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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From to
Commission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
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(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 12,222,379 shares as of February 28, 1999.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran, Inc. and Subsidiaries' Proxy Statement dated April 2,
1999, are incorporated by reference into Part III.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 1998
AMTRAN INC. AND SUBSIDIARIES
Page #
PART I
Item 1. Business........................................................................................... 4
Item 2. Properties.........................................................................................11
Item 3. Legal Proceedings..................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders................................................11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.......................12
Item 6. Selected Consolidated Financial Data...............................................................12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........................................35
Item 8. Financial Statements and Supplementary Data........................................................37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............50
PART III
Item 10. Directors and Officers of the Registrant...........................................................51
Item 11. Executive Compensation.............................................................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................51
Item 13. Certain Relationships and Related Transactions.....................................................51
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................52
Item 14d. Valuation and Qualifying Accounts..................................................................55
PART I
Item 1. Business
Amtran, Inc. (the "Company") owns American Trans Air, Inc. ("ATA"), the eleventh
largest passenger airline in the United States (based on 1998 revenues) and a
leading provider of airline services in selected markets. The Company is also
the largest commercial charter airline in the United States and the largest
charter provider of passenger airline services to the U.S. military, in each
case based on 1998 revenues. For the year ended December 31, 1998, the revenues
of the Company consisted of 55.6% scheduled service, 24.2% commercial charter
service and 13.3% military charter service, with the balance derived from
related services.
Scheduled Service
The Company provides scheduled service through ATA to selected destinations
primarily from its gateways at Chicago-Midway and Indianapolis and also provides
transpacific services between the western United States and Hawaii. In the
second and third quarters of 1998, the Company added scheduled service between
Chicago-Midway and Dallas-Ft. Worth, Denver, New York-LaGuardia and San Juan.
The Company focuses on routes where it believes it can be a leading provider of
nonstop service and targets leisure and value-oriented business travelers.
The Company believes that it has significant competitive advantages in each of
its primary markets.
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 53.4% of the Company's total scheduled service
capacity in 1998. The Company is the number one carrier in terms of market
share in 12 out of its 13 nonstop jet routes from Chicago-Midway.
o Hawaii represented approximately 21.3% of the Company's total scheduled
service capacity in 1998. The Company believes it is the lowest-cost
provider of scheduled service between the western United States and Hawaii,
which is critical in this price-sensitive, predominantly leisure market.
Furthermore, a majority of the Company's capacity in the Hawaiian market is
contracted to the nation's largest independent Hawaiian tour operator,
which assumes capacity, yield and fuel risk.
o Indianapolis represented approximately 16.1% of the Company's total
scheduled service capacity in 1998. The Company began scheduled service
from Indianapolis in 1986 and believes that it benefits from being
perceived as the hometown airline. The Company is the number one provider
in terms of market share in 6 of its 7 nonstop jet routes from
Indianapolis.
Commercial Charter Service
The Company is the largest commercial charter airline in the United States and
provides services throughout the world, primarily to U.S., South American and
European tour operators. The Company seeks to maximize the profitability of
these operations by leveraging its leading market position, diverse aircraft
fleet and worldwide operating capability. The Company believes its commercial
charter services are a predictable source of revenues and operating profits in
part because its commercial charter contracts require tour operators to assume
capacity, yield and fuel price risk, and also because of the Company's ability
to re-deploy assets into favorable markets. The Company's commercial charter
services are marketed and distributed through a network of domestic and
international sales offices.
Military/Government Charter Service
The Company has provided passenger airline services to the U.S. military since
1983 and is currently the largest charter provider of these services. The
Company believes that because these operations are generally less seasonal than
leisure travel, they have tended to have a stabilizing impact on the Company's
operating margins. The U.S. government awards one-year contracts for its
military charter business and pre-negotiates contract prices for each type of
aircraft that a carrier makes available. The Company believes that its fleet of
aircraft is well suited to the needs of the military.
Strategy
The Company intends to enhance its position as a leading provider of passenger
airline services to selected markets where it can capitalize on its competitive
strengths. The key components of this strategy are:
Participate in Markets Where it Can Be a Leader
The Company focuses on markets where it can be a leading provider of airline
services. In scheduled service, the Company concentrates on routes where it can
be the number one or number two carrier. The Company achieves this result
principally through superior nonstop schedules, value-oriented service, focused
marketing efforts and certain airport and aircraft advantages. The Company is
the leading provider of commercial and military charter services in large part
because of its variety of aircraft types, superior operational performance and
its worldwide service capability.
Maintain Low-Cost Position
For 1996, 1997 and 1998, the Company's operating cost per available seat mile
("CASM") of 5.92(cent), 6.09(cent) and 6.09(cent), respectively, was the lowest
among large U.S. passenger airlines. The Company believes that its low-cost
structure provides a significant competitive advantage, allowing it to operate
profitably while pricing competitively in the scheduled service and commercial
and military charter markets. The Company believes its low-cost position is
primarily derived from its simplified product, route structure, low aircraft
ownership costs and low overhead costs.
Target Growth Opportunities
The Company intends to expand its operations selectively in areas where it
believes it can achieve attractive financial returns.
o Charter Expansion. The Company is acquiring five long-range Lockheed
L-1011-500 aircraft primarily for commercial and military charter service,
whose low-cost and high-seating capacity will enable the Company to compete
for business that it cannot now accommodate (e.g., nonstop service to
certain South American, European and Asian destinations).
o Scheduled Service Expansion at Chicago-Midway. The Company plans to
increase frequencies and add up to three additional destinations from its
Chicago-Midway gateway over the next 18 months and to support this
expansion by adding two incremental Boeing 757-200 aircraft to its fleet in
1999 and 2000.
o Selected Acquisitions. The Company continually evaluates possible
acquisitions of related businesses or interests therein to enhance its
competitive position in its market segments. Among other things, in early
1999, it completed the purchase of the 50% interest in its air cargo
operation that it did not previously own and acquired Travel Charter
International, a tour operator. It also has an agreement in principle to
acquire Chicago Express, a commuter airline which presently operates as the
ATA Connection, and Key Travel, another tour operator.
Industry Overview
Scheduled Airline Service
In the United States, the scheduled airline business is dominated by a small
number of large scheduled airlines, all of which have developed hub-and-spoke
route systems. As a result of this structure, many smaller cities or airports
are not served by direct or nonstop flights to leisure destinations and many
secondary leisure destinations do not receive direct or nonstop service from
more than a few major U.S. cities. Unlike most of the scheduled airlines, the
Company has focused on low-frequency, nonstop or direct service from its
principal gateways to leisure or business destinations where there is little or
no competing direct or nonstop service. The Company intends to continue to
pursue this strategy, and in 1998 added nonstop service from Chicago-Midway to
Denver, Dallas-Ft. Worth, New York-LaGuardia and San Juan.
Commercial and Military/Government Charter Airline Service
In the United States, the passenger charter airline business is served by major
scheduled airlines and a number of U.S. and non-U.S. charter airlines.
Historically, charter airlines have supplemented the service provided by
scheduled airlines by providing additional capacity at times of peak demand.
U.S. charter airlines have also provided service to the military both in times
of peak demand, such as during the Persian Gulf War, and on a longer-term basis
to supplement the U.S. military's own passenger fleet. Based on the most
recently available Department of Transportation ("DOT") statistics, total
charter flights by all U.S. airlines represented approximately 2.9% of all
available seat miles ("ASMs") flown within the United States during the twelve
months ended September 30, 1998.
The Company's Airline Operations
Services Offered
The following table provides a summary of the Company's major revenue sources
for the periods indicated:
Year Ended December 31,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(Dollars in millions)
Scheduled service $240.7 $362.0 $386.5 $371.8 $511.3
--------- --------- --------- --------- ----------
Commercial charter 204.0 229.5 226.4 228.1 222.6
Military charter 91.8 77.5 84.2 131.1 121.9
--------- --------- --------- --------- ----------
Total charter service 295.8 307.0 310.6 359.2 344.5
--------- --------- --------- --------- ----------
Other 44.0 46.0 53.8 52.2 63.6
========= ========= ========= ========= ==========
Total $580.5 $715.0 $750.9 $783.2 $919.4
========= ========= ========= ========= ==========
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be one of the top two largest carriers, focusing primarily
on low-cost, nonstop or direct flights. The Company currently provides scheduled
service primarily from its gateway cities of Chicago-Midway and Indianapolis to
popular vacation destinations such as Hawaii, Las Vegas, Florida, California,
Mexico and the Caribbean, as well as to New York's John F. Kennedy and LaGuardia
Airports, Denver and Dallas-Ft. Worth.
In October 1997, the Company expanded its Chicago Express commuter services by
adding the cities of Lansing and Madison to the flights it had already operated
out of Chicago-Midway to Indianapolis, Milwaukee, Des Moines, Dayton and Grand
Rapids since April 1997. Under the Chicago Express code share agreement, Chicago
Express provides aircraft, crews, insurance and maintenance, and the Company
provides all other services, including marketing, reservation services, fuel and
aircraft handling. The Company receives all passenger and cargo revenues and
pays Chicago Express a fixed fee per flight. The seats sold under the Chicago
Express code share agreement are listed on major computer reservations systems
("CRS") as ATA seats, even though the flights are operated by a separate
airline. Chicago Express uses 19-seat Jetstream 31 propeller aircraft. In
February 1999, the Company entered into an agreement in principle to acquire
Chicago Express. Closing of this transaction is subject to documentation,
approvals and other matters of substance.
Included in the Company's jet scheduled service are bulk sales agreements with
tour operators. Under these arrangements, which are very similar to charter
sales, the tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. The seats which the Company retains are sold through its own scheduled
service distribution network. Under bulk sales arrangements, the Company is
obligated to provide transportation to the tour operators' customers even in the
event of non-payment to the Company by tour operators. To minimize its credit
exposure under these arrangements, the Company requires bonding or a security
deposit for a significant portion of the contract price. Bulk seat sales
amounted to $67.3 million, $59.0 million and $68.6 million in 1996, 1997 and
1998, respectively, which represented 9.0%, 7.5% and 7.5%, respectively, of the
Company's consolidated revenues for such periods.
Commercial Charter
Commercial charter represented 30.2%, 29.1% and 24.2%, respectively of the
Company's consolidated revenues for 1996, 1997 and 1998. The Company's principal
customers for commercial charter are tour operators, sponsors of incentive
travel packages and specialty charter customers.
Tour Operator Programs. These leisure-market programs are generally contracted
for repetitive, round-trip patterns, operating over varying periods of time. In
such an arrangement, the tour operator pays a fixed price for use of the
aircraft, including the crew and all necessary passenger and aircraft handling
services, and assumes responsibility and risk for the actual sale of the
available aircraft seats. Because the Company has a contract with tour operators
for each flight or series of flights, it can, subject to competitive
constraints, structure the terms of each contract to reflect the costs of
providing the specific service, together with an acceptable return. Under most
of its contracts with tour operators, the Company passes through increases in
fuel costs from a contracted price. Under these contracts, if the fuel increase
causes the tour operator's fuel cost to rise in excess of 10%, the tour operator
has the option of canceling the contract. The Company is exposed to increases in
fuel costs that occur within 14 days of flight time.
Although the Company serves tour operators on a worldwide basis, its primary
customers are U.S.-based and European-based tour operators. European tour
operators accounted for 4.6%, 3.2% and 2.2%, respectively of consolidated
revenues for 1996, 1997 and 1998. Contracts with most European tour operators
establish prices payable to the Company in U.S. dollars, thereby reducing the
Company's foreign currency risk. The Company's five largest tour operator
customers represented approximately 22.4%, 16.2%, and 14.4%, respectively, of
the Company's consolidated revenues for 1996, 1997 and 1998, and the ten largest
tour operator customers represented approximately 29.7%, 20.8% and 17.5%,
respectively, of the Company's consolidated revenues for the same periods.
Incentive Travel Programs. Many corporations offer travel to leisure
destinations or special events as incentive awards for their employees. The
Company has historically provided air travel for many corporate incentive
programs. Incentive travel customers range from national incentive marketing
companies who arrange such programs for corporate clients to large corporations
that handle their incentive travel programs on an in-house basis.
Specialty Charters. The Company operates a significant number of specialty
charter flights. These programs are normally contracted on a single round-trip
basis and vary extensively in nature, from flying university alumni to a
football game, to transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site. These flights,
some of which are arranged on very short notice based on aircraft availability,
allow the Company to increase aircraft utilization during off-peak periods.
Military/Government Charter
In 1996, 1997 and 1998, sales to the U.S. military and other governmental
agencies were approximately 11.2%, 16.8% and 13.3%, respectively, of the
Company's consolidated revenues. Traditionally, the Company's focus has been on
short-term military "contract expansion" business which is routinely awarded by
the U.S. government based on price and availability of appropriate aircraft. The
U.S. government awards one-year contracts for its military charter business, and
pre-negotiates contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the participating airlines'
average costs. The short-term expansion business is awarded pro rata to those
carriers with aircraft availability who have been awarded the most fixed-award
business, and then to any additional carrier that has aircraft available. The
Company's contractor teaming arrangement significantly increases the likelihood
that the team will receive both fixed-award and contract expansion business.
The Company is subject to biennial inspections by the Department of Defense as a
condition of retaining its eligibility to perform military charter flights. The
last such inspection was completed in the fourth quarter of 1997. As a result of
the Company's military business, it has been required from time to time to meet
operational standards beyond those normally required by the DOT, Federal
Aviation Administration ("FAA") and other government agencies.
Other Business
In addition to its core charter and scheduled service businesses, the Company
operates several other smaller businesses that complement its core businesses.
For example, the Company sells ground arrangements (hotels, car rentals and
attractions) through its Ambassadair and ATA Vacations subsidiaries; provides
airframe and powerplant mechanic training through American Trans Air Training
Corporation; and provides helicopter charter services through its ExecuJet
subsidiary. Additionally, the Company, through its subsidiary Amber Air Freight,
markets cargo services in the Company's scheduled and charter operations. In
aggregate, these businesses, together with incidental revenues associated with
core charter and scheduled service operations, accounted for 7.1%, 6.6% and
6.9%, respectively, of consolidated revenues in 1996, 1997 and 1998.
Aircraft Fleet
As of December 31, 1998, the Company was certified to operate a fleet of 15
Lockheed L-1011s, 24 Boeing 727-200ADVs and 9 Boeing 757-200s. The Company also
has an agreement in principle to acquire Chicago Express which is certified to
operate Jetstream 31 propeller aircraft. As of December 31, 1998, the Company
had taken delivery of an incremental Lockheed L-1011-500 which was undergoing
modifications, and not yet flight certified. See " - Properties."
Lockheed L-1011 Aircraft
The Company's 15 Lockheed L-1011 aircraft are wide-body aircraft, 11 of which
have a range of 2,971 nautical miles, three of which have a range of 3,425
nautical miles, and one of which has a range of 5,577 nautical miles. These
aircraft conform to the FAA's Stage 3 noise requirements and have a low
ownership cost relative to other wide-body aircraft types. See "--Environmental
Matters." As a result, the Company believes these aircraft provide a competitive
advantage when operated on long-range routes, such as on transatlantic, South
American and transpacific routes. These aircraft have an average age of
approximately 23 years. As of December 31, 1998, 14 of these aircraft were owned
by the Company and one was under an operating lease that expires in March 2003.
The Company has agreed to purchase three additional L-1011-500 aircraft in 1999.
Certain of the Lockheed L-1011 aircraft owned by the Company are subject to
mortgages and other security interests granted in favor of the Company's lenders
under its revolving credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Boeing 727-200ADV Aircraft
The Company's 24 Boeing 727-200ADV aircraft are narrow-body aircraft equipped
with high-thrust, JT8D-15/-15A/-17/-17A engines and have a range of 2,050
nautical miles. These aircraft, of which 16 conform to Stage 3 and eight conform
to Stage 2 noise requirements as of December 31, 1998, have an average age of
approximately 19 years. The Company leases 23 of these aircraft, with initial
lease terms that expire between January 1999 and September 2003, subject to the
Company's right to extend each lease for varying terms or purchase the aircraft.
Subsequent to December 31, 1998, the Company purchased eight of the 23 leased
aircraft Prior to December 31, 1999, the Company will be required to make
capital expenditures for engine "hushkits" so that its entire fleet conforms to
Stage 3 noise requirements in accordance with FAA regulations. The Company
currently plans to install hushkits on eight remaining Stage 2 Boeing 727-200
aircraft before the end of 1999. The capital cost to hushkit a Boeing 727-200ADV
aircraft is approximately $2.5 million. See "--Environmental Matters."
Boeing 757-200 Aircraft
The Company's 9 Boeing 757-200 aircraft are relatively new, narrow-body
aircraft, all of which have a range of 3,679 nautical miles. These aircraft, all
of which are leased, have an average age of approximately 3 years and meet Stage
3 noise requirements. The Company's Boeing 757-200s have higher ownership costs
than the Company's Lockheed L-1011 and Boeing 727-200ADV aircraft, but lower
operational costs. In addition, unlike most other narrow-body aircraft, the
Boeing 757-200 has the capacity to operate on extended flights over water. The
leases for the Company's Boeing 757-200 aircraft have initial terms that expire
on various dates between December 1999 and July 2017, subject to the Company's
right to extend each lease for varying terms.
Although Lockheed L-1011 and Boeing 727-200ADV aircraft are subject to the FAA's
Aging Aircraft program, the Company does not currently expect that its cost of
compliance for these aircraft will be material. See "--Regulation."
Flight Operations
Worldwide flight operations are planned and controlled by the Company's Flight
Operations Group based in Indianapolis, Indiana, which is staffed on a 24-hour
basis, seven days a week. Logistical support necessary for extended operations
away from the Company's fixed bases is coordinated through its global
communications network. The Company has the ability to dispatch maintenance and
operational personnel and equipment as necessary to support temporary operations
around the world.
