SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended: March 31, 2004
or

For the transition period from                     to                    

Commission File Number 0-26582

WORLD AIRWAYS, INC.

The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices)

(770) 632-8000
(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 the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   o    No  x

     The number of shares of the registrant’s Common Stock outstanding on April 30, 2004 was 11,488,898.

WORLD AIRWAYS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

TABLE OF CONTENTS

2

ITEM 1. FINANCIAL STATEMENTS

ASSETS
(in thousands)
(unaudited)

(Continued)

3

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
(in thousands except share amounts)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

4

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
(in thousands except per share data)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

5

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
Three Months Ended March 31, 2004
(in thousands except share amounts)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

6

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(in thousands)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

7

WORLD AIRWAYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.		Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.
		The Condensed Consolidated Balance Sheet for December 31, 2003 is derived from the audited Consolidated Financial Statements included in the Company’s 2003 Form 10-K.
		These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.
2.		Earnings per Share
		The following table sets forth the computations of basic and diluted earnings per share (in thousands except per share data):

8

At March 31, 2004, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share data):

     The per share weighted-average fair value of stock options granted during the first quarters of 2004 and 2003 was $4.06 and $0.77, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:

4.		Sub-lease Obligation
		The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia, through April 2006. The Company received rental income, sufficient to offset its lease expense through March 2002, after which time no rental income was received except for a total of $0.4 million received in the fourth quarter of 2003 and the first quarter of 2004. The Company is currently seeking a new sub-lessee for this office space. During the first quarter of 2004, the Company used $0.4 million of the accrual, reviewed its estimates and assumptions at March 31, 2004, and determined that an additional $0.4 million should be added to the accrual, resulting in a $2.0 million balance at March 31, 2004. The fair value of the liability was determined based on the remaining lease rentals, reduced by estimated sublease rentals that can be reasonably obtained for the property. The liability is included in other accrued liabilities on the accompanying consolidated balance sheets. The Company’s total remaining obligation at March 31, 2004 under the lease was $3.3 million.
		If the Company is not successful in finding a suitable sub-lessee in the anticipated time or if the sublease rentals from a new sub-lessee are less than anticipated, the Company will be required to recognize an additional liability for these costs. This liability will be adjusted for changes, if any, resulting from revisions to estimated cash flows, measured using the credit-adjusted risk-free rate of 8% that was initially used to measure the liability.
5.		Union Negotiations
		The Company’s cockpit crewmembers, who constitute approximately 28% of the Company’s employees and are represented by the International Brotherhood of Teamsters (the “Teamsters”), are subject to a collective bargaining agreement that became amendable June 30, 2003. In December 2003, the Company announced that it would begin

9

		negotiations with the cockpit crewmembers in January 2004. It also announced that the Teamsters had requested mediation services from the National Mediation Board. In January 2004, the Company and representatives of the Teamsters reached a tentative agreement for a contract extension. However, on February 27, 2004, the Company received notification that the tentative agreement was not ratified by a majority of the Teamsters membership. The Company will reconvene negotiations with the Teamsters at a later date, which has not yet been determined.
6.		Corporate Headquarters
		In March 2004, the company that owned the building containing World Airways’ corporate headquarters, of which World Airways’ former Chairman and CEO is a principal, sold the building to a real estate investment trust. In conjunction with this transaction, the Company executed a new 15-year lease that provides for reduced rental rates and increased flexibility for expansion. Before approving the terms of the new lease, the Company’s Board of Directors retained both an independent outside law firm to provide a comparative analysis as well as a national commercial real estate firm to independently verify that the new lease terms did not have a material incremental financial impact on the Company.
7.		TM Travel Services, Inc.
		The Company entered into a contract with TM Travel Services, Inc. (“TM Travel”) in September 2003, to provide air services between Honolulu, Hawaii, and Las Vegas, Nevada. From the inception of the program, TM Travel did not meet its financial obligations to the Company on a timely basis. In March 2004, the Company and TM Travel entered into an agreement that would have enabled TM Travel to become current in its payments. However, TM Travel failed to make any of these rescheduled payments. Further, the Company was advised by the Department of Transportation (“DOT”) that it was not going to renew TM Travel’s public charter prospectus beyond May 2, 2004. The DOT required World Airways to operate all scheduled flights through that date. For the first quarter of 2004, the Company provided $0.8 million in bad debt expense related to TM Travel. In the second quarter of 2004, the Company will provide an additional $1.7 million in bad debt expense related to revenues generated in the second quarter from this program. In connection with this program, the Company issued a letter of credit, totaling $1.0 million, which was provided to an insurance company to support two surety bonds issued to the DOT and the State of Hawaii. These bonds were necessary for TM Travel to qualify as a public charter operator. These bonds are currently subject to any passenger refunds not paid by TM Travel, and will terminate in the first half of July 2004. No provision for loss has been recorded in the Company’s Condensed Consolidated Financial Statements for any loss that the Company might incur related to these bonds.
8.		Post-Retirement Health Care Benefits Plan
		World Airways’ cockpit crewmembers and eligible dependents are covered by a post-retirement health care benefits plan. A summary of the net periodic post-retirement benefit costs is as follows:

The Company still anticipates to contribute approximately $230,000 to fund its health care obligations in 2004, as was previously disclosed in its financial statements for the year ended December 31, 2003. As of March 31, 2004, $22,175 of contributions has been made.

10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of World Airways, Inc. (“World Airways” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2003. The information contained herein is not a comprehensive management overview and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the aforementioned filing.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”). These risks could cause the Company’s actual results for 2004 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company.

The Financial Accounting Standards Board (“FASB”) issued a revised FASB Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities, which took effect in the first quarter of 2004. The Company currently does not have any interests in variable interest entities or special interest entities.

OVERVIEW

General

For the first quarter of 2004, the Company’s earnings before income taxes were $11.6 million compared to $6.6 million for the same period in 2003. The Company recorded income tax expense of $3.7 million in the first quarter of 2004, compared to no income tax expense for the comparable period of last year. The Company utilized all of its unrestricted federal net operating loss carry-forwards in 2003. For the first quarter of 2004, the Company’s net earnings were $7.9 million compared to $6.6 million for 2003.

The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the quarters ended March 31, 2004 and 2003.

For 2004, the Company expects to:

•

be profitable for a third consecutive year;

•

further diversify the revenue mix by adding more commercial customers;

•

on a per block hour basis, hold flat or reduce major cost categories (flight, maintenance, fuel and aircraft costs);

•

work on concluding a new collective bargaining agreement with its pilots; and

•

initiate plans to introduce Boeing 767 aircraft to the fleet in 2005.

Significant Customer Relationships

The Company is highly dependent on revenues from the U.S. Air Force (“USAF”). The loss of the USAF as a customer would have a material adverse effect on the Company. The Company’s largest customers, and the percent of revenues from those customers, for the quarters ended March 31, 2004 and 2003, are as follows:

11

RESULTS OF OPERATIONS

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Operating Revenues. Revenues from operations increased $6.0 million, or 4.8%, to $129.6 million in the first quarter of 2004 from $123.6 million in the first quarter of 2003. The revenue increase in the first quarter of 2004 was due principally to significant growth in both military passenger flying for the USAF and commercial passenger flying. This increase was partially offset by a reduction in military cargo revenue for the USAF. Two key variables that impact the amount of operating revenues are listed below: