ATLANTIC COAST AIRLINES HOLDINGS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 0-21976

ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3621051
(State of incorporation) (IRS Employer
Identification No.)

45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (703) 650-6000

Securities registered pursuant to Section 12(b) of the Act:

Common Stock par value $ .02 NASDAQ National Market
(Title of Class) (Name of each exchange
on which registered)

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 Act of 1934
during the preceding 12 months (or for such shorter period 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. ____

The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 1, 2002 was approximately $1.2 billion.

As of March 1, 2002 there were 50,054,000 shares of common stock of the
registrant issued and 45,007,668 shares of common stock were outstanding.

Documents Incorporated by Reference

Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-K.

Document Incorporated Part of Form 10-K
Proxy Statement for 2002 Annual Meeting Part III, Items 10-13
of Shareholders

2
PART I

Item 1. Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking
statements. Statements in the Business and Management's Discussion and
Analysis of Operations and Financial Condition sections of this filing,
together with other statements beginning with such words as "believes",
"intends", "plans", and "expects" include forward-looking statements that
are based on management's expectations given facts as currently known by
management on the date this Form 10-K was first filed with the SEC.
Actual results may differ materially. Factors that could cause the
Company's future results to differ materially from the expectations
described here include the costs and other effects of enhanced security
measures and other possible government orders; changes in and
satisfaction of regulatory requirements including requirements relating
to fleet expansion; changes in levels of service agreed to by the Company
with its code share partners due to market conditions; the ability of
these partners to manage their operations and cash flow; the ability and
willingness of these partners to continue to deploy the Company's
aircraft and to utilize and pay for scheduled service at agreed rates;
increased cost and reduced availability of insurance; changes in existing
service; final calculation and auditing of government compensation;
unexpected costs or delays in the implementation of new service; adverse
weather conditions; satisfactory resolution of union contracts becoming
amendable during 2002 with the Company's aviation maintenance technicians
and ground service equipment mechanics, and the Company's flight
attendants; ability to hire and retain employees; availability and cost
of funds for financing new aircraft; the ability of Fairchild Dornier to
fulfill its contractual obligations to the Company, and of Bombardier and
Fairchild Dornier to deliver aircraft on schedule; airport and airspace
congestion; ability to successfully retire turboprop aircraft; flight
reallocations and potential service disruptions due to labor actions by
employees of Delta Air Lines or United Airlines; general economic and
industry conditions; and additional acts of war. The statements in this
Annual Report are made as of March 29, 2002 and the Company undertakes no
obligation to update any of the forward-looking information included in
this release, whether as a result of new information, future events,
changes in expectations or otherwise.

General

Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is a holding
company with its primary subsidiary being Atlantic Coast Airlines
("ACA"), a regional airline serving 64 destinations in 28 states in the
Eastern and Midwestern United States and Canada as of March 1, 2002 with
760 scheduled non-stop flights system-wide every weekday. On July 1,
2001, ACAI combined the operations of its Atlantic Coast Jet, Inc.
("ACJet") subsidiary into the operations of ACA. As a result, ACA now
operates under its marketing agreements as both a United Express carrier
with United Air Lines, Inc. ("United") and as a Delta Connection carrier
with Delta Air Lines, Inc. ("Delta"). United Express operations are
conducted throughout the Eastern and Central United States, while Delta
Connection operations are conducted predominately in the Northeastern
United States and Canada. Unless the context indicates otherwise, the
terms "the Company", "we", "us", or "our" refer herein to Atlantic Coast
Airlines Holdings, Inc. As of March 1, 2002, the Company operated a
fleet of 124 aircraft (93 regional jets and 31 turboprop aircraft) having
an average age of approximately three years.

3
Recent Developments

On September 11, 2001, two United airplanes and two American
Airlines, Inc. airplanes were hijacked and used in terrorist attacks on
the United States. As a result of these terrorist attacks, the Federal
Aviation Administration ("FAA") issued a federal ground stop order that
required the immediate suspension of all commercial airline flights on
the morning of September 11, 2001. The Company recommenced flight
operations on September 14 at reduced levels from its pre-September 11
schedule. The events of September 11, together with the slowing economy
throughout 2001, has significantly affected the U.S. airline industry.
These events have resulted in changed government regulation, declines and
shifts in passenger demand, higher insurance rates and tightened credit
markets which continue to affect the operations and financial condition
of participants in the U.S. airline industry and may affect the Company
in ways that it is not currently able to predict. See, for example,
"Business - Insurance," "Business - Regulation," and "Management's
Discussion and Analysis of Results of Operations and Financial
Condition," below.

Marketing Agreements

The Company derives substantially all of its revenues through
its marketing agreements with United and Delta.

United Express:

The Company's United Express Agreements ("UA Agreements")
define the Company's relationship with United. In November 2000, the
Company and United amended and restated the UA Agreements, effectively
changing from a prorated fare arrangement to a fee-per-departure
arrangement. Under the UA Agreements in effect prior to November 2000,
the Company was responsible for scheduling, marketing and pricing its
flights, in coordination with United's operations, and paid a portion of
fares it received to United. Under the fee-per-departure structure in
effect as of December 1, 2000, the Company is contractually obligated to
operate a flight schedule designated by United, for which United pays the
Company an agreed amount per departure regardless of the number of
passengers carried, with incentive payments based on operational
performance. The Company thereby assumes the risks associated with
operating the flight schedule and United assumes the risk of scheduling,
marketing, and selling seats to the traveling public. The restated UA
Agreements are for a term of ten years. The restated UA Agreements give
ACA the authority to operate 128 regional jets in the United Express
operation. By operating under the UA Agreements, the Company is able to
use United's "UA" flight designator code to identify the Company's
flights and fares in the major airline Computer Reservation Systems,
including United's "Apollo" reservation system, and to use the United
Express logo and exterior aircraft paint schemes and uniforms similar to
those of United.

Pursuant to the restated UA Agreements, United, at its own
expense, provides a number of additional services to ACA. These include
customer reservations, customer service, pricing, scheduling, revenue
accounting, revenue management, frequent flyer administration,
advertising, provision of ground support services at most of the airports
served by both United and ACA, provision of ticket handling services at
United's ticketing locations, and provision of airport signage at
airports where both ACA and United operate. Under the restated
agreement, the Company remains responsible for fees associated with the
major airline Computer Reservation Systems. The UA Agreements do not
prohibit United from serving, or from entering into agreements with other
airlines who would serve, routes served by the Company, but state that
United may terminate the UA Agreements if ACAI or ACA enter into a
similar arrangement with any other carrier other than Delta or a
replacement for Delta without United's prior written approval. The UA
Agreements limit the ability of ACAI and ACA to merge with another
company or dispose of certain assets or aircraft without offering United
a right of first refusal to acquire the Company or such assets or
aircraft, and provide United a right to terminate the UA Agreements if
ACAI or ACA merge with or are controlled or acquired by another carrier.
The UA agreements provide United with the right to assume ACA's ownership
or leasehold interest in certain aircraft in the event ACA breaches
specified provisions of the UA agreements, or fails to meet specified
performance standards.
4

The UA Agreements call for the resetting of fee-for-departure
rates annually based on the Company's planned level of operations for the
upcoming year. On December 31, 2001, the Company and United agreed on fee-
per-departure rates to be utilized during 2002. Under the terms of this
agreement the Company and United settled prior contract issues, agreed
that there would be no adjustment for utilization changes in the fourth
quarter of 2001, agreed to aggressively contain costs in 2002, and
committed to a J-41 retirement plan.

Delta Connection:

In September 1999, the Company reached a ten-year agreement
with Delta to operate regional jet aircraft as part of the Delta
Connection program on a fee-per-block hour basis. The Company began Delta
Connection revenue service on August 1, 2000. The Company's Delta
Connection Agreement ("DL Agreement") defines the Company's relationship
with Delta. The Company is compensated by Delta on a fee-per-block hour
basis. Under the fee-per-block hour structure, the Company is
contractually obligated to operate a flight schedule designated by Delta,
for which Delta pays the Company an agreed amount per block hour flown
regardless of the number of passengers carried, with incentive payments
based on operational performance. The Company thereby assumes the risks
associated with operating the flight schedule and Delta assumes the risks
of scheduling, marketing, and selling seats to the traveling public. By
operating as part of the Delta Connection program, the Company is able to
use Delta's "DL" flight designator to identify ACA's flights and fares in
the major Computer Reservation Systems, including Delta's "Deltamatic"
reservation system, and to use the Delta Connection logo and exterior
aircraft paint schemes and uniforms similar to those of Delta.

Pursuant to the DL Agreement, Delta, at its expense, provides a
number of support services to ACA. These include customer reservations,
customer service, ground handling, station operations, pricing,
scheduling, revenue accounting, revenue management, frequent flyer
administration, advertising and other passenger, aircraft and traffic
servicing functions in connection with the ACA operation. Delta may
terminate the DL Agreement at any time if the Company fails to maintain
certain performance standards and, subject to certain rights of the
Company and by providing 180 days notice to the Company, may terminate
without cause. If Delta terminates the Delta agreement without cause
prior to March 2010, the Company has the right to sell all or some of the
Delta Connection aircraft to Delta. In January 2001, the Company reached
an agreement with United and Delta to place 20 CRJ's originally ordered
for the Delta Connection program in the United Express program. The DL
Agreement requires the Company to obtain Delta's approval if it chooses
to enter into a code-sharing arrangement with another carrier other than
a replacement for United, to list its flights under any other code, or to
operate flights for any other carrier, except with respect to such
arrangements with United or non-U.S. code-share partners of United or in
certain other circumstances. The DL Agreement does not prohibit Delta
from serving, or from entering into agreements with other airlines who
would serve, routes flown by the Company. The DL Agreement also
restricts the ability of the Company to dispose of aircraft subject to
the agreement without offering Delta a right of first refusal to acquire
such aircraft, and provides that Delta may extend or terminate the
agreement if, among other things, the Company merges with or sells its
assets to another entity, is acquired by another entity or if any person
acquires more than a specified percentage of its stock.
5
Due to the rapid increase in fleet size during 2001, the
Company and Delta agreed to compensation for 2001 utilizing a cost plus
formula based on reimbursement of fixed amounts for initial pilot
training expenses and for all other costs, based on actual costs
incurred, plus a contracted margin, and incentive compensation tied to
operating performance. The Company and Delta have agreed to return to a
fee-per-block hour rate arrangement for 2002. The Company and Delta are
currently setting these rates based on the Company's planned level of
operations for the upcoming year. The Company does not anticipate
material differences on a per-block-hour basis for its 2002 revenues as
compared to 2001 revenues due to the reversion to a fee-per-block-hour
rate.

