-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SaAByugsL8QeFeOHtEcVEsH/wXB/rrOE7/4dYMjRCeRnpXux35NkbdZm6dFeiGM2 rSTtFst6G6/sDCwP15tUuA== 0000950153-98-000900.txt : 19980812 0000950153-98-000900.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950153-98-000900 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980810 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICA WEST AIRLINES INC CENTRAL INDEX KEY: 0000706270 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 860418245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-12337 FILM NUMBER: 98680215 BUSINESS ADDRESS: STREET 1: 4000 E SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6026930800 MAIL ADDRESS: STREET 1: 4000 EAST SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 10-Q/A 1 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT 1 (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - -------- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - -------- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------ ------ COMMISSION FILE NUMBER 1-10140 AMERICA WEST AIRLINES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0418245 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 4000 EAST SKY HARBOR BLVD, PHOENIX, ARIZONA 85034 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 693-0800 N/A (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 XX NO ---- ---- INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES XX NO ---- ---- THE COMPANY HAS 1,000 SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF JULY 31, 1998. THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERICA WEST HOLDINGS CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H (2). 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICA WEST AIRLINES, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, ASSETS 1998 1997 - ------ ---- ---- (Unaudited) Current assets: Cash and cash equivalents ................................................................. $ 165,079 $ 171,638 Short-term investments .................................................................... 64,423 -- Accounts receivable, net .................................................................. 96,562 88,138 Advances to parent company and affiliate, net.............................................. 48,001 -- Expendable spare parts and supplies, net .................................................. 27,141 27,135 Prepaid expenses .......................................................................... 34,537 36,917 ---------- ---------- Total current assets .................................................................. 435,743 323,828 ---------- ---------- Property and equipment: Flight equipment .......................................................................... 839,851 783,384 Other property and equipment .............................................................. 140,482 143,172 Equipment purchase deposits ............................................................... 48,936 45,246 ---------- ---------- 1,029,269 971,802 Less accumulated depreciation and amortization ............................................ 337,933 276,430 ---------- ---------- Net property and equipment ............................................................ 691,336 695,372 ---------- ---------- Other assets: Restricted cash ........................................................................... 29,931 57,158 Reorganization value in excess of amounts allocable to identifiable assets, net .............................................................. 321,645 363,268 Deferred income taxes ..................................................................... 74,700 74,700 Other assets, net ......................................................................... 66,263 33,005 ---------- ---------- Total other assets .................................................................... 492,539 528,131 ---------- ---------- $1,619,618 $1,547,331 ========== ==========
See accompanying notes to condensed financial statements. 2 3 AMERICA WEST AIRLINES, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1998 1997 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt ............... $ 46,924 $ 54,000 Accounts payable ................................... 104,848 140,908 Air traffic liability .............................. 211,870 173,149 Accrued compensation and vacation benefits ......... 41,150 37,277 Accrued taxes ...................................... 82,748 36,376 Other accrued liabilities .......................... 64,921 43,574 ---------- ---------- Total current liabilities ...................... 552,461 485,284 ---------- ---------- Long-term debt, less current maturities ................ 227,438 272,760 Deferred credits and other liabilities ................. 98,405 104,519 Commitments and contingencies Stockholder's equity: Common Stock $.01 par value. Authorized, issued and outstanding; 1,000 shares ...................... -- -- Additional paid-in capital ......................... 533,650 539,301 Retained earnings .................................. 207,664 145,467 ---------- ---------- Total stockholder's equity ..................... 741,314 684,768 ---------- ---------- $1,619,618 $1,547,331 ========== ==========
See accompanying notes to condensed financial statements. 3 4 AMERICA WEST AIRLINES, INC. CONDENSED STATEMENTS OF INCOME (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- Operating revenues: Passenger ................................... $ 491,042 $ 450,753 $ 934,834 $ 886,293 Cargo ....................................... 11,887 12,054 24,492 24,810 Other ....................................... 16,560 14,949 31,116 28,840 --------- --------- --------- --------- Total operating revenues ................ 519,489 477,756 990,442 939,943 --------- --------- --------- --------- Operating expenses: Salaries and related costs .................. 112,262 102,326 217,846 203,343 Aircraft rents .............................. 60,195 55,089 118,940 110,021 Other rents and landing fees ................ 28,794 28,862 58,252 59,678 Aircraft fuel ............................... 47,798 57,608 98,082 126,724 Agency commissions .......................... 34,900 40,452 66,517 78,764 Aircraft maintenance materials and repairs .. 44,041 37,669 86,469 68,981 Depreciation and amortization ............... 12,765 12,348 25,063 24,425 Amortization of excess reorganization value . 4,974 6,256 9,948 12,511 Other ....................................... 99,968 86,563 187,710 171,450 --------- --------- --------- --------- Total operating expenses ................ 445,697 427,173 868,827 855,897 --------- --------- --------- --------- Operating income ................................ 73,792 50,583 121,615 84,046 --------- --------- --------- --------- Nonoperating income (expenses): Interest income ............................. 6,041 4,390 11,086 8,630 Interest expense, net ....................... (8,263) (12,059) (17,935) (24,140) Other, net .................................. - (168) (264) 128 --------- --------- --------- --------- Total nonoperating expenses, net ........ (2,222) (7,837) (7,113) (15,382) --------- --------- --------- --------- Income before income taxes ...................... 71,570 42,746 114,502 68,664 --------- --------- --------- --------- Income taxes .................................... 31,381 19,749 49,921 31,723 --------- --------- --------- --------- Net income ...................................... $ 40,189 $ 22,997 $ 64,581 $ 36,941 ========= ========= ========= =========
See accompanying notes to condensed financial statements. 4 5 AMERICA WEST AIRLINES, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 1997 ---- ---- Net cash provided by operating activities .............. $ 187,220 $ 88,846 --------- --------- Cash flows from investing activities: Purchases of property and equipment ................ (67,215) (76,459) Sales (purchases) of short-term investments ........ (64,423) 38,075 Equipment purchase deposits and other .............. (10,456) (6,345) --------- --------- Net cash used in investing activities .......... (142,094) (44,729) --------- --------- Cash flows from financing activities: Repayment of debt .................................. (45,634) (21,624) Repurchase of warrants ............................. (5,651) (13,342) Other .............................................. (400) -- --------- --------- Net cash used in financing activities ........... (51,685) (34,966) --------- --------- Net increase (decrease) in cash and cash equivalents ... (6,559) 9,151 --------- --------- Cash and cash equivalents at beginning of period ....... 171,638 137,499 --------- --------- Cash and cash equivalents at end of period ............. $ 165,079 $ 146,650 ========= ========= Cash, cash equivalents and short-term investments at end of period ...................................... $ 229,502 $ 147,706 ========= ========= Cash paid for: Interest, net of amounts capitalized ............... $ 11,898 $ 15,978 ========= ========= Income taxes ....................................... $ 4,211 $ 132 ========= ========= Non-cash financing activities: Notes payable issued for equipment purchase deposits $ 3,500 $ 16,553 ========= ========= Notes payable canceled under the aircraft purchase agreement ............................. $ (10,309) $ -- ========= =========
See accompanying notes to condensed financial statements. 5 6 AMERICA WEST AIRLINES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1998 1. BASIS OF PRESENTATION The unaudited condensed financial statements included herein have been prepared by America West Airlines, Inc., ("AWA" or the "Company"), a wholly-owned subsidiary of America West Holdings Corporation ("Holdings"), pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles. In the opinion of management, the condensed financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation. Certain prior year amounts have been reclassified to conform with current year presentation. The accompanying condensed financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 2. FLIGHT EQUIPMENT AIRCRAFT PURCHASE AGREEMENT AMENDMENT In April 1998, AWA and AVSA executed Amendment No. 1 to the aircraft purchase agreement which provided for the reduction of the firm order of Airbus aircraft from 34 to 29. The aggregate net cost of firm commitments remaining is approximately 1.0 billion based on a 3.5 percent annual price escalation. ENGINE HUSH KITS In May 1998, AWA entered into an agreement to purchase 14 737 hush kits at an aggregate net cost of approximately $14 million to comply with Federal Aviation Administration's ("FAA") Stage III noise reduction requirements. Delivery of the hush kits began in May 1998 and will continue through the first quarter of 1999. As of June 30, 1998, one aircraft has been outfitted with a hush kit. ENGINE MAINTENANCE AGREEMENT In April 1998, AWA entered into a long-term maintenance agreement to have certain aircraft engines maintained on a flight hour basis. 3. BOND FINANCING In April 1998 AWA completed the refunding of its $29.3 million variable rate industrial development revenue bonds due 2016 ("old bonds") by issuing $29.3 million of 6.3 percent fixed rate industrial development revenue bonds due April 2023 ("new bonds"). Interest on the new bonds is payable semiannually (April 1 and October 1) and commences on October 1, 1998. The new bonds are subject to optional redemption prior to the maturity date on or after April 1, 2008, in whole or in part, on any interest payment date at the following redemption prices: 102 percent on April 1 or October 1, 2008; 101 percent on April 1 or October 1, 2009; and 100 percent on April 1, 2010 and thereafter. As a result of the refinancing, $29.9 million of cash, which secured the irrevocable direct pay letter of credit that backed the old bonds, was released and available for general corporate purposes. 6 7 AMERICA WEST AIRLINES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1998 4. PASSENGER COMMISSIONS Effective May 1, 1998, AWA revised its eight percent travel agent commission program to limit commissions paid to a maximum $50 payment per round trip and a maximum $25 payment per one way itinerary on all tickets issued in the United States and Canada. AWA also announced a new Internet commission policy which offers to all online vendors selling AWA travel a five percent commission with a maximum $10 payment. 5. ADVANCES TO PARENT COMPANY AND AFFILIATE As of June 30, 1998, AWA has advanced to Holdings $56.3 million. In addition, AWA has net obligations of $8.3 million due to The Leisure Company ("Leisure Co."), a wholly owned subsidiary of Holdings. All amounts bear interest at market rates. 6. SUBSEQUENT EVENTS MESA CODE SHARE AGREEMENT In July 1998, AWA entered into a codesharing agreement with Mesa Airlines ("Mesa") whereby Mesa serves as a feeder carrier for AWA to provide America West Express regional airline service from AWA's Phoenix hub using Canadair regional jets, deHavilland turboprops, and Hawker-Beech 1900 aircraft. The agreement contemplates adding regional operations in the airline's hubs in Las Vegas and Columbus. The codesharing agreement with Mesa provides for convenient flight schedules, passenger handling and computer reservations under AWA flight designator code. The Mesa agreement will be in effect through August 2004. FAA SETTLEMENT On July 15, 1998, AWA and the FAA entered into an agreement to settle disputes over alleged maintenance violations. Under the agreement, AWA did not admit any wrongdoing, will implement certain changes in maintenance oversight and will pay a civil penalty of $2.5 million. An additional civil penalty of $2.5 million will be forgiven upon implementation of the terms of the agreement. AWA's response to the FAA initiatives as well as protracted labor negotiations resulted in a deterioration in AWA's on time performance and schedule completion in late June and in July 1998. AIRCRAFT LEASES In July 1998, AWA entered into aircraft lease arrangements for two B737-300 aircraft with lease terms of five and six years, respectively. 7 8 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS In January 1998, Leisure Co. began operations as a new travel subsidiary of Holdings to develop and grow the vacation package tour business of the former America West Vacation division. With the commencement of Leisure Co. operations, management believes that an improved understanding of AWA's results can be gained by comparing the three and six months ended June 30, 1998 to pro forma results for the same periods in 1997, which assumes Leisure Co. had commenced operations as a subsidiary of Holdings on January 1, 1997. The unaudited pro forma statements of income presented herein have been prepared based upon certain pro forma adjustments to AWA's historical statements of income for the three and six months ended June 30, 1997. The 1997 pro forma results are for information purposes only and are not necessarily indicative of what actually would have been achieved if Leisure Co. had functioned as a separate entity during such period. In addition, the pro forma information is not intended to be a projection of results that will be obtained in the future. America West Airlines, Inc. Statements of Income (In thousands) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Pro Forma Pro Forma Operating revenues: Passenger ................................ $ 491,042 $ 450,753 $ 934,834 $ 886,293 Cargo .................................... 11,887 12,054 24,492 24,810 Other .................................... 16,560 14,949 31,116 28,840 --------- --------- --------- --------- Total operating revenues .............. 519,489 477,756 990,442 939,943 --------- --------- --------- --------- Operating expenses: Salaries and related costs ............... 112,262 100,554 217,846 199,616 Aircraft rental .......................... 60,195 55,089 118,940 110,021 Rentals and landing fees ................. 28,794 28,862 58,252 59,678 Aircraft fuel ............................ 47,798 57,608 98,082 126,724 Agency commissions ....................... 34,900 38,529 66,517 75,123 Aircraft maintenance materials and repairs 44,041 37,669 86,469 68,981 Depreciation and amortization ............ 12,765 12,258 25,063 24,230 Reorganization value amortization ........ 4,974 5,923 9,948 11,845 Other .................................... 99,968 94,064 187,710 186,006 --------- --------- --------- --------- Total operating expenses .............. 445,697 430,556 868,827 862,224 --------- --------- --------- --------- Operating income ............................. 73,792 47,200 121,615 77,719 --------- --------- --------- --------- Nonoperating income (expenses): Interest income .......................... 6,041 4,390 11,086 8,630 Interest expense ......................... (8,263) (12,059) (17,935) (24,140) Other, net ............................... -- (168) (264) 128 --------- --------- --------- --------- Total nonoperating expenses, net ...... (2,222) (7,837) (7,113) (15,382) --------- --------- --------- --------- Income before income taxes ................... $ 71,570 $ 39,363 $ 114,502 $ 62,337 ========= ========= ========= =========
8 9 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 The table below sets forth selected operating data for AWA.
Three Months Ended Percent Six Months Ended Percent June 30, Change June 30 Change 1998 1997 1998-1997 1998 1997 1998-1997 ---- ---- --------- ---- ---- --------- Aircraft (end of period)....................... 104 100 4.0 104 100 4.0 Average daily aircraft utilization (hours)..... 12.2 12.4 (1.6) 12.3 12.4 (0.8) Available seat miles (in millions)............. 6,082 5,848 4.0 11,928 11,638 2.5 Block hours.................................... 115,050 113,089 1.7 228,252 225,812 1.1 Average stage length (miles)................... 819 770 6.4 811 769 5.5 Average passenger journey (miles).............. 1,227 1,145 7.2 1,170 1,117 4.7 Revenue passenger miles (in millions).......... 4,287 4,144 3.4 7,923 8,126 (2.5) Load factor (percent).......................... 70.5 70.9 (0.4) pts 66.4 69.8 (3.4) pts Passenger enplanements (in thousands).......... 4,643 4,674 (0.7) 8,792 9,264 (5.1) Yield per revenue passenger mile (cents)....... 11.46 10.88 5.3 11.80 10.91 8.2 Revenue per available seat mile: Passenger (cents)........................... 8.07 7.71 4.7 7.84 7.62 2.9 Total (cents)............................... 8.54 8.17 4.5 8.30 8.08 2.7 Fuel consumption (gallons in millions)......... 97.1 93.4 4.0 190.2 185.5 2.5 Fuel price (cents per gallon).................. 49.23 61.70 (20.2) 51.56 68.32 (24.5) Average number of full-time equivalent employees................................... 9,667 9,651 0.2 9,567 9,571 -
The table below sets forth the major components of operating cost per available seat mile ("CASM") for AWA. CASM for 1997 is based on the 1997 pro forma numbers for AWA.
Three Months Ended Percent Six Months Ended Percent June 30, Change June 30 Change 1998 1997 1998-1997 1998 1997 1998-1997 ---- ---- --------- ---- ---- --------- (in cents) Pro Forma Pro Forma Salaries and related costs..................... 1.85 1.72 7.6 1.83 1.71 7.0 Aircraft rents................................. .99 .94 5.3 1.00 .95 5.3 Other rents and landing fees................... .47 .49 (4.1) .49 .51 (3.9) Aircraft fuel.................................. .79 .99 (20.2) .82 1.09 (24.8) Agency commissions............................. .57 .66 (13.6) .56 .65 (13.8) Aircraft maintenance materials and repairs..... .72 .64 12.5 .72 .59 22.0 Depreciation and amortization.................. .21 .21 - .21 .21 - Amortization of excess reorganization value.... .08 .10 (20.0) .08 .10 (20.0) Other.......................................... 1.65 1.61 2.5 1.57 1.60 (1.9) ---- ---- ---- ---- 7.33 7.36 (0.4) 7.28 7.41 (1.8) ==== ==== ==== ====
9 10 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 Three Months Ended June 30, 1998 and 1997 For the three months ended June 30, 1998 and 1997, AWA realized operating income of $73.8 million and $47.2 million, respectively. Income before income taxes for the three month period in 1998 was $71.6 million compared to $39.4 million in 1997. Total operating revenues for the 1998 second quarter were $519.5 million. Passenger revenues were $491.0 million for the three months ended June 30, 1998, an increase of $40.3 million or 8.9 percent from 1997. Passenger revenue per available seat mile ("RASM") for the quarter increased 4.7 percent to 8.07 cents from 7.71 cents driven by a 5.3 percent increase in passenger yield. The increase in RASM and yield reflects the continued benefits of AWA's improved product and revenue management capabilities. The increases occurred despite a 6.4 percent increase in aircraft stage length due to increased flying to long-haul business markets. Capacity, as measured by available seat miles ("ASMs"), increased 4.0 percent in the 1998 second quarter as compared to 1997 while load factor decreased by .4 points to 70.5 percent. Cargo and other revenues increased 5.3 percent to $28.4 million for the second quarter of 1998. CASM decreased .4 percent to 7.33 cents in the second quarter of 1998 from 7.36 cents for the comparable 1997 period, primarily due to lower fuel prices. Significant changes in the components of operating expense per ASM are explained as follows: - Salaries and related costs per ASM increased 7.6 percent primarily due to increases in the accrual for AWArd Pay ($5.1 million) resulting from higher operating income in 1998 and employee benefit related costs. AWArd Pay is the program by which AWA awards performance bonuses to eligible non-executive, non-union employees provided certain annually established operating income and performance targets are attained. In addition, a salary level increase in the pilot contract that was effective May 1997 and increased training drove pilot salaries per ASM higher in the 1998 quarter over the comparable 1997 period. - Aircraft rent expense per ASM increased 5.3 percent due to the net addition of four leased aircraft to the fleet during the 1998 quarter as compared to 1997. - Other rents and landing fees expense per ASM decreased 4.1 percent in the second quarter of 1998 as landings decreased by 2.9 percent. - Aircraft fuel expense per ASM decreased 20.2 percent due to a 20.2 percent decrease in the average price per gallon of fuel to 49.23 cents in the 1998 quarter from 61.70 cents in 1997. - Agency commissions expense per ASM decreased 13.6 percent as cost reductions associated with the change in agency commission rate from 10 percent to eight percent in October 1997 and the $50 commission cap implemented on May 1, 1998 more than offset the effects of higher passenger revenues in the 1998 quarter. - Aircraft maintenance materials and repairs expense per ASM increased 12.5 percent primarily due to a $5.0 million increase in capitalized maintenance amortization expense for the second quarter of 1998 when compared to the 1997 second quarter. - Amortization of excess reorganization value expense per ASM decreased 20.0 percent as a result of the reduction in the unamortized balance of excess reorganization value due to the utilization of tax attributes of the pre-reorganized Company. 10 11 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 - Other operating expenses per ASM increased 2.5 percent to 1.65 cents from 1.61 cents primarily due to the effect in the 1998 quarter of the FAA settlement (see Note 6. "Subsequent Events - FAA Settlement" in Notes to Condensed Financial Statements) and Year 2000 costs and higher interrupted trip expense and crew accommodation costs. These increases were offset in part by reduced advertising costs. Net nonoperating expenses decreased $5.6 million to $2.2 million in the three months ended June 30, 1998 from $7.8 million in 1997. Excluding $2.1 million of interest income and $2.0 million of interest expense associated with inter-company notes, the year-over-year change was primarily due to a net decrease in interest expense as AWA's average outstanding debt was $94.7 million lower in the second quarter of 1998 as compared to 1997. Six Months Ended June 30, 1998 and 1997 For the six months ended June 30, 1998 and 1997, AWA realized operating income of $121.6 million and $77.7 million, respectively. Income before income taxes for the six month period in 1998 was $114.5 million compared to $62.3 million in 1997. Total operating revenues for the six months ended June 30, 1998 were $990.4 million. Passenger revenues were $934.8 million for the six months ended June 30, 1998, an increase of $48.5 million or 5.5 percent from 1997. RASM for the six months ended June 30, 1998 increased 2.9 percent to 7.84 cents from 7.62 cents driven by an 8.2 percent increase in passenger yield. The increase in RASM and yield occurred despite a 5.5 percent increase in aircraft stage length due to increased flying to long-haul business markets and the lapse of a federal transportation excise tax for the period January 1 to March 6, 1997. Capacity, as measured by ASMs, increased 2.5 percent in the six months ended June 30, 1998 as compared to 1997 while load factor decreased by 3.4 points to 66.4 percent. Cargo and other revenues increased 3.6 percent to $55.6 million for the six months ended June 30, 1998. CASM decreased 1.8 percent to 7.28 cents in the six months ended June 30, 1998 from 7.41 cents for the comparable 1997 period, primarily due to lower fuel prices. Significant changes in the components of operating expense per ASM are explained as follows: - Salaries and related costs per ASM increased 7.0 percent primarily due to increases in the accrual for AWArd Pay ($6.3 million) resulting from higher operating income in 1998. In addition, a salary level increase in the pilot contract that was effective May 1997 and higher headcount increased pilot salaries in the six month period ended June 30, 1998 compared to 1997. - Aircraft rent expense per ASM increased 5.3 percent due primarily to the net addition of four leased aircraft to the fleet during the six months ended June 30, 1998 as compared to 1997. - Other rents and landing fees expense per ASM decreased 3.9 percent in the six months ended June 30, 1998 as landings decreased by 3.4 percent. An increase in airport rents of $1.8 million was offset by lower equipment rentals as fewer spare parts were on loan from other airlines. - Aircraft fuel expense per ASM decreased 24.8 percent due to a 24.5 percent decrease in the average price per gallon of fuel to 51.56 cents in the 1998 period from 68.32 cents in 1997. 11 12 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 - Agency commissions expense per ASM decreased 13.8 percent as the cost reduction associated with the change in agency commission rate from 10 percent to eight percent in October 1997 more than offset the effects of higher passenger revenues in the six month period ended June 30, 1998. A $50 commission cap implemented on May 1, 1998 also contributed to the decrease. - Aircraft maintenance materials and repairs expense per ASM increased 22.0 percent primarily due to a $9.5 million increase in capitalized maintenance amortization expense for the six months ended June 30, 1998 when compared to the comparable period in 1997 and higher airframe maintenance and component repair costs. - Amortization of excess reorganization value expense per ASM decreased 20.0 percent as a result of the reduction in the unamortized balance of excess reorganization value due to the utilization of tax attributes of the pre-reorganized Company. - Other operating expenses per ASM decreased 1.9 percent to 1.57 cents from 1.60 cents primarily due to reduced advertising costs and traffic liability insurance rates which were offset in part by the effect in 1998 of the FAA settlement and Year 2000 costs, and higher crew accommodation expenses. Net nonoperating expenses decreased $8.3 million to $7.1 million in the six months ended June 30, 1998 from $15.4 million in 1997. Excluding $4.2 million of interest income and $3.9 million of interest expense associated with inter-company notes, the year-over-year change was primarily due to a net decrease in interest expense as AWA's outstanding debt was $97.1 million lower in the 1998 period as compared to 1997. LIQUIDITY AND CAPITAL RESOURCES Unrestricted cash and cash equivalents and short-term investments increased to $229.5 million at June 30, 1998 from $171.6 million at December 31, 1997. Net cash provided by operating activities increased to $187.2 million for the six months ended June 30, 1998 from $88.8 million in 1997 due principally to the period-over-period change in air traffic liability, which grew 22.4 percent in the 1998 period as compared to a decrease of 13.7 percent in the 1997 period and higher net income in 1998. Net cash used in investing activities increased to $142.1 million for the six months ended June 30, 1998 period from $44.7 million for the 1997 period. This increase was primarily due to the purchase of short-term investments totaling $64.4 million and the payment of $10.5 million in equipment purchase deposits for aircraft. Net cash used in financing activities was $51.7 million for the six months ended June 30, 1998 compared to $35.0 million in the 1997 period primarily due to the repayment of $30 million of revolving credit facility debt and the repurchase of AWA warrants. Operating with a working capital deficiency is common in the airline industry as tickets sold for transportation which have not yet been provided are classified as a current liability while the related income producing assets, the aircraft, are classified as non-current. AWA's working capital deficiency at June 30, 1998 was $116.7 million, a decrease of 27.7 percent from December 31, 1997. In April 1998, AWA completed the refunding of its $29.3 million variable rate industrial development revenue bonds due 2016 ("old bonds") by issuing $29.3 million of 6.3 percent fixed rate industrial development revenue bonds due April 2023 ("new bonds"). Interest on the new bonds is payable semiannually (April 1 and October 1) and commences on October 1, 1998. The new bonds are subject to optional redemption prior to the maturity date on or after April 1, 2008, in whole or in part, on any interest payment date at the following redemption prices: 102 percent on April 1 or October 1, 2008; 101 percent on April 1 or October 1, 2009; and 12 13 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 100 percent on April 1, 2010 and thereafter. As a result of the refinancing, $29.9 million of cash, which secured the irrevocable direct pay letter of credit that backed the old bonds, was released and became available for general corporate purposes. At June 30, 1998, AWA had firm commitments to AVSA, to purchase a total of 29 Airbus aircraft, with three to be delivered in the fourth quarter of 1998. AWA also has an option to purchase 52 more Airbus aircraft of which 12 are subject to reconfirmation by AWA. The aggregate net cost of firm commitments remaining under the aircraft order is approximately $1.0 billion based on a 3.5 percent annual price escalation. AWA has arranged for financing from AVSA for more than two-thirds of such commitment. AWA intends to seek additional financing (which may include public debt financing or private financing) in the future when and as appropriate. There can be no assurance that sufficient funding will be obtained for all aircraft. A default by AWA under the AVSA purchase commitment could have a material adverse effect on the Company. As of June 30, 1998, AWA's fleet consisted of 104 aircraft of which 17 aircraft meet the FAA's Stage II (but not Stage III) noise reduction requirements and must be retired or significantly modified prior to the year 2000. In May 1998, AWA entered into an agreement to purchase 14 737 hush kits at an aggregate net cost of approximately $14 million to comply with Stage III requirements. Delivery of the hush kits began in May 1998 and will continue through the first quarter of 1999. As of June 30, 1998, one aircraft had been outfitted with a hush kit. The remaining four non-compliant aircraft will be retired. Capital expenditures for the six months ended June 30, 1998 and 1997 were approximately $67.2 million and $76.5 million, respectively. Included in these amounts are capital expenditures for capitalized maintenance of approximately $55.3 million for the six months ended June 30, 1998 and $47.3 million for the six months ended June 30, 1997. Certain of AWA's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios and other financial covenants with which AWA was in compliance at June 30, 1998. OTHER INFORMATION YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in the computer shutting down or performing incorrect computations. As a result, before December 31, 1999, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Many of the Company's systems, including information and computer systems and automated equipment, will be affected by the Year 2000 issue. The Company is also heavily reliant on the FAA's management of the nation's air traffic control system, local authorities' management of the airports at which AWA operates, and vendors to provide goods (fuel, catering, etc.), services (telecommunications, data networks, satellites, etc.) and data (frequent flyer partnerships, alliances, etc.). 13 14 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 The Company has underway a Year 2000 Project to identify the programs and infrastructure that could be affected by the Year 2000 issues and is implementing a plan to resolve the problems identified on a timely basis. The plan will require the Company to devote a considerable amount of internal resources and hire substantial external resources to assist with the implementation and monitoring of the plan, and will require the replacement of certain equipment and modification of certain software. The Company currently estimates that the total cost of its Year 2000 Project will be approximately $29 million, including approximately $23 million which has been or will be expensed as incurred and approximately $6 million of capital expenditures. These costs include approximately $6 million of normal system software and equipment upgrades and replacements which the Company anticipated incurring in the ordinary course regardless of the Year 2000 issue. Substantially all of those costs will be incurred during the second half of 1998 and during 1999. If the Company's plan to address the Year 2000 issue is not successfully or timely implemented, the Company may need to devote more resources to the process and additional costs may be incurred, which could have a material adverse effect on the Company's financial condition and results of operations. The Company is also in the process of discussing with the FAA, airport authorities and its vendors the potential impact the Year 2000 issue will have on their systems. Problems encountered by the FAA, the airport authorities or vendors in connection with the Year 2000 issue also may have a material adverse effect on the Company's financial condition and results of operations. As a component of its Year 2000 Project, the Company is developing contingency plans to mitigate the effects of problems experienced by it or key vendors or service providers in the timely implementation of Year 2000 programs. The costs of the Company's Year 2000 Project and the date on which the Company plans to complete the Year 2000 compliance program are based on management's best estimates, and reflect assumptions regarding the availability and cost of personnel trained in this area, the compliance plans of third parties (including the FAA and other third parties mentioned above) and similar uncertainties. However, due to the complexity and pervasiveness of the Year 2000 issue and in particular the uncertainty regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved, and actual results could differ materially from those anticipated. FORWARD LOOKING INFORMATION This report contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. Whether such forward-looking statements and information ultimately prove to be accurate depends on various uncertainties and future developments that cannot be predicted. The results of operations in the air travel business historically fluctuate in response to general economic conditions. The airline industry is sensitive to changes in economic conditions that affect business and leisure travel and is highly susceptible to unforeseen events, such as political instability, regional hostilities, recession, fuel price escalation, inflation, adverse weather conditions or other adverse occurrences that result in a decline in air travel. Any event that results in decreased travel or increased competition among airlines could have a material adverse effect on the Company's financial condition and results of operations. The Company's results of operations for interim periods are not necessarily indicative of those for an entire year, because the travel business is subject to seasonal fluctuations. Due to the greater demand for air travel during the summer months, revenues in the airline travel industries in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. In addition, the Company's business is subject to significant risks, including, the competitive nature of the industry, the lack of significant unencumbered assets and significant future capital requirements, the results of union negotiations, the concentration of the voting power of the Company, the cost of aircraft fuel, certain regulatory matters, operating and financial restrictions on the Company imposed by certain loan and debt instruments and Year 2000 compliance issues. For a more complete discussion of these and other risks and uncertainties that may affect the Company's business and future operating results, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is on file with the Securities and Exchange Commission. 14 15 AMERICA WEST AIRLINES, INC. JUNE 30, 1998 SIGNATURE Pursuant to the requirements 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. AMERICA WEST AIRLINES, INC. By /s/ W. Douglas Parker ----------------------------- W. Douglas Parker Senior Vice President and Chief Financial Officer DATED: August 10, 1998 15 -----END PRIVACY-ENHANCED MESSAGE-----