United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From ______ to ______
Commission file number 000-21642
ATA HOLDINGS CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
(Address of principal executive offices) (Zip Code)
(317) 247-4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No ______
Applicable Only to Issuers 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 Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,764,753 shares outstanding as of
October 31, 2002
PART I - Financial Information
Item I - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ....................................... $ 113,058 $ 184,439
Aircraft pre-delivery deposits .................................. 88,882 166,574
Receivables, net of allowance for doubtful accounts
(2002 - $17,222; 2001 - $1,526) ................................. 69,686 75,046
Inventories, net ................................................ 50,733 47,648
Assets held for sale ............................................ - 18,600
Prepaid expenses and other current assets ....................... 29,242 19,471
------------- -------------
Total current assets ................................................. 351,601 511,778
Property and equipment:
Flight equipment ................................................ 338,241 327,541
Facilities and ground equipment ................................. 131,895 119,975
------------- -------------
470,136 447,516
Accumulated depreciation ........................................ (176,205) (132,573)
------------- -------------
293,931 314,943
Goodwill ............................................................. 21,780 21,780
Assets held for sale ................................................. 8,595 33,159
Prepaid aircraft rent ................................................ 75,798 49,159
Investment in BATA, LLC .............................................. 19,138 30,284
Deposits and other assets ............................................ 43,635 41,859
------------- -------------
Total assets ......................................................... $ 814,478 $ 1,002,962
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................. $ 15,177 $ 5,820
Short-term debt .................................................. 65,591 118,239
Accounts payable ................................................. 29,634 26,948
Air traffic liabilities .......................................... 92,417 100,958
Accrued expenses ................................................. 177,508 177,102
------------- -------------
Total current liabilities ............................................ 380,327 429,067
Long-term debt, less current maturities .............................. 334,727 373,533
Deferred income taxes ................................................ - 13,655
Deferred gains from sale and leaseback of aircraft ................... 52,877 45,815
Other deferred items ................................................. 36,496 16,760
------------- -------------
Total liabilities .................................................... 804,427 878,830
Redeemable preferred stock; authorized and issued 800 shares ......... 80,000 80,000
Shareholders' equity (deficit):
Preferred stock; authorized 9,999,200 shares; none issued ........ - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,476,193 - 2002; 13,266,642 - 2001 ................... 65,290 61,964
Treasury stock; 1,711,440 shares - 2002; 1,710,658 shares - 2001 (24,778) (24,768)
Additional paid-in capital ....................................... 10,824 11,534
Other comprehensive loss ......................................... - (687)
Retained deficit ................................................. (121,285) (3,911)
------------- -------------
Total shareholders' equity (deficit) ................................. (69,949) 44,132
------------- -------------
Total liabilities and shareholders' equity ........................... $ 814,478 $ 1,002,962
============= =============
See accompanying notes.
2
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Scheduled service.................................. $ 231,633 $ 208,490 $ 664,431 $ 656,044
Charter............................................ 68,185 93,629 238,698 292,603
Ground package..................................... 5,605 8,738 30,582 45,214
Other.............................................. 11,866 10,612 32,689 33,988
---------- ---------- ---------- ----------
Total operating revenues........................... 317,289 321,469 966,400 1,027,849
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits....................... 95,094 84,956 264,782 249,444
Fuel and oil....................................... 52,956 67,908 151,350 205,918
Aircraft rentals................................... 51,244 26,884 135,731 68,279
Handling, landing and navigation fees.............. 29,343 21,640 85,473 70,299
Depreciation and amortization...................... 18,850 32,156 60,258 101,400
Crew and other employee travel..................... 14,485 15,089 41,933 46,695
Aircraft maintenance, materials and repairs........ 11,308 14,704 37,388 50,064
Other selling expenses............................. 11,103 10,311 33,462 32,258
Passenger service.................................. 10,379 12,614 29,677 35,725
Advertising........................................ 9,553 7,190 30,181 20,695
Insurance.......................................... 8,021 2,520 23,693 6,960
Facilities and other rentals....................... 6,294 5,347 17,492 14,670
Commissions........................................ 3,964 7,707 18,089 28,520
Ground package cost................................ 3,757 6,381 23,832 36,665
Special charges.................................... - 9,367 - 9,367
Aircraft impairments and retirements............... 34,318 37,633 51,559 41,749
U.S. Government grant.............................. - (62,597) 15,210 (62,597)
Other.............................................. 16,264 17,207 55,169 52,961
---------- ---------- ---------- ----------
Total operating expenses........................... 376,933 317,017 1,075,279 1,009,072
---------- ---------- ---------- ----------
Operating income (loss)............................ (59,644) 4,452 (108,879) 18,777
Other income (expense):
Interest income.................................... 626 1,157 2,138 4,247
Interest expense................................... (7,729) (7,036) (25,979) (21,345)
Other.............................................. (620) 1,831 (988) 1,763
---------- ---------- ---------- ----------
Other expense...................................... (7,723) (4,048) (24,829) (15,335)
---------- ---------- ---------- ----------
Income (loss) before income taxes.................. (67,367) 404 (133,708) 3,442
Income taxes (credits)............................. (6,746) 16 (19,569) 907
---------- ---------- ---------- ----------
Net income (loss).................................. (60,621) 388 (114,139) 2,535
Preferred stock dividends.......................... (375) (375) (3,235) (3,083)
---------- ---------- ---------- ----------
Income (loss) available to common shareholders..... $ (60,996) $ 13 $ (117,374) $ (548)
========== ========== ========== ==========
Basic earnings per common share:
Average shares outstanding......................... 11,764,753 11,509,333 11,694,097 11,439,167
Net income (loss) per share........................ $(5.18) $0.00 $ (10.04) $ (0.05)
========== ========== ========== ==========
Diluted earnings per common share:
Average shares outstanding......................... 11,764,753 12,515,904 11,694,097 11,439,167
Net income (loss) per share........................ $(5.18) $0.00 $ (10.04) $ (0.05)
========== ========== ========== ==========
See accompanying notes.
3
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(Dollars in thousands)
Redeemable Additional Other
Preferred Common Treasury Paid-in Comprehensive Retained
Stock Stock Stock Capital Income (Loss) Deficit Total
-------- -------- --------- -------- ---- ---------- --------
Balance, December 31, 2001 . $ 80,000 $ 61,964 $ (24,768) $ 11,534 $ (687) $ (3,911) $ 124,132
-------- -------- --------- -------- ---- ---------- --------
Net income ................... - - - - - 1,880 1,880
Net gain on derivative
instruments .................. - - - - 629 - 629
---- ---------- --------
Total comprehensive
income ....................... - - - - 629 1,880 2,509
---- ---------- --------
Preferred stock dividends .... - - - - - (375) (375)
Restricted stock grants ...... - 10 - 3 - - 13
Stock options exercised ...... - 291 - (138) - - 153
-------- -------- --------- -------- ---- ---------- --------
Balance, March 31, 2002 .... $ 80,000 $ 62,265 $ (24,768) $ 11,399 $ (58) $ (2,406) $ 126,432
======== ======== ========= ======== === ========== ========
Net loss ..................... - - - - - (55,398) (55,398)
Net gain on derivative
instruments .................. - - - - 391 - 391
---- ---------- --------
Total comprehensive
income (loss) ................ - - - - 391 (55,398) (55,007)
---- ---------- --------
Preferred stock dividends .... - - - - - (2,485) (2,485)
Payment of liability
with stock ................... - 2,445 - (295) - - 2,150
Restricted stock grants ...... - 3 (10) 1 - - (6)
Stock options exercised ...... - 577 - (281) - - 296
-------- -------- --------- -------- ---- ---------- --------
Balance, June 30, 2002 ..... $ 80,000 $ 65,290 $ (24,778) $ 10,824 $ 333 $ (60,289) $ 71,380
======== ======== ========= ======== === ========== ========
Net loss ..................... - - - - - (60,621) (60,621)
Net loss on derivative
instruments .................. - - - - (333) - (333)
---- ---------- --------
Total comprehensive
loss ......................... - - - - (333) (60,621) (60,954)
---- ---------- --------
Preferred stock dividends .... - - - - - (375) (375)
-------- -------- --------- -------- ---- ---------- --------
Balance, September 30, 2002. $ 80,000 $ 65,290 $ (24,778) $ 10,824 $ - $ (121,285) $ 10,051
======== ======== ========= ======== ==== ========== ========
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
2002 2001
------------- -------------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss)............................................ $(114,139) $ 2,535
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization................................ 60,258 101,400
Aircraft impairments and retirements......................... 51,559 41,749
Deferred income taxes (credits).............................. (13,655) 2,842
Other non-cash items......................................... 30,913 (4,650)
Changes in operating assets and liabilities:
U.S. Government grant receivable............................. 15,210 (29,996)
Other receivables............................................ (9,850) 2,805
Inventories.................................................. (5,570) (10,554)
Prepaid expenses............................................. (9,771) 6,850
Accounts payable............................................. 2,686 29,949
Air traffic liabilities...................................... (8,541) (17,331)
Accrued expenses............................................. (3,984) 16,375
--------- ---------
Net cash provided by operating activities (4,884) 141,974
--------- ---------
Investing activities:
Aircraft pre-delivery deposits............................... 77,396 (61,666)
Capital expenditures......................................... (57,618) (251,031)
Noncurrent prepaid aircraft rent............................. (19,273) (18,778)
Investment in BATA, LLC...................................... 18,632 18,043
Reductions (additions) to other assets....................... (3,867) 5,272
Proceeds from sales of property and equipment................ 408 32
--------- ---------
Net cash provided by (used in) investing activities 15,678 (308,128)
--------- ---------
Financing activities:
Preferred stock dividends.................................... (3,235) (3,083)
Proceeds from sale/leaseback transactions.................... 2,794 369
Proceeds from short-term debt................................ 56,859 71,537
Payments on short-term debt.................................. (109,507) (18,726)
Proceeds from long-term debt................................. 194,491 151,238
Payments on long-term debt................................... (224,016) (5,600)
Proceeds from stock options exercises........................ 449 1,434
Purchase of treasury stock................................... (10) (204)
--------- ---------
Net cash provided by (used in) financing activities (82,175) 196,965
--------- ---------
Increase (decrease) in cash and cash equivalents............. (71,381) 30,811
Cash and cash equivalents, beginning of period............... 184,439 129,137
--------- ---------
Cash and cash equivalents, end of period..................... $ 113,058 $ 159,948
========= =========
Supplemental disclosures:
Cash payments for:
Interest..................................................... $ 33,102 $ 33,794
Income taxes (refunds)....................................... $ 3,063 $ (7,931)
Financing and investing activities not affecting cash:
Accrued capitalized interest................................. $ (6,406) $ 11,293
See accompanying notes.
5
ATA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of ATA Holdings Corp.,
formerly Amtran, Inc., and subsidiaries (the "Company") have been prepared
in accordance with instructions for reporting interim financial information
on Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles
generally accepted in the United States.
The consolidated financial statements for the quarters ended September 30,
2002 and 2001 reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations
and cash flows for such periods. Results for the nine months ended
September 30, 2002 are not necessarily indicative of results to be expected
for the full fiscal year ending December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
2. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended September 30,
2002 2001
------------ ------------
Numerator:
Net income (loss) $ (60,621,000) $ 388,000
Preferred stock dividends (375,000) (375,000)
------------- ----------
Income (loss) available to common
shareholders-numerator for basic and
diluted earnings per share $ (60,996,000) $ 13,000
============= ==========
Denominator:
Denominator for basic earnings per share
- weighted average shares 11,764,753 11,509,333
Effect of potential dilutive securities:
Employee stock options - 1,006,571
------------- ----------
Denominator for diluted earnings per share
- adjusted weighted average shares 11,764,753 12,515,904
============= ==========
Basic income (loss) per share $ (5.18) $ 0.00
============= ==========
Diluted income (loss) per share $ (5.18) $ 0.00
============= ==========
6
Nine Months Ended September 30,
2002 2001
------------ ------------
Numerator:
Net income (loss) $(114,139,000) $ 2,535,000
Preferred stock dividends (3,235,000) (3,083,000)
------------- -----------
Loss available to common
shareholders-numerator for basic and
diluted earnings per share $(117,374,000) $ (548,000)
============= ===========
Denominator:
Denominator for basic and diluted earnings
per share - weighted average shares 11,694,097 11,439,167
============= ===========
Basic loss per share $ (10.04) $ (0.05)
============= ===========
Diluted loss per share $ (10.04) $ (0.05)
============= ===========
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings per Share," the impact of 1,914,486 shares of
convertible redeemable preferred stock in the three months and nine months
ended September 30, 2002 and 2001, has been excluded from the computation
of diluted earnings per share because their effect would be antidilutive.
In addition, the impact of 180,886 and 668,841 employee stock options,
respectively, has been excluded from the computation of diluted earnings
per share for the nine months ended September 30, 2002 and 2001,
respectively, because their effect would be antidilutive.
3. Segment Disclosures
The Company identifies its segments on the basis of similar products and
services. The airline segment derives its revenues primarily from the sale
of scheduled service or charter air transportation. ATA Leisure Corp.
("ATALC") derives its revenues from the sale of vacation packages, which,
in addition to air transportation, include hotels and other ground
arrangements. ATALC purchases air transportation for its vacation packages
from ATA and other airlines.
On July 1, 2002, the Company outsourced the management operations of two of
its ATALC brands, ATA Vacations and Travel Charter International ("TCI"),
to Milwaukee-based The Mark Travel Corporation ("MTC"). MTC will create,
advertise, take reservations and deliver these ATALC brands. MTC will
receive revenue from the package sales, and the Company will receive a
royalty fee from MTC. Other ATALC products, including Key Tours' Canadian
Rail programs and Key Tours' Las Vegas ground operations, will not be
outsourced. The Company expects this segment to have a less material effect
on the consolidated financial statements as a result of the outsourcing
arrangements, and does not consider it a reportable segment due to its
immateriality.
4. Commitments and Contingencies
In 2000, the Company entered into a purchase agreement with the Boeing
Company to purchase directly from Boeing 10 new Boeing 757-300s and 20 new
Boeing 737-800s. The Boeing 737-800 aircraft are powered by General
Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by
Rolls-Royce RB211-535 E4C engines. The Company also received purchase
rights for an additional 50 aircraft. The manufacturer's list price is
$73.6 million for each 757-300 and $52.4 million for each 737-800, subject
7
to escalation. The Company's purchase price for each aircraft is subject to
various discounts. To fulfill its purchase obligations, the Company has
arranged for each of these aircraft, including the engines, to be purchased
by third parties that will, in turn, enter into long-term operating leases
with the Company. As of September 30, 2002, the Company had taken delivery
of eight Boeing 737-800s and 10 Boeing 757-300s obtained directly from
Boeing. All remaining aircraft to be purchased directly from Boeing are
currently scheduled for delivery between October 2002 and August 2004.
Aircraft pre-delivery deposits are required for these purchases, and the
Company has funded these deposits using operating cash and deposit finance
facilities. As of September 30, 2002, the Company had $93.3 million in
pre-delivery deposits outstanding for these aircraft, of which $65.6
million was provided by deposit finance facilities with various lenders.
Upon delivery of the aircraft, pre-delivery deposits funded with operating
cash will be returned to the Company, and those funded with deposit
facilities will be used to repay those facilities.
In December 2001, the Company entered into an agreement to exercise
purchase rights on two Boeing 757-300 aircraft to be delivered in May and
June 2003. The Company currently has purchase rights remaining for eight
Boeing 757-300 aircraft and 40 Boeing 737-800 aircraft.
The Company has operating lease agreements in place to lease 14 new Boeing
737-800s from International Lease Finance Corporation ("ILFC"). As of
September 30, 2002, the Company had taken delivery of 12 Boeing 737-800s
that are being leased from ILFC. The remaining two aircraft under these
operating lease agreements are scheduled for delivery in June 2003 and May
2004.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006.
In March 2001, the Company entered into a limited liability company
agreement with Boeing Capital Corporation ("BCC") to form BATA Leasing LLC
("BATA") a 50/50 joint venture. Because the Company does not control BATA,
the Company's investment is being accounted for under the equity method of
accounting. BATA is expected to remarket the Company's fleet of Boeing
727-200 aircraft in either passenger or cargo configurations. In exchange
for supplying the aircraft and certain operating services to BATA, the
Company has and will continue to receive both cash and equity in the income
or loss of BATA. The Company transferred 12 Boeing 727-200 aircraft to BATA
in 2001, and subsequently leased nine of those aircraft back through
short-term operating leases with BATA. As of June 30, 2002, all nine leases
had terminated, but the Company is subject to lease return conditions
contained in these nine operating leases upon delivery of any of these
aircraft to a third party by BATA. As of September 30, 2002, a third-party
lessee or buyer has not been identified for any of these aircraft.
Management believes it is reasonably possible that a lessee or buyer will
be identified. The Company estimates that it could incur up to $7.0 million
of expense to meet the return conditions, if all nine of the aircraft were
sold or leased by BATA to third parties. No liability has been recorded for
these return conditions.
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
5. New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets ("FAS 142"), effective for fiscal years beginning after December 15,
2001. As required upon adoption of FAS 142, as of June 30, 2002 the Company
had completed transitional impairment reviews on its goodwill. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" for a description of the
Company's application of FAS 142.
8
The Company adopted FASB Statement of Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS
144") effective January 1, 2002. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting
Policies" for a description of the Company's application of FAS 144.
9
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter and Nine Months Ended September 30, 2002, Versus Quarter and Nine Months
Ended September 30, 2001
Overview
The Company is a leading provider of 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, American Trans Air,
Inc. ("ATA"), has been operating for 30 years and is the tenth largest U.S.
airline in terms of 2001 capacity and traffic. ATA provides jet scheduled
service through nonstop and connecting flights from the gateways of
Chicago-Midway and Indianapolis to popular vacation destinations such as Hawaii,
Phoenix, Las Vegas, Florida, California, Mexico and the Caribbean, as well as to
New York's LaGuardia Airport, Philadelphia, Denver, Dallas-Ft. Worth,
Washington, D.C., Boston, Seattle, Minneapolis-St. Paul, Newark and Charlotte.
The Company's commuter subsidiary Chicago Express Airlines, Inc. ("Chicago
Express") provides commuter scheduled service between Chicago-Midway and the
cities of Indianapolis, Cedar Rapids, Des Moines, Dayton, Flint, Grand Rapids,
Lexington, Madison, Milwaukee, Moline, South Bend, Springfield and Toledo. ATA
also provides charter service to independent tour operators, specialty charter
customers and the U.S. military.
In the quarter and nine months ended September 30, 2002, the Company recorded an
operating loss of $59.6 million and $108.9 million, respectively, as compared to
operating income of $4.5 million and $18.8 million in the same periods of 2001.
Consolidated yield declined by 0.6% and 7.1%, respectively, in the quarter and
nine months ended September 30, 2002, as compared to the same periods of 2001,
while consolidated load factors declined 5.6% and 2.5%, respectively, between
the same periods. Weak pricing was evident particularly in scheduled service in
2002, and reflects the continuing impacts of severely reduced demand for both
business and leisure air travel subsequent to the terrorist attacks of September
11, 2001. The Company also believes that consumer confidence continues to be
eroded by an unsettled economic climate in the United States and that some
customers are choosing alternative modes of transportation due to the impact of
enhanced security procedures on air transportation convenience. The Company
expects continued weakness in unit revenue and load factor throughout the
remainder of 2002.
The Company's unit costs remained among the lowest of major airlines in 2002.
Excluding special and unusual items, consolidated cost per available seat mile
("CASM") was 7.62 cents and 7.73 cents, respectively, in the quarter and nine
months ended September 30, 2002, as compared to 7.79 cents and 8.11 cents,
respectively, in the comparable periods of 2001 (see "Results of Operations in
Cents Per ASM.") In 2002 unit cost of salaries, wages and benefits were higher
than in 2001, because the Company recorded a charge of $9.9 million to record a
signing bonus relating to recently-ratified amendments to the cockpit crew
collective bargaining agreement and implemented higher pay rates under the
amended agreement effective July 1, 2002. The Company is continuing its efforts
to further reduce its operating costs in the fourth quarter of 2002, and also
expects to continue to realize net operating cost savings from the ongoing
deliveries of its new fleet of Boeing 737-800 and Boeing 757-300 aircraft, and
ongoing retirements of Lockheed L-1011 aircraft. The Company had retired all of
its Boeing 727-200 aircraft by June 30, 2002.
The Company, however, does not expect that it will be able to fully mitigate the
weak revenue results solely through cost savings initiatives. Consequently, the
Company expects to incur operating and net losses for the full year 2002,
including further losses in the fourth quarter.
10
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. Certain significant accounting policies applied in the
preparation of the financial statements require management to make difficult,
subjective or complex judgments, and are considered critical accounting policies
by the Company. The Company has identified the following areas as critical
accounting policies.
Goodwill Accounting. In June 2001, the FASB issued new accounting standards
pertaining to goodwill in FAS 142, effective for fiscal years beginning after
December 15, 2001. Under FAS 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. The Company's goodwill is related to its ATALC, ATA Cargo,
Inc. ("ATA Cargo") and Chicago Express subsidiaries acquired in 1999.
FAS 142 requires companies to perform transitional impairment reviews of
goodwill as of the date of adoption of the statement, which was January 1, 2002.
The transitional goodwill impairment test was required to be completed by June
30, 2002, based upon the carrying values and estimated fair values as of January
1, 2002. This test is a two-step process. Step one compares the fair value of a
reporting unit (determined through market quotes or the present value of
estimated future cash flows) with its carrying amount (assets less liabilities,
including goodwill.) If the estimated fair value exceeds the carrying amount,
goodwill of the reporting unit is considered not impaired, and step two of the
impairment test is not necessary. If the carrying amount of a reporting unit
exceeds its estimated fair value, the second step of the goodwill impairment
test is then performed, which compares the implied fair value of the reporting
unit's goodwill (determined in accordance with purchase accounting), with the
carrying amount of the reporting unit's goodwill. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to that excess. If an
impairment loss is recognized, the adjusted carrying amount of the goodwill
becomes the new accounting basis for future impairment tests.
The fair market values of all of the Company's reporting units were estimated
using discounted future cash flows, since market quotes were not readily
available. For Chicago Express and ATA Cargo, future cash flows were estimated
based on historical performance. In both cases, the estimated fair market value
was higher than the carrying amount of the reporting unit, and thus no
impairment was indicated.
The fair market value of ATALC was estimated based on projected future cash
flows from the Key Tours and Key Tours Las Vegas brands, estimated cash flows
from royalties under the new management services contract with MTC (see Footnote
3, "Segment Disclosures"), and incremental cash flows from the increased sale of
scheduled service seats to ATA Vacations customers under the management services
agreement. Based on this analysis, the estimated fair market value of ATALC was
higher than its carrying amount, and thus no impairment was indicated.
All of the estimates of fair market value for the Company's three reporting
units involved highly subjective judgments on the part of management, including
the amounts of cash flows to be received, their estimated duration, and
perceived risk as reflected in selected discount rates. In some cases, cash
flows were estimated without the benefit of historical data, although historical
data was used where available. Although the Company believes its estimates and
judgments to be reasonable, different assumptions and judgments might have
resulted in the impairment of some or all of the Company's recorded goodwill of
$21.8 million under the transitional testing rules of FAS 142.
11
U. S. Government Grant Reimbursement Accounting. The Air Transportation Safety
and System Stabilization Act passed in response to the September 11, 2001
terrorist attacks provided for, among other things, up to $5.0 billion in
compensation for the direct and incremental losses resulting from the terrorist
attacks incurred by U. S. domestic passenger and cargo airlines from September
11, 2001 through December 31, 2001.
Due to the limited guidance provided by the legislation and the evolving
guidance provided by the interpretive rules of the Department of Transportation
("DOT"), the Company has made subjective and judgmental estimates in calculating
and recording the amount of grant revenue to recognize. In the third and fourth
quarters of 2001, the Company recognized $66.3 million in total grant revenues.
As of December 31, 2001, $44.5 million had been received, and $21.8 million was
recorded as a receivable.
In the second quarter of 2002, the DOT issued new guidelines for measuring
reimbursable losses and the Company submitted a final application, accompanied
by the required accountant's report on agreed upon procedures. Based on review
of its application with the DOT, the Company determined that it is probable that
a portion of the receivable recorded in 2001 may not be collected, and therefore
recorded a valuation allowance of $15.2 million against the $21.8 million
receivable as of June 30, 2002. As of September 30, 2002, the remaining
receivable had not yet been collected, but the Company does not currently
believe that a further change to the valuation allowance is necessary. The
Company is continuing to discuss its compensation claim with the DOT, and
currently expects that claim to be settled during the fourth quarter of 2002.
Fleet Impairment Accounting. Effective January 1, 2002, the Company adopted FAS
144, which superseded FASB Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of ("FAS 121") but the Company continues to account for the fleet
and related assets that were impaired prior to January 1, 2002 under FAS 121, as
required by FAS 144. The Company has been performing impairment reviews in
accordance with FAS 121 on the Lockheed L-1011-50/100 and the Boeing 727-200
fleets since the end of 2000, and both fleets became impaired under FAS 121
subsequent to the events of September 11, 2001.
In the third quarter of 2002, the Company decided to retire one of its five
Lockheed L-1011-500 aircraft earlier than originally planned. This event caused
the Company to consider whether the net book value of the remaining four
aircraft and related assets in this fleet could be recovered through future cash
flows. In the third quarter of 2002, the Company performed an impairment
analysis on the Lockheed L-1011-500 fleet and related assets, in accordance with
FAS 144, and determined that the Lockheed L-1011-500 fleet and related assets
were not impaired.
Both FAS 144 and FAS 121 require that whenever events or circumstances indicate
that the Company may not be able to recover the net book value of its productive
assets through future cash flows, an assessment must be performed of expected
future cash flows, and undiscounted estimated future cash flows must be compared
to the net book value of these productive assets to determine if impairment is
indicated. They specify that impaired assets be written down to their estimated
fair market value by recording an impairment charge to earnings. FAS 144 and FAS
121 state that fair market values may be estimated using discounted cash flow
analysis or quoted market prices, together with other available information, to
estimate fair market values. The Company primarily used discounted cash flow
analysis to estimate fair market value of the Lockheed L-1011-50/100 fleet, and
quoted market prices to estimate the value of the Boeing 727-200 fleet.
The application of FAS 144 and FAS 121 required the exercise of significant
judgment and the preparation of numerous significant estimates. The Company
estimated future cash flows from the productive use of these fleets by
estimating the expected net cash contribution from revenues less operating
expenses, and adjusting for estimated cash outflows for heavy maintenance and
estimated cash inflows from final disposal of the assets, for up to ten years
into the future. Although the Company believes that its estimates of cash flows
in the application of FAS 144 and FAS 121 were reasonable, and were based upon
all available information, including extensive historical cash flow data about
the prior use of these fleets, such estimates nevertheless required substantial
12
judgments and were based upon material assumptions about future events. Such
estimates were significant in determining the amount of the impairment charge to
be recorded, which could have been materially different under different sets of
assumptions and estimates.
As FAS 144 and FAS 121 require the Company to continuously evaluate fair market
values of previously impaired assets, it is possible that future estimates of
fair market value may result in additional material charges to earnings, if
those estimates indicate a material reduction in fair market value as compared
to the estimates made at the end of the third quarter of 2002.
Results of Operations
For the quarter ended September 30, 2002, the Company had an operating loss of
$59.6 million, as compared to operating income of $4.5 million in the comparable
quarter of 2001; and the Company had a $61.0 million net loss available to
common shareholders in the third quarter of 2002, as compared to net income
available to common shareholders of $13,000 in the third quarter of 2001.
Operating revenues decreased 1.3% to $317.3 million in the third quarter of
2002, as compared to $321.5 million in the same period of 2001. Consolidated
revenue per available seat mile ("RASM") decreased 6.1% to 7.06 cents in the
third quarter of 2002, as compared to 7.52 cents in the third quarter of 2001.
Scheduled service revenues increased $23.1 million between periods, or 11.1%,
while, charter revenues decreased $25.4 million between periods, or 27.1%. These
revenue changes reflected the Company's continuing strategy to build capacity in
scheduled service at Chicago-Midway. Capacity in commercial charter operations
declined as a result of the continued retirement of Boeing 727-200 aircraft and
Lockheed L-1011-50/100 aircraft. Scheduled service unit revenues continued to
reflect weakness in both load factors and yields in the third quarter of 2002.
Operating expenses increased 18.9% to $376.9 million in the third quarter of
2002, as compared to $317.0 million in the comparable period of 2001.
Consolidated CASM increased 13.1% to 8.39 cents in the third quarter of 2002, as
compared to 7.42 cents in the third quarter of 2001. Operating expenses in both
quarters included special charges, aircraft impairment and retirement charges,
and U.S. Government grant amounts. After excluding these special items,
consolidated CASM decreased 2.2% to 7.62 cents in the third quarter of 2002, as
compared to 7.79 cents in the third quarter of 2001.
For the nine months ended September 30, 2002, the Company had an operating loss
of $108.9 million, as compared to operating income of $18.8 million in the
comparable period of 2001; and the Company had a $117.4 million net loss
available to common shareholders in the nine months ended September 30, 2002, as
compared to a net loss available to common shareholders of $0.5 million in the
same period of 2001.
Operating revenues decreased 6.0% to $966.4 million in the nine months ended
September 30, 2002, as compared to $1.028 billion in the same period of 2001.
Consolidated RASM decreased 9.3% to 7.41 cents in the nine months ended
September 30, 2002, as compared to 8.17 cents in the same period of 2001.
Scheduled service revenues increased $8.4 million between periods, while charter
revenues decreased $53.9 million, and ground package revenues decreased $14.6
million.
Operating expenses increased 6.5% to $1.075 billion in the nine months ended
September 30, 2002, as compared to $1.009 billion in the comparable period of
2001. Consolidated CASM increased 2.7% to 8.24 cents in the nine months ended
September 30, 2002, as compared to 8.02 cents in the same period of 2001. After
excluding special items, consolidated CASM decreased 4.7% to 7.73 cents in the
nine months ended September 30, 2002, as compared to 8.11 cents in the
comparable period of 2001.
13
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per available seat mile ("ASM").
Cents per ASM Cents per ASM
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
-------------------------------------- -----------------------------------
Consolidated operating revenues: 7.06 7.52 7.41 8.17
Consolidated operating expenses:
Salaries, wages and benefits 2.12 1.99 2.03 1.98
Fuel and oil 1.18 1.59 1.16 1.64
Aircraft rentals 1.14 0.63 1.04 0.54
Handling, landing and navigation fees 0.65 0.51 0.65 0.56
Depreciation and amortization 0.42 0.75 0.46 0.81
Crew and other employee travel 0.32 0.35 0.32 0.37
Aircraft maintenance, materials and repairs 0.25 0.34 0.29 0.40
Other selling expenses 0.25 0.24 0.26 0.26
Passenger service 0.23 0.30 0.23 0.28
Advertising 0.22 0.17 0.23 0.16
Insurance 0.18 0.06 0.18 0.06
Facilities and other rentals 0.14 0.13 0.13 0.12
Commissions 0.09 0.18 0.14 0.23
Ground package cost 0.08 0.15 0.18 0.29
Special charges - 0.22 - 0.07
Aircraft impairment and retirements 0.76 0.88 0.40 0.33
U.S. Government grant - (1.47) 0.12 (0.50)
Other 0.36 0.40 0.42 0.42
---- ---- ---- ----
Total consolidated operating expenses 8.39 7.42 8.24 8.02
---- ---- ---- ----
Consolidated operating income (loss) (1.33) 0.10 (0.83) 0.15
===== ==== ===== ====
ASMs (in thousands) 4,494,336 4,272,432 13,050,595 12,583,425
Consolidated operating expenses, excluding
special charges, aircraft impairment and
retirements, and U.S. Government grant 7.62 7.79 7.73 8.11
==== ==== ==== ====
14
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200, and Boeing 757-300
aircraft in all of the Company's business units. Data shown for "Saab"
operations include the operations of Saab 340B propeller aircraft by Chicago
Express as the ATA Connection.
Three Months Ended September 30,
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------------
Departures Jet 17,147 14,471 2,676 18.49
Departures Saab 11,669 6,732 4,937 73.34
------------------------------------------------------------------------------
Total Departures (a) 28,816 21,203 7,613 35.91
------------------------------------------------------------------------------
Block Hours Jet 50,833 44,453 6,380 14.35
Block Hours Saab 10,982 6,224 4,758 76.45
------------------------------------------------------------------------------
Total Block Hours (b) 61,815 50,677 11,138 21.98
------------------------------------------------------------------------------
RPMs Jet (000s) 3,195,420 3,238,209 (42,789) (1.32)
RPMs Saab (000s) 43,664 22,244 21,420 96.30
------------------------------------------------------------------------------
Total RPMs (000s) (c) 3,239,084 3,260,453 (21,369) (0.66)
------------------------------------------------------------------------------
ASMs Jet (000s) 4,428,021 4,235,610 192,411 4.54
ASMs Saab (000s) 66,315 36,822 29,493 80.10
------------------------------------------------------------------------------
Total ASMs (000s) (d) 4,494,336 4,272,432 221,904 5.19
------------------------------------------------------------------------------
Load Factor Jet (%) 72.16 76.45 (4.29) (5.61)
Load Factor Saab (%) 65.84 60.41 5.43 8.99
------------------------------------------------------------------------------
Total Load Factor (%) (e) 72.07 76.31 (4.24) (5.56)
------------------------------------------------------------------------------
Passengers Enplaned Jet 2,375,954 2,070,172 305,782 14.77
Passengers Enplaned Saab 254,403 135,174 119,229 88.20
------------------------------------------------------------------------------
Total Passengers Enplaned (f) 2,630,357 2,205,346 425,011 19.27
------------------------------------------------------------------------------
Revenue $ (000s) 317,289 321,469 (4,180) (1.30)
RASM in cents (g) 7.06 7.52 (0.46) (6.12)
CASM in cents (h) 8.39 7.42 0.97 13.07
Yield in cents (i) 9.80 9.86 (0.06) (0.61)
See footnotes (a) through (i) on pages 16-17.
15
Nine Months Ended September 30,
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------------
Departures Jet 49,305 44,167 5,138 11.63
Departures Saab 28,982 18,665 10,317 55.27
---------------------------------------------------------------------------------
Total Departures (a) 78,287 62,832 15,455 24.60
---------------------------------------------------------------------------------
Block Hours Jet 146,085 134,549 11,536 8.57
Block Hours Saab 27,182 17,194 9,988 58.09
---------------------------------------------------------------------------------
Total Block Hours (b) 173,267 151,743 21,524 14.18
---------------------------------------------------------------------------------
RPMs Jet (000s) 9,290,163 9,221,576 68,587 0.74
RPMs Saab (000s) 106,071 68,210 37,861 55.51
---------------------------------------------------------------------------------
Total RPMs (000s) (c) 9,396,234 9,289,786 106,448 1.15
---------------------------------------------------------------------------------
ASMs Jet (000s) 12,891,505 12,481,432 410,073 3.29
ASMs Saab (000s) 159,090 101,993 57,097 55.98
---------------------------------------------------------------------------------
Total ASMs (000s) (d) 13,050,595 12,583,425 467,170 3.71
---------------------------------------------------------------------------------
Load Factor Jet (%) 72.06 73.88 (1.82) (2.46)
Load Factor Saab (%) 66.67 66.88 (0.21) (0.31)
---------------------------------------------------------------------------------
Total Load Factor (%) (e) 72.00 73.83 (1.83) (2.48)
---------------------------------------------------------------------------------
Passengers Enplaned Jet 6,939,844 6,395,596 544,248 8.51
Passengers Enplaned Saab 646,904 413,323 233,581 56.51
---------------------------------------------------------------------------------
Total Passengers Enplaned (f) 7,586,748 6,808,919 777,829 11.42
---------------------------------------------------------------------------------
Revenue $ (000s) 966,400 1,027,849 (61,449) (5.98)
RASM in cents (g) 7.41 8.17 (0.76) (9.30)
CASM in cents (h) 8.24 8.02 0.22 2.74
Yield in cents (i) 10.28 11.06 (0.78) (7.05)
See footnotes (e) through (i) on page 17.
(a) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(b) 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.
(c) 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.
(d) 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.
16
(e) 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 an entire
aircraft is sold by the Company instead of individual seats. Since both costs
and revenues are largely fixed for these types of charter flights, changes in
load factor have less impact on business unit profitability. Consolidated load
factors and scheduled service load factors for the Company are shown in the
appropriate tables for industry comparability, but load factors for individual
charter businesses are omitted from applicable tables.
(f) 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."
(g) 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 (i) below for the definition of yield).
(h) 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.
(i) 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.
17
Operating Revenues
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 737-800, Boeing 757-200,
and Boeing 757-300 aircraft in scheduled service. Data shown for "Saab"
operations include the operations of Saab 340B propeller aircraft by Chicago
Express as the ATA Connection.
Three Months Ended September 30,
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------------
Departures Jet 15,020 11,645 3,375 28.98
Departures Saab 11,669 6,732 4,937 73.34
---------------------------------------------------------------------------------
Total Departures (a) 26,689 18,377 8,312 45.23
---------------------------------------------------------------------------------
Block Hours Jet 42,722 33,830 8,892 26.28
Block Hours Saab 10,982 6,224 4,758 76.45
---------------------------------------------------------------------------------
Total Block Hours (b) 53,704 40,054 13,650 34.08
---------------------------------------------------------------------------------
RPMs Jet (000s) 2,693,804 2,307,374 386,430 16.75
RPMs Saab (000s) 43,664 22,244 21,420 96.30
---------------------------------------------------------------------------------
Total RPMs (000s) (c) 2,737,468 2,329,618 407,850 17.51
---------------------------------------------------------------------------------
ASMs Jet (000s) 3,562,676 2,945,974 616,702 20.93
ASMs Saab (000s) 66,315 36,822 29,493 80.10
---------------------------------------------------------------------------------
Total ASMs (000s) (d) 3,628,991 2,982,796 646,195 21.66
---------------------------------------------------------------------------------
Load Factor Jet (%) 75.61 78.32 (2.71) (3.46)
Load Factor Saab (%) 65.84 60.41 5.43 8.99
---------------------------------------------------------------------------------
Total Load Factor (%) (e) 75.43 78.10 (2.67) (3.42)
---------------------------------------------------------------------------------
Passengers Enplaned Jet 2,148,094 1,700,855 447,239 26.29
Passengers Enplaned Saab 254,403 135,174 119,229 88.20
---------------------------------------------------------------------------------
Total Passengers Enplaned (f) 2,402,497 1,836,029 566,468 30.85
---------------------------------------------------------------------------------
Revenue $ (000s) 231,633 208,490 23,143 11.10
RASM in cents (g) 6.38 6.99 (0.61) (8.73)
Yield in cents (i) 8.46 8.95 (0.49) (5.47)
Revenue per segment $ (j) 96.41 113.55 (17.14) (15.09)
See footnotes (a) through (i) on pages 16-17.
(j) 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.
18
Nine Months Ended September 30,
2002 2001 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------------------------
Departures Jet 41,347 35,056 6,291 17.95
Departures Saab 28,982 18,665 10,317 55.27
---------------------------------------------------------------------------------
Total Departures (a) 70,329 53,721 16,608 30.92
---------------------------------------------------------------------------------
Block Hours Jet 116,317 101,349 14,968 14.77
Block Hours Saab 27,182 17,194 9,988 58.09
---------------------------------------------------------------------------------
Total Block Hours (b) 143,499 118,543 24,956 21.05
---------------------------------------------------------------------------------
RPMs Jet (000s) 7,336,282 6,722,193 614,089 9.14
RPMs Saab (000s) 106,071 68,210 37,861 55.51
---------------------------------------------------------------------------------
Total RPMs (000s) (c) 7,442,353 6,790,403 651,950 9.60
---------------------------------------------------------------------------------
ASMs Jet (000s) 9,785,177 8,653,441 1,131,736 13.08
ASMs Saab (000s) 159,090 101,993 57,097 55.98
---------------------------------------------------------------------------------
Total ASMs (000s) (d) 9,944,267 8,755,434 1,188,833 13.58
---------------------------------------------------------------------------------
Load Factor Jet (%) 74.97 77.68 (2.71) (3.49)
Load Factor Saab (%) 66.67 66.88 (0.21) (0.31)
---------------------------------------------------------------------------------
Total Load Factor (%) (e) 74.84 77.56 (2.72) (3.51)
---------------------------------------------------------------------------------
Passengers Enplaned Jet 5,970,143 5,199,950 770,193 14.81
Passengers Enplaned Saab 646,904 413,323 233,581 56.51
---------------------------------------------------------------------------------
Total Passengers Enplaned (f) 6,617,047 5,613,273 1,003,774 17.88
---------------------------------------------------------------------------------
Revenue $ (000s) 664,431 656,044 8,387 1.28
RASM in cents (g) 6.68 7.49 (0.81) (10.81)
Yield in cents (i) 8.93 9.66 (0.73) (7.56)
Revenue per segment $ (j) 100.41 116.87 (16.46) (14.08)
See footnotes (a) through (i) on pages 16-17.
See footnote (j) on page 18.
Scheduled service revenues in the third quarter of 2002 increased 11.1% to
$231.6 million from $208.5 million in the third quarter of 2001; and scheduled
service revenues in the nine months ended September 30, 2002 increased 1.3% to
$664.4 million from $656.0 million in the same period of 2001. Scheduled service
revenues comprised 73.0% and 68.8%, respectively, of consolidated revenues in
the quarter and nine months ended September 30, 2002, as compared to 64.9% and
63.8%, respectively, of consolidated revenues in the same periods of 2001. While
the Company's capacity in 2002 has increased from 2001, both load factor and
yield have declined from the prior year.
In the third quarter of 2002, the Company's scheduled service at Chicago-Midway
accounted for approximately 67.8% of scheduled service ASMs and 87.4% of
scheduled service departures, as compared to 63.6% and 85.8%, respectively, in
the third quarter of 2001. In the third quarter of 2002, the Company began
nonstop service from Chicago-Midway to Charlotte. In the first quarter of 2002,
the Company began nonstop international service to Aruba, Cancun, Grand Cayman
19
and Guadalajara. In the third and fourth quarters of 2001, the Company began
operating nonstop between Chicago-Midway and the cities of Newark and Miami. The
Company began nonstop service from Chicago-Midway to San Jose, California on
October 1, 2002 and has announced nonstop service to Montego Bay, Jamaica and
Puerto Vallarta, Mexico beginning in the fourth quarter of 2002.
Chicago Express operates, as of September 30, 2002, 17 34-seat Saab 340B
aircraft between Chicago-Midway and the cities of Indianapolis, Cedar Rapids,
Des Moines, Dayton, Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline,
Springfield, South Bend and Toledo.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business throughout
2002 and beyond. Chicago Express has been performing well as a feeder of
passengers to the jet system. The Company operated 140 peak daily jet and
commuter departures from Chicago-Midway and served 34 destinations on a nonstop
basis in the third quarter of 2002, as compared to 111 peak daily jet and
commuter departures and 27 nonstop destinations in the third quarter of 2001.
The Company's anticipated growth at Chicago-Midway will be accomplished in
conjunction with the completion 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 at least 12 jet
gates and one commuter aircraft gate at the new airport concourses. One new gate
was occupied in October 2001, and the Company moved to seven additional new
gates in the first quarter of 2002. The five remaining gates are expected to be
available for use by the Company in 2004. The construction of a Federal
Inspection Service ("FIS") facility at Chicago-Midway was completed in the first
quarter of 2002, and the opening of this facility allowed the Company to begin
nonstop international services from Chicago-Midway in the first quarter of 2002,
as noted above. The Company plans to continue to add new nonstop jet service to
international destinations using this customs facility at Chicago-Midway
Airport.
The Company's Hawaii service accounted for 16.9% of scheduled service ASMs and
3.8% of scheduled service departures in the third quarter of 2002, as compared
to 23.1% and 5.1%, respectively, in the third quarter of 2001. The Company
provided nonstop services in both periods from Los Angeles, Phoenix and San
Francisco to both Honolulu and Maui, with connecting service between Honolulu
and Maui. From June to September 2002, the Company operated seasonal service to
Lihue from Los Angeles and San Francisco. 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's Indianapolis service accounted for 10.0% of scheduled service ASMs
and 6.0% of scheduled service departures in the third quarter of 2002, as
compared to 7.7% and 5.9%, respectively, in the third quarter of 2001. In both
quarters, the Company operated nonstop to Cancun, Ft. Lauderdale, Ft. Myers, Las
Vegas, Los Angeles, Orlando, St. Petersburg, San Francisco and Sarasota. The
Company also began limited jet service, in the second quarter of 2002, between
Indianapolis and Chicago-Midway, with continuing service to Seattle, and began
nonstop service to New York LaGuardia and Phoenix from Indianapolis beginning in
the third quarter of 2002. The Company has served Indianapolis for 30 years
through the Ambassadair Travel Club, and in scheduled service since 1986.
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 hundreds of customer-designated destinations throughout the
world. Commercial charter revenues accounted for 6.5% and 11.2%, respectively of
consolidated revenues in the quarter and nine months ended September 30, 2002,
as compared to 16.6% in each of the comparable periods of 2001.
20
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
Three Months Ended September 30,
-------------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------------
Departures (a) 1,157 1,972 (815) (41.33)
Block Hours (b) 3,888 6,792 (2,904) (42.76)
RPMs (000s) (c) 246,956 675,275 (428,319) (63.43)
ASMs (000s) (d) 304,538 798,277 (493,739) (61.85)
Passengers Enplaned (f) 166,148 315,603 (149,455) (47.36)
Revenue $ (000s) 20,626 53,329 (32,703) (61.32)
RASM in cents (g) 6.77 6.68 0.09 1.35
RASM excluding fuel escalation in cents (k) 6.56 6.52 0.04 0.61
Nine Months Ended September 30,
------------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------------
Departures (a) 5,257 6,386 (1,129) (17.68)
Block Hours (b) 17,949 21,387 (3,438) (16.08)
RPMs (000s) (c) 1,228,998 1,755,865 (526,867) (30.01)
ASMs (000s) (d) 1,535,375 2,239,239 (703,864) (31.43)
Passengers Enplaned (f) 792,176 1,017,639 (225,463) (22.16)
Revenue $ (000s) 108,120 170,124 (62,004) (36.45)
RASM in cents (g) 7.04 7.60 (0.56) (7.37)
RASM excluding fuel escalation in cents (k) 6.96 7.26 (0.30) (4.13)
See footnotes (a) through (g) on pages 16-17.
(k) 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 majority of the decline in commercial charter revenues in the third quarter
and nine months ended September 30, 2002, as compared to the same periods of
2001, was due to the retirement of certain Lockheed L-1011 and Boeing 727-200
aircraft that the Company has traditionally used in commercial charter flying.
Since aircraft utilization (number of productive hours of flying per aircraft
each month) is typically much lower for commercial charter, as compared to
scheduled service flying, the Company's replacement fleets of new Boeing 737-800
and Boeing 757-300 aircraft are economically disadvantaged when used in the
charter business, because of their higher fixed-ownership cost. Consequently,
the Company expects its commercial charter revenues to continue to decline
throughout the remainder of 2002 as the fleet supporting this business continues
to shrink through aircraft retirements.
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
21
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts. Track charter accounted for approximately
$16.1 million and $84.2 million, respectively, in revenues in the quarter and
nine months ended September 30, 2002, as compared to $44.9 million and $135.6
million, respectively, in the comparable periods of 2001.
Specialty charter (including incentive travel programs) is a product which is
designed to meet the unique requirements of the 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. Specialty charter accounted for approximately
$2.5 million and $9.8 million, respectively, in revenues in the quarter and nine
months ended September 30, 2002, as compared to $4.5 million and $14.0 million,
respectively, in the comparable periods of 2001.
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government flight operations of the Company.
Three Months Ended September 30,
-------------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------------------------
Departures (a) 955 854 101 11.83
Block Hours (b) 4,175 3,831 344 8.98
RPMs (000s) (c) 252,215 255,560 (3,345) (1.31)
ASMs (000s) (d) 554,979 491,359 63,620 12.95
Passengers Enplaned (f) 60,140 53,714 6,426 11.96
Revenue $ (000s) 47,559 40,300 7,259 18.01
RASM in cents (g) 8.57 8.20 0.37 4.51
RASM excluding fuel escalation in cents (l) 8.52 7.89 0.63 7.98
Nine Months Ended September 30,
-------------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------------------------
Departures (a) 2,679 2,709 (30) (1.11)
Block Hours (b) 11,732 11,756 (24) (0.20)
RPMs (000s) (c) 719,779 738,316 (18,537) (2.51)
ASMs (000s) (d) 1,559,070 1,580,397 (21,327) (1.35)
Passengers Enplaned (f) 175,380 176,572 (1,192) (0.68)
Revenue $ (000s) 130,578 122,479 8,099 6.61
RASM in cents (g) 8.38 7.75 0.63 8.13
RASM excluding fuel escalation in cents (l) 8.40 7.43 0.97 13.06
See footnotes (a) through (g) on pages 16-17.
(l) 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 participates in two related military/government charter programs
known as "fixed-award" and "short-term expansion." Pursuant to the U.S.
22
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
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 represents a majority of the
passenger transport capacity of the 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 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 all 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. 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 (i) 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; (ii) the percentage of
passenger capacity of the Company with respect to its own team; (iii) the amount
of fixed-award and expansion flying required by the U.S. military in each
contract year; and (iv) the availability of the Company's aircraft to accept and
fly expansion awards. The Company earned $175.6 million in military/government
charter revenues in the contract year ended September 30, 2002.
The increase in RASM for military/government charter revenues in the quarter and
nine months ended September 30, 2002, as compared to the same periods of 2001,
was due primarily to rate increases awarded for the current contract year ending
September 30, 2002, based upon cost data submitted to the U.S. military by the
Company and other air carriers providing these services, and partially due to
the mix of aircraft hours flown. The Company has renewed its U.S. military
contract for the fiscal year beginning October 1, 2002, and has obtained an
average rate nearly unchanged as compared to the prior contract year. The
Company expects the volume of military flying to be higher than in the contract
year ended September 30, 2002, but due to the small rate changes expects
military/government charter RASM in the contract year beginning October 1, 2002
to be only slightly higher than the current contract year.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its ATALC and Ambassadair subsidiaries. Ambassadair Travel Club offers
tour-guide-accompanied vacation packages to its approximately 32,000 individual
and family members. ATALC offers numerous ground accommodations to the general
public, which are marketed through travel agents, as well as directly by the
Company.
In the third quarter of 2002, ground package revenues decreased 35.6% to $5.6
million, as compared to $8.7 million in the third quarter of 2001, and in the
nine months ended September 30, 2002, ground package revenues decreased 32.3% to
$30.6 million, as compared to $45.2 million in the same period of 2001.
The decline in ground package sales (and related ground package costs) in the
first nine months of 2002, as compared to the first nine months of 2001, is
partially due to the reduced demand for leisure travel subsequent to the
terrorist attacks of September 11, 2001. Also, effective July 1, 2002, the
Company outsourced the management and marketing of its ATA Vacations and Travel
Charter International brands to MTC. Under that outsourcing agreement, MTC will
directly sell ground arrangements to customers who also purchase charter or
scheduled service air transportation from the Company. Therefore, the Company
anticipates that ground package sales (and related ground package costs) will
23
continue to experience significant year-over-year declines in the remainder of
2002, as these sales will no longer be recorded by the Company for ATA Vacations
and Travel Charter International.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled, charter and ground package operations of the
Company, such as cancellation and miscellaneous service fees, Ambassadair Travel
Club membership dues and cargo revenue. Other revenues increased 12.3% to $11.9
million in the third quarter of 2002, as compared to $10.6 million in the third
quarter of 2001, and decreased 3.8% to $32.7 million in the nine months ended
September 30, 2002, as compared to $34.0 million in the same period of 2001.
Although certain administrative fee revenues increased between periods, most
other revenues declined in association with the ongoing diminished travel demand
subsequent to the terrorist attacks of September 11, 2001.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in the third quarter of 2002 increased
11.9% to $95.1 million, as compared to $85.0 million in the third quarter of
2001, and in the nine months ended September 30, 2002, increased 6.2% to $264.8
million, as compared to $249.4 million in the same period of 2001.
On July 16, 2002, the Company's cockpit crewmembers, who are represented by the
Air Line Pilots Association ("ALPA"), ratified an amended collective bargaining
agreement, which became effective July 1, 2002. The Company expects future
salaries, wages and benefits costs to be significantly increased by the amended
cockpit crewmember contract. The amended contract is expected to increase
cockpit crewmembers' average salaries by approximately 80% over the four year
contract period. Additionally, the amended contract provides for expanded
retirement benefits for cockpit crewmembers. Although their existing 401(k)
employer match will be capped in future years, a defined contribution plan has
been established for cockpit crewmembers effective January 1, 2003. Certain
insurance benefits for cockpit crewmembers have also been enhanced as a result
of the amended contract. The increase in salaries, wages and benefits in the
quarter and nine months ended September 30, 2002, as compared to the same
periods of 2001, is primarily due to the Company recording $9.9 million for a
signing bonus as provided by the amended cockpit crewmember contract. Also,
impacting the quarter and nine months ended September 30, 2002, were cockpit
crewmember contract rate increases effective July 1, 2002, and generally
increasing costs for all employees' medical and workers' compensation benefits.
Fuel and Oil. Fuel and oil expense decreased 21.9% to $53.0 million in the third
quarter of 2002, as compared to $67.9 million in the same period of 2001, and
decreased 26.5% to $151.4 million in the nine months ended September 30, 2002,
as compared to $205.9 million in the same period of 2001.
Total jet block hours increased 14.4% and 8.6%, respectively, in the quarter and
nine months ended September 30, 2002, as compared to the same periods of 2001.
Despite this increase, the Company consumed 14.9% and 14.7% fewer gallons of jet
fuel for flying operations, respectively, between the quarter and nine-month
periods ended September 30, 2002 and 2001, which resulted in a decrease in fuel
expense of approximately $10.4 million and $30.9 million, respectively. This
decrease was primarily due to the addition of Boeing 737-800 and Boeing 757-300
aircraft to the Company's fleet beginning in May 2001. These aircraft replaced
certain less-fuel-efficient Boeing 727-200 and Lockheed L-1011 aircraft, which
were retired from revenue service.
During the quarter and nine months ended September 30, 2002, the Company's
average cost per gallon of jet fuel consumed decreased by 2.6% and 13.2%,
respectively, as compared to the same periods of 2001, resulting in a decrease
in fuel and oil expense of approximately $3.4 million and $23.9 million,
respectively, between those periods.
24
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. No material gains or losses were recorded
in any period presented. As of September 30, 2002, the Company had no
outstanding fuel hedge agreements.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. The Company accounts for aircraft rentals
expense in equal monthly amounts over the life of each operating lease. As of
September 30, 2002 and December 31, 2001, the Company had recorded $75.8 million
and $49.2 million, respectively, of prepaid aircraft rent under its operating
leases. Aircraft rentals expense for the third quarter of 2002 increased 90.3%
to $51.2 million from $26.9 million in the third quarter of 2001, and increased
98.7% to $135.7 million in the nine months ended September 30, 2002, as compared
to $68.3 million in the same period of 2001. The increase was mainly
attributable to the delivery of 25 leased Boeing 737-800 and 10 leased Boeing
757-300 aircraft between May 2001 and September 2002, which resulted in an
increase in rental expense of $26.9 million and $71.5 million, respectively, in
the quarter and nine months ended September 30, 2002, as compared to the same
periods of 2001. This increase was partially offset by a decline in rental
expense recognized in the third quarter and nine months ended September 30,
2001, of $5.0 million and $6.2 million, respectively, associated with the
accrual of rents under operating leases for certain Boeing 727-200s which were
removed from revenue service shortly after the events of September 11, 2001. No
such expense was incurred in 2002.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 35.6% to $29.3 million in the
third quarter of 2002, as compared to $21.6 million in the third quarter of
2001, and increased by 21.6% to $85.5 million in the nine months ended September
30, 2002, as compared to $70.3 million in the same period of 2001. The increase
in handling, landing and navigation fees between the third quarters of 2002 and
2001 and the nine months ended September 30, 2002 and 2001, was partly due to an
increase in system-wide jet departures, which increased by 18.5% between the
third quarters of 2002 and 2001 and which increased 11.6% between the nine
months ended September 30, 2002 and 2001. The Company's average cost to handle
its aircraft also increased in 2002, as compared to 2001, primarily due to
higher costs incurred for airport security as a result of the terrorist attacks
on September 11, 2001.
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 on a units-of-production basis using
aircraft flight hours and cycles (landings) as the units of measure.
Depreciation and amortization expense decreased 41.3% to $18.9 million in the
third quarter of 2002, as compared to $32.2 million in the third quarter of
2001, and decreased 40.5% to $60.3 million in the nine months ended September
30, 2002, as compared to $101.4 million in the same period of 2001.
In 2001, the Company retired three Lockheed L-1011-50 aircraft from revenue
service, immediately preceding their next heavy maintenance check. In the first
nine months of 2002, the Company retired another five L-1011-50/100 aircraft
earlier than planned. During the fourth quarter of 2001, the Company also
determined that the remaining ten Lockheed L-1011-50/100 aircraft, rotable parts
and inventory were impaired. These assets were subsequently classified as held
for use in accordance with FAS 121, requiring them to be recorded on the balance
sheet at their estimated fair market value at the time of impairment, which is
the new asset basis to be depreciated over their estimated remaining useful
lives. Due primarily to the reduced cost basis of the remaining ten aircraft,
25
and the early retirement of eight aircraft, the Company recorded $5.0 million
and $14.6 million, respectively, less depreciation and amortization expense for
this fleet in the quarter and nine months ended September 30, 2002, as compared
to the same periods of 2001.
Following the events of September 11, 2001, the Company decided to retire its
Boeing 727-200 fleet earlier than originally planned. Most of the aircraft were
retired from revenue service in the fourth quarter of 2001, although some were
used for charter service through the first five months of 2002. As a result,
these aircraft were determined to be impaired under FAS 121. Boeing 727-200
aircraft not already transferred to BATA have been classified in the
accompanying balance sheets as assets held for sale. In accordance with FAS 121,
depreciation expense was not recorded after the fleet was deemed impaired and
held for disposal, and will not be recorded in future accounting periods. As a
result, the Company did not record any depreciation expense on the Boeing
727-200 fleet in the quarter and nine months ended September 30, 2002, which
resulted in a decrease of $7.8 million and $28.7 million, respectively, in
depreciation and amortization expense in the quarter and nine months ended
September 30, 2002, as compared to the same periods of 2001.
Partially offsetting these decreases were increased amortization of capitalized
engine and airframe overhauls on the Lockheed L-1011-500 fleet and increases in
depreciation and amortization expense associated with other fleet rotable parts,
owned engines and the provision for inventory obsolescence, along with
fluctuations in expenses related to furniture and fixtures, computer hardware
and software, and debt issue costs between periods, none of which was
individually significant.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of