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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999.
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission File No.: 0-26914
AirTran Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 58-2189551
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard, Orlando, Florida 32827
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(Address of principal executive offices) (Zip code)
(407) 251-5600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
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. [ ]
As of March 10, 2000, the aggregate market value of voting stock held by non-
affiliates of the Registrant, based on the closing sales price of such stock in
the NASDAQ Stock Market on March 10, 2000, was approximately $244,367,000. As
of March 10, 2000, the Registrant had 65,724,148 shares of Common Stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Portions of the Proxy Statement, to be used in connection with the solicitation
of proxies to be voted at the Registrant's annual meeting of Stockholders to be
held on May 18, 2000 and to be filed with the Commission, are incorporated by
reference into Part III of this Report on Form 10-K.
Exhibit Index is located on pages 38-41
PART I
ITEM 1. BUSINESS
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General
The Company operates a low fare scheduled airline serving short-haul markets
primarily in the eastern United States. The Company is the second-largest
"affordable fare" airline in the United States behind Southwest Airlines (in
terms of originating travel). The Company's operations are focused on its hub in
Atlanta, Georgia, the nation's busiest airport and the fourth largest travel
market (in terms of passengers) in the United States. As of December 31, 1999,
the Company operated eight Boeing 717-200 (B717) aircraft, 35 McDonnell Douglas
DC-9 aircraft (DC-9) and four Boeing 737-200 (B737) aircraft and offered more
than 274 flights per day, including more than 130 daily departures from Atlanta
to 29 other cities. Additional contractual service is offered between
Gulfport/Biloxi and Dallas/Fort Worth, Houston (Hobby), Fort Lauderdale, Tampa
and Orlando.
The Company commenced operations in 1993 as ValuJet Airlines, Inc. ("ValuJet")
with two DC-9 aircraft serving three cities from Atlanta with eight flights per
day. In 1995, ValuJet became a wholly-owned subsidiary of ValuJet, Inc. The
Company's operations were interrupted by the suspension of the Company's service
on June 17, 1996, resuming on September 30, 1996 with limited operations.
ValuJet changed its name to "AirTran Airlines, Inc." ("Airlines"), and ValuJet,
Inc. changed its name to "AirTran Holdings, Inc." ("Holdings") in connection
with the Company's acquisition of Airways Corporation and its subsidiary,
AirTran Airways, Inc. ("Airways"), in November 1997. As part of that
transaction, Airways became a wholly-owned subsidiary of the Company. From
November 1997 until April 1998, the Company operated under the FAA operating
certificates of both Airlines and Airways. Since April 1998, all of the
Company's airline operations have been conducted under the Airways operating
certificate. The Airlines operating certificate was extinguished in August 1998.
In August 1999, Airlines merged with and into Airways.
The principal executive offices of the Company are located at 9955 AirTran
Boulevard, Orlando, Florida 32827, and its telephone number is (407) 251-5600.
The Company maintains an Internet site at http://www.airtran.com. The reference
to the Company's web address does not constitute incorporation by reference of
the information contained at the site.
Strategy
The Company's strategy is to offer among the lowest fares in its markets and
generate traffic by stimulating demand with price-sensitive travelers. The
Company controls 22 gates at Hartsfield Atlanta International Airport. Atlanta
provides a large local traffic base and the hub is well positioned for
connecting traffic throughout the Southeast. Atlanta's geographic position
enhances the Company's connecting opportunities. To maintain profitability, the
Company intends to maintain an affordable fare structure and offer safe and
reliable travel to both price-sensitive business and fare-conscious leisure
travelers. The Company intends to pursue a modest growth strategy while
maintaining its low cost structure. The Company also generates revenue by
carrying cargo, primarily U.S. Mail, A.S.A.P. express package service and air
freight. The
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Company's pricing structure is intended to stimulate new demand for air travel
by leisure customers and business travelers who would have otherwise not
traveled or who would have utilized ground transportation. The Company's fare
structure generally dictates pricing in most markets it serves, providing
travelers with substantial savings not generally available in the absence of
service by the Company. In addition to advance purchase fares, the Company
maintains reasonably priced "walk-up" fares that are generally well below
similar fares offered by its competitors in comparable markets, as well as
business class prices at substantial discounts to competitors' offerings. The
Company's fare structure is possible as a result of its comparatively low cost
structure.
The Company's comparatively low cost structure is made possible through low
ownership costs of its DC-9 aircraft, more fuel-efficient and less maintenance
burdened B717 aircraft, lower labor costs, lower distribution costs due to high
percentage of Internet bookings and the Company's decision not to offer many
amenities offered by many major airlines (such as hot meals and airport clubs).
As a result of the acquisition of B717 aircraft, the Company's ownership cost
will increase, but the Company believes that it will be able to maintain its
comparatively low cost structure as a result of expected savings in maintenance
and aircraft fuel efficiency.
The Company's service is intended to satisfy not only the basic air
transportation needs of its targeted customers, price-sensitive business
travelers and fare-conscious leisure travelers, but to provide customers with a
travel experience worth repeating.
In 1998, the Company sought to enhance its product offerings with the
introduction of business class, assigned seating, travel agency distribution and
an innovative frequent flyer program. In 1999, the Company focused on unit
revenue improvement, customer satisfaction and retention, increased penetration
of the corporate market, enhanced programs for leisure traffic, and continued
growth of alternative distribution channels, such as the Internet. For the
fourth quarter of 1999, Internet sales provided approximately 16.7% of total
passenger revenue.
Geographic Market
The Company's markets served from Atlanta are located predominantly in the
eastern United States. These markets are attractive to the Company due to the
concentration of major population centers within relatively short distances from
Atlanta, historically high air fares and the potential for attracting a
significant number of leisure and business customers.
In the Company's city selection process, the Company considers the market
demographics, the support offered by the airport communities to be served, the
ability to stimulate air travel and competitive factors.
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Fares, Route System and Scheduling
The Company serves 29 markets from Atlanta, generally under 1,000 miles. The
Company serves major metropolitan markets, including New York, Newark, Boston,
Philadelphia, Washington, Chicago, Miami, Houston and Dallas, and leisure
markets in Florida. The routes served to and from Atlanta range in frequency
from two to fifteen trips per day. The schedules are designed to provide a
consistent product for business-oriented travelers and to facilitate connections
for passengers traveling through Atlanta.
The Company offers a range of fares based on advance purchases of 14 days, 7
days, 3 days and "walk-up" fares. The Company manages the availability of seats,
at each fare level, by day of week and by flight to maximize revenue on peak-
travel days. Most of the Company's fares are nonrefundable, but can be changed
prior to departure with a $50 service charge. The Company's fares are always
offered on a one-way basis. The Company's fares do not require a round trip
purchase or a specific day of week (e.g., Saturday night) stay. The Company's
fare offerings are in direct contrast to prevalent pricing policies in the
industry where there are typically many different price offerings and
restrictions for seats on any one flight.
The Company's published Atlanta fares for coach non-stop service range from $39
to $99 for one-way travel on a 14-day advance purchase basis and $79 to $239 for
one-way travel on a "walk-up" basis. The Company offers fare sales from time to
time in order to generate additional traffic. The Company utilizes the Internet
and other distribution channels to stimulate incremental demand.
The Company provides one-stop service between many of its markets on a
connecting basis through Atlanta. The Company faces competition from numerous
airlines with varying degrees of flight frequency and marketing approaches. In
addition, the Company competes with numerous nonstop flights to many of its
cities from alternate airports in the same metropolitan areas as served by the
Company (such as Washington's Ronald Reagan National Airport, Chicago's O'Hare
Airport and New York's Kennedy Airport).
The airline industry is highly competitive. The Company competes primarily with
Delta in the markets served by the Company from Atlanta. In most all of these
markets, Delta offers more frequency than the Company.
The identity of competing airlines and the number of the flights they may fly
changes from month to month. Competing airlines and their flight schedules are
subject to frequent change. The Company's competition includes carriers with
substantially greater financial resources and name recognition.
The Company's aircraft scheduling strategy is directly related to the perceived
needs of its target market segments. The Company's target customers are price-
sensitive business travelers and fare-conscious leisure travelers.
The Company operates with a limited number of support aircraft in order to
provide operating spares and to rotate aircraft into routine scheduled
maintenance.
Maintenance and Repairs
Since all of the Company's DC-9 and B737 aircraft are more than 20 years old,
they will generally require higher maintenance expense than newer aircraft. The
Company believes that its aircraft are mechanically reliable and that in the
long-term the estimated cost of maintenance
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to fly such aircraft will be within industry norms for these aircraft types and
ages. Amendments to Federal Aviation Administration ("FAA") regulations are
under consideration, which would require certain heavy maintenance checks and
other maintenance requirements for aircraft operating beyond certain operational
limits. The Company would be required to comply with such proposals, if adopted,
and with any other aging aircraft issues, regulations or Airworthiness
Directives that may be promulgated in the future. There can be no assurance that
the Company's maintenance expenses (including costs to comply with aging
aircraft requirements) will fall within industry norms.
Aircraft maintenance and repair consists of routine daily or "turn-around"
maintenance and major overhaul. Routine daily maintenance is performed at
Atlanta by the Company's employees or contract employees and by contractors at
the other cities served by the Company. Heavy maintenance and other work which
require hangar facilities are currently performed at outside maintenance
contractors. Other routine daily maintenance contractors are provided by other
airlines, which operate DC-9 aircraft or other maintenance companies approved by
the FAA, both of which have employees qualified in DC-9 aircraft maintenance.
The Company expects that its maintenance expenses will be significantly reduced
with the addition of the B717 aircraft. However, the B717 aircraft will require
greater inventories of spare parts and associated costs.
Fuel
Jet fuel is a significant expenditure for the Company. The Company estimates
that a ten percent increase in the December 31, 1999 fuel cost would increase
fuel expenses by approximately $10.8 million in the year 2000, net of fuel hedge
instruments outstanding at December 31, 1999. Jet fuel costs are subject to wide
fluctuations as a result of sudden disruptions in supply. Due to the effect of
world and economic events on the price and availability of oil, the future
availability and cost of jet fuel cannot be predicted with any degree of
certainty. Increases in fuel prices or a shortage of supply could have a
material adverse effect on the Company's operations and operating results.
The majority of the Company's aircraft are relatively fuel inefficient compared
to newer aircraft and industry averages. The primary reason for this
inefficiency is engine technology. The B717 aircraft are expected to be more
fuel-efficient and should make the Company relatively less susceptible to
adverse effects attributable to fuel price changes.
A significant increase in the price of jet fuel would result in a
disproportionately higher increase in the Company's average total costs than its
competitors using more fuel efficient aircraft, whose fuel costs represent a
smaller portion of total costs, and who have greater purchasing leverage because
of size. Subject to market conditions, the Company might seek to pass such a
cost increase to its customers through a fare increase. There can be no
assurance that any such fare increase, or surcharge, would not reduce the
competitive advantage the Company seeks by offering affordable fares.
5
Distribution and Marketing
The Company's marketing efforts are vital to its success as it seeks to position
its product to stimulate new customer demand. The Company focuses on two primary
market segments: the price conscious business travellers and leisure travellers.
These are the market segments in which the consumers seek value and in which the
Company believes it offers the greatest opportunity for stimulating new demand.
The primary objectives of the Company's marketing activities are to develop an
innovative brand identity and personality that is visibly unique and easily
contrasted with its competitors. The Company communicates directly with its
existing customer base and attempts to reach potential customers through
extensive use of advertising as well as active public relations efforts. The
Company communicates regularly and frequently with existing and potential
customers through the use of advertisements in newspapers, on radio, on
television, on billboards, through direct mail, in movie theatres and through a
website on the Internet. These communications feature the Company's
destinations, everyday affordable fares, ease of use (including its simplified
fare structure, ticketless alternative and easy-to-use web site) and calls to
action (through travel agents, toll-free numbers or the website).
The Company distributes its product through various channels: (1) direct to the
consumer via phone; (2) direct to the consumer via Internet; (3) through travel
agents and the global distribution systems ("GDS"); (4) through travel agents
direct - both via phone and via Internet. Of the distribution channels, during
1999, 47.3% of passenger revenue was booked direct from the consumer via phone,
11.0% was booked from the consumer and travel agents via the Internet and 41.7%
was booked through travel agents' GDS. The Company pays customary 5% sales
commissions to travel agents. Information on its customers' needs, travel
patterns and demographics is collected, organized and stored by the Company's
automated reservation system and may be used at a future time for direct
marketing efforts.
Travel agents play an integral role distributing the Company's product. In
1997, 8% of the Company's product was distributed through travel agents. During
1999, the percentage of distribution through travel agents was 41.7%. In 1999,
the Company was awarded "Best Domestic Airline of 1999" by the Southeast Chapter
of the American Society of Travel Agents.
The Company's Internet site is a leader in the field of airline electronic
commerce. In 1999, 11% of the Company's bookings came through this important
distribution channel. In May 1999, Travel Agent magazine ranked the Company's
web site an "A" for the user friendliness of its online booking engine. The
magazine further reported that the Company's web site booking engine is "simple"
and "elegant". In October 1999, the Company created additional functionality
with its website by allowing travel agents and corporate accounts the ability to
book travel online.
To attract more business fliers, the Company launched Business Class in late
1997. Business Class consists of a premium cabin with 2 by 2 oversized seats
with seven inches more legroom and additional seatroom than the coach seat.
Targeted to the price-sensitive business flier,
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Business Class is currently available for $25 over full coach fare to Atlanta.
In addition, a standby program for upgrades is available at the departure gates.
In addition, the Company began assigning seats in 1997. Full fare passengers,
the Company's most profitable business customers who tend to book at the last
minute, are allowed to reserve seats at the time of booking. All other
customers may reserve seats one hour prior to departure. In effect, the
Company's most profitable customers choose the best seats first, but all
passengers have assigned seats prior to boarding.
Furthermore, in March 1998, the Company launched a self-administered frequent
flier program known as "A-Plus Rewards" under which customers may earn either
free roundtrip travel or Business Class upgrades. A customer may earn a free
roundtrip by flying as few as six paid roundtrips. Full fare Business Class
customers earn double credits which make a free roundtrip even easier to obtain.
In addition, free travel on other airlines may be earned by doubling the
required number of roundtrips needed for free travel. Free trips on other
airlines may be used only to/from Atlanta, apply only to cities not served by
the Company and are subject to other terms and conditions. Furthermore, free
upgrades to Business Class may be earned in lieu of free tickets.
The Company performs marketing, promotional and media relations in house. An
outside firm assists the Company in handling advertising and public relations.
The Company has partnered with The Hertz Corporation to operate a reservation
call and Internet booking solicitation agreement under which the Company's
customers are able to reserve a Hertz rental car at discounted rates when making
a reservation for the Company's flights. In addition, the Company partners with
American Express to send direct mail pieces to American Express Cardmembers who
regularly fly over the Company's route system. The American Express offer
allows customers (who charge their airfare on their American Express Card) to
earn a free ticket in A-Plus Rewards at an even faster pace.
Air travel in the Company's markets tends to be seasonal, with the highest
levels occurring during the winter months to Florida and the summer months to
the midwest and northeastern United States. Advertising and promotional
expenses may be greater in lower traffic periods, as well as when entering a new
market, in an attempt to stimulate air travel.
Computer Reservations
The Company is a participant in all of the leading travel agency GDSs, which
include Amadeus, Galileo, SABRE, SystemOne, and WorldSpan. These systems provide
flight schedules, pricing information and allow travel agents participating in
all of these systems to electronically process a flight reservation without
contacting the Company's reservations facility.
At the time of a sale/reservation, the Company provides its customers with a
confirmation number, similar to the systems used by hotels and car rental
agencies. At the airport, this information is available for customer check-in,
which helps to alleviate long lines and achieve a
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quicker turnaround of aircraft. After the flight has departed, the Company's
internal information system posts passenger revenue from the passenger manifest
information.
Employees
As of February 24, 2000, the Company employed approximately 4,000 employees and
3,200 full-time equivalents.
Training, both initial and recurrent, is required for most employees. The
average training period for all new employees is approximately one to three
weeks, depending on classification. Both pilot training and mechanic training
are provided by in-house training instructors and at times, may be provided by
professional training organizations.
FAA regulations require pilots to be certificated as commercial pilots, with
specific ratings for aircraft to be flown, and to be medically certified as
physically fit. Pilot certificates and medical certifications are subject to
periodic continuation requirements including recurrent training and recent
flying experience. Mechanics, quality-control inspectors and flight dispatchers
must be certificated and qualified for specific aircraft. Flight attendants must
have initial and periodic competency fitness training and qualification.
Training programs are subject to approval and monitoring by the FAA. Management
personnel directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed by
FAA regulations. All of these employees are subject to pre-employment, random
and post-accident drug testing.
The Company has entered into a collective bargaining agreement with its pilots
represented by the National Pilots Association ("NPA"). The contract includes
competitive wages to those of similar airlines and expires in March 2001.
The Company has entered into a collective bargaining agreement with its
mechanics represented by the International Brotherhood of Teamsters ("the
Teamsters"). The contract includes simplified work rules and pay increases.
The contract expires in August 2001.
The Company has entered into a collective bargaining agreement with its flight
attendants represented by the Association of Flight Attendants ("AFA"). The
contract includes a ten percent pay increase in year one and a four percent
increase each year thereafter expiring in October 2002.
The Company's dispatchers voted to be represented by the Transport Workers Union
("TWU") in April 1999. The TWU and the Company have yet to sign a contract, but
are in negotiations and expect to sign one in early 2000.
In February 2000, the Company's customer service, ramp and reservation agents
rejected the International Association of Machinists in a vote that received
less than 30% support. The
8
Company is unable to predict whether any of its other employees will elect to be
represented by a labor union or other collective bargaining unit. The election
by the Company's employees for representation in such an organization could
result in employee compensation and working condition demands that may affect
operating performance or expenses.
The Company does not expect that the unionization of these employee groups will
have a material adverse effect on its operating costs or performance.
Airport Operations
Ground handling services typically can be placed in three categories - public
contact, under-wing and complete ground handling. Public contact services
involve meeting, greeting and serving the Company's customers at the check-in
counter, gate and baggage claim area. Under-wing ground handling services
include, but are not limited to, marshaling the aircraft into and out of the
gate, baggage and mail loading and unloading, as well as lavatory and water
servicing, deicing and certain services provided to the aircraft overnight.
Complete ground handling consists of public contact and under-wing services
combined.
The Company conducts its own ground handling services in 24 airports, including
Atlanta. At other airports, Company operations not conducted by the Company's
employees are contracted to other air carriers, ground handling companies or
fixed base operators. The Company has at least one employee at each of these
cities to oversee its operations.
Insurance
The Company carries customary levels of passenger liability insurance, aircraft
insurance for aircraft loss or damage and other business insurance. The Company
is exposed to potential catastrophic losses that may be incurred in the event of
an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service, but also significant potential claims of injured passengers and
others. The Company is required by the DOT to carry liability insurance on each
of its aircraft. The Company currently maintains liability insurance in the
amount of $850 million per occurrence. Although the Company currently believes
its insurance coverage is adequate, there can be no assurance that the amount of
such coverage will not be changed or that the Company will not be forced to bear
substantial losses from accidents. Substantial claims resulting from an
accident in excess of related insurance coverage or not covered by the Company's
insurance could have a material adverse effect on the Company. Moreover, any
aircraft accident, even if fully insured, could cause and has caused a public
perception that some of the Company's aircraft are less safe or reliable than
other aircraft, which could have and has had a material adverse effect on the
Company's business.
Seasonality and Cyclicality
The Company's operations are primarily dependent upon passenger travel demand
and, as such, may be subject to seasonal variations. Management believes that
the weakest travel periods will generally be during the months of January and
and September. Leisure travel generally increases during the summer months and
at holiday periods.
The airline industry is highly volatile. General economic conditions directly
affect the level of passenger travel. Leisure travel is highly discretionary and
varies depending on economic
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conditions. While business travel is not as discretionary, business travel
generally diminishes during unfavorable economic times, as businesses tend to
tighten cost controls.
Government Regulations
The airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which has substantially eliminated government
authority to regulate domestic routes and fares. Deregulation has increased the
ability of airlines to compete with respect to destination, flight frequencies
and fares. Nevertheless, the airline industry remains highly regulated in other
aspects, as more fully described below.
DOT Oversight
Although regulation of domestic routes and fares was abolished by the Airline
Deregulation Act of 1978, the Department of Transportation ("DOT") retains the
authority to alter or amend any airline's certificate or to revoke such
certificate for intentional failure to comply with the terms and conditions of
the certificate. In addition, the DOT has jurisdiction over international
tariffs and pricing, international routes, computer reservation systems, and
economic and consumer protection matters such as advertising, denied boarding
compensation, smoking and codeshare arrangements and has the authority to impose
civil penalties for violation of the United States Transportation Code or DOT
regulations.
