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, 2004.
[ ] 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) 282-4000
(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, Without 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, 2004) was approximately $19.0
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 - 11,824,287 shares outstanding as of February
28, 2005.
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.
None
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 2004
ATA HOLDINGS CORP. AND SUBSIDIARIES
Page #
PART I
Item 1.
Business.................................................3
Item 2. Properties..............................................12
Item 3. Legal
Proceedings.............................................14
Item 4. Submission of Matters to a Vote of Security
Holders.................................................15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stock
Matters and Issuer Purchase of Securities..............16
Item 6. Selected Consolidated Financial
Data....................................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................47
Item 8. Financial Statements and Supplementary Data.............49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................78
Item 9A. Controls and
Procedures..............................................78
Item 9B. Other
Information.............................................79
PART III
Item 10. Directors and Officers of the Registrant................80
Item 11. Executive Compensation..................................83
Item 12. Security Ownership of Certain Beneficial Owners ........86
Item 13. Certain Relationships and Related Transactions..........87
Item 14. Principal Accountant Fees and Services..................89
PART IV
Item 15. Exhibits and Financial Statement Schedules................90
2
PART I
Item 1. Business
Company Overview
ATA Holdings Corp. (the "Company") owns ATA Airlines, Inc. ("ATA"), a major air
carrier in the United States. The Company provides low-cost scheduled airline
services and operates one of the largest (based on 2004 revenue)
military/commercial air transport charter businesses in the United States. The
Company was incorporated in Indiana in 1984. As discussed in more detail below,
on October 26, 2004 (the "Petition Date"), the Company and seven of its
subsidiaries, including ATA (collectively the "Debtors"), filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the U.S. Bankruptcy Code
in the U.S. Bankruptcy Court for the Southern District of Indiana (the
"Bankruptcy Court").
Since the Filing, the Company has been revising its business plans to provide
the basis for a plan of reorganization to be proposed in the Chapter 11 cases of
the Debtors. Key objectives incorporated in the revised business plans, which
are continuing to be refined and changed in response to market conditions,
include:
o focusing on scheduled service from the Chicago-Midway Airport to maximize
the benefit of the recently established codesharing agreement with
Southwest Airlines Co. ("Southwest");
o maintaining and possibly expanding scheduled service to Hawaii, which also
benefits from the codesharing agreement;
o maintaining ATA's position as a leading provider of military passenger
charter services;
o "regauging" and reducing ATA's fleet of aircraft by at least one-third to
improve efficiencies;
o reducing operating costs, including management and other employee expenses;
and
o rejecting burdensome contracts to reduce associated costs.
The Company and ATA have taken a number of actions necessary to achieve these
objectives, develop a viable plan of reorganization and emerge from the Chapter
11 cases. These actions include:
o assigning ATA's leasehold interest in six gates and a hangar facility at
Chicago-Midway to Southwest for $40.0 million;
o establishing a codesharing agreement with Southwest for air transportation
service to and from Chicago-Midway and other airports;
o obtaining from Southwest $47.0 million in debtor-in-possession financing,
as well as a term financing commitment in the same amount to refinance this
debtor-in-possession financing upon confirmation of a plan of
reorganization acceptable to Southwest;
o significantly reducing scheduled service from Indianapolis, Indiana, a
market which has experienced severe and on-going price and route
competition;
3
o reaching agreements with ATA's aircraft and aircraft engine lessors for the
rejection of leases and return of non-economic aircraft and engines;
o changing executive management, including appointing a new Chief Executive
Officer for ATA;
o temporarily amending collective bargaining agreements with the unions
representing the flight attendants and cockpit crews to achieve significant
cost savings, and continuing negotiations to obtain extension and
enhancement of these savings; and
o obtaining an extension of the exclusive period in which the Debtors may
file a plan of reorganization until May 24, 2005.
As a result, the discussion of the business and financial activities of the
Company and its subsidiaries for 2004 and earlier periods in this report do not
reflect the current business and financial activities of the Company and its
subsidiaries or those that would be expected upon emergence of the Debtors from
the Chapter 11 cases.
The following table summarizes the Company's revenue sources for the periods
indicated:
Year Ended December 31,
2004 2003 2002 2001 2000
------------ ------------ ----------- ----------- ----------
(Dollars in Millions)
Scheduled Service $ 1,099.9 $ 1,085.4 $ 886.6 $ 820.7 $ 753.3
------------ ------------ ----------- ----------- ----------
Military Charter 326.9 296.9 177.9 167.5 188.6
Commercial Charter 32.0 69.3 131.3 192.2 246.7
------------ ------------ ----------- ----------- ----------
Total Charter 358.9 366.2 309.2 359.7 435.3
------------ ------------ ----------- ----------- ----------
Other 73.8 66.9 81.6 95.1 103.0
------------ ------------ ----------- ----------- ----------
Total $ 1,532.6 $ 1,518.5 $ 1,277.4 $ 1,275.5 $ 1,291.6
============ ============ =========== =========== ==========
Percentage of Consolidated Revenues:
Scheduled Service 71.8% 71.5% 69.4% 64.3% 58.3%
Military Charter 21.3% 19.6% 13.9% 13.1% 14.6%
Commercial Charter 2.1% 4.6% 10.3% 15.1% 19.1%
Scheduled Service
ATA provides scheduled airline services to major metropolitan
markets, primarily from the Chicago-Midway Airport and the Indianapolis
International Airport. ATA also provides scheduled service to Hawaii and other
exotic leisure destinations. In addition, beginning February 4, 2005, ATA offers
its customers additional destinations in the United States through a new
codeshare agreement with Southwest. ATA announced significant route reductions
from Indianapolis International Airport in early 2005, most of which reductions
of service are effective as of April 11, 2005, in response to the competitive
pricing environment at that airport.
Approximately 64.8% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in 2004, as compared
to 67.1% in 2003. The Hawaiian market generated approximately 14.9% of total
scheduled service capacity in 2004, as compared to 12.9% in 2003. Another 14.7%
of total scheduled service capacity was generated in the Indianapolis market in
2004, as compared to 13.3% in 2003.
4
Included in ATA'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. Under bulk-seat sales arrangements, ATA is obligated to provide
transportation to the tour operators' customers even in the event of non-payment
to ATA by tour operators. To reduce its credit exposure under these
arrangements, ATA requires a letter of credit or prepayment of a portion of the
contract price.
Military/Government Charter Service
ATA 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 the military contract provides full reimbursement for
actual fuel expenses, they have a stabilizing impact on ATA'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.
ATA primarily uses its fleet of four Lockheed L-1011-500 aircraft and one
Lockheed L-1011-100 aircraft to support this military business. These aircraft
have a range and seating configuration preferred by the military. ATA also uses
several Boeing 757 aircraft in its military charter services. In the event that
ATA retires the L1011-500 fleet, it will need to obtain suitable replacement
aircraft to fully satisfy the requirements of the military. 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.
ATA 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
ATA provides commercial passenger charter airline services, primarily through
U.S. tour operators. Under these contracts for seat sales, fuel cost increases
over the agreed upon target price in the contract are passed on the to the tour
operator. Other scheduled carriers compete with ATA'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.
Commercial charter revenue has declined significantly since 2000, primarily due
to the retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that
ATA had traditionally used in commercial charter flying. ATA's 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 profitably operate commercial charter
flights.
The Chapter 11 Filing
Chapter 11 Reorganization. On the Petition Date, each of the Debtors filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in
the Bankruptcy Court.
The Debtors continue to operate their respective businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of the Bankruptcy Procedure and applicable court orders. As a
debtor-in-possession, each of the Debtors is authorized under the provisions of
Chapter 11 to continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without prior approval from
the Bankruptcy Court. On October 29, 2004, the Bankruptcy Court granted the
Debtors certain first day motions for various reliefs designed to stabilize
operations and maintain relationships with customers, vendors, employees and
5
others. The first day motions granted authority to the Debtors, among other
things, to (a) pay pre-petition and post-petition employee wages, salaries and
benefits and other employee obligations; (b) honor customer programs, including
the frequent flyer program and ticketing program; and (c) honor pre-petition
obligations related to interline, clearinghouse, and other similar agreements.
On October 29, 2004 the Bankruptcy Court entered an interim order which permits
ATA to use the unrestricted cash, eligible accounts receivable and other
collateral pledged to secure ATA's secured term loan (the "ATSB Loan"), a
significant portion of which is guaranteed by the Air Transportation
Stabilization Board (the "ATSB"). The interim order has the effect of giving the
ATSB Loan lenders a replacement lien on unrestricted cash and all other assets
of the Debtors to secure diminution of pre-petition cash collateral. This
interim order has been extended for successive short periods, currently through
April 7, 2005, and requires compliance by the Debtors with certain terms, such
as the maintenance of minimum cash collateral balances and periodic reporting
requirements. Further extensions cannot be assured, and a failure to maintain
the right to use cash collateral would be material and adverse to the ability of
the Debtors to reorganize under Chapter 11 of the U. S. Bankruptcy Code.
As required by the Bankruptcy Code, the United States Trustee has appointed an
official committee of unsecured creditors (the "Official Committee"). The
Official Committee and its legal representatives have a right to be heard on all
matters that come before the Bankruptcy Court in each of the Debtor's cases.
There can be no assurance that the Official Committee will support the Debtors'
positions in the reorganization cases or any plan of reorganization, once
proposed, and disagreements between the Debtors and the Official Committee could
protract the reorganization cases, could negatively impact the Debtors' ability
to operate during the Chapter 11 cases, and could delay or prevent the Debtors'
emergence from Chapter 11.
The Filing triggered defaults on substantially all debt and lease obligations of
the Debtors. Subject to certain exceptions under the Bankruptcy Code, the Filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date. For example, creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on or otherwise exercise rights or remedies with respect
to a pre-petition claim, are enjoined unless and until the Bankruptcy Court
lifts the automatic stay or the Bankruptcy Code otherwise provides.
Notwithstanding the above general discussion of the automatic stay, the Debtors'
right to retain and operate certain aircraft, aircraft engines and other
equipment defined in section 1110 of the Bankruptcy Code that are leased or
subject to a security interest or conditional sale contract are specifically
governed by section 1110 of the Bankruptcy Code. That section provides, in
relevant part, that unless the Debtors, prior to 60 days after the Petition
Date, agree to perform all obligations under the lease, security agreement, or
conditional sale contract and cure all defaults thereunder (other than defaults
constituting a breach of provisions relating to the filing of the Chapter 11
cases, the Debtors' insolvency or other financial condition of the Debtors)
within the time specified in section 1110, the right of the lessor, secured
party or conditional vendor to take possession of such equipment in compliance
with the provisions of the lease, security agreement, or conditional sale
contract and to enforce any of its other rights or remedies under such lease,
security agreement, or conditional sale contract is not limited or otherwise
affected by the automatic stay, by any other provision of the Bankruptcy Code,
or by any power of the Bankruptcy Court.
The section 1110 deadline for the Debtors was December 26, 2004. As of December
31, 2004, the Company operated 82 aircraft, including 76 aircraft that were
financed with operating leases. As of March 25, 2005, with regards to the 76
leased aircraft, the Company has returned 22 of these aircraft and related
6
engines to the lessor. The Company expects to return 28 additional aircraft and
related engines to the lessor between March 31, 2005 and January 25, 2006. The
Company has renegotiated long-term rates on 10 aircraft and related engines.
Finally, the Company has elected to cure existing defaults and is paying the
contract rates required under the Bankruptcy Code with respect to 16 aircraft
and related engines. The Company expects these changes in fleet to result in
additional changes to amounts reported in the December 31, 2004 balance sheet
associated with the aircraft, including prepaid aircraft rent, and to result in
additional significant aircraft rejection charges in 2005.
Under section 365 of the Bankruptcy Code, the Debtors may assume, assume and
assign, or reject certain executory contracts and unexpired leases, including,
without limitation, leases of real property, aircraft and aircraft engines,
subject to the approval of the Bankruptcy Court and certain other conditions.
Generally, the rejection of an executory lease or unexpired lease is treated as
a pre-petition breach of the lease or contract in question and, subject to
certain exceptions, relieves the Debtors of performing future obligations under
such lease or contract but entitles the lessor or contract counterparty to
pre-petition general unsecured claims for damages caused by such deemed breach.
The lessor or contract counterparty may file a claim against the relevant
Debtor's estate for such damages. The assumption of an executory contract or
unexpired lease generally requires a cure of most existing defaults under such
executory contract or unexpired lease. The Company expects that liabilities
subject to compromise will arise in the future as a result of damage claims
resulting from the rejection of certain executory contracts and unexpired leases
by the Debtors. However, the Company expects that the assumption of certain
executory contracts and unexpired leases may convert liabilities subject to
compromise to liabilities not subject to compromise.
The Debtors have undertaken to notify all known or potential creditors of the
Chapter 11 cases for purposes of identifying and quantifying all pre-petition
claims. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11
filings automatically stayed the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to October 26, 2004. The deadline
for filing by creditors of proofs of claim with the Bankruptcy Court was January
24, 2005, with a limited exception for governmental entities, which have until
April 24, 2005. A proof of claim arising from the rejection of an executory
contract or lease must be filed no later than thirty days from the effective
date of the authorized rejection.
The Bankruptcy Court extended the period during which the Debtors' have an
exclusive right to file a plan of reorganization until May 24, 2005. There is no
assurance that these exclusivity periods will be further extended by the
Bankruptcy Court. If a Debtor's exclusivity period lapses, any party in interest
may file a plan of reorganization for that Debtor. In addition to being voted on
by holders of impaired claims and equity interests, a plan of reorganization
must satisfy certain requirements of the Bankruptcy Code and must be approved,
or confirmed, by the Bankruptcy Court in order to become effective. A plan has
been accepted by holders of claims against and equity interests in a Debtor if
(1) at least one-half in number and two-thirds in dollar amount of claims
actually voting in each impaired class of claims have voted to accept the plan
and (2) at least two-thirds in amount of equity interests actually voting in
each impaired class of equity interests have voted to accept the plan. Under
certain circumstances set forth in the provisions of section 1129(b) of the
Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has
not been accepted by all impaired classes of claims and equity interests. A
class of claims or equity interests that does not receive or retain any property
under the plan on account of such claims or interests is deemed to have voted to
reject the plan. The precise requirements and evidentiary showing for confirming
a plan, notwithstanding its rejection by one or more impaired classes of claims
or equity interests, depends upon a number of factors, including the status and
seniority of the claims or equity interests in the rejecting class, i.e.,
secured claims or unsecured claims, subordinated or senior claims, preferred or
common stock.
Although the Debtors expect to develop reorganization plans for emergence from
Chapter 11 in 2005, there can be no assurance that a reorganization plan will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan will be consummated. The Debtors have incurred and will continue to incur
7
significant costs associated with their respective reorganizations. The amount
of these costs, which are being expensed as incurred, are expected to
significantly affect their financial results.
The ultimate recovery, if any, to holders of common stock of the Company will
not be determined until confirmation of a plan of reorganization for the
Company. The plan of reorganization could result in holders of common stock
receiving no distribution on account of their interest in the Company and
cancellation of the outstanding shares. The Southwest commitments for
post-reorganization financing, equity investment in the Company and codesharing
require that all outstanding equity of the Company be cancelled without any
distributions to the holders of such equity.
DIP Financing Arrangements. On November 17, 2004, ATA obtained $15.5 million in
debtor-in-possession financing from the Indiana Transportation Finance Authority
("ITFA"). ATA sold to the ITFA property consisting primarily of aircraft parts,
free and clear of any liens. The ITFA leased the property to the Indianapolis
Airport Authority, which in turn subleased the property to ATA. ATA terminated
this financing, repurchased the assets, and paid interest to the ITFA on
December 30, 2004.
On December 23, 2004, ATA and Southwest entered into a Secured
Debtor-in-Possession Credit and Security Agreement (the "DIP Facility") that
provides up to $40.0 million in cash to the Company, plus a letter of credit in
the approximate amount of $7.0 million to secure two pre-petition loans obtained
by ATA from the City of Chicago for the construction of a jet bridge extension
(the "Chicago LOC"). The Company received $40.0 million under the DIP Facility
on December 23, 2004. A closing fee of 2.5%, or $1.0 million, was treated as a
principal advance under the DIP Facility.
The base interest rate, paid monthly, on amounts borrowed under the DIP Facility
is the greater of (a) 8.0% per annum, or (b) the three-month LIBOR rate, plus
5.0% per annum. Southwest will also receive an unused commitment fee of 1.0% per
annum, paid monthly, for any amounts not drawn pursuant to the DIP Facility and
a guaranty fee of 3.0% per annum, paid monthly, for any amounts guaranteed but
not drawn under the Chicago LOC. During the term of the agreement, the Company
is subject to certain financial covenants. ATA has obtained amendments to these
financial covenants for the months of January and February 2005. There is no
assurance ATA will be able to comply with these financial covenants in March,
2005, or thereafter, or that Southwest will agree to further amendments to these
covenants or to waive ATA's non-compliance. The DIP facility is guaranteed by
the Company and its other subsidiaries. The DIP Facility will terminate on the
earlier of (1) the effective date of a plan of reorganization or (2) September
30, 2005, unless otherwise extended.
Asset Sale. On December 23, 2004, the Company and Southwest executed and closed
a substantial portion of the transactions contemplated by an Asset Acquisition
Agreement (the "Asset Acquisition Agreement") by which ATA agreed to assign to
Southwest ATA's leasehold interest in six specified gates and a hangar facility
at Chicago-Midway airport and related assets for $40.0 million, subject to
certain adjustments. The Asset Acquisition Agreement was entered into after the
completion of an auction process supervised by the Bankruptcy Court. ATA
received $34.0 million of proceeds from the assignment of its leasehold interest
in six specified gates and related assets on December 23, 2004. Almost all of
the funds were recorded as deferred gain on the Company's balance sheet and will
be amortized over ATA's remaining lease term of eight years at Chicago-Midway.
As of December 31, 2004, the assignment of the leasehold interest in the hangar
facility and related assets had not been executed and closed, and the $6.0
million had not been received. It is expected to be received in the first half
of 2005 concurrently with a delayed closing of the hanger lease assignment to
Southwest.
The completion of the closing under the Asset Acquisition Agreement with
Southwest triggered a requirement for ATA to pay AirTran Airways, Inc. a
termination fee of $3.25 million related to an earlier agreement with respect to
assets at Chicago Midway Airport.
8
For further information on the Filing and Southwest transactions, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity Outlook."
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 ATA's fixed bases is coordinated through its global communications
network. ATA has the ability to dispatch maintenance and operational personnel
and equipment as necessary to support flight operations around the world.
ATA's Maintenance and Engineering Center is located at the Indianapolis
International Airport. This facility is an FAA-certificated repair station and
has the capability to perform routine and non-routine maintenance on ATA's
aircraft. ATA 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. On December 23, 2004, the ATA agreed to assign its
leasehold rights to this hangar facility and related assets to Southwest. The
transaction is expected to close in the first half of 2005, at which time it is
anticipated that ATA will sublease a bay of the hangar, or another hanger
controlled by Southwest, from Southwest. ATA has entered into hourly engine
maintenance agreements on these fleets, and the counterparties to these
agreements perform the major overhauls and maintenance on these engines. ATA has
approximately 750 employees supporting its aircraft maintenance operations and
currently maintains 14 permanent maintenance facilities, including its
Indianapolis and Chicago facilities.
Fuel Price Risk Management
Prices and availability of aviation fuel are subject to political, economic and
market factors that are generally outside of the Company's control. Prices may
be effected by many factors including: the impact of political instability and
crude oil production; unexpected changes in the availability of petroleum
products due to disruptions at distribution systems or refineries; unpredicted
increases in demand due to weather or the pace of economic growth; inventory
levels of crude oil and other petroleum products; and the relative fluctuation
between the U.S. dollar and other major currencies.
Although many air carriers enter into fixed price swaps, collar structures and
other derivative contracts to reduce the exposure to changes in fuel prices, the
Company's financial position has prevented ATA from hedging fuel prices in the
past two years.
ATA had fuel reimbursement clauses and guarantees that applied to approximately
27.4%, 29.0%, and 29.4%, respectively, of consolidated revenues in 2004, 2003
and 2002.
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.
The U.S. Government has issued supplemental war-risk coverage to U.S. air
carriers, including ATA, as a result of the reduction in coverage offered by the
commercial market after the September 11 terrorist attacks, which will continue
through August 31, 2005. It is anticipated that after August 31, 2005, a
commercial product for war-risk coverage will become available, but ATA expects
that it may incur significant additional costs for this coverage.
9
Employees
As of December 31, 2004, the Company had approximately 6,900 full-time and
part-time employees, approximately 2,700 of whom were represented under
collective bargaining agreements. On January 26, 2005, ATA announced plans to
significantly reduce service out of Indianapolis. By April 11, 2005, ATA expects
to have reduced the number of non-stop destinations out of Indianapolis from 19
to four. On February 7, 2005, the Company announced plans to sell or discontinue
the Chicago Express Airlines ("Chicago Express") business unit, which employed
approximately 600 people as of the date of the announcement. In the absence of a
successful sale or a decision by the Company to extend operations beyond that
date, Chicago Express's operations will cease on March 28, 2005. These actions
will significantly reduce the number of people the Company employs.
ATA's flight attendants are represented by the Association of Flight Attendants
("AFA"). The current AFA collective bargaining agreement became subject to
amendment in October 2004. ATA concluded an amendment to the AFA agreement on
October 15, 2004. Under the amended AFA agreement, cabin crewmembers will reduce
their base hourly pay rate effective October 15, 2004 by 10% through October 15,
2006, resulting in savings of approximately $11.6 million over the same time
period. On October 15, 2006, ATA has agreed to return to non-amendable rates of
pay for flight attendants who were employed on April 11, 2004.
ATA's cockpit crews are represented by the Air Line Pilots Association ("ALPA").
The current ALPA collective bargaining agreement will become subject to
amendment in June 2006. During the third quarter of 2004, ATA reached an
agreement to amend its contract with its cockpit crewmembers. Under the
amendment, crewmembers agreed to forego contractual rate increases that
otherwise would have become effective July 1, 2004 and July 1, 2005, resulting
in savings of approximately $26.0 million. The amendments include new
contractual increases effective July 1, 2006 and July 1, 2007. Also, in February
2005, ATA signed a letter of agreement for the time period from January 31, 2005
through May 31, 2005. Under the period of the letter of agreement, the cockpit
crewmembers agreed to an approximate 20% pay reduction, certain work rule
changes and a 50% reduction in contributions to the Crewmember Money Purchase
Plan. ATA expects the letter of agreement to reduce costs approximately by $12.0
million over the duration of the agreement.
ATA's flight dispatchers are represented by the Transport Workers Union ("TWU").
The current TWU collective bargaining agreement became subject to amendment in
August 2004. ATA's ramp service agents elected to be represented by the
International Association of Machinists ("IAM") in February 2001. On September
10, 2004, the ramp workers ratified a first collective bargaining agreement with
ATA. In February 2002, ATA's aircraft mechanics elected to be represented by the
Aircraft Mechanics Fraternal Association ("AMFA"). ATA began negotiations with
the AMFA in October 2002, but no collective bargaining agreement has been
finalized.
While ATA believes that relations with its employees remain good, any prolonged
dispute with employees or work stoppages, whether or not represented by a union,
could have a material adverse impact on the Company's financial condition,
results of operations or cash flows.
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
10
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.
The Aviation and Transportation Security Act ("Aviation Security Act") was
signed into law in 2001, 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. The Aviation Security Act is also funded by
a separate security infrastructure fee assessed to each air carrier. The amount
of the air carrier assessment is payable monthly and is equal to the amount each
air carrier spent on aviation security in 2000.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company's subsidiary, ATA Cargo, Inc. ("ATA Cargo").
Employee 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 employee 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 ATA'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, ATA,
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 authorities granted by the DOT and its
air carrier-operating certificates 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's financial condition,
results of operations or cash flows.
Competition
The scheduled airline industry is highly competitive. Airlines compete to
varying degrees with other air carriers and with other forms of transportation.
11
ATA competes with major airlines and low-cost competitors. Northwest Airlines
has steadily increased operations at Indianapolis International Airport over the
past year. In the past two years, the Company's profitability has been
significantly eroded by competitive pricing and route pressures, unfavorable
economic trends, and rising fuel and salary costs. These factors, combined with
the front-loaded aircraft leases entered into by ATA prior to the terrorist
attacks of September 11, 2001, left the Company with limited cash resources to
weather the adverse conditions that have affected the industry in the recent
past.
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.
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 ATA's and Chicago Express's 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 financial
condition, results of operations or cash flows.
Available Information
A copy of this annual report on Form 10-K, as well as other annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports are accessible free of charge on the Company's
website (www.ata.com) in the "Investor Relations" section as soon as reasonably
practicable after such report has been filed with or furnished to the Securities
and Exchange Commission.
12
Item 2. Properties
Aircraft Fleet
At December 31, 2004, 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 2004.
Owned(Encumbered- Operating-Lease Operating-Lease
Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-100 - - 1 1
Lockheed L-1011-500 4 - - 4
Boeing 737-800 - 18 15 33
Boeing 757-200 - 14 1 15
Boeing 757-300 - 12 - 12
SAAB 340B 2 15 - 17
--------------------------------------------------------------
TOTAL 6 59 17 82
==============================================================
The Debtors' right to retain and operate certain aircraft, aircraft engines and
other equipment defined in section 1110 of the Bankruptcy Code that are leased
or subject to a security interest or conditional sale contract are specifically
governed by section 1110 of the Bankruptcy Code. That section provides, in
relevant part, that unless the Debtors, prior to 60 days after the Petition
Date, agree to perform all obligations under the lease, security agreement, or
conditional sale contract and cure all defaults thereunder (other than defaults
constituting a breach of provisions relating to the filing of the Chapter 11
cases, the Debtors' insolvency or other financial condition of the Debtors)
within the time specified in section 1110, the right of the lessor, secured
party or conditional vendor to take possession of such equipment in compliance
with the provisions of the lease, security agreement, or conditional sale
contract and to enforce any of its other rights or remedies under such lease,
security agreement, or conditional sale contract is not limited or otherwise
affected by the automatic stay, by any other provision of the Bankruptcy Code,
or by any power of the Bankruptcy Court.
The section 1110 deadline for the Debtors was December 26, 2004. As of December
31, 2004, the Company operated 82 aircraft, including 76 aircraft that were
financed with operating leases. As of March 25, 2005, with regards to the 76
leased aircraft, the Company has returned 22 of these aircraft and related
engines to the lessor. The Company expects to return 28 additional aircraft and
related engines to the lessor between March 31, 2005 and January 25, 2006. The
Company has renegotiated long-term rates on 10 aircraft and related engines.
Finally, the Company has elected to cure existing defaults and is paying the
contract rates required under the Bankruptcy Code with respect to 16 aircraft
and related engines. The Company expects these changes in fleet to result in
additional changes to amounts reported in the December 31, 2004 balance sheet
associated with the aircraft, including prepaid aircraft rent, and to result in
additional significant aircraft rejection charges in 2005.
ATA is in the process of "regauging" its fleet to meet with its evolving revised
business plan. Prior to the Filing, ATA's fleet consisted of 65 jet aircraft of
five types. ATA expects to reduce the overall size of the fleet by at least
one-third by rejecting non-economic leases and obtaining new leases of more
appropriately sized aircraft on more favorable economic terms.
13
Ground Properties
ATA leases three adjacent office buildings in Indianapolis consisting of
approximately 136,000 square feet, under leases that expire in 2010. 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.
ATA's Maintenance and Operations Center is located at the Indianapolis
International Airport. This 150,000-square-foot facility was designed to meet
the base maintenance needs of ATA's operations, as well as to provide support
services for other maintenance locations. In addition, ATA utilizes a
120,000-square-foot office building, immediately adjacent to ATA's Indianapolis
Maintenance and Engineering Center, which is occupied by its Maintenance and
Engineering office staff along with a flight operations center.
ATA leases Hangar No. 2 at Chicago-Midway Airport. On December 23, 2004, ATA
agreed to assign its leasehold rights in Hangar No. 2 to Southwest. The
transaction is expected to close in the first half of 2005, at which time it is
anticipated that ATA will sublease a bay of the hangar, or another hanger
controlled by Southwest, from Southwest. This property is used to perform line
maintenance on ATA's narrow-body fleets. ATA also leases an 18,700-square-foot
reservation facility located near Chicago's O'Hare Airport.
ATA routinely leases various properties at airports for use by passenger
service, flight operations and maintenance staffs.
Item 3. Legal Proceedings
On the Petition Date, the Company and seven of its subsidiaries filed voluntary
petitions for reorganization under Charter 11 of the Bankruptcy Code in
Bankruptcy Court. As debtors-in-possession, the Debtors are authorized under
Chapter 11 to continue to operate as an ongoing business, but may not engage in
transaction outside the ordinary course of business without the prior approval
of the Bankruptcy Court. As of the Petition Date, virtually all pending
litigation is stayed, and absent further order of the Bankruptcy Court, no
party, subject to certain exceptions, may take any action, again subject to
certain exceptions, to recover on pre-petition claims against the Debtors. In
addition, the Debtors may reject pre-petition executory contracts and unexpired
lease obligations and parties affected by these rejections may file claims with
the Bankruptcy Court. At this time, it is not possible to predict the outcome of
the Chapter 11 process or its effect on the Company's business.
David M. Wing, the Company's former Executive Vice President and Chief Financial
Officer, filed a complaint against ATA with the United States Department of
Labor (the "DOL"). The complaint resulted from a disagreement concerning the
circumstances under which Mr. Wing left his employment with the Company on or
about June 24, 2004. In order to settle the dispute, ATA entered into a
Settlement Agreement on October 18, 2004 with Mr. Wing, pursuant to which Mr.
Wing executed an employment contract with the Company and Mr. Wing resumed his
former duties at his previous level of compensation. The employment contract
required the Company to pay Mr. Wing a sign up bonus of $157,500. Mr. Wing
subsequently resigned on December 21, 2004. On November 15, 2004, the DOL
dismissed the complaint.
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.
14
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, 2004.
15
PART II
Item 5. Market for the Registrant's Common Stock, Related Stock Matters and
Issuer Purchase of Securities
Until November 5, 2004, the Company's common stock was quoted on the NASDAQ
National Market ("NASDAQ") under the symbol "ATAH." Following the Filing, on
November 8, 2004, the Company's common stock began trading on the over the
counter market under the symbol "ATAHQ.PK." As of December 31, 2004, there were
approximately 305 shareholders of record. The Company cannot assure that an
active trading market for the common stock will exist in the future.
Market Prices of Common Stock
Year Ended December 31, 2004
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
High 13.31 8.89 6.00 3.33
Low 7.66 5.13 1.89 0.16
Close 8.35 5.25 2.44 1.40
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
No dividends have been paid on the Company's common stock since becoming
publicly held.
The value of the Company's common stock is highly speculative. Any plan of
reorganization for the Company could result in holders of common stock receiving
no distribution on account of their interests as shareholders and cancellation
of the outstanding common stock. The arrangements with Southwest for
post-reorganization financing, equity injection and codesharing require that all
outstanding pre-petition equity of the Company be cancelled without any
distributions under the plan to the holders of that equity. The Company
presently intends to seek confirmation of a plan of reorganization which
satisfies the requirements of Southwest respecting the cancellation of the
existing equity of the Company. Accordingly, the Company urges that caution be
exercised with respect to any existing or future investments in the Company
common stock.
The Company does not expect to hold an annual meeting of shareholders prior to
the confirmation of a plan of reorganization.
The Company has 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 and 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
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. Any plan of reorganization for
the Company could result in the holders of the Series B Preferred and the Series
A Preferred receiving no distribution on account of their interests as holders
of this preferred stock, and cancellation of the Series B Preferred and Series A
16
Preferred which is outstanding. The arrangements with Southwest for
post-reorganization financing, equity injection and codesharing require that all
outstanding Series B Preferred and Series A Preferred be cancelled without any
distributions under the plan to the holders of such preferred stock. Subject to
certain exceptions under the Bankruptcy Code, the Filing provides an automatic
stay against the continuation of any judicial or administrative proceedings or
other actions against the Debtors or their property to recover on, collect or
secure a claim arising prior to the Petition Date until the Bankruptcy Court
lifts the stay.
See Item 12 for Equity Compensation Plan information.
Item 6. Selected Consolidated Financial Data
The 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.
Five-Year Summary
Year Ended December 31,
(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 1,532,571 $ 1,518,533 $ 1,277,370 $ 1,275,484 $ 1,291,553
Operating expenses (1) 1,632,734 1,440,992 1,437,407 1,367,354 1,288,983
Operating income (loss) (1) (100,163) 77,541 (160,037) (91,870) 2,570
Reorganization expenses (2) (638,479) - - - -
Income (loss) before taxes (815,729) 21,745 (194,214) (116,067) (19,931)
Net income (loss) available to common shareholders (3) (816,854) 15,792 (174,984) (81,885) (15,699)
Net income (loss) per share - basic (69.09) 1.34 (14.94) (7.14) (1.31)
Net income (loss) per share - diluted (69.09) 1.27 (14.94) (7.14) (1.31)
Balance Sheet Data (at end of period):
Property and equipment, net $ 182,759 $ 253,482 $ 265,627 $ 314,943 $ 522,119
Total assets 651,065 869,987 848,136 1,002,962 1,032,430
Total debt 41,000 494,696 509,428 497,592 457,949
Liabilities Subject to Compromise (5) 1,249,676 - - - -
Mandatorily Redeemable preferred stock (4) - 56,330 52,110 50,000 50,000
Convertible redeemable preferred stock, subject to compromise 30,000 32,907 30,375 30,000 30,000
Shareholders' equity (deficit) (920,556) (104,007) (120,009) 44,132 124,654
Selected Consolidated Operating Statistics (Unaudited):
Revenue passengers carried (thousands) 11,653.4 11,226.9 10,046.7 8,635.2 8,006.1
Revenue passenger miles (millions) 14,678.5 14,358.7 12,384.2 11,675.7 11,816.8
Available seat miles (millions) 21,242.0 21,125.9 17,600.0 16,187.7 16,390.1
Passenger load factor 69.1% 68.0% 70.4% 72.1% 72.1%
(1) Operating results for the years ended December 31, 2004, 2003 and 2002
include the following items:
17
2004 2003 2002
-----------------------------------------
Aircraft impairments and retirements $ (7,887) $ (5,288) $ (66,787)
U.S. Government grants - 37,156 (16,221)
Goodwill impairments - - (6,893)
-----------------------------------------
Total - income (loss) $ (7,887) $ 31,868 $ (89,901)
==========================================
(2) The accompanying consolidated financial statements, for the period ended
December 31, 2004, of the Company have been prepared in accordance with
American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code ("SOP 90-7) and on a going-concern basis, which
contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business.
Reorganization expenses identify those costs that are not in the ordinary
course of business and include aircraft lease rejection charges,
impairments and professional fees related to the Filing. See "Notes to
Consolidated Financial Statements - Note 1 - The Company and the Chapter 11
Filing" for more information.
(3) Preferred stock dividends of $1.1 million, $4.6 million, and $5.7 million
were recorded in 2004, 2003 and 2002, respectively. No common stock
dividends were paid in any period presented.
(4) Mandatorily redeemable preferred stock of $50.0 million was outstanding as
of December 31, 2004 and was classified on the balance sheet as a liability
subject to compromise.
(5) Liabilities subject to Compromise refers to liabilities that will be
accounted for under a plan of reorganization, including claims incurred
prior to the Petition Date. These amounts result from known or potential
claims to be resolved through the Chapter 11 process and such claims remain
subject to future adjustments. See "Notes to Consolidated Financial
Statements - Note 5 - Liabilities Subject to Compromise" for more
information.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
On October 26, 2004, the Company, and seven of its subsidiaries including ATA
and Chicago Express, filed voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District
of Indiana. In connection with the Filing, the Debtors are developing plans of
reorganization to address their respective debts and other obligations, lower
operating costs and restructure operations. See "Notes to Consolidated Financial
Statements - Note 1 - The Company and the Chapter 11 Filing."
The Company, through its principal subsidiary ATA, provides scheduled airline
services to leisure, business, and other value-oriented travelers, and is a
leading provider of charter services to the U.S. military. The Company, through
its principal subsidiary, ATA, has been operating for 33 years and is a major
U.S. airline.
For the year ended December 31, 2004, the Company recorded an operating loss of
$100.2 million, as compared to an operating income of $77.5 million in the same
period of 2003. For the year ended December 31, 2004, the Company had a net loss
available to common shareholders of $816.9 million, as compared to a net income
available to common shareholders of $15.8 million in 2003. The net income
recorded in 2003 includes $37.2 million received in U.S. Government funds, which
was recorded as a reduction in operating expenses. The net loss in 2004 includes
$638.5 million of expenses related to the Company's reorganization in Chapter 11
and a non-cash charge of $27.3 related to the Company's bond exchange in the
first quarter of 2004.
18
Consolidated revenue per available seat mile ("RASM") increased to 7.21 cents
for the year ended December 31, 2004, as compared to 7.19 cents in 2003.
However, the Company's scheduled service RASM decreased to 6.30 cents in 2004,
from 6.49 cents in 2003, due to increased industry capacity in the markets the
Company serves and competitive pricing by several airlines. Consolidated cost
per available seat mile ("CASM") increased to 7.68 cents for the year ended
December 31, 2004, as compared to 6.82 cents in 2003. The 2003 CASM reflects the
benefit from the receipt of $37.2 million, or 0.18 cents, in U.S. Government
funds received in the second quarter of 2003. The 2004 CASM was adversely
impacted by a 30.6% increase in the price of fuel, as compared to 2003. In
addition, the Company experienced higher maintenance costs in 2004 as a result
of contractual rate increases in the hourly engine maintenance agreements for
the Company's jets.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses the Company's consolidated financial statements. 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.
Revenue Recognition. Revenue derived from ticket sales is recognized at the time
service is provided. Passenger ticket sales are initially recorded as air
traffic liability. 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
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("FAS 144"), which superseded FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("FAS 121"). 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
19
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 Boeing 727-200 fleet since the end of 2000, and the fleet initially became
impaired under FAS 121 subsequent to the terrorist attacks of September 11,
2001. In accordance with FAS 121 and FAS 144, the Company continues to monitor
the current value of these previously impaired assets. The Company has used both
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 based on a common
fleet retirement date of December 2010. In the fourth quarter of 2004, due to
the Company's financial position, cash constraints and related limitations
imposed by the Chapter 11 initiated in the fourth quarter of 2004, the Company
determined the likelihood of expending the funds to perform heavy checks on the
airframes when they become due in 2005 through 2007 is remote. Therefore, the
Company changed its retirement assumptions in its impairment analysis performed
in the fourth quarter of 2004 and determined that this fleet was impaired. The
Company used discounted cash flow analysis to estimate the fair value of this
fleet.
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.
Goodwill Accounting. Effective January 1, 2002, the Company adopted FASB
Statement of Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and
Other Intangible Assets, 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
2003 and 2004. As of January 1, 2003, the Company's goodwill related to the ATA
Leisure Corp. ("ATALC") brands outsourced to Mark Travel Corporation ("MTC"),
Chicago Express and ATA Cargo. The Company determined that all of the goodwill
related to the MTC reporting unit was impaired in 2004, mainly due to changes in
its route structure and operations. The goodwill related to Chicago Express and
ATA Cargo remained unimpaired as of December 31, 2004 and 2003. See "Notes to
Consolidated Financial Statements - Note 19 - Subsequent Events" for further
information on Chicago Express.
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.
20
Aircraft Lease Rejection Charges. During the period each of the Debtors operates
under Chapter 11 Bankruptcy protection, such Debtor has the right to assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property, aircraft and aircraft
engines, subject to the approval of the Bankruptcy Court and certain other
conditions. Generally, the rejection of an executory lease or unexpired lease is
treated as a pre-petition breach of the lease or contract in question and,
subject to certain exceptions, relieves the rejecting Debtor of performing its
future obligations under such lease or contract but entitles the lessor or
contract counterparty to a pre-petition general unsecured claim for damages
caused by such deemed breach. The lessor or contract counterparty may file a
claim against the Debtor's estate for such damages. The aircraft leases and
aircraft engine leases rejection charges are non-cash charges which are
comprised of the Company's estimate of claims resulting from the rejection or
return of the aircraft and engines as part of the bankruptcy process. They also
include the write-off of assets and liabilities related to aircraft that the
Company has rejected, committed to return dates with the lessor or intended to
reject as part of the Company's business plan as of December 31, 2004. The
amount includes the Company's estimate of claims, which are based upon
provisions contained in the original leases among other things, resulting from
the rejection or return of the aircraft as part of the bankruptcy process. The
estimate that the Company recorded is subject to material adjustments as the
Debtors proceed through the bankruptcy process.
21
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,
----------------------------------------------
2004 2003 2002
---------- ---------- ----------
Consolidated operating revenues 7.21 7.19 7.26
Consolidated operating expenses:
Salaries, wages and benefits 1.99 1.89 2.02
Fuel and oil 1.73 1.31 1.17
Aircraft rentals 1.14 1.07 1.08
Handling, landing and navigation fees 0.56 0.54 0.63
Aircraft maintenance, materials and repairs 0.35 0.22 0.30
Crew and other employee travel 0.27 0.30 0.31
Depreciation and amortization 0.24 0.27 0.44
Other selling expenses 0.24 0.24 0.25
Passenger service 0.20 0.19 0.22
Advertising 0.16 0.18 0.23
Facilities and other rentals 0.13 0.11 0.13
Commissions 0.12 0.11 0.13
Insurance 0.12 0.14 0.19
Ground package cost 0.06 0.06 0.16
Aircraft impairments and retirements 0.04 0.03 0.38
Goodwill impairment - - 0.04
U.S. Government grants - (0.18) 0.09
Other 0.33 0.34 0.40
---------- ---------- ----------
Total consolidated operating expenses 7.68 6.82 8.17
---------- ---------- ----------
Consolidated operating income (loss) (0.47) 0.37 (0.91)
========== ========== ==========
ASMs (in thousands) 21,242,000 21,125,905 17,599,968
22
Year Ended December 31, 2004, Versus Year Ended December 31, 2003
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 737-800, Boeing 757-200 and Boeing 757-300 aircraft in all of the
Company's business units. Data shown for "SAAB" operations include the
operations of SAAB 340B propeller aircraft by Chicago Express as the ATA
Connection.
Twelve Months Ended December 31,
-----------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
-----------------------------------------------------------
Departures Jet 84,768 79,790 4,978 6.24
Departures SAAB 53,096 52,071 1,025 1.97
---------- ---------- ---------- -------
Total Departures 137,864 131,861 6,003 4.55
---------- ---------- ---------- -------
Block Hours Jet 257,959 246,951 11,008 4.46
Block Hours SAAB 51,310 51,256 54 0.11
---------- ---------- ---------- -------
Total Block Hours 309,269 298,207 11,062 3.71
---------- ---------- ---------- -------
RPMs Jet (000s) 14,489,926 14,166,987 322,939 2.28
RPMs SAAB (000s) 188,549 191,712 (3,163) (1.65)
---------- ---------- ---------- -------
Total RPMs (000s) (a) 14,678,475 14,358,699 319,776 2.23
---------- ---------- ---------- -------
ASMs Jet (000s) 20,939,030 20,815,681 123,349 0.59
ASMs SAAB (000s) 302,970 310,224 (7,254) (2.34)
---------- ---------- ---------- ------
Total ASMs (000s) (b) 21,242,000 21,125,905 116,095 0.55
---------- ---------- ---------- -------
Load Factor Jet 69.20 68.06 1.14 1.67
Load Factor SAAB 62.23 61.80 0.43 0.70
---------- ---------- ---------- ------
Total Load Factor (c) 69.10 67.97 1.13 1.66
---------- ---------- ---------- -------
Passengers Enplaned Jet 10,547,275 10,138,487 408,788 4.03
Passengers Enplaned SAAB 1,106,110 1,088,388 17,722 1.63
---------- ---------- ---------- ------
Total Passengers Enplaned (d) 11,653,385 11,226,875 426,510 3.80
---------- ---------- ---------- -------
Revenue $ (000s) 1,532,571 1,518,533 14,038 0.92
RASM in cents (e) 7.21 7.19 0.02 0.28
CASM in cents (f) 7.68 6.82 0.86 12.61
Yield in cents (g) 10.44 10.58 (0.14) (1.32)
Average Aircraft in Service
Lockheed L-1011 5.67 7.63 (1.96) (25.69)
Boeing 737-800 32.63 30.68 1.95 6.36
Boeing 757-200 15.21 15.17 0.04 0.26
Boeing 757-300 12.00 10.94 1.06 9.69
SAAB 340B 16.10 16.10 - -
Average Block Hours Flown per day
Lockheed L-1011 8.52 7.73 0.79 10.22
Boeing 737-800 10.85 10.60 0.25 2.36
Boeing 757-200 11.66 11.55 0.11 0.95
Boeing 757-300 10.60 10.98 (0.38) (3.46)
SAAB 340B 8.73 8.72 0.01 0.11
See footnotes (a) through (g) on page 24.
23
(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 2004 increased 0.9% to $1.533 billion, as compared
to $1.519 billion in 2003. This increase was due to a $14.5 million increase in
scheduled service revenue, a $30.0 million increase in military/government
charter revenues and a $6.6 million increase in other revenues, partially offset
by a $37.3 million decrease in commercial charter 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.
24
Twelve Months Ended December 31,
_____________________________________________________________
2004 2003 Inc (Dec) % Inc (Dec)
_____________________________________________________________
Scheduled Service
Departures 130,338 122,628 7,710 6.29
Block Hours 276,287 258,021 18,266 7.08
RPMs (000s) (a) 12,728,760 12,079,272 649,488 5.38
ASMs (000s) (b) 17,450,098 16,735,500 714,598 4.27
Load Factor (c) 72.94 72.18 0.76 1.05
Passengers Enplaned (d) 11,190,961 10,464,348 726,613 6.94
Revenue $ (000s) 1,099,944 1,085,420 14,524 1.34
RASM in cents (e) 6.30 6.49 (0.19) (2.93)
Yield in cents (g) 8.64 8.99 (0.35) (3.89)
Revenue per segment $ (h) 98.29 103.73 (5.44) (5.24)
Military/Government Charter
Departures 5,993 5,721 272 4.75
Block Hours 27,844 27,689 155 0.56
ASMs (000s) (b) 3,379,282 3,426,275 (46,993) (1.37)
Revenue $ (000s) 326,897 296,893 30,004 10.11
RASM in cents (e) 9.67 8.67 1.00 11.53
RASM excluding fuel escalation (j) 9.25 8.56 0.69 8.06
Commercial Charter
Departures 1,373 3,473 (2,100) (60.47)
Block Hours 4,676 12,368 (7,692) (62.19)
ASMs (000s) (b) 376,265 949,375 (573,110) (60.37)
Revenue $ (000s) 31,973 69,314 (37,341) (53.87)
RASM in cents (e) 8.50 7.30 1.20 16.44
RASM excluding fuel escalation (i) 8.36 6.97 1.39 19.94
Percentage of Consolidated Revenues:
Scheduled Service 71.8% 71.5% 0.3% 0.42
Military Charter 21.3% 19.6% 1.7% 8.67
Commercial Charter 2.1% 4.6% (2.5)% (54.35)
See footnotes (a) through (g) on page 24.
(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.
Scheduled Service Revenues. Scheduled service revenues in 2004 increased 1.4% to
$1.100 billion from $1.085 billion in 2003. For the year ended December 31,
2004, unit revenues decreased 2.9% and yields decreased 3.9% on 4.3% more
capacity, as compared to the year ended December 31, 2003. During 2004, ATA
25
experienced significant pressure from a competitive pricing environment,
including extraordinary discounting by several airlines in many of the scheduled
service markets ATA serves. The primary reason for the competitive pricing
environment has been the industry's added capacity, which especially impacted
ATA's transcontinental and other east-west markets in early 2004. As a result,
ATA cancelled some of its east-west routes beginning in March and April 2004
while continuing to review its other scheduled service markets. ATA announced
additional route changes in late 2004 and early 2005 in response to the
competitive pricing environment, which include a significant reduction in the
number of flights serving the Indianapolis market.
Military/Government Charter Revenues. Military/government charter revenue
increased 10.1% to $326.9 million in 2004 from $296.9 million in 2003. The
increase in revenue in 2004, as compared to 2003, was mainly due to an increase
in fuel escalation revenues earned from contractual fuel price guarantees and a
change in the mix of aircraft flying, as narrow body aircraft replaced the
retired wide body aircraft.
Commercial Charter Revenues. Commercial charter revenues decreased 53.8% to
$32.0 million in 2004 from $69.3 million in 2003. The majority of the decline in
commercial charter revenues continues to reflect the retirement of certain
Lockheed L-1011 aircraft that ATA has traditionally used in commercial charter
flying. Since aircraft utilization is typically much lower for commercial
charter, as compared to scheduled service flying, ATA'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.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. Currently, the Company markets these
ground packages through its subsidiary, Ambassadair Travel Club ("Ambassadair").
In 2004, ground package revenues increased 1.4% to $14.9 million, from $14.7
million in 2003.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with operations of the Company, such as cancellation and
miscellaneous service fees and cargo revenue. Other revenues increased 12.6% to
$58.8 million in 2004 from $52.2 million in 2003.
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 5.7% to $422.4 million in 2004
from $399.6 million in 2003.
The increase in salaries, wages and benefits in 2004, as compared to 2003, is
partially due to the Company incurring higher costs for employee medical and
workers' compensation benefits. In addition, the Company employed additional
crewmembers and other operational employees in 2004 to handle its increased
scheduled service capacity, as compared to 2003. Also, on July 1, 2003, ATA's
cockpit crewmembers received contractual rate increases.
During the third quarter of 2004, ATA reached an agreement to amend its contract
with its cockpit crewmembers represented by ALPA. Under the amendments,
crewmembers agreed to forego contractual rate increases that otherwise would
have become effective July 1, 2004 and July 1, 2005 resulting in savings of
approximately $26.0 million. The amendments include new contractual increases
effective July 1, 2006 and July 1, 2007. Also, in February 2005, ATA signed a
letter of agreement for the time period from January 31, 2005 through May 31,
2005. Under the agreement during this period, the cockpit crewmembers agreed to
an approximate 20% pay reduction, certain work rule changes and a 50% reduction
in contributions to the Cockpit Member Pension Plan. The Company expects the
agreement to reduce costs approximately $12.0 million over the duration of the
agreement.
26
ATA also concluded an amendment to its agreement with cabin crewmembers
represented by AFA on October 15, 2004. Under terms of the amended agreement,
cabin crewmembers will reduce their base hourly pay rate effective October 15,
2004 by 10% through October 15, 2006, resulting in savings of approximately
$11.5 million over the same time period. On October 15, 2006, non-amendable
rates of pay return to the rates in force on April 11, 2004.
Fuel and Oil. Fuel and oil expense increased 33.4% to $368.3 million in 2004, as
compared to $276.1 million in 2003. During 2004, the average cost per gallon of
jet fuel consumed increased by 30.6% compared to 2003, resulting in an increase
in fuel and oil expense of approximately $84.6 million between those periods.
The Company also benefits from fuel reimbursement clauses and guarantees in its
bulk scheduled service, commercial charter and military/government contracts,
but the benefit of these price guarantees is accounted for as revenue when
realized.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. Many of the Company's aircraft operating
leases were originally structured to require very significant cash payments in
the early years of the lease in order to obtain more overall favorable lease
rates. The Company accounts for aircraft rentals expense in equal monthly
amounts over the life of each operating lease because straight-line expense
recognition is most representative of the time pattern from which benefit is
derived from use of the aircraft. Although the Company restructured many of its
operating leases in January 2004, the amount of the cash payments in excess of
the aircraft rent expense in these early years generated a significant prepaid
aircraft rent amount on the Company's balance sheet. Aircraft rentals expense in
2004 increased 7.1% to $242.6 million from $226.6 million in 2003. These
increases were mainly attributable to the delivery of two leased Boeing 737-800s
and three leased Boeing 757-300s between mid-2003 and December 2004.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly through certain foreign airspace.
Handling, landing and navigation fees increased by 5.4% to $120.0 million in
2004, as compared to $113.8 million in 2003. This increase was due to a 4.6%
increase in system-wide jet departures, as compared to 2003, which resulted in
an increase in handling and landing fees of $9.3 million. The Company also
incurred an increase in security costs of $3.3 million in 2004, as compared to
2003, partially due to the temporary suspension of the aviation security fee
during part of 2003. The Company experienced a decrease in the cost of handling
per departure due to negotiation of favorable terms in new contracts, resulting
in decreased expenditures of $7.3 million in 2004, as compared to 2003.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200, Boeing 757-300 and SAAB 340B power
plants. These agreements provide for the Company to pay monthly fees based on a
specified rate per engine flight hour in exchange for major engine overhauls and
maintenance. Aircraft maintenance, materials and repairs expense increased 64.1%
to $75.0 million in 2004, as compared to $45.7 million in 2003, primarily due to
contractual rate increases in the jet aircraft hourly maintenance agreements.
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
decreased 10.3% to $57.5 million in 2004, as compared to $64.1 million in 2003.
27
The Company was able to realize a reduction in crew and other employee travel
expense in 2004, as compared to 2003, due to efficiencies gained from flying a
significant amount of military flights on similar routings. Also, the number of
incremental new aircraft in 2003 resulted in training costs for crew, cabin and
other personnel, which was not repeated in 2004 due to fewer deliveries of new
aircraft. In addition, the Company realized a reduction in per diem costs in
2004, as compared to 2003, as a result of contract amendments entered into in
2004 with the cockpit and cabin crewmembers.
Depreciation and Amortization. Depreciation and amortization expense decreased
8.3% to $52.0 million in 2004, as compared to $56.7 million in 2003, primarily
due to the retirement of five L-1011-50 and 100 aircraft from revenue service in
2003 and 2004 collectively. These retirements resulted in $5.7 million less in
depreciation in 2004, as compared to 2003.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems ("CRS"), credit card discount
expenses incurred when selling to customers using credit cards for payment and
toll-free telephone services provided to customers who contact the Company
directly to book reservations. Other selling expenses increased 2.4% to $51.4
million in 2004, as compared to $50.2 million in 2003, primarily due to
increased credit card and CRS fees associated with scheduled services
passengers.
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 2004 and 2003, catering represented 84.0% and 82.4%,
respectively, of total passenger service expense.
The total cost of passenger service increased 4.6% to $42.9 million in 2004, as
compared to $41.0 million in 2003, primarily due to an increase in scheduled
service passengers enplaned, and the increase in military/government flying
between years, as that flying requires a more expensive catering product.
Advertising. Advertising expense decreased 11.6% to $33.5 million in 2004, as
compared to $37.9 million in 2003. The Company incurs advertising costs
primarily to support single-seat scheduled service sales. The decrease in costs
between years is primarily due to the Company reducing its marketing efforts
after its Chapter 11 filing.
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 12.0% to $27.1 million in 2004, as compared to $24.2 million
in 2003. The Company experienced cost increases at certain locations due to
increased frequency to those destinations and normal contractual rate increases.
Commissions. The Company incurs commission expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense increased 17.0% to $26.2 million in 2004, as
compared to $22.4 million in 2003.
The Company experienced an increase of $5.5 million in military/government
commissions in 2004, as compared to 2003, due to both increased revenues in 2004
and the deactivation of the Civil Reserve Air Fleet ("CRAF") in June 2003, as
certain of the CRAF flights flown in 2003 were exempt from commissions.
Substantially all military flights in 2004 were commissionable. The Company
experienced a decrease in scheduled service commissions of $1.7 million in 2004,
as compared to 2003, due to the increasing share of non-commissionable ticket
purchases made on the Company's own website, as compared to the share of
commissionable sales made through travel agents.
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 18.5% to $24.6 million in 2004, as compared to
$30.2 million in 2003. The decrease is mainly attributable to the U.S.
Government providing increased war-risk coverage in 2004, which was provided at
28
higher rates by the commercial insurance markets in 2003. The U.S. Government
currently plans to provide this insurance through August 2005, at which time the
Company may experience a rate increase with a commercial provider.
Ground Package Cost. Ground package cost is incurred by the Company through
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair customers. Ground package cost
increased 3.3% to $12.5 million in 2004, as compared to $12.1 million in 2003
consistent with ground package revenue.
Aircraft Impairments and Retirements. The Company began performing impairment
reviews on its 727-200 fleet in 2000 and the fleet became impaired under FAS 121
in 2001, subsequent to the terrorist attacks of September 11. In accordance with
FAS 121, the Company continues to monitor current fair market values of
previously impaired assets. In 2004, the Company recorded an additional asset
impairment charge of $7.9 million against its remaining net book value of Boeing
727-200 aircraft (recorded as an investment in the BATA joint venture) and
related assets, as compared to $5.3 million recorded in 2003. The current
estimate of this fleet's fair market value is based on discounted cash flow
analysis. The carrying amount of approximately $685,000 related to assets of
this fleet is classified as long-term assets held for sale and appears in the
deposits and other assets line of the accompanying balance sheet. See
"Reorganization Expenses" for discussion of the L1011-500 impairments.
U.S Government Grants. In 2003, the U.S. Government enacted the Emergency
Wartime Supplemental Appropriations Act ("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 the September 11, 2001 terrorist attacks. Pursuant to this legislation, the
Company received $37.2 million in cash in May 2003, which was recorded as a
credit to operating expenses. The Company does not expect to receive any further
material compensatory funds from the U.S. Government, and did not receive such
reimbursements in 2004.
Other Operating Expenses. Other operating expenses decreased 4.6% to $69.0
million in 2004, as compared to $72.3 million in 2003, attributable to various
changes in other expenses comprising this line item, none of which were
individually significant.
Interest Income and Expense. Interest expense in 2004 decreased to $51.1
million, as compared to $56.3 million in 2003. In accordance with SOP 90-7,
following its Chapter 11 filing, the Company did not record interest expense
with respect to unsecured debt or secured debt in which the collateral value is
less than the principal amount of the debt.
Loss on Extinguishment of Debt. On January 30, 2004, the Company completed
exchange offers and issued Senior Notes due 2009 ("2009 Notes") and cash
consideration for certain of its $175 million 10 1/2% Senior Notes due August in
2004 ("2004 Notes") and issued Senior Notes due 2010 ("2010 Notes" and, together
with the 2009 Notes, "New Notes") and cash consideration for certain of its $125
million 9 5/8% Senior Notes due in December 2005 ("2005 Notes" and, together
with the 2004 Notes, "Existing Notes"). 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 of 2005 Notes. As a result of this transaction, the Company recorded a
non-operating loss on extinguishment of debt of $27.3 million in accordance with
FASB Emerging Issues Task Force Issue No. 96-19, Debtor's Accounting for
Modification of Exchange of Debt Terms ("EITF 96-19"). The loss mainly relates
to the accounting for the $13 million cash consideration paid at closing of the
exchange offers and the $13 million of incremental notes issued during he
exchange offers.
Reorganization Expenses. In accordance with SOP 90-7, the Company's revenues,
expenses (including professional fees), realized gains and losses, and provision
29
for losses that can be directly associated with the reorganization and
restructuring of the business are reported separately as reorganization items in
the consolidated statement of operations.
For the year ended December 31, 2004, the Company had recognized the following
reorganization expenses in the consolidated statement of operations (in
thousands):
Aircraft lease rejection charges $ 568,317
Aircraft impairment 44,499
Professional fees 8,747
Goodwill impairment 6,399
Other 10,517
--------------
$ 638,479
==============
The aircraft leases and aircraft engine leases rejection charges are non-cash
charges which are comprised of the Company's estimate of claims resulting from
the rejection or return of the aircraft and engines as part of the bankruptcy
process. They also include the write-off of assets and liabilities related to
aircraft leases and aircraft engine leases that the Company has rejected,
committed to return dates with the lessor or intended to reject as part of the
Company's business plan as of December 31, 2004. The estimate that the Company
recorded is subject to material adjustments as the Debtors proceed through the
bankruptcy process.
The aircraft impairment charge relates to the Company's L1011-500 fleet. In
2003, the Company began evaluating this fleet and related parts and inventory
for impairment under FAS 144 assuming a common fleet retirement date of December
2010 and the fleet remained unimpaired through 2003. In 2004, given the
Company's financial position, cash constraints and related limitations imposed
by the Chapter 11 filing initiated in the fourth quarter of 2004, the Company
determined the likelihood of expending the funds to perform heavy checks on the
airframes when they become due in late 2005 through mid 2007 is remote.
Therefore, the Company evaluated the fleet and related parts and inventory for
impairment assuming the aircraft would be retired at the date of their next
required airframe heavy check. This evaluation indicated that the aircraft were
impaired and the Company recorded a related impairment charge of $44.5 million
in the fourth quarter of 2004. The Company estimates this fleet's fair market
value using discounted cash flow analysis. In accordance with SOP 90-7, because
the 2004 impairment charge was directly related to the Company's reorganization
under Chapter 11, the charge was recorded as a reorganization expense on the
Company's statement of operations. 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, as the Company is still
flying these aircraft. The assets are being depreciated in accordance with the
planned fleet retirement schedule.
The goodwill impairment charge relates to the Company's MTC product. In the
fourth quarter of 2004, the Company determined that due to route structure and
operational changes related to the Company's reorganization under Chapter 11,
the fair market value of this reporting unit, based on discounted cash flow
analysis, had declined.
Income Tax Expense. No income tax benefit was recorded applicable to the $816.0
million pre tax loss in 2004 as a full valuation allowance was established by
the Company. In 2003, the Company recorded income tax expense of $1.3 million,
representing an estimate of the income taxes to be paid, applica