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, 2002.
[ ] 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)
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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ 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 June 30, 2002) was approximately $23.4
million.
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 - 11,764,753 shares outstanding as of February
28, 2003.
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 ATA Holdings Corp. 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 - 2002
ATA HOLDINGS CORP. AND SUBSIDIARIES
Page #
PART I
Item 1. Business........................................................3
Item 2. Properties......................................................9
Item 3. Legal Proceedings..............................................10
Item 4. Submission of Matters to a Vote of Security Holders............11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters.................................................12
Item 6. Selected Consolidated Financial Data.. ......................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.....45
Item 8. Financial Statements and Supplementary Data....................47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................76
PART III
Item 10. Directors and Officers of the Registrant.......................77
Item 11. Executive Compensation.........................................77
Item 12. Security Ownership of Certain Beneficial Owners and Management.77
Item 13. Certain Relationships and Related Transactions.................77
Item 14. Controls and Procedures........................................77
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.78
Item 15d. Valuation and Qualifying Accounts..............................80
2
PART I
Item 1. Business
Company Overview
ATA Holdings Corp., formerly Amtran, Inc. (the "Company") owns ATA Airlines,
Inc., formerly American Trans Air, Inc. ("ATA"), the tenth largest passenger
airline in the United States, based upon 2002 capacity and traffic. The Company
is a leading provider of low-cost scheduled airline services, the largest
commercial charter airline in the United States based upon revenues for the
twelve months ended June 30, 2002, and is one of the largest providers of
passenger airline services to the U.S. military, based upon 2002 revenue. The
Company was incorporated in Indiana in 1984.
The following table summarizes the Company's revenue sources for the periods
indicated:
Year Ended December 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------
(Dollars in millions)
Scheduled Service $ 886.6 $ 820.7 $ 753.3 $ 624.6 $ 511.3
----------- ----------- ----------- ----------- ----------
Commercial Charter 131.3 192.2 246.7 263.8 222.6
Military Charter 177.9 167.5 188.6 126.2 121.9
----------- ----------- ----------- ----------- ----------
Total Charter Service 309.2 359.7 435.3 390.0 344.5
----------- ----------- ----------- ----------- ----------
Other 81.6 95.1 103.0 107.8 63.6
----------- ----------- ----------- ----------- ----------
Total $ 1,277.4 $ 1,275.5 $ 1,291.6 $ 1,122.4 $ 919.4
=========== =========== =========== =========== ==========
Percentage of Consolidated Revenues:
Scheduled Service 69.4% 64.3% 58.3% 55.7% 55.6%
Commercial Charter 10.3% 15.1% 19.1% 23.5% 24.2%
Military Charter 13.9% 13.1% 14.6% 11.2% 13.3%
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be a leading carrier 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 such as 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 also provides
transpacific service between the Western United States and Hawaii.
The Company owns all of the issued and outstanding stock of Chicago Express
Airlines, Inc. ("Chicago Express"), which currently operates a fleet of 17 SAAB
340B 34-seat propeller aircraft and provides commuter passenger scheduled
service between Chicago-Midway and the cities of Indianapolis, Cedar Rapids,
Dayton, Des Moines, Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline,
Toledo, South Bend, and Springfield.
Included in the Company's jet scheduled service are bulk-seat sales agreements
with tour operators. Under these arrangements, a tour operator purchases a large
portion of the seats on an aircraft and assumes responsibility for distribution
of those seats. The Company sells the remaining seats through its own scheduled
service distribution network. Under bulk-seat sales arrangements, the Company is
3
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 a letter of credit or
prepayment of a portion of the contract price.
Commercial Charter Service
The Company provides commercial passenger charter airline services, primarily
through U.S. tour operators. The most significant portion of commercial charter
revenue is derived from contracts with tour operators for repetitive,
leisure-oriented round-trip patterns, operating over varying periods of time.
Under such contracts, the tour operator pays a fixed price for use of the
aircraft 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. The
Company is required to absorb increases in fuel costs that occur within 14 days
of flight time.
In 2002, commercial charter revenue declined significantly, primarily due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that were
historically used in commercial charter flying. The Company's replacement fleets
of new Boeing 737-800 and 757-300 aircraft are economically disadvantaged when
used in the lower-utilization charter business, due to their higher fixed
ownership cost. Consequently, the Company expects future commercial charter
revenue to continue to represent a declining percentage of total revenue.
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 scheduled service, and because the military contract provides full
reimbursement for actual fuel expenses, they 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. Each contract year extends from
October 1 through September 30. The Company primarily uses its fleet of four
Lockheed L-1011-500 aircraft and certain Lockheed L-1011-50 and 100 aircraft to
support this military business, since these aircraft have a range and seating
configuration preferred by the military.
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.
Industry Overview
The terrorist attacks of September 11, 2001 and generally weak economic
conditions have adversely affected the Company and the airline industry. The
industry as a whole, and the Company, suffered very significant financial losses
in 2001 and 2002. During 2002, two major air carriers, US Airways Group and UAL
Corporation, filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Historically, air carriers involved in reorganizations have
substantially reduced their fares, which could reduce airline yields further
from current levels. Certain air carriers are seeking to recover, at least
partially, by reducing their seat capacity. As this is accomplished by
eliminating aircraft from operating fleets, the fair value of aircraft may be
adversely affected. The Company has recorded substantial charges to earnings
resulting from fleet retirements and impairments over the past two years.
However, during this period the Company has substantially replaced its fleet of
aging aircraft with new fuel-efficient Boeing aircraft. The industry and the
Company have also been adversely impacted by substantially higher insurance
costs, and higher passenger security costs.
4
The Company has benefited from some of the U.S. Government's initiatives for
assisting the airline industry. Most significant to the Company was the Air
Transportation Safety and System Stabilization Act ("Act") passed in 2001, which
provided for, among other things, up to $5.0 billion in compensation to U.S.
airlines and air cargo carriers for direct and incremental losses resulting from
the September 11, 2001 terrorist attacks and the availability of up to $10.0
billion in U.S. Government guarantees of certain loans made to air carriers,
which are administered by the newly-established Air Transportation Stabilization
Board ("ATSB"). The Company received $50.1 million is U.S. Government grant
compensation. The Company also obtained a $168.0 million secured term loan, of
which $148.5 million is guaranteed by the ATSB.
While it is expected that adverse industry conditions are likely to continue
throughout 2003, the Company's management believes it has a viable plan to
ensure sufficient cash to fund operations during the next 12 months. In addition
to the assistance the Company has already received in the form of U.S.
Government grant compensation and the secured term loan, the plan calls for
focusing marketing efforts on those routes where the Company believes it can be
a leading provider and implementing a number of cost-saving initiatives the
Company believes will enhance its low-cost advantage. Although the Company
believes the assumptions underlying its 2003 financial projections are
reasonable, there are significant risks which could cause the Company's 2003
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain outcome of the two major airline bankruptcies filed
in 2002, the possibility of other airline bankruptcy filings, and the uncertain
outcome and geopolitical impact of the conflict in the Middle East.
Company Strategy
The Company intends to combat the adverse industry conditions by enhancing its
position as a leading provider of passenger airline services in 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 generally focuses on markets where 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. The Company intends to expand its operations
selectively in areas where it believes it can achieve attractive financial
returns.
Maintain Low-Cost Position and Maximize Aircraft Utilization For 2002, 2001 and
2000, the Company's consolidated operating cost per available seat mile ("CASM")
of 8.17(cent), 8.45(cent) and 7.86(cent), respectively, was one of the lowest
among large U.S. passenger airlines. The Company believes that its lower costs
provide a significant competitive advantage. Supplementing the Company's cost
control initiatives is the enhancement of aircraft utilization, or the average
number of hours flown per aircraft per day. This strategy has become
increasingly important with the delivery of many new aircraft in the last
several years.
5
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 against smaller regional or start-up airlines. Competition
is generally on the basis of price, schedule and frequency, quality of service
and convenience.
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 71.2% of the Company's total scheduled service
capacity in 2002. The Company is the number one carrier in terms of market
share, based upon second quarter 2002 origin and destination revenue
passengers, on 19 of the 21 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 the customer convenience of
Chicago-Midway's proximity to downtown Chicago. The Company also enjoys a
strong competitive position relative to the entire Chicago metropolitan
area.
o Hawaii represented approximately 13.7% of the Company's total scheduled
service capacity in 2002. 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 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.
o Indianapolis represented approximately 10.5% of the Company's total
scheduled service capacity in 2002. The Company 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 2002 origin
and destination revenue passengers, in seven of its nine jet routes from
Indianapolis. In Indianapolis, the Company operates Ambassadair Travel
Club, Inc. ("Ambassadair"), the nation's largest travel club, with
approximately 32,000 individual or family memberships, providing the
Company with another local marketing advantage.
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 with the Company's commercial charter operations by 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.
Competition for Military/Government Charter Services
The Company competes for military and other government charters primarily with
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier makes
available for use to the military, among other factors.
6
Flight Operations and Aircraft Maintenance
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.
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This facility is an FAA-certificated repair station and
has the capability to perform routine and non-routine maintenance on the
Company's aircraft. The Company also has a maintenance facility at the
Chicago-Midway Airport, which is used to provide line maintenance for the Boeing
757-200, Boeing 757-300 and Boeing 737-800 fleets. The Company has approximately
1,150 employees supporting its aircraft maintenance operations, and currently
maintains 19 permanent maintenance facilities, including its Indianapolis and
Chicago facilities.
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 29.4%, 32.0%, and 33.5% respectively, of consolidated revenues in
2002, 2001 and 2000. The Company occasionally enters into fuel-hedging contracts
to reduce volatility of fuel prices for a portion of its scheduled service fuel
needs. As of December 31, 2002, the Company had no outstanding fuel hedge
contracts.
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.
Immediately following the September 11, 2001 terrorist attacks, the Company's
aviation insurers, and other air carriers' aviation insurers, reduced the
maximum amount of liability insurance coverage for losses related to persons
other than passengers and employees, resulting from acts of terrorism, war,
hijacking or other similar perils (war-risk coverage) and significantly
increased their premiums for this reduced coverage. Pursuant to the Air
Transportation Safety and System Stabilization Act ("Act") and other enabling
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, which is expected to continue through
2003. It is anticipated that after this date, a commercial product for war-risk
coverage will become available, but the Company expects that it may incur
significant additional costs for this coverage.
Employees
As of December 31, 2002, the Company had approximately 7,200 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"). The current collective bargaining
agreement with the AFA will become subject to amendment, but will not expire, in
7
October 2004. The Company's cockpit crews are represented by the Air Line Pilots
Association ("ALPA"). The current collective bargaining agreement with ALPA will
become subject to amendment, but will not expire, in June 2006. The Company's
flight dispatchers are represented by the Transport Workers Union ("TWU"). The
current collective agreement with the TWU will become subject to amendment, but
will not expire, in August 2004. The Company's ramp service agents elected to be
represented by the International Association of Machinists ("IAM") in February
2001. The Company began negotiations with the IAM in May 2001, but no collective
bargaining agreement has been finalized. In February 2002, the Company's
aircraft mechanics elected to be represented by the Aircraft Mechanics Fraternal
Association ("AMFA"). The Company began negotiations with the AMFA in October
2002, but no collective bargaining agreement has been finalized.
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 Department of Transportation ("DOT") and the Federal Aviation
Administration ("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.
In 2001, the Aviation and Transportation Security Act ("Aviation Security Act")
was signed into law, creating the Transportation Security Administration ("TSA")
within the DOT and requiring substantially all aspects of civil aviation
passenger security and screening to be placed under federal control in 2002. The
cost of the provisions set forth in the Aviation Security Act are partially
funded by a 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 in February 2002. The Aviation
Security Act is also funded by a separate security infrastructure fee assessed
to each air carrier beginning in the second quarter of 2002. The amount of the
air carrier assessment is payable monthly and is equal to the amount each air
carrier spent on aviation security in 2000.
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, Inc. ("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
8
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.
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 a Passenger Facility Charge of up to $4.50
collected from 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, 2002,
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
compliance with any of these regulations will have a material impact on the
Company's capital expenditures, earnings or competitive position.
9
Item 2. Properties
Aircraft Fleet
At December 31, 2002, ATA and Chicago Express were certified to operate a fleet
of 83 aircraft. The following table summarizes the ownership characteristics of
each aircraft type as of the end of 2002.
Owned (Encumbered- Operating-Lease Operating-Lease
Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-50 and 100 5 - 1 6
Lockheed L-1011-500 4 - - 4
Boeing 737-800 - 18 12 30
Boeing 757-200 - 14 2 16
Boeing 757-300 - 10 - 10
SAAB 340B 2 15 - 17
--------------------------------------------------------------
TOTAL 11 57 15 83
==============================================================
Lockheed L-1011 Aircraft
The Company's Lockheed L-1011 aircraft are wide-body aircraft, and have a low
ownership cost relative to other wide-body aircraft types. Of the six Lockheed
L-1011-50 and 100 aircraft, three have a range of 2,971 nautical miles and three
have a range of 3,425 nautical miles. The four Lockheed L-1011-500 aircraft have
a range of 5,577 nautical miles. The combined fleet has an average age of
approximately 25 years.
Boeing 737-800 Aircraft
The Company's 30 Boeing 737-800 aircraft are narrow-body aircraft and have a
range of 2,500 nautical miles. These aircraft have higher ownership costs than
the Company's Lockheed L-1011 fleet, but lower operational costs resulting from
reduced fuel consumption, lower maintenance and cockpit crew costs, and improved
operating reliability. The fleet has an average age of approximately 1 year, and
the leases on these aircraft have initial terms that expire between June 2016
and December 2022.
Boeing 757-200 Aircraft
The Company's 16 Boeing 757-200 aircraft are narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft also have higher ownership
costs than the Company's Lockheed L-1011 aircraft, but lower operational costs.
In addition, the Company's Boeing 757-200s have the capacity to operate on
extended flights over water. The fleet has an average age of approximately 5
years, and the leases on these aircraft have initial terms that expire between
January 2003 and May 2022.
10
Boeing 757-300 Aircraft
The Company's 10 Boeing 757-300 aircraft are narrow-body aircraft and have a
range of 2,700 nautical miles. These aircraft also have higher ownership costs
than the Company's Lockheed L-1011 aircraft, but lower operational costs. The
fleet has an average age of approximately 1 year, and the leases on these
aircraft have initial terms that expire on various dates between August 2021 and
September 2022.
SAAB 340B Aircraft
The Company's 17 SAAB 340B aircraft are commuter aircraft with twin turboprop
engines. These 34-seat aircraft have an average age of approximately 11.5 years
and the leases on 15 of these aircraft have initial lease terms that expire
between September 2009 and March 2012.
Ground 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 Operations 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. 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 flight
operations center.
The Company leases Hangar No. 2 at Chicago's Midway Airport for an initial lease
term of ten years, subject to two five-year renewal options. This property is
used to perform line maintenance on the Company's 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.
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, 2002.
11
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 "ATAH." The Company had 280 and 262 registered shareholders,
respectively, at December 31, 2002 and 2001.
Market Prices of Common Stock
Year Ended December 31, 2002
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 16.30 14.95 7.49 7.17
Low 11.75 6.01 2.72 3.15
Close 14.00 6.86 3.40 4.57
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
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 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 and for other corporate purposes. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 10 -
Redeemable Preferred Stock."
12
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 appearing elsewhere herein.
ATA HOLDINGS CORP.
Five-Year Summary
Year Ended December 31,
(Dollars in thousands, except per share data and ratios) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $1,277,370 $1,275,484 $1,291,553 $1,122,366 $919,369
Operating expenses 1,437,407 1,367,354 1,288,983 1,032,339 843,996
Operating income (loss) (1) (160,037) (91,870) 2,570 90,027 75,373
Income (loss) before taxes (194,214) (116,067) (19,931) 77,797 67,210
Net income (loss) available to common shareholders (2) (174,984) (81,885) (15,699) 47,342 40,081
Net income (loss) per share - basic (14.94) (7.14) (1.31) 3.86 3.41
Net income (loss) per share - diluted (14.94) (7.14) (1.31) 3.51 3.07
Balance Sheet Data (at end of period):
Property and equipment, net $ 265,627 $ 314,943 $ 522,119 $ 511,832 $329,332
Total assets 848,136 1,002,962 1,032,430 815,281 594,549
Total debt 509,428 497,592 457,949 347,871 246,671
Redeemable preferred stock 82,485 80,000 80,000 - -
Shareholders' equity (deficit) (120,009) 44,132 124,654 151,376 102,751
Selected Consolidated Operating Statistics: (3)
Revenue passengers carried (thousands) 10,046.7 8,635.2 8,006.1 7,044.6 6,168.3
Revenue passenger miles (millions) 12,384.2 11,675.7 11,816.8 10,949.0 9,758.1
Available seat miles (millions) 17,600.0 16,187.7 16,390.1 15,082.6 13,851.7
Passenger load factor 70.4% 72.1% 72.1% 72.6% 70.5%
(1) Operating results for the years ended December 31, 2002 and 2001 include
several non-recurring or unusual charges. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - State
of the Industry and the Company," "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 15 - Fleet Impairment" and
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 16- Goodwill and Other Intangible Assets."
(2) Preferred stock dividends of $5.7 million, $5.6 million, and $0.4 million
were recorded in 2002, 2001 and 2000, respectively. 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.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of low-cost scheduled airline services and
charter airline services to value-oriented travelers, and to the U.S. military.
The Company, through its principal subsidiary, ATA, has been operating for 30
years and is the tenth largest U.S. airline in terms of 2002 capacity and
traffic.
The Company recorded an operating loss of $160.0 million, and a loss available
to common shareholders of $175.0 million, for the year ended December 31, 2002.
Results of operations in 2002 were significantly impacted by non-cash aircraft
and goodwill impairment charges, and an adjustment to reduce a receivable for
U.S. Government grant compensation; such charges totaled $89.9 million.
Consolidated revenues were approximately unchanged in 2002 from 2001, although
consolidated available seat miles ("ASMs") increased 8.7% between years,
resulting in a decline in revenue per available seat mile ("RASM".) This
reflects a very weak pricing environment experienced by the Company and the
entire airline industry in 2002. Declining unit revenues are a result of excess
industry capacity in the scheduled service business, which began as a direct
result of the terrorist attacks of September 11, 2001, but has continued with
the weakened economy. The Company also believes that consumer confidence
continues to be affected by both the unsettled economic climate in the United
States, and by conflict in the Middle East and other geopolitical uncertainties.
The Company expects continued weakness in unit revenue throughout 2003.
The Company's unit costs remained among the lowest of the major airlines in
2002. The Company is continuing its efforts to further reduce operating costs,
and expects to continue to realize additional cost savings from the ongoing
deliveries of its new fleet of Boeing 737-800 and Boeing 757-300 aircraft. The
Company also expects, however, that fuel costs will remain very high as compared
to long-term average energy prices, and that these prices will adversely affect
the Company's results of operations in 2003. Due to the lack of available
credit, the Company does not have in place any fuel price hedge contracts for
expected 2003 consumption of jet fuel.
For the 2003 fiscal year, the Company currently expects that it may break even
or earn a small operating profit. However, significant uncertainties continue to
exist with respect to unit revenues and fuel prices, both of which may be
adversely affected by geopolitical and economic events, including the uncertain
outcome of the two major airline bankruptcies filed in 2002 and the unknown
impact of the conflict in the Middle East, which are not within the Company's
direct control. Therefore, the Company can provide no assurance that it will
break even or return to profitability in 2003.
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 ("GAAP"). 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.
14
Revenue Recognition. Passenger ticket sales are initially recorded as a
component of air traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. Tickets that are sold but not flown
on the scheduled travel date can be exchanged and reused for another flight, up
to a year from the date of sale, or can be refunded if the ticket is sold under
a refundable tariff. A small percentage of tickets (or partially-used tickets)
expire unused. The majority of the Company's tickets sold are nonrefundable in
cash, which is the primary source of forfeited tickets. The Company records
estimates of earned revenue in the period tickets are originally sold, for a
percentage of those sales which are expected to expire unused over the period of
ticket validity. These estimates are based upon historical experience over many
years, with particular emphasis given to expiration experience in more recent
years. The Company has consistently applied this accounting method to estimate
revenue from future unused and expired tickets.
Revenue accruals for expired and unused tickets are routinely compared to actual
expired and unused ticket experience to validate the accuracy of the Company's
estimates with respect to forfeited tickets, and accrual adjustments resulting
from these comparisons have not been material to the Company's results of
operations. If, however, customer behavior changes from historical patterns in
the manner in which tickets are purchased and used, it is possible that the
Company's revenue accruals for unused and expired tickets may require material
future adjustments in order to account for those changes in customer behavior.
Impairments of Long-Lived Assets. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144 ("FAS 144") , Accounting for
the Impairment or Disposal of Long-Lived Assets, which superseded FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of. The Company continues to account for aircraft and related assets
that were impaired prior to January 1, 2002 and classified as held for sale
under the provisions of FAS 121, which is required by FAS 144. Both FAS 144 and
FAS 121 require that whenever events and circumstances indicate that the Company
may not be able to recover the net book value of its productive assets, that the
undiscounted estimated future cash flows must be compared to the net book value
of these productive assets to determine if impairment is indicated. FAS 144 and
FAS 121 require that assets deemed impaired be written down to their estimated
fair value through a charge to earnings. FAS 144 and FAS 121 state that fair
values may be estimated using discounted cash flow analysis or quoted market
prices, together with other available information.
The Company had been performing impairment reviews in accordance with FAS 121 on
the Lockheed L-1011-50 and 100 and the Boeing 727-200 fleets since the end of
2000, and both fleets initially became impaired under FAS 121 subsequent to the
terrorist attacks of September 11, 2001. The Company primarily used discounted
cash flow analysis to estimate the fair value of the Lockheed L-1011-50 and 100
fleet, and used quoted market prices to estimate the fair value of the Boeing
727-200 fleet.
In 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 remaining four aircraft and related assets in this fleet
were impaired. The Company performed an impairment analysis on the Lockheed
L-1011-500 fleet and related assets in accordance with FAS 144, and determined
that this fleet was not impaired. The Company primarily used discounted cash
flow analysis to estimate the fair value of the Lockheed L-1011-500 fleet.
The application of FAS 144 and FAS 121 required the exercise of significant
judgment and the preparation of numerous significant estimates. Although the
Company believes that its estimates, with regards to future cash flows, were
reasonable and based upon all available information, they required substantial
judgments and were based upon material assumptions about future events. Such
15
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.
Goodwill Accounting. In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001, under which goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. A FAS 142 impairment review involves 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.
FAS 142 required companies to complete by June 30, 2002, a transitional goodwill
impairment review as of the date of adoption of the statement, which was January
1, 2002. The Company's recorded goodwill as of January 1, 2002 was related to
its ATA Leisure Corp., ("ATALC"), ATA Cargo and Chicago Express subsidiaries
acquired in 1999. During the transitional impairment review, the Company
identified ATALC, ATA Cargo and Chicago Express as the reporting units as
defined by FAS 142. The fair values of all of the Company's reporting units were
estimated using discounted future cash flows, since market quotes were not
readily available. In all transitional reviews, the estimated fair value was
higher than the carrying amount of each reporting unit, and thus no impairment
was indicated.
In addition to the transitional goodwill impairment review, FAS 142 required
companies to perform the first of their annual goodwill impairment reviews
during 2002. The Company performed its first annual impairment test in the
fourth quarter of 2002. By this time, the Company had outsourced the management
of two of its ATALC brands to the Mark Travel Corporation ("MTC"). The Company
continued in 2002 to manage the other ATALC brands, including the Key Tours
Canadian Rail programs, Key Tours Las Vegas ground operations, and the Kodiak
Call Center (collectively "KTI brands"). See further discussion in "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 13 - Segment Disclosures." Based upon guidance provided in FAS 142, the
Company determined that the reporting unit previously identified as ATALC during
the transition test, was more appropriately defined as two reporting units,
after giving effect to the operational changes resulting from the outsourcing
agreement completed in the middle of 2002. In its first annual goodwill
impairment review, the Company determined that the goodwill related to Chicago
Express, ATA Cargo and the MTC brands was unimpaired. However, the estimated
fair value of the KTI brands was determined to be lower than the carrying
amount, and an impairment loss of $6.9 million was therefore recorded in the
fourth quarter of 2002.
All of the Company's fair value estimates 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 additional impairment charges.
16
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
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Consolidated operating revenues 7.26 7.88 7.88
Consolidated operating expenses:
Salaries, wages and benefits 2.02 2.01 1.81
Fuel and oil 1.17 1.55 1.68
Aircraft rentals 1.08 0.61 0.44
Handling, landing and navigation fees 0.63 0.55 0.59
Depreciation and amortization 0.44 0.75 0.76
Crew and other employee travel 0.31 0.37 0.40
Aircraft maintenance, materials and repairs 0.30 0.38 0.43
Other selling expenses 0.25 0.26 0.22
Advertising 0.23 0.16 0.13
Passenger service 0.22 0.27 0.28
Insurance 0.19 0.07 0.05
Ground package cost 0.16 0.26 0.31
Commissions 0.13 0.21 0.24
Facilities and other rentals 0.13 0.13 0.10
Special charges 0.00 0.14 0.00
Aircraft impairments and retirements 0.38 0.73 0.00
Goodwill impairment 0.04 0.00 0.00
U.S. Government grant 0.09 (0.41) 0.00
Other 0.40 0.41 0.42
---- ---- ----
Total consolidated operating expenses 8.17 8.45 7.86
---- ---- ----
Consolidated operating income (loss) (0.91) (0.57) 0.02
====== ====== ====
ASMs (in thousands) 17,599,968 16,187,687 16,390,101
17
Year Ended December 31, 2002, Versus Year Ended December 31, 2001
Consolidated Flight Operations and Flight 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.
Twelve Months Ended December 31,
------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------
Departures Jet 66,903 56,962 9,941 17.45
Departures SAAB 42,105 26,836 15,269 56.90
------------------------------------------------------
Total Departures 109,008 83,798 25,210 30.08
------------------------------------------------------
Block Hours Jet 199,290 172,207 27,083 15.73
Block Hours SAAB 40,008 24,836 15,172 61.09
------------------------------------------------------
Total Block Hours 239,298 197,043 42,255 21.44
------------------------------------------------------
RPMs Jet (000s) 12,231,661 11,581,733 649,928 5.61
RPMs SAAB (000s) 152,576 94,009 58,567 62.30
------------------------------------------------------
Total RPMs (000s) (a) 12,384,237 11,675,742 708,495 6.07
------------------------------------------------------
ASMs Jet (000s) 17,362,835 16,041,928 1,320,907 8.23
ASMs SAAB (000s) 237,133 145,759 91,374 62.69
------------------------------------------------------
Total ASMs (000s) (b) 17,599,968 16,187,687 1,412,281 8.72
------------------------------------------------------
Load Factor Jet 70.45 72.20 (1.75) (2.42)
Load Factor SAAB 64.34 64.50 (0.16) (0.25)
------------------------------------------------------
Total Load Factor (c) 70.37 72.13 (1.76) (2.44)
------------------------------------------------------
Passengers Enplaned Jet 9,139,770 8,058,886 1,080,884 13.41
Passengers Enplaned SAAB 906,909 576,339 330,570 57.36
------------------------------------------------------
Total Passengers Enplaned (d) 10,046,679 8,635,225 1,411,454 16.35
------------------------------------------------------
Revenue $ (000s) 1,277,370 1,275,484 1,886 0.15
RASM in cents (e) 7.26 7.88 (0.62) (7.87)
CASM in cents (f) 8.17 8.45 (0.28) (3.31)
Yield in cents (g) 10.31 10.92 (0.61) (5.59)
See footnotes (c) through (g) on page 19.
(a) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(b) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
18
(c) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because an entire
aircraft is sold by the Company instead of individual seats. Since both costs
and revenues are largely fixed for these types of charter flights, changes in
load factor have less impact on business unit profitability. Consolidated load
factors and scheduled service load factors for the Company are shown in the
appropriate tables for industry comparability, but load factors for individual
charter businesses are omitted from applicable tables.
(d) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(e) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (g) for the definition of yield).
(f) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available seat capacity.
(g) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
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 2002 increased 0.2% to $1.277 billion, as compared
to $1.275 billion in 2001. This increase was due to a $65.9 million increase in
scheduled service revenue, a $10.4 million increase in military/government
charter revenues and a $3.0 million increase in other revenues, partially offset
by a $60.9 million decrease in commercial charter revenues and a $16.5 million
decrease in ground package revenues.
19
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, commercial charter and
military/government charter operations of the Company.
Twelve Months Ended December 31,
------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------
Scheduled Service
Departures 98,877 72,787 26,090 35.84
Block Hours 201,077 156,331 44,746 28.62
RPMs (000's) (a) 9,911,884 8,694,323 1,217,561 14.00
ASMs (000's) (b) 13,608,326 11,443,304 2,165,022 18.92
Load Factor (c) 72.84 75.98 (3.14) (4.13)
RASM in cents (e) 6.51 7.17 (0.66) (9.21)
Yield in cents (g) 8.94 9.44 (0.50) (5.30)
Revenue per segment $ (h) 100.08 112.74 (12.66) (11.23)
Commercial Charter
Departures 6,459 7,293 (834) (11.44)
Block Hours 22,159 24,495 (2,336) (9.54)
ASMs (000's) (b) 1,875,885 2,588,780 (712,895) (27.54)
RASM in cents (e) 7.00 7.43 (0.43) (5.79)
RASM excluding fuel escalation (i) 6.89 7.13 (0.24) (3.37)
Military Charter
Departures 3,650 3,702 (52) (1.40)
Block Hours 15,975 16,159 (184) (1.14)
ASMs (000's) (b) 2,103,874 2,147,248 (43,374) (2.02)
RASM in cents (e) 8.46 7.80 0.66 8.46
RASM excluding fuel escalation (j) 8.48 7.58 0.90 11.87
See footnotes (a) through (g) on pages 18 and 19.
(h) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
(i) Commercial charter contracts generally provide that the tour operator will
reimburse the Company for certain fuel cost increases, which, when earned, are
accounted for as additional revenue. A RASM calculation, excluding the impact of
fuel reimbursements, is provided as a separate measure of unit revenue changes.
(j) Military/government reimbursements to the Company are calculated based upon
a "cost plus" formula, including an assumed average fuel price for each contract
year. If actual fuel prices differ from the contract rate, revenues are adjusted
up or down to neutralize the impact of the change to the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
20
Scheduled Service Revenues. Scheduled service revenues increased 8.0% in 2002 to
$886.6 million from $820.7 million in 2001. Scheduled service revenues comprised
69.4% of consolidated revenues in 2002, as compared to 64.3% in 2001. While
total scheduled service revenues and ASMs increased, scheduled service RASM
declined 9.2% from 7.17 cents in 2001 to 6.51 cents in 2002. The declining unit
revenues experienced by the Company were a result of continuing overcapacity in
the airline industry. Customer demand declined abruptly immediately after the
terrorist attacks of September 11, 2001, and demand has also been lowered by the
slowing pace of economic activity in the United States. The Company does not
expect any significant recovery in demand for its services until after the
uncertainty of the conflict in the Middle East has been resolved, and economic
growth returns.
Scheduled service departures grew 35.8% in 2002, compared to the ASM growth of
18.9%. This reflects the growth of the Chicago Express SAAB 340B fleet from 11
aircraft as of December 31, 2001 to 17 aircraft as of December 31, 2002. The
additional SAAB aircraft generated significantly more departures, but because
the aircraft seats only 34 passengers and operates on short stage length
flights, the increase in ASMs was not as great as departures.
Approximately 71.2% of the Company's scheduled service capacity was generated by
the Chicago-Midway market in 2002, as compared to 66.8% in 2001. The Hawaiian
market generated approximately 13.7% of total scheduled service capacity in
2002, as compared to 18.6% in 2001. Another 10.5% of total scheduled service
capacity was generated in the Indianapolis market in 2002, as compared to 9.2%
in 2001.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business in the
future. The Company also anticipates further growth at Chicago-Midway, which
will be accomplished in conjunction with the completion of new terminal and gate
facilities at the Chicago-Midway Airport. Once all construction is complete in
2004, the Company expects to occupy at least 14 jet gates and one commuter
aircraft gate at the new airport concourses. A Federal Inspection Service
("FIS") facility was completed at Chicago-Midway in the first quarter of 2002,
which allowed the Company to begin nonstop international services from
Chicago-Midway. Also contributing to the growth at Chicago-Midway is Chicago
Express, which has been performing well as a feeder of passengers to ATA's jet
system. The Company operated 152 peak daily jet and commuter departures from
Chicago-Midway and served 41 destinations on a nonstop basis in 2002, as
compared to 109 peak daily jet and commuter departures and 28 nonstop
destinations in 2001.
The Company's declining capacity in the Hawaiian market was primarily
attributable to the transition to the smaller 247-seat Boeing 757-300 aircraft
from the wide-body Lockheed L-1011 aircraft for certain West Coast-Hawaii routes
beginning in mid-2002. The Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. From June to September 2002, the
Company operated seasonal service to Lihue from Los Angeles and San Francisco.
The Company's growth in the Indianapolis market is primarily attributable to the
addition of limited jet service between Indianapolis and Chicago-Midway in the
second quarter of 2002, and the addition of nonstop service to New York
LaGuardia and Phoenix beginning in the third quarter of 2002.
Commercial Charter Revenues. Commercial charter revenues decreased 31.7% to
$131.3 million in 2002 from $192.2 million in 2001. Commercial charter revenues
accounted for 10.3% of consolidated revenues in 2002, as compared to 15.1% in
2001.
21
The majority of the decline in commercial charter revenues was due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying. Since aircraft
utilization (number of productive hours of flying per aircraft each month) is
typically much lower for commercial charter, as compared to scheduled service
flying, the Company's replacement fleets of new Boeing 737-800 and Boeing
757-300 aircraft are economically disadvantaged when used in the charter
business, because of their higher fixed-ownership cost. Consequently, the
Company expects its commercial charter revenues to continue to decline as the
fleet supporting this business continues to shrink through aircraft retirements.
The decrease in commercial charter RASM in 2002, as compared to 2001, was due to
the same economic and geopolitical factors which have reduced scheduled service
unit revenues between years. The Company currently expects that commercial
charter will represent a less significant source of future revenues, especially
after the end of 2003 when a contract with a major customer expires.
Military/Government Charter Revenues. Military/government charter revenue
increased 6.2% to $177.9 million in 2002 from $167.5 million in 2001.
Military/government charter revenue accounted for 13.9% of consolidated revenues
in 2002, as compared to 13.1% in 2001.
The increase in revenue and RASM for military/government charter revenues in
2002 was due primarily to rate increases awarded for the contract year ended
September 30, 2002, based upon cost data submitted to the U.S. military by the
Company and other air carriers providing these services. The Company earned
$175.6 million in the contract year ended September 30, 2002, a 10.2% increase
as compared to $159.3 million earned in the preceding contract year ended
September 30, 2001. The Company renewed its U.S. military contract for the
fiscal year beginning October 1, 2002, although the reimbursement rate was
nearly unchanged as compared to the prior 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 Ambassadair and ATALC 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 2002, ground package revenues decreased 31.6% to $35.7 million, as compared
to $52.2 million in 2001. This decline in ground package sales (and related
ground package costs) is primarily due to the Company's July 1, 2002 outsourcing
of the management and marketing of its ATA Vacations and Travel Charter
International brands to MTC. Under that outsourcing agreement, MTC directly
sells ground arrangements to customers who also purchase charter or scheduled
service air transportation from the Company. Therefore, ground package sales
(and related ground package costs) are no longer recorded by the Company for ATA
Vacations and Travel Charter International.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with operations of the Company, such as cancellation and
miscellaneous service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 7.0% to $45.9 million in 2002, as compared to
$42.9 million in 2001, primarily due to an increase in cancellation and
administrative fee revenues.
22
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 2002 increased 9.2% to $355.2 million,
as compared to $325.2 million in 2001.
The increase in salaries, wages and benefits primarily reflects the impact of
the Company's amended collective bargaining agreement with the Company's cockpit
crewmembers, who are represented by ALPA. The Company recorded $9.9 million in
2002 for a signing bonus as provided by the amended contract. Cockpit crewmember
contract rate increases became effective July 1, 2002. The Company also incurred
increasing costs in 2002 for employee medical and workers' compensation
benefits. The Company expects future salaries, wages and benefits costs to be
significantly increased by the amended cockpit crewmember contract. The amended
contract is expected to increase cockpit crewmembers' average salaries by
approximately 80% over the four-year contract period. Additionally, the amended
contract provides for expanded retirement benefits for cockpit crewmembers.
Fuel and Oil. Fuel and oil expense decreased 17.8% to $206.6 million in 2002, as
compared to $251.3 million in 2001. Although total jet block hours increased
15.7% in 2002, as compared to 2001, the Company consumed 8.9% fewer gallons of
jet fuel for flying operations. 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. The
decrease in fuel burn, due to the new aircraft, resulted in a decrease in fuel
and oil expense of approximately $25.0 million. Also contributing to the decline
in fuel expense was the decrease in the Company's average cost per gallon of jet
fuel consumed of 7.9%, resulting in an additional savings in fuel and oil
expense of approximately $18.1 million.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. During 2002, the Company recorded gains of
$0.5 million on these hedge contacts, as compared to losses of $2.6 million in
2001. As of December 31, 2002, the Company had no outstanding fuel hedge
agreements.
Since December 31, 2002, the cost per gallon of jet fuel has increased
approximately 21% based on March 20, 2003 market prices. Continued increases in
the cost of fuel will adversely affect the Company in 2003.
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
December 31, 2002 and December 31, 2001, the Company had recorded $68.8 million
and $49.2 million, respectively, of prepaid aircraft rent under its operating
leases. Aircraft rentals expense in 2002 increased 92.0% to $190.1 million from
$99.0 million in 2001. The increase was mainly attributable to the delivery of
30 leased Boeing 737-800 and 10 leased Boeing 757-300 aircraft between May 2001
and December 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.
23
Handling, landing and navigation fees increased by 24.6% to $110.5 million in
2002, as compared to $88.7 million in 2001. The increase in handling, landing
and navigation fees between years was primarily due to a 17.5% increase in
system-wide jet departures. The Company also incurred approximately $5.7 million
in additional airport security costs associated with increased security
requirements implemented after 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. Depreciation and amortization expense decreased 36.8% to
$76.7 million in 2002, as compared to $121.3 million in the 2001.
In 2001 and 2002, the Company retired eight Lockheed L-1011-50 aircraft from
revenue service. During the fourth quarter of 2001, the Company also determined
that the remaining fleet of Lockheed L-1011-50 and 100 aircraft, rotable parts
and inventory was impaired. These assets were classified as held for use in
accordance with FAS 121, requiring them to be recorded on the balance sheet at
their estimated fair value at the time of impairment, which is the new asset
basis to be depreciated over their estimated remaining useful lives. The Company
recorded a further reduction in the carrying value of these assets in 2002. Due
to the reduced cost basis of these assets, the Company recorded $17.6 million
less depreciation and amortization expense for this fleet in 2002, as compared
to 2001.
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, and these aircraft were determined to be impaired under FAS
121. Boeing 727-200 aircraft not already transferred to BATA Leasing LLC
("BATA"), a 50/50 joint venture with Boeing Capital Corporation ("BCC"), 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 sale. As a result, depreciation expense on the
Boeing 727-200 fleet decreased by $28.9 million in 2002, as compared to 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 air transportation, hotels and per diem reimbursements to cockpit and
cabin crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
decreased 7.6% to $54.8 million in 2002, as compared to $59.3 million in 2001.
This decrease was mainly due to the decrease in military and charter flights
between years, which often operate to and from points remote from the Company's
crew bases including international destinations, thus requiring significant
positioning expenditures for crewmembers on other airlines and higher hotel
costs. The decrease also reflects a decline in non-crew employee travel in 2002,
as compared to 2001, due to the Company's cost-cutting initiatives.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities, and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200/300 and Saab 340B power plants. These
24
agreements provide for the Company to pay monthly fees based on a specified rate
per engine flight hour, in exchange for major engine overhauls and maintenance.
Aircraft maintenance, materials and repairs expense decreased 14.8% to $52.3
million in 2002, as compared to $61.4 million in 2001.
The decline in maintenance, materials and repairs expense in 2002, as compared
to 2001, was primarily attributable to a decrease in materials consumed and
components repaired related to maintenance on the Company's aging fleets of
Lockheed L-1011-50 and 100 and Boeing 727-200 aircraft. During 2001 and 2002,
the Company placed 23 Boeing 727-200 aircraft into BATA, and retired eight
Lockheed L-1011-50 aircraft prior to the due dates of heavy maintenance visits.
Maintenance, materials and repairs expense associated with these two fleets
decreased $20.1 million in 2002, as compared to 2001.
This decline in maintenance, materials and repairs was partially offset by an
increase in the cost of the hourly engine maintenance agreement for the
Company's growing fleet of Saab 340B propeller aircraft operated by Chicago
Express. In addition, the Company entered into an hourly engine maintenance
agreement for the Boeing 757-200 fleet in 2002, which resulted in an increase in
maintenance, materials and repair expense between years.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems ("CRS"), credit card discount
expenses incurred when selling to customers using credit cards for payment, and
toll-free telephone services provided to single-seat and vacation package
customers who contact the Company directly to book reservations. Other selling
expenses increased 5.5% to $43.9 million in 2002, as compared to $41.6 million
in 2001. This increase is primarily the result of a greater portion of the
Company's sales being made on credit cards, and higher CRS fees.
Advertising. Advertising expense increased 51.5% to $40.0 million in 2002, as
compared to $26.4 million in 2001. The Company incurs advertising costs
primarily to support single-seat scheduled service sales. The increase in
advertising was primarily attributable to the promotion of the new scheduled
service destinations added in 2002 and the promotion of low fares in a market
that had less demand for air service. The Company also increased advertising in
an effort to increase consumer preference for the Company's enhanced product,
especially in its important Chicago-Midway hub, which included a new advertising
campaign identifying the Company as "An Honestly Different Airline."
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and the
cost of onboard entertainment programs, together with certain costs incurred for
mishandled baggage and passengers inconvenienced due to flight delays or
cancellations. For 2002 and 2001, catering represented 82.1% and 74.4%,
respectively, of total passenger service expense.
The total cost of passenger service decreased 12.8% to $38.3 million in 2002, as
compared to $43.9 million in 2001. Approximately $7.4 million of the decrease is
attributable to catering expense, primarily because in 2002 the Company boarded
a higher ratio of scheduled service passengers to charter passengers than in
2001. Scheduled service passengers are provided a significantly less expensive
catering service than is provided to commercial charter and military passengers.
In addition, in 2002 the
Company introduced round-trip catering for flights originating in Chicago-Midway
to reduce catering service charges. In 2002, as compared to 2001, the Company
also incurred approximately $4.8 million less expense for mishandled baggage and
passenger inconvenience, due to significantly fewer flight delays and
cancellations in 2002.
25
Insurance. Insurance expense represents the Company's cost of hull and liability
insurance and the costs of general insurance policies held by the Company,
including workers' compensation insurance premiums. The total cost of insurance
increased 217.8% to $34.0 million in 2002, as compared to $10.7 million in 2001.
Liability insurance increased $14.8 million in 2002, as compared to 2001.
Immediately following the September 11, 2001 terrorist attacks, the Company's
insurer reduced the maximum amount of insurance coverage they would underwrite
for liability to persons other than employees or passengers resulting from acts
of terrorism, war, hijacking, or other similar perils (war-risk coverage) and
significantly increased their premiums for this reduced coverage. Pursuant to
the Air Transportation Safety and System Stabilization Act and other enabling
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, which is expected to continue through
2003. It is anticipated that after this date a commercial product for war-risk
coverage will become available, but the Company may continue to incur
significant additional costs for this coverage.
Hull insurance increased $5.1 million in 2002, as compared to 2001. The increase
is mainly attributable to the increase in the Company's hull value between
periods due to the addition of the new Boeing 737-800 and Boeing 757-300
aircraft. The increase is also attributable to an increase in premium rates
following the September 11, 2001 terrorist attacks. Expenses related to the
Company's general insurance policies increased $3.4 million in 2002, as compared
to 2001, due primarily to an increase in workers' compensation premiums and
claims handling fees between periods, and general increases in other
miscellaneous policies between years.
Ground Package Cost. Ground package cost is incurred by the Company with hotels,
car rental companies, cruise lines and similar vendors who provide ground and
cruise accommodations to Ambassadair and ATALC customers. Ground package cost
decreased 33.9% to $27.9 million in 2002, as compared to $42.2 million in 2001,
approximately proportional to the decrease in ground package revenues. See the
"Ground Package Revenues" section above for an explanation of the decline in
both ground package sales and related costs.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense decreased 33.0% to $23.3 million in 2002, as
compared to $34.8 million in 2001.
The Company experienced a decrease in commissions of $3.8 million in 2002, as
compared to 2001, attributable to commissions paid to travel agents by ATALC,
which is consistent with the decrease in related revenue. In addition, scheduled
service commissions decreased $9.0 million in 2002 due to the elimination of
standard travel agency commissions for sales made after March 21, 2002. The
Company continues to pay special travel agency commissions targeted to specific
markets and periods of the year.
Facilities and Other Rentals. Facilities and other rentals include the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facilities and other
rentals increased 11.9% to $22.6 million in 2002, as compared to $20.2 million
in 2001. Growth in facilities costs between periods was primarily attributable
to facilities at airport locations required to support new scheduled service
destinations added in late 2001 and 2002, and expanded services at existing
destinations.
26
Special Charges. Special charges represent direct expenses which, due to the
events of September 11, 2001, were considered unusual in nature under the
provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and the Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). Special
charges in 2001 were $21.5 million, while no expenses were classified as special
charges in 2002. The 2001 special charges were comprised primarily of costs
associated with the early removal from service of the Company's Boeing 727-200
fleet, some of which were leased, a decision made immediately after September
11, 2001; costs associated with the Company's proposed transaction in which ATA
Holdings Corp. would have been taken private, which was substantially complete
by September 11, 2001, when the Company lost financing as a result of the
September 11, 2001 attacks; and expenses directly associated with the FAA's
temporarily-mandated suspension of commercial flights on September 11, 2001 and
for several days thereafter. Also classified as special charges were increased
hull and liability insurance costs; additional advertising expense incurred as a
direct result of September 11, 2001; interest expense related to debt incurred
under the Company's credit facility to provide operating cash after September
11, 2001; and other expenses not individually significant.
Aircraft Impairments and Retirements. Aircraft impairment and retirement costs
decreased 43.8% to $66.8 million in 2002, as compared to $118.9 million in 2001.
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, determined the aircraft and related rotable parts and
inventory were impaired under FAS 121 and recorded an impairment charge. In
accordance with FAS 121, the Company continues to re-evaluate current fair
values of previously impaired assets, making further adjustments as deemed
appropriate. In 2002, the Company recorded asset impairment charges of $35.9
million, as compared to $44.5 million in 2001, related to its remaining net book
value of Boeing 727-200 aircraft, including those recorded as an investment in
BATA.
In 2001, the Company also determined that the Lockheed L-1011-50 and 100 fleet
and related rotable parts and inventory were impaired under FAS 121 and recorded
an impairment charge. In accordance with FAS 144, the Company continues to
re-evaluate the current fair values of these impaired assets, making further
adjustments as deemed appropriate. In 2002, the Company recorded asset
impairment charges of $7.6 million, as compared to $67.8 million in 2001,
related to its remaining net book value of Lockheed L-1011-50 and 100 aircraft
and related parts.
In 2002, the Company retired three Lockheed L-1011-50 aircraft, resulting in a
charge of $9.0 million, and retired one Lockheed L-1011-500 aircraft, resulting
in a charge of $14.2 million. In 2001, the Company retired three Lockheed
L-1011-50 aircraft resulting in a charge of $6.6 million. These charges were
included as part of aircraft impairments and retirements.
Goodwill Impairment. The Company began annual goodwill impairment reviews under
FAS 142 in 2002. In accordance with FAS 142, the Company determined that the
fair value of the KTI brands was lower than the carrying amount and a goodwill
impairment loss of $6.9 million was recorded in the fourth quarter of 2002.
U.S Government Grant. After the terrorist attacks of September 11, 2001, the Air
Transportation Safety and System Stabilization Act ("Act") was passed, which
provided for, among other things, up to $5.0 billion in compensation to U.S. air
carriers for direct and incremental losses resulting from the September 11, 2001
terrorist attacks, and the availability of up to $10.0 billion in U.S.
Government guarantees of certain loans made to air carriers, which are
administered by the newly established Air Transportation Stabilization Board
("ATSB").
27
The Company had recorded $66.3 million in U. S. Government grant compensation as
of December 31, 2001. This estimate was based on guidance available from the DOT
at the time for identifying those expenses it deemed reimbursable. Throughout
2002, the Company discussed the calculation with the DOT, and as of December 31,
2002 had reversed approximately $16.2 million of the accrued government
reimbursement and revised its estimate of total U.S. Government grant
compensation to $50.1 million. In early 2003, the Company received the last cash
installment of grant reimbursement from the U.S. Government, consistent with
that estimate.
Other Operating Expenses. Other operating expenses decreased 5.6% to $71.2
million in 2002, as compared to $67.4 million in 2001. No expenses comprising
this line item changed significantly between these periods.
Interest Income and Expense. Interest expense in 2002 increased to $35.7
million, as compared to $30.1 million in 2001. The Company incurred $1.7 million
in 2002 in interest expense relating to the $168.0 million guaranteed loan
funded in November 2002. No such financing was in place in 2001. The Company
also capitalized $3.4 million less interest in 2002, as compared to 2001,
associated with new aircraft pre-delivery deposit requirements.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $2.8 million in 2002, as compared to
$5.3 million in 2001. The decrease in interest income between years is primarily
due to a decline in the average interest rate earned.
Income Tax Expense. In 2002, the Company recorded an income tax credit of $25.0
million applicable to $194.2 million in pre-tax loss, while in 2001 the Company
recorded an income tax credit of $39.8 million applicable to $116.1 million in
pre-tax loss. The effective tax rate applicable to 2002 was 12.8%, as compared
to 34.2% in 2001.
As of December 31, 2002, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under accounting principles
generally accepted in the United States that net deferred tax assets should be
fully reserved if it is more likely than not that they will not be realized
through carrybacks or other tax strategies, the Company has recorded a full
valuation allowance against its net deferred asset of $43.3 million. This
allowance adjustment, included in income tax expense, resulted in an effective
tax rate of 12.8% for a tax credit applicable to the loss incurred in 2002. As
of December 31, 2002, the Company had recorded an income tax refund receivable
of $15.8 million using a five-year carryback of alternative minimum tax
operating losses from 1997 to 2001. Payment for this refund was received in
March 2003.
28
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 (k) 26,836 18,985 7,851 41.35
-------------------------------------------------------------
Total Departures 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 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) (a) 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) (b) 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 (c) 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 (d) 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 (e) 7.88 7.88 - -
CASM in cents (f) 8.45 7.86 0.59 7.51
Yield in cents (g) 10.92 10.93 (0.01) (0.09)
See footnotes (a) through (g) on pages 18 and 19.
(k) During the first three quarters of 2000, Chicago Express operated certain
19-seat Jetstream ("J31") aircraft as it phased in the SAAB fleet.
29
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.
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 (k) 26,836 18,985 7,851 41.35
-------------------------------------------------------------
Total Departures 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 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) (a) 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) (b) 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 (c) 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 (d) 7,279,489 6,193,660 1,085,829 17.53
-------------------------------------------------------------
Revenue $ (000s) 820,666 753,301 67,365 8.94
RASM in cents (e) 7.17 7.44 (0.27) (3.63)
Yield in cents (g) 9.44 9.71 (0.27) (2.78)
Revenue per segment $ (h) 112.74 121.62 (8.88) (7.30)
See footnotes (a) through (k) on pages 18 - 20 and 29.
30
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.
The Company's scheduled service operations in 2001 were adversely affected by
the terrorist attacks of September 11. The Company estimates that it 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
beganoperating 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. 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.
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
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui.
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.
Commercial Charter Revenues. 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.
31
The following t