In order to enhance the reliability of its service, the Company seeks to
maintain at least two spare Lockheed L-1011 and three spare Boeing 727-200
aircraft at all times. Spare aircraft can be dispatched on short notice to most
locations where a substitute aircraft is needed for mechanical or other reasons.
These spare aircraft allow the Company to provide a dispatch reliability to its
customers that is difficult for an airline of smaller size to match.
Maintenance and Support
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This 120,000 square-foot facility was designed to meet
the maintenance needs of the Company's fleet and to provide supervision and
control of purchased maintenance services. The Company performs approximately
75% of its own maintenance work, excluding engine overhauls and Lockheed L-1011
and Boeing 727-200 heavy airframe checks.
The Company currently maintains ten permanent maintenance facilities, including
its Indianapolis facility. In addition, the Company utilizes "road teams," which
are dispatched primarily as charter flight operations require to arrange and
supervise maintenance services at temporary locations. The Company also uses
road teams to supervise all maintenance not performed in-house.
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 50.4%, 53.4% and 45.0%, respectively, of consolidated revenues in
1996, 1997 and 1998. The Company closely monitors jet fuel spot prices and crude
oil and heating oil futures markets to provide early indications of potential
shifts in jet fuel prices for timely management review and action. The Company
did not engage in any material fuel hedging activities in 1996 or 1997, but
began a fuel hedging program in 1998 and has hedged a significant portion of its
scheduled service fuel exposure for the first six months of 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Operating Expenses - Fuel and Oil."
Competition
The Company's products and services face varying degrees of competition in
diverse markets.
Competition for Scheduled Services
In scheduled service, the Company competes both against the large U.S. scheduled
service airlines and, from time to time, against smaller regional or start-up
airlines. Competition is generally on the basis of price, schedule and
frequency, quality of service and convenience.
Competition for Commercial Charter Services
In the commercial charter market, the Company competes both against the major
U.S. scheduled airlines, and against small U.S. charter airlines. The Company
also competes against several European and Mexican charter and scheduled
airlines, some of which are larger and have substantially greater financial
resources than the Company. The scheduled carriers compete for leisure travel
customers with the Company's commercial charter operations in a variety of ways,
including wholesaling discounted seats on scheduled flights to tour operators,
promoting packaged tours to travel agents for sale to retail customers and
selling discounted, airfare-only products to the public. As a result, all
charter airlines, including the Company, generally are required to compete for
customers against the lowest revenue-generating seats of the scheduled airlines.
During periods of dramatic fare cuts by other scheduled airlines, the Company is
forced to respond competitively to these deeply discounted prices.
The Company also competes directly against other charter airlines. In the United
States, these charter airlines are smaller in size than the Company. In Europe,
several charter airlines are as large or larger than the Company. Certain
European charter airlines are affiliates of large scheduled airlines or tour
operators. As a result, in addition to their greater access to financial
resources, these charter airlines may also have greater distribution
capabilities, including exclusive or preferential relationships with affiliated
tour operators.
Competition for Military/Government Charter Services
The Company competes for military and other government charters with primarily
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier, alone or
through a teaming arrangement, makes available for use to the military. The
formation of different competing teaming arrangements could adversely affect the
Company's U.S. military charter business.
Insurance
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers'
compensation. Under the Company's current insurance policies, it will not be
covered by such insurance were it to fly, without the consent of its insurance
provider, to certain high-risk countries. The Company does not consider the
inability to operate into or out of any of these countries to be a significant
limitation on its business. The Company will support certain U.S. government
operations in areas where its insurance policy does not provide coverage for
losses when the U.S. government provides replacement insurance coverage.
Employees
As of December 31, 1998, the Company had approximately 6,000 employees,
approximately 2,300 of which were represented under collective bargaining
agreements. The Company's flight attendants are represented by the Association
of Flight Attendants ("AFA") and the Company's cockpit crews are represented by
the Air Line Pilots Association ("ALPA"). The current collective bargaining
agreement with the AFA became amendable in December 1998, and the current
collective bargaining agreement with the ALPA becomes amendable in September
2000. The Company began negotiations with the AFA in the third quarter of 1998
to amend the collective bargaining agreement, and these negotiations are
continuing. The existence of a significant dispute with any sizeable number of
its employees could have a material adverse effect on the Company's operations
and financial condition.
Regulation
The Company is subject to regulation by the DOT and the FAA. The DOT is
primarily responsible for regulating consumer protection and other economic
issues affecting air services and determining a carrier's fitness to engage in
air transportation. In 1981, the DOT granted the Company a Certificate of Public
Convenience and Necessity pursuant to Section 401 of the Federal Aviation Act
authorizing it to engage in air transportation. The Company is also subject to
the jurisdiction of the FAA with respect to its aircraft maintenance and
operations. The FAA requires each carrier to obtain an operating certificate and
operations specifications authorizing the carrier to fly to specific airports
using specified equipment. All of the Company's aircraft must also have and
maintain certificates of airworthiness issued by the FAA. The Company holds an
FAA air carrier operating certificate under Part 121 of the Federal Aviation
Regulations.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
The FAA has issued a series of Airworthiness Directives under its "Aging
Aircraft" program which are applicable to the Company's Lockheed L-1011 and
Boeing 727-200 aircraft. The Company does not currently expect the future cost
of these directives to be material.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company through its cargo affiliate. Labor relations in
the air transportation industry are generally regulated under the Railway Labor
Act, which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. The Company is subject to the jurisdiction of the Federal
Communications Commission regarding the utilization of its radio facilities. In
addition, the Immigration and Naturalization Service, the U.S. Customs Service,
and the Animal and Plant Health Inspection Service of the Department of Agri-
culture 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. 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 or are considering adopting a Passenger Facility
Charge ("PFC") of up to $3.00 generally payable by each passenger departing from
the airport. This charge must be collected from passengers by transporting air
carriers, such as the Company, and must be remitted to the applicable airport
authority. Airport operators must obtain approval of the FAA before they may
implement a PFC. The $3.00 maximum on PFCs may be raised if Congress enacts an
amendment to the legislation authorizing these charges.
Based upon bilateral aviation agreements between the U.S. and other nations,
and, in the absence of such agreements, comity and reciprocity principles, the
Company, as a charter carrier, is generally not restricted as to the frequency
of its flights to and from most foreign destinations. However, these agreements
generally restrict the Company to the carriage of passengers and cargo on
flights which either originate in the U.S. and terminate in a single foreign
nation, or which originate in a single foreign nation and terminate in the U.S.
Proposals for any additional charter service must generally be specifically
approved by the civil aeronautics authorities in the relevant countries.
Approval of such requests is typically based on considerations of comity and
reciprocity and cannot be guaranteed.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft must comply with certain Stage 3 noise restrictions by
certain specified deadlines. These regulations require that the Company achieve
a 75.0% Stage 3 fleet by December 31, 1998. In general, the Company would be
prohibited from operating any Stage 2 aircraft after December 31, 1999. As of
December 31, 1998, 83.3% of the Company's fleet met Stage 3 requirements. The
Company expects to meet future Stage 3 fleet requirements through Boeing 727-200
hushkit modifications.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency ("EPA") regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company believes it has made all necessary modifications to its operating fleet
to meet fuel-venting requirements and smoke-emissions standards.
The Company maintains on its property in Indiana two underground storage tanks
which contain quantities of de-icing fluid and emergency generator fuel. These
tanks are subject to various EPA and State of Indiana regulations. The Company
believes it is in compliance with applicable regulatory requirements with
respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses materials which
are regulated as hazardous under federal, state and local law. The Company
maintains programs to protect the safety of its employees who use these
materials and to manage and dispose of any resulting waste, and believes that it
is in substantial compliance with all applicable laws and regulations.
Item 2. Properties
The Company leases three adjacent office buildings in Indianapolis, consisting
of approximately 136,000 square feet. These buildings are located approximately
one mile from the Indianapolis International Airport terminal and are used as
principal business offices, an operations center and for the Indianapolis
reservations center.
The Company's Maintenance and Engineering Center is also located at Indianapolis
International Airport. This 120,000 square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. The Indianapolis Maintenance
and Engineering Center is an FAA-certificated repair station and has the
capability to perform routine, as well as non-routine, maintenance on the
Company's aircraft.
In 1998, the Company began construction of a 120,000 square-foot office building
immediately adjacent to the Company's Indianapolis Maintenance and Engineering
Center. This facility will house the Company's Maintenance and Engineering
office staff along with the airline's operations center effective in the second
quarter of 1999.
In 1995, the Company completed the lease of Hangar No. 2 at Chicago's Midway
Airport for an initial lease term of ten years, subject to two five-year renewal
options. The Company has completed significant improvements to this leased
property, which is used to provide line maintenance for the Boeing 757-200 and
Boeing 727-200 narrow-body fleets.
Also in 1995, the Company relocated and expanded its Chicago area reservations
unit to an 18,700 square-foot facility located near Chicago's O'Hare Airport.
This reservation facility primarily serves customers in the greater Chicago
metropolitan area in support of the Company's Chicago-Midway scheduled service
operation.
The Company also routinely leases various properties at airports around the
world for use by passenger service, flight operations and maintenance staffs.
Other properties are also leased for the use of sales office staff. These prop-
perties are used in support of both scheduled and charter flight operations in
such locations as Atlanta, Baltimore, Boston, Cancun, Chicago, Dallas-Ft. Worth,
Denver, Detroit, Ft. Lauderdale, Ft. Myers, Frankfurt, Honolulu, Indianapolis,
Las Vegas, London Gatwick, Los Angeles, Maui, Milwaukee, Minneapolis, New York,
Oakland, Orlando, Phoenix, St. Louis, St.Petersburg, San Francisco, San Juan and
Sarasota.
At December 31, 1998, the Company was certified to operate a fleet of 48
aircraft. The following table summarizes the ownership characteristics of each
aircraft type operated by the Company as of the end of 1998.
Ownership Boeing Boeing Lockheed Lockheed
Status 727-200ADV 757-200ER L-1011-50/100 L-1011-500
- ---------------------------------------------------- ------------------- ------------------- -------------------
Owned 1 N/A 1 1
(Unencumbered)
Owned N/A N/A 12 N/A
(Encumbered-Pledged on
Bank Facility)
Leased 22 7 N/A N/A
(Fixed Buy-out)
Operating Lease 1 2 1 N/A
(No Buy-out)
TOTAL 24 9 14 1
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably foreseeable in
light of the nature of the Company's business. The majority of these suits are
covered by insurance. In the opinion of management, the resolution of these
claims will not have a material adverse effect on the business, operating
results or financial condition of the Company.
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, 1998.
Part II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "AMTR." The Company had 279 registered
shareholders at December 31, 1998.
Year Ended December 31, 1998
Market Prices of Common Stock High Low Close
-------- ---------- ----------
First quarter 16 3/8 7 1/2 16 1/4
Second quarter 27 15 1/8 24 5/8
Third quarter 30 20 7/8 23 1/2
Fourth quarter 27 5/8 13 3/4 27 1/8
No dividends have been paid on the Company's common stock since becoming
publicly held.
Item 6. Selected Consolidated Financial Data (Unaudited)
The unaudited selected consolidated financial data in this table have
been derived from the consolidated financial statements of the Company
for the respective periods presented. The data should be read in con-
junction with the consolidated financial statements and related notes.
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
(Dollars in thousands, except per share data and ratios)
-------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 580,522 $ 715,009 $ 750,851 $ 783,193 $ 919,369
Operating expenses 572,107 697,073 786,907 769,709 843,996
Operating income (loss) (1) 8,415 17,936 (36,056) 13,484 75,373
Income (loss) before taxes 5,879 14,653 (39,581) 6,027 67,210
Net income (loss) 3,486 8,524 (26,674) 1,572 40,081
Net income (loss) per share - basic (2) 0.30 0.74 (2.31) 0.14 3.41
Net income (loss) per share - diluted (2) 0.30 0.74 (2.31) 0.13 3.07
Balance Sheet Data (at end of period):
Property and equipment, net $ 223,104 $ 240,768 $ 224,540 $ 267,681 $ 329,332
Total assets 346,288 413,137 369,601 450,857 594,549
Total debt 118,106 138,247 149,371 191,804 246,671
Shareholders' equity (3) 72,753 81,185 54,744 56,990 102,751
Ratio of total debt to shareholders' equity 1.62 1.70 2.73 3.37 2.40
Ratio of total liabilities to shareholders' 3.76 4.09 5.75 6.91 4.79
equity
Selected Operating Statistics for
Consolidated Passenger Services: (4)
Revenue passengers carried (thousands) 4,237.9 5,368.2 5,680.5 5,307.4 6,168.3
Revenue passenger miles (millions) 7,158.8 8,907.7 9,172.4 8,986.0 9,758.1
Available seat miles (millions) 10,443.1 12,521.4 13,295.5 12,647.7 13,851.7
Passenger load factor 68.6% 71.1% 69.0% 71.0% 70.5%
(1) The Company has reclassified gain (loss) on the sale of
operating assets for 1994-1995 from non-operating gain (loss)
to operating income (loss) to be consistent with the 1996-1998
presentation. Also, in the third quarter of 1996, the Company
recorded a $4.7 million loss on the disposal of leased assets
associated with the reconfiguration of its fleet.
(2) In 1997, the Company adopted Financial Accounting
Standards Board Statement 128, "Earnings per Share," which
established new standards for the calculation and disclosure
of earnings per share. All prior period earnings per share
amounts disclosed in this five-year summary have been restated
to conform to the new standards under Statement 128.
(3) No dividends were paid in any periods presented.
(4) Operating statistics pertain only to ATA (including operations
under the Chicago Express code share agreement) and do not
include information for other operating subsidiaries of the
Company.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Amtran is a leading provider of targeted scheduled airline services and charter
airline services to leisure and other value-oriented travelers. Amtran, through
its principal subsidiary, ATA, has been operating for 26 years and is the
eleventh largest U.S. airline in terms of 1998 revenues. ATA provides scheduled
service through nonstop and connecting flights from the gateways of
Chicago-Midway and Indianapolis to popular vacation destinations such as Hawaii,
Las Vegas, Florida, California, Mexico and the Caribbean, as well as to Denver,
Dallas-Ft. Worth and New York City's LaGuardia and John F. Kennedy airports. ATA
also provides charter service throughout the world to independent tour
operators, specialty charter customers and the U.S. military.
In 1998, the Company generated record operating earnings and net income as
compared to any previous fiscal year in the Company's 25-year history. These
results were primarily due to the effects of record operating revenues,
unchanged unit operating expenses and higher utilization of aircraft.
1997 was a year of recovery for the Company, after a substantial net loss in
1996. Extensive business unit profitability analysis in late 1996 prompted the
Company to undertake significant restructuring of scheduled service operations
and standardization of the Boeing 757-200 fleet. As a result of these efforts,
the Company finished 1997 with net income, a substantial improvement over 1996.
Results of Operations
In 1998, the Company earned $75.4 million in operating income and $40.1 million
in net income, as compared to operating and net income of $13.5 million and $1.6
million, respectively, in 1997 and an operating and net loss of $36.1 million
and $26.7 million, respectively in 1996.
Operating expenses increased 9.7% to $844.0 million in 1998, as compared to
$769.7 million in 1997. Operating expense per ASM remained unchanged at 6.09
cents in both years. Operating expenses were $786.9 million in 1996, which
equated to 5.92 cents per ASM.
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
Cents per ASM
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
Operating revenues: 6.64 6.19 5.65
Operating expenses:
Salaries, wages and benefits 1.52 1.36 1.23
Fuel and oil 0.99 1.22 1.21
Depreciation and amortization 0.57 0.49 0.47
Handling, landing and navigation fees 0.54 0.55 0.53
Aircraft maintenance, materials and repairs 0.39 0.41 0.42
Aircraft rentals 0.38 0.43 0.49
Crew and other employee travel 0.30 0.29 0.27
Passenger service 0.24 0.26 0.25
Commissions 0.21 0.21 0.20
Other selling expenses 0.16 0.12 0.13
Ground package cost 0.14 0.15 0.14
Advertising 0.13 0.10 0.08
Facilities and other rentals 0.07 0.07 0.07
Disposal of assets - - 0.03
Other 0.45 0.43 0.40
Total operating expenses 6.09 6.09 5.92
Operating income (loss) 0.55 0.10 (0.27)
ASMs (in thousands) 13,851,731 12,647,683 13,295,505
Year Ended December 31, 1998, Versus Year Ended December 31, 1997
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
Twelve Months Ended December 31,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 45,881 39,517 6,364 16.10
Departures J31(a) 16,388 10,091 6,297 62.40
--------------- --------------- ---------------- ---------------
Total Departures (b) 62,269 49,608 12,661 25.52
--------------- --------------- ---------------- ---------------
Block Hours Jet 144,237 129,216 15,021 11.62
Block Hours J31 16,166 10,210 5,956 58.33
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 160,403 139,426 20,977 15.05
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 9,727,097 8,967,900 759,197 8.47
RPMs J31 (000s) 30,991 18,055 12,936 71.65
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 9,758,088 8,985,955 772,133 8.59
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 13,799,507 12,615,230 1,184,277 9.39
ASMs J31 (000s) 52,224 32,453 19,771 60.92
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 13,851,731 12,647,683 1,204,048 9.52
--------------- --------------- ---------------- ---------------
Load Factor Jet 70.49 71.09 (0.60) (0.84)
Load Factor J31 59.34 55.63 3.71 6.67
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 70.45 71.05 (0.60) (0.84)
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,991,662 5,210,578 781,084 14.99
Passengers Enplaned J31 176,604 96,812 79,792 82.42
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 6,168,266 5,307,390 860,876 16.22
--------------- --------------- ---------------- ---------------
Revenue (000s) $919,369 $783,193 $136,176 17.39
RASM in cents (h) 6.64 6.19 0.45 7.27
CASM in cents (i) 6.09 6.09 - -
Yield in cents (j) 9.42 8.72 0.70 8.03
See footnotes (a) through (j) on pages 14 and 15.
(a) Effective April 1, 1997, the Company began ATA Connection service between
Chicago-Midway and the cities of Indianapolis, Milwaukee, Des Moines, Dayton and
Grand Rapids under a code sharing agreement with Chicago Express. Services were
expanded to include Lansing, Michigan and Madison, Wisconsin in October 1997.
Services were provided by Chicago Express using Jetstream 31 ("J31") propeller
aircraft.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(e) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(f) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because 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.
(g) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(h) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (j) below for the definition of yield).
(i) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available seat capacity.
(j) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
entire aircraft is sold at one time for one price. Consolidated yields and
scheduled service yields are shown in the appropriate tables for industry
comparability, but yields for individual charter businesses are omitted from
applicable tables.
Operating Revenues
Total operating revenues in 1998 increased 17.4% to $919.4 million from $783.2
million in 1997. This increase was due to a $139.5 million increase in scheduled
service revenues, a $10.5 million increase in other revenues and a $0.9 million
increase in ground package revenues, partially offset by a $5.5 million decrease
in commercial charter revenues, and a $9.2 million decrease in
military/government charter revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
Twelve Months Ended December 31,
1998 1997 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 31,237 23,800 7,437 31.25
Departures J31(a) 16,388 10,091 6,297 62.40
--------------- --------------- ---------------- ---------------
Total Departures (b) 47,625 33,891 13,734 40.52
--------------- --------------- ---------------- ---------------
Block Hours Jet 92,263 72,883 19,380 26.59
Block Hours J31 16,166 10,210 5,956 58.33
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 108,429 83,093 25,336 30.49
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 5,777,555 4,523,245 1,254,310 27.73
RPMs J31 (000s) 30,991 18,055 12,936 71.65
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 5,808,546 4,541,300 1,267,246 27.90
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 7,756,330 6,209,825 1,546,505 24.90
ASMs J31 (000s) 52,224 32,453 19,771 60.92
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 7,808,554 6,242,278 1,566,276 25.09
--------------- --------------- ---------------- ---------------
Load Factor Jet 74.49 72.84 1.65 2.27
Load Factor J31 59.34 55.63 3.71 6.67
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 74.39 72.75 1.64 2.25
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 4,094,454 3,087,706 1,006,748 32.61
Passengers Enplaned J31 176,604 96,812 79,792 82.42
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 4,271,058 3,184,518 1,086,540 34.12
--------------- --------------- ---------------- ---------------
Revenues (000s) $511,254 $371,762 $139,492 37.52
RASM in cents (h) 6.55 5.96 0.59 9.90
Yield in cents (j) 8.80 8.19 0.61 7.45
Rev per segment $ (k) 119.70 116.74 2.96 2.54
See footnotes (a) through (j) on pages 14 and 15.
(k) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
Scheduled service revenues in 1998 increased 37.5% to $511.3 million from $371.8
million in 1997. Scheduled service revenues comprised 55.6% of consolidated
revenues in 1998, as compared to 47.5% of consolidated revenues in 1997.
The Company currently has a code share agreement with Chicago Express under
which Chicago Express operates 19-seat Jetstream 31 propeller aircraft as the
ATA Connection between Chicago-Midway and the cities of Indianapolis, Milwaukee,
Des Moines, Dayton, Grand Rapids, Lansing and Madison. The period-to-period
percentage changes in departures, block hours and passengers boarded were
significantly impacted by the operation of ATA Connection Jetstream 31 commuter
flights in the twelve months ended December 31, 1998, which operated only during
the nine months ended December 31, 1997. Such operations in all periods generate
comparatively less impact to ASMs and RPMs due to the small seat capacity and
short stage length of ATA Connection propeller aircraft as compared to the
Company's jet aircraft. In February 1999, the Company entered into an agreement
in principle to acquire Chicago Express Airlines, Inc., ATA's code sharing
partner at Chicago-Midway.
The Company's 1998 scheduled service at Chicago-Midway accounted for
approximately 53.4% of scheduled service ASMs and 73.5% of scheduled service
departures, as compared to 42.9% and 63.2%, respectively, in 1997. On May 1,
1998, the Company began three daily nonstop flights to Dallas-Ft. Worth and two
daily nonstop flights to Denver, none of which services were provided during
1997. In addition to these new services, the Company added frequencies in 1998
to most existing jet markets, including Ft. Lauderdale, Ft. Myers, Las Vegas,
Los Angeles, Orlando, Phoenix, St. Petersburg and San Francisco. Flight
frequencies to Sarasota declined between periods. ATA Connection Jetstream 31
flights in 1998 and the nine months ended December 31, 1997 served
Chicago-Midway from the cities of Dayton, Des Moines, Grand Rapids, Indianapolis
and Milwaukee. In addition, the Company operated ATA Connection Jetstream 31
service between Chicago-Midway and the cities of Lansing and Madison throughout
1998, while such service was operated only during the fourth quarter of 1997.
The Company anticipates that its Chicago-Midway operation will represent a focus
of growing significance for its scheduled service business in 1999 and beyond.
The Company operated 57 daily jet and commuter departures from Chicago-Midway
and served 21 destinations on a nonstop basis in the summer of 1998, as compared
to 15 nonstop destinations served in the summer of 1997. By the end of 1998, the
Company completed a $1.5 million renovation of the existing terminal facilities
at Chicago-Midway to enhance their attractiveness and convenience for the
Company's customers. The Company also presently expects to occupy 13 jet gates
and six commuter aircraft gates at the new Chicago-Midway terminal which is
presently scheduled for completion in 2002, as compared to the six jet gates
currently occupied in the existing terminal.
The Company's growing commitment to Chicago-Midway is consistent with its
strategy for enhancing revenues and profitability in scheduled service by
focusing primarily on low-cost, nonstop flights from airports where it has
market or aircraft advantages in addition to its low-cost. The Company expects
its growing concentration of connecting flights at Chicago-Midway to provide
both revenue premiums and operating cost efficiencies, as compared to the
Company's other gateway cities.
The Company's Hawaii service accounted for 21.3% of scheduled service ASMs and
5.4% of scheduled service departures in 1998, as compared to 24.6% and 6.8%,
respectively, in 1997. The Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. In addition, in 1998, seasonal
nonstop service was operated from San Diego to Honolulu, which was not operated
in 1997. The Company provides these services through a marketing alliance with
the largest independent tour operator serving leisure travelers to Hawaii from
the United States. The Company distributes the remaining seats on these flights
through normal scheduled service distribution channels.
The Company believes it has superior operating efficiencies in west coast-Hawaii
markets due to the relatively low ownership cost of the Lockheed L-1011 fleet
and because of the high daily hours of utilization obtained for both aircraft
and crews.
The Company's Indianapolis service accounted for 16.1% of scheduled service ASMs
and 12.7% of scheduled service departures in 1998, as compared to 20.5% and
18.1%, respectively, in 1997. In 1998, the Company operated nonstop to Cancun,
Ft. Lauderdale, Ft. Myers, Las Vegas, Los Angeles, Orlando, St. Petersburg, San
Francisco and Sarasota. The Company has served Indianapolis for 26 years through
the Ambassadair Travel Club and in scheduled service since 1986.
The Company continues to evaluate the profitability of its scheduled service
markets and expects to adjust its service from time to time. The Company
believes that scheduled service yields and load factors in 1998 have benefited
from strong customer demand for air transportation in the United States during a
period of constrained industry growth in seat capacity relative to this demand.
The ability of the Company to increase its year-over-year scheduled service seat
capacity by 25.1%, and to operate with a higher load factor between years,
further underscores the fundamental strength of current demand in its domestic
scheduled service.
Commercial Charter Revenues. The Company's commercial charter revenues are
derived principally from independent tour operators and specialty charter
customers. The Company's commercial charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Commercial charter revenue growth in 1998 was constrained by the
reassignment of several narrow-body aircraft to scheduled service expansion and
by subservice contracts with other airlines, which the Company believes have
been more profitable for these aircraft than the commercial charter applications
they replaced. The Company, however, continues to believe that tour operator and
specialty charter are businesses where the Company's experience and size provide
meaningful competitive advantage and are businesses to which the Company remains
committed. Commercial charter revenues accounted for 24.2% of consolidated
revenues in 1998, as compared to 29.1% in 1997.
The Company is addressing its seat capacity limitations in the commercial and
military/government charter business units through the acquisition of long-range
Lockheed L-1011 series 500 aircraft. In July 1998, the Company committed to the
purchase of five such aircraft for delivery between the third quarter of 1998
and the second quarter of 1999. Although Lockheed L-1011 series 500 maintenance
procedures and cockpit design are similar to the Company's existing fleet of
Lockheed L-1011 series 50 and series 100 aircraft, they differ operationally in
that their ten-to-eleven-hour range permits them to operate nonstop to parts of
Asia, South America and Central and Eastern Europe using an all-coach seating
configuration preferred by the U.S. military and most of the Company's
commercial charter customers. The Company expects to place these aircraft into
service in commercial and military/government charter operations during 1999,
which will increase the available seat capacity for these charter business
units, in addition to opening new long-range market opportunities to the Company
which it cannot serve with its existing fleet.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
Twelve Months Ended December 31,
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 9,602 10,589 (987) (9.32)
Block Hours (c) 33,516 36,836 (3,320) (9.01)
RPMs (000s) (d) 3,009,638 3,373,840 (364,202) (10.79)
ASMs (000s) (e) 3,882,202 4,169,102 (286,900) (6.88)
Passengers Enplaned (g) 1,617,901 1,840,056 (222,155) (12.07)
Revenue (000s) $222,571 $228,062 $(5,491) (2.41)
RASM in cents (h) 5.73 5.47 0.26 4.75
See footnotes (b) through (h) on pages 14 and 15.
The Company operates in two principal components of the commercial charter
business, known as "track charter" and "specialty charter." The larger track
charter business component is generally comprised of low frequency but
repetitive domestic and international flights between city pairs, which support
high passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts. Track charter accounted for approximately
$176.4 million in revenues in 1998, as compared to $184.3 million in 1997.
Specialty charter (including incentive travel programs) is a product which is
designed to meet the unique requirements of the customer and is a business
characterized by lower frequency of operation and by greater variation in city
pairs served than the track charter business. Specialty charter includes such
diverse contracts as flying university alumni to football games, transporting
political candidates on campaign trips and moving NASA space shuttle ground
crews to alternate landing sites. The Company also operates an increasing number
of trips in all-first-class configuration for certain corporate and high-end
leisure clients. Although lower utilization of crews and aircraft and infrequent
service to specialty destinations often result in higher average operating
costs, the Company has determined that the revenue premium earned by meeting
special customer requirements more than compensates for these increased costs.
The diversity of the Company's three fleet types also permits the Company to
meet a customer's particular needs by choosing the aircraft type which provides
the most economical solution for those requirements. Specialty charter accounted
for approximately $35.1 million in revenues in 1998, as compared to $34.6
million in 1997.
MilitarylGovernment Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government flight operations of the Company.
Twelve Months Ended December 31,
1998 1997 Inc (Dec) % Inc (Dec)
Departures (b) 4,447 4,860 (413) (8.50)
Block Hours (c) 16,389 18,704 (2,315) (12.38)
RPMs (000s) (d) 821,813 1,044,317 (222,504) (21.31)
ASMs (000s) (e) 1,963,069 2,165,169 (202,100) (9.33)
Passengers Enplaned (g) 205,641 265,862 (60,221) (22.65)
Revenue (000s) $121,911 $131,115 $(9,204) (7.02)
RASM in cents (h) 6.21 6.06 0.15 2.48
See footnotes (b) through (h) on pages 14 and 15.
The Company participates in two related military/government charter programs
known as "fixed award" and "short-term expansion." Pursuant to the U.S.
military's fixed-award system, each participating airline is awarded certain
"mobilization value points" based upon the number and type of aircraft made
available by that airline for military flying. In order to increase the number
of points awarded, the Company has entered into a contractor teaming arrangement
with four other cargo airlines. Under this arrangement, the team has a greater
likelihood of receiving fixed-award business and, to the extent that the award
includes passenger transport, the opportunity for the Company to operate this
flying is enhanced since the Company represents all of the passenger transport
capacity of the team. As part of its participation in this teaming arrangement,
the Company pays a commission to the team, which passes that revenue on to all
team members based upon their mobilization points. All airlines participating in
the fixed-award business contract annually with the U.S. military from October 1
to the following September 30. For each contract year, reimbursement rates are
determined for aircraft types and mission categories based upon operating cost
data submitted by the participating airlines. These contracts are generally not
subject to renegotiation once they become effective.
Short-term expansion business is awarded by the U.S. military first on a pro
rata basis to those carriers who have been provided fixed-award business and
then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The overall amount of military flying that the Company performs in any one year
is dependent upon several factors, including (i) the percentage of mobilization
value points represented by the Company's team as compared to total mobilization
value points of all providers of military service; (ii) the percentage of
passenger capacity of the Company with respect to its own team; (iii) the amount
of fixed-award and expansion flying required by the U.S. military in each
contract year; and (iv) the availability of the Company's aircraft to accept and
fly expansion awards.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
to its Ambassadair club members and through its ATA Vacations subsidiary to its
scheduled service passengers. In 1998, ground package revenues increased 4.0% to
$23.2 million, as compared to $22.3 million in 1997.
The Company's Ambassadair Travel Club offers hundreds of tour-guide-accompanied
vacation packages to its approximately 38,000 individual and family members
annually. In 1998, total packages sold decreased 5.0% as compared to 1997, but
the average revenue earned for each ground package sold increased 20.4% between
periods.
ATA Vacations offers numerous ground accommodations to the general public for
use with the Company's scheduled service flights in many areas of the United
States. These packages are marketed through travel agents, as well as directly
by the Company. In 1998, total packages sold decreased 10.2% as compared to
1997, while the average revenue earned for each ground package sold decreased
3.2% between years.
The number of ground packages sold and the average revenue earned by the Company
for a ground package sale are a function of the mix of vacation destinations
served, the quality and types of ground accommodations offered and general
competitive conditions with other air carriers offering similar products in the
Company's markets, all of which are factors that can change from period to
period.
In early 1999, the Company completed the purchase of Travel Charter
International, a tour operator, and has an agreement in principle to acquire
another tour operator, Key Travel.
Other Revenues. Other revenues are comprised of the consolidated revenues of
affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of the Company. Other
revenues increased 35.1% to $40.4 million in 1998, as compared to $29.9 million
in 1997.
In 1998, as compared to 1997, the Company earned $4.3 million more in substitute
service revenues, $3.2 million more in cancellation and administrative fees, and
$2.4 million more in cargo and other affiliate company revenues, partially
offset by $0.6 million less revenue earned from the sale of surplus and obsolete
aircraft parts.
A substitute service agreement typically provides for the Company to operate
aircraft with its crews on routes designated by the customer airline to carry
the passengers of that airline for a limited period of time. The Company has
seen increased demand for this type of service in 1998 due to delays in new
aircraft deliveries being experienced by various airlines. The Company also
increased its administrative fee for change-of-reservation on non-refundable
scheduled service tickets from $50 to $60 per change effective August 1998, and
the volume of such fees earned also increased between years in proportion to the
increase in scheduled service passengers boarded.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in 1998 increased 22.5% to $211.3 million
from $172.5 million in 1997.
The Company increased its average equivalent employees by 18.4% between 1998 and
1997 in order to appropriately staff the growth in available seats offered
between periods. Categories of employees where this growth was most significant
included cockpit and cabin crews, reservations agents, airport passenger and
ramp service agents, and aircraft maintenance personnel, all of which are
influenced directly by flight activity. Some employment growth in 1998 was also
needed to correct for certain employee shortages in 1997, particularly in the
areas of cockpit crews, reservations agents and airframe and power plant
mechanics.
The average rate of pay earned by the Company's employees (including all
categories of salaries, wages and benefits, except for variable compensation)
was unchanged between 1998 and 1997. While most employees received wage rate
increases between years, new employees are generally hired at lower average
starting rates of pay than those rates in effect for more senior employees. The
increase in new employees between periods approximately offset the wage rate
increases applicable to more senior employees.
In 1998, the Company recorded $8.9 million in variable compensation and related
payroll taxes as a result of the significant improvement in earnings as compared
to 1997, when no such compensation was incurred. In the second quarter of 1997,
a one-time charge of $2.0 million was recorded for variable compensation expense
associated with the resignation of the Company's former President and Chief
Executive Officer.
Salaries, wages and benefits cost per ASM increased 11.8% in 1998 to 1.52 cents,
as compared to 1.36 cents in 1997. This unit-cost increase was attributable to
the faster rate of growth in average equivalent employees between years than
seat capacity, and to the variable compensation earned in 1998, which was not
earned in 1997.
Fuel and Oil. Fuel and oil expense decreased 10.6% to $137.4 million in 1998, as
compared to $153.7 million in 1997. This decrease occurred despite the Company
consuming 9.8% more gallons of jet fuel for flying operations between years,
which resulted in an increase in fuel expense of approximately $15.0 million.
Jet fuel consumption increased primarily due to the increased number of block
hours of jet flying operations between periods. The Company flew 144,237 jet
block hours in 1998, as compared to 129,216 jet block hours in 1997, an increase
of 11.6% between years.