Aircraft Maintenance and Operations
The Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including equipment, dispatch, communications,
training, flight personnel and other matters affecting air safety. The FAA has
the authority to issue new or additional regulations. To ensure compliance with
its regulations, the FAA conducts regular safety audits and requires all
airlines to obtain operating, airworthiness and other certificates, which are
subject to suspension or revocation for cause.
The FAA has issued several Airworthiness Directives ("ADs") mandating
modifications to the older aircraft maintenance programs. These ADs were issued
to ensure that the oldest portion of the nation's aircraft fleet remains
airworthy and require structural modifications to or inspections of those
aircraft. The Company believes that all of its aircraft are in compliance with
the aging aircraft mandates.
The Company cannot predict the cost of compliance with all present and future
rules and regulations and the effect of such compliance on the business of the
Company, particularly its expansion plans and aircraft acquisition program.
FAA Funding
In 1997, a law was enacted imposing new aviation ticket taxes as part of larger
tax legislation designed to balance the nation's budget, provide targeted tax
relief and fund air traffic control, other FAA programs and airport development.
As enacted, these new taxes will be imposed through September 30, 2007. Included
in the new law is a phase in of a modified federal air
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transportation excise tax structure with a system that includes: a domestic
excise tax starting at 9% which decreased to 7.5% in 1999; a domestic segment
tax starting at $1.00 and increasing to $3.00 by 2002; and an increase in taxes
imposed on international travel. Both the domestic segment tax and the
international tax are indexed for inflation. The legislation also includes a
7.5% excise tax on certain amounts paid to an air carrier for the right to
provide mileage and similar awards (e.g., purchase of frequent flyer miles by a
credit card company). As a result of competitive pressures, the Company and
other airlines have been limited in their ability to pass on the cost of these
taxes to passengers through fare increases.
Fuel Tax
In August 1993, the federal government increased taxes on fuel, including
aircraft fuel, by 4.3 cents per gallon. Total fuel taxes paid by the Company in
1999 were $9.4 million.
Passenger Facility Charges
During 1990, Congress enacted legislation to permit airport authorities, with
prior approval from the DOT, to impose passenger facility charges ("PFCs") as a
means of funding local airport projects. These charges, which are intended to be
collected by the airlines from their passengers, are limited to $3.00 per
enplanement and to no more than $12.00 per round trip. To date, the Company has
passed on the cost of the PFCs to its passengers.
Slot Restrictions
At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's
O'Hare International Airport and Washington's Ronald Reagan National Airport,
which have been designated "High Density Airports" by the FAA, there are
restrictions on the number of aircraft that may land and take off during peak
hours. In the future, these take off and landing time slot restrictions and
other restrictions on the use of various airports and their facilities may
result in curtailment of services by, and increased operating costs for,
individual airlines, including the Company, particularly in light of the
increase in the number of airlines operating at such airports. In general, the
FAA rules relating to allocated slots at the High Density Airports contain
provisions requiring the relinquishment of slots for nonuse and permit carriers,
under certain circumstances, to sell, lease or trade their slots to other
carriers. The Company currently utilizes 12 slots at LaGuardia Airport.
Additional Security and Safety Measures
In 1996 and 1997 the President's Commission on Aviation Safety and Security
issued recommendations and the U.S. Congress and the FAA adopted increased
safety and security measures designed to increase airline passenger safety and
security and protect against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. Examples of increased safety
and security measures include the introduction of a domestic passenger manifest
requirement, increased passenger profiling, enhanced pre-board screening of
passengers and carry on baggage, positive bag match for profile selections,
continuous physical bag search at checkpoints, additional airport security
personnel, expanded criminal background checks for
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selected airport employees, significantly expanded use of bomb sniffing dogs,
certification of screening companies, aggressive testing of existing security
systems, expansion of aging aircraft inspections to include non structural
components, development of a new systems approach for air carriers and the FAA
to monitor and improve safety oversight and installation of new ground proximity
warning systems on all commercial aircraft. The Company cannot forecast what
additional security and safety requirements may be imposed in the future or the
costs or revenue impact that would be associated with complying with such
requirements.
Miscellaneous
All air carriers are subject to certain provisions of the Communications Act of
1934, as amended, because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent the
Company is subject to FCC requirements, it has taken and will continue to take
all necessary steps to comply with those requirements.
The Company's operations may become subject to additional federal regulatory
requirements in the future under certain circumstances. The Company's labor
relations are covered under Title II of the Railway Labor Act of 1926, as
amended, and are subject to the jurisdiction of the National Mediation Board.
During a period of past fuel scarcity, air carrier access to jet fuel was
subject to allocation regulations promulgated by the Department of Energy. The
Company is also subject to state and local laws and regulations at locations
where it operates and the regulations of various local authorities that operate
the airports it serves.
All international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. The Company does not
currently provide any international service. To the extent the Company seeks to
provide international air transportation in the future, it will be required to
obtain additional authority from the DOT.
Environmental Regulations
The Airport Noise and Capacity Act of 1990 ("ANCA") generally recognizes the
rights of airport operators with noise problems to implement local noise
abatement programs so long as they do not interfere unreasonably with interstate
or foreign commerce or the national air transportation system. The ANCA
generally requires FAA approval of local noise restrictions on Stage 3 aircraft
first effective after October 1990. While the Company has had sufficient
scheduling flexibility to accommodate local noise restrictions imposed to date,
the Company's operations could be adversely affected if locally-imposed
regulations become more restrictive or widespread.
The Environmental Protection Agency ("EPA") regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company believes it has made all necessary modifications to its fleet to meet
emission standards issued by the EPA.
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Risk Factors
The Company's Recent Operating Losses; Negative Net Worth
The Company recorded net losses of $99.4 million in 1999, $40.7 million in 1998,
and $96.7 million in 1997. The Company's earnings before fixed charges for each
of the three years ended December 31, 1999 were inadequate to cover fixed
charges. Continued losses by the Company or continued failure by the Company to
cover fixed charges in the future would likely have a material adverse effect on
the Company's financial condition. The recording of a non-cash fleet
disposition charge of $147.7 million in fourth quarter 1999 resulted in the
Company incurring a net loss for the 1999 year and having negative net worth at
December 31, 1999. The Company's consolidated debt, recent history of losses
and negative net worth may adversely affect the Company's ability to obtain
financing on terms satisfactory to the Company in the future.
Risks Due to the Company's Significant Amount of Debt
The entire principal amount of the Company's 10.25% Senior Notes ($150.0
million) and 10.5% Senior Secured Notes ($80.0 million) will become due on April
15, 2001. The Company does not expect to generate sufficient cash flow from
operations to repay all $230.0 million of such debt by its due date.
Accordingly, the Company will likely need to refinance all or a portion of the
outstanding debt through additional equity or debt or a combination thereof.
However, the Company may not be able to obtain such financing on acceptable
terms. In such event, the Company could be forced to default on its debt
obligations and, ultimately, seek protection under federal bankruptcy laws.
The ability of the Company to make scheduled payments of principal or interest
and the Company's ability to refinance its debt depend on its future performance
and financial results. Such results are subject to general economic, financial,
competitive, legislative, regulatory, and other factors that are, to some
extent, beyond the Company's control.
In 1999, the Company issued $178.9 million of enhanced equipment trust
certificates and will incur substantial additional debt (some of which may be
under capital leases) to finance the acquisition of the B717 aircraft. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
The amount of the Company's debt could have important consequences to investors,
including the following:
. a substantial portion of the Company's cash flow from operations must be
dedicated to debt service and will not be available for operations;
. the Company's ability to obtain additional financing for aircraft purchases,
capital expenditures, working capital, or general corporate purposes could be
limited;
. the Company's vulnerability to adverse economic and industry conditions is
greater than its larger and more financially secure competitors;
13
. 24 of the Company's DC-9 aircraft are pledged as collateral to secure its
$80.0 million 10.5% Senior Secured Notes due 2001;
. eight B717 aircraft are pledged as collateral to secure other debt of the
Company with a principal balance of $178.9 million as of December 31, 1999;
. an additional one DC-9, three B737s and certain engines are pledged as
collateral to secure other debt of the Company with a principal balance of
$6.8 million as of December 31, 1999; and
. future B717 aircraft to be acquired by the Company will be pledged as
collateral to secure debt incurred by the Company.
The Company's Debt Covenants Could Limit How It Conducts Its Business
The Company's debt instruments contain covenants that, among other things,
restrict its ability to:
. incur additional indebtedness
. pay dividends and make other distributions
. prepay subordinated indebtedness
. make investments and other restricted payments
. create liens
. sell assets
. enter into certain mergers
. engage in certain transactions with affiliates
The Company's current and future financing arrangements contain and are expected
to continue to contain similar or more restrictive covenants. As a result of
these restrictions, the Company may be limited in how it conducts business, and
the Company may be unable to raise additional debt or equity financing to
operate during general economic or business downturns, to compete effectively,
or to take advantage of new business opportunities. This may affect the
Company's ability to generate revenues and make profits. Without sufficient
revenues and cash, the Company may not be able to pay interest and principal on
its indebtedness.
The Company's failure to comply with the covenants and restrictions contained in
its indentures and other financing agreements could lead to a default under the
terms of these agreements. If such a default occurs, the other parties to such
agreements could declare all amounts borrowed
14
and all amounts due under other instruments that contain provisions for cross-
acceleration or cross-default due and payable. If that occurs, the Company
cannot assure investors it would be able to make payments on its debt, meet its
working capital and capital expenditure requirements, or be able to find
additional alternative financing. Even if the Company could obtain additional
alternative financing, it cannot assure investors such financing would be on
favorable or acceptable terms.
Fuel Costs
The cost of jet fuel is an important expense for the Company. Jet fuel costs
are subject to wide fluctuations as a result of sudden disruptions in supply,
such as the effect of the invasion of Kuwait by Iraq in August 1990. The
Company estimates that a ten percent increase in fuel cost at December 31, 1999
would increase fuel expenses by approximately $10.8 million in the year 2000,
net of fuel hedge instruments outstanding at December 31, 1999. Comparatively,
based on 1999 fuel usage, a 10% increase in fuel prices would have resulted in
an increase in fuel expense of approximately $2.8 million, net of hedging
instruments utilized during 1999. The change in market risk is the result of
the Company hedging a larger portion of its fuel consumption in 1999 than in
2000. Due to the effect of world and economic events on the price and
availability of oil, the future availability and cost of jet fuel cannot be
predicted with any degree of certainty. Increases in fuel prices or a shortage
of supply could have a materially adverse effect on the Company's operations and
operating results.
The Company's DC-9 and B737 aircraft are relatively fuel-inefficient compared to
newer aircraft and industry averages. The primary reason for this inefficiency
is engine technology. As a result, a significant increase in the price of jet
fuel would likely result in a disproportionately higher increase in the
Company's average total costs than its competitors using more fuel-efficient
aircraft and whose fuel costs represent a smaller portion of total costs. The
Company may seek to pass such increase to its customers through a fare increase.
There can be no assurance that any such fare increase would not reduce the
competitive price advantage the Company seeks by offering affordable fares.
In order to provide a measure of control over price and supply, effective March
1999, the Company commenced participation in a fuel-hedging program whereby the
Company manages the price risk of fuel by entering into fixed rate fuel swap
contracts. The fuel-hedging program is designed to mitigate, but not eliminate,
the adverse effect of increases in fuel prices. The Company's fuel hedging
contracts covered approximately 80% of the Company's estimated fuel requirements
for the last ten months of 1999 and will cover 11% of its estimated fuel
requirements for the first six months of 2000. There can be no assurance that
the Company's fuel hedging program will continue to cover any of its fuel
requirements in the future.
Market Dominance by Delta Air Lines, Inc.
The Atlanta market, which is the Company's principal hub, is currently dominated
by Delta Air Lines, Inc. ("Delta"). Delta offers more than 620 flights per day
from Atlanta, which represents more than 75% of all departures from Hartsfield
Atlanta International Airport. Based on departures, the Company operates
approximately 12% of all departures from Hartsfield. The
15
Company's Atlanta-based strategy may not be successful in light of Delta's
Atlanta market dominance.
Competitors in the Low-Fare Market
Delta Express, a division of Delta, began offering low-cost, low-fare service in
several of the Company's markets in 1996. MetroJet, a division of US Airways,
began offering low-fare service in both Boston and Washington, D.C. (Dulles) in
1999. The Company does not presently compete directly with Delta Express or
Southwest Airlines on any routes, but competes with MetroJet on its Atlanta-
Washington, D.C. and Atlanta-Boston routes. The Company may face greater
competition from Delta Express, MetroJet, Southwest Airlines or other low fare
carriers in the future.
A Highly Competitive Industry
The airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which has substantially eliminated government
authority to regulate domestic routes and fares. Deregulation has increased the
ability of airlines to compete with respect to destination, flight frequencies
and fares. The Company competes with airlines that serve the Company's current
and proposed routes and which are larger and have greater name recognition and
greater financial resources than the Company.
The Company may also face competition from any of the following:
. existing airlines that may begin serving markets which the Company currently
serves or may serve in the future;
. current competitors that may expand their existing service;
. new competitors that may form new airline companies and enter the low-fare
market; and
. companies that provide ground transportation.
Competitors with greater financial resources than the Company may price their
fares at or below the Company's fares or increase their service. Such
competition could prevent the Company from attaining a share of the passenger
traffic necessary to sustain profitable operations. The Company's ability to
meet price competition depends on its ability to operate at costs equal to or
lower than its competitors or potential competitors.
Industry Profitability
The airline industry is characterized by low gross profit margins and high fixed
costs. The expenses of each flight do not vary significantly with the number of
passengers carried and, therefore, a relatively small change in the number of
passengers, or in average fare or traffic mix (the ratio of typically high-
yielding business passengers to typically low-yielding leisure passengers),
could have a disproportionate effect on an airline's operating and financial
results.
16
Accordingly, a minor shortfall from expected revenue levels could have a
material adverse effect on the Company's results of operations.
The industry has experienced and continues to experience substantial
restructuring as many established carriers have implemented varying strategies
in pursuit of profitability, including consolidation to expand operations and
increase market strength, establishing lower cost airlines within airlines, such
as Shuttle by United, Delta Express by Delta and MetroJet by U.S. Airways, and
by entering into global alliance arrangements. Because these restructurings
have only recently begun to appear in the marketplace or, in some cases, have
not yet been implemented, the Company is unable to predict what effect, if any,
these activities will have on its business, financial condition and results of
operations.
Significant Dependence on Atlanta Market
The Company's business strategy has focused and is expected to continue to focus
on adding flights to and from its Atlanta base of operations. A reduction in
the Company's share of the Atlanta market or reduced passenger traffic to or
from Atlanta could have a material adverse effect on the Company's financial
condition and results of operations. In addition, the Company's dependence on a
primary hub and on a route network operating largely on the East Coast makes it
more susceptible to adverse weather conditions along the East Coast than some of
its competitors that may be better able to spread weather-related risks over
larger route systems.
Aging Aircraft; Maintenance and Reliability
The Company's fleet consists predominantly of DC-9 aircraft manufactured between
1967 and 1976 and B737 aircraft manufactured between 1968 and 1985. Many
aircraft components must be replaced after specified numbers of flight hours or
take-off and landing cycles and new aviation technology may need to be
retrofitted. As a result, the cost in general to maintain aging aircraft will
exceed the cost to maintain newer aircraft.
Currently, the FAA is considering amendments to FAA regulations, which would
require certain heavy maintenance checks and other additional maintenance
requirements for aircraft operating beyond certain operational limits. It is
likely that these maintenance requirements will apply to the aircraft operated
by the Company, although it is uncertain whether the proposed amendments will
require any changes to the heavy maintenance procedures already used by the
Company. In addition, the Company will be required to comply with any other
future regulations or Airworthiness Directives issued with respect to aging
aircraft. As a result, the Company's costs of maintenance (including costs to
comply with aging aircraft requirements for its DC-9 and B737 aircraft) may
increase in the future.
The Company believes that its aircraft are mechanically reliable based on the
percentage of scheduled flights completed. However, the Company cannot assure
that its aircraft will continue to be sufficiently reliable over longer periods
of time. Furthermore, given the age of the Company's fleet, any public
perception that the Company's aircraft are less than completely reliable could
have a material adverse effect on the Company's business.
17
Purchase Commitments
The Company is obligated to purchase 50 B717 aircraft from The Boeing Company
("Boeing"). As of December 31, 1999, the Company has taken delivery of eight of
these aircraft. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." There
can be no assurance that the Company will be able to obtain satisfactory
financing to allow it to fulfill its obligations under the contract. If the
Company defaults in its obligations, Boeing would have the right to terminate
the purchase agreement and to seek other remedies available to it. The Company
may not be able to utilize all the aircraft it has committed to purchase. If the
Company cannot use such aircraft, it may be required to sell or lease such
aircraft on terms which will depend upon market conditions at the time. There
can be no assurance that the Company will not suffer a financial loss from any
such sales or leases.
Risk of Loss
Any accident involving the Company's aircraft could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service, but also significant potential claims of injured passengers and
others. Moreover, any aircraft accident, even if fully insured, could cause and
has caused a public perception that some of the Company's aircraft are less safe
or reliable than other aircraft, which could have and has had a negative effect
on the Company's business. The occurrence of one or more subsequent incidents or
accidents involving the Company's aircraft would likely have a substantial
adverse effect on the Company's public perception and future operations.
The Company is required by the DOT to carry liability insurance on each of its
aircraft. The Company currently maintains liability insurance in the amount of
$850 million per occurrence. Although the Company currently believes its
insurance coverage is adequate, the amount of such coverage may be changed in
the future or the Company may be forced to bear substantial losses from
accidents. Substantial claims resulting from an accident in excess of related
insurance coverage could have a material adverse impact on the Company.
Risks Due to Litigation
For a discussion of certain risks presented by litigation affecting the Company,
see "Item 3 - Legal Proceedings."
Dependence on Executive Officers
The Company is dependent on the services of Joseph B. Leonard, Robert L. Fornaro
and its other executive officers. The loss of services of these officers could
materially and adversely affect the business of the Company and its future
prospects. The Company does not, and does not presently intend to, maintain key
man life insurance on any of its officers.
18
Beginning in 1999, the Company has a new senior management team. There can be
no assurance that the new management team will be effective in managing the
Company or will be able to successfully work with existing personnel.
Reliance on Others
The Company has entered into agreements with contractors, including other
airlines, to provide certain facilities and services required for its
operations, including aircraft maintenance, ground facilities, baggage handling
and personnel training. The Company will likely need to enter into similar
agreements in any new markets that it decides to serve. All of these agreements
are subject to termination after notice. The Company's reliance upon others to
provide essential services on behalf of the Company may result in relative
inability to control the efficiency, timeliness and quality of contract
services. Management expects that the Company will be required to rely on such
contractors for some time in the future.
Airport Access
The Company's markets are located primarily in the eastern United States.
Access to certain "slot" controlled airports (such as Washington's Reagan
National, New York's Kennedy and LaGuardia and Chicago's O'Hare) is limited, and
the Company may not be able to obtain or maintain access to such airports at an
acceptable cost. Any condition, which would deny or limit the Company's access
to the airports it serves or seeks to serve, may have a negative impact on the
Company's business.
Taxation Affecting Air Fares
Recent federal legislation has imposed taxes on domestic airline transportation
equal to a segment charge (currently $2.50 to be increased to $3.00 by 2002)
plus 7.5% of the ticket price. These taxes will likely have a greater effect on
leisure travelers. Since the Company relies to a large extent on leisure
travelers, such a tax increase may affect the Company to a greater extent than
competitors who rely more heavily on business travelers.
Employee Relations
For a discussion of certain risks presented by the possible unionization of
employee groups not currently represented by unions, see "Employees".
Regulatory Matters
In the last several years, the FAA has issued a number of maintenance directives
and other regulations relating to, among other things, retirement of older
aircraft, security measures, collision avoidance systems, airborne windshear
avoidance systems, noise abatement, commuter aircraft safety, and increased
inspections and maintenance procedures to be conducted on older aircraft. The
Company expects to continue incurring expenses for the purpose of complying with
the FAA's aging aircraft regulations. In addition, several airports have
recently sought to
19
increase substantially the rates charged to airlines, and the ability of
airlines to contest such increases has been restricted by federal legislation,
DOT regulations, and judicial decisions.
