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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2001.
[ ] 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
AMTRAN, INC.
(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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant (based on closing price of shares of Common
Stock on the NASDAQ National Market on February 28, 2002) was approximately
$45.0 million.
Applicable Only to Registrants Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Registrants
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,556,284 shares outstanding as of February
28, 2002.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran, Inc. Proxy Statement to be filed within 120 days after
the close of the last fiscal year are incorporated by reference into Part III.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 2001
AMTRAN, INC. AND SUBSIDIARIES
Page #
PARTI Item 1. Business.............................................................................................3
Item 2. Properties..........................................................................................15
Item 3. Legal Proceedings...................................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................................................16
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters........................17
Item 6. Selected Consolidated Financial Data................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............19
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........................................54
Item 8. Financial Statements and Supplementary Data.........................................................56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................83
PART III
Item 10. Directors and Officers of the Registrant............................................................84
Item 11. Executive Compensation..............................................................................84
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................84
Item 13. Certain Relationships and Related Transactions......................................................84
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......................................85
Item 14d. Valuation and Qualifying Accounts...................................................................87
2
PART I
Item 1. Business
Amtran, Inc. (the "Company") owns American Trans Air, Inc. ("ATA"), the tenth
largest passenger airline in the United States (based upon 2001 capacity and
traffic) and a provider of airline-related services in selected markets. The
Company is the largest commercial charter airline in the United States based
upon revenues for the twelve months ended June 30, 2001, and is one of the
largest providers of passenger airline services to the U.S. military, based upon
2001 revenue. For the year ended December 31, 2001, the revenues of the Company
consisted of 64.3% scheduled service, 15.1% commercial charter service and 13.1%
military charter service, with the balance derived from related services. The
Company was incorporated in Indiana in 1984.
Segment Information
The Company identifies its business segments on the basis of similar products
and services. The airline segment derives its revenues principally from the sale
of scheduled service, commercial charter and military/government charter air
transportation. The tour operator segment, ATA Leisure Corp. ("ATALC"), derives
its revenues primarily from the sale of vacation packages that, in addition to
scheduled service or commercial charter air transportation, typically include
hotels, rental cars and other ground arrangements. For detailed segment
disclosures, see "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 14 - Segment Disclosures."
During 1999, the Company acquired several independent tour operator businesses
and combined their operations with the Company's existing vacation package
brand, ATA Vacations Inc. ("ATA Vacations"), to form ATALC. See "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 13 - Acquisition of Businesses."
Scheduled Service
The Company provides scheduled service through ATA to selected destinations
primarily from its gateways at Chicago-Midway and Indianapolis and also provides
transpacific services between the western United States and Hawaii. During the
third and fourth quarters of 2001, the Company began operating nonstop flights
from Chicago-Midway to Newark and Miami. The Company also began nonstop service
in the fourth quarter of 2001 to San Juan from Miami. The Company focuses on
routes where it believes it can be a leading provider of nonstop service and
targets leisure and value-oriented business travelers.
The Company believes that it has significant competitive advantages in each of
its primary markets.
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 66.8% of the Company's total scheduled service
capacity in 2001. The Company is the number one carrier in terms of market
share, based upon second quarter 2001 origin and destination revenue
passengers, on 16 of the 20 nonstop jet routes it serves from
Chicago-Midway. The Company believes its service at this gateway would be
difficult to replicate because of limited airport capacity. This
competitive position is enhanced by Chicago-Midway's proximity to downtown
Chicago and the fact that, for a substantial portion of the population
within the metropolitan region, Chicago-Midway is the most convenient
airport. Based upon second quarter 2001 origin and destination revenue
passengers, the Company also enjoys a strong competitive position relative
to the entire Chicago metropolitan area. The Company is the number one
carrier in terms of market share on five of its 20 nonstop jet routes after
taking into consideration competitors' flights originating from both
Chicago-Midway and O'Hare International Airport, and is one of the top five
carriers in terms of market share on those routes on which it is not the
number one carrier. The Company's Chicago-Midway operations include service
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to a number of midwestern cities provided by its commuter airline
subsidiary, Chicago Express Airlines, Inc. ("Chicago Express"). This
service provides an increasingly important source of feeder traffic for
longer-haul jet flights from Chicago-Midway. The Company began jet service
at Chicago-Midway in December 1992, and initiated its commuter operation in
1997.
o Hawaii represented approximately 18.6% of the Company's total scheduled
service capacity in 2001. The Company believes it is the lowest-cost
provider of scheduled service between the western United States and Hawaii,
which is critical in this price-sensitive, predominantly leisure market.
Furthermore, a majority of the Company's capacity in the Hawaiian market is
contracted to the nation's largest independent Hawaiian tour operator,
which assumes capacity, yield and most fuel-price risk. The Company has
served the Hawaiian market since 1974 through its commercial charter
operations and since 1987 through its scheduled service operations.
o Indianapolis represented approximately 9.2% of the Company's total
scheduled service capacity in 2001. The Company began scheduled service
from Indianapolis in 1986 and believes that it benefits from being
perceived as the hometown airline. The Company is the number one provider
in terms of market share, based upon second quarter 2001 origin and
destination revenue passengers, in five of its seven jet routes from
Indianapolis. In Indianapolis, the Company operates Ambassadair Travel
Club, Inc. ("Ambassadair"), the nation's largest travel club, with
approximately 34,000 individual or family memberships, providing the
Company with a local marketing advantage similar to a frequent flier
program.
Commercial Charter Service
The Company provides commercial passenger charter airline services throughout
the world, primarily through U.S. tour operators. The Company seeks to maximize
the profitability of these operations by leveraging its leading market position,
diverse aircraft fleet and worldwide operating capability. The Company believes
its commercial charter services are a predictable source of revenues and
operating profits in part because its commercial charter contracts require tour
operators to assume capacity, yield and fuel price risk, and also because of the
Company's ability to re-deploy assets into alternate markets.
Military/Government Charter Service
The Company has provided passenger airline services to the U.S. military since
1983 and is currently one of the largest commercial airline providers of these
services. The Company believes that because these operations are generally less
seasonal than leisure travel, they have tended to have a stabilizing impact on
the Company's operating margins. The U.S. Government awards one year contracts
for its military charter business and pre-negotiates contract prices for each
type of aircraft that a carrier makes available. The Company believes that its
fleet of aircraft is well suited to the needs of the military.
ATA Leisure Corp. (ATALC)
The Company has provided vacation package sales to its scheduled service
customers under the wholly owned brand of ATA Vacations since 1987. In addition,
the Company has served primarily vacation travelers in the Detroit metropolitan
area for approximately 18 years in its commercial charter business. In order to
grow and consolidate its vacation package business, the Company acquired several
Detroit-area tour operators in 1999 (see "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note 13 - Acquisition of
Businesses"). The Company operates all of its vacation package brands as ATALC,
with administrative offices in Detroit.
4
Strategy
The Company intends to enhance its position as a leading provider of passenger
airline services to selected markets where it can capitalize on its competitive
strengths. The key components of this strategy are:
Participate in Markets Where it Can Be a Leader
The Company focuses on marketswhere it can be a leading provider of airline
services. In scheduled service, the Company concentrates on routes where it can
be the number one or number two carrier. The Company achieves this result
principally through nonstop schedules, value-oriented pricing, focused marketing
efforts and certain airport and aircraft advantages. The Company is a leading
provider of commercial and military charter services in large part because of
its variety of aircraft types, superior operational performance and its
worldwide service capability.
Maintain Low-Cost Position
For 2001, 2000 and 1999, the Company's consolidated operating cost per available
seat mile ("CASM") of 8.45(cent), 7.86(cent) and 6.84(cent), respectively, was
one of the lowest among large U.S. passenger airlines. The Company's airline
segment CASM was 7.98(cent), 7.19(cent) and 6.17(cent), respectively, for the
same annual periods. The Company believes that its lower costs provide a
significant competitive advantage, allowing it to operate profitably while
pricing competitively in the scheduled service and commercial and military
charter markets. The Company believes its low-cost position is primarily derived
from its simplified product, route structure and low overhead costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations in Cents per ASM."
In May 2000, the Company entered into a series of agreements to acquire 39 new
Boeing 737-800 aircraft and 10 new Boeing 757-300 aircraft. These aircraft are
scheduled to replace the Company's older fleets of Lockheed L-1011-50 and 100,
and Boeing 727-200 aircraft. Fourteen of the Boeing 727-200 aircraft were
retired from service in 2001, and the remainder will be retired from service in
2002. Three Lockheed L-1011 aircraft were also retired in 2001. The Company
expects to achieve significant operating cost savings with the introduction of
new aircraft, including (1) reduced fuel consumption; (2) transition from
three-person to two-person cockpit crews; (3) lowered maintenance costs; and (4)
improved utilization and dispatch reliability. The Company accepted delivery of
14 Boeing 737-800 aircraft and five Boeing 757-300 aircraft in 2001, and the
remainder of new aircraft are expected to be in service by 2004.
Target Growth Opportunities
The Company intends to expand its operations selectively in areas where it
believes it can achieve attractive financial returns.
Scheduled Service Expansion at Chicago-Midway. The Company plans to increase
frequencies and potentially add new destinations from Chicago-Midway over the
next 12 months. The Company will also occupy additional gates upon completion of
the new terminal at Chicago-Midway to facilitate these expanding operations. In
the third and fourth quarters of 2001, the Company began operating nonstop
service from Chicago-Midway to Newark and Miami, and between Miami and San Juan.
The Company has also begun new nonstop service between Chicago-Midway and Aruba,
Cancun, Grand Cayman and Guadalajara in the first quarter of 2002.
Selected Strategic Transactions. The Company continually evaluates possible
acquisitions of related businesses or interests therein to enhance its
competitive position in its market segments. In addition, the Company has and
will continue to evaluate other possible business combinations or other
strategic transactions, some of which could result in an increase in
indebtedness, a change of control in the Company, or both.
5
Industry Overview
Scheduled Airline Service
The Company is a leading provider of targeted scheduled airline services and
charter airline services to leisure and other value-oriented travelers, and to
the U.S. military. The Company, through its principal subsidiary, ATA, has been
operating for 29 years and is the tenth largest U.S. airline in terms of 2001
capacity and traffic. ATA provides 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, Miami and Newark. Chicago Express also provides
commuter passenger service between Chicago-Midway and the cities of
Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids, Madison, South Bend
and Springfield. ATA also provides charter service to independent tour
operators, specialty charter customers and the U.S. military.
On September 11, 2001, four commercial aircraft, operated by two other U.S.
airlines, were hijacked and destroyed in terrorist attacks on the United States.
In response to these attacks, on September 11, the Federal Aviation
Administration, ("FAA") temporarily suspended all commercial flights to, from
and within the United States until September 13. The Company resumed limited
flight operations on September 13, with the exception of flights to and from
Chicago-Midway Airport which commenced partial operations on September 14. From
September 11 to September 14, the Company canceled over 800 scheduled flights.
Upon resuming its pre-attack flight schedule the week of September 17, the
Company experienced significantly lower passenger traffic and unit revenues than
prior to the attacks. In response to this, the Company reduced its flight
schedule by approximately 20%, as compared to the schedule operated immediately
prior to September 11, and furloughed approximately 1,100 employees by the
middle of October 2001. By December 31, 2001, the Company had recalled
approximately half of the furloughed employees and had added some capacity back
to its flight schedule.
The Company's operations were significantly disrupted by the terrorist attacks
during and after the FAA-mandated shut down of the air traffic system. Load
factors were significantly lower immediately after the attacks, and fare levels
declined, and have remained lower due to reduced consumer demand. Consumer
demand improved in the fourth quarter of 2001; however, the Company cannot
predict when consumer demand will return to pre-attack levels. The attacks have
had a significant impact on the Company's results of operations for the year
ended December 31, 2001, producing $66.3 million in attack-related costs and
revenue losses between September 11 and December 31, which are expected to be
reimbursed through a U.S. Government grant, $44.5 million of which was received
in cash in the third and fourth quarters of 2001. The Company also recorded
asset impairment losses of $112.3 million relating to its Lockheed L-1011-50 and
100, and Boeing 727-200 fleets.
For additional details with respect to the impact of the terrorist attacks, see
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 2 - Impact of Terrorist Attacks on September 11, 2001." For
the Company's discussion of possible future effects from these attacks, see
"Forward-Looking Information and Risk Factors."
Commercial and Military/Government Charter Airline Service
In the United States, the passenger charter airline business is served by major
scheduled airlines and a number of U.S. and non-U.S. charter airlines.
Historically, charter airlines have supplemented the service provided by
scheduled airlines by providing additional capacity at times of peak demand and
6
on a longer-term basis to supplement the U.S. military's own passenger fleet.
Based upon the most recently available U.S. Department of Transportation ("DOT")
statistics, total charter flights by all U.S. airlines represented approximately
2.2% of all available seat miles ("ASMs") flown within the United States during
the 12 months ended June 30, 2001.
The Company estimates that it lost approximately $1.4 million in commercial
charter revenues as a result of flight cancellations attributable to the
terrorist attacks on September 11, 2001, representing a relatively small portion
of the total decline in commercial charter revenues of $54.5 million in 2001, as
compared to 2000. The majority of this revenue decline is attributable to the
retirement of Lockheed L-1011-50 aircraft, and Boeing 727-200 aircraft, both of
which have been traditionally used by the Company in commercial charter
applications due to their low ownership costs relative to newer aircraft. Since
aircraft utilization (or the number of hours of revenue flying per aircraft per
month) is much lower for commercial charter flying than for scheduled service
flying, the Company's replacement fleets of Boeing 737-800 and Boeing 757-300
aircraft are economically disadvantaged when used in the charter business, as
high monthly utilization is needed to recover their much higher fixed-ownership
costs. For this reason, and also due to higher maintenance and fuel costs on the
Lockheed and Boeing aging aircraft remaining in service, the Company is becoming
less cost competitive in the charter business segment than in past years. For
this reason, the Company expects that commercial charter flying will continue to
decline as a percentage of consolidated revenues in 2002 and beyond.
The Company estimates that it lost approximately $1.0 million in
military/government charter revenues due to the events of September 11,
representing a relatively small portion of the decline in these revenues of
$21.1 million in 2001, as compared to 2000. The majority of this revenue decline
was attributable to changes in teaming arrangements used by both the Company and
some of the Company's competitors, which resulted in a decline in fixed-award
flying allocated to the Company for the contract year ended September 30, 2001.
Based upon possible changes in competitive teaming arrangements and other
factors, the Company currently expects its military/government charter revenues
to increase slightly in the contract year ending September 30, 2002, as compared
to the prior contract year. The Company will continue to use primarily its fleet
of five Lockheed L-1011-500 aircraft to support this military business, since
this aircraft has competitive operating costs relative to other suppliers of
military flying, and has a range and seating configuration preferred by the
military.
The Company's Airline Operations
Services Offered
The following table provides a summary of the Company's major revenue sources
for the periods indicated:
Year Ended December 31,
2001 2000 1999 1998 1997
(Dollars in millions)
Scheduled Service $ 820.7 $ 753.3 $ 624.6 $ 511.3 $ 371.8
--------- --------- -------- ------- -------
Commercial Charter 192.2 246.7 263.8 222.6 228.1
Military Charter 167.5 188.6 126.2 121.9 131.1
--------- --------- -------- ------- -------
Total Charter Service 359.7 435.3 390.0 344.5 359.2
--------- --------- -------- ------- -------
Other 95.1 103.0 107.8 63.6 52.2
--------- --------- -------- ------- -------
Total $ 1,275.5 $ 1,291.6 $1,122.4 $ 919.4 $ 783.2
--------- --------- -------- ------- -------
7
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be one of the leading carriers in those markets, focusing
primarily on low-cost, nonstop or direct flights. The Company currently provides
scheduled service primarily from its gateway cities of Chicago-Midway and
Indianapolis to popular vacation and business destinations. Virtually all of the
Company's scheduled service revenue growth has resulted from expanded flying to
and from Chicago-Midway.
Beginning in April 1997, the Company had entered into a code-share agreement
with Chicago Express to operate passenger airline services between
Chicago-Midway and other midwestern cities using Jetstream 31s. On April 30,
1999, the Company acquired all of the issued and outstanding stock of Chicago
Express. Chicago Express' results of operations, beginning in May 1999, were
consolidated into those of the Company, replacing the fixed fee per flight
previously recorded by the Company. This generated no material change to
operating revenues or expenses. Chicago Express began service to South Bend,
Indiana in October 2000 and Springfield, Illinois in August 2001. Chicago
Express ceased flying to Lansing, Michigan in November 2000. During 2000,
Chicago Express placed nine Saab 340B aircraft into service in conjunction with
the retirement from service of the Jetstream 31s. Chicago Express purchased two
additional Saab 340B aircraft in August 2001.
Included in the Company's jet scheduled service are bulk-seat sales agreements
with tour operators. Under these arrangements, which are very similar to charter
sales, the tour operator takes up to 87% of an aircraft as a bulk-seat purchase.
The seats that the Company retains are sold through its own scheduled service
distribution network. Under bulk-seat sales arrangements, the Company is
obligated to provide transportation to the tour operators' customers even in the
event of non-payment to the Company by tour operators. To reduce its credit
exposure under these arrangements, the Company requires bonding or a security
deposit for a portion of the contract price. Bulk-seat revenues amounted to
$107.9 million, $84.5 million and $71.2 million in 2001, 2000 and 1999,
respectively, which represented 8.5%, 6.5% and 6.3%, respectively, of the
Company's consolidated revenues for such periods.
Commercial Charter
Commercial charter represented 15.1%, 19.1% and 23.5%, respectively, of the
Company's consolidated revenues for 2001, 2000 and 1999. The Company's principal
customers for commercial charter are tour operators, sponsors of incentive
travel packages and specialty charter customers.
Tour Operator Programs. These leisure-market programs are generally contracted
for repetitive, round-trip patterns, operating over varying periods of time. In
such an arrangement, the tour operator pays a fixed price for use of the
aircraft, including the crew and all necessary passenger and aircraft handling
services, and assumes responsibility and risk for the actual sale of the
available aircraft seats. Under most of its contracts with tour operators, the
Company passes through increases in fuel costs from a contracted price. If the
fuel price increase causes the tour operator's fuel cost to rise in excess of
10%, the tour operator has the option of canceling the contract. The Company
experienced no significant contract cancellations in 2001, 2000 or 1999 as a
result of fuel price increases. The Company is required to absorb increases in
fuel costs that occur within 14 days of flight time.
Incentive Travel Programs. Many corporations offer travel to leisure
destinations or special events as incentive awards for their employees. The
Company has historically provided air travel for many corporate incentive
programs. Incentive travel customers range from national incentive marketing
companies who arrange such programs for corporate clients, to large corporations
that handle their incentive travel programs on an in-house basis.
8
Specialty Charters. The Company operates a significant number of specialty
charter flights. These programs are normally contracted on a single round-trip
basis and vary extensively in nature. These flights allow the Company to
increase aircraft utilization during off-peak periods.
Largest Tour Operator Customers
Although the Company serves tour operators on a worldwide basis, its primary
customers are U.S.-based. The Company's five largest tour operator customers
represented approximately 18.0%, 17.5% and 17.2%, respectively, of the Company's
consolidated revenues for 2001, 2000 and 1999. Such tour operator revenues are
derived from both scheduled service bulk-seat sales and commercial charter
contracts. None of these customers accounts for more than 10% of consolidated
revenues.
Military/Government Charter
In 2001, 2000 and 1999, sales to the U.S. military and other governmental
agencies were approximately 13.1%, 14.6% and 11.2%, respectively, of the
Company's consolidated revenues. Traditionally, the Company's focus has been on
short-term military "contract expansion" business which is routinely awarded by
the U.S. Government based on availability of appropriate aircraft. The U.S.
Government awards one-year contracts for its military charter business and
pre-negotiates contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the participating airlines'
average costs. The short-term expansion business is awarded pro rata to those
carriers with aircraft availability who have been awarded the most fixed-award
business, and then to any additional carrier that has aircraft available.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (1) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (2) the percentage of
passenger capacity of the Company with respect to its own team; (3) the amount
of fixed-award and expansion flying required by the U.S. military in each
contract year; and (4) the availability of the Company's aircraft to accept and
fly expansion awards. Under its current teaming arrangement, the Company expects
its military/government charter revenues to increase slightly for the contract
year ending September 2002, as compared to the contract year ending September
2001.
The Company is subject to biennial inspections by the U.S. Department of Defense
as a condition of retaining its eligibility to perform military charter flights.
The last such inspection was successfully completed in November 2001.
Other Business
In addition to its charter and scheduled service businesses, the Company
operates several other smaller businesses that complement its airline
businesses. The Company sells ground arrangements (hotels, car rentals and
attractions) through its Ambassadair and ATALC subsidiaries; provides airframe
and power plant mechanic training through American Trans Air Training
Corporation; and provides helicopter charter services through its ExecuJet, Inc.
subsidiary. Additionally, the Company, through its subsidiary ATA Cargo, Inc.,
("ATA Cargo") markets cargo services primarily in the Company's scheduled
service operations. In aggregate, these businesses, together with incidental
revenues associated with core commercial charter and scheduled service
operations, accounted for 7.5%, 8.0% and 9.6%, respectively, of consolidated
revenues in 2001, 2000 and 1999.
9
Aircraft Fleet
As of December 31, 2001, ATA was certified to operate a fleet of 15 Lockheed
L-1011s, 10 Boeing 727-200ADVs, 14 Boeing 737-800s, 15 Boeing 757-200s and five
Boeing 757-300s. The Company's commuter affiliate, Chicago Express, was
separately certified to operate 11 Saab 340B propeller aircraft. All of these
aircraft conform to the FAA's Stage 3 noise regulations. See "Environmental
Matters."
Lockheed L-1011 Aircraft
The Company's 15 Lockheed L-1011 aircraft are wide-body aircraft, seven of which
have a range of 2,971 nautical miles, three of which have a range of 3,425
nautical miles, and five of which have a range of 5,577 nautical miles. These
aircraft have a low ownership cost relative to other wide-body aircraft types.
They have an average age of approximately 25 years. As of December 31, 2001, the
Company owned 14 of these aircraft and one was under an operating lease that
expires in December 2005, due to a lease extension signed in March 2001. All of
the Lockheed L-1011 aircraft owned by the Company are subject to mortgages and
other security interests granted in favor of the Company's lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Boeing 727-200ADV Aircraft
The Company's 10 Boeing 727-200ADV aircraft are narrow-body aircraft equipped
with high-thrust, JT8D-17/-17A engines and have a range of 2,050 nautical miles.
These aircraft have an average age of approximately 21 years. As of December 31,
2001, the Company owned six of these aircraft, while leasing the remaining four
aircraft with initial lease terms that expire between December 2001 and
September 2002, subject to the Company's right to extend each lease for varying
terms or purchase the aircraft. All of the Boeing 727-200 aircraft owned by the
Company are subject to mortgages and other security interests granted in favor
of the Company's lenders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." In
addition to the four leased aircraft in revenue service at December 31, 2001,
the Company is also obligated on three additional leased aircraft which are no
longer in revenue service.
Boeing 737-800 Aircraft
The Company's 14 Boeing 737-800 aircraft are narrow-body aircraft and have a
range of 2,500 nautical miles. These aircraft, all of which are leased, are new
aircraft delivered in 2001. The Company's Boeing 737-800s have higher ownership
costs than the Company's Lockheed L-1011 and Boeing 727-200ADV aircraft, but
lower operational costs resulting from reduced fuel consumption, lower
maintenance and cockpit crew costs, and improved operating reliability. The
leases for the Company's Boeing 737-800 aircraft have initial terms that expire
on various dates between June 2016 and December 2021.
Boeing 757-200 Aircraft
The Company's 15 Boeing 757-200 aircraft are narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft, all of which are leased,
have an average age of approximately four years. The Company's Boeing 757-200s
have higher ownership costs than the Company's Lockheed L-1011 and Boeing
727-200ADV aircraft, but lower operational costs. In addition, the Company's
Boeing 757-200s have the capacity to operate on extended flights over water. The
leases for the Company's Boeing 757-200 aircraft have initial terms that expire
on various dates between January 2002 and May 2022, subject to the Company's
right to extend each lease for varying terms.
10
Boeing 757-300 Aircraft
The Company's five Boeing 757-300 aircraft are narrow-body aircraft and have a
range of 2,700 nautical miles. These aircraft, all of which are leased, are new
aircraft delivered in 2001. The Company's Boeing 757-300s have higher ownership
costs than the Company's Lockheed L-1011 and Boeing 727-200ADV aircraft, but
lower operational costs. The leases for the Company's Boeing 757-300 aircraft
have initial terms that expire on various dates between August and December
2021.
Saab 340B Aircraft
The Company's 11 Saab 340B aircraft are commuter aircraft with twin turboprop
engines. These 34-seat aircraft have an average age of approximately 11.5 years.
As of December 31, 2001, the Company owned two of these aircraft, while leasing
the remaining nine aircraft with initial lease terms that expire between
September 2009 and June 2011.
Although Lockheed L-1011 and Boeing 727-200 aircraft are subject to the FAA's
Aging Aircraft program, the Company does not currently expect that its cost of
compliance for these aircraft will be material.
Flight Operations
Worldwide flight operations are planned and controlled by the Company's Flight
Operations Group based in Indianapolis, Indiana, which is staffed on a 24-hour
basis, seven days a week. Logistical support necessary for extended operations
away from the Company's fixed bases is coordinated through its global
communications network. The Company has the ability to dispatch maintenance and
operational personnel and equipment as necessary to support temporary operations
around the world.
Aircraft Maintenance and Support
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This 150,000 square-foot facility was designed to meet
the maintenance needs of the Company's fleet and to provide supervision and
control of purchased maintenance services. The Company has approximately 1,174
employees supporting its aircraft maintenance operations, and currently
maintains 14 permanent maintenance facilities, including its Indianapolis
facility.
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 32.0%, 33.5% and 34.8%, respectively, of consolidated revenues in
2001, 2000 and 1999. The Company engaged in a fuel-hedging program from 1998 to
mid-1999, which hedged a portion of its scheduled service fuel price risk during
that time period. The Company reestablished its fuel-hedging program in the
third quarter of 2000 and continued this program in 2001. See "Quantitative and
Qualitative Disclosures About Market Risk," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Operating Expenses -
Fuel and Oil."
11
Competition
The Company's products and services encounter varying degrees of competition in
the markets it serves.
Competition for Scheduled Services
In scheduled service, the Company competes both against the large U.S. scheduled
service airlines and, from time to time, against smaller regional or start-up
airlines. Competition is generally on the basis of price, schedule and
frequency, quality of service and convenience.
Competition for Commercial Charter Services
In the commercial charter market, the Company competes both against the major
U.S. scheduled airlines and against small U.S. charter airlines. The scheduled
carriers compete for leisure travel customers with the Company's commercial
charter operations in a variety of ways, including wholesaling discounted seats
on scheduled flights to tour operators, promoting packaged tours to travel
agents for sale to retail customers and selling discounted, airfare-only
products to the public. As a result, all charter airlines, including the
Company, generally are required to compete for customers against the lowest
revenue-generating seats of the scheduled airlines.
The Company also competes against several U.S. and foreign charter airlines. In
the United States, these charter airlines are smaller in size than the Company.
In Europe, several charter airlines are as large or larger than the Company.
Certain European charter airlines are affiliates of large scheduled airlines or
tour operators.
Competition for Military/Government Charter Services
The Company competes for military and other government charters with primarily
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier, alone or
through a teaming arrangement, makes available for use to the military, among
other factors.
Insurance
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers'
compensation. Under the Company's current insurance policies, it will not be
covered by such insurance were it to fly, without the consent of its insurance
provider, to certain high-risk countries. The Company will support certain U.S.
Government operations in areas where its insurance policy does not provide
coverage when the U.S. Government provides replacement insurance coverage.
As a result of the September 11, 2001 terrorist attacks, the Company's aviation
insurers, and other air carriers' aviation insurers, have significantly reduced
the maximum amount of insurance coverage they will underwrite for liability to
persons other than employees or passengers resulting from acts of terrorism,
war, hijacking or other similar perils (war-risk coverage). In addition, the
Company, and other air carriers, are being charged significantly higher premiums
for this reduced coverage as well as other aviation insurance. The Air
Transportation Safety and System Stabilization Act ("Act") provided for
reimbursement to air carriers of incremental costs of the war-risk coverage for
a 30-day period ended October 31, 2001. In addition, and pursuant to this
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, through May 20, 2002. It is
anticipated that, after this date a commercial product for war-risk coverage
will become available, but the Company expects to incur significant additional
costs for this coverage.
12
Employees
As of December 31, 2001, the Company had approximately 7,000 full and part-time
employees, approximately 2,600 of whom were represented under collective
bargaining agreements. The Company's flight attendants are represented by the
Association of Flight Attendants ("AFA"), and the Company's cockpit crews are
represented by the Air Line Pilots Association ("ALPA"). The current collective
bargaining agreement with the AFA was ratified in April 2000 and will become
subject to amendment in October 2004. The current collective bargaining
agreement with ALPA became subject to amendment, but did not expire, in
September 2000. The Company began negotiations with ALPA in the second quarter
of 2000 to amend the collective bargaining agreement, and negotiations are
currently in progress. The Company's flight dispatchers are represented by the
Transport Workers Union ("TWU"). This collective agreement was ratified in
August 2000, and will become subject to amendment in August 2004.
On February 14, 2001, the Company's ramp service agents elected to be
represented by the International Association of Machinists ("IAM"). The Company
began negotiations with the IAM in May 2001. On February 15, 2002, the Company's
aircraft mechanics elected to be represented by the Aircraft Mechanics Fraternal
Association ("AMFA"). The Company has not begun negotiations with the AMFA.
While the Company believes that relations with its employees are good, any
prolonged dispute with employees, whether or not represented by a union, could
have an adverse impact on the Company's operations.
Regulation
The Company is subject to a wide range of governmental regulation, including
that of the DOT and the FAA.
The DOT principally regulates economic matters affecting air service, including:
air carrier certification and fitness; insurance; leasing arrangements;
allocation of route rights and authorization of proposed scheduled and charter
operations; allocation of landing slots and departing slots; consumer
protection; and competitive practices. The FAA primarily regulates flight
operations, especially matters affecting air safety, including airworthiness
requirements for each type of aircraft and crew certification. The FAA requires
each carrier to obtain an operating certificate and operations specifications
authorizing the carrier to fly to specific airports using specified equipment.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company through ATA Cargo. Labor relations in the air
transportation industry are generally regulated under the Railway Labor Act,
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. The Company is subject to the jurisdiction of the Federal
Communications Commission regarding the utilization of its radio facilities. In
addition, the Immigration and Naturalization Service, the U.S. Customs Service,
and the Animal and Plant Health Inspection Service of the Department of
Agriculture have jurisdiction over inspection of the Company's aircraft,
passengers and cargo to ensure the Company's compliance with U.S. immigration,
customs and import laws. Also, while the Company's aircraft are in foreign
countries, they must comply with the requirements of similar authorities in
those countries. The Commerce Department also regulates the export and re-export
of the Company's U.S.-manufactured aircraft and equipment.
13
On November 19, 2001, President Bush signed into law the Aviation and
Transportation Security Act ("Aviation Security Act"). This law provides for
placing substantially all aspects of civil aviation passenger security and
screening under federal control, to be phased in during 2002 and 2003, and
creates a new Transportation Security Administration under the DOT. The cost of
the provisions set forth in the Aviation Security Act will be funded by a new
security fee of $2.50 per passenger enplanement, limited to $5 per one-way trip
and $10 per round trip. Air carriers, including the Company, began collecting
the new fee on ticket sales beginning February 1, 2002. The Aviation Security
Act will also be funded by financial assessments to each air carrier beginning
in the second quarter of 2002. The amount of the air carrier assessment is
limited to the amount each air carrier spent on aviation security in 2000.
In addition to various federal regulations, local governments and authorities in
certain markets have adopted regulations governing various aspects of aircraft
operations, including noise abatement, curfews and use of airport facilities.
Many U.S. airports have adopted or are considering adopting a Passenger Facility
Charge of up to $4.50 generally payable by each passenger departing from the
airport and remitted by the Company to the applicable airport authority.
Based upon bilateral aviation agreements between the U.S. and other nations,
and, in the absence of such agreements, comity and reciprocity principles, the
Company, as a charter carrier, is generally not restricted as to the frequency
of its flights to and from most foreign destinations. However, these agreements
generally restrict the Company to the carriage of passengers and cargo on
flights which either originate in the U.S. and terminate in a single foreign
nation, or which originate in a single foreign nation and terminate in the U.S.
The civil aeronautics authorities in the relevant countries must generally
specifically approve proposals for any additional charter service. Approval of
such requests is typically based on considerations of comity and reciprocity and
cannot be guaranteed.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier-operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft must comply with certain Stage 3 noise restrictions by
certain specified deadlines. In general, the Company is prohibited from
operating any Stage 2 aircraft after December 31, 1999. As of December 31, 2001,
the Company's entire fleet met Stage 3 requirements.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency regulates operations, including air carrier
operations, which affect the quality of air in the United States. The Company
believes it has made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke-emissions standards.
At the Company's aircraft maintenance facilities, materials are used that are
regulated as hazardous under federal, state or local laws. The Company is
required to maintain programs to protect the safety of the employees who use
these materials and to manage and dispose of any waste generated by the use of
these materials in compliance with these laws. More generally, the Company is
also subject at these facilities to federal, state and local regulations
relating to protection of the environment and to discharge of material into the
environment. The Company does not expect that the costs associated with ongoing
14
compliance with any of these regulations will have a material impact on the
Company's capital expenditures, earnings or competitive position.
Item 2. Properties
The Company leases three adjacent office buildings in Indianapolis consisting of
approximately 136,000 square feet. These buildings are located approximately one
mile from the Indianapolis International Airport terminal and are used as
principal business offices and for the Indianapolis reservations center.
The Company's Maintenance and Engineering Center is also located at Indianapolis
International Airport. This 150,000-square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. The Indianapolis Maintenance
and Engineering Center is an FAA-certificated repair station and has the
capability to perform routine and non-routine maintenance on the Company's
aircraft. In addition, the Company utilizes a 120,000 square-foot office
building immediately adjacent to the Company's Indianapolis Maintenance and
Engineering Center which is occupied by its Maintenance and Engineering office
staff along with the Company's operations center.
In 1995, the Company leased Hangar No. 2 at Chicago's Midway Airport for an
initial lease term of ten years, subject to two five-year renewal options. The
Company has completed significant improvements to this leased property, which is
used to provide line maintenance for the Boeing 757-200, Boeing 727-200, Boeing
757-300 and Boeing 737-800 narrow-body fleets. The Company also leases an
18,700-square-foot reservation facility located near Chicago's O'Hare Airport.
The Company routinely leases various properties at airports for use by passenger
service, flight operations and maintenance staffs.
At December 31, 2001, ATA and Chicago Express were certified to operate a fleet
of 70 aircraft. The following table summarizes the ownership characteristics of
each aircraft type operated by units of the Company as of the end of 2001.
Owned (Encumbered-
Owned Pledged on Bank Operating-Lease Operating-Lease
(Unencumbered) Facility or Other Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-50/100 - 9 - 1 10
Lockheed L-1011-500 - 5 - - 5
Boeing 727-200ADV - 6 3 1 10
Boeing 737-800 - - 8 6 14
Boeing 757-200 - - 13 2 15
Boeing 757-300 - - 5 - 5
Saab 340B 2 - 9 - 11
- - - - --
TOTAL 2 20 38 10 70
= == == == ==
15
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are routine and incidental to the
Company's business. The majority of these lawsuits are covered by insurance. To
the knowledge of management, none of these claims involve damages in excess of
10 percent of the assets of the Company, nor are any a material proceeding under
federal or state environmental laws, nor are any an environmental proceeding
brought by a governmental authority involving potential monetary sanctions in
excess of $100,000.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the quarter ended
December 31, 2001.
16
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "AMTR." The Company had 262 and 255 registered shareholders,
respectively, at December 31, 2001 and 2000.
Market Prices of Common Stock
Year Ended December 31, 2001
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 14.75 22.20 22.75 15.20
Low 9.44 9.00 7.60 5.50
Close 9.63 21.89 8.60 14.95
Market Prices of Common Stock
Year Ended December 31, 2000
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
High 19.38 18.44 13.88 15.00
Low 13.63 8.63 10.00 9.00
Close 17.88 12.44 10.94 14.50
No dividends have been paid on the Company's common stock since becoming
publicly held.
In the last half of 2000, the Company issued and sold 300 shares of Series B
convertible redeemable preferred stock, without par value ("Series B
Preferred"), at a price and liquidation amount of $100,000 per share. The Series
B Preferred is convertible into shares of the Company's common stock at a
conversion rate of 6,381.62 shares of common stock per share of Series B
Preferred at a conversion price of $15.67 per share of common stock, subject to
antidilution adjustments. The Series B Preferred is optionally redeemable by the
Company under certain conditions, but the Company must redeem the Series B
Preferred no later than September 20, 2015. Optional redemption by the Company
may occur at 103.6% of the liquidation amount beginning September 20, 2003,
decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation
amount at the mandatory redemption date of September 20, 2015.
Also, in the last half of 2000, the Company issued and sold 500 shares of Series
A redeemable preferred stock, without par value ("Series A Preferred"), at a
price and liquidation amount of $100,000 per share. The Series A Preferred is
optionally redeemable by the Company under certain conditions, but the Company
must redeem the Series A Preferred in equal semiannual payments beginning
December 28, 2010, and ending December 28, 2015. Optional redemption by the
Company may occur at a redemption premium of 50.0% of the dividend rate
beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend
rate commencing December 28, 2006, and to 0.0% after the seventh year from
issuance. Prior to the third anniversary of issuance, the Company may redeem the
Series A Preferred with the net proceeds of a public offering of the Company's
common stock.
The issuance and sale of the Series A and Series B Preferred was exempt from
registration requirements under Section 4(2) of the Securities and Exchange Act
of 1933, which applies to private offerings of securities. The proceeds of the
issuances of the Series A and Series B Preferred were used to finance aircraft
pre-delivery deposits on Boeing 757-300 and Boeing 737-800 aircraft ordered by
the Company. See "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 10 - Redeemable Preferred Stock."
17
Item 6. Selected Consolidated Financial Data - (Unaudited)
The unaudited selected consolidated financial data in this table have been
derived from the consolidated financial statements of the Company for the
respective periods presented. The data should be read in conjunction with the
consolidated financial statements and related notes.
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data and ratios) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 1,275,484 $ 1,291,553 $1,122,366 $ 919,369 $783,193
Operating expenses 1,367,354 1,288,983 1,032,339 843,996 769,709
Operating income (loss) (1) (91,870) 2,570 90,027 75,373 13,484
Income (loss) before taxes (116,067) (19,931) 77,797 67,210 6,027
Net income (loss) available to common shareholders (2) (81,885) (15,699) 47,342 40,081 1,572
Net income (loss) per share - basic (7.14) (1.31) 3.86 3.41 0.14
Net income (loss) per share - diluted (7.14) (1.31) 3.51 3.07 0.13
Balance Sheet Data (at end of period):
Property and equipment, net $ 314,943 $ 522,119 $ 511,832 $ 329,332 $267,681
Total assets 1,002,962 1,032,430 815,281 594,549 450,857
Total debt 497,592 457,949 347,871 246,671 191,804
Redeemable preferred stock 80,000 80,000 - - -
Shareholders' equity 44,132 124,654 151,376 102,751 56,990
Ratio of total debt to shareholders' equity 11.28 3.67 2.30 2.40 3.37
Ratio of total liabilities to shareholders' equity 19.91 6.64 4.39 4.79 6.91
Selected Consolidated Operating Statistics: (3)
Revenue passengers carried (thousands) 8,635.2 8,006.1 7,044.6 6,168.3 5,307.4
Revenue passenger miles (millions) 11,675.7 11,816.8 10,949.0 9,758.1 8,986.0
Available seat miles (millions) 16,187.7 16,390.1 15,082.6 13,851.7 12,647.7
Passenger load factor 72.1% 72.1% 72.6% 70.5% 71.0%
(1) During 2001, several nonrecurring events resulted in significant charges
and credits to operating loss. See "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note 2 - Impact of
Terrorist Attacks on September 11, 2001" and "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 16 -
Asset Impairment."
(2) Preferred stock dividends of $375,000 were paid in 2000 and preferred stock
dividends of $5.6 million were paid in 2001. No common stock dividends were
paid in any periods presented.
(3) Operating statistics pertain only to ATA and Chicago Express and do not
include information for other operating subsidiaries of the Company.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of targeted scheduled airline services and
charter airline services to leisure and other value-oriented travelers, and to
the U.S. military. The Company, through its principal subsidiary, ATA, has been
operating for 29 years and is the tenth largest U.S. airline in terms of 2001
capacity and traffic. ATA provides 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, Miami and Newark. Chicago Express also provides
commuter passenger service between Chicago-Midway and the cities of
Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids, Madison, South Bend
and Springfield. ATA also provides charter service to independent tour
operators, specialty charter customers and the U.S. military.
On September 11, 2001, four commercial aircraft, operated by two other U.S.
airlines, were hijacked and destroyed in terrorist attacks on the United States.
In response to these attacks, on September 11, the FAA temporarily suspended all
commercial flights to, from and within the United States until September 13. The
Company resumed limited flight operations on September 13, with the exception of
flights to and from Chicago-Midway airport which commenced partial operations on
September 14. From September 11 to September 14, the Company canceled over 800
scheduled flights. Upon resuming its pre-attack flight schedule the week of
September 17, the Company experienced significantly lower passenger traffic and
unit revenues than prior to the attacks. In response to this, the Company
reduced its flight schedule by approximately 20%, as compared to the schedule
operated immediately prior to September 11, and furloughed approximately 1,100
employees by the middle of October 2001. By December 31, 2001, the Company had
recalled approximately half of the furloughed employees and had added some
capacity back to its flight schedule.
The Company's operations were significantly disrupted by the terrorist attacks
during and after the FAA-mandated shutdown of the air traffic system. Load
factors were significantly lower immediately after the attacks, and fare levels
declined, and have remained lower, due to reduced consumer demand. Consumer
demand improved in the fourth quarter of 2001; however, the Company cannot
predict when consumer demand will return to pre-attack levels. The attacks have
had a significant impact on the Company's results of operations for the year
ended December 31, 2001, producing $66.3 million in attack-related costs and
revenue losses between September 11 and December 31, which are expected to be
reimbursed through a U.S. Government grant, $44.5 million of which was received
in cash in the third and fourth quarters of 2001.
For additional details with respect to the impact of the terrorist attacks, see
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 2 - Impact of Terrorist Attacks on September 11, 2001." For
the Company's discussion of possible future effects from these attacks, see
"Forward-Looking Information and Risk Factors."
The Company had an operating loss of $91.9 million, and a net loss after taxes
of $76.3 million, for the year ended December 31, 2001. Profitability in 2001
was severely impacted by the terrorist attacks on September 11, 2001, and by
non-cash impairment charges associated with the Boeing 727-200 and Lockheed
L-1011-50 and 100 fleets totaling $73.8 million, net of tax.
19
In May 2000, the Company placed an order for 39 new Boeing 737-800 aircraft and
ten new Boeing 757-300 aircraft. These aircraft are equipped with Boeing's
latest technology and equipment, and are significantly more fuel-efficient than
certain of the Company's three-engine aging aircraft. The Company accepted
delivery of 14 Boeing 737-800 aircraft and five Boeing 757-300 aircraft in 2001.
The Company expects to accept delivery of another 16 Boeing 737-800s and five
Boeing 757-300s in 2002, with the remainder of new aircraft on order expected to
be in service by 2004.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make judgments and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosures of contingent
assets and liabilities.
The Company discusses significant accounting policies in "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 1 -
Significant Accounting Policies." Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments.
Those that do require management to make difficult, subjective or complex
judgments are considered critical accounting policies.
The Company has identified the accounting policy for fleet impairments as
critical. In applying Financial Accounting Standards Board ("FASB") Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of ("FAS 121"), significant subjective
estimates are required to calculate expected future cash flows and the fair
market values to which assets are adjusted.
The Company has also identified the accounting policy for U. S. Government grant
reimbursements for direct and incremental losses associated with the terrorist
attacks of September 11, 2001 as critical. Due to limited guidance provided by
the legislation and interpretive rules of the DOT, the Company made subjective
and judgmental estimates in calculating the amount of reimbursement to
recognize.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year Ended December 31, 2001 Versus Year Ended December 31, 2000 -
Operating Expenses" for a further discussion of estimates and uncertainties
relating to asset impairments and U.S. Government grant reimbursements.
20
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, consolidated
operating revenues and expenses expressed as cents per ASM.
Cents per ASM
Year Ended December 31,
----------------------------------------------------
2001 2000 1999
---------- ---------- ----------
Consolidated operating revenues 7.88 7.88 7.44
Consolidated operating expenses:
Salaries, wages and benefits 2.01 1.81 1.67
Fuel and oil 1.55 1.68 1.13
Depreciation and amortization 0.75 0.76 0.64
Aircraft rentals 0.61 0.44 0.39
Handling, landing and navigation fees 0.55 0.59 0.59
Aircraft maintenance, materials and repairs 0.38 0.43 0.37
Crew and other employee travel 0.37 0.40 0.33
Passenger service 0.27 0.28 0.26
Ground package cost 0.26 0.31 0.33
Other selling expenses 0.26 0.22 0.19
Commissions 0.21 0.24 0.26
Advertising 0.16 0.13 0.12
Facilities and other rentals 0.13 0.10 0.09
Special charges 0.14 0.00 0.00
Impairment loss 0.69 0.00 0.00
U.S. Government grant (0.41) 0.00 0.00
Other 0.52 0.47 0.47
---------- ---------- ----------
Total consolidated operating expenses 8.45 7.86 6.84
---------- ---------- ----------
Consolidated operating income (loss) (0.57) 0.02 0.60
========== ========== ==========
ASMs (in thousands) 16,187,687 16,390,101 15,082,630
The following table sets forth, for the periods indicated, operating revenues
and expenses for each reportable segment, in thousands of dollars, and expressed
as cents per ASM.
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
---- ---- ----
Airline and Other
Operating revenue (000s) $1,201,560 $1,192,984 $ 1,022,541
RASM (cents) 7.42 7.28 6.78
Operating expense (000s) $1,291,342 $1,178,737 $ 929,898
CASM (cents) 7.98 7.19 6.17
Adjusted CASM (cents) (Note 1) 7.56 7.19 6.17
ATALC
Operating revenue (000s) $ 73,924 $ 98,569 $ 99,825
RASM (cents) 0.46 0.60 0.66
Operating expense (000s) $ 76,012 $ 110,246 $ 102,441
CASM (cents) 0.47 0.67 0.67
Note 1 - Airline adjusted CASM excludes special charges, impairment loss and
U.S. Government grant compensation from operating expenses in 2001.
21
Year Ended December 31, 2001, Versus Year Ended December 31, 2000
Consolidated Flight Operations and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200 and Boeing 757-300
aircraft in all of the Company's business units. Data shown for "J31/Saab"
operations include the operations of Jetstream 31 and Saab 340B propeller
aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31,
-----------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures Jet 56,962 55,714 1,248 2.24
Departures J31/Saab (a) 26,836 18,985 7,851 41.35
-----------------------------------------------------------
Total Departures (b) 83,798 74,699 9,099 12.18
-----------------------------------------------------------
Block Hours Jet 172,207 172,824 (617) (0.36)
Block Hours J31/Saab 24,836 18,708 6,128 32.76
-----------------------------------------------------------
Total Block Hours (c) 197,043 191,532 5,511 2.88
-----------------------------------------------------------
RPMs Jet (000s) 11,581,733 11,760,135 (178,402) (1.52)
RPMs J31/Saab (000s) 94,009 56,669 37,340 65.89
-----------------------------------------------------------
Total RPMs (000s) (d) 11,675,742 11,816,804 (141,062) (1.19)
-----------------------------------------------------------
ASMs Jet (000s) 16,041,928 16,295,730 (253,802) (1.56)
ASMs J31/Saab (000s) 145,759 94,371 51,388 54.45
-----------------------------------------------------------
Total ASMs (000s) (e) 16,187,687 16,390,101 (202,414) (1.23)
-----------------------------------------------------------
Load Factor Jet 72.20 72.17 0.03 0.04
Load Factor J31/Saab 64.50 60.05 4.45 7.41
-----------------------------------------------------------
Total Load Factor (f) 72.13 72.10 0.03 0.04
-----------------------------------------------------------
Passengers Enplaned Jet 8,058,886 7,686,077 372,809 4.85
Passengers Enplaned J31/Saab 576,339 320,062 256,277 80.07
-----------------------------------------------------------
Total Passengers Enplaned (g) 8,635,225 8,006,139 629,086 7.86
-----------------------------------------------------------
Revenue $ (000s) 1,275,484 1,291,553 (16,069) (1.24)
RASM in cents (h) 7.88 7.88 - -
CASM in cents (i) 8.45 7.86 0.59 7.51
Yield in cents (j) 10.92 10.93 (0.01) (0.09)
See footnotes (c) through (j) on page 23.
(a) Chicago Express provides service between Chicago-Midway and the cities of
Indianapolis, Milwaukee, Des Moines, Dayton, Grand Rapids, Madison, South Bend
and Springfield as the ATA Connection, currently using 34-seat Saab 340B
propeller aircraft. During 1999 and the first three quarters of 2000, Chicago
Express operated up to nine 19-seat Jetstream 31 ("J31") aircraft as it phased
in the Saab fleet. As of September 30, 2000, all J31 aircraft had been removed
from revenue service.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
22
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) 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.
(e) 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.
(f) 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 Company
sells an entire aircraft 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.
(g) 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."
(h) 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 (j) below for the definition of yield).
(i) 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.
(j) 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
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 2001 decreased 1.3% to $1.275 billion, as compared
to $1.292 billion in 2000. This decrease was due to a $54.5 million decrease in
commercial charter revenues, a $21.1 million decrease in military/government
charter revenues, a $7.6 million decrease in ground package revenues, and a $0.3
million decrease in other revenues, partially offset by a $67.4 million increase
in scheduled service revenues.
23
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200, Boeing 757-200, Boeing 757-300
and Boeing 737-800 aircraft in scheduled service. Data shown for "J31/Saab"
operations include the operations of Jetstream 31 and Saab 340B propeller
aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31,
-----------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures Jet 45,951 40,892 5,059 12.37
Departures J31/Saab (a) 26,836 18,985 7,851 41.35
-----------------------------------------------------------
Total Departures (b) 72,787 59,877 12,910 21.56
-----------------------------------------------------------
Block Hours Jet 131,495 118,473 13,022 10.99
Block Hours J31/Saab 24,836 18,708 6,128 32.76
-----------------------------------------------------------
Total Block Hours (c) 156,331 137,181 19,150 13.96
-----------------------------------------------------------
RPMs Jet (000s) 8,600,314 7,700,639 899,675 11.68
RPMs J31/Saab (000s) 94,009 56,669 37,340 65.89
-----------------------------------------------------------
Total RPMs (000s) (d) 8,694,323 7,757,308 937,015 12.08
-----------------------------------------------------------
ASMs Jet (000s) 11,297,545 10,025,603 1,271,942 12.69
ASMs J31/Saab (000s) 145,759 94,371 51,388 54.45
-----------------------------------------------------------
Total ASMs (000s) (e) 11,443,304 10,119,974 1,323,330 13.08
-----------------------------------------------------------
Load Factor Jet 76.13 76.81 (0.68) (0.89)
Load Factor J31/Saab 64.50 60.05 4.45 7.41
-----------------------------------------------------------
Total Load Factor (f) 75.98 76.65 (0.67) (0.87)
-----------------------------------------------------------
Passengers Enplaned Jet 6,703,150 5,873,598 829,552 14.12
Passengers Enplaned J31/Saab 576,339 320,062 256,277 80.07
-----------------------------------------------------------
Total Passengers Enplaned (g) 7,279,489 6,193,660 1,085,829 17.53
-----------------------------------------------------------
Revenue $ (000s) 820,666 753,301 67,365 8.94
RASM in cents (h) 7.17 7.44 (0.27) (3.63)
Yield in cents (j) 9.44 9.71 (0.27) (2.78)
Revenue per segment $ (k) 112.74 121.62 (8.88) (7.30)
See footnotes (a) through (j) on pages 22 and 23.
(k) 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.
Scheduled service revenues in 2001 increased 8.9% to $820.7 million from $753.3
million in 2000. Scheduled service revenues were 64.3% of consolidated revenues
in 2001, as compared to 58.3% of consolidated revenues in 2000.
As described in "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 2 - Impact of Terrorist Attacks on
September 11, 2001," the Company's scheduled service operations were adversely
affected by the terrorist attacks of September 11. The Company estimates that it
24
lost approximately $80.0 million in scheduled service revenues between September
11 and December 31, 2001, as a result of flights which were canceled, and as a
result of flights operated with lower load factors and yields. In the eight
months ended August 31, 2001, the Company's scheduled service RASM was virtually
unchanged at 7.72 cents, as compared to 7.71 cents in the comparable period of
2000. However, due to the decrease in scheduled service demand after the
terrorist attacks, resulting in lower load factors and yields, the Company's
scheduled service RASM in the last four months of 2001 was 5.92 cents, a
decrease of 14.3%, as compared to 6.91 cents in the last four months of 2000.
The Company's scheduled service at Chicago-Midway accounted for approximately
66.8% of scheduled service ASMs and 86.6% of scheduled service departures in
2001, as compared to 63.5% and 83.5%, respectively, during 2000. During the
third and fourth quarters of 2001, the Company began operating nonstop flights
to Newark and Miami. During the second and third quarters of 2000, the Company
began operating nonstop flights to Ronald Reagan Washington National Airport,
Boston, Seattle and Minneapolis-St. Paul. In addition to this new service, the
Company served the following existing jet markets in both years: Dallas-Ft.
Worth, Denver, Ft. Lauderdale, Ft. Myers, Las Vegas, Los Angeles, New York's
LaGuardia Airport, Orlando, Philadelphia, Phoenix, St. Petersburg, San
Francisco, San Juan and Sarasota.
In April 1999, the Company acquired all of the issued and outstanding stock of
Chicago Express which then operated 19-seat Jetstream 31 propeller aircraft
between Chicago-Midway and the cities of Indianapolis, Milwaukee, Des Moines,
Dayton, Grand Rapids, Lansing and Madison. Chicago Express began service to
South Bend, Indiana and Springfield, Illinois, respectively, in October 2000 and
August 2001, and ceased flying to Lansing, Michigan, in November 2000. In the
first three quarters of 2000, Chicago Express completed the replacement of nine
19-seat Jetstream 31 aircraft with nine 34-seat Saab 340B aircraft. Chicago
Express purchased two additional Saab 340B aircraft in the third quarter of
2001.
The Company anticipates that its Chicago-Midway operation will represent an
increasing proportion of its scheduled service business in 2002 and beyond. The
Company operated 109 peak daily jet and commuter departures from Chicago-Midway
in 2001, as compared to 94 in 2000, and served 28 destinations on a nonstop
basis in 2001, as compared to 25 nonstop destinations served in 2000. In order
to accommodate the growth in jet departures in the existing terminal, in October
2000 Chicago Express established a remote boarding operation at Chicago-Midway
Airport with shuttle bus service between the remote location and the main
terminal. This change has allowed the Company to convert the former Chicago
Express gate to a jet departure gate.
The Company's anticipated growth at Chicago-Midway will be accomplished in
conjunction with the construction of new terminal and gate facilities at the
Chicago-Midway Airport. In March 2001, the Company occupied 24 newly constructed
ticketing and passenger check-in spaces in the new terminal, an increase from 16
ticketing and passenger check-in spaces previously occupied. Once all
construction is complete in 2004, the Company expects to occupy 12 jet gates and
one commuter aircraft gate at the new airport concourses. One of the gates which
the Company will occupy opened on October 30, 2001. The Company moved to seven
additional new gates in the first quarter of 2002, and five additional gates are
expected to be available for use by the Company in 2004. In addition,
construction of a Federal Inspection Service ("FIS") facility at Chicago-Midway
was completed in the first quarter of 2002. The Company began nonstop
international services from this facility in early 2002 to Aruba, Cancun, Grand
Cayman and Guadalajara.
The Company's Hawaii service accounted for 18.6% of scheduled service ASMs and
3.9% of scheduled service departures in 2001, as compared to 17.0% and 4.3%,
respectively, in 2000. The Company provided nonstop service in both years from
25
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. The Company provides these
services through a marketing alliance with the largest independent tour operator
serving leisure travelers to Hawaii from the United States. The Company
distributes the remaining seats on these flights through normal scheduled
service distribution channels. The Company believes it has superior operating
efficiencies in west coast-Hawaii markets due to the high daily hours of
utilization obtained for both aircraft and crews.
The Company's Indianapolis service accounted for 9.2% of scheduled service ASMs
and 6.5% of scheduled service departures in 2001, as compared to 12.2% and 8.8%,
respectively, in 2000. In both years, the Company operated nonstop to Cancun,
Ft. Lauderdale, Ft. Myers, Las Vegas, Orlando, St. Petersburg and Sarasota. The
Company has served Indianapolis for 29 years through the Ambassadair Travel Club
and through scheduled service since 1986.
The Company continuously evaluates the profitability of its scheduled service
markets and expects to adjust its schedule and flight frequencies from time to
time, particularly with reference to the ongoing impacts of the terrorist
attacks. Although unit revenues did partially recover toward the end of 2001,
unit revenues in the first quarter of 2002 are expected to be below first
quarter 2001 levels. Weak revenues are related to both the ongoing impact of the
September 11, 2001 terrorist attacks on the demand for air travel, and continued
weakness in the U.S. domestic economy. The Company is adding a small amount of
capacity to its scheduled service network in the first quarter of 2002 as it
continues to accept new aircraft deliveries. The Company cannot predict when
year-over-year unit revenue growth will resume in its scheduled service
business.
Commercial Charter Revenues. The Company's commercial charter revenues are
derived principally from independent tour operators and specialty charter
customers. The Company's commercial charter product provides full-service air
transportation to customer-designated destinations throughout the world.
Commercial charter revenues accounted for 15.1% of consolidated revenues in 2001
as compared to 19.1% in 2000.
The impact of the September 11, 2001 terrorist attacks was less significant on
the commercial charter business than on scheduled service. The Company estimates
that it lost approximately $1.4 million in commercial charter revenues as a
result of flight cancellations during the FAA-mandated air system shutdown from
September 11 until September 13, and decreased demand for commercial charter
flights following September 11. The majority of the decline in commercial
charter revenues in 2001, as compared to 2000, was principally due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying. Since aircraft
utilization (number of productive hours of flying per aircraft each month) is
typically much lower for commercial charter, as compared to scheduled service
flying, the Company's replacement fleets of new Boeing 737-800 and Boeing
757-300 aircraft are economically disadvantaged when used in the charter
business, because of their higher fixed-ownership cost. Consequently, the
Company expects its commercial charter revenues to continue to decline in future
periods as the fleet supporting this business continues to shrink through
aircraft retirements.
Although total commercial charter revenues have declined in 2001, as compared to
2000, commercial charter RASM has increased over the same time periods. The
Company has eliminated lower-RASM flying as this business has been reduced in
size, thus increasing average RASM on the flying that it has retained.
26
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
Twelve Months Ended December 31,
-------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures (b) 7,293 9,722 (2,429) (24.98)
Block Hours (c) 24,495 34,356 (9,861) (28.70)
RPMs (000s) (d) 2,010,477 2,687,051 (676,574) (25.18)
ASMs (000s) (e) 2,588,780 3,610,413 (1,021,633) (28.30)
Passengers Enplaned (g) 1,128,660 1,472,340 (343,680) (23.34)
Revenue $ (000s) 192,246 246,705 (54,459) (22.07)
RASM in cents (h) 7.43 6.83 0.60 8.78
RASM less fuel escalation (l) 7.13 6.47 0.66 10.20
See footnotes (b) through (h) on pages 22 and 23.
(l) 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.
The Company operates in two principal components of the commercial charter
business, known as "track charter" and "specialty charter." The larger track
charter business component is generally comprised of low-frequency but
repetitive domestic and international flights between city pairs, which support
high-passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed-city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts. Track charter accounted for approximately
$149.7 million in revenues in 2001, as compared to $192.8 million in 2000.
Specialty charter is a product that is designed to meet the unique requirements
of a customer and is a business characterized by lower frequency of operation
and by greater variation in city pairs served than the track charter business.
Specialty charter includes such diverse contracts as flying university alumni to
football games, transporting political candidates on campaign trips and moving
NASA space shuttle ground crews to alternate landing sites. The Company also has
operated trips in an all-first-class configuration for certain corporate and
high-end leisure clients. Although lower utilization of crews and aircraft and
infrequent service to specialty destinations often result in higher average
operating costs, the Company has determined that the revenue premium earned by
meeting special customer requirements more than compensates for these increased
costs. The diversity of the Company's fleet types also permits the Company to
meet a customer's particular needs by choosing the aircraft type that provides
the most economical solution for those requirements. Specialty charter accounted
for approximately $18.8 million in revenues in 2001, as compared to $31.5
million in 2000.
The remainder of commercial charter revenues are attributable primarily to the
air revenues of ATALC and Ambassadair, which did not change significantly
between years.
27
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government charter operations of the Company.
Twelve Months Ended December 31,
-------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures (b) 3,702 4,961 (1,259) (25.38)
Block Hours (c) 16,159 19,443 (3,284) (16.89)
RPMs (000s) (d) 965,740 1,339,545 (373,805) (27.91)
ASMs (000s) (e) 2,147,248 2,605,791 (458,543) (17.60)
Passengers Enplaned (g) 225,641 329,200 (103,559) (31.46)
Revenue $ (000s) 167,524 188,557 (21,033) (11.15)
RASM in cents (h) 7.80 7.24 0.56 7.73
RASM less fuel escalation (m) 7.58 6.88 0.70 10.17
See footnotes (b) through (h) on pages 22 and 23.
(m) 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.
The Company estimates that it lost approximately $1.0 million in military
revenues, net of cancellation fees, due to the FAA-mandated shut down of the air
traffic system from September 11 until September 13. After having resumed flight
operations late in the day on September 13, 2001, the Company's military flight
schedule quickly returned to normal. Although current military flight operations
of the Company have not been significantly affected by the terrorist attacks of
September 11, future operations may be significantly affected by changes in the
transportation needs of the U.S. military, possibly in association with military
operations in the United States and abroad. Heightened military activities
related to international conflict usually bring reduced demand to the Company's
scheduled service business. The Company cannot predict the magnitude and
possible future impact on its results of operations and financial condition, if
any, of these possible future events.
The decline in military revenues in 2001, as compared to 2000, was primarily due
to changes in teaming arrangements used both by the Company and some of the
Company's competitors in the military/government charter business. Such changes
reduced the fixed-award flying allocated to the Company for the contract year
ending September 30, 2001. The Company earned $159.3 million in
military/government charter revenues in the contract year ended September 30,
2001, a 6.0% reduction as compared to $169.5 million earned in the preceding
contract year ended September 30, 2000. Under its current teaming arrangement,
the Company expects its military/government charter revenues to increase
slightly in the contract year ending September 2002.
The increase in RASM for military/charter revenues in 2001, as compared to 2000,
was due to rate increases awarded for the current contract year, based upon cost
data submitted to the U.S. military by the Company and other air carriers
providing these services.
The Company participates in two related military/government charter programs
known as "fixed-award" and "short-term expansion." Pursuant to the U.S.
military's fixed-award system, each participating airline is awarded certain
"mobilization value points" based upon the number and type of aircraft made
available by that airline for military flying. In order to increase the number
of points awarded, the Company has traditionally participated in contractor
teaming arrangements with other airlines. Under these arrangements, the team has
28
a greater likelihood of receiving fixed-award business and, to the extent that
the award includes passenger transport, the opportunity for the Company to
operate this flying is enhanced since the Company typically represents a
majority of the passenger transport capacity of its team. As part of its
participation in this teaming arrangement, the Company pays a commission to the
team, which passes that revenue on to all team members based upon their
mobilization value points. All airlines participating in the fixed-award
business contract annually with the U.S. military from October 1 to the
following September 30. For each contract year, reimbursement rates are
determined for aircraft types and mission categories based upon operating cost
data submitted by the participating airlines. These contracts generally are not
subject to renegotiation once they become effective.
Short-term expansion business is awarded by the U.S. military first on a pro
rata basis to those carriers who have been provided fixed-award business and
then to any other carrier with aircraft availability. Short-term expansion
flying is generally offered to airlines on very short notice.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (1) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (2) the percentage of
passenger capacity of the Company with respect to its own team; (3) the amount
of fixed-award and expansion flying required by the U.S. military in each
contract year; and (4) the availability of the Company's aircraft to accept and
fly expansion awards.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental, cruise and other accommodations in conjunction with
the Company's air transportation product. The Company markets these ground
packages through its ATALC subsidiary and to its Ambassadair Travel Club
members.
Ambassadair Travel Club offers tour-guide-accompanied vacation packages to its
approximately 34,000 individual and family members annually. ATALC offers
numerous ground accommodations to the general public in many areas of the United
States, Mexico and the Caribbean. These packages are marketed through travel
agents, as well as directly by the Company.
In 2001, ground package revenues decreased 12.7% to $52.2 million, as compared
to $59.8 million in 2000. The number of ground packages sold and the average
revenue earned by the Company for a ground package sale are a function of the
seasonal mix of vacation destinations served, the quality and types of ground
accommodations offered and general competitive conditions in the Company's
markets, all of which factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled, charter and ground package operations of the
Company, such as cancellation and service fees, Ambassadair Travel Club
membership dues and cargo revenue. Other revenues decreased 0.5% to $42.9
million in 2001, as compared to $43.1 million in 2000.
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 2001 increased 9.5% to $325.2 million
from $297.0 million in 2000.
29
The Company increased its average equivalent employees by approximately 4.7%
between 2001 and 2000. This annual growth rate combines employment growth in
conjunction with a growing flight schedule prior to the terrorist attacks on
September 11, offset by the employee furloughs under the Company's cost-cutting
initiatives implemented shortly after the attacks. Through the first nine months
of the year, the average equivalent headcount increased approximately 11.0%,
which primarily reflected growth in categories of employees that were required
for the increased flight activity the Company was experiencing prior to
September 11. In the fourth quarter of 2001, employment declined by
approximately 12.5%, as compared to the fourth quarter of 2000. By the middle of
October 2001, the Company had furloughed approximately 1,100 employees as a
result of a 20% flight capacity reduction implemented after the September 11
attacks. As of December 31, 2001, the Company had recalled approximately half of
those employees furloughed during the fourth quarter of 2001.
Additionally, in May 2000, the Company replaced its contracted ground handler at
its busiest airport, Chicago-Midway, with its own ramp employees. Although this
contributed to a year-over-year increase in salaries, wages and benefits, the
Company experienced a corresponding reduction in handling, landing and
navigation fees, where third-party handling expenses are classified. Chicago
Express salaries, wages and benefits also increased in 2001, as compared to
2000, due to the replacement of nine 19-seat Jetstream 31 aircraft with 11
34-seat Saab 340B aircraft, thus more than doubling total commuter seat capacity
between years.
Also contributing to the increase in salaries, wages and benefits, is an
increase of approximately $7.8 million in benefits expenses to $34.3 million in
2001 as compared to $26.5 million in 2000. This increase is primarily due to
increases in medical insurance claims and workers' compensation costs between
years.
Fuel and Oil. Fuel and oil expense decreased 8.6% to $251.3 million in 2001, as
compared to $274.8 million in 2000. The Company consumed 5.8% fewer gallons of
jet fuel for flying operations in 2001, as compared to 2000, which resulted in a
decrease in fuel expense of approximately $13.7 million between periods. Fuel
consumption varies with changes in jet block hours flown, and with changes in
the fleet mix. The Company flew 172,207 jet block hours in 2001, as compared to
172,824 jet block hours in 2000, a decrease of 0.4% between years. Fuel
consumption in 2001 was more significantly affected by the delivery of 14 Boeing
737-800 aircraft and five Boeing 757-300 aircraft, replacing certain
less-fuel-efficient Boeing 727-200 and Lockheed L-1011 aircraft subsequently
retired from service. The Company estimates that approximately $9.4 million of
the variance attributable to lower fuel consumption resulted from flying
approximately 18,000 of these block hours using the 19 new aircraft, as compared
to flying those block hours with the less-fuel-efficient fleets. During 2001,
the Company's average cost per gallon of jet fuel consumed decreased by 6.0% as
compared to 2000, resulting in a decrease in fuel and oil expense of
approximately $12.6 million between periods.
During 2001 and 2000, the Company entered into several fuel price hedge
contracts under which the Company sought to reduce the risk of fuel price
fluctuations. The Company recorded losses of $2.6 million on these hedge
contracts in 2001 as compared to gains of $0.1 million in 2000. As of December
31, 2001, the Company had entered into swap agreements for approximately 6.3
million gallons of heating oil for future delivery between January 2002 and June
2002, which represented approximately 2.6% of total expected fuel consumption in
2002. See "Quantitative and Qualitative Disclosures about Market Risk," and
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 15 - Fuel Price Risk Management" for more information on the
Company's fuel price risk management program.
30
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. Amortization is primarily the periodic expensing of
capitalized airframe and engine overhauls for all fleet types on a
units-of-production basis using aircraft flight hours and cycles (landings) as
the units of measure. Depreciation and amortization expense decreased 3.0% to
$121.3 million in 2001, as compared to $125.0 million in 2000.
During the first nine months of 2001, the Company was depreciating the L-1011-50
and 100 fleet assuming a common retirement date of 2004. However, during 2001,
the Company decided to retire several of these aircraft as of their next
scheduled heavy maintenance check. During the first nine months of 2001, the
Company retired three L-1011-50 aircraft from revenue service in this manner,
recording a loss on disposal of $6.6 million for these aircraft in other
operating expense. During the fourth quarter of 2001, the Comp