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| GIA > SEC Filings for GIA > Form 10-Q on 15-May-2008 | All Recent SEC Filings |
15-May-2008
Quarterly Report
Special Note Regarding Forward-Looking Statements
This Form 10-Q, including the sections entitled "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements. These statements relate to, among other things:
• our business strategy;
• our value proposition;
• the market opportunity for our services, including expected demand for our services;
• information regarding the replacement, deployment, acquisition and financing of certain numbers and types of aircraft, and projected expenses associated therewith;
• costs of compliance with FAA regulations, Department of Homeland Security regulations and other rules and acts of Congress;
• the ability to pass taxes, fuel costs, inflation, and various expense to our customers;
• certain projected financial obligations;
• our estimates regarding our capital requirements; and
• any of our other plans, objectives, expectations and intentions contained in this prospectus that are not historical facts.
These statements, in addition to statements made in conjunction with the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions, are forward-looking statements. These statements relate to future events or our future financial performance and only reflect management's expectations and estimates. You should read this Form 10-Q completely and with the understanding that our results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. We undertake no duty to update these forward-looking statements after the date of this Form 10-Q, even though our situation may change in the future. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements:
• changing external competitive, business, budgeting, fuel supply, weather or economic conditions;
• changes in our relationships with employees or code share partners;
• availability and cost of funds for financing new aircraft and our ability to profitably manage our existing fleet;
• adverse reaction and publicity that might result from any accidents;
• the impact of current or future laws and government investigations and regulations affecting the airline industry and our operations;
• additional terrorist attacks; and
• consumer unwillingness to incur greater costs for flights.
Overview
We operate a scheduled airline, scheduled and on-demand charter services, and a flight training academy for commercial pilots.
Our most significant market opportunity relates to the fact that we currently operate in and have targeted future expansion in unserved and underserved short haul markets, which is a growing opportunity for two principal reasons. Many smaller markets are being abandoned by major carriers, as they shift their focus increasingly to international markets and away from domestic markets and hubs. In addition, many smaller markets are also being abandoned by regional airlines, as they continue to gravitate toward larger jet aircraft in the 70-100 seat range, and away from smaller turboprop aircraft. As a result, we will continue to seek opportunities to grow in the expanding number of smaller underserved or unserved markets that are suitable for its fleet of small-capacity aircraft.
Our most significant challenges relate to:
• unprecedented increases and volatility in the price of aircraft fuel, which accounts for 26% of our airline operating expenses;
• securing cost-effective maintenance resources as the average age of our aircraft fleet increases; and
• pilot availability within a very competitive industry-wide environment.
Each of our business components is briefly described below.
Airline
We began providing air charter service in 1988, and have provided scheduled passenger service in Florida and the Bahamas since 1990. We signed our first major code share agreement with United Airlines in 1994. In 1997, Gulfstream entered into a cooperative alliance and code share agreement with Continental Airlines and has since operated as a Continental Connection carrier. We also have code share agreements with United Airlines, Northwest Airlines, and Copa Airlines. We estimate that over 60% of our revenue is derived from local "point to point" traffic within Florida and the Bahamas, with connecting traffic from our code-share partners and other carriers destined primarily for the Bahamas making up the balance. Continental is our largest connecting partner, with passengers connecting to and from Continental flights providing approximately 20% of our revenue. Revenue generated by the airline is classified in our statement of operations as Airline Passenger Revenue.
Cuba and Other Charter Revenue
Gulfstream Air Charter, Inc. ("GAC"), a company which is owned by Thomas L. Cooper, operates charter flights between Miami and Havana. GAC is licensed by the Office of Foreign Assets Control of the U.S. Department of the Treasury as a carrier and travel service provider for charter air transportation between designated U.S. and Cuban airports.
Pursuant to a services agreement between Gulfstream and GAC dated August 8, 2003 and amended on March 14, 2006, Gulfstream provides use of its aircraft, flight crews, the Gulfstream name, insurance, and service personnel, including passenger, ground handling, security, and administrative. Gulfstream also maintains the financial records for GAC. Pursuant to the March 14, 2006 amended agreement, Gulfstream receives 75% of the income generated by GAC's Cuban charter operation. Prior to March 14, 2006, Gulfstream received all of the income generated up to a cumulative total of $1 million, and then 75% thereafter.
Income provided under the services agreement has previously been reported in the statement of operations for periods prior to January 1, 2008 as Academy, charter and other revenue. The Company had evaluated the applicability of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, ("FIN 46") to the accounting by the Company of the services agreement between its wholly-owned subsidiary, Gulfstream, and the Cuba charter business ("Cuba Charter") operated by GAC. The Company concluded that compliance with the consolidation or disclosure requirements of FIN 46 as it relates to Cuba Charter would not materially impact the consolidated financial statements of the Company for periods prior to January 1, 2008. Therefore, the Company determined that further consideration of FIN 46 was unnecessary.
The Company has recently evaluated the applicability of FIN 46 to its results of operations for the three months ended March 31, 2008. As a result of the increasing significance of the Cuba charter business to our overall performance, we have consolidated the results of the Cuba charter business as a variable interest entity effective January 1, 2008.
In addition to the Cuba revenue described above, our charter revenues are principally derived from on-demand charter services, sub-service flying for other scheduled airlines and a 15-year agreement with a government subcontractor, subject to two-year renewals, to operate daily flights between West Palm Beach and Andros Town, Bahamas. Revenue and related expenses associated with Gulfstream's charter activity are reported gross as charter revenue and within the appropriate expense categories of the Company's statement of operations.
Academy
The Academy offers training programs for pilots holding commercial multi-engine instrument certifications and at least 190 hours of flying time. Pilots with these ratings are qualified to fly commercial airplanes, but are often unable to find positions with airlines without additional training and flying time. The Academy enhances its students' career prospects by providing them with the training and experience necessary to obtain pilot positions with commercial airlines. The Academy enrolled 137, 78 and 80 students in 2005, 2006 and 2007, respectively, virtually all of whom were hired by airlines after graduation, including those hired by Gulfstream. The Academy's revenues are included as Academy, Charter and Other Revenue in our statement of operations, and its expenses are included as general and administrative expenses.
Current Developments
Our operating results for the three months ended March 31, 2008 were significantly impacted by the continued unprecedented rise in fuel prices and substantially higher maintenance expenses, especially related to our fleet of eight Embraer EMB120 aircraft.
In January 2008, we began implementation of a revised business plan to reduce the complexity of our operations, lower our operating expenses and improve liquidity by selling certain aircraft and parts inventory. Our revised business plan specifically encompasses:
• improving liquidity through the sale of our fleet of eight Embraer EMB120 aircraft and related parts inventory;
• restructuring our route network to eliminate city pairs that are no longer profitable in the present high fuel price environment, and to redeploy assets to existing or new higher margin routes;
• increasing our average ticket prices to offset as much as possible the rising price of jet fuel; and
• cost reduction initiatives related to flight operations, maintenance, passenger service and general and administrative.
More recently, like much of the airline industry, we have added a $25 charge for checking a second piece of luggage, which will become effective in June 2008. We also were recently awarded Essential Air Service routes by the Department of Transportation for service beginning in August 2008 between Continental's Cleveland hub and three smaller cities in Pennsylvania and West Virginia. We intend to begin service on these routes in the second half of this year.
Although we expect our revised business plan and these recent initiatives to produce positive contributions to operating results during the second half of 2008 and into 2009, crude oil prices have continued to spike even higher since the end of the first quarter of 2008, reaching more than $126 per barrel during May 2008. In addition, the economy has continued to slow since the end of 2007, and our passenger counts have been declining for the past several months. As a result, we expect our year-over-year passenger revenue to decline somewhat from prior-year levels during the next several months, despite recent increases in average ticket prices in excess of 10% compared to year-ago levels.