Additional laws and regulations have been proposed from time to time that could
significantly increase the cost of airline operations by imposing additional
requirements or restrictions on operations. Laws and regulations have also been
considered that would prohibit or restrict the ownership and/or transfer of
airline routes or takeoff and landing slots. Also, the availability of
international routes to United States carriers is regulated by treaties and
related agreements between the United States and foreign governments that are
amendable. The Company cannot predict what laws and regulations may be adopted
or their impact, but there can be no assurance that laws or regulations
currently proposed or enacted in the future will not adversely affect the
Company.
Seasonal and Cyclical Nature of Airline Business
Due to the greater demand for air travel during the summer months, revenue in
the airline industry in the second and third quarters of the year is generally
significantly greater than revenue in the first quarter of the year and
moderately greater than revenue in the fourth quarter of the year for the
majority of air carriers. The Company's results of operations generally reflect
this seasonality, but have also been impacted by numerous other factors that are
not necessarily seasonal, including the extent and nature of competition from
other airlines, fare competition, changing levels of operations, fuel prices,
and general economic conditions.
The airline industry is highly volatile. General economic conditions directly
affect the level of passenger travel. Leisure travel is highly discretionary and
varies depending on economic conditions. While business travel is not as
discretionary, business travel generally diminishes during unfavorable economic
times, as businesses tend to tighten cost controls.
20
ITEM 2. PROPERTY
--------
Operating Aircraft Fleet
Owned and leased aircraft operated by the Company as of December 31, 1999
included:
Average Average
No. of Operating Age
Aircraft Type Seats Owned Leases Total (Years)
- ------------- ------- ----- --------- ----- --------
B717 117 8 0 8 0.21
DC-9 106 28 7 35 29.10
B737 119 3 1 4 22.80
----- --------- -----
Total 39 8 47 23.63
For information concerning the estimated useful lives, residual values, lease
terms, operating rent expense and firm orders on additional aircraft, see Note 1
to the consolidated financial statements.
As of December 31, 1999, 36 of the Company's owned aircraft were encumbered
under debt agreements.
The Company took delivery of the first of 50 B717's beginning in September,
1999. These aircraft will be used to replace the B737's and DC-9's currently in
operation. The Company returned five B737's to lessors during 1999. The
Company expects to take delivery of eight B717 aircraft in 2000.
The delivery schedule for the Company's 42 B717's under firm contract is as
follows:
Aircraft Type 2000 2001 2002 2003
- ------------- ---- ---- ---- ----
B717 8 16 18 -
The first of the eight B717 aircraft to be delivered in 2000 was delivered in
January 2000.
A preliminary retirement schedule of the Company's aircraft is as follows:
Aircraft Type 2000 2001 2002 2003
- ------------- ---- ---- ---- ----
DC-9 - 10 15 10
B737 - 3 - 1
21
The delivery and retirement schedules represent Management's best estimates as
of March 15, 2000. Consequently, actual deliveries and/or retirements may vary
from the above tables. See Item 7. Management's Discussion and Analysis -
Forward Looking statements.
Ground Facilities
The Company's principal executive offices are located two miles from the Orlando
International Airport in a leased facility consisting of approximately 34,000
square feet of office space. The facility houses the executive offices of the
Company as well as the Company's operations staff (including in-flight
operations and station operations), general administrative staff, computer
systems and personnel training facility. The lease agreement for this facility
expires in 2007 and may be extended an additional ten years through the exercise
of options in five-year increments.
The Company owns an aircraft hangar of approximately 70,000 square feet at the
Orlando International Airport, subject to a ground lease with the Greater
Orlando Aviation Authority. The ground lease agreement for this facility expires
in 2011 and may be extended an additional ten years through the exercise of
options in five-year increments. The hangar houses a portion of the Company's
maintenance staff, maintenance records and parts inventory.
The Company leases 19,739 square feet of office space in Atlanta for use as a
reservations center under a lease that expires September 30, 2004. The Company
also leases approximately 15,000 square feet of space in Atlanta for use as a
training center under a lease that expires August 31, 2004. The Company also
leases a 13,028 square feet reservations center in Savannah, Georgia, which
expires in January 2003.
The Company has signatory status on the lease of facilities at Hartsfield
Atlanta International Airport, which expires in 2010. The check-in-counters,
gates and airport office facilities at each of the other airports the Company
serves are leased from the appropriate airport authority or subleased from other
airlines. Such arrangements may include baggage handling, station operations,
cleaning and other services.
If such facilities at any additional cities to be served by the Company are not
available to the Company at acceptable rates, or if such facilities become no
longer available to the Company at acceptable rates, then the Company may choose
not to service such markets.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Of the numerous lawsuits that were filed against the Company seeking damages
attributable to those on Flight 592, the remaining two cases are being pursued
in state courts in Florida and Texas. The Company believes that the $750
million coverage available with respect to these claims will be sufficient to
cover all claims arising from the accident. As all claims are handled
independently by the Company's insurance carrier, the Company cannot reasonably
estimate the amount of liability that may finally exist. As a result, no
accruals for losses and the related claim for recovery from the Company's
insurance carrier have been reflected in the Company's financial statements.
There can be no assurance that the total amount of judgments and
22
settlements will not exceed the amount of insurance available therefor or that
all damages awarded will be covered by insurance.
On October 1, 1999, the Company filed suit in the Superior Court of Gwinnett
County, Georgia, against United States Aviation Underwriters, Inc. and United
States Aviation Insurance Group for declaratory relief and damages based on
claims of breach of contract and tortious breach of covenant of good faith and
fair dealing for matters involving litigation related to Flight 592.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of its business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ---------------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
Market Information
The Company's Common Stock, $.001 par value, is traded on the NASDAQ Stock
Market under the symbol "AAIR". As of March 10, 2000, there were approximately
5,512 holders of record of the Company's Common Stock. The following table sets
forth the reported high and low sale prices for the Common Stock for each fiscal
quarter since January 1, 1998.
Fiscal year ended December 31, 1998 High Low
- ----------------------------------- ---- ---
Quarter Ending March 31, 1998 $8.06 $3.00
Quarter Ending June 30, 1998 $9.44 $6.76
Quarter Ending September 30, 1998 $8.12 $3.88
Quarter Ending December 31, 1998 $4.47 $2.13
Fiscal year ended December 31, 1999 High Low
- ----------------------------------- ---- ---
Quarter Ending March 31, 1999 $5.13 $2.75
Quarter Ending June 30, 1999 $6.00 $4.13
Quarter Ending September 30, 1999 $7.25 $4.94
Quarter Ending December 31, 1999 $6.06 $3.50
As of March 10, 2000, the closing price of the Common Stock was $3.94.
Dividends
No cash dividends have ever been declared by the Company on its Common Stock. In
addition, the Company's debt indentures restrict the Company's ability to pay
cash dividends. The Company intends to retain earnings to finance the
development and growth of its business. Accordingly, the Company does not
anticipate that any dividends will be declared on its Common Stock for the
foreseeable future. Future payments of cash dividends, if any, will depend on
the Company's financial condition, results of operations, business conditions,
capital requirements, restrictions contained in agreements, future prospects and
other factors deemed relevant by the Company's Board of Directors.
24
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item is as follows:
(in thousands except per share data)
1999 1998(b) 1997 1996 1995
-------- -------- -------- --------- ---------
Operating revenues $523,468 $439,307 $211,456 $219,636 $367,757
Net income (loss) (99,394) (40,738) (96,663) (41,469) 67,763
Net income (loss),
excluding special items 29,094 (a) (13,246) (c) (66,581) (d) (11,098) (e) 67,763
Basic earnings (loss)
per share (1.53) (0.63) (1.72) (0.76) 1.24
Diluted earnings (loss)
per share (1.53) (0.63) (1.72) (0.76) 1.13
Diluted earnings (loss) per share,
excluding special items 0.45 (a) (0.20) (c) (1.19) (d) (0.20) (e) 1.13
Total assets 467,014 376,406 433,864 417,187 346,741
Long-term debt including
current maturities 415,688 245,994 250,712 244,706 109,038
Notes: All special items listed below are pre-tax.
(a) Excludes a $147.7 million impairment loss related to the accelerated
retirement of the DC-9 fleet as a result of the introduction of the B717
fleet and a gain of $19.6 million for a litigation settlement.
(b) See Note 1 to the consolidated financial statements.
(c) Excludes a $27.5 million impairment loss related to the acceleration of the
retirement of four owned B737 aircraft as a result of the elimination of
their original route system and continued operating losses upon their
redeployment to other routes.
(d) Excludes a $24.8 million charge related to the shutdown of the airline in
1996 and a $5.2 million charge for the renaming of the airline in connection
with the merger with Airways Corporation in November 1997.
(e) Excludes a $68.0 million charge related to the shutdown of the airline in
1996, a $3.9 million gain on the sale of property, a $13.0 million
arrangement fee for aircraft transfer and a $2.8 million gain on insurance
recovery.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
For the twelve months ended December 31, 1999, 1998 and 1997
The following is a table of selected operational statistics and financial data
for the twelve months ended December 31, 1999, 1998 and 1997:
Twelve Months Ended
December 31,
1999 1998 1997
--------- --------- ---------
Revenues passengers 6,460,533 5,462,827 3,005,731
Revenue passengers miles /(1)/ (000's) 3,473,490 3,244,539 1,597,585
Available seat miles /(2)/ (000's) 5,467,556 5,442,234 3,017,892
Passenger load factor /(3)/ 63.5% 59.6% 52.9%
Break-even load factor /(4)/ 59.4% 61.5% 76.3%
Average yield per revenue
passenger mile /(5)/ 14.01(cents) 12.97(cents) 12.58(cents)
Passenger revenue per available
seat mile /(6)/ 8.90(cents) 7.73(cents) 6.66(cents)
Operating cost per available seat mile /(7)/ 8.19(cents) 7.91(cents) 9.38(cents)
Average stage length (miles) 528 546 468
Average cost of aircraft fuel per gallon 49.95(cents) 54.87(cents) 69.00(cents)
Average daily utilization /(8)/ (hours) 9:54 9:42 8:25
Number of aircraft in fleet at end of period 47 50 53
(1) The number of scheduled revenue miles flown by passengers.
(2) The number of seats available for passengers multiplied by the number of
scheduled miles each seat is flown.
(3) The percentage of aircraft seating capacity that is utilized is calculated
by dividing revenue passenger miles by available seat miles.
(4) Excluding shutdown and other nonrecurring, rebranding and impairment
charges, the percentage of seats that must be occupied by revenue
passengers in order for the Company to break even on a pre-tax income
basis.
(5) The average amount one passenger pays to fly one mile.
(6) Passenger revenue divided by available seat miles.
(7) Operating expenses, excluding shutdown and other nonrecurring, rebranding
and impairment charges, divided by available seat miles.
(8) The average number of hours per day that an aircraft flown in revenue
service is operated.
26
Operating expenses per Available Seat Mile: (excluding shutdown and other
nonrecurring, rebranding and impairment charges)
For the twelve months
ended December 31,
1999 1998 1997
-------- --------- ---------
Operating expenses
Salaries, wages and benefits 2.21(cents) 1.99(cents) 1.79(cents)
Aircraft fuel 1.25 1.32 1.62
Maintenance, materials and repairs 1.58 1.37 2.03
Commissions 0.68 0.64 0.33
Landing fees and other rents 0.49 0.43 0.60
Marketing and advertising 0.29 0.28 0.44
Aircraft rent 0.09 0.13 0.03
Depreciation 0.52 0.53 0.93
Other operating 1.08 1.22 1.61
---------- ---------- ----------
Total operating expenses 8.19(cents) 7.91(cents) 9.38(cents)
========== ========== ==========
1999 Compared to 1998
Summary
Excluding the pre-tax impairment charge of $147.7 million and litigation
settlement gain of $19.6 million, we recorded net income of $29.1 million or 45
cents per share in 1999 versus a net loss, excluding a pre-tax impairment charge
of $27.5 million, of $13.2 million or 20 cents per share in 1998. We recorded a
net loss of $99.4 million for the year ended December 31, 1999 compared to a net
loss of $40.7 million for the year ended December 31, 1998.
Excluding the special items mentioned above, our operating income increased
$47.2 million to $56.1 million in 1999 from $8.9 million in 1998. Excluding
special items, our operating margin in 1999 was 11.1% versus an operating margin
of 2.0% in 1998.
Operating Revenues
Passenger revenues increased by 15.6% or $65.6 million in 1999 compared to 1998.
The growth in our passenger revenue stems from increasing traffic demand in both
the business and leisure market segments. Business class loads were up
significantly versus last year. Adjustments in pricing and inventory strategies
also led to gains in leisure traffic. Yield (the average amount a passenger
pays to fly one mile) increased by 8.0%, year over year, from 13.0 cents to 14.0
cents.
27
Unit revenue increased 15.1%, from 7.7 cents to 8.9 cents in 1998 and 1999,
respectively - better improvements than any major airline in the industry.
Our traffic, or revenue passenger miles (RPMs), increased 7.1% or 229.0 million
on a 0.5% increase in capacity, or available seat miles (ASMs). For the year
ended December 31, 1999, load factor increased 3.9 points to 63.5% versus 59.6%
for the year ended December 31, 1998. However, we continue to experience strong
competition that could negatively impact future loads and yields.
Other revenue increased 121.8%, or $18.2 million, this year compared to last
year due to the $19.6 million gain from a litigation settlement.
Operating Expenses
Excluding the impairment charges in 1999 and 1998, operating expenses increased
$17.4 million or 4.0% year over year. Our operating cost per ASM, excluding
impairment charges, increased 3.5% to 8.19 cents from 7.91 cents a year ago.
Salaries, wages and benefits increased 11.3%, or $12.3 million, due to a 6.1%
increase in overall headcount and contractual wage increases for our union-
represented labor groups. Aircraft fuel expense decreased year over year by
$3.6 million, or 5.0%, due to a 9.0% decrease in the average fuel cost per
gallon offset by a 4.4% increase in fuel consumption. Maintenance increased
15.8% or $11.8 million, due to a volume increase of five check lines as a result
of completing our structural life improvement program, and six additional engine
overhauls. The timing of maintenance to be performed is determined by the
number of hours an aircraft and engine are flown. Commissions paid to travel
agents increased $2.4 million or 6.9% due to an increase in commissionable
sales, offset by a rate reduction from 10% to 8% during the second quarter of
1998 and a further reduction to 5% during the fourth quarter of 1999. Landing
fees and other rents increased $3.6 million compared to the year ended 1998 due
to increased departures. We operated 5.1% more departures in 1999 than 1998, at
96,858 and 92,141, respectively. Aircraft rent decreased $2.4 million in 1999
from 1998 due to the return of five leased B737 aircraft throughout the year.
Other operating expenses decreased by $7.3 million, or 11.0%, primarily due to
the decline of credit card chargebacks and communications costs.
In the fourth quarter of 1999, we decided to accelerate the retirement of our
owned DC-9 fleet to accommodate the introduction of the B717 fleet. In
connection with our decision to accelerate the retirement of these aircraft, we
performed an evaluation to determine, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, whether future cash flows (undiscounted
and without interest charges) expected to result from the use and eventual
disposition of these aircraft would be less than the aggregate carrying amount
of these aircraft and related assets. As a result of the evaluation, we
determined that the estimated future cash flows expected to be generated by
these aircraft would be less than their carrying amount, and therefore these
aircraft are impaired as defined by SFAS No. 121. Consequently, the original
cost bases of these assets were reduced to reflect the fair market value at the
date the decision was made, resulting in a $147.7 million impairment charge. We
considered recent transactions and market trends involving similar aircraft in
determining the fair market value. See Note 10 to the consolidated financial
statements.
28
Non-operating Expenses
Interest expense, net of interest income, increased 11.2% due to the November 3,
1999, issuance of $178.9 million of debt for financing ten B717 aircraft. See
Note 5 to the consolidated financial statements.
Income tax expense was $2.7 million and $0 in 1999 and 1998, respectively. The
1999 tax expense results from the utilization of a portion of our $141 million
of net operating loss ("NOL") carryforwards, existing at December 31, 1998,
offset in part by alternative minimum tax and the application to goodwill of the
tax benefit related to the realization of a portion of the Airways Corporation
NOL carryforwards. We have not recognized any benefit from the use beyond 1999
of NOL carryforwards because our evaluation of all the available evidence in
assessing the realizability of tax benefits of such loss carryforwards indicates
that the underlying assumptions of future profitable operations contain risks
that do not provide sufficient assurance to recognize such tax benefits
currently.
1998 Compared to 1997
Summary
Our results of operations for 1997 are not reflective of the results to be
expected in future periods. This comes as a result of reduced service levels
during the year of 1997, incremental costs incurred to reinitiate service to
certain markets and to reactivate aircraft taken out of service and the merger
of Airways Corporation into our Company in November 1997. Our financial results
include the operations of Airways Corporation only from and after November 17,
1997, the date of the Merger.
We recorded a net loss of $40.7 million and $96.7 million for the years ended
December 31, 1998 and 1997, respectively. Excluding the impairment charge of
$27.5 million, we recorded a net loss of $13.2 million, or 20 cents per share,
in 1998 versus a net loss of $66.6 million, excluding a charge of $30.1 million
related to rebranding and shutdown costs, or $1.19 per share, in 1997.
Excluding the special items previously mentioned, our operating income increased
$80.6 million, from an operating loss of $71.7 million in 1997 to operating
income of $8.9 million in 1998. Our operating margin in 1998 was 2.0% versus an
operating margin deficit of 33.9% in 1997.
Operating Revenues
Passenger revenues in 1998 were $420.9 million as compared to $200.9 million for
the year ending December 31, 1997. The 109.5% increase is principally due to an
81.8% increase in revenue passengers enplaned and a 103.1% increase in revenue
passenger miles. Our yield (the average amount that a passenger pays to fly one
mile) increased 3.2%, year over year, from 12.6 cents to 13.0 cents.
29
Our RPMs increased 103.1%, or 1.6 billion, on an 80.3% increase in ASMs. For
the year ended December 31, 1998, load factor increased 6.7 points to 59.6%
versus 52.9% for the twelve months ended December 31, 1997.
Cargo revenue increased 55.0%, from $2.3 million in 1997 to $3.5 million in 1998
due to an 80.3% increase in capacity.
Other revenues increased 80.5%, or $6.7 million, in 1998 compared to 1997 due to
the 81.8% increase in revenue passengers enplaned.
Operating Expenses
Excluding the impairment charge in 1998 and rebranding and shutdown and other
nonrecurring charges in 1997, operating expenses increased $147.2 million or
52.0%. Our operating cost per ASM decreased 15.7% to 7.91 cents from 9.38 cents
in 1997. Labor costs increased from $54.1 million in 1997 to $108.5 million in
1998 primarily due to contractual wage increases for our union-represented labor
groups and the acquisition of Airways Corporation on November 17, 1997. Aircraft
fuel increased 47.4% primarily due to the increase in consumption related to
increased service levels, offset by a 21.7% decrease in price per gallon in 1998
from 69.0 cents per gallon 54.0 cents per gallon. Maintenance costs increased
21.7% due to additional check lines and engine overhauls principally resulting
from an increase in the number of operating aircraft from 44 at December 31,
1997 to 50 at December 31, 1998. Commissions expense increased 246.1% largely
due to the increase in passenger volume and the increase of travel agency
bookings through the Airline Reporting Corporation ("ARC"), which we joined in
September 1997. Landing fees and other rents increased 28.2%, from $18.2 million
in 1997 to $23.4 million in 1998, due to a 72% increase in number of departures.
Marketing and advertising increased 13.6% from $13.3 million in 1997 to $15.1
million in 1998. However, as a percentage of revenue, marketing and advertising
decreased 2.9 percentage points from 6.3% in 1997 to 3.4% in 1998, which is more
in line with industry standards. Aircraft rent increased from $0.9 million in
1997 to $7.2 million in 1998 due to a full year of B737 rent expense versus only
six weeks of aircraft rent expense recognized after the acquisition of Airways
Corporation in November 1997. Depreciation expense remained flat year over year.
Additional capital spending increased depreciation $12 million offset by a $12
million reduction due to revising the salvage values of our DC-9 equipment. See
Note 1 of the consolidated financial statements. Other operating expenses
increased 37.3%, or $18.0 million, in 1998 as compared to 1997, primarily as a
result of increases in passenger and aircraft servicing expenses.