Agreements with Other Airlines:

As of March 1, 2002 the Company has implemented code-sharing
arrangements with Lufthansa German Airlines ("Lufthansa"), Air Canada,
and Scandinavian Airlines involving certain United Express flights. Such
international code-sharing arrangements permit these foreign air carriers
to place their respective airline codes on certain flights operated by
ACA, and provide a wide range of benefits for passengers including
schedule coordination, through ticketing and frequent flyer
participation. The revenue benefits from these arrangements inures to
United, and any such arrangements as may be made in the future with
respect to the Company's Delta Connection flights would inure to Delta,
due to the nature of the Company's agreements with these two airlines.
Thus the Company's primary role under these arrangements is to obtain
regulatory approvals for the relationships and to operate the flights.

Charter Operations

The Company established a charter operation in February 2002.
The Company is presently providing regular private shuttle service to two
destinations pursuant to an agreement with a major corporation and
performing ad hoc charter services secured through brokers and other
means. The charter business is solicited and managed by a dedicated
management team separate from those involved in airline operations,
utilizing the Company's operations and maintenance services. The Company
has ordered three 328JETs for its charter business, one of which has been
delivered and the others of which are scheduled to be delivered during
the second quarter of 2002.

Markets

The Company's United Express operation is centered around
Washington's Dulles and Chicago's O'Hare airports. During 2001 and 2002,
the Company has greatly increased its Chicago operation such that as of
March 2002, 55% of the Company's United Express capacity (as measured in
available seat miles) is flown to/from Chicago's O'Hare airport. The
growth in Chicago results from the combination of adding complementary
service to United mainline service in 14 markets and replacing United
mainline service completely in 11 markets during 2001.
6
The Delta Connection operation is focused at New York's
LaGuardia airport, Boston's Logan airport and Cincinnati Northern
Kentucky International airport. As of March 2002, 42% of the Company's
Delta Connection capacity (as measured in available seat miles) was at
LaGuardia, 31% was at Boston, and 27% was at Cincinnati.
7
The following tables set forth the destinations served by the
Company as of March 1, 2002:

United Express Service
Washington-Dulles (To/From)
(Regional Jet and Turboprop Service)

Albany, NY Louisville, KY
Allentown, PA Manchester, NH
Binghamton, NY Nashville, TN
Birmingham, AL Newburgh, NY
Buffalo, NY New York, NY
(Kennedy)
Burlington, VT New York, NY
(LaGuardia)
Charleston, SC Newark, NJ
Charleston, WV Norfolk, VA
Charlottesville, VA Philadelphia, PA
Cleveland, OH Pittsburgh, PA
Columbia, SC Portland, ME
Columbus, OH Providence, RI
Dayton, OH Raleigh-Durham, NC
Detroit, MI Richmond, VA
Greensboro, NC Roanoke, VA
Greenville/Spartanburg, SC Rochester, NY
Harrisburg, PA Savannah, GA
Hartford, CT/Springfield, MA State College, PA
Indianapolis, IN Syracuse, NY
Jacksonville, FL White Plains, NY
Knoxville, TN
Chicago-O'Hare (To/From)
(Regional Jet Service)
Akron/Canton, OH Lansing, MI
Albany, NY Lexington, KY
Allentown, PA Memphis, TN
Buffalo, NY Madison, WI
Cedar Rapid/Iowa City, IA Nashville, TN
Charleston, SC Norfolk/Virginia Beach, VA
Charleston, WV Oklahoma City, OK
Charlotte, NC Omaha, NE
Cleveland, OH Peoria, IL
Columbia, SC Portland, ME
Dayton, OH Raleigh/Durham, NC
Des Moines, IA Roanoke, VA
Detroit, MI Rochester, NY
Fargo, ND Saginaw, MI
Grand Rapids, MI Savannah, GA
Greenville/Spartanburg, SC Sioux Falls, SD
Greensboro/High Point, NC South Bend, IN
Hartford, CT/Springfield, MA Springfield/Branson, MO
Indianapolis, IN Syracuse, NY
Jacksonville, FL Tulsa, OK
Kansas City, MO White Plains, NY
Knoxville, TN Wilkes-Barre/Scranton, PA

8

Delta Connection Service
New York LaGuardia (To/From)
(Regional Jet Service)

Columbia, SC Greenville/Spartanburg, SC
Columbus, OH Indianapolis, IN
Charleston, SC Nashville, TN
Cincinnati, OH Portland, ME
Dayton, OH Raleigh-Durham, NC
Greensboro/High Point, NC Richmond, VA

Boston Logan (To/From)
(Regional Jet Service)
Bangor, ME Newark, NJ
Burlington, VT Philadelphia, PA
Cincinnati, OH Portland, ME
Montreal, Quebec Canada Raleigh-Durham, NC
New York, NY (Kennedy) Washington-Dulles, DC

Cincinnati-Northern Kentucky (To/From)
(Regional Jet Service)
Birmingham, AL Columbia, SC
Boston, MA Greensboro/High Point, NC
Bristol, TN Greenville/Spartanburg, SC
Burlington, VT Nashville, TN
Charleston, SC New York, NY
(LaGuardia)
Charlotte, NC Raleigh-Durham, NC

Fleet Description

Fleet Expansion: As of March 1, 2002, the Company operated a
fleet of 60 Canadair Regional Jets ("CRJs"), 33 Fairchild Dornier 328
regional jets ("328JET"), and 31 British Aerospace Jetstream-41 ("J-41s")
turboprop aircraft. Thirty 328JETs are operated under the Delta
Connection program, 59 CRJs, two 328JETs and 31 J-41's are operated under
the United Express program, and one 328JET and one CRJ are currently
dedicated to charter operations.

As of March 1, 2002, the Company had a total of 36 CRJs on firm
order from Bombardier, Inc., in addition to the 60 already delivered, and
held options for 80 additional CRJs. The Company also had 32 328JETs on
firm order from Fairchild-Dornier, in addition to the 33 already
delivered, and held options for an additional 81 aircraft. In January
2001, the Company reached an agreement with United and Delta to place 20
CRJs originally ordered for the Delta Connection program in the United
Express Program. The future delivery schedule of the remaining 68 firm
ordered regional jet aircraft undelivered as of March 1, 2002 is as
follows: 16 CRJs for delivery during the remainder of 2002 and 20 CRJs
for delivery in 2003, and 10 328JETs for delivery during the remainder of
2002 and 22 328JETs in 2003.

9
Fleet Composition: The following table describes the Company's
fleet of aircraft, scheduled firm deliveries and options as of March 1,
2002:

Total Number Number
Number of of Average
of Aircraft Aircraft Passenger Age in Firm
Aircraft Leased Owned Capacity Years Orders Options

Canadair 60 56 4 50 2.1 36 80
Regional Jets
Fairchild 33 32 1 32 1.0 32 81
Dornier 328JET
British 31 26 5 29 7.2 - -
Aerospace J-41
124 114 10 3.1 68 161

Turboprop Retirement: During the fourth quarter of 2001, the
Company recorded an aircraft early retirement charge of $23.5 million
($14.0 million after tax) for the early retirement of nine leased
Jetstream-41 turboprop aircraft, which the Company plans to remove from
service prior to year-end 2002. The Company anticipates taking
additional charges during 2002 of approximately $48 million pre-tax
($28.4 million after-tax) for the retirement of its remaining 29-seat
Jetstream-41 turboprop aircraft. Fairchild Dornier GMBH ("Fairchild
Dornier"), the manufacturer of the 328JETS, is contractually obligated to
make the Company whole for any difference between lease payments, if any,
received from remarketing the 26 J-41 aircraft leased by the Company and
the lease payment obligations of the Company on those aircraft.
Fairchild Dornier also has agreed to purchase the five J-41 aircraft
owned by the Company at their net book value at the time of retirement.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Outlook and Business Risks" below. In 2001, the
Company completed the early retirement of the 19 seat J-32 turboprop fleet
and reversed approximately $500,000 of excess aircraft early retirement
charges that had been expensed in 2000.

In March 2001, the Company reached agreement with the lessor
for the early return and lease termination of the 28 19-seat Jetstream-32
turboprop aircraft formerly utilized in the Company's United Express
operations. Under this agreement, the Company paid a lease termination
fee, which consisted of $19.1 million in cash and the application of $5.2
million in credits due from the lessor. The Company completed the early
retirement of these aircraft from its fleet and returned the aircraft to
the lessor during 2001. The Company is in the process of completing the
disposal of spare parts and has certain oversight obligations with
respect to seven aircraft until July 2003, but does not expect to incur
any additional charges against earnings for the early retirement of the J-
32 fleet.
10
Fuel

The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program. As
such, the Company reasonably expects that its results of operations with
United and Delta will not be directly affected by fuel price volatility.

Insurance

Following the September 11 terrorist attacks, the aviation
insurance industry imposed a worldwide surcharge on aviation insurance
rates as well as a reduction in coverage for certain war risks. In
response to the reduction in coverage, the Air Transportation Safety and
System Stabilization Act provided U.S. air carriers with the option to
purchase certain war risk liability insurance from the United States
government on an interim basis at rates that are more favorable than
those available from the private market. The Company has purchased this
coverage through May 19, 2002 and anticipates renewing it for as long as
the coverage is available from the U.S. government. The airlines and
insurance industry, together with the United States and other
governments, are continuing to evaluate both the cost and options for
providing coverage of aviation insurance. Recently, an industry-led
group announced a proposal to create a mutual insurance company, to be
called Equitime, to cover war risk and terrorism risk, which would
initially seek support through government guarantees. Equitime would
provide a competitive alternative to insurance being offered by the
traditional insurance market, which opposes this initiative. Equitime's
organizers project that it may be available to provide insurance as early
as May 2002 to up to 70 U.S. carriers. The Company has not been actively
involved in the formation of Equitime and is unable to anticipate whether
this source of insurance will be made available and, if so, whether it
will offer competitive rates. The Company anticipates that it will
follow industry practices with respect to sources of insurance.

Competition

Under the Company's fee arrangements with United and Delta,
United and Delta are responsible for establishing routes and fee
structure, and the Company's revenue is not directly related to passenger
revenue earned by United or Delta on its flights. However, the overall
system benefit to those airlines is likely to affect the Company in such
areas as future growth opportunities.

