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, 2003.
[ ] 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, 2003) was approximately $25.8
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 - 11,823,864 shares outstanding as of February
29, 2004.
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 - 2003
ATA HOLDINGS CORP. AND SUBSIDIARIES
Page #
PART I
Item 1. Business..................................................3
Item 2. Properties...............................................10
Item 3. Legal Proceedings........................................12
Item 4. Submission of Matters to a Vote of Security Holders......12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters..................................13
Item 6. Selected Consolidated Financial Data.....................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................15
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk.....................................................43
Item 8. Financial Statements and Supplementary Data..............45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................76
Item 9a. Controls and Procedures..................................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. Principal Accountant Fees and Services...................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. (the "Company") owns ATA Airlines, Inc. ("ATA"), the tenth
largest passenger airline in the United States, based upon 2003 capacity and
traffic. The Company is a leading provider of low-cost scheduled airline
services, is the largest commercial charter airline in the United States based
upon revenues for the twelve months ended September 30, 2003, and is one of the
largest providers of passenger airline services to the U.S. military, based upon
2003 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,
2003 2002 2001 2000 1999
--------- -------- --------- ---------- ---------
(Dollars in millions)
Scheduled Service $ 1,085.4 $ 886.6 $ 820.7 $ 753.3 $ 624.6
--------- -------- --------- ---------- ---------
Military Charter 296.9 177.9 167.5 188.6 126.2
Commercial Charter 69.3 131.3 192.2 246.7 263.8
--------- -------- --------- ---------- ---------
Total Charter Service 366.2 309.2 359.7 435.3 390.0
--------- -------- --------- ---------- ---------
Other 66.9 81.6 95.1 103.0 107.8
--------- -------- --------- ---------- ---------
Total $ 1,518.5 $1,277.4 $ 1,275.5 $ 1,291.6 $ 1,122.4
========= ======== ========= ========== =========
Percentage of Consolidated Revenues:
Scheduled Service 71.5% 69.4% 64.3% 58.3% 55.7%
Military Charter 19.6% 13.9% 13.1% 14.6% 11.2%
Commercial Charter 4.6% 10.3% 15.1% 19.1% 23.5%
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be a leading carrier in those markets. 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, Charlotte and
Pittsburgh. The Company also provides transpacific service between the Western
United States and Hawaii. The Company had provided transcontinental service
between San Francisco and New Jersey beginning in October 2003, but that service
ended in March 2004.
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. The Company has subsequently announced that
effective May 31, 2004 it will end service to Cedar Rapids and Lexington, and it
will begin service to Ft. Wayne on June 1.
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
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.
3
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 two 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. It is expected that one L-1011 aircraft
will be retired from service in the second half of 2004. The Company also uses
several Boeing 757 aircraft in its military charter services, and expects to add
several more Boeing 757 aircraft to its military business in 2004.
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 2003.
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 in recent years has been 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 some 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.
Beginning in 2001, commercial charter revenue has declined significantly,
primarily due to the retirement of certain Lockheed L-1011 and Boeing 727-200
aircraft that the Company had traditionally 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. In addition, decreases in general
airline fare levels throughout the United States since 2000 have reduced the
opportunity to operate commercial charter flights profitably. Consequently, the
Company expects future commercial charter revenue to continue to represent a
declining percentage of total revenue.
Industry Overview and Recent Developments
The terrorist attacks of September 11, 2001, and generally weak economic
conditions of the past several years have adversely affected the Company and the
airline industry. The industry as a whole, and the Company, suffered very
significant financial losses in the years ended December 31, 2002, and 2001.
While the Company realized net income for the year ended December 31, 2003, that
net income was favorably impacted by the Company's receipt in the second quarter
of 2003 of $37.2 million in U.S. Government funds in conjunction with the
Emergency Wartime Supplemental Appropriations Act ("Supplemental Act"). The
Supplemental Act was signed into law in April 2003, and made available $2.3
billion in reimbursements to U.S. air carriers for expenses incurred and revenue
foregone related to federally mandated enhanced aviation security subsequent to
September 11, 2001.
During 2002, two major air carriers, US Airways Group and UAL Corporation, filed
for reorganization under Chapter 11 of the United States Bankruptcy Code. US
Airways Group emerged from bankruptcy protection in March 2003. Historically,
air carriers involved in reorganizations have substantially reduced their fares,
which could reduce airline yields further from current levels. Certain air
carriers have sought to reduce financial losses, at least partially, by reducing
their seat capacity. As this has been accomplished by eliminating aircraft from
operating fleets, the fair value of aircraft, including aircraft owned by the
Company, has been adversely affected. The Company has recorded substantial
charges to earnings resulting from fleet retirements and impairments over the
past three years. However, during this period, the Company has substantially
replaced its fleet of aging aircraft with new fuel-efficient Boeing aircraft.
4
In addition to the funds received in the second quarter of 2003, the Company has
benefited from some of the U.S. Government's other 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 of U.S. Government grant
compensation under the Act, of which the final payment of $6.2 million was
received in the first quarter of 2003. The Company also obtained a $168.0
million secured term loan in November 2002, of which $148.5 million is
guaranteed by the ATSB. See "Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements - Note 6 - Debt" and "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 10 -
Shareholders' Deficit" for additional information about the ATSB loan.
The terrorist attacks of September 11, 2001 and the generally weak economy have
also had a negative impact on the Company's liquidity. The Company's new Boeing
aircraft are all leased and have higher fixed-ownership costs than the older
fleets that they replaced. The terms of many of these aircraft operating leases
were determined before September 11, 2001, and were structured to require
significant cash payments in the first few years of each lease in order to
reduce the total rental cost over the related lease terms. Consequently, the
Company made large cash lease payments on many of its aircraft in the year ended
December 31, 2003, which resulted in a substantial use of the Company's cash. As
of December 31, 2003, the Company was also scheduled to repay the $175 million
outstanding principal of its 10 1/2% Senior Notes ("2004 Notes") in August 2004
and the $125 million outstanding principal of its 9 5/8% Senior Notes ("2005
Notes" and, together with the 2004 Notes, "Existing Notes") in December 2005.
On January 30, 2004, the Company successfully completed exchange offers and
issued new Senior Notes due 2009 ("2009 Notes") and cash consideration for
certain of its 2004 Notes and issued new Senior Notes due 2010 ("2010 Notes"
and, together with the 2009 Notes, "New Notes") and cash consideration for
certain of its 2005 Notes. In completing the exchange offers, the Company
accepted $260.3 million of Existing Notes tendered for exchange, issuing $163.1
million in aggregate principal amount of 2009 Notes and delivering $7.8 million
in cash in exchange for $155.3 million in aggregate principal amount of 2004
Notes tendered, and issuing $110.2 million in aggregate principal amount of 2010
Notes and delivering $5.2 million in cash in exchange for $105.0 million in
aggregate principal amount of 2005 Notes. In addition to the New Notes issued,
$19.7 million in aggregate principal amount of the 2004 Notes and $20.0 million
in aggregate principal amount of the 2005 Notes remain outstanding after the
completion of the exchange offers. In connection with the exchange offers, the
Company also obtained the consent of the holders of the Existing Notes to amend
or eliminate all of the restrictive operating covenants and certain default
provisions of the indentures governing the Existing Notes. See "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 6 - Debt" for additional information about the exchange offers.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, Boeing Capital Services
Corporation ("BCSC"), General Electric Capital Aviation Services ("GECAS") and
International Lease Finance Corporation ("ILFC"). The effect of the lease
amendments was to delay the payment of portions of the amounts due under those
operating leases primarily between June 30, 2003, and March 31, 2005 and to
extend the leases generally for two years. Most of the payments delayed during
this time period will be subsequently paid at various times throughout the
remaining life of the leases.
5
The Company received a refund of $29.8 million on January 30, 2004 related to
payments made in 2003 under the original terms of certain retroactively amended
leases. The amendments will also result in approximately $69.6 million in lower
cash payments during 2004 under these operating leases, as compared to payments
which would have been due under the original terms. See "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 7 -
Lease Commitments" for additional information about the Company's operating
leases.
While the Company expects that adverse industry conditions are likely to
continue throughout 2004, the Company's management believes that with the
completion of the exchange offers and operating lease amendments the Company has
a viable plan to provide sufficient cash to fund operations for the next 12
months. The Company's plan continues to require focused marketing efforts on
those businesses and markets where the Company believes it can be a leading
provider and the implementation of additional cost-saving initiatives the
Company believes will maintain its low-cost advantage. Although the Company
believes the assumptions underlying its 2004 financial projections are
reasonable, there are significant risks that could cause the Company's 2004
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain consequences of the major airline bankruptcies, the
possibility of other airline bankruptcy filings and the ongoing geopolitical
impact of the conflicts 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 onmarkets 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 satisfactory financial
returns.
Maintain Low-Cost Position and Maximize Aircraft Utilization
For 2003, 2002 and 2001, the Company's consolidated operating cost per available
seat mile ("CASM") of 6.82(cent), 8.17(cent) and 8.45(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.
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.
6
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 67.1% of the Company's total scheduled service
capacity in 2003. The Company is the number one carrier in terms of market
share, based upon third quarter 2003 origin and destination revenue
passengers, on 18 of the 24 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 Indianapolis represented approximately 13.3% of the Company's total
scheduled service capacity in 2003. 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 third quarter 2003 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.
o Hawaii represented approximately 12.9% of the Company's total scheduled
service capacity in 2003. 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.
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.
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.
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
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
1,000 employees supporting its aircraft maintenance operations and currently
maintains 17 permanent maintenance facilities, including its Indianapolis and
Chicago facilities.
7
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 29.0%, 29.4%, and 32.0%, respectively, of consolidated revenues in
2003, 2002 and 2001. The Company occasionally enters into fuel-hedging contracts
to reduce volatility of fuel prices for a portion of its scheduled service fuel
needs. However, the Company did not enter into any fuel-hedging contracts in
2003 and as of December 31, 2003, 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.
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 will continue through 2004. 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, 2003, the Company had approximately 7,900 full-time and
part-time employees, approximately 2,900 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 October 2004. The Company's cockpit crews are
represented by the Air Line Pilots Association ("ALPA"). The current collective
bargaining agreement with the 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.
8
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 fee on ticket sales 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. In May 2003, the Company received a refund of
$37.2 million in security fees and infrastructure fees paid prior to that date,
and collection of the security fees was temporarily suspended from June through
September 2003.
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
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 that
is 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
The Company's operations are subject to comprehensive federal, state, and local
laws and regulations relating to pollution and the protection of the
environment, including those governing aircraft noise, the discharge of
pollutants into the air and water, the management and disposal of hazardous
substances and wastes, and the cleanup of contaminated sites. Some of the
Company's operations require environmental permits and controls, and these
permits are subject to modification, renewal and revocation by issuing
authorities. Although the Company believes it is in compliance in all material
respects with applicable environmental laws, the Company could incur substantial
costs, including cleanup costs, fines, civil or criminal penalties, or
third-party property damage or personal injury claims as a result of violations
of, or liabilities under, environmental laws or noncompliance with the
environmental permits required for the Company's operations. In addition, the
adoption of new or more stringent requirements could increase the cost of the
Company's operations, require significant capital expenditures, or result in
material restrictions on the Company's operations.
9
At the Company's aircraft maintenance facilities and the airports the Company
serves, materials are used such as aircraft deicing fluids, fuel, oils and other
materials 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 wastes
generated by the use of these materials in compliance with applicable laws. The
Environmental Protection Agency regulates operations, including air carrier
operations, which affect the quality of air in the United States, such as the
regulation of the discharge of aircraft emissions exhaust into the environment.
The Company believes it has made all necessary modifications to its operating
fleet to meet fuel-venting requirements and smoke-emissions standards. In
addition, noise generated by aircraft is subject to regulation by the FAA under
the Airport Noise and Capacity Act of 1990 and its implementing regulations. As
a result, the Company has been and may continue to be required to reduce its
hours of operation at particular airports, to install noise abatement equipment
on its aircraft or to change operational procedures during takeoff and landing.
At the present time, the Company believes its airline equipment and scheduled
flights are in material compliance with these and other local noise abatement
requirements, and the Company does not believe any such restrictions will have a
material adverse effect on the Company's business, financial condition or
results of operations.
Item 2. Properties
Aircraft Fleet
At December 31, 2003, ATA and Chicago Express were certified to operate a fleet
of 82 aircraft. The following table summarizes the ownership characteristics of
each aircraft type as of the end of 2003.
Owned (Encumbered- Operating-Lease Operating-Lease
Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-50 and 100 1 - 1 2
Lockheed L-1011-500 4 - - 4
Boeing 737-800 - 18 14 32
Boeing 757-200 - 14 1 15
Boeing 757-300 - 12 - 12
SAAB 340B 2 15 - 17
--------- --------- --------- ---------
TOTAL 7 59 16 82
========= ========= ========= =========
10
Lockheed L-1011-50 and 100 Aircraft
The Company's two Lockheed L-1011-50 and 100 aircraft are wide-body aircraft.
The L-1011-50 has a range of 2,971 nautical miles and the L-1011-100 has a range
of 3,425 nautical miles. These aircraft have a low ownership cost relative to
other wide-body aircraft types. The fleet has an average age of approximately 26
years.
Lockheed L-1011-500 Aircraft
The Company's four Lockheed L-1011-500 aircraft are wide-body aircraft and have
a range of 5,577 nautical miles. These aircraft have a low ownership cost
relative to other wide-body aircraft types. The fleet has an average age of
approximately 22 years.
Boeing 737-800 Aircraft
The Company's 32 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 and lower maintenance and cockpit crew costs, and
improved operating reliability. The fleet has an average age of approximately 2
years, and the leases on these aircraft have terms that expire between May 2017
and December 2024.
Boeing 757-200 Aircraft
The Company's 15 Boeing 757-200 aircraft are narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft 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 terms that expire between April
2008 and May 2022.
Boeing 757-300 Aircraft
The Company's 12 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
Company's Boeing 757-300s have the capability to operate on extended flights
over water. The fleet has an average age of approximately 2 years, and the
leases on these aircraft have terms that expire on various dates between August
2023 and September 2024.
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 12.5 years
and the leases on 15 of these aircraft have 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, under leases that expire in 2007. 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 expiring in 2005, 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.
11
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. The
Company's management does not expect that the outcome of its current legal
proceedings, individually or collectively, will have a material adverse effect
on the Company's financial condition, results of operations or cash flows. To
the knowledge of management, there are also no material proceedings under
federal or state environmental laws, nor are there any environmental proceedings
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, 2003.
12
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 281 and 280 registered shareholders,
respectively, at December 31, 2003 and 2002.
Market Prices of Common Stock
Year Ended December 31, 2003
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 5.98 7.79 10.95 10.45
Low 3.42 3.45 6.07 6.37
Close 3.75 7.36 7.00 9.65
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
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.
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 11 -
Redeemable Preferred Stock."
13
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) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 1,518,533 $ 1,277,370 $ 1,275,484 $ 1,291,553 $ 1,122,366
Operating expenses (1) 1,440,992 1,437,407 1,367,354 1,288,983 1,032,339
Operating income (loss) (1) 77,541 (160,037) (91,870) 2,570 90,027
Income (loss) before taxes 21,745 (194,214) (116,067) (19,931) 77,797
Net income (loss) available to common shareholders(2) 15,792 (174,984) (81,885) (15,699) 47,342
Net income (loss) per share - basic 1.34 (14.94) (7.14) (1.31) 3.86
Net income (loss) per share - diluted 1.27 (14.94) (7.14) (1.31) 3.51
Balance Sheet Data (at end of period):
Property and equipment, net $ 253,482 $ 265,627 $ 314,943 $ 522,119 $ 511,832
Total assets 869,987 848,136 1,002,962 1,032,430 815,281
Total debt 494,696 509,428 497,592 457,949 347,871
Redeemable preferred stock 56,330 52,110 50,000 50,000 -
Convertible redeemable preferred stock 32,907 30,375 30,000 30,000 -
Shareholders' equity (deficit) (104,007) (120,009) 44,132 124,654 151,376
Selected Consolidated Operating Statistics:
Revenue passengers carried (thousands) 11,226.9 10,046.7 8,635.2 8,006.1 7,044.6
Revenue passenger miles (millions) 14,358.7 12,384.2 11,675.7 11,816.8 10,949.0
Available seat miles (millions) 21,125.9 17,600.0 16,187.7 16,390.1 15,082.6
Passenger load factor 68.0% 70.4% 72.1% 72.1% 72.6%
(1) Operating results for the years ended December 31, 2003, 2002 and 2001
include the following items:
2003 2002 2001
---------------------------------
Aircraft impairments and retirements $ (5,288) $ (66,787) $ (118,868)
U.S. Government grants 37,156 (16,221) 66,318
Goodwill impairments - (6,893) -
Special charges - - (21,525)
-------- --------- ----------
Total - income (loss) $ 31,868 $ (89,901) $ (74,075)
======== ========= ==========
For more information on special charges, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year Ended December
31, 2002, Versus Year Ended December 31, 2001 - Special Charges."
14
(2) Preferred stock dividends of $4.6 million, $5.7 million, and $5.6 million
were recorded in 2003, 2002 and 2001, respectively. No common stock dividends
were paid in any period presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of scheduled airline services to leisure and
other value-oriented travelers, and a leading provider of charter services to
the U.S. military. The Company, through its principal subsidiary, ATA, has been
operating for 31 years and is the tenth largest U.S. airline in terms of 2003
capacity and traffic.
In the year ended December 31, 2003, the Company recorded operating income of
$77.5 million, as compared to an operating loss of $160.0 million in the same
period of 2002. In the year ended December 31, 2003, the Company had a net
income available to common shareholders of $15.8 million, as compared to a net
loss available to common shareholders of $175.0 million in 2002. The net income
recorded in 2003 includes $37.2 million received under the Supplemental Act,
which was recorded as a reduction in operating expenses.
Consolidated revenue per available seat mile ("RASM") decreased to 7.19 cents in
the year ended December 31, 2003, as compared to 7.26 cents in 2002. The
decrease in 2003 was mainly due to a weak scheduled service pricing environment
in the first six months of 2003, which was impacted by the war in the Middle
East. In addition, the Company's scheduled service unit revenues were adversely
affected by the Company's capacity growth of 20% between the year ended December
31, 2002 and 2003, due to the addition of new Boeing 737-800 and Boeing 757-300
aircraft to the Company's fleet. The Company was able to utilize some of the
increased capacity in its military charter service in order to meet the
increased flying requirements due to the Civil Reserve Air Fleet ("CRAF")
activation between February and June 2003, which supported Operation Iraqi
Freedom. In 2003, the Company's military charter revenue increased 66.9%, as
compared to 2002. The CRAF program ended on June 18, 2003, and the Company
recorded 19.2% less military revenue for the second half of 2003, as compared to
the first half of 2003.
The Company's unit costs remained among the lowest of major airlines in 2003.
Consolidated cost per available seat mile ("CASM") decreased to 6.82 cents in
the year ended December 31, 2003, as compared to 8.17 cents in 2002. The 2003
CASM amount reflects the benefit from the receipt of $37.2 million, or 0.18
cents per available seat mile ("ASM"), in the year ended December 31, 2003, in
U.S. Government funds from the Supplemental Act; and a charge of $5.3 million,
or 0.03 cents per ASM, for aircraft impairments and retirements. The 2002 CASM
amount reflects a charge of $16.2 million, or 0.09 cents per ASM, in connection
with the expected reduction of U.S. Government compensation under the Act, and a
charge of $66.8 million, or 0.38 cents per ASM, for aircraft impairments and
retirements. The remaining CASM declines in 2003 were mainly due to the
Company's continuing efforts to further reduce operating expenses; the benefits
from increased aircraft, facility and employee utilization; and the cost savings
realized from the addition of its new fleets comprised of Boeing 737-800 and
Boeing 757-300 aircraft. These CASM improvements were achieved despite a 15.9%
increase in the average cost per gallon of jet fuel consumed in 2003, as
compared to 2002. These fuel price increases cost the Company an incremental
$37.7 million in 2003, net of a $7.4 million increase in fuel escalation
revenues. Fuel escalation revenue is recorded when tour operators or the U.S.
Government reimburse the Company for certain fuel cost increases as part of
commercial charter, bulk scheduled service or military/government contracts.
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 used
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.
15
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. Accrual adjustments resulting from
these comparisons have not been material to the Company's consolidated revenue.
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 ("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, including the investment in BATA Leasing, LLC ("BATA") 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, the
undiscounted estimated future cash flows from the expected use of those assets
must be compared to their net book value 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 discounted cash flows and quoted market prices to estimate the
fair value of the Boeing 727-200 fleet.
Beginning in 2002, the Company has performed impairment analyses on the Lockheed
L-1011-500 fleet and related assets in accordance with FAS 144, and has
determined that this fleet is not impaired. The application of FAS 144 and FAS
121 requires the exercise of significant judgment and the preparation of
numerous significant estimates. Although the Company believes that its estimates
with regard to future cash flows are reasonable and based upon all available
information, they require substantial judgments and are based upon material
assumptions about future events. Such estimates are significant in determining
the amount of the impairment charge to be recorded, if any, which could have
been materially different under different sets of assumptions and estimates.
16
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 requires companies to perform annual goodwill impairment reviews. The
annual impairment tests are required to be completed in the same fiscal quarter
each year. The Company performed its annual tests in the fourth quarter of both
2002 and 2003. The Company's goodwill relates to ATA Leisure Corp. ("ATALC"),
Chicago Express and ATA Cargo, all of which are subsidiaries that were acquired
in 1999. The Company identified two FAS 142 reporting units for ATALC. The ATALC
brands whose management was outsourced to Mark Travel Corporation ("MTC") in
July 2003 were one reporting unit. The other reporting unit related to the Key
Tours brands ("KTI") that sold Canadian rail packages and ground packages in Las
Vegas. In the 2002 goodwill impairment review, the Company determined that the
goodwill related to Chicago Express, ATA Cargo and the MTC reporting unit was
not impaired. However, the estimated fair value of the KTI reporting unit was
lower than the carrying amount and an impairment loss of $6.9 million, on the
total goodwill balance for KTI, was recorded in the fourth quarter of 2002. As
of December 31, 2003, the Company no longer markets any of the KTI brands. In
the 2003 goodwill impairment review, the Company determined that the goodwill
related to Chicago Express, ATA Cargo and the MTC reporting unit was not
impaired.
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.
17
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.
Cents per ASM
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Consolidated operating revenues 7.19 7.26 7.88
Consolidated operating expenses:
Salaries, wages and benefits 1.89 2.02 2.01
Fuel and oil 1.31 1.17 1.55
Aircraft rentals 1.07 1.08 0.61
Handling, landing and navigation fees 0.54 0.63 0.55
Crew and other employee travel 0.30 0.31 0.37
Depreciation and amortization 0.27 0.44 0.75
Other selling expenses 0.24 0.25 0.26
Aircraft maintenance, materials and repairs 0.22 0.30 0.38
Passenger service 0.19 0.22 0.27
Advertising 0.18 0.23 0.16
Insurance 0.14 0.19 0.07
Facilities and other rentals 0.11 0.13 0.13
Commissions 0.11 0.13 0.21
Ground package cost 0.06 0.16 0.26
Special charges - - 0.13
Aircraft impairments and retirements 0.03 0.38 0.73
Goodwill impairment - 0.04 -
U.S. Government grant (0.18) 0.09 (0.41)
Other 0.34 0.40 0.42
---- ----- -----
Total consolidated operating expenses 6.82 8.17 8.45
---- ----- -----
Consolidated operating income (loss) 0.37 (0.91) (0.57)
==== ===== =====
ASMs (in thousands) 21,125,905 17,599,968 16,187,687
18
Year Ended December 31, 2003, Versus Year Ended December 31, 2002
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 "SAAB"
operations include the operations of SAAB 340B propeller aircraft by Chicago
Express as the ATA Connection. Data for subservice operations is not included.
Twelve Months Ended December 31,
--------------------------------
2003 2002 Inc (Dec) % Inc (Dec)
---- ---- --------- -----------
Departures Jet 79,790 66,903 12,887 19.26
Departures SAAB 52,071 42,105 9,966 23.67
---------- ---------- --------- ------
Total Departures 131,861 109,008 22,853 20.96
---------- ---------- --------- ------
Block Hours Jet 246,951 199,290 47,661 23.92
Block Hours SAAB 51,256 40,008 11,248 28.11
---------- ---------- --------- ------
Total Block Hours 298,207 239,298 58,909 24.62
---------- ---------- --------- ------
RPMs Jet (000s) 14,166,987 12,231,661 1,935,326 15.82
RPMs SAAB (000s) 191,712 152,576 39,136 25.65
---------- ---------- --------- ------
Total RPMs (000s) (a) 14,358,699 12,384,237 1,974,462 15.94
---------- ---------- --------- ------
ASMs Jet (000s) 20,815,681 17,362,835 3,452,846 19.89
ASMs SAAB (000s) 310,224 237,133 73,091 30.82
---------- ---------- --------- ------
Total ASMs (000s) (b) 21,125,905 17,599,968 3,525,937 20.03
---------- ---------- --------- ------
Load Factor Jet 68.06 70.45 (2.39) (3.39)
Load Factor SAAB 61.80 64.34 (2.54) (3.95)
---------- ---------- --------- ------
Total Load Factor (c) 67.97 70.37 (2.40) (3.41)
---------- ---------- --------- ------
Passengers Enplaned Jet 10,138,487 9,139,770 998,717 10.93
Passengers Enplaned SAAB 1,088,388 906,909 181,479 20.01
---------- ---------- --------- ------
Total Passengers Enplaned (d) 11,226,875 10,046,679 1,180,196 11.75
---------- ---------- --------- ------
Revenue $ (000s) 1,518,533 1,277,370 241,163 18.88
RASM in cents (e) 7.19 7.26 (0.07) (0.96)
CASM in cents (f) 6.82 8.17 (1.35) (16.52)
Yield in cents (g) 10.58 10.31 0.27 2.62
Average Aircraft in Service
Lockheed L-1011 7.63 10.54 (2.91) (27.61)
Boeing 737-800 30.68 22.37 8.31 37.15
Boeing 757-200 15.17 15.96 (0.79) (4.95)
Boeing 757-300 10.94 7.96 2.98 37.44
SAAB 340B 16.10 13.33 2.77 20.78
Average Block Hours Flown per day
Lockheed L-1011 7.73 5.86 1.87 31.91
Boeing 737-800 10.60 9.84 0.76 7.72
Boeing 757-200 11.55 10.73 0.82 7.62
Boeing 757-300 10.98 9.82 1.16 11.81
SAAB 340B 8.72 8.22 0.50 6.08
See footnotes (a) through (g) on page 20.
19
(a) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(b) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(c) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because 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 2003 increased 19.0% to $1.519 billion, as compared
to $1.277 billion in 2002. This increase was due to a $198.8 million increase in
scheduled service revenue, a $119.0 million increase in military/government
charter revenues and a $6.4 million increase in other revenues, partially offset
by a $62.0 million decrease in commercial charter revenues and a $21.0 million
decrease in ground package revenues.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, military/government charter and
commercial charter operations of the Company.
20
Twelve Months Ended December 31,
--------------------------------
2003 2002 Inc (Dec) % Inc (Dec)
---------------------------------------------------------
Scheduled Service
Departures 122,628 98,877 23,751 24.02
Block Hours 258,021 201,077 56,944 28.32
RPMs (000s) (a) 12,079,272 9,911,884 2,167,388 21.87
ASMs (000s) (b) 16,735,500 13,608,326 3,127,174 22.98
Load Factor (c) 72.18 72.84 (0.66) (0.91)
Passengers Enplaned (d) 10,464,348 8,859,044 1,605,304 18.12
Revenue $ (000s) 1,085,420 886,579 198,841 22.43
RASM in cents (e) 6.49 6.51 (0.02) (0.31)
Yield in cents (g) 8.99 8.94 0.05 0.56
Revenue per segment $ (h) 103.73 100.08 3.65 3.65
Military/Government Charter
Departures 5,721 3,650 2,071 56.74
Block Hours 27,689 15,975 11,714 73.33
ASMs (000s) (b) 3,426,275 2,103,874 1,322,401 62.86
Revenue $ (000s) 296,893 177,901 118,992 66.89
RASM in cents (e) 8.67 8.46 0.21 2.48
RASM excluding fuel escalation (j) 8.56 8.48 0.08 0.94
Commercial Charter
Departures 3,473 6,459 (2,986) (46.23)
Block Hours 12,368 22,159 (9,791) (44.19)
ASMs (000s) (b) 949,375 1,875,885 (926,510) (49.39)
Revenue $ (000s) 69,314 131,341 (62,027) (47.23)
RASM in cents (e) 7.30 7.00 0.30 4.29
RASM excluding fuel escalation (i) 6.97 6.89 0.08 1.16
Percentage of Consolidated Revenues:
Scheduled Service 71.5% 69.4% 2.1% 3.03
Military Charter 19.6% 13.9% 5.7% 41.01
Commercial Charter 4.6% 10.3% (5.7%) (55.34)
See footnotes (a) through (g) on page 20.
(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.
21
Scheduled Service Revenues. Scheduled service revenues in 2003 increased 22.4%
to $1.085 billion from $886.6 million in 2002. This increase was due primarily
to increases in scheduled service capacity and a small increase in revenue per
segment flown.
Approximately 67.1% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in 2003, as compared
to 71.2% in 2002. The Hawaiian market generated approximately 12.9% of total
scheduled service capacity in 2003, as compared to 13.7% in 2002. Another 13.3%
of total scheduled service capacity was generated in the Indianapolis market in
2003, as compared to 10.5% in 2002.
Although the scheduled service RASM for the entire year 2003 was down only
slightly as compared to 2002, the Company noted significant fluctuations in unit
revenue performance during the course of 2003. Unit revenues in the first
quarter of 2003 were down almost 8%, as compared to the first quarter of 2002.
The Company believes that the first quarter 2003 traffic was significantly
affected by the elevated risk of terrorist attack noted before the beginning of
Operation Iraqi Freedom in February 2003, and by the war itself, which began in
March 2003. Unit revenues in the second quarter of 2003 were down slightly more
than 2%, as compared to the second quarter of 2002, which the Company believes
was affected by the speedy end of the Iraqi invasion and by seasonal spring
travel demand. In the third quarter of 2003, unit revenues were almost 7% higher
than in the third quarter of 2002, which the Company believes reflected a very
strong summer travel season rebound from the first half of 2003. However, in the
fourth quarter of 2003 unit revenues were only slightly higher than in the
fourth quarter of 2002, and the Company noted in particular a decline in
year-over-year RASM performance in November and December of 2003.
This late-2003 scheduled service RASM decline continued into the first quarter
of 2004, with a significant year-over-year decline in unit revenue in January
2004. Although some improvement in RASM was experienced in February and March as
compared to January, the Company expects to report a year-over-year decline in
overall scheduled service unit revenue performance in the first quarter of 2004,
as compared to the first quarter of 2003. The scheduled service revenue
environment is expected to continue to be very volatile and uncertain for the
remainder of 2004, and the Company expects it will be challenged by competitive
price and capacity actions in all of the Company's scheduled service markets for
the remainder of the year.
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
mid-2004, the Company expects to occupy at least 14 jet gates and one commuter
aircraft gate at the new airport concourses, as compared to ten jet gates and
one commuter gate as of December 31, 2003. Also contributing to the growth at
Chicago-Midway is Chicago Express, which has been performing well as a commuter
feeder of passengers to ATA's jet system.
Military/Government Charter Revenues. Military/government charter revenue
increased 66.9% to $296.9 million in 2003 from $177.9 million in 2002. The
increase in military/government charter revenues in 2003 was mainly due to the
activation of CRAF in February 2003, which required ATA to pledge up to 13
aircraft to military/government charter use to support Operation Iraqi Freedom.
The CRAF program allowed the Company to increase its Lockheed L-1011 aircraft
utilization (number of productive hours of flying per aircraft per day) to an
average of 7.7 daily hours in 2003, as compared to 5.9 daily hours in 2002. The
increased utilization allowed the Company to operate its military/government
charter service more efficiently between periods. Although the CRAF program
ended on June 18, 2003, the Company still experienced a high volume of military
flying, recording only 19.2% less revenue for the second half of 2003, as
compared to the first half 2003.
22
Commercial Charter Revenues. Commercial charter revenues decreased 47.2% to
$69.3 million in 2003 from $131.3 million in 2002. The majority of the decline
in commercial charter revenues continues to reflect the retirement of certain
Lockheed L-1011 and Boeing 727-200 aircraft in prior years that the Company had
traditionally used in commercial charter flying. Since aircraft utilization is
typically much lower for commercial charter, as compared to scheduled service
flying, the Company's replacement fleets of new Boeing 737-800 and Boeing
757-300 aircraft are economically disadvantaged when used in the charter
business because of their higher fixed-ownership cost. In addition, decreases in
general airline fare levels throughout the United States since 2000 have reduced
the opportunity to operate commercial charter flights profitably. Consequently,
the Company expects its commercial charter revenues to continue to decline as
the fleet supporting this business continues to be retired.
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 offers
tour-guide-accompanied vacation packages to its approximately 32,000 individual
and family members.
In 2003, ground package revenues decreased 58.9% to $14.7 million, from $35.7
million in 2002. This decline was due primarily 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.
The net fee earned by the Company on these sales through the MTC outsourcing
agreement has been recorded in other revenues since the third quarter of 2002.
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 13.7% to $52.2 million in 2003 from $45.9
million in 2002 primarily due to increases in cargo revenue.
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 increased 12.5% to $399.6 million in 2003
from $355.2 million in 2002.
The increases in salaries, wages and benefits between years primarily reflects
the impact of the Company's amended collective bargaining agreement (which was
ratified in July 2002) with the Company's cockpit crewmembers, who are
represented by ALPA. Initial cockpit crewmember contract salary rate increases
became effective July 1, 2002, and cockpit crewmembers received an additional
salary rate increase in July 2003 per this contract. Additionally, the amended
contract provides for expanded defined-contribution benefits for cockpit
crewmembers effective January 1, 2003, which resulted in additional salaries,
wages and benefits expense between periods. 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, of which 40% was realized between July 2002 and the end of 2003. The
next scheduled rate increase for cockpit crewmembers is July 1, 2004. In
addition, the Company incurred higher salary costs as a result of employing
additional crewmembers and other operations employees to handle its increased
capacity in 2003 as compared to 2002. The Company also incurred increasing costs
in 2003 for employee medical and workers' compensation benefits.
23
Fuel and Oil. Fuel and oil expense increased 33.6% to $276.1 million in 2003, as
compared to $206.6 million in 2002. During 2003, the average cost per gallon of
jet fuel consumed increased by 15.9% compared to 2002, resulting in an increase
in fuel and oil expense of approximately $37.7 million between those periods.
Although jet block hours increased 23.9% in 2003, as compared to 2002, the
Company only consumed 17.5% more gallons of fuel due to the continuing impact of
the Company replacing its aging, less-fuel-efficient Boeing 727-200 and Lockheed
L-1011 aircraft with new Boeing 737-800 and Boeing 757-300 aircraft. The
increase in gallons consumed resulted in an increase in fuel and oil expense of
approximately $34.9 million in 2003, as compared to 2002.
The Company periodically has entered into fuel price hedge contracts to reduce
the risk of fuel rice increases. Although the Company did not have any hedge
contracts in place in 2003, the Company did benefit from fuel reimbursement
clauses and guarantees in its bulk scheduled service, commercial charter and
military/government contracts. The benefit of these price guarantees is
accounted for as revenue when realized. The Company has continued to experience
increases in the cost per gallon of jet fuel in the first quarter of 2004, which
will adversely affect reported earnings for that period, and any future
increases in the cost of fuel may continue to adversely affect the Company's
earnings. See "Item 7a. - Quantitative and Qualitative Disclosures About Market
Risk" for more information.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. Many of the Company's aircraft operating
leases were originally structured to require very significant cash in the early
years of the lease in order to obtain more overall favorable lease rates. The
Company accounts for aircraft rentals expense in equal monthly amounts over the
life of each operating lease because straight-line expense recognition is most
representative of the time pattern from which benefit is derived from use of the
aircraft. The amount of the cash payments in excess of the aircraft rent expense
in these early years has resulted in a significant prepaid aircraft rent amount
on the Company's balance sheet. Aircraft rentals expense in 2003 increased 19.2%
to $226.6 million from $190.1 million in 2002. These increases were mainly
attributable to the delivery of seven leased Boeing 737-800s, three leased
Boeing 757-300s and one leased 757-200 aircraft between late 2002 and December
2003.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 3.0% to $113.8 million in
2003, as compared to $110.5 million in 2002. This increase was due to a 21.0%
increase in system-wide jet departures, as compared to 2002, which resulted in
an increase in handling and landing fees of $17.4 million. The Company also
incurred $5.0 million more in navigation fees in 2003, as compared to 2002, due
to the increase in international military/government flying between periods. The
increase was offset by a decrease in the cost of handling per departure due to
the negotiation of more favorable terms in new contracts, resulting in $15.7
million less expense in 2003, as compared to 2002. The Company also operated
relatively fewer flights to higher-cost international destinations in 2003 than
in the prior year. This expense was also favorably affected by the temporary
suspension of the payment of the aviation security infrastructure fee by the
Company from June 1, 2003, to September 30, 2003, pursuant to the Supplemental
Act, which resulted in savings of $1.4 million in 2003.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
increased 17.0% to $64.1 million in 2003, as compared to $54.8 million in 2002,
primarily due to the increase in military/government flying. Since military
flights often operate to and from points remote from the Company's crew bases,
the Company incurs significant travel expenses on other airlines for positioning
of those crews.
24
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 26.1% to
$56.7 million in 2003, as compared to $76.7 million in 2002.
The decrease in depreciation and amortization expense is mainly attributable to
the L-1011-50 and 100 fleet. The Company retired four of these aircraft from
revenue service in 2002 and four more from revenue service in 2003. In addition,
the Company recorded a reduction in the carrying value of the L-1011-50 and 100
aircraft and related assets in the fourth quarter of 2002, in accordance with
FAS 144. Due to the reduced-cost basis of the remaining assets and the
retirements in 2002 and 2003, the Company recorded $13.8 million less in
depreciation and amortization in 2003, as compared to 2002. The decrease in
depreciation and amortization is also due to fluctuations associated with other
fleet owned airframes and owned engines, along with fluctuations in expenses
related to other property and equipment, none of which are individually
significant.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems, credit card discount expenses
incurred when selling to customers using credit cards for payment and toll-free
telephone services provided to single-seat and vacation package customers who
contact the Company directly to book reservations. Other selling expenses
increased 14.4% to $50.2 million in 2003, as compared to $43.9 million in 2002.
The Company experienced increases in all areas of other selling expenses due to
the increase in scheduled service passengers enplaned in 2003 as compared to
2002.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200/300 and SAAB 340B power plants. These
agreements provide for the Company to pay monthly fees based on a specified rate
per engine flight hour in exchange for major engine overhauls and maintenance.
Aircraft maintenance, materials and repairs expense decreased 12.6% to $45.7
million in 2003, as compared to $52.3 million in 2002.
In 2004, the Company expects to incur significantly higher costs under its
hourly engine maintenance agreements. These agreements generally provide for the
escalation of hourly rates as the related power plants age, which reflects
higher costs to maintain them. The Company currently expects to incur
approximately $30 million in such higher costs in 2004, as compared to 2003.
The decrease was mainly attributable to the retirement by mid-2002 of the
Company's entire Boeing 727-200 fleet and the retirement of certain Lockheed
L-1011 aircraft, all of which were replaced with new Boeing 737-800 and 757-300
aircraft.
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 2003 and 2002, catering represented 82.4% and 82.1%,
respectively, of total passenger service expense.
The total cost of passenger service increased 7.0% to $41.0 million in 2003, as
compared to $38.3 million in 2002. The increase was mainly attributable to an
increase in military/government flying which requires a significantly more
expensive catering product than scheduled service.
25
Advertising. Advertising expense decreased 5.3% to $37.9 million in 2003, as
compared to $40.0 million in 2002. The Company incurs advertising costs
primarily to support single-seat scheduled service sales. The relative decrease
in 2003 is primarily attributable to more sales promotions in 2002 to regain
customers after the September 11, 2001, terrorist attacks. In addition, the
Company placed its creative advertising contract with a new agency in 2003 on
more economical terms than the prior contract.
Insurance. Insurance expense represents the Company's cost of hull and liability
insurance and the costs of general insurance policies held by the Company,
including workers' compensation insurance premiums and claims handling fees. The
total cost of insurance decreased 11.2% to $30.2 million in 2003, as compared to
$34.0 million in 2002. The decrease is mainly attributable to the U.S.
Government providing increased war-risk coverage in 2003. This coverage was
provided at higher rates by the commercial insurance markets in 2002. The
Company also completed the placement of its hull and liability insurance for the
new policy year beginning October 1, 2003, at rates which will be approximately
20% lower as compared to the policy year ended September 30, 2003.
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 7.1% to $24.2 million in 2003, as compared to $22.6 million in
2002. The growth in facilities costs is due to added airport locations in 2003
to support new scheduled service destinations and expanded services at existing
locations.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service and to secure
military/government charter revenues using a teaming arrangement with other
cargo and passenger carriers. Commissions expense decreased 3.9% to $22.4
million in 2003, as compared to $23.3 million in 2002.
Scheduled service commissions decreased $5.8 million between years mainly due to
the elimination of standard travel agency commissions for sales made after March
21, 2002 and the continued increase of ticket purchases made on the Company's
own website at the expense of travel agent sales. The Company continues to pay
special travel agency commissions targeted to specific markets and periods of
the year. In addition, the Company experienced a decrease in commission expense
for ATALC of approximately $3.4 million in 2003, as compared to 2002, which is
consistent with the decrease in related revenue. These decreases were partially
offset by an increase in commission expense of $7.9 million in 2003, as compared
to 2002, attributable to growth in military revenue.
Ground Package Cost. Ground package cost is incurred by the Company through
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair. Ground package cost decreased
56.6% to $12.1 million in 2003, as compared to $27.9 million in 2002,
approximately proportional to the decrease in ground package revenues. See
"Ground Package Revenues" above for an explanation of the decline in both ground
package sales and related costs for the period.
Aircraft Impairments and Retirements. Following the events of September 11,
2001, the airline industry began experiencing excess capacity as consumer demand
for scheduled service declined. At the same time, the Company was taking
delivery of a significant number of new Boeing 737-800 and 757-300 aircraft,
which it planned to utilize in its scheduled service markets. To adjust its
capacity to new market demands, the Company decided to retire its Boeing 727-200
fleet earlier than originally planned. Before September 11, 2001, the Company
had a plan in place to gradually retire these aircraft between mid-2001 and
mid-2002. As the Company retired the Boeing 727-200 aircraft, it contributed
them to BATA to re-market these aircraft to third parties. The Company
accelerated this plan by retiring certain individual aircraft earlier than
planned and the Company retired all of these aircraft from service by May 31,
2002. In accordance with FAS 121, the Company recorded an impairment charge of
$44.5 million in 2001. In accordance with FAS 121, the Company continues to
monitor current fair market values of previously impaired assets. In 2003, the
Company recorded an additional asset impairment charge of $5.3 million against
its remaining net book value of Boeing 727-200 aircraft, recorded as an
investment in the BATA joint venture, as compared to $35.9 million recorded in
2002. The current estimate of this fleet's fair market value is based on quoted
market prices and estimated salvage values. The carrying amount of one Boeing
727-200 that was not contributed to BATA, with related assets, is classified as
long-term assets held for sale in the accompanying balance sheet in accordance
with FAS 121.
26
Also in 2001, for reasons similar to those described above, the Company retired
certain Lockheed L-1011-50 and 100 aircraft, and determined that the remaining
Lockheed L-1011-50 and 100 fleet and related rotable parts and inventory were
impaired under FAS 121. The Company recorded an impairment charge of $67.8
million relating to this fleet in 2001. In 2002, the Company retired three owned
L-1011-50 aircraft by removing them from revenue service, which resulted in a
charge of $9.0 million, and recorded an additional asset impairment charge of
$7.6 million against its remaining net book value of Lockheed L-1011-50 and 100
aircraft and related parts. No such charges were recorded in 2003. In accordance
with FAS 144, the Company continues to monitor the fair market values of these
assets.
The Company estimates this fleet's fair market value using discounted cash flow
analysis. The carrying amount of these assets is classified as assets held for
use and appears in the property and equipment section of the accompanying
consolidated balance sheets, since the Company is still flying certain of these
aircraft. The assets are being depreciated in conjunction with the planned fleet
retirement schedule.
In 2002, the Company recorded a charge of $14.2 million related to the
retirement of one owned L-1011-500 aircraft. As a result, the Company began
evaluating that fleet and related parts and inventory for impairment under FAS
144. Through 2003, the Company's analysis continues to show the fleet
unimpaired.
The following tables summarize the Company's aircraft impairments and
retirements expense in 2003 and 2002:
2003 2002
----------------
Boeing 727-200 impairment charge $ 5,288 $ 35,871
Lockheed L-1011-50 and 100 impairment charge - 7,638
Lockheed L-1011-50 retirement - 9,029
Lockheed L-1011-500 retirement - 14,249
-------- --------
Aircraft impairments and retirements $ 5,288 $ 66,787
======== ========
Goodwill Impairment. The Company began annual goodwill impairment reviews under
FAS 142 in 2002. In accordance with FAS 142, the Company determined that no
goodwill impairment had occurred in 2003.
U.S Government Grants. On April 16, 2003, President Bush signed into law the
Supplemental Act, which made available $2.3 billion in reimbursement to U.S. air
carriers for expenses incurred and revenue foregone related to enhanced aviation
security subsequent to September 11, 2001. Pursuant to this legislation, the
Company received $37.2 million in cash in May 2003, which was recorded as a
credit to operating expenses.
After the terrorist attacks of September 11, 2001, the Air Transportation Safety
and System Stabilization Act ("Act") was passed, which provided for, among other
things, up to $5.0 billion in compensation to U.S. carriers for direct and
incremental losses resulting from the September 11, 2001, terrorist attacks. The
Company had recorded $66.3 million in U.S. Government grant compensation as of
December 31, 2001, based on guidance available from the DOT at the time of
identifying those expenses it deemed reimbursable. As of December 31, 2001, the
Company had received $44.5 million in cash under the Act and had a receivable of
$21.8 million for the remaining amount. Throughout 2002, the Company discussed
the reimbursement with the DOT, and, as a result of those discussions, the
Company recorded a reserve of approximately $15.2 million against its receivable
in the second quarter of 2002. The Company subsequently finalized its discussion
with the DOT in the first quarter of 2003 and received the final cash
compensation of $6.2 million under the Act.
27
The Company does not expect to receive any further material compensatory funds
from the U.S. Government.
Interest Income and Expense. Interest expense in 2003 increased to $56.3
million, as compared to $35.7 million in 2002. The Company recorded $12.1
million in interest expense in 2003 related to the secured term loan acquired in
November 2002. In accordance with Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity ("FAS 150"), the Company reclassified its Series A
Preferred as a liability on the Company's balance sheet beginning July 1, 2003,
and the related dividends of $2.1 million recognized thereafter were recorded as
interest expense.
Income Tax Expense. The Company recorded $1.3 million in income tax expense in
2003 applicable to $21.7 million in pre-tax income, while in 2002, the Company
recorded income tax benefit of $25.0 million applicable to $194.2 million in
pre-tax loss. The effective tax rates applicable to 2003 and 2002 were 6.0% and
12.8%, respectively.
As of December 31, 2003, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under GAAP that net deferred
tax assets should be fully reserved if it is more likely than not that they will
not be realized through carrybacks or other strategies, the Company recorded a
full valuation allowance against its net deferred tax asset of $33.5 million.
The Company utilized a portion of its net operating loss carryovers to offset
taxable income in 2003. As a result, in 2003 the Company paid $0.4 million
alternative minimum tax and recorded this as a current tax expense, together
with $0.9 million in state and local income taxes.
Year Ended December 31, 2002, Versus Year Ended December 31, 2001
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 "SAAB"
operations include the operations of SAAB 340B propeller aircraft by Chicago
Express as the ATA Connection.
28
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)
Average Aircraft in Service
Lockheed L-1011 10.54 15.67 (5.13) (32.74)
Boeing 737-800 22.37 5.78 16.59 287.02
Boeing 757-200 15.96 15.04 0.92 6.12
Boeing 757-300 7.96 3.08 4.88 158.44
SAAB 340B 13.33 8.33 5.00 60.02
Average Block Hours Flown per day
Lockheed L-1011 5.86 6.65 (0.79) (11.88)
Boeing 737-800 9.84 5.95 3.89 65.38
Boeing 757-200 10.73 11.28 (0.55) (4.88)
Boeing 757-300 9.82 5.06 4.76 94.07
SAAB 340B 8.22 8.17 0.05 0.61
See footnotes (a) through (g) on page 20.
Operating Revenues
Total operating revenues in 2002 increased 0.2% to $1.277 billion, as