In the fourth quarter of 1998, we decided to accelerate the retirement of four
owned Boeing B737 aircraft as a result of the elimination of their original
route system and continued operating losses upon their redeployment to other
routes. The B737s are intended to be replaced with B717 aircraft. In connection
with our decision to accelerate the retirement of these aircraft, which were
acquired in the acquisition of Airways Corporation, we performed an evaluation
to determine, in accordance with SFAS No. 121, whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amount of these aircraft and related assets and an allocation of cost in excess
of net assets acquired resulting from the acquisition of Airways
30
Corporation. SFAS No. 121 requires that when a group of assets being tested for
impairment was acquired as part of a business combination that was accounted for
using the purchase method of accounting, any cost in excess of net assets
acquired that arose as part of the transaction must be included as part of the
asset grouping. As a result of the evaluation, we determined that the estimated
future cash flows expected to be generated by these aircraft would be less than
their carrying amount and allocated cost in excess of net assets acquired, and
therefore these aircraft are impaired as defined by SFAS No. 121. Consequently,
the original cost bases of these assets were reduced to reflect the fair market
value at the date the decision was made, resulting in a $27.5 million impairment
loss. We considered recent transactions and market trends involving similar
aircraft in determining the fair market value. See Note 10 to our consolidated
financial statements.
During 1997, we incurred $30.1 million of costs attributable to rebranding the
airline and shutdown and other nonrecurring costs attributable to the continued
effects of the reduced schedule after the 1996 suspension of operations. No
such costs were incurred during 1998.
Non-operating Expenses
Interest expense, net, increased $4.5 million primarily due to the decrease in
interest income earned from excess cash as a result of cash and cash equivalents
decreasing from $86.0 million at December 31, 1997 to $10.9 million at December
31, 1998.
We have not recognized any benefit from the future use of operating loss
carryforwards because our evaluation of all the available evidence in assessing
the realizability of the tax benefits of such loss carryforwards indicates that
the underlying assumptions of future profitable operations contain risks that do
not provide sufficient assurance to recognize such tax benefits currently. Our
income tax benefit was $0 and $22.8 million in 1998 and 1997, respectively. The
benefit recorded in 1997 was the result of operating loss carryback claims.
Outlook for 2000
During 1999, we celebrated many accomplishments on our return to profitability.
The accomplishments include, but are not limited to:
. Four quarters of profitability (exclusive of impairment loss in fourth quarter
and litigation settlement gain)
. Significant improvement in cash balance
. Introduction and delivery of eight B717 aircraft
. Awarded 75% of Department of Defense contract awards in which we bid -
estimated to be worth nearly $9.0 million per year
. Significant Revenue per ASM growth compared to the industry
31
We expect 2000 to be another good year for our airline. We will benefit from
the travel agent commission reduction from 8% to 5%, reduced maintenance costs
per block hour and reduced depreciation expense as a result of the impairment
loss. We are exposed to high jet fuel prices without the benefit of a
significant hedge. Higher interest expense is also a risk we will face in 2000.
We are incurring higher interest expense due to aircraft financing. In
addition, there can be no assurance that attractive financing will be available
when we seek to refinance our $230.0 million of debt due in April 2001.
Year 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and non-
information technology systems and believe those systems successfully responded
to the Year 2000 date change. We expensed approximately $800,000 during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our internal systems, or
the products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Liquidity and Capital Resources
We rely primarily on operating cash flows to provide working capital. We have
no lines of credit or other facilities. As of December 31, 1999, we had cash
and cash equivalents of $58.1 million compared to $10.9 million at December 31,
1998 and working capital deficit of $7.3 million compared to a working capital
deficit of $30.8 million at December 31, 1999 and 1998, respectively. We
generally must satisfy all of our working capital expenditure requirements from
cash provided by operating activities, from external capital sources or from the
sale of assets. Substantial portions of our assets have been pledged to secure
various issues of our outstanding indebtedness. To the extent that the pledged
assets are sold, the applicable financing agreements generally require the sales
proceeds to be applied to repay the corresponding indebtedness. To the extent
that our access to capital is constrained, we may not be able to make certain
capital expenditures or to continue to implement certain other aspects of our
strategic plan, and we may therefore be unable to achieve the full benefits
expected therefrom. Based on the favorable economic conditions of the U.S.
airline industry, we expect to be able to generate positive working capital
through our operations; however, we cannot predict whether the current favorable
economic trends and conditions will continue, or the effects of competition or
other factors, such as increased fuel prices, that are beyond our control.
As of December 31, 1999, cash and cash equivalents increased from December 31,
1998 by $47.2 million. Operating activities generated $75.7 million in cash.
Investing activities used cash of $197.7 million primarily related to the
acquisition of eight B717 aircraft and several DC-9 hush kits. Financing
activities generated cash of $169.2 million in connection with issuance of debt
for the acquisition of ten B717 aircraft offset by long-term debt payments.
32
As of December 31, 1999, our operating fleet consisted of 35 DC-9 aircraft, four
B737 aircraft and eight B717 aircraft. We returned five leased B737 aircraft and
grounded six Stage 2 DC-9 and B737 aircraft during 1999.
We have contracted with Boeing for the purchase of 50 B717 aircraft for delivery
from 1999 to 2002 - of which eight had been delivered as of December 31, 1999.
During the third quarter of 1998, we reached an agreement with Boeing to defer
the remaining progress payments until the first delivery, which occurred in
September 1999. Progress payments resumed in September 1999 and we paid $6.6
million in progress payments through December 1999. There can be no assurance
that cash provided by Operations will be sufficient to meet the progress
payments for the B717s. If we exercise our option to acquire up to an
additional 50 B717 aircraft, additional payments could be required beginning in
2001. We expect to finance at least 85% of the cost of each of these aircraft.
We completed a private placement of $178.9 million, enhanced equipment trust
certificates (EETCs) on November 3, 1999. The proceeds will be used to purchase
the first ten B717 aircraft. The EETCs bear interest at 10.63% per annum and
are payable in semi-annual installments from April 17, 2000, through April 17,
2017. Although Boeing has agreed to provide financing support with respect to
the remaining aircraft to be acquired, we will be required to obtain the
financing from other sources. We believe that with the support to be provided
by Boeing, aircraft-related debt financing should be available when needed.
However, there is no assurance that we will be able to obtain sufficient
financing on attractive terms, if at all. If we are unable to secure acceptable
financing, we could be required to modify our aircraft acquisition plans or to
incur higher than anticipated financing costs, which could have a material
adverse effect on our results of operations and cash flows.
On November 5, 1999, we announced our decision to accelerate the retirement of
the DC-9 fleet to accommodate the introduction of the B717 fleet. The
accelerated retirement allows for a more moderate capacity growth and resulted
in a non-cash pretax fleet disposition charge of $147.7 million during the
fourth quarter of 1999.
As of December 31, 1999, our debt related to asset financing totaled $265.7
million, with respect to which aircraft and certain other equipment are pledged
as security. Included in such amount is $80.0 million of 10.50% Senior Secured
Notes due April 2001 under which interest is payable semi-annually and the
$178.9 million of 10.63% enhanced equipment trust certificates, of which a
portion of interest and principal is payable semi-annually. In addition, we
have $150.0 million of 10.25% Senior Notes outstanding. The principal balance
of the Senior Notes is due in April 2001 and interest is payable semi-annually.
The entire principal amount of the Senior Notes ($150.0 million) and Senior
Secured Notes ($80.0 million) will become due on April 15, 2001. We do not
expect to generate sufficient cash flow from operations to repay all $230.0
million of such debt by its due date. Accordingly, we will likely need to
refinance all or a portion of the outstanding debt through additional equity or
debt or a combination thereof. The ability to refinance our debt depends on our
future performance and financial results. Such results are subject to general
economic, financial, competitive, legislative, regulatory, and other factors
that are, to some extent, beyond our control. All of our debt has final
maturities ranging from 2000 to 2017 with scheduled debt payments as of December
31, 1999 as follows: 2000--$19.6 million, 2001--$232.2 million, 2002--$7.5
million, 2003--$4.6 million, 2004--$6.1 million and thereafter--$145.7 million.
33
Certain debt bears interest at rates ranging from 5.85% to 11.67% per annum and
is repayable in consecutive monthly or quarterly installments over a four- to
seven-year period. One of these notes, with an aggregate unpaid principal
balance of approximately $1.2 million as of December 31, 1999, has a variable
rate of interest based on the London Interbank Offered Rate ("LIBOR") plus 1.50%
to 3.73%.
Due to the competitive nature of the airline industry, in the event of any
increase in the price of jet fuel, there can be no assurance that we would be
able to pass on increased fuel prices to our customers by increasing fares.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for periods beginning after June 15, 2000. We are
currently evaluating SFAS No. 133 and have not yet determined its impact on the
consolidated financial statements.
Forward-Looking Statements
The statements that are contained in this Report that are not historical facts
are "forward-looking statements" which can be identified by the use of forward-
looking terminology such as "expects", "intends", "believes", "will" or the
negative thereof or other variations thereon or comparable terminology.
We wish to caution the reader that the forward-looking statements contained in
this Report are only estimates or predictions and are not historical facts.
Such statements include, but are not limited to:
. Our performance in future periods;
. our ability to maintain profitability and to generate working capital from
operations;
. our ability to take delivery of and to finance aircraft;
. the adequacy of our Company's insurance coverage; and
. the results of pending litigation or investigations.
No assurance can be given that future results will be achieved and actual events
or results may differ materially as a result of risks facing our Company or
actual events differing from the assumptions underlying such statements. Such
risks and assumptions include, but are not limited to:
. consumer demand and acceptance of services offered by our Company;
34
. our ability to achieve and maintain acceptable cost levels;
. fare levels and actions by competitors;
. regulatory matters, general economic conditions; commodity prices; and
. changing business strategy and results of litigation.
Additional information concerning factors that could cause actual results to
vary materially from the future results indicated, expressed or implied in such
forward-looking statements is contained elsewhere in our Form 10-K for the year
ended December 31, 1999.
All forward-looking statements made in connection with this Report are expressly
qualified in their entirety by these cautionary statements. Our Company
disclaims any obligation to update or correct any of its forward-looking
statements.
Business Strategy
Even though we currently have no plans to do so, we may change our business
strategy in the future and may not pursue some of the goals and initiatives
stated herein.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market Risk Sensitive Instruments and Positions
We are subject to certain market risks including interest rates and commodity
prices (i.e., aircraft fuel). The adverse effects of changes in these markets
pose a potential loss as discussed below. The sensitivity analyses do not
consider the effects that such adverse changes may have on overall economic
activity nor do they consider additional actions we may take to mitigate our
exposure to such changes. Actual results may differ. See the Notes to the
consolidated financial statements for a description of our Company's financial
policies and additional information.
Interest Rates
As of December 31, 1999 and 1998, the fair value of our long-term debt was
estimated to be $392.3 million and $175.3 million, respectively, based upon
discounted future cash flows using current incremental borrowing rates for
similar types of instruments or market prices. Market risk, estimated as the
potential increase in fair value resulting from a hypothetical one percent
decrease in interest rates, was approximately $8.0 million as of December 31,
1999, and approximately $4.2 million as of December 31, 1998.
Aircraft Fuel
Our results of operations are impacted by changes in the price of aircraft fuel.
Excluding the impairment charges, aircraft fuel accounted for 15.3% and 16.7% of
our operating expenses in 1999 and 1998, respectively. Based on our 2000
projected fuel consumption, a ten percent increase in the average price per
gallon of aircraft fuel at December 31, 1999 would increase fuel expense for the
next twelve months by approximately $10.8 million, net of hedging instruments
outstanding at December 31, 1999. Comparatively, based on 1999 fuel usage, a
10% increase in fuel prices would have resulted in an increase in fuel expense
of approximately $2.8 million, net of hedging instruments utilized during 1999.
The increase in market risk is primarily due to our fuel hedging contracts
covering significantly more fuel requirements in 1999 than in 2000. In 1999, we
entered into fixed rate swap contracts and jet fuel purchase commitments in
order to manage the price risk and utilization of fuel cost. At December 31,
1999, we had hedged approximately 11% of our projected fuel requirements for the
first six months of 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The response to this Item is submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "ELECTION OF DIRECTORS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of Stockholders to be held May 18, 2000, which Proxy Statement is to be filed
with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "EXECUTIVE COMPENSATION" in the Proxy Statement to be
used in connection with the solicitation of proxies for the Company's annual
meeting of Stockholders to be held May 18, 2000, which Proxy Statement is to be
filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "STOCK OWNERSHIP" in the Proxy Statement to be used in
connection with the solicitation of proxies for the Company's annual meeting of
Stockholders to be held May 18, 2000, which Proxy Statement is to be filed with
the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "CERTAIN TRANSACTIONS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of Stockholders to be held May 18, 2000, which Proxy Statement is to be filed
with the Commission.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. The response to this portion of Item 14 is submitted as a separate
section of this report.
2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Filing of Exhibits:
4.13 Second Supplemental Indenture dated April 23, 1999, among the
Company, its subsidiaries and The Bank of New York.
4.14 Third Supplemental Indenture dated December 30, 1999, among the
Company, its subsidiaries and The Bank of New York
10.21 Note Purchase Agreement dated as of November 3, 1999, among the
Company, AirTran Airways, Inc., State Street Bank and Trust Company
of Connecticut, National Association and First Security Bank, National
Association.
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23 - Consent of Independent Auditors
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated October 21, 1999 to report third quarter earnings.
(c) The following exhibits are filed herewith or incorporated by reference
as indicated. Exhibit numbers refer to Item 601 of Regulation S-K.
Exhibit No. And Description
- ---------------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (As amended on November 17, 1997) (10)
4.1 See the Articles of Incorporation filed as Exhibit 3.1 and Bylaws filed as
Exhibit 3.2
4.2 Agreement and Plan of Merger among the Company, ValuJet Airlines, Inc. and
VJET Acquisition, Inc. (1)
4.3 Plan of Reorganization and Agreement of Merger dated July 10, 1997,
between the Company and Airways Corporation (2)
4.4 Plan of Merger dated July 10, 1997, between the Company and Airways
Corporation (2)
4.5 Amendment to Plan of Reorganization and Agreement of Merger between the
Company and Airways Corporation (2)
38
4.6 Amendment to Plan of Merger between the Company and Airways Corporation
(2)
4.7 Indenture dated as of April 17, 1996, among the Company, its subsidiaries
and Bank of Montreal Trust Company, as Trustee (3)
4.8 First Supplemental Indenture dated August 26, 1996, among the Company, its
subsidiaries, Bank of Montreal Trust Company and Fleet National Bank (11)
4.9 Second Supplemental Indenture dated August 5, 1997, among the Company, its
subsidiaries and State Street Bank and Trust (10)
4.10 Third Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and State Street Bank and Trust (11)
4.11 Indenture dated August 13, 1997, among the Company, its subsidiaries and
The Bank of New York, as Trustee (4)
4.12 First Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and The Bank of New York (11)
4.13 Second Supplemental Indenture dated April 23, 1999, among the Company, its
subsidiaries and The Bank of New York (Page 71)
4.14 Third Supplemental Indenture dated December 30, 1999, among the Company,
its subsidiaries and The Bank of New York (Page 75)
10.1 Incentive Stock Option Agreement dated June 1, 1993, between ValuJet
Airlines, Inc. and Lewis H. Jordan (5)(6)
10.2 1993 Incentive Stock Option Plan (5)(6)
10.3 1994 Stock Option Plan (5)(6)
10.5 1995 Employee Stock Purchase Plan (7)
10.6 Purchase Agreement between McDonnell Douglas Corporation and ValuJet
Airlines, Inc. dated December 6, 1995. The Commission has granted
confidential treatment with respect to certain portions of this Agreement
(8)
10.7 Agreement and Lease of Premises Central Passenger Terminal Complex
Hartsfield Atlanta International Airport (8)
10.8 1996 Stock Option Plan (6)(9)
10.9 Consulting Agreement dated November 17, 1997, between the Company and
Robert L. Priddy (6) (10)
10.10 Consulting Agreement dated November 17, 1997, between the Company and
Lewis H. Jordan (6) (10)
10.11 Airways Corporation 1995 Stock Option Plan (6)(12)
10.12 Airways Corporation 1995 Directors Stock Option Plan (6)(12)
10.13 Lease of headquarters in Orlando, Florida, dated November 14, 1995 (13)
10.14 Orlando International Lease and Use Agreement (14)
10.15 Orlando Tradeport Maintenance Hangar Lease Agreement by and between
Greater Orlando Aviation Authority and Page AvJet Corporation dated
December 11, 1989 (15)
10.16 Amendment No. 1 to Orlando Tradeport Maintenance Hangar Lease Agreement by
and between Greater Orlando Aviation Authority and Page AvJet Corporation
dated June 22, 1990 (15)
10.17 Agreement and Second Amendment to Orlando Tradeport Maintenance Hangar
Lease Agreement by and between Greater Orlando Aviation Authority and The
Company. dated January 25, 1996 (15)
10.18 Supplemental Agreement dated as of November 17, 1998, between the
Company and D. Joseph Corr (11)
10.19 Employment Agreement dated as of January 4, 1999, between the Company and
Joseph B. Leonard (11)
39
10.20 Loan Agreement dated as of January 25, 1999, among the Company, Lewis H.
Jordan, Robert L Priddy, Timothy P. Flynn and Maurice J. Gallagher, Jr.
(11)
10.21 Note Purchase Agreement dated as of November 3, 1999, among the Company,
AirTran Airways, Inc., State Street Bank and Trust Company of
Connecticut National Association and First Security Bank, National
Association. (Page 82)
21 Subsidiaries of the Registrant (Page 574)
23 Consent of Independent Auditors (Page 575)
27 Financial Data Schedule (Page 576)
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 33-95232, filed with the Commission on August 1,
1995 and amendments thereto.
(2) Incorporated by reference to the Company's Registration Statement Form
S-4, registration number 333-33837, filed with the Commission on August
18, 1997 and amendments thereto.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, Commission File No. 0-26914, filed
with the Commission on May 3, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 333-37487, filed with the Commission on October
9, 1997 and amendments thereto.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1, registration number 33-78856, filed with the Commission on May 12,
1994 and amendments thereto.
(6) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) of
Form 10-K.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, Commission File No. 0-24164, filed
with the Commission on August 11, 1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, Commission File No. 0-24164, filed with
the Commission on March 29, 1996 and amendment thereto.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 0-24164, filed with
the Commission on March 31, 1997.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, Commission File No. 0-26914, filed with
the Commission on March 27, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, Commission File No. 0-26914, filed with
the Commission on
40
March 31, 1999.
(12) Incorporated by reference to Airways Corporation's Registration Statement
on Form S-4, registration number 33-93104, filed with the Commission.
(13) Incorporated by reference to the Quarterly Report on Form 10-Q of Airways
Corporation (Commission File No. 0-26432) for the quarter ended December
31, 1995.
(14) Incorporated by reference to the Quarterly Report on Form 10-Q of Airways
Corporation (Commission File No. 0-26432) for the quarter ended December
31, 1996.
(15) Incorporated by reference to the Annual Report on Form 10-K of Airways
Corporation (Commission File No. 0-26432) for the year ended March 31,
1997.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRTRAN HOLDINGS, INC.
By:
/s/ Joseph B. Leonard
---------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
Date: March 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Joseph B. Leonard March 22, 2000
- ---------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
/s/ Robert L. Fornaro March 22, 2000
- ---------------------
Robert L. Fornaro
President and Chief Financial Officer
/s/ David W. Lancelot March 22, 2000
- ---------------------
David W. Lancelot
Vice President and Controller (Chief Accounting Officer)
/s/ Don L. Chapman March 22, 2000
- ------------------
Don L. Chapman
Director
/s/ John K. Ellingboe March 22, 2000
- ---------------------
John K. Ellingboe
Director
/s/ Lewis H. Jordan March 22, 2000
- -------------------
Lewis H. Jordan
Director
/s/ Robert L. Priddy March 22, 2000
- --------------------
Robert L. Priddy
Director
42
/s/ Robert D. Swenson March 22, 2000
- ---------------------
Robert D. Swenson
Director
43
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1999
AirTran Holdings, Inc.
Orlando, Florida
44
The following consolidated financial statements of AirTran Holdings, Inc. are
included in Item 8:
CONTENTS
Consolidated statements of operations - Years ended
December 31, 1999, 1998, and 1997........................................ 47
Consolidated balance sheets - December 31, 1999 and 1998................. 48
Consolidated statements of stockholders' equity (deficit) - Years ended
December 31, 1999, 1998, and 1997........................................ 50
Consolidated statements of cash flows - Years ended
December 31, 1999, 1998, and 1997........................................ 51
Notes to consolidated financial statements - December 31, 1999........... 52
The following consolidated financial statements schedule of AirTran Holdings,
Inc. is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
45
Report of Independent Auditors
The Stockholders and Board of Directors
AirTran Holdings, Inc.
We have audited the accompanying consolidated balance sheets of AirTran
Holdings, Inc. as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index at item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards