UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended March 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-17895
MAIR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Minnesota |
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41-1616499 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
150 South Fifth Street, Suite 1360
Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (612) 333-0021
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o.
The aggregate market value of voting stock held by nonaffiliates of the registrant as of September 30, 2004 was approximately $84,000,000.
As of June 1, 2005, there were 20,574,340 shares of common stock of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant’s 2005 Annual Meeting of Shareholders are incorporated by reference into the Part III Items 10, 11, 12, 13 and 14 of this Form 10-K.
MAIR HOLDINGS, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended March 31, 2005
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K under the caption “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are forward-looking and are based upon information currently available to the Company. The Company, through its officers, directors or employees, may also from time to time make oral forward-looking statements. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Any such statement is qualified by reference to these cautionary statements.
Undue reliance should not be placed on the Company’s forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company’s control. The Company’s forward-looking statements are based on the information currently available and speak only as of the date on which this report was filed with the United States Securities and Exchange Commission (“SEC”). Over time, actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by the Company’s forward-looking statements, and such differences might be significant and materially adverse to the Company’s shareholders. Many important factors that could cause such a difference are described in this Annual Report under the caption “Certain Risk Factors Relating to the Company and the Airline Industry” within Item 1 in this Annual Report on Form 10-K.
All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified by the factors described above. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Annual Report on Form 10-K, including forward looking statements, as a result of facts, events or circumstances after the date of this report, except as required by law in the normal course of its public disclosure practices.
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MAIR Holdings, Inc. (“Holdings”) is the holding company for Mesaba Aviation, Inc., a regional air carrier based in Minneapolis, Minnesota (“Mesaba”) and Big Sky Transportation Co., a regional air carrier based in Billings, Montana (“Big Sky”). Mesaba and Big Sky are each wholly owned subsidiaries of Holdings. Holdings, Mesaba and Big Sky are referred to herein collectively as the “Company.” Mesaba and Big Sky are the Company’s reportable segments that are managed independently. Additional detail on segment reporting is included in Note 11 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Operations
Mesaba
Mesaba operates as a regional air carrier providing scheduled passenger service as “Mesaba Airlines/Northwest Airlink” and “Mesaba Airlines/Northwest Jet Airlink” under two separate agreements with Northwest Airlines, Inc., a wholly owned indirect subsidiary of Northwest Airlines Corporation (“Northwest”), to 109 cities in the United States and Canada from Northwest’s hub airports in Minneapolis/St. Paul, Detroit and Memphis.
Under the Airline Services Agreement (the “Airlink Agreement”), Mesaba operates Saab 340 jet-prop aircraft (“Saab”) for Northwest. This agreement provides for exclusive rights to designated service areas and extends through June 30, 2007. Under the Airlink Agreement, Mesaba recognizes revenue for each completed “available seat mile” (the number of seats in an aircraft multiplied by the number of miles those seats are flown). Additionally, under the Airlink Agreement, Mesaba purchases fuel, ground handling and other services from Northwest. Either Northwest or Mesaba may terminate the Airlink Agreement on 365 days notice. The Airlink Agreement may be terminated immediately by Mesaba or Northwest in the event that the other party is the subject of a bankruptcy or similar proceeding or is divested of a substantial part of its assets. Additionally, the non-defaulting party may terminate the agreement in the event of a breach of a non-monetary provision that remains uncured for a period of more than 30 days after receipt of written notification of such default, or the breach of a monetary provision that remains uncured for a period of more than ten days after receipt of written notification of such default. Northwest may also terminate the Airlink Agreement in the event of certain lease and other performance defaults; change in control events; revocation or failure to obtain Department of Transportation (“DOT”) certification; failure to elect a chief executive officer of the Company and Mesaba reasonably acceptable to Northwest; or if more than 50% of the aircraft subject to the agreement are not operated for more than seven consecutive days or 25% of such aircraft are not operated for more than 21 consecutive days, other than as a result of the Federal Aviation Administration (“FAA”) grounding a specific aircraft type for all carriers.
Under the Regional Jet Services Agreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets (“RJ85”) for Northwest. The Jet Agreement extends through April 25, 2007. Under the Jet Agreement, Mesaba recognizes revenue for each “block hour” flown (the elapsed time between aircraft departing and arriving at a gate). Northwest provides fuel and airport and passenger related services at Northwest’s expense. Either Mesaba or Northwest may immediately terminate the Jet Agreement in the event that the other party is the subject of a bankruptcy or similar proceeding or is divested of a substantial part of its assets. Additionally, the non-defaulting party may terminate the agreement in the event of a breach of a non-monetary provision that remains uncured for a period of more than 30 days
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after receipt of written notification of such default, or the breach of a monetary provision that remains uncured for a period of more than ten days after receipt of written notification of such default. Northwest may also terminate the Jet Agreement in the event of certain lease and other performance defaults; change in control events; revocation or failure to obtain DOT certification; failure to elect a chief executive officer of the Company and Mesaba reasonably acceptable to Northwest; if more than 25% of the aircraft subject to the agreement are not operated for more than seven consecutive days, other than as a result of the FAA grounding all RJ85 aircraft for all carriers; or if there is a strike, cessation or interruption of work involving Mesaba pilots, flight attendants or mechanics providing jet service.
Under the agreements, all scheduled flights that Mesaba operates are designated as Northwest flights using Northwest’s designator code in all computer reservation systems, including the Official Airline Guide, with an asterisk and a footnote indicating that Mesaba is the carrier providing the service. In addition, flight schedules of Mesaba and Northwest are closely coordinated to facilitate interline connections, and Mesaba’s passenger gate facilities at the Minneapolis/St. Paul International Airport, Detroit Metropolitan Airport and Memphis International Airport are integrated with Northwest’s facilities in the main terminal buildings, rather than at the more remote commuter air terminals. Mesaba’s RJ85 aircraft are painted in the colors of Northwest Airlines and the Saab aircraft are painted in a distinctive “Northwest Airlink” configuration, with a Northwest logo in addition to Mesaba’s name.
Mesaba, through the agreements, receives ticketing and certain check-in, baggage, freight and aircraft handling services from Northwest at certain airports. In addition, Mesaba receives its computerized reservations services from Northwest. Northwest also performs all marketing, scheduling, yield management and pricing services for Mesaba’s flights.
Pursuant to a non-binding letter of intent, Mesaba and Northwest are currently negotiating a new omnibus airline services agreement intended to replace the Airlink Agreement and Jet Agreement. See the “Recent Developments” section below.
Big Sky
Big Sky operates as a regional carrier based in Billings, Montana, providing scheduled passenger, airfreight, express package and charter services. Big Sky provides scheduled air service to 18 communities in Montana, Colorado, Idaho, North Dakota, Oregon, Washington and Wyoming via its Billings hub. Big Sky operates 65 scheduled flights per weekday with a reduced weekend schedule that provides interline and online connecting services, as well as local market services. Big Sky also has code-sharing agreements with Alaska/Horizon Airlines, America West Airlines and Northwest, where its services are marketed jointly with those air carriers for connecting flights.
Big Sky also provides service between its Billings hub and seven communities primarily in Central/Eastern Montana and between Moses Lake, Washington, Portland, Oregon and Boise, Idaho and between Sheridan, Wyoming and Denver, Colorado under contracts with the DOT’s Essential Air Service (“EAS”) program. The EAS program subsidizes air carriers to provide air service to designated rural communities throughout the country that could not otherwise economically justify that service based on their passenger traffic. The DOT pays EAS subsidies for each departure in a covered market. Big Sky bids on the EAS contracts every two years. In addition, Big Sky continually reviews EAS flying opportunities and makes bids with the DOT for flying where it is operationally and financially feasible.
Competition
The airline industry is highly competitive as a result of the Airline Deregulation Act of 1978 (the “Deregulation Act”), which generally increased competition by eliminating restrictions on fares and route selection. The Deregulation Act also contributed to the withdrawal of national and major carriers from
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short-haul markets by allowing them to more easily obtain additional long-haul routes, which can be more efficiently and profitably served by larger jet aircraft. Elimination of barriers to entry into new markets, however, also created greater potential for competing service by other carriers operating small, fuel-efficient aircraft on short-haul routes serving small and medium-sized cities. Mesaba and Big Sky compete with other regional airlines on most routes they serve. Mesaba and Big Sky also face competition from regional carriers offering service to alternative hubs for connecting flights. Other carriers, including major carriers, can at any time institute competing service on routes served by Mesaba or Big Sky.
The Airlink Agreement and Jet Agreement do not prohibit Northwest from contracting with other regional airlines to provide the same services that Mesaba currently provides. Northwest currently has an airline services agreement with Pinnacle Airlines Corp. (“Pinnacle”), and Pinnacle serves many of the same cities as Mesaba. Northwest could choose to expand its agreement with Pinnacle in competition with Mesaba. Northwest could also choose to establish relationships with other regional airlines.
Competitive factors in the airline industry generally include fares, frequency and dependability of service, convenience of flight schedules, type of aircraft flown, airports served, relationships with travel agents, and efficiency and reliability of reservations systems and ticketing services. The compatibility of flight schedules with those of other airlines and the ability to offer through fares and convenient inter-airline flight connections are also important competitive factors. Holdings believes its subsidiaries are competitive with respect to each of such factors because of their relationship with Northwest, established reputation, cost structure and an aircraft fleet that is properly suited for the small and medium-sized cities served.
Fuel
The Company believes that the following arrangements assure an adequate supply of fuel for current and future operations for both Mesaba and Big Sky, provided that Northwest does not experience a supply shortage.
Mesaba
Mesaba has arrangements with Northwest for its fuel requirements. Certain provisions of the Airlink Agreement protect Mesaba from fluctuations in aviation fuel prices while the Jet Agreement requires Northwest to provide RJ85 fuel, at Northwest’s expense, to Mesaba.
Big Sky
Big Sky purchases a majority of its fuel from Northwest. Big Sky purchases the balance of its fuel under arrangements with several fuel suppliers. None of these arrangements provides protection from fluctuations in fuel prices.
Fares
Mesaba
Mesaba derives its passenger revenues by selling its capacity to Northwest at predetermined rates. Mesaba is primarily paid by Northwest per available seat mile under the Airlink Agreement and per completed block hour under the Jet Agreement.
Big Sky
Big Sky generates its passenger revenues from passenger ticket sales through participation in Airline Reporting Corp., a clearinghouse for travel agencies, its own reservations center in Billings, a ticket by mail program and on-line E-ticketing. Big Sky has ticketing and baggage agreements with all major
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airlines that serve its region, which allow its services to be sold by those airlines. Big Sky establishes its passenger fares on a market-by-market basis utilizing a combination of factors, including the cost of providing the service based upon projected passenger levels, the competitive price of alternative means of transportation (including both air and surface) and the distance between markets. Big Sky also employs the use of discounts off the base fares for advance ticket purchases and other special needs passengers that are common throughout the airline industry.
Regulations
Pursuant to Federal aviation laws, the DOT and the FAA have certain regulatory authority over the operations of all air carriers. The jurisdiction of the FAA extends primarily to the safety and operational provisions of the Federal Aviation Act, while the responsibility of the DOT involves principally the regulation of certain economic aspects of airline operations.
FAA Regulation
Mesaba and Big Sky each hold an Air Carrier Certificate issued by the FAA under Part 119 of the Federal Aviation Regulations, permitting Mesaba and Big Sky to conduct flight operations in compliance with Part 121 of the Federal Aviation Regulations, which are the same regulatory requirements applicable to major airlines. The FAA regulations to which Mesaba and Big Sky are subject are extensive and include, among other items, regulation of aircraft maintenance and operations, equipment, ground facilities, dispatch, communications, training, weather observation, flight personnel and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires airlines to obtain operating, airworthiness and other certificates that are subject to suspension or revocation for cause. Mesaba and Big Sky hold all certificates necessary for their operations.
DOT Regulation
Mesaba and Big Sky each hold a Certificate of Public Convenience and Necessity issued by the DOT under federal aviation laws. As certificated carriers, Mesaba and Big Sky are required to file quarterly reports with the DOT, including a report of aircraft operating expenses and related statistics.
Transportation Security Administration Regulation
In response to the terrorist attacks of September 11, 2001, Congress enacted the Aviation and Transportation Security Act of 2001 (the “ATSA”). The ATSA created the Transportation Security Administration (the “TSA”) to oversee aviation and airport security. Among other security measures, the ATSA enhanced background checks, provided federal air marshals aboard flights, improved flight deck security, enhanced airline crew security training, improved training of security screening personnel and enhanced airport perimeter access.
Air Transportation Safety and System Stabilization Act
In September 2001, Congress enacted the Air Transportation Safety and System Stabilization Act. This legislation provided cash grants to U.S. airlines to compensate for “direct and incremental losses” incurred from September 11, 2001, through December 31, 2001. Mesaba recognized a pre-tax grant of approximately $0.3 million as “other nonoperating income” in the accompanying consolidated statements of operations in fiscal 2003, in accordance with DOT and applicable authoritative accounting guidance. In addition, Big Sky recognized and received $0.2 million during the period from December 1, 2002 (date of acquisition) to March 31, 2003 under the same program.
Emergency Wartime Supplemental Appropriations Act
In April 2003, Congress enacted the Emergency Wartime Supplemental Appropriations Act (the “Wartime Act”), which included, among other items, a $2.3 billion government grant to U.S. airlines for security fees previously remitted to the TSA and $100 million for reimbursement of aircraft cockpit door
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reinforcement costs. In connection with reimbursements under the Wartime Act, for the year ended March 31, 2004, Mesaba recognized $2.3 million as “other nonoperating income” and Big Sky recognized $0.3 million as “other nonoperating income” and $0.2 million as a reduction of “administrative and other expense” in the accompanying consolidated statements of operations. Retention of these funds requires compliance with the provisions of the Wartime Act.
Railway Labor Act
The Company’s relations with its labor unions are governed by the Railway Labor Act (the “RLA”). Comprehensive provisions are set forth in the RLA establishing the right of airline employees to organize and bargain collectively and impose a duty upon air carriers and their employees to exert every reasonable effort to make and maintain collective bargaining agreements. The RLA contains detailed procedures, which must be exhausted before a lawful work stoppage may occur, including a formal declaration of an impasse by the National Mediation Board.
Other Regulations
Under the Noise Control Act of 1972 and the Aviation Safety and Noise Abatement Act of 1979, the FAA has authority to monitor and regulate aircraft engine noise. Management of Mesaba and Big Sky believe that their aircraft comply with or are exempt from such regulations and that Mesaba and Big Sky comply with standards for aircraft exhaust emissions and fuel storage facilities issued by the Environmental Protection Agency. As a foreign carrier operating in Canada, Mesaba is subject to regulation by the Transport Canada and has been issued a Foreign Air Carrier Operating Certificate and Canadian Transportation Agency economic licenses. Because Northwest maintains certain contracts with the Department of Defense, Mesaba is subject to that department’s periodic inspections.
Insurance
The Company carries the types of insurance customary in the airline industry, including coverage for public liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers’ compensation. The Company believes that its insurance coverage is adequate as to the amounts and risks covered. However, there can be no assurance that the insurance carried would be sufficient to protect Mesaba and Big Sky adequately in the event of a catastrophic accident or event.
Aircraft Maintenance
The maintenance performed on the Company’s aircraft can be divided into two general categories: routine line maintenance and major overhauls. Mesaba and Big Sky employ their own aircraft, avionics and engine maintenance staffs that perform substantially all routine line maintenance to the aircraft and engines. As of October 2003, Mesaba contracted out most of its major overhauls on airframes, engines and other rotable parts on the Saab and RJ85 aircraft at FAA authorized facilities. Major overhauls on Big Sky’s fleets, including airframes, engines and other rotable parts, are performed internally or at FAA authorized facilities.
Airport and Terminal Services
Mesaba’s ticket counter and baggage-handling space is leased from local airport authorities or other airlines at all of the airports served. In 45 of the cities it serves, Mesaba receives support services under agreements with Northwest. In accordance with the Airlink Agreement, Mesaba pays local airport authorities for the use of landing fields at rates that are based on the number of flights per day, fixed fees, or on the number of aircraft landings and aircraft weight. Northwest pays for Mesaba’s landing fees under the Jet Agreement.
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Mesaba receives other revenue from Northwest, Pinnacle and other airlines for ground handling services performed at the Minneapolis/St. Paul, Detroit and other spoke airports.
Big Sky leases airport counter, baggage and ramp space for ground services and customer services at all of the cities it currently serves. Big Sky contracts for ground handling services from other airlines as needed.
Employees
As of March 31, 2005, the Company and its subsidiaries employed approximately 3,950 employees with approximately 45.6% of those employees represented by labor unions. Mesaba had approximately 3,750 (913 part-time) employees and Big Sky had approximately 200 (58 part-time) employees. Neither Mesaba nor Big Sky had any official work stoppages during fiscal 2005. Management, in general, believes that its relations with the Company’s employees are good. The Company’s labor agreements are as follows:
Mesaba
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Approximate |
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Number of |
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Amendable |
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Employee Group |
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Employees |
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Union |
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Date |
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Pilots |
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876 |
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Air Line Pilots Association (“ALPA”) |
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January 2009 |
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Mechanics |
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244 |
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Aircraft Mechanics Fraternal Association (“AMFA”) |
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August 2003 |
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Dispatchers |
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23 |
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Transportation Workers Union (“TWU”) |
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May 2005 |
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Flight Attendants |
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567 |
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Association of Flight Attendants |
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April 2006 |
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Customer service agents |
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1,605 |
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None |
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Management / Administrative / Clerical |
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435 |
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None |
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3,750 |
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Mesaba negotiated a new agreement with ALPA under Section 6 of the RLA, which became effective January 31, 2004. The mechanics, which constitute 6.5% of Mesaba’s workforce, are currently working under an agreement that became amendable in August 2003. Mesaba is currently negotiating with the AMFA under Section 6 of the RLA for a new agreement. Mesaba is also negotiating with the dispatchers, which constitute 0.6% of Mesaba’s workforce.
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Big Sky
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Approximate |
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Number of |
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Amendable |
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Employee Group |
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Employees |
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Union |
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Date |
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Pilots |
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56 |
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United Transportation Union |
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December 2009 |
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Mechanics |
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23 |
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International Association of Machinists and Aerospace Workers |
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August 2010 |
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Dispatchers |
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11 |
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United Transportation Union |
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December 2009 |
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Customer service agents |
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76 |
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None |
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Management / Administrative / Clerical |
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34 |
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None |
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200 |
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During fiscal 2004, Big Sky negotiated a new agreement with the International Association of Machinists and Aerospace Workers, which was ratified in January 2004.
Cyclicality and Seasonality
The airline industry generally is subject to cyclical moves in the economy. Because both personal discretionary travel and business travel may be expected to decline during periods of economic weakness, the airline industry tends to experience poorer financial results during such periods.
Mesaba’s cyclicality is tied to the business and operating decisions of Northwest. Operations of the major airlines continue to be impacted by the rapid growth of low cost airlines, the increasing number of businesses utilizing teleconferencing or web-based meetings and the advent of internet travel web sites, which enable consumers to find travel alternatives. Mesaba has historically shown greater revenues and earnings in the first and second fiscal quarters. Northwest has historically seen increased leisure travel during these periods on domestic and international routes, which contributes to an increased number of flights for Mesaba.
Seasonal factors, primarily weather conditions and passenger demand, historically have affected Big Sky’s monthly passenger boardings. Big Sky has historically shown a higher level of passenger boardings in the July through December period as compared with the January through June period for many of the cities served. As a result of such factors, Big Sky’s revenues and earnings historically have been greater during the July through December period.
Recent Developments
Northwest Letter of Intent
On April 20, 2005, Holdings and Mesaba executed a non-binding letter of intent with Northwest to allow Mesaba to operate 15 Bombardier CRJ-200 regional jets (“CRJ”) under the Northwest Airlink banner, with exclusive rights to the next 20 CRJ-200 or CRJ-440 aircraft Northwest Airlines may order. Mesaba expects to lease the aircraft from Northwest and expects the first aircraft to enter service before the end of 2005. Mesaba expects to enter into a new 10-year omnibus airline services agreement with Northwest covering the operation of the CRJs, Saabs and RJ85s that will replace the existing Airlink Agreement and the Jet Agreement, which are set to expire in 2007. As part of the letter of intent, Mesaba agreed to incur the costs necessary to bring the new CRJ fleet into service.
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Holdings and Mesaba are currently negotiating the definitive new omnibus airline services agreement with Northwest, which is subject to final approval by all parties. Upon execution of the definitive agreement, Holdings expects to amend the currently outstanding warrants held by Northwest to reduce the number of shares of the Company’s common stock issuable upon exercise from 4,151,922 shares exercisable at prices from $7.25 to $21.25 per share to an aggregate of 4,112,500 shares exercisable at a price of $8.74 per share. The warrants are expected to expire ten years from the date of the definitive airline services agreement. Sixty percent of the shares are expected to become exercisable upon the delivery of the 15th CRJ aircraft to Mesaba, and an additional 4% of the shares are expected to become exercisable with each subsequent delivery of the next ten CRJ aircraft. Pursuant to the letter of intent, Holdings also agreed to enter into a registration rights agreement to register the shares of stock currently held by Northwest and the shares of stock that will be issuable to Northwest upon exercise of the warrants.