ability of the Company to attract and
maintain key employees; limiting the Company's ability to obtain trade credit;
and impairing present and future relationships with vendors and service
providers. See "Liquidity Outlook" section below for further details regarding
the Filing.
Statement of Cash Flow Overview
In the nine months ended September 30, 2004, net cash used in operating
activities was $32.1 million, as compared to net cash provided by operating
activities of $115.5 million for the same period of 2003. The decrease in cash
provided and used by operating activities between periods primarily resulted
from the significant net loss in the first nine months of 2004, as compared to
the net income in the first nine months of 2003, partially offset by net
favorable changes in operating assets and liabilities.
31
Net cash used in investing activities was $16.2 million in the first nine months
of 2004, as compared to $100.3 million in the same period of 2003. The Company
realized a decrease in non-current prepaid aircraft rent payments of $13.0
million, which includes the $29.8 million refund received on January 30, 2004
related to payments made in 2003 under the original terms of certain
retroactively amended leases, in the first nine months of 2004. The Company
experienced an increase in non-current prepaid aircraft rent of $84.7 million in
the same period of 2003 due to very significant payments required under its
aircraft operating leases. See "Liquidity Outlook" section below and "Notes to
Consolidated Financial Statements - Note 7 -Prepaid and Accrued Aircraft Rent"
for further details. In addition, the Company made capital expenditures totaling
$21.4 million in the first nine months of 2004, as compared to $36.2 million in
the period of 2003.
Net cash used in financing activities was $54.7 million in the nine months ended
September 30, 2004, as compared to $18.4 million in the same period of 2003.
Upon completion of the exchange offers on January 30, 2004, the Company paid all
accrued preferred dividends in arrears totaling $9.2 million in the first
quarter of 2004. In addition, in the first nine months of 2004, the Company also
paid $13.0 million as cash consideration for the completion of the exchange
offers and made other scheduled debt payments of $45.3 million. In the first
nine months of 2003, the Company made scheduled debt payments of $14.2 million.
Also in the first nine months of 2004, the Company reduced restricted cash $11.7
million primarily due to the cancellation of a surety bond relating to the
Department of Transportation ("DOT") charter obligations. The Company replaced
the bond with an escrow arrangement, which requires the Company to place advance
receipts for certain charter flights into escrow until the flight operates. In
contrast, in the first nine months of 2003, the Company's restricted cash
increased by $10.2 million to collateralize additional letters of credit.
Liquidity Outlook
Bankruptcy Reorganization.
As a result of the continuing financial difficulties previously reported by the
Company as well as factors adversely affecting the airline industry generally,
on October 26, 2004, the Company, and seven of its subsidiaries including ATA
and Chicago Express, filed voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District
of Indiana. As of the date of the Filing the Company's unrestricted cash balance
was approximately $53.8 million. The Filing followed the Company's failure to
meet its September 30, 2004, trailing-twelve-months EBITDAR to fixed charges
ratio covenant under its secured term loan, which is partially guaranteed by the
ATSB, and identical covenants in its Union Planter's Bank mortgage note payable
agreements. Also, the Company defaulted under its Fleet Capital Corporation note
payable agreements that contain cross-default provisions to uncured events of
default in other indebtedness agreements of the Company. These obligations have
been classified as current liabilities on the Company's consolidated balance
sheet as of September 30, 2004. The Filing triggered defaults on substantially
all debt and lease obligations of the Debtors. Subject to certain exceptions
under the Bankruptcy Code, the Filing automatically enjoined, or stayed, the
continuation of any judicial or administrative proceedings or other actions
against the Debtors or their property to recover on, collect or secure a claim
arising prior to the Petition Date. For example, creditor actions to obtain
possession of property from the Debtors, or to create, perfect or enforce any
lien against the property of the Debtors, or to collect on or otherwise exercise
rights or remedies with respect to a pre-petition claim, are enjoined unless and
until the Bankruptcy Court lifts the automatic stay.
On October 29, 2004 the Bankruptcy Court entered an interim order which permits
the Company to operate by utilizing the unrestricted cash, eligible accounts
receivable and other collateral pledged to secure the Company's secured term
loan, a significant portion of which is guaranteed by the ATSB. The interim
order has the effect of giving the ATSB a replacement lien on unrestricted cash
and certain other assets generated after the Filing. This interim order has been
extended for successive short periods, and requires compliance by the Company
with certain terms such as the maintenance of minimum cash collateral balances
and periodic reporting requirements. Future renewals cannot be assured, and a
failure to renew this arrangement would be material and adverse to the Company's
ability to reorganize under Chapter 11 of the U. S. Bankruptcy Code.
32
Notwithstanding the above general discussion of the automatic stay, the Debtors'
right to retain and operate certain aircraft, aircraft engines and other
equipment defined in section 1110 of the Bankruptcy Code that are leased or
subject to a security interest or conditional sale contract are specifically
governed by section 1110 of the Bankruptcy Code. That section provides, in
relevant part, that unless the Debtors, within the Section 1110 Deadline or
December 24, 2004, agree to perform obligations under the lease, security
agreement, or conditional sale contract and cure all defaults there under (other
than defaults constituting a breach of provisions relating to the filing of the
Chapter 11 cases, the Debtors' insolvency or other financial condition of the
Debtors) within the time specified in section 1110, the right of the lessor,
secured party or conditional vendor to take possession of such equipment in
compliance with the provisions of the lease, security agreement, or conditional
sale contract and to enforce any of its other rights or remedies under such
lease, security agreement, or conditional sale contract is not limited or
otherwise affected by the automatic stay, by any other provision of the
Bankruptcy Code, or by any power of the Bankruptcy Court. The provisions of
section 1110 may materially impact the Debtors' options with respect to
development of a plan of reorganization.
The Debtors have the exclusive right for 120 days after the Petition Date to
file a plan of reorganization and, if they do so, 60 additional days to obtain
necessary acceptances of their plan. These periods may be extended by the
Bankruptcy Court for cause. If the Debtors' exclusivity period lapses, any party
in interest may file a plan of reorganization for any of the Debtors. In
addition to being voted on by holders of impaired claims and equity interests, a
plan of reorganization must satisfy certain requirements of the Bankruptcy Code
and must be approved, or confirmed, by the Bankruptcy Court in order to become
effective. A plan has been accepted by holders of claims against and equity
interests in the Debtors if (1) at least one-half in number and two-thirds in
dollar amount of claims actually voting in each impaired class of claims have
voted to accept the plan and (2) at least two-thirds in amount of equity
interests actually voting in each impaired class of equity interests have voted
to accept the plan. Under certain circumstances set forth in the provisions of
section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan
even if such plan has not been accepted by all impaired classes of claims and
equity interests. A class of claims or equity interests that does not receive or
retain any property under the plan on account of such claims or interests is
deemed to have voted to reject the plan. The precise requirements and
evidentiary showing for confirming a plan notwithstanding its rejection by one
or more impaired classes of claims or equity interests depends upon a number of
factors, including the status and seniority of the claims or equity interests in
the rejecting class ,i.e., secured claims or unsecured claims, subordinated or
senior claims, preferred or common stock.
As required by the Bankruptcy Code, the United States Trustee has appointed an
official committee of unsecured creditors (the "Official Committee"). The
Official Committee and its legal representatives have a right to be heard on all
matters that come before the Bankruptcy Court. There can be no assurance that
the Official Committee will support the Debtors' positions in the reorganization
cases or any plan of reorganization, once proposed, and disagreements between
the Debtors and the Official Committee could protract the reorganization cases,
could negatively impact the Debtors' ability to operate during the Chapter 11
cases, and could delay the Debtors' emergence from Chapter 11.
The disposition of assets and liquidation or sales of liabilities in the Chapter
11 cases are subject to significant uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code,
and subject to the Bankruptcy Court approval or otherwise as permitted in the
normal course of business, the Debtors may sell or otherwise dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the attached consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications reported
in these consolidated financial statements, which do not give effect to any
adjustments to the carrying value or amounts of liabilities that might result as
a consequence of confirmation of a plan of reorganization.
Although the Debtors expect to develop a reorganization plan for emergence from
Chapter 11 in 2005, there can be no assurance that a reorganization plan will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan will be consummated. The Company has incurred and will continue to incur
significant costs associated with the reorganization. The amount of these costs,
which are being expensed as incurred, are expected to significantly affect its
results of operations.
33
On November 5, 2004, the Company's common stock was delisted from the Nasdaq
National Market. The common stock trades in the over-the -counter market under
the symbol "ATAHQ." The value of the Company's common stock is highly
speculative. The Company urges that appropriate caution be exercised with
respect to existing and future investments in any liabilities and/or securities
of the Company or the other Debtors.
On November 16, 2004, the Company and ATA entered into an Asset Acquisition
Agreement with AirTran Airways, by which AirTran Airways has agreed to acquire
assets and assume liabilities relating to ATA's operations at Chicago-Midway
Airport.
The agreement also provides for assignment to AirTran Airways of leases at
airports served by ATA from Chicago-Midway, excluding Indianapolis International
Airport and certain other airports which ATA expects to serve following its
reorganization. AirTran Airways also has an option to purchase or assume leases
for ground support and related equipment of ATA at Chicago-Midway and the other
airports whose leases are assumed. The parties expect the closing will occur on
or before December 23, 2004.
The purchase price, excluding amounts to be paid for purchased equipment and
assumed leases, is approximately $90 million, subject to adjustment. The
purchase price will be paid as follows: approximately $42 million to the Company
and approximately $7 million to the City of Chicago at closing; approximately
$12 million to the Company on January 11, 2005; and approximately $7 million to
the Company on April 1, 2005. In addition, up to a total of $22 million will be
paid to the Company from closing through December 31, 2012 depending upon the
frequency of certain AirTran Airways' flights to and from Chicago-Midway.
ATA expects to maintain its current domestic flight service levels at
Chicago-Midway through January 11, 2005 and, subject to certain contingencies,
to make available to AirTran Airways up to twelve of ATA's Boeing 737-800
aircraft on a "wet lease" basis for varying periods of time through
approximately June 4, 2005. ATA also expects to continue to serve international
destinations from Chicago-Midway.
In addition, the parties intend to negotiate a number of agreements for an
expanded relationship between them, including joint code sharing and joint
marketing arrangements, an arrangement by which Chicago Express Airlines, Inc.,
a subsidiary of the Company, would support AirTran Airways' Chicago-Midway
operations, and agreements by which the parties would support each other's
operations at certain airports. In addition, the agreement contemplates that the
parties will negotiate an agreement for the assumption by AirTran Airways of
responsibility for passenger tickets previously sold by ATA for air travel to or
from Chicago-Midway.
Any closing of the AirTran Transaction is subject to a number of conditions,
including approvals by the Bankruptcy Court, the City of Chicago, the FAA and
other affected regulatory authorities. In addition, it is possible that the
Company will receive superior proposals to acquire all or part of the assets
that are subject to the AirTran Transaction pursuant to Bid Procedures approved
by the Bankruptcy Court on November 19, 2004. Other parties have indicated to
the Bankruptcy Court that they intend to submit bids to purchase all or a
portion of the Company's assets by December 13, 2004. The agreement provides for
the payment to AirTran Airways of a termination fee of approximately $3.25
million or reimbursement of its expenses up to $1 million if the agreement is
terminated under certain circumstances, including, among others, the transfer of
one or more of the assets and leases related to ATA's Chicago-Midway operations
to a third party or the sale or merger of the Company or ATA with a third party.
On November 17, 2004, ATA closed the Financing Transaction with the ITFA that
will provide ATA with over $15 million of DIP financing as it continues to
negotiate a restructuring of its operations with lessors, creditors and other
affected parties. Under this agreement, ATA received $15 million on November 17,
2004. The Company and ATA are currently operating as debtors-in-possession in a
jointly administered Chapter 11 cases pending in Indianapolis.
34
Under the Financing Transaction, ATA sold property consisting primarily of
aircraft parts, free and clear of any liens to the ITFA. The ITFA in turn leased
that property to the IAA and the IAA subleased the property to ATA. ATA is
obligated to repurchase the property upon the earlier to occur of the closing of
the AirTran Transaction or an Alternative Transaction (as defined in the Bid
Procedures discussed above), or February 15, 2005. As part of the repurchase of
the property, ATA will reimburse the ITFA for interest on the funds it provided
which carry interest at a variable rate, currently equal to approximately 3% per
annum.
As part of the Financing Transaction, ATA has committed to continue to operate
from its headquarters in Indianapolis, maintain substantial hub operations at
Indianapolis International Airport, provide passenger service to destinations in
Indiana and continue to employ a substantial number of Indianapolis-based
employees. A breach of these covenants would likely require ATA to pay an
additional fee of $1.5 million to the IAA.
The Financing Transaction was approved by the Bankruptcy Court on November 16,
2004.
Restructuring of Fixed Obligations. During the first nine months of 2004, the
Company took significant steps to address its liquidity problems created by the
economic conditions the Company faced since 2001. On January 30, 2004, the
Company completed exchange offers and issued 2009 Notes and cash consideration
for certain of its 2004 Notes and issued 2010 Notes and cash consideration for
certain of its 2005 Notes. In completing the exchange offers, the Company
accepted $260.3 million of Existing Notes tendered for exchange, issuing $163.1
million in aggregate principal amount of 2009 Notes and delivering $7.8 million
in cash in exchange for $155.3 million in aggregate principal amount of 2004
Notes tendered, and issuing $110.2 million in aggregate principal amount of 2010
Notes and delivering $5.2 million in cash in exchange for $105.0 million in
aggregate principal amount of 2005 Notes. In addition to the New Notes issued,
$19.7 million in aggregate principal amount of the 2004 Notes and $20.0 million
in aggregate principal amount of the 2005 Notes remained outstanding after the
completion of the exchange offers. The remaining 2004 Notes were subsequently
paid on August 1, 2004. In connection with the exchange offers, the Company also
obtained the consent of the holders of the Existing Notes to amend or eliminate
certain of the restrictive operating covenants and certain default provisions of
the indentures governing the Existing Notes. In accordance with EITF 96-19, the
Company recorded a non-operating loss on extinguishment of debt of $27.3 million
in the first quarter of 2004. The loss is primarily related to the accounting
for the $13 million cash consideration paid at closing of the exchange offers
and the $13 million of incremental notes issued during the exchange offers. In
accordance with EITF 96-19, the New Notes were recorded in the Company's balance
sheet at fair value at the date of the exchange offers, which closely
approximated their face value. Following the Filing, however, the aggregate
principal amount of all outstanding notes, together with any unpaid premium, if
any, and accrued principal, became due and immediately payable. Subject to
certain exceptions under the Bankruptcy Code, the Filing provides an automatic
stay against the continuation of any judicial or administrative proceedings or
other actions against the Debtors or their property to recover on, collect or
secure a claim arising prior to the Petition Date until the Bankruptcy Court
lifts the stay.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, BCSC, GECAS and ILFC.
The original terms of many of these aircraft operating leases were determined
before September 11, 2001, and many were structured to require significant cash
payments in the first few years of each lease in order to reduce the total
rental cost over the entire lease terms. The effect of the lease amendments was
to delay the payment of portions of the amounts due under those operating
leases, primarily between September 30, 2003 and March 31, 2005, and to extend
the leases generally for two years. Most of the payments delayed during this
time period are to be subsequently paid at various times throughout the
remaining life of the leases. The Company received a refund of $29.8 million on
January 30, 2004 related to payments made in 2003 under the original terms of
the leases. The amendments will also result in approximately $69.6 million in
lower cash payments during 2004, substantially all of which had been realized as
of September 30, 2004, under these operating leases, as compared to payments
that would have been due under the original lease terms.
35
Aircraft and Fleet Transactions. The Company has a purchase agreement with
Boeing to purchase directly from Boeing seven new Boeing 737-800s, which are
currently scheduled for delivery between July 2007 and December 2007. These
aircraft are powered by General Electric CFM56-7B27 engines. The manufacturer's
list price is $52.4 million for each 737-800, subject to escalation. The
Company's purchase price for each aircraft is subject to various discounts.
According to a 2004 amendment to the purchase agreement with Boeing, if the
Company does not have permanent financing for these aircraft suitable to the
Company, and does not have suitable pre-delivery deposit financing, and if
Boeing does not elect to provide such financing suitable to the Company, these
deliveries can be delayed for one year periods annually through December 31,
2010. Aircraft pre-delivery deposits are required for these aircraft, and the
Company has historically funded these deposits for past aircraft deliveries
using operating cash and pre-delivery deposit finance facilities. The Company
can provide no assurance that it will be able to secure pre-delivery deposit
finance facilities or permanent financing for any future aircraft purchases. As
of September 30, 2004, the Company had $4.9 million in long-term pre-delivery
deposits outstanding for the seven future aircraft deliveries, which were funded
with operating cash. Upon delivery and financing of the aircraft, pre-delivery
deposits funded with operating cash are expected to be returned to the Company.
As of September 30, 2004, the Company also has purchase rights with Boeing for
40 Boeing 737-800 aircraft.
The Company also has commitments to take delivery of one additional Boeing
737-800 and four spare engines, all of which are currently scheduled for
delivery between the remainder of 2005 and 2008.
In March 2001, the Company entered a limited liability agreement with Boeing
Capital Corporation - Equipment Leasing Corporation forming BATA, a 50/50 joint
venture. BATA is remarketing the Company's fleet of Boeing 727-200 aircraft in
cargo configurations. As of September 30, 2004, the Company had transferred 23
of its fleet of 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 ATSB. 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 a substantial portion of the Company's unrestricted
cash, certain receivables, certain aircraft, spare engines, and rotable parts.
The aircraft, spare engines and parts consist of two Lockheed L-1011-500
aircraft, one 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. As of September 30, 2004, the Company failed to meet an
EBITDAR to fixed charges ratio covenant under the secured term loan. Since the
Company is unable to meet this financial covenant, it is in default under this
agreement as well as under the two mortgage notes payable to Union Planters Bank
Inc. as a result of identical covenants, and the lenders have the right to
accelerate the maturity date of the loan and exercise other remedies against the
Company. Also, the Company defaulted under its Fleet Capital Corporation notes
payable agreements contain cross-default provisions related to uncured events of
default in other indebtedness of the Company. As a result of the default, these
obligations have been recorded as current liabilities on the Company's
consolidated balance sheet as of September 30, 2004.
As a result of the Filing, the Company is also in default and subject to
immediate acceleration of all balances under the terms of the agreements of all
of these notes as well as its unsecured senior notes and certain other debt
instruments. Subject to certain exceptions under the Bankruptcy Code, the Filing
provides an automatic stay against the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date until the Bankruptcy Court lifts the stay.
36
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.
On March 30, 2004, the Company signed a letter agreement with Boeing and ILFC
(together "Issuer") that provides a financing commitment from the Issuer to ATA
for up to $30 million under certain specific conditions. However, a definitive
agreement was not reached with the Issuer on this financing agreement prior to
the bankruptcy Filings.
Card Agreements. 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. The Company
maintains an agreement with a bank for the processing and collection of charges
for Visa and MasterCard as well as agreements with American Express Travel
Related Services Company, Inc. for the American Express Card and Discover Card
Services, Inc. for the Discover Card (collectively referred to as the "Credit
Card Providers"). Under these agreements with the Credit Card Providers, a sale
is normally charged to the purchaser's card account and is paid to the Company
in cash within a few days or weeks of the date of purchase, although the Company
may provide the purchased transportation services days, weeks or months later.
According to the agreements, the Credit Card Providers can retain cash collected
by them on processed card charges as a deposit. 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 Credit Card Providers. The deposit secures this potential
obligation of the Credit Card Providers to make such refunds. The Credit Card
Providers have exercised their rights to withhold distributions and as of
September 30, 2004 had retained $69.2 million of the Company's future sales as
compared to $43.2 million at September 30, 2003. Based on deposit requirements
in place as of October 15, 2004, the September 30, 2004 deposit balance would
have increased by approximately $13.3 million.
The Company and the Credit Card Providers each have the right to terminate the
agreements upon providing 60 or 90 days notice to the other party depending on
the Credit Card Provider. The Company can give no assurance that it could obtain
replacement Credit Card Providers. Lack of access to Credit Card Provider
services would have a significant adverse impact on the Company's ability to
continue operations.
ATA Credit Card. On March 31, 2004, the Company entered into agreements with a
credit card issuer and Visa to introduce a consumer credit card ("the Card")
bearing redemption benefits on ATA. Holders of the Card accumulate points
through purchases on the Card, which will allow them to earn free travel on the
airline once certain point thresholds are attained. The Company launched the
Card in the third quarter of 2004. The Company earns revenue from the credit
card issuer as consideration for issuing the Card with the Company's logo,
providing free transportation, and certain cooperative advertising activities.
Upon signing the agreement, the Company received a prepayment for future revenue
to be earned from the issuer, almost all of which remained unearned by the
Company, as of September 30, 2004.
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. As of September 30, 2004, the Company's restricted cash pledged
to secure its letters of credit for all surety bonds totaled $31.9 million and
is shown as non-current restricted cash on the Company's balance sheet.
37
The DOT 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. On December 15, 2003, upon cancellation of
the DOT charter obligation surety bond by the issuer, the Company entered into
an escrow arrangement which requires the Company to place advance receipts for
certain charter flights into escrow until the flight operates. Once the flight
occurs the Company is paid from the escrow account those advance deposits
specific to that completed flight. As of September 30, 2004, the Company has
$4.7 million in advance charter receipts deposited in escrow, which was included
in prepaid expenses and other current assets on the Company's balance sheet as
of that date. The surety bond of $12.9 million relating to the DOT charter
obligations was released in the first quarter of 2004, and the restricted cash
securing the letter of credit was returned to the Company.
38
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report 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.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the following:
o the ability of the Company to continue as a going concern;
o the ability of the Company to obtain court approval with respect to motions
in the Chapter 11 proceeding;
o risks associated with obtaining the consents and other approvals required
to consummate the transactions contemplated in the agreements with AirTran
Airways for the sale of certain assets;
o the ability of the Company to develop, prosecute, confirm and consummate
one or more plans of reorganization with respect to the Chapter 11 cases
and close the AirTran Transaction or Alternative Transaction on a timely
basis;
o risks associated with third parties seeking and obtaining Bankruptcy Court
approval to terminate or shorten the exclusivity period for the Company, to
propose and confirm one or more plans of reorganization, for the
appointment of a Chapter 11 trustee or to convert the case to a Chapter 7
case;
o the ability of the Company to obtain and maintain normal terms with vendors
and service providers;
o the ability of the Company to maintain contracts that are critical to its
operations;
o the potential adverse effects of the Chapter 11 reorganization on the
Company's liquidity or results of operations;
o the ability of the Company to fund and execute its business plan and to
attract, motivate and/or retain key employees;
o the ability of the Company to attract and retain customers;
o demand for transportation in markets in which the Company operates;
o economic conditions;
o the effects of any hostilities or act of war;
o labor costs;
o aviation fuel costs;
o competitive pressures on pricing (particularly from lower-cost
competitors);
o weather conditions;
o government legislation and regulation; and
o other risks and uncertainties listed from time to time in reports the
Company periodically files with the Securities and Exchange Commission.
The Company is under no obligation to update, and will not undertake to update,
its forward-looking statements to reflect future events or changes in
circumstances.
39
PART I - Financial Information
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's results of operations are significantly impacted by changes in the
price of aircraft fuel. The price of fuel is subject to political, economic and
market factors that are generally outside of the Company's control. Continued
significant increases in fuel costs could materially and adversely affect the
Company's liquidity, results of operations and financial condition. 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 2003.
40
PART I - Financial Information
Item 4 - Controls and Procedures
The Company conducted an evaluation (under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act"), as amended, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of September 30, 2004. Based on this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2004, the controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by the Company in
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls, subsequent to the
date of the evaluation.
41
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
The Company failed to meet its September 30, 2004, trailing-twelve-months
EBITDAR to fixed charges ratio covenant under its secured term loan, which is
partially guaranteed by the ATSB, and identical covenants in its Union Planter's
mortgage note payable agreements. Also, the Company defaulted under its Fleet
Capital Corporation notes payable agreements contain cross-default provisions
related to uncured events of default in other indebtedness of the Company. As a
result of the defaults, these obligations have been reclassified as current
liabilities on the Company's consolidated balance sheet as of September 30,
2004. As a result of the Filing, the Company is also in default and subject to
immediate acceleration of all balances under the terms of the agreements of all
of these notes as well as its unsecured senior notes and certain other debt
instruments. The Filing also triggered defaults on substantially all lease
obligations of the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other information
None
Item 6 - Exhibits
(a) Exhibits are filed as a separate section of this report as set forth
in the Index to Exhibits attached to this report.
42
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: November 22, 2004 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.
-----------
*3.1 Restated Articles of Incorporation of the Company
*3.2 By-laws of the Company
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
*Previously filed as exhibit to ATA Holdings Corp.'s Registration Statement on
Form S-1 (File No. 33-59630), and incorporated herein by reference.