In order to fund an expected liquidity shortfall for the remainder of 2008, we expect to raise between $3-$4 million of cash, after repayment of $7.5 million of existing debt, through the sale of our fleet of eight Embraer EMB 120 aircraft. On May 13, 2008, we executed a non-binding letter of intent with a prospective buyer for the initial sale of five aircraft, and $500,000 has been deposited by the buyer in an escrow account. We expect to sign a purchase contract and close the sale within the next several weeks. We intend to sell the remaining three Embraer aircraft during the next three months.
In order to execute our revised business plan during the next twelve months, we believe we will need to access additional sources of capital within the next several months, in addition to the cash generated through our aircraft sales. We can make no assurance that additional sources of capital will be available to us under terms acceptable to us, or at all, or that implementation of our revised business plan will be timely or successfully completed, or that we will be able to fund our operations in the long term.
Results of Operations
Comparative Results for the Three Months Ended March 31, 2007 and 2008
The following table sets forth our financial results (unaudited) for the three months ended March 31, 2007 and 2008.
Three Months Ended
March 31, Percent
2007 2008 Change
(In thousands)
Revenue
Airline passenger revenue $ 27,657 $ 27,737 0.3%
Academy, charter and other revenue 1,569 3,518 124.2%
Total Revenue 29,226 31,255 6.9%
Operating Expenses
Flight operations 3,329 3,890 16.9%
Aircraft fuel 5,629 8,186 45.4%
Aircraft rent 1,591 1,618 1.7%
Maintenance 5,297 7,577 43.0%
Passenger service 5,735 6,653 16.0%
Promotion & sales 2,064 2,154 4.4%
General and administrative 1,732 2,034 17.4%
Depreciation and amortization 920 1,075 16.8%
Total Operating Expenses 26,297 33,187 26.2%
Income (loss) from operations 2,929 (1,932 ) NM
Non-Operating Income and (Expense)
Interest (expense) (294 ) (154 ) -47.6%
Other income 20 16 -20.0%
Total Non-Operating Income and (Expense) (274 ) (138 ) -49.6%
Income (loss) before taxes 2,655 (2,070 ) NM
Provision (benefit) for income taxes 1,002 (784 ) NM
Income (loss) before minority interest 1,653 (1,286 ) NM
Minority interest 5 - NM
Net income (loss) $ 1,658 $ (1,286 ) NM
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Operating Statistics. The following table sets forth our major operational statistics and the percentage-of-change for the three months ended March 31, 2007 and 2008.
Three Months Ended
March 31, Percent
2007 2008 Change
Operating Statistics (unaudited):
Available seat miles (000's) (1) 74,961 72,185 -3.7%
Revenue passenger miles (000's) (2) 45,309 41,331 -8.8%
Revenue passengers carried 229,229 207,502 -9.5%
Departures flown 18,077 17,502 -3.2%
Passenger load factor (3) 60.4 % 57.3 % -5.3%
Average yield per revenue passenger mile (4) $ 0.610 $ 0.671 9.9%
Revenue per available seat miles (5) $ 0.384 $ 0.429 11.5%
Operating costs per available seat mile (6) $ 0.340 $ 0.445 31.0%
Average passenger fare (7) $ 120.65 $ 133.67 10.8%
Average passenger trip length (miles) (8) 198 199 0.8%
Fuel cost per gallon (incl taxes) $ 1.94 $ 2.98 53.6%
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1. "Available seat miles" or "ASMs" represent the number of seats available for passengers in scheduled flights multiplied by the number of scheduled miles those seats are flown.
2. "Revenue passenger miles" or "RPMs" represent the number of miles flown by revenue passengers.
3. "Passenger load factor" represents the percentage of seats filled by revenue passengers and is calculated by dividing revenue passenger miles by available seat miles.
4. "Average yield per revenue passenger mile" represents the average passenger revenue received for each mile a revenue passenger is carried.
5. "Revenue per available seat mile" or "RASM" represents the average total operating revenue received for each available seat mile.
6. "Operating cost per available seat mile" represents operating expenses divided by available seat miles.
7. "Average passenger fare" represents passenger revenue divided by the number of revenue passengers carried.
8. "Average passenger trip length" represents revenue passenger miles divided by the number of revenue passengers carried.
Net Income. Our consolidated net loss for the three months ended March 31, 2008 was $1.3 million compared to net income of $1.7 million for the comparable period last year. These results were primarily due to the continued unprecedented rise in fuel prices and substantially higher maintenance expenses, especially related to our fleet of eight Embraer EMB 120 aircraft.
Operating Income. The consolidated operating loss for the three months ended March 31, 2008 was $1.9 million compared to operating income of $2.9 million for the comparable period last year. The following table identifies the operating profit contributions from each of our respective operating components.
Three Months Ended
March 31,
2007 2008
(In thousands)
Airline and charter $ 3,885 $ (822 )
Academy (43 ) (149 )
Total income from operations 3,842 (971 )
Less: General and administrative 913 961
Consolidated income (loss) from operations $ 2,929 $ (1,932 )
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The operating loss of the Airline and charter operation in the first quarter of 2008 was $0.8 million compared to an operating profit of $3.9 million in the comparable period in 2007. The profit decline was primarily attributable to substantially higher fuel prices, increased maintenance expenses, and higher pilot training expenses.
Revenues. Consolidated revenues increased to $31.3 million for the three months ended March 31, 2008 from $29.2 million for the comparable period in 2007, representing an increase of 6.9%. The overall increase was due principally to the inclusion during the first quarter of 2008 of $2.0 million of Charter and other revenue resulting from the consolidation as a variable interest entity of our Cuba charter business. For the first quarter of 2007, only the profit of $170,000 from the Cuba charter business was included as Charter and other revenue. The following table identifies the revenue contribution from each of our operating components.
Three Months Ended
March 31, Percent
2007 2008 Change
(In thousands)
Revenue
Airline passenger revenue $ 27,657 $ 27,737 0.3%
Charter and other revenue 1,148 3,202 178.9%
Academy 789 924 17.1%
Intercompany revenue elimination (368 ) (608 ) 65.2%
Total Revenue $ 29,226 $ 31,255 6.9%
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Airline Passenger Revenue. Airline passenger revenue increased 0.3% for the three months ended March 31, 2008 from the comparable period in 2007. This increase was primarily attributable to a 10.8% increase in average fares, offset largely by a 9.5% decrease in the number of passengers carried.
We increased our average passenger fare during the first quarter of 2008 to $133.67 from $120.65 in the comparable period in 2007, in response to the rapid rise in fuel prices that occurred during the last twelve months.
We reduced our capacity for the first quarter of 2008 compared to a year ago as available seat miles declined by 3.7%. While increased fares help to offset higher fuel prices, they also often result in a decline in the number of passengers flown. In the first quarter of 2008, the number of passengers flown declined by 9.5% compared to the same period in 2007.
Charter, Cuba Operations and Other Revenue. Revenues from charter and other revenue increased 178.9% to $3.2 million for the first quarter of 2008 from $1.1 million in the comparable period in 2007. The overall increase was due principally to the inclusion of $2.0 million of revenue resulting from the consolidation as a variable interest entity of our Cuba charter business for the first quarter of 2008. For the first quarter of 2007, only the profit of $170,000 from the Cuba charter business was included as Revenue. The remaining increase was attributable to newly-initiated charter service to Chub Cay and Great Harbour Cay in the Bahamas.
Academy Revenue. Academy revenue increased 17.1% for the first quarter of 2008 to $924,000 from $789,000 for the same period last year. Most of the increase related to higher intercompany revenue charged to the Airline for pilot training of flight crews caused by the higher than normal pilot attrition rate of the past nine months, which has recently abated.
Airline Operating Expenses. As a result of the increasing significance of the Cuba charter business to our overall performance, we have consolidated the results of the Cuba charter business as a variable interest entity for the three months ended March 31, 2008 pursuant to the requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. For the three months ended March 31, 2007, the operating profit of the Cuba charter business was included as a component of Revenue.
The following table presents Gulfstream's operating expenses, before elimination of intercompany expenses, for the three months ended March 31, 2007 and 2008:
Percent of Airline
Operating Expenses Revenue
Three Months Ended March 31, Percent
2007 2008 2007 2008 Change
(In thousands)
Flight operations $ 3,687 $ 4,513 13.3% 16.3% 22.4%
Aircraft fuel 5,629 8,186 20.4% 29.5% 45.4%
Aircraft rent 1,591 1,618 5.8% 5.8% 1.7%
Maintenance 5,297 7,577 19.2% 27.3% 43.0%
Passenger service 5,735 6,653 20.7% 24.0% 16.0%
Promotion & sales 2,064 2,154 7.5% 7.8% 4.4%
Depreciation and amortization 920 1,075 3.3% 3.9% 16.8%
Total $ 24,923 $ 31,776 90.1% 114.6% 27.5%
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Flight Operations. Major components of flight operations expense include salaries for pilots, flight attendants and other operations personnel, as well as pilot training expenses. Flight operations expenses increased to $4.5 million for the first quarter of 2008 from $3.7 million in the comparable period of 2007, representing an increase of 22.4%.
Most of the increase in flight operations expenses in the first quarter of 2008 are attributable to three principal factors: 1) the inclusion of $547,000 of expenses resulting from the consolidation as a variable interest entity of our Cuba charter business for the first quarter of 2008; 2) pilot training expenses; and 3) fewer pilots provided by the Academy. The industry-wide pilot shortage for most of the past year has resulted in an abnormally high attrition rate for our pilots and increased pilot training expenses, including increased payroll and lodging expenses during training, increased costs for hiring additional flight instructors, and significantly higher flight simulator time. We expect some relief from this problem beginning in the second quarter of 2008 as our attrition rate has returned to a more normal level.
Aircraft Fuel. Our average price for jet fuel for the first quarter of 2008 increased to $2.98 per gallon, an increase of 53.6% from the $1.94 per gallon price during the comparable period last year. The average cost for a gallon of jet fuel most recently was approximately $3.65. As a result of the relentless rise in fuel prices over the past year, fuel increased as a percent of airline revenue to 29.5% during the first quarter of 2008 from 20.4% during the comparable period last year.
Aircraft Rent. Aircraft rent is related to the lease costs associated with our 27 Beech 1900D aircraft. As a percentage of revenue, aircraft rent was unchanged at 5.8%.
Maintenance and repairs expense. Major components of maintenance and repairs expense include all salaries and wages, repair parts and materials, and expenses incurred from third party service providers required to maintain our aircraft engines. Maintenance increased 43.0% to $7.6 million for the first quarter of 2008 from $5.3 million during the comparable period last year. Our maintenance costs increased primarily as a result of increased material and repair costs associated with our Embraer fleet, a new Beechcraft 1900D engine overhaul contract requiring higher hourly payments, increased employee turnover, higher hourly labor rates and $254,000 of maintenance expense associated with the consolidation as a variable interest entity of our Cuba charter business for the first quarter of 2008.
Passenger Service. Major components of passenger service expense include ground handling services, airport counter and gate rentals, wages paid to airport employees, passenger liability insurance, security and miscellaneous passenger-related expenses. Passenger service expense increased 16.0% to $6.7 million for the first quarter of 2008 from $5.7 million for the same period last year. This increase was largely attributable to $539,000 of passenger service expense associated with the consolidation as a variable interest entity of our Cuba charter business for the first quarter of 2008, as well as increased rents at certain airports and an overall increase in wage rates provided to our airport employees.
Promotion and Sales. Major components of promotion and sales expense include credit card commissions, travel agent commissions and reservation system fees. Promotion and sales expense for the first quarter of 2008 included $140,000 of promotion and sales expense associated with the consolidation as a variable interest entity of our Cuba charter business.
Depreciation and amortization expense. Depreciation and amortization expense increased to $1.1 million for the first quarter of 2008 from $0.9 million for the same period last year. This increase was primarily due to the additional depreciation resulting from the increased incidence of capitalized engine overhaul events attributable to our fleet of Embraer aircraft.
General and Administrative and Academy Operating Expense. Our consolidated general and administrative expenses include the expenses of the Academy, as set forth in the following table.
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