Slots

Slots are reservations for takeoffs and landings at specified
times and are required by governmental authorities to operate at certain
airports. The Company has rights to and utilizes takeoff and landing
slots at Chicago-O'Hare and LaGuardia, Kennedy and White Plains, New York
airports. The Company also uses slot exemptions at Chicago-O'Hare, which
differ from slots in that they allow service only to designated cities
and are not transferable to other airlines without the approval of the
U.S. Department of Transportation ("DOT"). Airlines may acquire slots by
governmental grant, by lease or purchase from other airlines, or by loan
when another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased and
loaned slots are subject to renewal and termination provisions. Under
rules presently in effect, all slot regulation is scheduled to end at
Chicago-O'Hare after July 1, 2002 and at LaGuardia and Kennedy after
January 1, 2007. The rules also provide that, in addition to those slots
currently held by carriers, operators of regional jet aircraft may apply
for, and the Secretary of Transportation must grant, additional slots at
Chicago, LaGuardia, and Kennedy in order to permit the carriers to offer
new service, increase existing service or upgrade to regional jet service
in qualifying smaller communities. There is no limit on the number of
slots a carrier may request.
11
The ability of regional carriers to obtain slots at LaGuardia
in large numbers led to an increase in flight activity at the airport
that exceeded the capacity of LaGuardia. As a result, and to reduce
airport congestion and delays, the FAA implemented a slot lottery system
resulting in a decrease in the operation of new regional jet service to
and from LaGuardia including ACA services operated for Delta. The FAA
has stated that the slot lottery is a temporary measure, and that it is
considering implementing a long-term solution that could involve
increasing landing and other fees to discourage operations during peak
hours. To the extent other airports experience significant flight
delays, the FAA or local airport operators could seek to impose similar
peak period pricing systems or other demand-reducing strategies, which
could impede the Company's ability to serve or increase service at any
such impacted airport.

Employees

As of March 1, 2002, the Company had 3,601 full-time and 391
part-time employees, classified as follows:

Classification Full- Part-
Time Time

Pilots 1,221 1
Flight attendants 517 -
Station personnel 898 349
Maintenance personnel 480 8
Management,
administrative and
clerical personnel 485 33

Total employees 3,601 391

The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), flight attendants are represented by the
Association of Flight Attendants ("AFA"), and aviation maintenance
technicians and ground service equipment mechanics are represented by the
Aircraft Mechanics Fraternal Association ("AMFA").

In January 2001, the Company agreed to a new four-and-a-half
year contract with its pilot union that was subsequently ratified and
became effective on February 9, 2001. The collective bargaining
agreement covers pilots flying for the United Express, Delta Connection,
and charter operations. The new agreement provides for substantial
increases in pilot compensation and improvements in benefits, training,
and other matters, which the Company believes are consistent with the
regional airline industry.

ACA's collective bargaining agreement with AFA was ratified in
October 1998. The agreement is for a four-year duration and becomes
amendable in October 2002. This agreement covers all flight attendants
working for the Company. The collective bargaining agreement with AMFA
was ratified in June 1998. The agreement is for a four-year duration and
becomes amendable in June 2002. This agreement covers all aviation
maintenance technicians and ground service equipment mechanics working
for the Company.
12
The Company believes that certain of the Company's
unrepresented labor groups are from time to time approached by unions
seeking to represent them. However, as of March 1, 2002, the Company has
not received any official notice of organizing activity and there have
been no representation applications filed with the National Mediation
Board by any of these groups. The Company believes that the wage rates
and benefits for non-union employee groups are comparable to similar
groups at other regional airlines.

The Company continues to emphasize employee recruiting and
retention efforts and to hire personnel to accommodate its growth plans.
Recently the Company has benefited from a decline in attrition due to the
softening of the national economy. However, due to fluctuations in
industry hiring demands, a competitive local labor market in Northern
Virginia and the potential for the resumption of normal attrition, there
can be no assurance that the Company will be able to continue to meet its
hiring requirements.

Pilot Training

The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow the Company to train
CRJ, J-41 and 328JET pilots at PAIFA's facility near Washington-Dulles.
In 2001, PAIFA relocated its Washington-Dulles operations to a new
training facility housing two CRJ simulators, a 328JET simulator, and a J-
41 simulator near the Company's Washington-Dulles headquarters. The
Company has agreements to purchase an annual minimum number of CRJ and J-
41 simulator training hours at agreed rates, through 2010 for the CRJ,
and 2002 for the J-41. The Company's payment obligations for CRJ and J-
41 simulator usage over the remaining years of the agreements total
approximately $12.5 million.

In 2001, a simulator provision and service agreement between
PAIFA, CAE Schreiner and the Company was executed and 328JET training
commenced at the PAIFA facility. Under this agreement, the Company has
committed to purchase all of its 328JET simulator time from PAIFA at
agreed upon rates, with no minimum number of simulator hours guaranteed.
A second 328JET simulator is scheduled for installation at the Washington-
Dulles PAIFA simulator facility in July 2002.

Regulation

Economic. The Department of Transportation ("DOT") has
extensive authority to issue certificates authorizing carriers to engage
in air transportation, establish consumer protection regulations,
prohibit certain unfair or anti-competitive pricing practices, mandate
conditions of carriage and make ongoing determinations of a carrier's
fitness, willingness and ability to provide air transportation. The DOT
can bring proceedings for the enforcement of its regulations under
applicable federal statutes, which proceedings may result in civil
penalties, revocation of operating authority or criminal sanctions.

The Company's ACA subsidiary holds a certificate of public
convenience and necessity, issued by the DOT, that authorizes it to
conduct scheduled and charter air transportation of persons, property and
mail between all points in the United States, its territories and
possessions. In addition, ACA may conduct charters to points outside the
United States, subject to obtaining any necessary authority from any
foreign country to be so served. This certificate requires that ACA
maintain DOT-prescribed minimum levels of insurance, comply with all
applicable statutes and regulations and remain continuously "fit" to
engage in air transportation. In addition to this authority, ACA is
authorized to engage in air transportation between the United States and
Canada.
13
The Company's ACJet subsidiary also holds a certificate of
public convenience and necessity, issued by the DOT, that authorizes it
to conduct scheduled and charter air transportation of persons, property
and mail between all points in the United States, its territories and
possessions. On July 1, 2001, the Company combined the operations of its
ACJet subsidiary into the operations of Atlantic Coast Airlines. ACJet
is now a dormant company with its only assets being its DOT and FAA air
carrier operating certificates. The certificates issued to ACJet are
subject to revocation for dormancy as of July 1, 2001.

Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time proposes
and adopts new regulations or amends existing regulations that may impose
additional regulatory burdens and costs on the Company. In addition,
air carriers may volunteer to impose new or additional requirements on
themselves to address Congressional concerns or concerns expressed by the
public, such as passenger rights initiatives. Imposition of new laws and
regulations on air carriers or agreement on voluntary initiatives could
increase the cost of operation and or limit carrier management
discretion.

Safety. The FAA extensively regulates the safety-related
activities of air carriers. The Company is subject to the FAA's
jurisdiction with respect to aircraft maintenance and operations,
equipment, ground facilities, flight dispatch, communications, training,
weather observation, flight personnel, airport security, the
transportation of hazardous materials and other matters affecting air
safety. To ensure compliance with its regulations, the FAA requires that
airlines under its jurisdiction obtain an operating certificate and
operations specifications for the particular aircraft and types of
operations conducted by such airlines. The Company's ACA subsidiary
possesses an operating certificate and related authorities issued by the
FAA authorizing it to conduct operations with turboprop and turbojet
equipment. The Company, like all carriers, requires specific FAA
authority to add aircraft to its fleet. ACA's authority to conduct
operations is subject to suspension, modification or revocation for
cause. The FAA has authority to bring proceedings to enforce its
regulations, which proceedings may result in civil or criminal penalties
or revocation of operating authority.

The Company's ACJet subsidiary was issued by the FAA an
operating certificate and related authorities authorizing it to conduct
operations with turbojet equipment. On July 1, 2001, the Company
combined the operations of its ACJet subsidiary into the operations of
Atlantic Coast Airlines.

From time to the time and with varying degrees of intensity,
the FAA conducts inspections of air carriers. Such inspections may be
scheduled or unscheduled and may be triggered by specific events
involving either the specific carrier being inspected or other air
carriers. In addition, the FAA may require airlines to demonstrate that
they have the capacity to properly manage growth and safely operate
increasing numbers of aircraft.
14
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and
other mandatory orders. These relate to, among other things, the
inspection of aircraft and the mandatory removal and replacement of parts
or structures. In addition, the FAA from time to time amends its
regulations and such amended regulations may impose additional regulatory
burdens on the Company, such as the required installation of new safety-
related items. Depending upon the scope of the FAA's orders and amended
regulations, these requirements may cause the Company to incur
substantial, unanticipated expenses that may not be reimbursable under
the Company's marketing agreements. The FAA enforces its maintenance
regulations by the imposition of civil penalties, which can be
substantial.

On November 19, 2001 the President signed into law the Aviation
and Transportation Security Act (the "Security Act"). The Security Act
requires heightened passenger, baggage and cargo security measures to be
adopted as well as enhanced airport security procedures. The Security
Act created the Transportation Security Administration ("TSA") that has
taken over the responsibility for conducting the screening of passengers
and their baggage at the nation's airports as of February 17, 2002. The
activities of the TSA are to be funded in part by the application of a
$2.50 per passenger enplanement security fee (subject to a maximum of
$5.00 per one way trip) and payment by all passenger carriers of a sum
not exceeding each carrier's passenger and baggage screening cost
incurred in calendar year 2000. The TSA is charged to have equipment in
operation by the end of 2002 to be able to electronically screen all
checked passenger baggage with explosive detection systems. The TSA is
also required to deploy federal air marshals on an increased number of
passenger flights.

The Security Act imposes new and increased requirements for air
carrier employee background checks and additional security training of
flight and cabin crew personnel. These additional and new requirements
may increase the security related costs of the Company. The Security Act
also mandates and the FAA has adopted new rules requiring the
strengthening of cockpit doors, some of the costs of which may be
reimbursed by the FAA. The Company has completed level one fortification
of its cockpit doors on all of its aircraft as of November 15, 2001. The
FAA has mandated additional cockpit door modifications that will result
in additional costs. The Company intends to apply for reimbursement of
these costs and other security costs for which the FAA has established a
cost reimbursement program. There is no guarantee that the Company will
be reimbursed in full for the cost of these modifications. New passenger
and baggage screening requirements have caused disruptions in the flow of
passengers through airports and in some cases delayed airline operations.
The Company may experience security-related disruptions in the future,
including reduced passenger demand for air travel, but believes that its
exposure to such disruptions is not greater than that faced by other
providers of regional air carrier services.

Although the TSA has taken over the former responsibilities of
the air carriers for the screening of all passengers and baggage, the FAA
continues to require air carriers to adopt and enforce procedures
designed to safeguard property, and ensure airport and aircraft to
protect against terrorist acts. The FAA, from time to time, imposes
additional security requirements on air carriers and airport authorities
based on specific threats or world conditions or as otherwise required.
The FAA has issued a number of security directives following the
September 11 terrorist attacks, and the Company has adjusted its security
procedures on numerous occasions in response to these directives. The
Company incurs substantial expense in complying with current security
requirements and it cannot predict what additional security requirements
may be imposed in the future or the cost of complying with such
requirements.
15
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the transportation of
hazardous materials. The Company has policies against accepting
hazardous materials or other dangerous goods for transportation.
Employees of the Company are trained in the recognition of hazardous
materials and dangerous goods through an FAA approved training course.
The Company may ship aircraft and other parts and equipment, some of
which may be classified as hazardous materials, using the services of
third party carriers, both ground and air. In acting in the capacity of
a shipper of hazardous materials, the Company must comply with applicable
regulations. The FAA enforces its hazardous material regulations by the
imposition of civil penalties, which can be substantial.

Other Regulation. In the maintenance of its aircraft fleet and
ground equipment, the Company handles and uses many materials that are
classified as hazardous. The Environmental Protection Agency and similar
local agencies have jurisdiction over the handling and processing of
these materials. The Company is also subject to the oversight of the
Occupational Safety and Health Administration concerning employee safety
and health matters. The Company is subject to the Federal Communications
Commission's jurisdiction regarding the use of radio frequencies.

Federal law establishes maximum aircraft noise and emissions
limits. At the present time, all of the aircraft operated by the Company
comply with all applicable federal noise and emissions regulations.
Federal law generally preempts airports from imposing unreasonable local
noise rules that restrict air carrier operations. However, under certain
circumstances airport operators may implement reasonable and
nondiscriminatory local noise abatement procedures, which procedures
could impact the ability of the Company to serve certain airports,
particularly in off-peak hours.

Seasonality

Seasonal factors such as winter snowstorms, thunderstorms, and
hurricanes have the ability to affect the Company's departures,
completion factor, profitability and cash generation. As a whole, the
Company's principal geographic areas of operations usually experience
more adverse weather during the year as compared to other geographical
regions, causing a greater percentage of the Company's and other
airlines' flights to be canceled.

Item 2. Properties

Leased Facilities

Airports

The Company leases gate and ramp facilities at most of the
airports ACA serves and leases ticket counter and office space at those
locations where ticketing is handled by Company personnel. Payments to
airport authorities for ground facilities are generally based on a number
of factors, including space occupied as well as flight and passenger
volume. The Company occupies a 69,000 square foot passenger concourse at
Washington-Dulles dedicated solely to regional airline operations. The
36-gate concourse, designed to support the Company's United Express
operation, is owned by the Metropolitan Washington Airports Authority and
leased to the Company under a 15-year lease.
16
Corporate Offices

In December 2000, the Company moved into a newly built three-
story office building encompassing 77,000 square feet of space under a
ten year operating lease. This new facility houses the executive,
administrative and system control departments. The Company's previously
leased headquarters facility, comprised of 79,000 square feet, has been
transformed into an employee training and services center. The Company
renegotiated this lease for a new seven-year term expiring in January
2008. Together, these two properties will provide the necessary
facilities for the Company's continued growth.

Maintenance Facilities

The FAA's safety regulations mandate periodic inspection and
maintenance of commercial aircraft. The Company performs most line
maintenance, service and inspection of its aircraft and engines at its
maintenance facilities using its own personnel.

The Company performs maintenance functions at its 112,000
square foot aircraft maintenance facility at Washington-Dulles airport,
and at its 34,000 square foot hangar facility in Columbia, SC. The
Washington-Dulles facility is comprised of 60,000 square feet of hangar
space and 52,000 square feet of support space and includes hangar, shop
and office space necessary to maintain the Company's fleet. In addition
to these facilities, the company performs maintenance functions and
maintains leased hangar space at LaGuardia Airport in New York, Logan
Airport in Boston, O'Hare International Airport in Chicago, and
Cincinnati Northern Kentucky International Airport.

Item 3. Legal Proceedings

The Company is a party to routine litigation and to FAA civil
action proceedings, all of which are viewed to be incidental to its
business, and none of which the Company believes are likely to have a
material effect on the Company's financial position or the results of its
operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted during the fiscal quarter ended
December 31, 2001, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the NASDAQ National Market ("NASDAQ/NM")
under the symbol "ACAI". Trading of the Common Stock commenced on July
21, 1993.
17
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the NASDAQ/NM for the periods
indicated:

2000 High Low
First quarter $12.97 $8.31
Second quarter $16.00 $11.99
Third quarter $18.49 $13.00
Fourth quarter $21.38 $13.53

2001
First quarter $23.50 $18.25
Second quarter $29.99 $20.75
Third quarter $29.16 $10.03
Fourth quarter $24.94 $13.61

2002
First quarter $29.21 $23.05
(through March 1, 2002)

As of March 1, 2002, the closing sales price of the Common
Stock on NASDAQ/NM was $27.25 per share and there were approximately 166
holders of record of Common Stock.

The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying any Common Stock cash dividends in the
foreseeable future. The Company intends to retain earnings to finance
the growth of its operations. The payment of Common Stock cash dividends
in the future will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition, the applicability of any
restrictions imposed upon the Company subsidiaries by certain of its
financing agreements, the dividend restrictions imposed by the Company's
line of credit, and other factors deemed relevant by the Board of
Directors. In addition, ACAI is a holding company and its only
significant asset is its investment in its subsidiary, ACA.

The Company's Board of Directors has approved the purchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of March 1, 2002, the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. The Company has approximately $21.6 million remaining
of the $40 million authorization. The Company did not repurchase shares
of its common stock during fiscal 2001.

Item 6. Selected Financial Data

The following selected financial data under the captions
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1997, 1998, 1999, 2000 and 2001
have been derived from the Company's consolidated financial statements.
The following selected operating data under the caption "Selected
Operating Data" have been derived from Company records. The data should
be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K.
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and
operating data)

Consolidated Financial Data: Years ended December 31,

1997 1998 1999 2000 2001

Operating revenues:
Passenger revenues $202,540 $285,243 $342,079 $442,695 $577,604
Other revenues 2,904 4,697 5,286 9,831 5,812
Total operating revenues 205,444 289,940 347,365 452,526 583,416
Operating expenses:
Salaries and related costs 49,661 68,135 84,554 107,831 164,446
Aircraft fuel 17,766 23,978 34,072 64,433 88,308
Aircraft maintenance and 16,860 22,730 24,357 36,750 48,478
materials
Aircraft rentals 29,570 36,683 45,215 59,792 90,323
Traffic commissions and 32,667 42,429 54,521 56,623 15,589
related fees
Facility rents and landing 10,376 13,475 17,875 20,284 32,025
fees
Depreciation and 3,566 6,472 9,021 11,193 15,353
amortization
Other 16,035 23,347 28,458 42,537 61,674
Aircraft early retirement - - - 28,996 23,026
charges (1)
Total operating expenses 176,501 237,249 298,073 428,439 539,222
Operating income 28,943 52,691 49,292 24,087 44,194
Other income (expense):
Interest expense (3,450) (4,207) (5,614) (6,030) (4,832)
Interest income 1,284 4,145 3,882 5,033 7,500
Debt conversion expense (2) - (1,410) - - -

Government compensation (3) - - - - 9,710
Other income (expense), net 62 326 (85) (278) 263
Total other expense, net (2,104) (1,146) (1,817) (1,275) 12,641

Income before income tax
expense and cumulative
effect of accounting 26,839 51,545 47,475 22,812 56,835
change
Income tax provision 12,339 21,133 18,319 7,657 22,513

Income before cumulative
effect of accounting change 14,500 30,412 29,156 15,155 34,322

Cumulative effect of - - (888) - -
accounting change, net (4)
Net income $14,500 $30,412 $28,268 $15,155 $34,322

19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(Dollars in thousands, except per share amounts and operating data)

Years ended December 31,

1997 1998 1999 2000 2001
Income per share:
Basic:
Income before $0.47 $.84 $.77 $.38 $.79
cumulative effect of
accounting change
Cumulative effect of - - (0.02) - -
accounting change
Net income per share (5) $0.47 $.84 $.75 $.38 $.79

Diluted:
Income before $0.40 $.71 $.68 $.36 $.76
cumulative effect of
accounting change
Cumulative effect of - - (0.02) - -
accounting change
Net income per share (5) $0.40 $.71 $.66 $.36 $.76

Weighted average number
of shares used
in computation (in 31,294 36,256 37,928 40,150 43,434
thousands) (5) 39,024 44,372 44,030 43,638 45,210
Basic
Diluted

Selected Operating Data:
Departures 146,069 170,116 186,571 199,050 235,794
Revenue passengers 1,666,975 2,534,077 3,234,713 3,778,811 4,937,208
carried
Revenue passenger 419,977 792,934 1,033,912 1,271,273 1,895,152
miles (000s) (6)
Available seat miles 861,222 1,410,763 1,778,984 2,203,839 3,292,798
(000s) (7)
Passenger load 48.8% 56.2% 58.1% 57.7% 57.6%
factor (8)
Revenue per $0.239 $0.206 $0.195 $0.205 $0.177
available seat mile
Cost per available $0.205 $0.168 $0.168 $0.181 $0.157
seat mile (9)
Average yield per $0.482 $0.360 $0.331 $0.348 $0.305
revenue passenger mile
(10)
Average passenger 252 313 320 336 384
trip length (miles)
Aircraft in service 65 74 84 105 117
(end of period)
Destinations served 43 53 51 53 64
(end of period)

Consolidated Balance
Sheet Data:
Working capital $45,028 $68,130 $60,440 $72,018 $138,659
Total assets 148,992 227,626 293,753 382,700 452,425
Long-term debt and
capital leases, less 76,145 64,735 92,787 67,089 60,643
current portion
Total stockholders' 34,805 110,377 125,524 168,173 221,300
equity

20
1. In 2001, the Company recorded an operating charge of $23,537,000
($14,005,000 net of income tax benefits) for the non-discounted value of
future lease and other costs associated with the early retirement of nine
J-41 turboprop aircraft. In 2000, the Company recorded an operating
charge of $28,996,000 ($17,398,000 net of income tax benefits) for the
present value of future lease and other costs associated with the early
retirement of 28 J-32 turboprop aircraft. Upon completion of the J-32
retirement plan in 2001, the Company reversed $500,000 of the original
2000 operating charge in 2001.

2. In connection with the induced conversion of a portion of the 7%
Convertible Subordinated Notes, the Company recorded a non-cash, non-
operating charge of approximately $1.4 million in 1998.

3. In 2001, the Company recognized $9.7 million as non-operating income
under the Air Transportation Safety and System Stabilization Act, signed
into law by President Bush on September 22, 2001.

4. In 1999, the Company recorded a charge of $888,000 for the
cumulative effect, net of income taxes, of a change in accounting for
preoperating costs in connection with the implementation of Statement of
Position 98-5.

5. All per share calculations have been restated to reflect 2-for-1
common stock splits effected as dividends distributed on May 15, 1998 and
February 23, 2001.

6. "Revenue passenger miles" or "RPMs" represent the number of miles
flown by revenue passengers.

7. "Available seat miles" or "ASMs" represent the number of seats
available for passengers multiplied by the number of scheduled miles the
seats are flown.

8. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles
by available seat miles.

9. "Operating cost per available seat mile" or "CASM" represents total
operating expenses, excluding aircraft early retirement charges, divided
by available seat miles.

10. "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.

21
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition

General

Atlantic Coast Airlines Holdings, Inc. ("ACAI") operates
through its wholly owned subsidiary, Atlantic Coast Airlines ("ACA"). In
2001, the Company recorded net income of $34.3 million compared to $15.2
million for 2000, and $28.3 million for 1999. The 2001 results include a
restructuring charge of $13.7 million, net of income taxes, related to
the planned early retirement of nine leased 29-seat J-41 turboprop
aircraft and $5.8 million, net of income taxes, in government
compensation received pursuant to the Air Transportation Safety and
System Stabilization Act ("Stabilization Act") signed by the President of
the United States in September 2001. The 2000 results include a
restructuring charge of $17.4 million, net of income taxes, related to
the early retirement of 28 leased 19-seat J-32 turboprop aircraft and non-
recurring tax credits of $1.4 million. The 1999 net results include the
cumulative effect of an accounting change, net of income taxes, of
$888,000 related to the adoption of Statement of Position 98-5, which
resulted in the write-off of remaining unamortized regional jet
implementation costs. Excluding these unusual items, net income for
2001, 2000 and 1999 would have been $42.2 million, $31.1 million, and
$29.2 million, respectively. For 2001, the Company's available seat
miles ("ASM") increased 49% with the addition of 19 Canadair Regional Jet
("CRJ") aircraft and 15 Fairchild Dornier 328JET ("328JET") aircraft, net
of the reduction of 21 J-32 turboprop aircraft during the year. The
number of total passengers increased 31%, and revenue passenger miles
("RPM") increased 49%.

Results of Operations

The Company's net income was $34.3 million (including a $23.0
million pre-tax operating charge related to the early retirement of nine
J-41 turboprop aircraft and $9.7 million in pre-tax income for government
compensation) or $.76 per diluted share in 2001 compared to $15.2 million
(including a $29.0 million pre-tax operating charge related to the early
retirement of 28 J-32 turboprop aircraft) or $.36 per diluted share in
2000, and $28.3 million or $.66 per diluted share in 1999. During 2001,
the Company generated operating income of $44.2 million (including a $23
million operating charge related to the early retirement of nine J-41
turboprop aircraft), compared to $24.1 million for 2000 (including a $29
million pre-tax operating charge related to the early retirement of 28 J-
32 turboprop aircraft) and $49.3 million for 1999. Excluding the
aircraft early retirement charges in 2001 and 2000, operating margins for
2001, 2000 and 1999 were 11.5%, 11.7% and 14.2% respectively.

Results for 2001 include special pre-tax government
compensation of $9.7 million arising from the Stabilization Act. The
Stabilization Act provides cash grants to commercial air carriers as
compensation for direct and incremental losses resulting from the attacks
of September 11, 2001 and incurred from that date through December 31,
2001.

The 83.5% increase in operating income from 2000 to 2001 is a
reflection of the 49.4% increase in available seat miles coupled with a
13.7% decrease in revenue per available seat mile and a 13.3% decrease in
the cost per available seat mile. Additionally, the 2001 aircraft early
retirement charge of $23 million was $6 million less than the aircraft
early retirement charge in 2000. Revenue and cost per available seat
mile have decreased as the turboprop aircraft are retired and the Company
utilizes more regional jets.
22
The 51.1% decrease in operating income from 1999 to 2000 is a
reflection of the J-32 retirement charge of $29 million. Excluding this
charge, operating income increased 7.7%, which reflects a 5.1% increase
in unit revenue (total revenue per ASM) from $0.195 to $0.205, an
increase of 7.7% in unit costs (cost per ASM) from $0.168 to $.181 and a
23.9% increase in ASM's.

Fiscal Year 2000 vs. 2001

Operating Revenues

The Company's operating revenues increased 28.9% to $583.4
million in 2001 compared to $452.5 million in 2000. The increase
resulted primarily from a 49.4% increase in ASMs to 3.3 billion as well
as a 9.9% increase in revenue per departure to $2,452. Revenue in 2001
was recognized primarily under fee-for-service agreements as compared to
a combination of a proration-of-fare agreement and a fee-for-service
agreement in 2000. Revenue for 2001 also included an additional $3.8
million attributable to routine subsequent period sampling adjustments to
prior billed tickets under the Company's former proration-of-fare
arrangement. The Company believes that it will no longer experience
revenue adjustments attributable to its former proration-of-fare
arrangements. The increase in ASMs reflects the addition of 19 CRJ
aircraft and 15 328JET aircraft in 2001, and the full year effect in 2001
of adding 14 CRJ aircraft and 14 328JET aircraft during 2000, offset by
the removal of 21 J-32 aircraft during 2001. Revenue passengers
increased 30.7% in 2001 compared to 2000, which combined with the
increase in the average passenger stage length resulted in a 49.1%
increase in RPMs.

The 40.8% decrease in other revenues year over year reflects a
$1.8 million decrease in revenue from package and mail delivery and a
$1.4 million decrease in United employee ticket revenue. The decrease
reflects the fact that these revenues are no longer earned by the Company
as a result of the restatement of the United Express agreement, which
went into effect on December 1, 2000.

Operating Expenses

Excluding the $23 million and $29 million aircraft early
retirement charge in 2001 and 2000, respectively, the Company's operating
expenses increased 29.2% to $516.2 million in 2001 compared to $399.4
million in 2000. This increase was due primarily to: a 52.5% increase in
total salary costs, a 51.1% increase in aircraft rentals, a 57.9%
increase in facility rents and landing fees and a 49.4% increase in ASMs.
These increases reflect the addition of 34 regional jet aircraft in 2001,
and the retirement of 21 J-32s during 2001.
23
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 2000
and 2001 is as follows:

Year Ended December 31,
2000 2001

Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)

Salaries and related 23.8% 4.9 28.2% 5.0
costs
Aircraft fuel 14.2% 2.9 15.1% 2.7

Aircraft maintenance 8.1% 1.7 8.3% 1.5
and materials
Aircraft rentals 13.2% 2.7 15.5% 2.7

Traffic commissions and 12.5% 2.6 2.7% .5
related fees
Facility rents and 4.5% .9 5.5% 1.0
landing fees
Depreciation and 2.5% .5 2.6% .4
amortization
Other 9.5% 1.9 10.6% 1.9
Aircraft early 6.4% 1.3 3.9% .7
retirement charge

Total 94.7% 19.4 92.4% 16.4

Costs per ASM decreased 15.5% to 16.4 cents in 2001 compared to
19.4 cents for 2000. The main factors contributing to the decrease were
a 49.4% increase in ASMs and a 72.5% decrease in the year-over-year
traffic commissions and related fees. The decrease in traffic
commissions and related fees reflects the fact that many of these fees
are no longer borne by the Company as a result of the restatement of the
United Express agreement, which went into effect on December 1, 2000.
Excluding the aircraft early retirement charge in both 2001 and 2000,
costs per ASM decreased 13.3% to 15.7 cents during 2001 compared to 18.1
cents for 2000.

Salaries and related costs per ASM increased 2.0% to 5.0 cents
in 2001 compared to 4.9 cents in 2000. In absolute dollars, salaries and
related expenses increased 52.5% from $107.8 million in 2000 to $164.4
million in 2001. The increase primarily resulted from the net addition
of 557 full and part time employees during 2001 to support the 34
regional jet aircraft added during 2001, an accrual of $2.9 million
recorded in 2001 reflecting estimated costs for additional company
contributions which may be made to the Company's 401(k) plan to address
operational defects found in the plan, and $1.8 million in executive
compensation related to deferred compensation benefits being provided to
senior executive officers.

The cost per ASM of aircraft fuel decreased to 2.7 cents in
2001 compared to 2.9 cents in 2000. The total average price per gallon
of fuel decreased 11.7% to 98 cents in 2001 compared to $1.11 in 2000.
In absolute dollars, aircraft fuel expense increased 37.1% from $64.4
million in 2000 to $88.3 million in 2001, reflecting a 27.3% increase in
block hours and the higher fuel consumption per hour of regional jet
aircraft versus turboprop aircraft which resulted in a 21.6% increase in
the system average burn rate (gallons used per block hour flown).

The cost per ASM of aircraft maintenance and materials
decreased to 1.5 cents in 2001 compared to 1.7 cents in 2000. In
absolute dollars, aircraft maintenance and materials expense increased
31.9% from $36.8 million in 2000 to $48.5 million in 2001. The increased
expense resulted from the increase in the size of the total fleet, the
continual increase in the average age of the J-41 turboprop fleet and the
gradual expiration of manufacturer's warranties on the CRJs.
24
The cost per ASM of aircraft rentals remained the same at 2.7
cents in 2001 and 2000. During 2001, the Company took delivery of 34
additional regional jet aircraft, all of which were lease financed. In
absolute dollars, aircraft rental expense increased 51.1% to $90.3
million as compared to $59.8 million in 2000 due to the additional
regional jet aircraft added to the fleet.

The cost per ASM of traffic commissions and related fees
decreased to .5 cents in 2001 as compared to 2.6 cents in 2000. In
absolute dollars, traffic commissions and related fees decreased 72.5% to
$15.6 million in 2001 from $56.6 million in 2000. The decrease reflects
the fact that many of these fees are no longer borne by the Company as a
result of the restatement of the United Express agreement, which went
into effect on December 1, 2000. Under the restated agreement, the
Company is now only responsible for fees associated with the major
airline Computer Reservation Systems.

The cost per ASM of facility rent and landing fees increased to
1.0 cents for 2001 from .9 cents for 2000. In absolute dollars, facility
rent and landing fees increased 57.9% to $32 million for 2001 from $20.3
million in 2000. The increase in absolute dollars for facility rent and
landing fees is a result of an 18.5% increase in the number of
departures, the heavier landing weight of the regional jets and the lease
of the Company's new corporate headquarters building commencing on
December 1, 2000.

The cost per ASM of depreciation and amortization decreased
slightly to 0.4 cents for 2001 from 0.5 cents in 2000. In absolute
dollars, depreciation and amortization expense for 2001 increased 37.2%
to $15.4 million from $11.2 million in 2000. The absolute increase
results in part from additional expenditures for rotable spare parts,
engines and aircraft improvements.

The cost per ASM of other operating expenses remained the same
at 1.9 cents for 2001 and 2000. In absolute dollars, other operating
expenses increased 45% to $61.7 million for 2001 from $42.5 million in
2000. The increased costs result primarily from a 200% increase in the
cost of passenger insurance, a 96.4% increase in the cost of hull
insurance, and the 30.7% increase in revenue passengers which resulted in
higher passenger handling costs, training expenses and crew accommodation
costs for new flight crews to support additional aircraft and stations.
The Company expects pilot training and crew accommodation costs to
continue to increase as the remaining firm ordered CRJ and 328JET
aircraft are received. Under the Stabilization Act, the government
subsequently authorized air carriers to apply for reimbursement for
increased insurance costs incurred during the period October 1, 2001 to
October 30, 2001, and the Company applied for, received, and recorded as
a reduction to insurance expense $652,000 in such reimbursements. This
amount was based on costs incurred during the period, and no other
insurance reimbursements are anticipated.

In 2001, the Company recorded an operating charge of 0.7 cents
per ASM for costs associated with the early retirement of nine J-41
turboprop aircraft, as compared to 1.3 cents per ASM in 2000 for costs
associated with the early retirement of 28 J-32 turboprop aircraft. In
absolute dollars, the amount of the charge was $23 million in 2001
compared to $29 million in 2000. The retirement of the J-32 fleet was
completed by December 31, 2001 and the Company reversed $500,000 of the
2000 charge. Nine of the J-41 turboprop aircraft are expected to be
retired in 2002, with the remaining 22 aircraft to be retired by December
31, 2003.
25
Other Income (Expense)

Interest expense decreased from $6 million in 2000 to $4.8
million in 2001. The decrease is the result of the full year effect of
the impact of the conversion of the Company's 7% notes into equity during
the first half of 2000.

Interest income increased from $5 million in 2000 to $7.5
million in 2001. This is primarily the result of the Company's
significantly higher cash balances during 2001 as compared to 2000 offset
partially by lower rate of return on short-term investments in 2001.

On September 22, 2001, President Bush signed into law the
Stabilization Act. The Stabilization Act provides cash grants to
commercial air carriers as compensation for (1) direct losses incurred
beginning with the terrorist attacks on September 11, 2001 as a result of
any FAA mandated ground stop order issued by the Secretary of
Transportation (and for any subsequent order which continues or renews
such a stoppage), and (2) incremental losses incurred during the period
beginning September 11, 2001 and ending December 31, 2001 as a direct
result of such attacks. The Company is entitled to receive cash grants
under these provisions. The exact amount of the Company's compensation
will be based on the lesser of actual losses incurred or a statutory
limit based on the total amount allocable to all airlines. This total
amount is not yet determinable because the statutory limit is subject to
information not yet released by the government. The Company has received
$9.7 million in government compensation, which is the government's
estimate of approximately 85% of the Company's allocation based on
preliminary data. The Company has received $9.7 million in cash grants
under these provisions recognized as non-operating income under
"government compensation" for the third and fourth quarters 2001. This
amount was the government's estimate of approximately 85% of amount due
to the Company based on preliminary data. The exact amount of the
Company's compensation will be based on the lesser of actual losses
incurred or a statutory limit based on the total amount allocable to all
airlines. This exact amount is not yet determinable because the
statutory limit is subject to information not yet released by the federal
government. As such, the Company is unsure if it will be entitled to any
further government compensation under this program and will recognize any
remaining payments as non-operating income during the period it is
determined the Company is entitled to such amounts. All amounts
received as government compensation are subject to audit and adjustment
by the federal government.

The Company recorded a provision for income taxes of $22.5
million for 2001, compared to a provision for income taxes of $7.7
million in 2000. The 2001 effective tax rate was approximately 39.6% as
compared to the 2000 effective tax rate of approximately 33.6%. This
increase is primarily due to a favorable state income tax ruling in 2000
resulting in the application of one time state tax credits, and the
realization of certain tax benefits that were previously reserved, which
together reduced income tax expense by approximately $1.4 million for
2000. The effective tax rates reflect non-deductible permanent
differences between taxable and book income.
26
Fiscal Year 1999 vs. 2000

Operating Revenues

The Company's operating revenues increased 30.3% to $452.5
million in 2000 compared to $347.4 million in 1999. The increase
resulted from a 23.9% increase in ASMs, together with an increase in
revenue per ASMs of 5.1%. The increase in ASMs reflects the addition of
fourteen CRJ aircraft and fourteen 328JET aircraft in 2000, and the full
year effect in 2000 of adding ten CRJ aircraft during 1999, offset by the
removal of seven J-32 aircraft during 2000. Revenue passengers increased
16.8% in 2000 compared to 1999, which combined with the increase in the
average passenger stage length resulted in a 23% increase in RPMs.

The 86% increase in other revenues year over year includes
amounts paid by Delta Air Lines related to certain pilot training for the
Delta Connection operation.

Operating Expenses

Excluding the $29.0 million aircraft early retirement charge,
the Company's operating expenses increased 34.0% to $399.4 million in
2000 compared to $298.1 million in 1999. This increase was due primarily
to: an 89% increase in total fuel costs as a result of a 49% increase in
the average price per gallon of jet fuel, coupled with a 20% increase in
the average fuel burn rate to 222 gallons per hour; a 23.9% increase in
ASMs; and expenses for the certification and start up of the ACJet
operation. The increase in ASMs, passengers and burn rates reflects the
addition of fourteen CRJs and fourteen 328JETs into scheduled service,
net of the retirement of seven J-32s during 2000.

A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1999
and 2000 is as follows:

Year Ended December 31,
1999 2000

Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)

Salaries and related 24.3% 4.8 23.8% 4.9
costs
Aircraft fuel 9.8% 1.9 14.2% 2.9
Aircraft maintenance 7.0% 1.4 8.1% 1.7
and materials
Aircraft rentals 13.0% 2.5 13.2% 2.7
Traffic commissions and 15.7% 3.1 12.5% 2.6
related fees
Facility rents and 5.2% 1.0 4.5% .9
landing fees
Depreciation and 2.6% .5 2.5% .5
amortization
Other 8.2% 1.6 9.5% 1.9
Aircraft early - - 6.4% 1.3
retirement charge

Total 85.8% 16.8 94.7% 19.4

Costs per ASM increased 15.5% to 19.4 cents in 2000 compared to
16.8 cents for 1999. The main factors contributing to the increase were
a 49% increase in the year over year price per gallon of jet fuel, the
expenses associated with the certification and start-up of ACJet, flight
crew training costs, and the aircraft early retirement charge. Excluding
the aircraft early retirement charge, costs per ASM increased 7.7% to
18.1 cents during 2000 compared to 16.8 cents for 1999.
27
Salaries and related costs per ASM increased 2.1% to 4.9 cents
in 2000 compared to 4.8 cents in 1999. In absolute dollars, salaries and
related expenses increased 27.5% from $84.6 million in 1999 to $107.8
million in 2000. The increase primarily resulted from the net addition
of 780 full and part time employees during 2000 to support the 28
regional jet aircraft added during 2000.

The cost per ASM of aircraft fuel increased to 2.9 cents in
2000 compared to 1.9 cents in 1999. The total price per gallon of fuel
increased 48.9% to $1.11 in 2000 compared to 74.6 cents in 1999. In
absolute dollars, aircraft fuel expense increased 89.1% from $34.1
million in 1999 to $64.4 million in 2000, reflecting the higher cost per
gallon fuel price, a 5.8% increase in block hours and the higher fuel
consumption per hour of regional jet aircraft versus a turboprop aircraft
which resulted in a 20% increase in the system average burn rate (gallons
used per block hour flown).

The cost per ASM of aircraft maintenance and materials
increased to 1.7 cents in 2000 compared to 1.4 cents in 1999. In
absolute dollars, aircraft maintenance and materials expense increased
50.9% from $24.4 million in 1999 to $36.8 million in 2000. The increased
expense resulted from the increase in the size of the total fleet, the
continual increase in the average age of the turboprop fleets, the
gradual expiration of manufacturer's warranties on the CRJs, and the
reversal in 1999 of approximately $1.5 million in life limited parts
repair expense accruals related to CRJ engines that were no longer
required based on the introduction of a maintenance contract covering the
GE engines operating on the CRJ fleet.

The cost per ASM of aircraft rentals increased slightly to 2.7
cents in 2000 compared to 2.5 cents in 1999. During 2000, the Company
took delivery of 28 additional regional jet aircraft, all of which were
lease financed. In absolute dollars, aircraft rental expense increased
32.2% to $59.8 million as compared to $45.2 million in 1999 due to the
additional aircraft added to the fleet.

The cost per ASM of traffic commissions and related fees
decreased to 2.6 cents in 2000 as compared to 3.1 cents in 1999. Delta
is responsible for travel agent commissions and related fees and
effective December 1, 2000, United is responsible for travel agent
commissions and program fee expense as a result of the restated UA
agreement. In absolute dollars, traffic commissions and related fees
increased 3.9% to $56.6 million in 2000 from $54.5 million in 1999. The
increase resulted from an increase in passenger revenues and passenger
volumes, offset by a reduction in the commission rates payable to travel
agents.

The cost per ASM of facility rents and landing fees decreased
to .9 cents for 2000 from 1.0 cent for 1999. In absolute dollars,
facility rent and landing fees increased 13.5% to $20.3 million for 2000
from $17.9 million in 1999. The increase in absolute dollars for
facility rent and landing fees is a result of a 6.7% increase in the
number of departures, and the heavier landing weight of the regional
jets.

The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for 2000 and 1999. In absolute dollars, depreciation
and amortization expense for 2000 increased 24.1% to $11.2 million from
$9 million in 1999. The absolute increase results in part from the full
year effect of purchasing two CRJ aircraft and rotable spare parts in
1999 for approximately $59 million.
28
The cost per ASM of other operating expenses increased to 1.9
cents for 2000 from 1.6 cents in 1999. In absolute dollars, other
operating expenses increased 49.5% to $42.5 million for 2000 from $28.5
million in 1999. The increased costs result primarily from the 16.8%
increase in revenue passengers which resulted in higher passenger
handling costs, training expenses for new flight crews, and expenses for
ACJet pre-operating activities.

In 2000, the Company recorded an operating charge of 1.3 cents
per ASM for costs associated with the early retirement of 28 J-32
turboprop aircraft. In absolute dollars, the amount of the charge was
$29 million. The charge included the estimated cost of contractual
obligations to meet aircraft return conditions as well as a lease
termination fee. The retirement of the J-32 fleet was completed on
December 31, 2001.

Other Income (Expense)

Interest expense increased from $5.6 million in 1999 to $6
million in 2000. The increase is the result of the full year effect of
the debt outstanding for the purchase of two CRJs in 1999 partially
offset by the impact of the conversion of the Company's 7% notes into
equity during the first half of 2000.

Interest income increased from $3.9 million in 1999 to $5
million in 2000. This is primarily the result of the Company's
significantly higher cash balances during 2000 as compared to 1999.

The Company recorded a provision for income taxes of $7.7
million for 2000, compared to a provision for income taxes of $18.3
million in 1999. The 2000 effective tax rate is approximately 33.6% as
compared to the 1999 effective tax rate of approximately 38.6%. This
decrease is due to a favorable state income tax ruling resulting in the
application of one time state tax credits, and the realization of certain
tax benefits that were previously reserved, which together reduced income
tax expense by approximately $1.4 million for 2000. The effective tax
rates reflect non-deductible permanent differences between taxable and
book income.

The American Institute of Certified Public Accountants issued
Statement of Position 98-5 on accounting for start-up costs, including
preoperating costs related to the introduction of new fleet types by
airlines. The new accounting guidelines were effective for 1999. The
Company had previously deferred certain start-up costs related to the
introduction of the CRJs and was amortizing such costs to expense ratably
over four years. Effective January 1, 1999, the Company recorded a
charge for the remaining unamortized balance of approximately $888,000,
net of $598,000 of income taxes, associated with previously deferred
preoperating costs.
29
Outlook and Business Risks

This Outlook and Business Risks section and the Liquidity and
Capital Resources section below contain forward-looking statements. The
Company's actual results may differ materially. Factors that could cause
the Company's future results to differ materially from the expectations
described here include the costs and other effects of enhanced security
measures and other possible government orders; changes in and
satisfaction of regulatory requirements including requirements relating
to fleet expansion; changes in levels of service agreed to by the Company
with its code share partners due to market conditions; the ability of
these partners to manage their operations and cash flow; the ability and
willingness of these partners to continue to deploy the Company's
aircraft and to utilize and pay for scheduled service at agreed rates;
the ability of these partners to force changes in rates; increased cost
and reduced availability of insurance; changes in existing service; final
calculation and auditing of government compensation; unexpected costs or
delays in the implementation of new service; adverse weather conditions;
satisfactory resolution of union contracts becoming amendable during 2002
with the Company's aviation maintenance technicians and ground service
equipment mechanics, and the Company's flight attendants; ability to hire
and retain employees; availability and cost of funds for financing new
aircraft; the ability of Fairchild Dornier to fulfill its contractual
obligations to the Company, and of Bombardier and Fairchild Dornier to
deliver aircraft on schedule; airport and airspace congestion; ability to
successfully retire turboprop aircraft; flight reallocations and
potential service disruptions due to labor actions by employees of Delta
Air Lines or United Airlines; general economic and industry conditions;
and additional acts of war. The statements in this Annual Report are
made as of March 29, 2002 and the Company undertakes no obligation to
update any of the forward-looking information included in this release,
whether as a result of new information, future events, changes in
expectations or otherwise.

The events of September 11, together with the slowing economy
throughout 2001, have significantly affected the U.S. airline industry.
These events have resulted in changed government regulation, declines and
shifts in passenger demand, increased insurance costs and tightened
credit markets which continue to affect the operations and financial
condition of participants in the industry including the Company, its
code share partners, and aircraft manufactures. These circumstances have
raised substantial risks and uncertainties, including those discussed
below, which may impact the Company, its code share partners, and
aircraft manufacturers, in ways that the Company is not currently able to
predict.

The Company provides service for its Delta Connection operations
exclusively with regional jets and is continuing its transformation of
its existing United Express operation to an all regional jet fleet. In
addition to the 60 CRJs and 33 328JETs in service as of March 1, 2002,
the Company has firm orders for an additional 36 CRJs from Bombardier
Inc. and 32 328JETs from Fairchild Dornier, with option orders for 80
CRJs and 81 328JETs, and long-term marketing agreements with United and
Delta to fly the firm ordered jet aircraft in United Express and Delta
Connection service. Under these agreements, the Company is dependent on
United and Delta for substantially all of its revenue and for providing
support services necessary to operate its aircraft, and is dependent on
Bombardier and Fairchild for providing aircraft expected to support the
Company's future growth and for other support described in this report on
Form 10-K. Business or operational difficulties, liquidity problems or
bankruptcy of any of these entities could materially impact the Company's
operations and financial condition.

The slowing economy in 2001 and the terrorist attacks of
September 11 have resulted in both United and Delta changing how the
Company's regional jet aircraft are utilized. In the past, regional jets
were primarily deployed to open new long, thin routes and to replace some
turboprop service in higher traffic markets. With the fleet reductions
of older, higher cost narrow body aircraft by United and Delta, the
Company has been replacing mainline service to select United markets from
Chicago and added mainline complementary service on numerous other
routes. For Delta, the Company is currently operating hubs at New York's
LaGuardia airport, Boston's Logan airport, and Cincinnati and Northern
Kentucky International Airport.
30
UAL Corporation, the parent of United, has disclosed that
during the fourth quarter 2001 it began implementing a financial recovery
plan that includes four planks: reducing the size of the airline and
cutting capital and operating spending in line with that reduction,
generating as much revenue as possible from each flight, working with its
unions and other employee groups to find further labor savings and
implementing a financing plan to support it through the execution of its
financial recovery plan. UAL Corporation further disclosed that the
impact of the events of September 11, 2001 on United and the sufficiency
of its financial resources to absorb that impact are dependent on a
number of factors, including United's success in implementing its
financial recovery plan.

Following September 11, United requested that the Company
propose measures that it could take to assist in improving United's
financial situation. The Company believes that United made a similar
request to other suppliers and vendors. On December 31, 2001, the
Company and United agreed on fee-per-departure rates to be utilized
during 2002. In addition, in the context of reaching this agreement, the
Company agreed to certain concessions that would benefit United by (1)
settling various existing contract issues, (2) agreeing that United would
not have to pay increased rates to reflect utilization changes in the
fourth quarter of 2001, (3) agreeing to 2002 rates that require
aggressive cost containment, and (4) reaffirming its commitment to retire
the Company's J-41 turboprop aircraft. The Company determined that these
concessions, which were favorable to United as compared to prior
contractual arrangements and were designed to assist United in its
financial recovery plan, were appropriate in light of the circumstances
at the time.

In late March 2002, United informed the Company that an
essential component of its financial recovery plan includes obtaining
cost reductions from its employees, suppliers and partners, and that
United is seeking the Company's assistance in decreasing the cost of the
Company's product and achieving cash flow improvements for United over the
next 24 months. The Company has commenced discussions with United
regarding opportunities for reducing its costs or creating value to
address United's financial situation. The basis for, nature, timing
and extent of any such actions has not been agreed. While the Company
has expressed its willingness to work with United to find mutually
acceptable opportunities, the Company believes that it is not
contractually obligated to make any such changes under the United
Express Agreements or the December 31, 2001 rate setting
agreement.

The Company's Delta Connection service commenced revenue
service with 328JETs during the third quarter of 2000 and added CRJs
during the fourth quarter of 2000. Approximately $7.8 million in start-
up expenses from inception through commencement of revenue service were
incurred, which were expensed as incurred. Delta is reimbursing the
Company for $5.2 million of these costs, and the amounts are being
recorded as revenue ratably through July 2003. As of December 31, 2001
the Company has recorded $2.0 million of this revenue.
31
The chairman of Fairchild Dornier, the manufacturer of the
328JET, recently stated that it has an immediate and critical need for
additional funding, and that it is in discussions with several potential
strategic partners regarding proposed investments. The Company is unable
to predict whether Fairchild Dornier will be successful in finding
additional capital or in otherwise restructuring its finances, but
believes that Fairchild Dornier may be forced to seek bankruptcy
protection if it is unsuccessful in its efforts. In the event of a
Fairchild Dornier bankruptcy, Fairchild Dornier could either sell,
liquidate or reorganize some or all of its businesses, and in the event
of a reorganization or sale of its businesses would have the right to
assume or reject future contractual obligations. Should Fairchild
Dornier be unable to deliver ordered 328JETS, the Company would reassess
available alternatives in pursuing its growth strategy and possibly delay
the Company's turboprop retirement plans, and adjust other plans
discussed elsewhere in this Form 10-K relating to its 328JET aircraft.

Fairchild Dornier has significant future obligations to the
Company in connection with the order of 328JET aircraft. These include
obligations: to deliver 32 firm ordered 328JETs and 81 additional option
328JETs with certain financing support; to pay the Company any difference
between the lease payments, if any, received from the remarketing the of
26 J-41 aircraft leased by the Company and the lease payment obligations
of the Company on those aircraft; to purchase five J-41 aircraft owned by
the Company at their net book value at the time of retirement; to assume
certain crew training costs; and, to provide spares, warranty,
engineering, and related support. Fairchild Dornier has delayed the
delivery of one 328JET that was scheduled to be delivered to the Company
during the week of March 25, 2002 for reasons connected with its
financing. The Company believes it has secured rights to Fairchild
Dornier's equity interest in the delivered 328JETs that it may proceed
against in the event that Fairchild Dornier fails to fulfill certain of
these obligations.

During the fourth quarter of 2001, the Company recorded a pre-
tax aircraft early retirement charge of $23.5 million for the early
retirement of nine leased Jetstream-41 turboprop aircraft, which the
Company plans to remove from service prior to year-end 2002. The Company
anticipates taking additional charges during 2002 of approximately $48.0
million pre-tax for the retirement of its remaining 29-seat Jetstream-41
turboprop aircraft. The undiscounted remaining lease obligations (net of
the Company's estimate of the future sublease rentals) on the J-41 fleet
after planned retirement dates in 2002 and 2003 are approximately $55
million and continue through 2010 and the book value of the five owned J-
41 aircraft as of March 1, 2002 is $18.1 million. To the extent that
Fairchild Dornier fulfills its contractual obligations, the majority of
the aircraft early retirement charge will not adversely affect the
Company's cash position, with the payments by Fairchild Dornier being
recorded as an aircraft purchase inducement on the 328JET aircraft. The
Company would remain liable for the lease payments on its J-41 aircraft
and thus be required to pay the remaining lease payments if, and to the
extent that, Fairchild Dornier were to default on its obligation.

As of December 31, 2001, the Company has received $9.7 million
in cash grants under the loss compensation provisions of the
Stabilization Act, which amount was recognized as non-operating income
under "government compensation" in its financial results for 2001. This
amount was the government's estimate of approximately 85% of amount due
to the Company based on preliminary data. The exact amount of the
Company's compensation will be based on the lesser of actual losses
incurred or a statutory limit based on the total amount allocable to all
airlines. This exact amount is not yet determinable because the
statutory limit is subject to information not yet released by the federal
government. As such, the Company is unsure if it will be entitled to any
further government compensation under this program and will recognize any
remaining payments as non-operating income during the period it is
determined the Company is entitled to such amounts. All amounts
received as government compensation are subject to audit and adjustment
by the federal government.
32
In addition to the compensation described above, the
Stabilization Act, among other things, provides U.S. air carriers with
the option to purchase certain war risk liability insurance from the
United States government on an interim basis at rates that are more
favorable than those available from the private market; authorizes the
federal government to reimburse air carriers for the increased cost of
war risk insurance premiums for a limited but undetermined period of time
as a result of the terrorist attacks of September 11, 2001; and,
authorizes the federal government, pursuant to new regulations, to
provide loan guarantees to air carriers in the aggregate amount of
$10 billion. Since September 11, the Company has purchased hull war risk
coverage through the private insurance market through September 24, 2002,
and has purchased liability war risk coverage from the U.S. government
through May 19, 2002 and anticipates renewing the government insurance
for as long as the coverage is available. The government subsequently
authorized air carriers to apply for reimbursement under the
Stabilization Act for increased insurance costs incurred during the
period October 1, 2001 to October 30, 2001, and the Company applied for,
received, and recorded as a reduction in insurance expense, $652,000 in
such reimbursements. The airlines and insurance industry, together with
the United States and other governments, are continuing to evaluate both
the cost and options for providing coverage of aviation insurance.
Recently, an industry-led group announced a proposal to create a mutual
insurance company, to be called Equitime, to cover war risk and terrorism
risk, which would initially seek support through government guarantees.
Equitime would provide a competitive alternative to insurance being
offered by the traditional insurance market, which opposes this
initiative. Equitime's organizers project that it may be available to
provide insurance as early as May 2002 to up to 70 U.S. carriers. The
Company has not been actively involved in the formation of Equitime and
is unable to anticipate whether this source of insurance will be made
available and, if so, whether it will offer competitive rates. The
Company anticipates that it will follow industry practices with respect
to sources of insurance.

The Company continues to evaluate the terms and conditions
being imposed by the government with respect to federal loan guarantees,
and has not yet determined whether to make application for any such
facility.

Collective bargaining agreements are negotiated under the
Railway Labor Act, which governs labor relations in the transportation
industry, and typically do not contain an expiration date. Instead, they
specify a date called the amendable date, by which either party may
notify the other of its desire to amend the agreement. Upon reaching the
amendable date, the contract is considered "open for amendment." Prior
to the amendable date, neither party is required to agree to
modifications to the bargaining agreement. Nevertheless, nothing
prevents the parties from agreeing to start negotiations or to modify the
agreement in advance of the amendable date. Contracts remain in effect
while new agreements are negotiated. During the negotiating period, both
the Company and the negotiating union are required to maintain the status
quo.

ACA's collective bargaining agreement with AFA was ratified in
October 1998. The agreement is for a four-year duration and becomes
amendable in October 2002. This agreement covers all flight attendants
working for the Company. The collective bargaining agreement with AMFA
was ratified in June 1998. The agreement is for a four-year duration and
becomes amendable in June 2002. This agreement covers all aviation
maintenance technicians and ground service equipment mechanics working
for the Company. Although there can be no assurances as to the outcome
of these negotiations, the Company anticipates being able to reach
agreement with both unions on mutually satisfactory contracts with no
material effect on its results of operations or financial position.
33
Liquidity and Capital Resources

As of December 31, 2001, the Company had cash, cash
equivalents, and short-term investments of $181 million and working
capital of $138.7 million compared to $121.2 million and $72 million,
respectively, as of December 31, 2000. During the year ended December
31, 2001, cash and cash equivalents increased $87.6 million, reflecting
net cash provided by operating activities of $88 million, net cash used
in investing activities of $5.7 million (primarily the results of
increased purchases of property and equipment of $34.9 million offset by
the net reduction in short term investments of $27.8 million) and net
cash provided by financing activities of $5.2 million. Net cash provided
by financing activities was mainly related to proceeds from exercise of
stock options.

As of December 31, 2000, the Company had cash, cash
equivalents, and short-term investments of $121.2 million and working
capital of $72 million compared to $57.4 million and $60.4 million,
respectively, as of December 31, 1999. During the year ended December
31, 2000, cash and cash equivalents increased $46.2 million, reflecting
net cash provided by operating activities of $93.9 million, net cash used
in investing activities of $43.8 million (related to aircraft purchase
deposits, purchases of aircraft and equipment and increases in short term
investments) and net cash used in financing activities of $3.9 million.
The increase in cash provided by operating activities is primarily due to
the restated UA Agreements, effective December 1, 2000, in which the
Company is now paid weekly in advance for monthly revenue as compared to
receiving monthly revenue 30 to 60 days after the end of a month. Net
cash used in financing activities was mainly related to payments of long-
term debt and capital lease obligations and purchases of treasury stock.

Capital Commitments
The Company's business is very capital intensive, requiring
significant amounts of capital to fund the acquisition of assets,
particularly aircraft. The Company has historically funded the
acquisition of its aircraft by entering into off-balance sheet financing
arrangements known as leveraged leases, in which third parties provide
equity and debt financing to purchase the aircraft and simultaneously
enter into long-term agreements to lease the aircraft to the Company.
Similarly, the Company often enters into long-term lease commitments with
airports to ensure access to terminal, cargo, maintenance and other
similar facilities. As can be seen in the table below setting forth
information as of December 31, 2001, these operating lease commitments
are significant.

(In thousands) 2002 2003 2004 2005 Thereafter Total

Long term debt $ 4,639 $ 4,900 $ 5,153 $ 6,019 $ 42,369 $ 63,080
Capital lease 1,584 1,565 772 - - 3,921
obligations
Guaranteed simulator 3,631 1,371 1,391 1,178 4,929 12,500
usage commitments
Operating lease 128,150 120,138 124,243 122,653 1,106,225 1,601,409
commitments
Aircraft purchase 524,000 664,000 - - - 1,188,000
commitments
Total contractual 662,004 791,974 131,559 129,850 1,153,523 2,868,910
cash obligations

See Note 4 "Debt", Note 5 "Obligations Under Capital Leases", Note 6
"Operating Leases", and Note 10 "Commitments and Contingencies" in the
Notes to Consolidated Financial Statements for additional discussion of
these items. The Company also has a variety of other long-term
contractual commitments that are of a nature that, under accounting
principles generally accepted in the United States, are not required to
be reflected on the Company's balance sheet, and that are not generally
viewed as "off-balance sheet financing arrangements," such as commitments
for major overhaul maintenance on the Company's aircraft. See "Liquidity
and Capital Resources - Other Commitments" below and "Business - Pilot
Training" above, and Note 1 "Summary of Accounting Policies - (l)
Maintenance" and Note 10 "Commitments and Contingencies - Training" in
the Notes to Consolidated Financial Statements for additional discussion
of these items.
34
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the expected availability
of operating lease financing, and other available equipment financing
will be sufficient to meet its working capital needs, expected operating
lease financing commitments, aircraft acquisitions and other capital
expenditures, and debt service requirements for the next twelve months.

Other Financing

On September 28, 2001, the Company entered into an asset-based
lending agreement with a financial institution that provided the Company
with a line of credit for up to $25 million. The new line of credit,
which will expire on October 15, 2003, replaced a previous $35 million
line of credit. The interest rate on this line is LIBOR plus .875% to
1.375% depending on the Company's fixed charges coverage ratio. As of
December 31, 2001, the Company's interest rate on its line of credit was
3.0%. The Company has pledged $15.3 million of this line of credit as
collateral for letters of credit issued on behalf of the Company by a
financial institution. The available borrowing under the line of credit
is limited to the value of the bond letter of credit on the Company's
Dulles, Virginia hangar facility plus the value of 60% of the book value
of certain rotable spare parts. As of December 31, 2001 the amount of
available credit under the line was $9.7 million. As of December 31,
2001 there were no outstanding borrowings on the $25 million line of
credit.

In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through
trusts, which purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i) leveraged lease
transactions relating to four J-41s and six CRJs, all of which were
leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment
Notes issued with respect to the Owned Aircraft are direct obligations of
ACA, guaranteed by ACAI and are included as debt obligations in the
accompanying consolidated financial statements and in the table above.
The Equipment Notes issued with respect to the Leased Aircraft are not
obligations of ACA or guaranteed by ACAI.

Aircraft

The Company has significant lease obligations for aircraft that
are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such
leases range from one to sixteen and three quarters years. The Company's
total rent expense in 2001 under all non-cancelable aircraft operating
leases was approximately $90.3 million. As of December 31, 2001, the
Company's minimum annual rental payments for 2002 under all non-
cancelable aircraft operating leases with remaining terms of more than
one year were approximately $120.9 million. In order to minimize the
total aircraft rental expense over the entire life of the related
aircraft leveraged lease transactions, the Company has uneven semiannual
lease payment dates of January 1 and July 1 for its CRJ and 328JET
aircraft. Currently, approximately 56.7% of the Company's annual lease
payments for its CRJ and 328JET aircraft are due in January and 28.4% are
due in July. The Company made lease payments for its CRJ and 328JET
aircraft totaling $59.9 million on January 2, 2002.
35
As of March 1, 2002, the Company had a total of 36 CRJs on
order from Bombardier, Inc., and held options for 80 additional CRJs.
The Company also has a firm order with Fairchild Dornier for 32 328JET
aircraft, and options for 81 additional 328JETs. Of the 68 firm ordered
aircraft deliveries, 26 are scheduled for the remainder of 2002 and 42
are scheduled for 2003. The addition of the firm ordered regional jets,
net of the removal from service of all of the turboprop aircraft, will
allow the Company to grow capacity as measured in ASM's, based on planned
aircraft delivery dates, by approximately 34% in 2002 and 25% in 2003. As
of March 2002, the Company's ASM capacity was split 82% in United Express
service and 18% in Delta Connection service. The Company is obligated to
purchase and finance (including leveraged leases) the 68 firm ordered
aircraft at an approximate capital cost of $1.1 billion. The Company
anticipates leasing all of its year 2002 aircraft deliveries on terms
similar to previously delivered regional jet aircraft, except that three
328JETs to be utilized for charter operations will be purchased by the
Company. One of these, which has already been acquired, was purchased
through the application of certain deposits previously placed with
Fairchild Dornier, and the others will be financed through debt, with
repayment over approximately ten years. Aircraft orders are subject to
price escalation formulas based on certain indices designed to reflect
increased costs in the production of the aircraft. During 2001 the rate
of escalation increased, and such increases will be reflected in future
aircraft cost or lease rates. During the first quarter of 2002, the rate
of escalation has remained constant.

The Company has financed its aircraft through leveraged lease
transactions, which include requiring equity and debt investors for each
aircraft. For the CRJs, the Company has firm commitments for equity
financing for 19 future aircraft and for debt financing for one aircraft,
and anticipates finalizing arrangements with Canada's export development
agency during the second quarter 2002 for debt financing for at least
nine additional aircraft. For the 328JETs, the manufacturer has
committed to find debt financing for all undelivered aircraft, to provide
equity financing for the next 8 aircraft and to find equity financing for
the remaining undelivered aircraft (for recent developments regarding
Fairchild Dornier, see Outlook). From time to time the Company seeks
investors to participate in its leveraged leases, with equity sources
normally consisting of domestic banks and industrial credit investors,
and debt sources including export credit agencies and European banks.
Commitments are normally sought during the first and second quarter of
each year for funding for aircraft to be delivered throughout the year.
Following the terrorist attacks, it has been the Company's experience
that sources of funding have decreased and the cost of available funding
has increased. The Company believes that it will able to find funding
for its future lease requirements, but the outcome, and the cost of
funds, is subject to market conditions in a volatile lease financing
market.

Capital Equipment and Debt Service

In 2002 the Company anticipates capital spending of
approximately $56 million consisting of approximately $30 millio