Fuel consumption growth between 1998 and 1997 was less than total block hour
growth, however, since most of the block hour growth in 1998 was in the
narrow-body Boeing 727-200 and Boeing 757-200 fleets, which consume
approximately 50% of the gallons per block hour which are consumed by the
Lockheed L-1011 fleet.
During 1998, the Company's average cost per gallon of jet fuel consumed
decreased by 20.0% as compared to 1997, resulting in a decrease in fuel and oil
expense of approximately $34.4 million between years. This reduction in fuel
price was experienced generally in the airline industry throughout 1998 as a
result of significant reductions in average crude oil and distillate market
prices as compared to 1997.
During the first, second and fourth quarters of 1998, the Company entered into
several fuel price hedge contracts under which the Company sought to reduce the
risk of fuel price increases during the year. The Company hedged some 1998 fuel
consumption under swap agreements which established specific swap prices for
designated periods, and hedged other 1998 fuel consumption under fuel cap
agreements which guaranteed a maximum price per gallon for designated periods.
Since the price of fuel declined during most of 1998, the Company recorded
approximately $2.5 million in additional fuel and oil expense under its hedge
contracts, which added approximately one cent to its average cost per gallon in
1998.
Fuel and oil expense decreased 18.9% to 0.99 cents per ASM in 1998, as compared
to 1.22 cents per ASM in 1997, primarily due to the period-to-period decrease in
the average price of fuel consumed.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, leasehold improvements and
rotable parts for all fleet types, together with other property and equipment
owned by the Company. Amortization is primarily the periodic expensing of
capitalized airframe and engine overhauls for all fleet types on a
units-of-production basis using aircraft flight hours and cycles (landings) as
the units of measure. Depreciation and amortization expense increased 25.9% to
$78.7 million in 1998, as compared to $62.5 million in 1997.
Depreciation expense attributable to owned airframes and leasehold improvements
increased $3.0 million in 1998, as compared to 1997. The Company purchased one
Boeing 757-200 and one Boeing 727-200 aircraft in late 1997 which had been
previously financed through operating leases, thereby increasing depreciation
expense on airframes between years. (The Company recorded a reduction in
aircraft rental expense between periods for the termination of operating leases
for these aircraft, which is further described below under "Aircraft Rentals.")
The Company also recorded additional inventory obsolescence expense for certain
aircraft parts held for sale which were sold during the first quarter of 1998,
and increased its investment in rotable parts and computer hardware and
software, among other items of property and equipment. These changes resulted in
an increase in depreciation expense of $2.4 million in 1998, as compared to
1997.
Amortization of capitalized engine and airframe overhauls increased $11.1
million in 1998, as compared to 1997, after including the offsetting
amortization associated with manufacturers' credits. Changes to the cost of
overhaul amortization were partly due to the increase in total block hours and
cycles flown between comparable periods for the Boeing 727-200 and Lockheed
L-1011 fleets, since such expense varies with that activity, and partly due to
the completion of more engine and airframe overhauls between periods for these
fleet types. Rolls-Royce-powered Boeing 757-200 aircraft, seven of which were
delivered new from the manufacturer between late 1995 and late 1998, are not
presently generating any engine or airframe overhaul expense, since the initial
post-delivery overhauls for these aircraft are not yet due under the Company's
maintenance programs.
The cost of engine overhauls that become worthless due to early engine failures
and which cannot be economically repaired is charged to depreciation and
amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs increased $1.3 million in
1998 as compared to 1997. When these early engine failures can be economically
repaired, the related repairs are charged to aircraft maintenance, materials and
repairs expense.
Effective July 1, 1998, the Company extended the estimated useful life of the 13
owned Lockheed L-1011 series 50 and series 100 aircraft to a common retirement
date of December 2004, and also reduced the estimated salvage value of the
related airframes, engines and rotables. The effect of this change in estimate
was to reduce depreciation expense in 1998 by $2.1 million.
Depreciation and amortization expense per ASM increased 16.3% to 0.57 cents in
1998, as compared to 0.49 cents in 1997. This increase was primarily due to the
increased amount of overhaul cost incurred to maintain the Company's Boeing
727-200 and Lockheed L-1011 airframes and engines. Airframes and engines which
originally enter the Company's fleet from time to time often do not require such
overhauls until several years later. Therefore, units added to the Company's
fleet over the last several years are currently scheduled for or are undergoing
overhaul. Such overhaul expense incurred and to be incurred is incremental in
comparison to prior periods. Although the Company's fleet of new Boeing 757-200
aircraft has not yet begun this initial overhaul cycle, the Company anticipates
that it will do so beginning in 1999, at which time increased overhaul
amortization expense per ASM will be incurred for this fleet type as well.
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 and baggage where the Company elects to
use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 7.5% to $74.6 million in
1998, as compared to $69.4 million in 1997. The total number of system-wide jet
departures between 1998 and 1997 increased by 16.1% to 45,881 from 39,517,
resulting in approximately $8.8 million in volume-related handling and landing
expense increases between periods.
This volume-related increase was partially offset, however, by a decrease of
approximately $3.3 million in price-and-mix-related handling and landing
expenses for 1998, as compared to 1997, attributable primarily to a change in
jet departure mix.
The cost per ASM for handling, landing and navigation fees decreased 1.8% to
0.54 cents in 1998, from 0.55 cents in 1997.
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 light airframe check and line 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. Aircraft maintenance, materials and repairs expense increased
4.3% to $53.7 million in 1998, as compared to $51.5 million in 1997.
The Company performed a total of 51 light airframe checks on its fleet during
1998, as compared to 44 such checks performed in 1997, an increase of 15.9%
between years. The cost of materials consumed and components repaired in
association with such light checks and other maintenance activity increased by
$1.6 million between 1998 and 1997.
The cost per ASM of aircraft maintenance, materials and repairs decreased 4.9%
to 0.39 cents in 1998, as compared to 0.41 cents in 1997.
Aircraft Rentals. Aircraft rentals expense for 1998 decreased 2.4% to $53.1
million from $54.4 million in 1997. The Company purchased one leased Boeing
757-200 in September 1997; returned one leased Boeing 757-200 to the lessor in
November of 1997; and added one new leased Boeing 757-200 each in December 1997
and August 1998. These fleet changes resulted in a reduction in Boeing 757-200
rentals expense of $0.9 million in 1998, as compared to 1997. Aircraft rentals
expense for the Boeing 727-200 and Lockheed L-1011 fleets did not change
significantly between years.
Aircraft rentals cost per ASM for 1998 was 0.38 cents, a decrease of 11.6% from
0.43 cents per ASM in 1997. Such reduction in cost per ASM was primarily
attributable to the increased utilization of all aircraft types between years,
producing more ASMs with approximately the same fleet size.
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 crew members incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of air transportation is
generally more significant for the commercial and military/government charter
business units since these flights often operate between cities in which Company
crews are not normally based and may involve extensive international positioning
of crews. Hotel and per diem expenses are incurred for scheduled, commercial and
military/government charter services, although higher per diem and hotel rates
generally apply to international assignments.
The cost of crew and other employee travel increased 13.7% to $41.6 million in
1998, as compared to $36.6 million in 1997. During 1998, the Company's average
full-time-equivalent cockpit and cabin crew employment was 13.5% higher than in
1997, while jet block hours flown increased by 11.6% between the same periods.
The average cost of hotel rooms per full-time-equivalent crew member increased
4.4% in 1998, as compared to 1997. Such hotel costs increased due to both higher
room rates paid in 1998, and due to aircraft flow changes associated with the
Company's 1998 summer schedule which resulted in more crews terminating their
daily flying away from their home bases than in the prior year.
The average cost of crew positioning per full-time-equivalent crew member
decreased 5.4% in 1998, as compared to 1997. Crew positioning costs declined
primarily due to the shift of revenue production from commercial charter and
military/government charter to scheduled service. Crews positioning out of base
for scheduled service can often position at no cost on Company flights, whereas
positioning to remote international locations for charter service is usually
done on other carriers at an incremental cost.
The cost per ASM for crew and other employee travel increased 3.4% to 0.30 cents
in 1998, as compared to 0.29 cents in 1997.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, 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 1998 and 1997,
catering represented 84.1% and 83.0%, respectively, of total passenger service
expense.
The total cost of passenger service increased 3.7% to $34.0 million in 1998, as
compared to $32.8 million in 1997. The Company experienced a decrease of
approximately 10.2% in the average unit cost of catering each passenger between
years, primarily because in 1998 there were relatively more scheduled service
passengers in the Company's business mix, who are provided a less expensive
catering product than the Company's longer-stage-length commercial and
military/government charter passengers. This resulted in a
price-and-business-mix reduction of $3.3 million in catering expense in 1998, as
compared to 1997. Total jet passengers boarded, however, increased 15.0% between
years, resulting in approximately $4.0 million in higher volume-related catering
expenses between the same sets of comparative periods.
The cost per ASM of passenger service declined 7.7% to 0.24 cents in 1998 from
0.26 cents in 1997.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense increased 9.2% to $28.5 million in 1998, as
compared to $26.1 million in 1997.
Scheduled service commissions expense increased by $2.3 million between 1998 and
1997. This increase was lower than the related increase of 37.5% in scheduled
service revenues between the same periods, partially because of an industry-wide
reduction in the standard travel agency commission rate from 10% to 8% which
became effective in October 1997, and partially due to relatively more
non-commissionable bulk seat scheduled service sales being made in 1998, as
compared to 1997. Neither commercial charter nor military/government charter
commissions expense changed significantly between 1998 and 1997.
The cost per ASM of commissions expense was unchanged at 0.21 cents for both
1998 and 1997.
Other Selling Expenses. Other selling expenses are comprised of (i) booking fees
paid to computer reservation systems ("CRS") to reserve single-seat sales for
scheduled service; (ii) credit card discount expenses incurred when selling
single seats and ground packages to customers using credit cards for payment;
(iii) costs of providing toll-free telephone service, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses primarily associated
with single-seat sales. Other selling expenses increased 42.6% to $22.1 million
in 1998, as compared to $15.5 million in 1997. Scheduled service passengers
boarded increased 34.1% between the same periods.
CRS fees increased $3.1 million in 1998, as compared to 1997, due to a 40.2%
increase in total CRS bookings made for the expanded scheduled service business
unit between periods, and due to a 7.5% increase in the average cost of each CRS
booking. Toll-free telephone costs increased $0.5 million between 1998 and 1997,
primarily due to higher toll-free usage related to higher scheduled service
reservations activity. Credit card discount expense increased $3.0 million in
1998 as compared to 1997, due to higher 1998 earned revenues in scheduled
service which were sold using credit cards as payment.
Other selling cost per ASM increased 33.3% to 0.16 cents in 1998, as compared to
0.12 cents in 1997.
Ground Package Cost. Ground package cost is incurred by the Company with hotels,
car rental companies, cruise lines and similar vendors who provide ground and
cruise accommodations to Ambassadair and ATA Vacations customers. Ground package
cost increased 1.0% to $19.4 million in 1998, as compared to $19.2 million in
1997. The number of Ambassadair ground packages sold in 1998 decreased 5.0%, as
compared to 1997, while the average cost of Ambassadair ground packages sold
increased by 29.8% between years. The number of ATA Vacations ground packages
sold in 1998 decreased 10.2% as compared to 1997, while the average cost of ATA
Vacations ground packages sold decreased by 7.6% between the same periods.
The cost per ASM of ground packages decreased 6.7% to 0.14 cents in 1998, as
compared to 0.15 cents in 1997.
Advertising. Advertising expense increased 40.2% to $17.8 million in 1998, as
compared to $12.7 million in 1997. The Company incurs advertising costs
primarily to support single-seat scheduled service sales and the sale of
air-and-ground packages. Advertising support for these lines of businesses was
increased in 1998, consistent with the Company's overall strategy to enhance
scheduled service RASM through increases in load factor and yield.
The 40.2% increase in total advertising expense between years was slightly
greater than the 37.5% increase in scheduled service revenues between the same
periods. The majority of the Company's growth in 1998 was from increased
frequencies at existing gateway cities such as Chicago-Midway, which provided
some advertising efficiencies in 1998 as compared to the prior year. Such
market-related efficiency was partially offset, however, due to temporarily
higher advertising support required in the second and third quarters of 1998 for
the introduction of the Company's new services to Dallas-Ft. Worth, Denver, San
Juan, and New York's LaGuardia airport, as well as to launch the Company's fall
promotions in the third and fourth quarters of 1998.
The cost per ASM of advertising increased 30.0% to 0.13 cents in 1998, as
compared to 0.10 cents in 1997.
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 10.5% to $9.5 million in 1998, as compared to $8.6 million in
1997. The rate of growth in facilities costs between periods was comparable to
the 9.5% rate of ASM growth between 1998 and 1997, due to the addition of new
facilities for services to Denver, Dallas-Ft. Worth and New York's LaGuardia
airport between periods.
The cost per ASM for facility and other rentals was unchanged at 0.07 cents in
both 1998 and 1997.
Other Operating Expenses. Other operating expenses increased 14.5% to $62.2
million in 1998, as compared to $54.3 million in 1997. Other operating expenses
which experienced significant changes between periods included: (i) $3.1 million
of additional costs for the Chicago Express Jetstream 31 code share agreement,
which agreement was not in effect in the 1997 first quarter, and because such
code share was expanded to include Lansing and Madison in 1998, which were
served in only the fourth quarter of 1997; (ii) $2.3 million in higher expenses
associated with the operation of the Company's affiliate business; and (iii)
$1.7 million in higher costs associated with the short-term leasing of
substitute aircraft, and the reprotection of some of the Company's passengers on
other airlines, due to higher-than-normal delayed and irregular flight
operations, primarily in the second quarter of 1998.
Other operating cost per ASM increased 4.7% to 0.45 cents in 1998, as compared
to 0.43 cents in 1997.
Interest Income and Expense. Interest expense in 1998 increased to $12.8 million
as compared to $9.5 million in 1997. The increase in interest expense between
periods was primarily due to changes in the Company's capital structure
resulting from the two financings completed on July 24, 1997, at which time the
Company (i) sold $100.0 million principal amount of 10.5% unsecured seven-year
notes, and (ii) entered into a new $50.0 million secured revolving credit
facility, thereby replacing the former secured revolving credit facility of
$122.0 million as of June 30, 1997. Additionally, in December 1998, the Company
sold $125.0 million principal amount of 9.625% unsecured senior notes.
Prior to completing these new financings, the Company utilized secured bank
credit facilities to finance cash flow requirements of the Company as they
arose, thereby minimizing the level of borrowings on which interest would be
paid. During 1998, the Company's weighted average debt outstanding was
approximately $159.1 million, as compared to $117.2 million in 1997.
The weighted average effective interest rate applicable to the Company's
outstanding debt in 1998 was 8.56%, as compared to 8.06% in 1997. The increase
in the weighted average effective interest rates between years was primarily due
to the 10.5% interest rate applicable to the $100.0 million in unsecured notes
issued on July 24, 1997, which was higher than the average interest rate which
was applicable to borrowings under the former credit facility.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $4.4 million in interest income in 1998,
as compared to $1.6 million in 1997.
Income Tax Expense. In 1998 the Company recorded $27.1 million in income tax
expense applicable to $67.2 million of pre-tax income for that period, while in
1997 income tax expense was $4.5 million on pre-tax income of $6.0 million. The
effective tax rate applicable to 1998 was 40.4%, as compared to 73.9% in 1997.
Income tax expense in both sets of comparative periods was affected by the
permanent non-deductibility for federal income tax purposes of a percentage of
amounts paid for crew per diem (45% in 1998 and 50% in 1997). The effect of this
and other permanent differences on the effective income tax rate for financial
accounting purposes becomes more pronounced in cases where before-tax income
approaches zero, which was a significant reason for the higher effective tax
rate in 1997.
Income tax expense for 1997 was also significantly affected by the one-time $2.0
million charge to salaries, wages and benefits for the executive compensation
package provided to the Company's former President and Chief Executive Officer.
Of the total compensation paid to this former executive of the Company in 1997,
approximately $1.7 million was non-deductible against the Company's federal
taxable income.
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated by Chicago Express as the ATA
Connection under a code sharing agreement.
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 39,517 46,416 (6,899) (14.86)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 49,608 46,416 3,192 6.88
--------------- --------------- ---------------- ---------------
Block Hours Jet 129,216 138,114 (8,898) (6.44)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 139,426 138,114 1,312 0.95
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 8,967,900 9,172,438 (204,538) (2.23)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 8,985,955 9,172,438 (186,483) (2.03)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 12,615,230 13,295,505 (680,275) (5.12)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 12,647,683 13,295,505 (647,822) (4.87)
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.09 68.99 2.10 3.04
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.05 68.99 2.06 2.99
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,210,578 5,680,496 (469,918) (8.27)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 5,307,390 5,680,496 (373,106) (6.57)
--------------- --------------- ---------------- ---------------
Revenue (000s) $783,193 $750,851 $32,342 4.31
RASM in cents (h) 6.19 5.65 0.54 9.56
CASM in cents (i) 6.09 5.92 0.17 2.87
Yield in cents (j) 8.72 8.19 0.53 6.47
N/M - Not meaningful
See footnotes (a) through (j) on pages 14 and 15.
Operating Revenues
Total operating revenues for 1997 increased 4.3% to $783.2 million from $750.9
million in 1996. This increase was due to a $1.6 million increase in commercial
charter revenues and a $47.0 million increase in military charter revenues,
partially offset by a $14.7 million decrease in scheduled service revenues and a
$1.6 million decrease in other revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service. Data shown for "J31" operations include the operations of
Jetstream 31 propeller aircraft operated on the Company's behalf by Chicago
Express as the ATA Connection.
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
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