Republic Airlines Annual Report 1982

ANNUAL REPORT 1982
REPUBLIC AIRLINES
WEST PALM BEACH
FORT LAUDERDALE
HOLLYWOOD
MIAMI
Contents
Highlights
About Republic
Letter to stockholders
Building the system
Building the fleet
Building the image
The future
Management's discussion and analysis
Financial statements
Auditors' report
Supplemental stockholder information
Five-year summary
Board of Directors and Officers
REPUBLIC AIRLINES,INC.
7500 Airline Drive Minneapolis, Minnesota 55450 612-726-7411
Highlights
1982 1981 1980
OPERATING REVENUES $ 1,530,668,000 $ 1,448,416,000 $ 916,715,000
OPERATING PROFIT $ 37,223,000 $ 16,456,000 $ 13,224,000
NET LOSS $ (39,861,000) $ (46,269,000) $ (24,662,000)
NET LOSS PER COMMON SHARE-Primary $ (1.99) $ (2.30) $ (1.19)
WORKING CAPITAL FROM OPERATIONS $ 30,501,000 $ 16,807,000 $ 14,840,000
RETAINED EARNINGS (DEFICIT) $ (30,286,000) $ 14,125,000 $ 64,830,000
STOCKHOLDERS' EQUITY $ 27,938,000 $ 72,348,000 $ 117,627,000
PASSENGERS 18,075,000 16,841,000 13,220,000
PASSENGER MILES 9,230,889,000 7,641,170,000 4,760,341,000
CARGO TON MILES 65,059,000 51,159,000 37,113,000
About Republic
Republic Airlines, the nation's fifth-largest
carrier, provides safe, dependable air
transportation to the traveling and
shipping public.
The company, originally called Wisconsin
Central Airlines, inaugurated scheduled
service on February 24, 1948. The name
was changed to North Central in 1952.
Southern Airways, which began service in
1949, was merged into the company in
1979, and the name became "Republic."
Hughes Airwest, another carrier with over
30 years of experience, was acquired
October 1, 1980.
The airline serves 150 cities-more
than any other carrier in the country. It
flies to most of the nation's metropolitan
areas and many intermediate-sized
communities. The route system extends
coast-to-coast, and from Canada to
Mexico and the Cayman Islands in the
Caribbean. (See map inside front cover.)
By carrying 18 million passengers in 1982,
Republic ranks fifth among U. S. airlines.
The company operates the seventh-
largest commercial jet fleet in the world.
Its 162 aircraft-Boeing 727s, Douglas
DC-9s and Convair 580s-make 1,300
departures daily.
Republic's 14,400 dedicated employees
offer the finest type of scheduled airline
service.
ANNUAL MEETING
Wednesday, April 27, 1983
REGISTRARS AND
TRANSFER AGENTS
Northwestern Trust Company
New York, New York 10005
Northwestern National Bank
Minneapolis, Minnesota 55480
SECURITIES LISTED
Common stock (RAI)
New York Stock Exchange
Midwest Stock Exchange
Convertible Senior Subordinated
Debentures-10-1 /8%
New York Stock Exchange
Trustee:
Northwestern National Bank
Minneapolis, Minnesota 55480
AUDITORS
Alexander Grant & Company
SAN FRANCISCO
SAN JOSE
BOSTON
WEST PALM BEACH
FORT LAUDERDALE
HOLLYWOOD
MIAMI
PUERTO VALLARTA
REPUBLIC AIRLINES,INC.
7500 Airline Drive Minneapolis, Minnesota 55450 612-726-7411
Highlights
1982 1981 1980
OPERATING REVENUES $ 1,530,668,000 $ 1,448,416,000 $ 916,715,000
OPERATING PROFIT $ 37,223,000 $ 16,456,000 $ 13,224,000
NET LOSS $ (39,861,000) $ (46,269,000) $ (24,662,000)
NET LOSS PER COMMON SHARE-Primary $ (1.99) $ (2.30) $ (1.19)
WORKING CAPITAL FROM OPERATIONS $ 30,501,000 $ 16,807,000 $ 14,840,000
RETAINED EARNINGS (DEFICIT) $ (30,286,000) $ 14,125,000 $ 64,830,000
STOCKHOLDERS' EQUITY $ 27,938,000 $ 72,348,000 $ 117,627,000
PASSENGERS 18,075,000 16,841,000 13,220,000
PASSENGER MILES 9,230,889,000 7,641,170,000 4,760,341,000
CARGO TON MILES 65,059,000 51,159,000 37,113,000
About Republic
Republic Airlines, the nation's fifth-largest
carrier, provides safe, dependable air
transportation to the traveling and
shipping public.
The company, originally called Wisconsin
Central Airlines, inaugurated scheduled
service on February 24, 1948. The name
was changed to North Central in 1952.
Southern Airways, which began service in
1949, was merged into the company in
1979, and the name became "Republic."
Hughes Airwest, another carrier with over
30 years of experience, was acquired
October 1, 1980.
The airline serves 150 cities-more
than any other carrier in the country. It
flies to most of the nation's metropolitan
areas and many intermediate-sized
communities. The route system extends
coast-to-coast, and from Canada to
Mexico and the Cayman Islands in the
Caribbean. (See map inside front cover.)
By carrying 18 million passengers in 1982,
Republic ranks fifth among U. S. airlines.
The company operates the seventh-
largest commercial jet fleet in the world.
Its 162 aircraft-Boeing 727s, Douglas
DC-9s and Convair 580s-make 1,300
departures daily.
Republic's 14,400 dedicated employees
offer the finest type of scheduled airline
service.
ANNUAL MEETING
Wednesday, April 27, 1983
REGISTRARS AND
TRANSFER AGENTS
Northwestern Trust Company
New York, New York 10005
Northwestern National Bank
Minneapolis, Minnesota 55480
SECURITIES LISTED
Common stock (RAI)
New York Stock Exchange
Midwest Stock Exchange
Convertible Senior Subordinated
Debentures-10-1 /8%
New York Stock Exchange
Trustee:
Northwestern National Bank
Minneapolis, Minnesota 55480
AUDITORS
Alexander Grant & Company
To our stockholders, employees and friends:
Republic Airlines made progress in
1982 by improving its financial
position while leading the major
carriers with a 21 percent traffic
increase. Greater productivity,
debt restructuring, lower unit
costs, and the sale of debentures
were highlights. Revenues were up
six percent to $1.53 billion, and
expenses of $1.57 billion were five
percent over 1981. The resulting
net loss was $39.9 million,
compared with a $46.3 million loss
a year ago.
Competition in the air transportation
industry has never been more
intense. The prolonged economic
recession substantially lowered
traffic demand and prompted fare
wars to attract customers. Over
capacity plagued the industry, and
prices were slashed drastically.
Two scheduled airlines ceased
operations last year, and two
others merged. All major carriers
continued to be adversely affected
by air traffic control restrictions.
Republic worked hard to cope with
these conditions, and before the
end of the year, several major
accomplishments were announced:
the loan agreement with the
company's principal banks was
restructured, extending long-term
debt payments and significantly
improving cash flow over the
next few years.
the purchase agreement for 11
McDonnell Douglas DC-9 Super
80s was revised to extend
deliveries through 1986.
$75 million of Convertible Senior
Subordinated Debentures were
sold, resulting in a strong year-
end cash position.
three fuel-efficient DC-9 Super
80s were delivered in
December 1982.
The revenues of $1.53 billion were
up six percent even though the
company had to match
unprofitable competitive fares.
Operating expenses increased to
$1.49 billion. Employee pay
concessions, lower fuel prices, and
improved productivity helped to
hold the line. As a result,
operating profit more than doubled
to $37.2 million in 1982, from
$16.5 million in 1981. Interest and
other expenses, partially offset by
the sale of tax benefits, were
$77.1 million. The net loss of
$39.9 million, or $1.99 per share,
resulted.
Republic's move toward financial
recovery was a team effort. Most
employees postponed wage
increases, accepted a ten percent
pay cut for six months, and
deferred a month's compensation
until August of 1983. The
exemplary spirit of Republic
personnel is one of the company's
greatest assets. Fewer employees
2
handled a record number of
passengers, yet maintained the
airline's reputation for helpful
service. The company's traffic
growth was greater than that of
any other major carrier.
Republic flew a record 9.2 billion
revenue passenger miles for the
21 percent increase, while the 11
major airlines had an average gain
of five percent for 1982. The
company also led the majors by
expanding its market share
18 percent. Over 18 million
passengers chose Republic,
seven percent ahead of the
previous year. Cargo ton miles,
showing excellent progress, rose
27 percent to 65.1 million.
The extraordinary traffic gains
were stimulated by a steady
buildup of service at hub cities
since January 1982. New nonstops
linked Minneapolis/St. Paul with
New York (LaGuardia), Los
Angeles, San Francisco, Portland,
Bismarck/Mandan, Grand Rapids
and Cincinnati. Memphis received
routes to Cincinnati, Knoxville, Las
Vegas and Los Angeles.
From Detroit, new nonstop flights
now operate to New Orleans,
Montreal, Los Angeles, and
Phoenix. Service was introduced
from Phoenix to Los Angeles,
Palm Springs/Indio and Chicago,
while Las Vegas gained flights to
San Francisco and Palm Springs/
Indio. Nonstops were also
inaugurated from Cleveland to
both Baltimore and Milwaukee.
Fort Myers was added to the
system in December. Flights
operate to this popular Florida
vacation spot from Minneapolis/
St. Paul via Orlando, and from
Detroit via Tampa/St. Petersburg/
Clearwater.
Creative advertising is achieving
national recognition for the
company. Hollywood celebrities
helped promote the new Los
Angeles service. A memorable
series of television commercials
featured actual passengers who
had written complimentary letters
to the airline. The public enthusi
astically responded to the "Kids Fly
Free" plan with Chex cereal and
the two-for-one "Pair Fare" ticket
offer. Campaigns were also
directed to travel agents-who sell
two-thirds of Republic's tickets.
Regular business travelers-the
backbone of airline traffic-received
special attention. Over 100,000
passengers are participating in the
"Frequent Flyer" program, which
awards travel bonuses for
selecting Republic often. Business
Coach-featuring wide, two-by-two
seating-was introduced on most
flights.
"Celebrity Service" highlighted
champagne and enhanced menus
on selected long-haul routes. At
airport terminals in Detroit,
Minneapolis/St. Paul, Chicago,
Atlanta, Memphis and Phoenix,
quiet and comfortable "Republic
Executive Suites" offer
passengers a variety of amenities.
Republic's fleet of 162 jet-powered aircraft
is the seventh-iargest in the world. Three new
high-technology DC-9 Super 80s were added in 1982.
Three DC-9 Super 80s were added
in 1982, bringing the fleet to
162 jet-powered aircraft. A flight
equipment standardization
program, currently underway,
reduces maintenance expense and
improves scheduling flexibility.
The goal for 1983 is to return the
company to profitability and
sustain Republic's growth.
Resources are being concentrated
in markets with the most potential
for solid, long-term gains. The
company's unique multi-hub route
structure and connecting flight
schedules are being steadily
refined for optimum use of aircraft
and personnel. This strategy has
already made Republic the
dominant carrier at several of
these traffic centers.
Republic is well prepared to take
full advantage of the increased
demand for airline service which is
forecast for the coming months.
As the national economy recovers,
deeply-discounted fares should not
be needed to stimulate traffic.
Based on these factors, the
company is encouraged by the
opportunities for further progress
in 1983.
Sincerely,
Hal N. Carr
Chairman of the Board
Chief Executive Officer
March 11, 1983
3
Building the system
Republic's route system draws
passengers to its major hubs from
medium-sized cities, and then carries
them to their final destinations on
long-haul flights. Results for 1982
prove this concept is working well.
Connecting traffic jumped 86 percent
at Minneapolis/St. Paul, 156 percent at
Memphis, and 95 percent at Phoenix.
Last year, Republic became the
leading passenger carrier at Memphis,
and continues to rank first at Detroit,
Phoenix, and Milwaukee.
For 1982, Republic again led all major
airlines in traffic growth. Revenue
passenger miles climbed 21 percent to
9.2 billion, while the majors as a
group experienced only a five percent
increase. Republic carried 18 million
passengers, up seven percent from
1981, and flew 65.1 million cargo ton
miles for a 27 percent gain. Over
196,000 small express shipments were
delivered under the VIP (Very
Important Package) program.
Six times last year, the month's traffic
exceeded the previous high set in
March 1981. The peak was reached in
June, when 1,813,605 air travelers
chose Republic. A single-day record
was established June 11 with 69,546
passengers. To supplement regular
scheduled flights, the airline provided
286 charter trips for 52,882 people.
The company's operating performance
in 1982 was again among the highest
in the industry. Republic flew 99
percent of its 157 million scheduled
miles. Contributing to this excellent
operating effort was the airline's
exacting maintenance program. Only
three-tenths of one percent of
Republic's departures were cancelled,
and just 1.7 percent were delayed for
maintenance reasons.
During the year, over 20 major routes
were introduced. The Minneapolis/St.
Paul hub received significant buildup,
with new nonstop flights to New York
(LaGuardia), Los Angeles, Portland,
San Francisco, Grand Rapids, Bismarck/
Mandan, and Cincinnati. The Memphis
hub was linked with Los Angeles,
Las Vegas and Cincinnati. In Detroit,
nonstops were added to Phoenix,
Los Angeles and New Orleans. At the
Phoenix hub, flights were inaugurated
to Chicago, Los Angeles and
Palm Springs/Indio. Cleveland gained
new service to Baltimore and
Milwaukee, and nonstops joined
Las Vegas to San Francisco and
Palm Springs/Indio.
In December, Fort Myers became the
newest city on the Republic system.
This popular Florida destination is
being served from Minneapolis/St.
Paul, via Orlando, and from Detroit
through Tampa/St. Petersburg/
Clearwater. In February 1983,
nonstops connected Memphis with
Knoxville, and single-plane service
was initiated between Montreal and
Los Angeles, via Detroit.
Republic's program for improving its
route system is based on development
of major hubs. The company is
already the dominant carrier at several
of these centers. By focusing on
markets with the greatest growth
possibilities, Republic should maximize
its inherent competitive strength and
control traffic at these hubs.
As a continuation of this strategy,
Republic announced plans early in
1983 to further expand service at
Minneapolis/St. Paul, Detroit, Memphis
and Phoenix. New nonstops being
introduced in April include Memphis to
New York (LaGuardia), Washington,
D.C. (National), Tampa/St. Petersburg/
Clearwater, and Jacksonville; Detroit-
Philadelphia; Las Vegas-Reno; and
Phoenix to San Diego, Portland and
New passenger facilities at New York LaGuardia,
Kansas City, Phoenix and other major airports improve
Republic's service in key markets.
4
Reservations agents respond to customers more rapidly.
Advanced computer terminals increase productivity by
displaying three separate categories of information
simultaneously.
Memphis. At Minneapolis/St. Paul,
additional nonstops are being
scheduled to New York (LaGuardia),
San Francisco, Seattle/Tacoma,
and Portland.
To accomplish this, the company is
reallocating some of its resources by
discontinuing service at seven points
-South Bend, Dayton, Spokane,
Pasco/Richland/Kennewick, Boise,
Twin Falls, and Redding/Red Bluff--
which do not enhance Republic's
primary east-west service patterns.
Also, the community of interest
between these cities and established
hubs is limited, and potential traffic
does not justify the personnel and
aircraft required.
The company does have a
commitment to the cities that surround
its traffic centers. The airline is
working closely with state and local
tourist bureaus and Chambers of
Commerce to promote business and
tourism so viable air transportation
can be continued. Should service by a
regional carrier be more economically
feasible, Republic will make every
effort to help the community secure
adequate, reliable replacement
service.
Last year, several employee groups
agreed to a series of work-rule
modifications and other concessions
designed to enable the airline to
compete effectively and economically
at some of the smaller cities around
its hubs. The changes, which are
currently being implemented, will also
help preserve jobs for these employees.
Seven regional airlines-Simmons,
Skywest, Mesaba, Sunbelt, AAA Air
Enterprises, National Florida and San
Juan-are co-hosts in ESCORT,
Republic's computerized reservations
and telecommunications system. The
airline also provides airport facilities,
counter and gate space, training,
ticketing, and ground service for 29
regional carriers. In addition, the
company has joint fare and interline
ticketing agreements with more than
100 regional airlines.
The complexity of serving over 150
cities, handling 50,000 passengers,
and making 1,300 departures daily
requires sophisticated reservations
and telecommunications. During 1982,
all computer operations were
consolidated at the airline's
headquarters in Minneapolis/St. Paul.
Two IBM 3081 mainframes, the largest
and fastest available, were added to
provide greater capacity for ESCORT.
On November 29, a new daily record
was set on ESCORT when 2.8 million
reservations and operational messages
were processed.
To further increase productivity, the
airline installed IBM Series I computer
terminals in its Minneapolis/St. Paul
and Phoenix central reservations
offices. These high-technology units
display three separate categories of
information simultaneously. This
reduces the workload of reservations
agents and speeds up service to
customers. In addition, Republic is
one of the first airlines to utilize the
enhanced toll-free (WATS) telephone
service for reservations. Calls can now
be easily transferred from one
reservations center to another at peak
periods.
Republic is introducing a new
automated system to expedite check
in procedures. By this summer,
passengers can receive computer
generated seat assignments at airport
ticket counters or at the gates. This
will also be available for on-line
connecting flights.
Operating restrictions are still being
imposed by the Federal Aviation
Administration at certain airports as a
result of the air traffic controllers'
strike. Although some relief was
granted in 1982, constraints are
continuing into 1983. Republic will add
service at key hubs and larger cities
as the air traffic control system
permits.
New facilities for Republic passengers
were completed at Baton Rouge,
Boston, Cleveland, Edmonton, Kansas
City, Miami, Seattle/Tacoma and West
Palm Beach during 1982. New air
freight terminals were occupied at
Milwaukee, Detroit, Houston (Hobby),
Green Bay/Clintonville, and Burbank.
At the Minneapolis/St. Paul main
operations base, the recently-
completed construction project added
70,000 square feet to the hangar area
and maintenance support shop space.
In Atlanta, the power plant facility was
developed to handle engine overhaul
for the company's entire fleet. Some
of this work had previously been done
by outside firms. Also, the airline's
Flight Crew Training Center was
remodeled. Other construction is
currently underway at New York
(LaGuardia), Milwaukee, Houston
(Hobby), Phoenix and Tucson.
These new facilities are especially
important in the company's program to
develop its unique multi-hub route
system. Most carriers concentrate on
just two or three hubs. Republic uses
eight carefully-selected major cities
across the country as traffic centers.
This permits high-level passenger
service, better equipment utilization,
and convenient single-carrier
transportation between 100 medium
sized cities and most major business
and pleasure destinations.
As traffic increases with economic
recovery, Republic is well prepared to
generate profits in all regions of the
country.
5
Flight simulators provide pilots
with effective, federally-approved
training and also reduce fuel
consumption and instruction costs.
Building the fleet
Three new McDonnell Douglas DC-9
Super 80s were added to Republic's
fleet in 1982. The airline now has six
of the highly-sophisticated, ultra-quiet
jets. Under a revised purchase
agreement with McDonnell Douglas
Corporation, Republic will receive
three Super 80s this year, and five in
1985 and 1986.
These new 145-passenger aircraft are
vital to Republic's future. The twin-
engine jets have proven to be 30
percent more fuel-efficient than earlier
aircraft with similar range and
capacity. The Super 80s have the
flexibility of making one-stop
transcontinental flights or operating in
short-haul markets. They also meet
the most stringent noise standards in
sensitive areas. Equally important,
surveys have shown a high level of
passenger satisfaction.
Republic'^ fleet of 162 jet-powered
aircraft-the seventh-largest in the
world-includes 132 DC-9s, 15 Boeing
727s, and 15 Convair 580s. With the
new Super 80s and improved
scheduling, the airline increased
available seat miles by 10 percent
in 1982.
This spring, a new DC-9-80 flight
simulator is being put into operation at
the company's Flight Crew Training
Center in Atlanta. By utilizing the most
recent advances in computer and
simulation technology, this device will
precisely duplicate the flight and
system characteristics of the aircraft.
Other airlines operating Super 80s
have contracted to purchase training
time on the company's new simulator.
(Only two are available in the United
States.) Republic's Flight Crew
Training Department has four
additional simulators which provide
pilots with effective, federally-
approved training, while significantly
reducing fuel consumption and
instruction costs.
Jet fuel continues to be one of the
airline's largest expenses because
over one million gallons are used
daily. With supplies remaining high
last year, the average price per gallon
dropped to 97.5 cents, a decrease of
six percent. Forecasts for 1983
indicate that this price trend will
continue unless a dramatic shift in oil
production occurs.
During 1982, Republic fully
implemented its new technique to
"power back" aircraft from the loading
gates at 30 airports. The procedure
employs the aircraft's reverse engine
thrust, instead of manpower and
expensive ground equipment, to move
the plane. Several airlines have
purchased the company's technical
documentation for this FAA-approved
method.
Extensive efforts to standardize major
maintenance checks increased
operating reliability. This resulted in
common aircraft components which
produced significant cost savings from
the sale of surplus parts and smaller
inventories at maintenance bases.
Republic mechanics completed
Business Coach modifications on 110
of the company's jets. New seats and
cabin dividers were installed, often in
a single night, and other changes
upgraded cabin appearance. To
increase the operating range of nine
aircraft, supplemental fuel tanks were
added.
Last year, the power plant facility in
Atlanta was developed to handle
engine overhaul for the entire
Republic fleet. Mechanics rebuilt 143
engines, while 66 engine modules
were repaired for assembly elsewhere.
Formerly, some of this work was done
by other firms. Republic is now
seeking contracts for power plant work
to increase the utilization of this
facility. One recent agreement covers
rebuilding up to 40 jet engines for two
South American carriers.
Completion of the large construction
project at the Minneapolis/St. Paul
main operations base has dramatically
expanded work space, permitting
greater productivity. New support shop
facilities are being used to maintain
most aircraft components. Space for
building and ground equipment
maintenance is also included.
The Federal Aviation Administration
issued a systemwide Repair Station
Certificate-Part 145 to Republic in
1982. This enables the company to
handle outside contracts for major
aircraft maintenance at its Phoenix,
Atlanta and Minneapolis/St. Paul
bases, and line repairs at all 16
maintenance bases.
6
Republic presently has over 50
contracts with various airlines and
aircraft operators for maintenance
work at 90 locations. Last year, the
company performed heavy airframe
work and completed FAA certification
of four DC-9s for one customer. A
16-member technical crew is provided
for these aircraft. Also being
maintained are a small fleet of DC-9s
for an airline and seven Boeing 727s
for a cargo carrier.
Other operators depend on Republic
for a wide variety of support service-
including emergency repairs, aircraft
parts and supplies, routine
maintenance, and training. In addition,
the company provides flight crew and
technical training, maintenance
support, and management assistance
to overseas carriers in Asia, Africa and
South America.
In 1983, Republic is making an
aggressive effort to further develop its
extensive contract operations. Besides
producing revenues, this program
makes more efficient use of the
company's maintenance facilities,
inventory, and highly-skilled people.
With superior equipment and
professional personnel, Republic is
continuing to hold down costs, while
improving the quality and performance
of its fleet.
At Republic's expanded power plant facility in Atlanta (right),
mechanics overhaul jet engines for the entire fleet. An
addition to the Main Operations Base in Minneapolis/St. Paul
(below) has dramatically enlarged work space in the hangar
area and support shops.
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7
Building the image
In today's environment, the airlines
are intensely competing for business.
Republic has responded with creative
advertising and innovative promotions.
These marketing programs emphasize
the company's name and logo,
nationwide route system, competitive
fares, and quality service.
Advertising campaigns introduced the
theme "Nobody Serves Our Republic
Like Republic." The first television ads
highlighted the airline's size with
destinations "from sea to shining
sea." The next series illustrated
employee professionalism by using the
actual passengers who had written
complimentary letters. Hollywood stars
Milton Berle, Debbie Reynolds, Doc
Severinson and Carol Channing
helped promote new "Celebrity
Service" to Los Angeles from Detroit
and Minneapolis/St. Paul.
Effective promotions in 1982
established Republic as a marketing
leader in the industry. Consumers
eagerly accepted the "Kids Fly Free"
cereal offer. The Ralston-Purina
Company issued several hundred
thousand certificates permitting a child
to fly free on Republic with a full fare
paying adult.
"Pair Fare," which used two-for-one
pricing, attracted a large number of
discretionary travelers. Nearly two-
thirds of these people said they would
not have flown, or would have chosen
another airline, if the plan had not
been available.
These programs were highly
successful. The company's 21 percent
increase in traffic was well ahead of
the five percent industry average.
Research in key cities showed that
awareness of Republic had improved
dramatically.
The airline and Ralston-Purina are
teamed up again in 1983. Millions of
Chex cereal boxes are announcing
family discounts on a complete
vacation package. This includes
reduced fares for parents and children
traveling together, plus hotel and car
rental savings.
Two ambitious projects-Business
Coach and the Frequent Flyer
program-have been developed to
attract a greater number of regular
business travelers. These services are
being vigorously advertised and
promoted in local newspapers,
national publications and trade
magazines so Republic can gain a
larger share of this important business
market.
Business Coach features pre-boarding,
roomy two-by-two seating in the front
of the aircraft, complimentary
beverages and other amenities. At
several major airports, the company
maintains comfortable "Executive
Suites" where passengers can work,
relax or meet with associates. Writing
space, magazines and beverages are
provided, and the suite is staffed with
an attendant.
Over 100,000 customers participated
in the "Frequent Flyer" program and
were awarded travel bonuses for
selecting Republic on a regular basis.
This year, the airline has introduced
"FASTRAC," its own computerized
mileage-tracking system, to simplify
the procedure. After every 12,000
miles of travel on Republic, members
automatically receive a free round-trip
coach ticket, plus a Business Coach
upgrade. By the end of 1983, more
than 200,000 Frequent Flyers are
expected to be enrolled. To give these
passengers personalized attention, a
Business Travel Service Center has
been established.
The company's Convention Travel
Service has achieved wide-spread
acceptance. Last year, Republic was
named "Official Airline" for nearly 200
events attended by 250,000 people.
Qualifying groups receive cost and
transportation information, air fare
discounts and promotional assistance.
The airline flies to 23 of the top 25
meeting and convention destinations
in the continental United States.
In 1982, Republic was also named the
Official Airline of the Aircraft Owners
and Pilots Association and the Civil Air
Patrol. "A.M. Weather," a popular
PBS television program, was funded in
part by a grant from the company.
Professional communication with the
news media led to positive articles
about Republic in business and trade
publications such as Forbes, The Wall
Street Journal, Air International, and
Air Transport World. A new program,
designed to assist travel writers, has
also helped create awareness of the
airline and the more than 150 cities it
serves. Several government and civic
bodies have publicly acknowledged
the company's assistance in
promoting tourism and business
development.
Steps have been taken to strengthen
relations with the 20,000 U.S. travel
agents who sell two-thirds of all
Republic tickets. The airline continues
to support the basic travel agency
system and seeks to improve agents'
access to flight information. The
company has become a co-host in
four major computerized reservations
and information systems-Apollo,
Sabre, System One and Marsplus.
Over 85 percent of the travel agencies
in the U.S. will be tied to one of these
automated systems by the end of 1983.
Company representatives made
174,000 calls on agencies and key
commercial accounts during 1982.
Retired employees, working as
volunteers, manned special toll-free
telephones to answer questions from
Republic Executive Suites are available to passengers for
relaxing, working or meeting with business associates. These
quiet, comfortable rooms are located in terminals at seven
major cities.
8
travel agents. Pilots, flight attendants,
and station, reservations, and
passenger agents invested their own
time to staff booths at travel fairs and
shopping centers, and assist with
other promotions. Eleven uniformed
flight crew members visited all 535
Congressional offices in Washington.
Nearly 6,000 people received guided
tours of the airline's facilities
throughout the system. Another 10,200
guests attended public functions held
in the company's headquarters.
Internal communications kept
Republic's 14,400 highly-skilled
employees well informed. "Republic
People," the company's newspaper, is
supplemented by a weekly bulletin
entitled "Extra Section." A telephone
call-in system, "Direct Approach,"
provides confidential answers to
inquiries from personnel. ESCORT is
used for immediate transmission of
important news.
Republic's corporate image reflects
the individual efforts of all employees
and the quality service they provide.
Creative marketing programs will
improve national identity and stimulate
further growth in 1983.
Business Coach service features pre-boarding, roomy
seating, complimentary beverages and other amenities at
fares below first class.
The future
Several important developments have
substantially improved Republic's
prospects for the future, and the
airline is implementing strategic plans
to take advantage of them.
One of the most significant events was
the Federal Aviation Administration's
recent announcement that flight
quotas are being eliminated at the 22
major airports across the country. The
air traffic control system should reach
pre-strike capacity by April, and most
operating restrictions should be lifted
this fall.
Republic will concentrate on
strengthening traffic centers, such as
Memphis, Detroit, Minneapolis/St. Paul
and Phoenix, and leave markets which
are not compatible with its current
hub-and-spoke system. Other carriers
are also reorganizing their route
structures, which often reduces
service at some of Republic's key
cities. Such changes will give the
company an opportunity to gain new
traffic in these markets.
Further, Republic and other major
airlines have shown they will not be
undersold by cut-rate carriers. This
should discourage the use of discount
pricing as a marketing tool and cause
new entrants to be more prudent.
Emphasis is returning to quality of
service. Republic plans to dominate
key markets by providing convenient
schedules, excellent inflight attention,
superior on-time performance, and
prompt baggage delivery. Employees
are striving to enhance the reputation
they have earned for caring about the
people they serve.
In the areas of cost control and
productivity, the support of Republic's
personnel has been gratifying. The
cooperation of employee groups, a
company strength for many years, has
allowed Republic to increase flights
and maintain its extensive system
without incurring proportionate
expenses. Additionally, the company
has successfully restructured its
finances so loan payments are more
manageable, operating cash is
available, and several new aircraft can
be purchased. This action is providing
the stability and capacity which are
vital to recovery.
Republic is convinced that people
enjoy air travel, and traffic will
increase when the national economy
improves. The airline has decisively
moved to maximize its strength,
eliminate excess costs, and prepare
for a profitable future.
9
Management's discussion and analysis
RESULTS OF OPERATIONS
1982 Compared with 1981
Republic made considerable progress
in traffic growth, productivity
improvements and operating profit
during 1982. The national recession
and continuing fare wars limited
revenue potential, and high interest
expense offset operating gains.
Revenues reached $1.53 billion,
operating expenses were $1.49 billion,
and the company achieved an
operating profit of $37.2 million.
Nonoperating expenses were $77.1
million, primarily interest of $100.7
million partially offset by $17.7 million
from the sale of tax benefits and $5.9
million of other nonoperating items.
This resulted in a net loss of $39.9
million for 1982.
In 1981, revenues were $1.45 billion,
operating expenses totaled $1.43
billion, and the operating profit was
$16.5 million. Nonoperating expenses
of $62.7 million in 1981 included
interest expense of $108.4 million,
after deducting $28.9 million from
the sale of tax benefits and $13.4
million from disposition of equipment.
The net loss was $46.3 million.
Operating revenues in 1982 rose
$82.3 million, or 5.7 percent,
compared with 1981. Passenger
revenues increased $90.7 million,
freight and mail climbed $8.3 million,
and public service revenues declined
$21.4 million. The higher passenger
revenues were associated with a 21
percent rise in passenger miles. This
would have equaled $280.9 million at
1981's average yield (revenue per
passenger mile). Drastic fare
discounting, which Republic had to
match, was the main factor causing
1982's average yield to decrease to
15.29 cents from 17.37 cents in 1981,
equal to 12 percent or $190.2 million
based on 1982's passenger miles.
Although the industry's traffic was
adversely affected by the national
recession, the company achieved its
growth through increased capacity,
new long-haul routes, and effective
marketing programs. May and June
traffic was affected by a 26-day strike
against another carrier.
Lower public service revenues reflect
the company's withdrawal from
unprofitable cities eligible for subsidy,
and government termination of
payments for service to various other
marginal traffic cities.
Operating expenses in 1982, partially
checked by stringent cost control and
productivity programs, were up $61.5
million, or 4.3 percent, over 1981.
However, operating expense per
available seat mile declined to nine
cents in 1982 from an average of 9.47
cents in 1981. Salaries and benefits
increased $12.6 million, although the
rise was tempered by six-month wage
reductions and freezes for most
employees which affected December
1981 and the first five months of 1982.
Fuel expense rose $3.9 million,
primarily from higher consumption
associated with flying more miles. This
was somewhat offset by conservation
measures, the introduction of more
efficient aircraft, and a six percent
drop in aviation fuel prices.
Travel agency commissions grew
$25.3 million due to higher gross
revenues, larger volume of sales by
agents (66.2 percent in 1982-62.5
percent in 1981), and extra incentives
for special promotional programs. All
other operating expense increases
relate to added capacity and inflation.
Interest expense before capitalized
interest declined $20.1 million, or 16.5
percent, from 1981. A substantial
portion of Republic's debt is tied to
the prime rate, which averaged 14.8
percent in 1982 and 18.8 percent in
1981. This reduction in interest rate
represents $17 million. Net interest
expense for 1982 declined only $7.7
million because interest capitalized on
pre-delivery deposits, for aircraft on
order, was greater in 1981.
Results for the fourth quarter reversed
an earlier improving trend with a net
loss of $27.3 million, compared with a
net loss of $12.5 million for the first
nine months of 1982. During the last
quarter, the industry suffered from a
sharp drop in traffic demand. This
immediately escalated the on-going
fare wars, but these did not boost
sales enough to compensate for lost
revenues. Initially, Republic sought to
maintain fare levels, but as market
share fell, the company was forced to
match all discounts.
1981 Compared with 1980
In accordance with generally accepted
accounting principles, Republic
Airlines financial statements include
the results of Republic Airlines West,
Inc. as a consolidated subsidiary only
since October 1, 1980, the date on
which that company (formerly Hughes
Airwest) was acquired. Comparison of
operating results of 1981 to 1980 is
limited by this acquisition and the
related integration and expansion of
routes, service, facilities, personnel
and schedules.
Republic lost $46.3 million in 1981
and $24.7 million in 1980. By
including Hughes Airwest's operations
for the first nine months of 1980, the
pro forma combined results showed a
net loss of $46.1 million. Even with
operating profits in both years, net
losses were incurred after deducting
interest and other net nonoperating
expenses. Results in 1981 were
favorably affected by the $28.9 million
sale of tax benefits and a $13.4 million
gain on disposition of equipment. In
1980, the gain on disposition of
equipment was $4.1 million.
Operating revenues in 1981 rose
$531.7 million, or 58 percent over
1980, showing the effect of the
acquisition and the use of newly-
10
acquired aircraft. While revenue
passenger miles increased 60 percent
over 1980, yield was off slightly to
17.37 cents in 1981, from 17.52 cents,
because of price competition and a
longer average passenger trip.
Revenues in 1981 were also adversely
affected by the lingering recession and
the operating restrictions imposed by
the Federal Aviation Administration
after the air traffic controllers' strike.
For 1981, operating expenses were up
$528.5 million. Salaries and benefits
gained $187 million, primarily because
of the Hughes Airwest acquisition.
Aircraft fuel expense for 1981 was
$145.5 million more than 1980 due to
rises of 34 percent in consumption
and 16 percent in the average price.
Agency commissions were $39.8
million over 1980, from increased
rates and larger sales volume.
Interest expense reached $108.4
million in 1981, more than double the
$48.3 million of 1980. Aircraft
purchases and the acquisition of
Hughes Airwest caused long-term debt
and capital lease obligations to go to
$756 million in 1981 from $674 million
in 1980, and from $281 million in
1979.Significant
portions of these
obligations bear interest at rates
floating with the prime rate, which
averaged 18.8 percent in 1981 and
15.3 percent in 1980.
Inflation and Changing Prices
For information concerning the effects
of changing prices and inflation on
the company's operations, see
"Supplemental Stockholder Information"
on Pages 22 and 23.
LIQUIDITY & CAPITAL RESOURCES
In November 1982, Republic and
McDonnell Douglas Corporation
revised their contract extending
deliveries of 11 DC-9-80 aircraft
through 1986. Three of these aircraft
were accepted in December 1982,
three more are scheduled to be
delivered in 1983, and the remaining
five in 1985 and 1986. The cost of the
eight DC-9-80s still on order will be
approximately $190 million, excluding
capitalized interest and possible price
escalation.
Continuing commitments for additional
fuel-efficient aircraft are required for
Republic to stay competitive and grow.
The company's acquisition costs for
new jets were $71 million in 1982 and
$140 million in 1981.
The ability of Republic to finance
aircraft purchases depends on many
factors-the company's operations and
financial condition, cost and avail
ability of funds in capital markets,
and the general economy. If third-party
financing cannot be obtained for the
three aircraft due in 1983, McDonnell
Douglas has agreed to lease them to
Republic on a long-term basis.
While sustaining net losses for three
consecutive years, the company's
working capital decreased by $52.6
million in 1981 and $22.7 million in
1980, but increased by $88.4 million in
1982 largely because of Republic's
sale of $75 million in debentures. The
airline has supplemented its working
capital and has conserved cash
primarily by the means listed below.
1. Employees. In September 1981,
most employees participated in a
"stock for pay" plan under which 15
percent of one month's wages, or a
total of $4.3 million was used to
purchase approximately 709,000
shares of the company's common
stock at the then-current market price.
This program was followed by work
force reduction and a temporary 10
percent pay cut and wage freezes for
most personnel, which saved $23
million. In February 1982, a majority of
employees agreed to a one-month pay
deferral which requires Republic to
repay $24 million in August 1983. In
return, the company adopted a profit-
sharing plan under which certain
employees share 50 percent of the
profit over three percent of gross
revenues in any year through
December 31, 1985.
2. Sale of Tax Benefits. Under terms
of the Economic Recovery Tax Act of
1981, Republic received $28.9 million
from the sale of tax benefits from new
aircraft placed in service during 1981.
Of that amount, $18.9 million was
used to retire current maturities of
debt, and $10 million was applied to
the purchase price of two DC-9-80S. In
December 1982, the company
completed a similar transaction worth
$17.7 million, and all proceeds were
used to purchase three DC-9-80S.
3. Pension Payment Deferral. Pursuant
to a waiver granted by the Internal
Revenue Service, the company
deferred a pension funding payment of
$24 million due September 15, 1982.
Payment of the deferred amount plus
interest is being funded over a 15-year
period, commencing in 1983.
4. Disposal of Aircraft. During 1981
and 1980, the airline sold 20 surplus
aircraft and other equipment for $71.6
million, representing a gain of $17.5
million. This money was applied to
debt and used for working capital.
During 1982, the company sold one
aircraft and other property for $17.2
million which primarily reduced debt.
5. Restructuring of Debt and Preferred
Stock Terms. Certain payments
relating to the company's 13 percent
Convertible Subordinated Debentures
and the preferred stock of Republic
Airlines West, Inc. were extended to
reduce obligations during the next four
years. In addition, the repayment
schedule of the Revolving Credit
Agreement with the company's major
banks has been revised. The original
principal payments of $54.5 million
yearly were reduced by $45.5 million
in 1983, $18.5 million in each of 1984
and 1985, and $8.5 million in 1986.
Thereafter, the payments increase
from 1987 to maturity in 1991.
Principal prepayments are required
under certain circumstances.
6. Issuance of Debentures. In
December 1982, Republic issued
10-1/8 percent Convertible Senior
Subordinated Debentures having a
face value of $75 million. The
company received $71 million, after
discounts and commissions.
The sale of these debentures has
given Republic a stronger cash
position. Cash and short-term
investments totaled $125.5 million at
December 31, 1982, compared with
$43.5 million at December 31, 1981.
The 1982 year-end cash position
should be sufficient to meet 1983
obligations and to sustain reasonable
losses during the historically weak
traffic months. After 1983, a break
even operation would provide the
company with adequate long-term
liquidity because depreciation and
amortization virtually equal the
scheduled principal payments of debt
and capital leases.
The company is highly leveraged.
Outstanding debt and obligations
under capital leases totaled $831.4
million at December 31, 1982. On
$439.5 million of this debt, interest
rates float with the prime.
During' 1982, Republic incurred debt of
$45 million in connection with the
purchase of three DC-9-80 aircraft and
$75 million with the 10-1/8 percent
Convertible Senior Subordinated
Debentures. At December 31, 1982,
the company had borrowed $395.5
million, the maximum available, under
its Revolving Credit Agreement which
is secured by liens on most of the
company's owned aircraft, engines,
and ground equipment. The financial
convenants of the Revolving Credit
Agreement include debt-to-equity ratio
and net worth requirements, a cash
and short-term investment minimum,
limitations on capital expenditures and
additional debt, and restrictions on the
payment of common stock dividends.
11
REPUBLIC
Consolidated balance sheets
(in thousands)
ASSETS
December 31
1982 1981
CURRENT ASSETS
Cash $ 34,402
Short-term investments (at cost which approximates market) 91,082
Accounts receivable, less allowances 120,974
Flight equipment parts and supplies 49,369
Prepaid expenses and other 32,813
328,640
$ 43,542
143,718
47,764
28,272
263,296
PROPERTY AND EQUIPMENT-at cost
Flight equipment
Ground property and equipment
Less accumulated depreciation
Advance deposits on equipment
835,338
101,936
937,274
248,606
688,668
19,641
708,309
767,689
96,811
864,500
199,026
665,474
67,490
732,964
PROPERTY AND EQUIPMENT UNDER CAPITAL LEASES
Flight equipment 157,145
Ground property and equipment 12,695
169,840
Less accumulated amortization 32,113
137,727
157,134
12,960
170,094
20,862
149,232
DEFERRED CHARGES AND OTHER ASSETS 11,498 9,075
$1,186,174 $1,154,567
12
AIRLINES, INC.
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
Current obligations under capital leases
Notes payable
Accounts payable
Interline payables and tickets outstanding
Accrued compensation and employee benefits
Accrued interest ..
Accrued pension liability
Other accrued expenses
LONG-TERM OBLIGATIONS
Long-term debt-less current maturities ...
Noncurrent obligations under capital leases
Long-term pension liability and other
COMMITMENTS AND CONTINGENCIES (Notes E and F)
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
STOCKHOLDERS' EQUITY
Common stock-authorized 30,000,000 shares of $.20 par value
Additional paid-in capital
Retained earnings (deficit)
December 31
1982
$ 27,654
6,465
53,903
68,137
76,178
19,620
33,832
21,203
306,992
647,349
149,938
25,957
823,244
28,000
4,413
53,811
(30,286)
27^938
$1,186,174
1981
$ 28,181
5,443
28,100
56,301
84,387
48,156
31,662
25,268
22,591
330,089
565,469
156,965
1,696
724,130
28,000
4,412
53,811
14,125
72,348
$1,154,567
The accompanying notes are an integral part of these statements.
13
Consolidated statements of operations
(in thousands except per share amounts)
Year ended December 31
1982 1981 1980
OPERATING REVENUES
Passenger $1,402,693 $1,311,951 $827,678
Freight and mail 72,914 64,604 50,585
Public service 18,665 40,058 22,354
Non-scheduled service and other 36,396 31,803 16,098
1,530,668 1,448,416 916,715
OPERATING EXPENSES
Salaries and benefits 540,614 528,004 340,981
Aircraft fuel 410,365 406,495 260,946
Maintenance materials and repairs 49,353 57,705 39,637
Food service 33,811 31,252 18,077
Rentals and landing fees 76,188 68,725 41,380
Agency commissions 103,546 78,280 38,435
Depreciation and amortization 68,818 63,728 40,310
Other 210,750 197,771 123,725
1,493,445 1,431,960 903,491
Operating profit 37,223 16,456 13,224
OTHER EXPENSES (INCOME)
Interest expense 102,045 122,181 57,767
Less interest capitalized 1,342 13,819 9,426
100,703 108,362 48,341
Sale of tax benefits (17,752) (28,930) -
Gain on disposition of equipment (2,570) (13,369) (4,112)
Interest income and other-net (3,297) (3,396) (4,403)
77,084 62,667 39,826
Loss before income taxes (39,861) (46,211) (26,602)
INCOME TAXES (CREDIT) 58 (1,940)
NET LOSS $ (39,861) $ (46,269) $ (24,662)
NET LOSS PER COMMON SHARE $(1.99) $(2.30) $(1.19)
The accompanying notes are an integral part of these statements.
14
Consolidated statements of changes in financial position
(in thousands)
SOURCES AND APPLICATIONS OF WORKING CAPITAL
SOURCES
From operations
Net loss
Charges (credits) to operations not using
(providing) working capital
Depreciation and amortization
Deferred income taxes and other
Working capital provided from operations
Net book value of equipment dispositions
Cancellation of advance deposits
Increase in long-term obligations
Restructuring of debt agreements
Deferral of pension payment *
Issuance of redeemable preferred stock of subsidiary ...
Issuance of common stock
Options and warrants exercised
Disposition of treasury stock
Other
APPLICATIONS
Acquisition of Hughes Airwest
Increase in long-term obligations
Property and equipment acquired
Long-term liabilities assumed
Additions to property and equipment
Reduction of long-term obligations
Payment of cash dividends
Acquisition of treasury stock
Other
INCREASE (DECREASE) IN WORKING CAPITAL ...
Working capital (deficit) at beginning of year
Working capital (deficit) at end of year
NET CHANGE IN WORKING CAPITAL ELEMENTS
Cash and short-term investments
Accounts receivable
Flight equipment parts and supplies
Prepaid expenses and other
Current maturities of debt and capital lease obligations
Notes and accounts payable
Interline payables and tickets outstanding
Accrued compensation, interest, pension and other
INCREASE (DECREASE) IN WORKING CAPITAL ...
Year ended December 31
1982
$(39,861)
68,818
1,544
30,501
14,635
39,454
118,983
46,755
24,086
1
1,203
275,618
84,291
90,885
4,550
7,451
187,177
88,441
(66,793)
$ 21,648
$ 81,942
(22,744)
1,605
4,541
(495)
30,498
16,250
(23,156)
$ 88,441
1981
$(46,269)
63,728
(652)
16,807
30,423
144,775
28,000
4,267
1,159
1,670
227,101
195,318
74,598
4,436
5,345
279,697
(52,596)
(14,197)
$(66,793)
$ (6,603)
23,845
4,502
(7,458)
(12,265)
(25,966)
(14,189)
(14,462)
$(52,596)
1980
$(24,662)
40,310
(808)
14,840
23,656
421,475
602
7,207
1,878
469,658
(38,500)
240,542
(141,223)
60,819
202,696
211,929
4,142
6,892
5,838
492,316
(22,658)
8,461
$(14,197)
$ 36,967
35,053
12,491
19,808
(3,140)
(18,252)
(32,280)
(73,305)
$(22,658)
The accompanying notes are an integral part of these statements.
Consolidated statements of changes in stockholders' equity
Years ended December 31,1980,1981 and 1982
(in thousands)
\\\\ UlUUbdllUb)
Common Stock
Shares
Additional
Paid-In
Retained
Earnings
Treasury Stock
Shares
Issued Amount Capital (Deficit) Held Amount
Balance at January 1, 1980 .
20,754 $4,151 $ 48,109 $ 93,634 135 $ 380
Cash dividend on common stock - - -
(4,142) - -
Exercise of stock options and warrants 197 39 563 - - -
Acquisition of treasury stock .
- - -
1,060 6,892
Disposition of treasury stock .
-
(65) -
(1,195) (7,272)
Net loss for 1980
.
- -
(24,662) - -
Balance at December 31, 1980
Cash dividends:
.
20,951 4,190 48,607 64,830 -- ""
Redeemable preferred stock - - -
(2,336) - -
Common stock - - -
(2,100) - -
Issuance of common stock 709 142 4,125 - - -
Exercise of stock options and warrants 401 80 1,079 - - -
Net loss for 1981 .
- -
(46,269) - -
Balance at December 31, 1981 .
22,061 4,412 53,811 14,125 - -
Cash dividends on redeemable preferred stock .. .
- -
(4,550) - -
Issuance of common stock 5 1 - - - -
Net loss for 1982 .
- -
(39,861) - -
Balance at December 31, 1982 .
22,066 $4,413 $ 53,811 $(30,286) -
$
The accompanying notes are an integral part of these statements.
Auditors' Report
Alexander Grant
& COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
MEMBER FIRM
GRANT THORNTON INTERNATIONAL
Stockholders and Board of Directors
Republic Airlines, Inc.
We have examined the consolidated balance sheets of Republic Airlines, Inc. (a Wisconsin corporation)
and its subsidiary as of December 31, 1982 and 1981, and the consolidated statements of operations,
changes in stockholders' equity and changes in financial position for the years ended December 31,1982,
1981 and 1980. Our examinations were made in accordance with generally accepted auditing standards
and accordingly included such tests of the accounting records and such other auditing procedures as
we considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above present fairly the financial position
of Republic Airlines, Inc., and its subsidiary at December 31, 1982 and 1981 and the results of their
operations and changes in their financial position for the years ended December 31,1982, 1981 and 1980
in conformity with generally accepted accounting principles applied on a consistent basis.
16
Minneapolis, Minnesota
February 24, 1983
Notes to financial statements
December 31,1982,1981 and 1980
Note A -
Summary of Significant Accounting Policies
1. Principles of Consolidation: The consolidated financial state
ments include the accounts of Republic Airlines West, Inc., a sub
sidiary. (See Note C for information concerning the acquisition of
Hughes Air Corp. d/b/a Hughes Airwest). All significant intercom
pany transactions have been eliminated.
2. Flight Equipment Parts and Supplies: Spare parts and supplies
are priced at average cost. An allowance for obsolescence
($9,023,000 at December 31, 1982 and $7,155,000 at December
31, 1981) is provided for repairable parts by allocating their cost
over the life of the related aircraft.
3. Prepaid Expenses -
Engine Overhaul: The company reclassi
fies to a current prepaid expense the estimated portion of the
purchase price of flight equipment attributable to its overhaul ex
pected to be consumed within the next twelve months ($21,322,000
at December 31, 1982 and $21,099,000 at December 31, 1981).
Actual overhaul costs are charged to expense as incurred.
4. Capitalized Interest: To properly reflect their total cost, major
additions to flight equipment and ground facilities include capital
ized interest based on the interest rate of the related debt out
standing. The capitalized interest is amortized over the useful lives
of the related assets for both financial reporting and income tax
reporting purposes.
5. Property, Equipment and Depreciation: Owned property and
equipment are stated at cost. Property and equipment acquired
under capital leases are stated at the lower of the present value
of minimum lease payments or fair market value at the inception
of the lease. Depreciation and amortization of property and equip
ment are provided on a straight line basis over estimated useful
lives of 7-20 years for flight equipment and 3-10 years for other
property and equipment.
6. Deferred Charges: Significant costs, such as personnel training
relating to the introduction of new types of aircraft, are deferred
and amortized over periods of up to five years. Expenses incurred
in connection with the issuance of long-term obligations are am
ortized on a straight line basis over the terms of the related obli
gations.
7. Passenger Revenues: Passenger revenue is recognized when
the transportation service is provided. Tickets sold but unused are
included as a current liability.
8. Pension Costs: The company has pension plans covering all
employee groups, and funds its current expense of normal costs.
Prior service costs are amortized over varying periods up to 40
years. Pension funding is determined under the unit credit, aggre
gate frozen liability, and individual entry age normal methods.
9. Income Taxes: The company uses the flow-through method of
accounting for investment tax credit which reduces income tax
expense when the related liability is reduced. Investment credits
not applied currently are offset against deferred income taxes to
the extent they are applicable to previously deferred taxes becom
ing payable in the carry-over periods. The company recognizes
deferred income taxes resulting from differences in financial and
income tax reporting.
Note B -
Sale of Tax Benefits -
The leasing provisions of the
Economic Recovery Tax Act of 1981 allowed the company to en
ter into sale-leaseback transactions for income tax purposes in
volving certain 1981 and 1982 equipment additions. As a result of
these transactions, the company has recognized nonoperating
income (net of related expenses) of $17,752,000 in the fourth
quarter of 1982 and $28,930,000 in the fourth quarter of 1981.
Provisions of these transactions include, among other things, in
demnification of the buyer against loss of the stipulated tax benefit
amount.
Note C -
Acquisition of Hughes Airwest - On October 1, 1980,
the company acquired from Summa Corporation and the Estate
of Howard R. Hughes, Jr. all of the outstanding stock of Hughes
Airwest. The total purchase price for all the stock was $38,500,000,
consisting of $24,000,000 cash and $14,500,000 of the com
pany's 13% convertible subordinated debentures. Hughes Air
west was a regional airline operating primarily in the western por
tions of the United States. The name of the acquired company
was changed to Republic Airlines West, Inc. which operated as a
subsidiary using the name "Republic Airlines." Effective Decem
ber 31, 1982, Republic Airlines West, Inc. adopted a plan of dis
solution whereby all of its assets and liabilities would transfer to
Republic Airlines, Inc.
The fair value of the net assets acquired exceeded the $38,500,000
purchase price by $44,028,000. This amount has been allocated
primarily to flight equipment as a reduction in fair value.
Results of Republic Airlines West, Inc. operations since the ac
quisition date are included in the consolidated statements of op
erations. The following data presents on a pro forma basis the
combined results of operations for the year ended December 31,
1980, as if the acquisition of Hughes Airwest had been effected
on January 1, 1980. Pro forma adjustments have been made to
record interest on the funds borrowed and assumed to acquire
Hughes Airwest, depreciation on the increased values of operat
ing property and equipment, maintenance expense on the direct
expense method rather than the accrual method for Hughes Air
west, and income tax adjustments based on pro forma operations
(in thousands except per share amounts-unaudited):
Operating revenues $1,238,955
Net loss $(46,051)
Net loss per share $(2.22)
Note D -
Long-term Debt - Long-term debt at December 31
consists of the following (in thousands):
1982 1981
Revolving credit agreement (a) $395,455 $404,500
Installment notes (b) 145,540 121,235
Equipment Trust Certificates (c):
due May 1, 1993 33,000 37,500
due July 1,1998 8,303 8,821
Subordinated debentures (d):
6%% paid December 15,1982 -
1,303
13% due November 15, 1993 14,500 14,500
101/e% due December 15, 2007 (net of
unamortized discount of $1,875,000) 73,125 -
Sundry 5,080 5,791
Total long-term debt (e) 675,003 593,650
Less current maturities (f) 27,654 28,181
$647,349 $565,469
17
Notes to financial statements
December 31,1982,1981 and 1980 (continued)
(a)Under
the original terms of the Revolving Credit Agreement,
the balance at December 31, 1982 (the maximum available) was
to be retired in quarterly installments through 1989, with principal
payments totaling $54,545,000 each year through 1988 and final
payments totaling $68,186,000 in 1989. Effective November 1,
1982, the company and the bank participants agreed to a debt
restructuring. Pursuant to this amendment of the Revolving Credit
Agreement, principal payments will begin October 1,1983 with an
installment of $9,000,000, followed by quarterly installments to
taling $36,000,000 annually in 1984 and 1985, $46,000,000 in
1986, $56,000,000 in 1987, $60,000,000 in 1988, 1989, and 1990,
and final payments of $32,455,000 in 1991. The amendment also
contains various provisions that require the company to prepay
indebtedness under the Revolving Credit Agreement if certain
conditions are met. In consideration of the debt restructuring, the
company granted warrants expiring in 1990 to the bank partici
pants to purchase 150,000 shares of the company's common stock
at $8.00 per share. Interest is paid monthly to each participating
bank at 1/2% over the Citibank, N.A. alternative rate or other rate
as negotiated with individual bank participants. Effective rate at
December 31, 1982 was 12%.
(b)Consists
of various installment notes with final maturity dates
from 1986 through 1997 at interest rates ranging from 8% (for
notes guaranteed by the Federal Aviation Administration) to 191/%.
The aggregate installment payments in 1983 will be approxi
mately $33,532,000 including interest.
(c)The
Equipment Trust Certificates due May 1,1993 require semi
annual sinking fund payments of $1,575,000 from 1983 through
1992 and $1,500,000 at maturity plus interest at 9%. The com
pany may make semi-annual optional sinking fund payments be
ginning in May 1983 up to $1,575,000 and may pay off the re
maining balance in full on or after May 1,1988 at a premium.
The Equipment Trust Certificates due July 1, 1998 require semi
annual sinking fund payments of approximately $259,000 plus in
terest at rates ranging from Vfe to 11/2% over the Citibank, N.A.
alternative rate. Effective rate at December 31, 1982 was 12%.
The company may pay off the remaining balance in full at any
time.
(d)On
October 1,1980, the company issued $14,500,000 of 13%
convertible subordinated debentures due November 15,1993 as
partial payment for the acquisition of the stock of Hughes Airwest.
Interest payments are due semi-annually. The debenture holder
may convert the principal to common stock of the company at
$13.42 per share, but has agreed to temporarily suspend the ob
ligation of the company to reserve or deliver shares issuable upon
conversion (1,080,477 shares at December 31, 1982) until such
time as the company, through a vote of its shareholders, increases
its authorized shares of common stock. If sufficient shares are not
authorized or otherwise obtained, the company may be required,
under certain circumstances, to pay cash to the debenture holder
based on the market price of the common stock or to accelerate
sinking fund payments. Prior to November 15, 1993, debentures
are redeemable beginning on November 16, 1985 at a premium.
Under the original terms of the debenture agreement, sinking fund
payments of $1,450,000 were due annually beginning November
15, 1983. In order to revise the sinking fund obligations of the
company on a basis comparable to the debt repayment modifi
cations made under the Revolving Credit Agreement, the deben
ture holder agreed to reduce sinking fund obligations to $240,000
in 1983, $950,000 in each of 1984 and 1985, and $1,220,000 in
1986. Thereafter, the sinking fund obligations increase from
$1,490,000 in 1987 to $1,650,000 in 1993. In consideration of the
restructuring, the company granted warrants expiring in 1990 to
the holder of the debentures to purchase 5,500 shares of the com
pany's common stock at $8.00 per share.
In December 1982, the company issued $75,000,000 of 10 1/a%
convertible senior subordinated debentures due December 15,
2007 at 971/2% of face value. The 101/a% debentures are superior
in right of payment to the company's 13% convertible subordi
nated debentures. Interest payments are due semi-annually and
debenture holders may convert the principal to common stock of
the company at $10.00 per share. Debentures are redeemable by
the company at a premium through December 15, 1992, and at
face value thereafter, except certain conditions must be met if
redemption is to occur prior to December 15, 1984. Sinking fund
payments of $3,750,000 are due annually beginning December
15, 1992, and continuing through December 15, 2006, with the
balance due at maturity.
(e)Substantially
all flight equipment and spare parts owned by
the company are pledged as collateral against the above debt.
Among the original loan covenants in the Revolving Credit Agree
ment are requirements for the maintenance of debt to equity ra
tios, restrictions on dividend payments until certain loan cove
nants are met and limitations on capital expenditures. As a result
of continuing losses in 1981 and 1982, these covenants were
amended to permit the company to remain in compliance. The
revised covenants, which include minimum stockholders' equity
and minimum cash and short-term investment provisions, are ef
fective through the remaining term of the Revolving Credit Agree
ment.
The company is required to maintain average compensating bal
ances ranging from 5% to 10% of the monthly average loan out
standing and is required to pay interest on any compensating bal
ance short-fall at 1/2% over the Citibank, N.A. alternative rate. During
1982 the company was required to maintain average compensat
ing balances (adjusted for float) of $20,982,000. At December 31,
1982, the required compensating balances (adjusted for float) were
approximately $18,455,000.
(f)Current
maturities of all long-term debt due in each of the next
five years following December 31, 1982 are as follows (in thou
sands):
1983 $27,654
1984 57,685
1985 57,715
1986 63,189
1987 70,437
18
Note E -
Leases -
The company has lease commitments for flight
equipment, various airport facilities, its main operating facilities,
its maintenance and training facilities, and other property and
equipment. The lease commitments for airport facilities are based
upon usage and landings and are subject to adjustment depend
ing upon the needs of the airport operating authority and, there
fore, the amounts of the commitments are not determinable.
During 1981, the company took delivery of one DC-9-80 and two
DC-9-30 aircraft under capital lease agreements. The debt obli
gations relating to the capitalization of these leases were
$27,197,000 at December 31, 1982. The aggregate payments in
1983 will be approximately $4,601,000 including interest at rates
ranging from 12%% to 141/2%.
The company also has other capital lease agreements for aircraft
acquired before 1981. The debt obligations relating to the capi
talization of these leases were $119,028,000 at December 31,
1982. The aggregate payments in 1983 will be approximately
$14,908,000 including interest at rates ranging from 81/4/o to 121/2%.
In addition, the company has various types of ground property
and equipment under capital lease agreements. The debt obli
gations relating to the capitalization of these leases were
$10,178,000 at December 31, 1982. The aggregate payments in
1983 will be approximately $2,467,000 including interest at a
weighted average of 131/2%.
At December 31, 1982, future minimum rental payments under
capital leases and noncancellable operating leases with initial or
remaining terms of more than one year are as follows (in thousands):
Operating Capital
Leases Leases
1983 $ 28,152 $ 21,976
1984 26,756 21,735
1985 25,685 21,439
1986 24,358 20,879
1987 21,809 19,035
Thereafter 308,285 192,587
Total minimum lease payments $435,045 297,651
Less amounts representing interest 141,248
Present value of future minimum capital
lease payments $156,403
Note F -
Commitments -
During the fourth quarter of 1982, the
company and McDonnell Douglas Corporation reached agree
ment regarding the company's commitments for eleven DC-9-80
aircraft and the rescheduling of aircraft delivery dates. Under the
amended agreement, the company took delivery of three DC-9-
80 aircraft in December 1982 and has agreed to take delivery of
three DC-9-80 aircraft in 1983 and the remaining five in 1985 and
1986. In addition, pre-delivery deposit notes of $31,812,000 were
cancelled and the related interest on those notes was forgiven for
1982. As a result of the reversal of amounts accrued in prior pe
riods for the above mentioned aircraft commitments, the net loss
in the fourth quarter of 1982 was reduced by $7,263,000 or $.33
per share. The company has also advanced pre-delivery deposits
of $12,266,000 in cash and has capitalized interest of $7,375,000
in connection with the purchase commitments on the remaining
eight DC-9-80 aircraft. A balance of approximately $180,000,000
will be expended prior to and at delivery. These prices may be
increased by standard escalation clauses during the period of
construction through delivery.
In June 1982, the company adopted a Profit Sharing Program (the
"Plan") effective January 1, 1982, for all employees who are em
ployed by the company on each of four eligibility dates, including
the first and last days, during the Plan year. Employees partici
pate, according to a formula, in 50% of the amount, if any, by
which the company's net profits (excluding sale of tax benefits and
gain on disposition of equipment) for any Plan year through De
cember 31, 1985, exceed 3% of the company's gross revenues
for such Plan year. The company has not accrued any liability as
of December 31, 1982, since it incurred a net loss for the year
then ended.
Note G -
Income Taxes -
Income tax expense for the years ended
December 31, is as follows (in thousands):
1982 1981 1980
Current income taxes
Federal
Investment tax credit
$ -
$1,206
567
$
200
State and local
1,773
(110)
200
(60)
1,663 140
Deferred income taxes
Federal
Investment tax credit
-
(2,978)
1,68a
(6,384)
4,929
State and local
-
(1,295)
(310)
(1,455)
(625)
-
(1,605) (2,080)
$ -
$ 58 $(1,940)
Differences between income tax expense and amounts derived
by applying the statutory federal income tax rate of 46% to income
before income taxes are as follows (in thousands):
Income tax expense (credit)
at statutory federal
1982 1981 1980
income tax rates $(18,336) $(21,257) $(12,237)
Investment tax credit -
2,250 5,129
Employee Stock Ownership Plan
State and local taxes net of federal
88 2,346 1,027
income tax benefit -
(420) (685)
Non-taxable permanent differences
Tax effect of net operating loss
5,235 3,099 "
carryforward not recognized ...
12,968 12,731 5,021
Other 45 1,309 (195)
$ $ 58 $ (1,940)
19
Notes to financial statements
December 31,1982,1981 and 1980 (continued)
Deferred income taxes arise from timing differences between fi
nancial and tax reporting. The tax effects of these differences are
as follows (in thousands):
1982 1981 1980
Capitalized interest
Investment tax credit
Training and development
Depreciation
Other
$ -
$(2,372)
-
1,683
(316)
(843)
-
243
$(2,899)
4,929
(685)
(3,794)
369
$ $(1,605) $(2,080)
For Federal income tax reporting purposes, the company and its
subsidiary file separate tax returns. Republic Airlines, Inc. has, as
of December 31, 1982, a net operating loss carryover of approx
imately $116,603,000 available to offset future taxable income.
Approximately $37,216,000 expires in 1995, $29,665,000 in 1996
and $49,722,000 in 1997. Investment tax credits of $38,200,000
are available to offset future income taxes payable and expire as
follows: $10,928,000 in 1994; $17,120,000 in 1995; $6,035,000
in 1996; and $4,117,000 in 1997.
Republic Airlines West, Inc. has, as of December 31,1982, a net
operating loss carryover of approximately $45,957,000 available
to offset future taxable income. Approximately $30,557,000 ex
pires in 1994, $10,492,000 in 1995 and $4,908,000 in 1996. In
vestment tax credits of $7,342,000 are available to offset future
income taxes payable and expire as follows: $937,000 in 1993;
$4,109,000 in 1994; $402,000 in 1995; $1,724,000 in 1996; and
$170,000 in 1997.
For financial reporting purposes, the company and its subsidiary
calculate income taxes on a consolidated basis. On this basis,
there are approximately $65,000,000 of net operating loss car
ryovers available to offset future consolidated taxable income and
consolidated investment tax credit carryovers of approximately
$39,800,000 are available to offset future consolidated tax provi
sions. Any utilization of the pre-aquisition net operating losses or
investment credits of Republic Airlines West, Inc. will be recorded
as adjustments of the purchase transaction.
The Internal Revenue Service has examined and cleared the
company's federal tax returns through December 31, 1976. Fed
eral income tax returns of the company through December 31,
1979 are currently being examined. Several adjustments have
been proposed, mainly dealing with the timing of tax deductions
and provision has been made for adjustments which may result.
Note H -
Retirement Plans -
The company has retirement plans
covering all employee groups. Pension expense for 1982, 1981
and 1980 was $35,865,000, $35,842,000 and $20,424,000, re
spectively. The company makes annual contributions to the plans
equal to the amounts accrued for pension expense. However, in
September 1982, the company received permission from the In
ternal Revenue Service to fund approximately $24,000,000 of the
1981 pension costs over a period of not more than fifteen years,
commencing in September 1983. Changes during 1982 in the ac
tuarial assumptions used in computing pension costs had the ef
fect of reducing the 1982 net loss by approximately $2,980,000 or
$.14 per share. Also in 1982, plan improvements and early retire
ment pension benefits had the effect of increasing the present
value of plan benefits approximately $44,665,000 and increasing
the 1982 net loss approximately $3,705,000 or $.17 per share.
Plan improvements during 1981 had the effect of increasing the
present value of plan benefits approximately $16,253,000 and in
creasing the 1981 net loss approximately $910,000 or $.04 per
share. Changes during 1^80 in the actuarial assumptions used in
computing pension costs had the effect of reducing the 1980 net
loss by approximately $3,864,000 or $.19 per share. The accu
mulated plan benefits and plan net assets for the company's de
fined benefit plans are as follows (in thousands):
January 1
1982 1981
Actuarial present value of
accumulated plan benefits
Vested
Nonvested
$284,865
30,609
$191,580
39,342
$315,474 $230,922
Net assets available for benefits $233,463 $232,057
The weighted average assumed rate of return used in determining
the above acturial present value of accumulated plan benefits was
7V2% for both 1982 and 1981.
Note I -
Net Loss Per Share -
Primary loss per share for 1982,
1981 and 1980 was based on the weighted average number of
common shares outstanding of 22,062,966, 21,385,451 and
20,722,638, respectively. The net loss was increased by preferred
dividend requirements of $3,943,000 in 1982 and $2,942,000 in
1981 prior to computing the per common share amount. Fully
diluted loss per share is not presented because it is anti-dilutive.
Note J -
Redeemable Preferred Stock of Subsidiary - The com
pany's subsidiary, Republic Airlines West, Inc., has authorized
500,000 shares of $100 par value Cumulative Preferred Stock. In
February 1981, the subsidiary issued 280,000 shares in a private
placement with McDonnell Douglas Corporation in connection with
related aircraft acquisition and financing transactions. Principal
terms of the cumulative preferred stock include:
20
Dividends: Annual cumulative dividends are payable quarterly at
an annual rate of $13.00 per share through April 1985, $16.00 per
share from May 1985 to January 1990, $18.00 per share from
February 1990 to January 1993, and $20.00 per share thereafter.
Optional Call: Callable at any time, at $100 per share plus all
unpaid dividends.
Preference: Upon liquidation $100 per share plus unpaid divi
dends before any distribution to the parent company.
Sinking Fund Redemption: Quarterly redemption of 21/2% of the
outstanding shares at a price of $100 per share plus dividends
unpaid to the redemption date, begins on April 30, 1987, and is
calculated to retire all preferred shares by April 30,1997.
Mandatory Purchase: In case of default, including failure to pay
dividends, the shareholder can require the parent company to
purchase all or any portion outstanding at $100 per share plus all
unpaid dividends. In addition, under the original terms of the
agreement, the shareholder could require the parent company to
purchase 17,500 shares quarterly beginning May 1983. However,
the shareholder agreed on November 29,1982 to limit the parent
company's purchase obligation to 9,000 shares in 1983, 46,200
shares in each of 1984 and 1985, 59,000 shares in 1986, 72,000
shares in 1987 and 47,600 shares in 1988.
Supplemental stockholder information
STOCKHOLDER'S DISCLOSURE OF OWNERSHIP
The Civil Aeronautics Board requires that any person who owns
as of December 31 of any year or who subsequently acquires
ownership, either beneficially or as trustee, of more than 5%, in
the aggregate, of the company's common stock shall file with the
Board, within the time limits prescribed, a report containing the
information required by Section 245.13 of Economic Regulations
of the Civil Aeronautics Board, unless such person has previously
filed such a report. Any stockholder who believes that he or she
may be required to file such a report may obtain further informa
tion by writing to the Director, Bureau of Pricing and Domestic
Aviation, Civil Aeronautics Board, Washington, D.C. 20428.
FORM 10-K REPORT
For the Form 10-K report to the Securities and Exchange Com
mission, write to Mr. A. L. Maxson, Senior Vice President-Finance,
Republic Airlines, Inc., 7500 Airline Drive, Minneapolis, MN 55450.
LABOR AGREEMENTS
Among the agreements the airline has with six labor unions, one
is currently under negotiation, three are amendable in 1983, and
two are amendable in 1984. The company expects to reach
equitable agreements with these unions.
COMMON STOCK INFORMATION
The following tabulation sets forth the price range for the compa
ny's common stock which is traded on the New York Stock Ex
change and the Midwest Stock Exchange.
1982 1981
High Low High Low
1st Quarter $4% $2% $ 8Va $5%
2nd Quarter 43A 31/s 115/s 75/e
3rd Quarter 61/2 4% 95/8 51/e
4th Quarter 91/2 45/s 51/2 3%
The company paid no cash dividends on common stock in 1982
and paid cash dividends on common stock of $. 10 per share to its
stockholders during the first quarter of 1981. The terms of the
Revolving Credit Agreement dated October 1,1980, as presently
amended, restrict payment of dividends on or the repurchase of
common stock until certain financial loan covenants are met. At
February 28, 1983, the company had 35,442 holders of common
stock.
QUARTERLY SUMMARIES OF OPERATIONS
(unaudited-in thousands except per share amounts)
1982
Three Months Ended
December 31 September 30 June 30
Operating Revenues $348,579 $397,172 $412,193
Operating Expenses 378,860 378,970 367,945
Operating Profit (Loss) (30,281) 18,202 44,248
Net Earnings (Loss)
Net Earnings (Loss) Per Common Share
(27,324) (5,824) 15,839
Primary (1.29) (.31) .68
Fully Diluted (1.29) (.31) .67
1981
Three Months Ended
March 31 December31 September 30 June 30 March 31
$372,724 $355,156 $368,224 $373,936 $351,100
367,670 363,191 365,526 357,171 346,072
5,054 (8,035) 2,698 16,765 5,028
(22,552) (7,759) (18,445) (4,879) (15,186)
(1.06) (.39) (.90) (.27) (.73)
(1.06) (39) (.90) (.27) (.73)
21
Supplemental stockholder information
(continued)
EFFECTS OF CHANGING PRICES (unaudited)
Basis of preparation of 1982 supplemental data
As required by Financial Accounting Standards Board (FASB)
Statement No. 33, "Financial Reporting and Changing Prices,"
the company has provided supplemental information concerning
the effects of changing prices on its financial statements. The
disclosures are intended to address two different aspects of an
inflationary environment: (1) the effect of a rise in the general
price level on the exchange value or purchasing power of the
dollar (called "general inflation") and (2) the specific price changes
in the individual resources used by the company.
The supplemental information on changing prices does not reflect
a comprehensive application of either type of inflation accounting.
During the experimental period, the FASB decided to focus on
those items most affected by changing prices, that is: (1) the ef
fect of both general inflation and specific price changes on inven
tories and property and equipment and the related impact on
earnings or loss, and (2) the effect of general inflation on mone
tary assets and liabilities.
Loss from operations
The net loss as reported in the primary statements represents
the amount reported on the historical cost basis of accounting.
Net loss adjusted for general inflation represents the historical
amounts of revenues and expenses stated in dollars of the same
(constant) general purchasing power, as measured by the av
erage level of the Consumer Price Index (CPI) for 1982. Under
this measurement method, historical amounts of depreciation
expense, gain on equipment dispositions, and spare parts in
ventory are adjusted to reflect the change in the level of the CPI
since the date the properties were acquired.
Current cost accounting attempts to deal with a different issue
than earnings or loss adjusted for general inflation. The specific
prices of the company's goods and services have risen at a
different rate than the general inflation rate as measured by the
CPI. The net loss adjusted for changes in specific prices (current
cost) measures spare parts inventory, property and equipment,
and gain from disposition of equipment at current cost (rather
than historical cost) at the balance sheet date.
Income taxes
Present tax laws do not allow deductions for higher depreciation
adjustments for the effects of inflation. Thus, taxes are levied on
the company at rates which, in real terms, exceed established
statutory rates. During periods of persistent inflation and rapidly
increasing prices, such a tax policy effectively results in a tax on
shareholders' investment in the company.
Purchasing power gain from holding net monetary
liabilities during the year
When prices are increasing, the holding of monetary assets (e.g.,
cash and receivables) results in a loss of general purchasing
power. Similarly, liabilities are associated with a gain of general
purchasing power because the amount of money required to
settle the liabilities represents dollars of diminished purchasing
power. The net gain in purchasing power is shown separately in
the accompanying supplemental data. The amount has been
calculated based on the company's average net monetary lia
bilities for the year multiplied by the change in the CPI for the
year. Such amount does not represent funds available for distri
bution to shareholders.
Current cost measurements
Current cost calculations involve a substantial number of judg
ments as well as use of various estimating techniques that have
been employed to limit the cost of accumulating the data. The
data reported should not be thought of as precise measurements
of the assets and expenses involved, but instead represent rea
sonable approximations of the price changes that have occurred
in the business environment in which the company operates.
Current cost asset amounts were derived principally through a
reference guide to current selling prices supplied by the Air Trans
port Association. Current cost depreciation is based on the av
erage current cost of property and equipment during the year.
Depreciation expense was computed by applying the ratio of
historical depreciation expense to average historical asset cost
to the average current cost of these assets. The result should
be approximately the same as would be calculated using the
depreciation methods used in preparing the primary financial
statements.
Current cost does not purport to represent the amount at which
the assets could be sold.
Increases in current cost adjusted for general inflation
Under current cost accounting, increases in specific prices (cur
rent cost) of spare parts inventory and property and equipment
held during the year are not included in the loss from operations
but are presented separately. The current cost increase is re
duced by the effect of general inflation measured by applying the
annual rate of change in the CPI to the average current cost
balance of spare parts inventory and property and equipment.
Five-year comparison of selected financial data
As described above, the determination of net assets reflects a
partial application of the two inflation accounting methods. Other
assets, consisting primarily of deferred charges, have not been
adjusted for general inflation, nor specific price changes. In ad
dition, noncurrent payables have not been converted to reflect
specific price changes (i.e., changes in interest rates).
22
CONSOLIDATED STATEMENT OF OPERATIONS
-ADJUSTED FOR CHANGING PRICES
Year ended December 31,1982 (in thousands-unaudited)
As Reported Adjusted for Adjusted for Changes
in the General in Specific Prices
Primary Statements Inflation (Current Cost)
Total operating revenues
Depreciation and amortization expense
Other operating expenses
Other expenses-net
Gain on disposition of equipment
Loss from operations
Gain from decline in purchasing power of net amounts owed
Increase in specific prices (current cost) of inventory and property and
equipment held during the year*
Effect of increase of general price level
Excess of increase in specific prices over increase in the general price level ...
$1,530,668 $1,530,668 $1,530,668
68,818 100,953 143,274
1,424,627 1,427,097 1,427,097
79,654 79,654 79,654
(2,570) (934) (1,679)
1,570,529 1,606,770 1,648,346
$ (39,861) $ (76,102) $ (117,678)
$ 33,380 $ 33,380
$ 347,476
280,535
$ 66,941
*At December 31,1982, current cost of inventory was $56,746,000, and the
current cost of property and equipment, net of accumulated depreciation and
amortization, was $1,888,810,000.
FIVE-YEAR COMPARISON OF SELECTED SUPPLEMENTARY FINANCIAL DATA
-ADJUSTED FOR EFFECTS OF CHANGING PRICES
(In average 1982 constant dollars, in thousands except per share and price index amounts-unaudited)
Total operating revenues-at historical costs
Total operating revenues-in average 1982 dollars
Historical cost information-adjusted for general inflation
Net loss from operations
Net loss from operations per common share
Equity in net assets at year-end
Current cost information
Net loss from operations
Net loss from operations per common share
Excess of increase in specific prices over increase in the general price level ..
Equity in net assets at year-end
Gain from decline in purchasing power of net amounts owed
Cash dividends declared per common share-historical
Cash dividends declared per common share-in average 1982 dollars
Market price per common share at year-end-historical
Market price per common share at year-end-in average 1982 dollars
Average consumer price index
NOTE: Certain data for 1978 has been omitted as permitted by FASB No. 33.
Year Ended December 31
1982 1981 1980 1979 1978
$1 ,530,668 $1 ,448,416 $ 916,715 $609,230 $487,565
$1 ,530,668 $1 ,537,214 $1 ,073,834 $810,158 $721,367
$ (76,102) $ (73,073) $ (47,463) $ (228)
$ (3.63) $ (3.57) $ (2.29) $ (.01) -
$ 340,621 $ 353,398 $ 299,328 $279,560
$ (117,678) $ (110,365) '$ (61,788) $ (8,166) _
$ (5.51) $ (5.31) $ (2.98) $ (.40) -
$ 66,941 $ 133,010 $ 96,490 $ 24,230 -
$1 ,135,704 $ 917,583 $ 759,832 $417,613 -
$ 33,380 $ 72,789 $ 65,703 $ 44,496 -
_
$ .10 $ .20 $ .20 $ .16
-
$ .11 $ .23 $ .27 $ .24
$ 7.88 $ 4.13 $ 6.00 $ 6.00 $ 7.13
$ 7.79 $ 4.24 $ 6.71 $ 7.55 $ 10.16
289.1 272.4 246.8 217.4 195.4
23
Five-year summary
OPERATIONS (in thousands, except per share)
Operating Revenues
1982 1981 1980* 1979 1978
$1,530,668 $1,448,416 $916,715 $609,230 $487,565
Operating Expenses 1,493,445 1,431,960 903,491 581,177 444,756
Operating Profit 37,223 16,456 13,224 28,053 42,809
Net Earnings (Loss) (39,861) (46,269) (24,662) 13,061 24,571
Net Earnings (Loss) Per Common Share-Primary . . .
(1.99) (2.30) (1.19) .70 1.42
Fully Diluted ...
(1.99) (2.30) (1.19) .68 1.31
OTHER FINANCIAL DATA (in thousands, except per share)
Current assets $ 328,640 $ 263,296 $ 249,010 $144,691 $107,764
Property and equipment--net 846,036 882,196 778,375 399,632 314,054
Total assets 1,186,174 1,154,567 1,036,226 549,381 428,424
Total long-term debt and capital lease obligations .. .
797,287 722,434 652,257 263,035 196,637
Redeemable preferred stock of subsidiary 28,000 28,000 - - -
Cash dividends per share of common stock -
.10 .20 .20 .16
TRAFFIC STATISTICS
Passengers 18,075,000 16,841,000 13,220,000 12,156,000 11,143,000
Passenger miles (000) 9,231,000 7,641,000 4,760,000 3,847,000 3,364,000
Available seat miles (000) 16,585,000 15,119,000 10,185,000 7,479,000 6,010,000
Passenger load factor 55.7% 50.5% 46.7% 51.4% 56.0%
Cargo ton miles (000) 65,000 51,000 37,000 32,000 28,000
* From October 1, 1980, operations include Republic Airlines
West, Inc., a consolidated subsidiary acquired on that date.
PASSENGERS
(MILLIONS)
PASSENGER MILES
(BILLIONS)
SEAT MILES
(BILLIONS)
CARGO TON MILES
(MILLIONS)
24
Board of Directors
Hal N. Carr *
Chairman of the Board
Republic Airlines
Cecil A. Beasley, Jr.
Partner-Ballard and Beasley
(attorneys)
Eric Bramley t
Retired Editor
Aviation Daily
(aviation industry news service)
G. F. DeCoursin *
Chairman of the Board
April Graphics
(commercial graphic arts)
Frank W. Hulse *
Vice Chairman of the Board
Republic Airlines
Alton F. Irby, Jr.
Chairman Emeritus
Fred S. James & Co. of Georgia
(insurance)
G. Gunby Jordan
Retired Chairman of the Board
The Jordan Company
(construction)
John M. Lawrence III
Partner-Lawrence, Thornton,
Payne, Watson & Kling (attorneys)
William R. Lummis
Chairman of the Board
Summa Corporation
(real estate investments, aviation,
hotels and recreation)
Daniel F. May *
President
Republic Airlines
Morton B. Phillips
Chairman of the Board
Westland Capital Corporation
(business investments)
G. Frank Purvis, Jr. t
Chairman of the Board
Pan American Life Insurance Co.
William E. Rankin
President
Summa Corporation
(real estate investments, aviation,
hotels and recreation)
Joseph E. Rapkin
Partner-Foley & Lardner
(attorneys)
Officers
Hal N. Carr
Chairman of the Board
Frank W. Hulse
Vice Chairman of the Board
Bernard Sweet
Vice Chairman of the Board
Daniel F. May
President and
Chief Executive Officer
Edwin N. Altman
Senior Vice President-
Operations
Dorman W. Atwood
Senior Vice President-
Maintenance and Engineering
Kenneth L. Hubertus
Senior Vice President-Customer
Service
George J. Karnas
Senior Vice President-Inflight
Service
A. L. Maxson
Senior Vice President-Finance
David E. Moran
Senior Vice President-Marketing
G. F. Wallis
Senior Vice President-Flight
Operations
John F. Bordi
Vice President-Computer
and Communications Service
J. Kenneth Courtenay
Vice President-Regulatory
and Community Affairs
Edward A. Dingivan
Vice President-Federal Affairs
John P. Dow
Vice President-Corporate Affairs
and Secretary
William G. Drechsler
Vice President-Maintenance and
Engineering
Joseph W. Ettel
Vice President-Industrial Relations
Gramer D. Foster
Vice President-Flying
Earl D. Jackson
Vice President-Maintenance and
Technical Service
Henry M. Ross t
President
Ross Industries
(machinery manufacturer)
Bernard Sweet *
Vice Chairman of the Board
Republic Airlines
Richard A. Trippeer, Jr.
President
Union Planters National Bank
of Memphis
Wm. Bew White, Jr. *
Partner-Bradley, Arant,
Rose & White (attorneys)
Kenneth B. Willett *
Chairman of the Board
First Financial Savings and
Loan Association
Frank M. Young III
Partner-North Flaskell Slaughter
Young & Lewis (attorneys)
* Executive Committee
t Audit Committee
W. Howard Mackinnon
Vice President and Treasurer
Michael D. Meyer
Vice President and Controller
William E. Oakes
Vice President-Marketing
Robert G. Rubens
Staff Vice President
Charlotte G. Westberg
Staff Vice-President
Robert P. Johnson
Assistant Vice President-Flight
Operations
John E. Manger
Assistant Vice President-
Long-Range Planning
Walter E. Nielsen
Assistant Treasurer
Gloria B. Olsen
Assistant Secretary
Raymond J. Rasenberger
Assistant Secretary
Ralph Strangis
Assistant Secretary
REPUBLIC AIRLINES. INC.
MINNEAPOLIS. MINNESOTA 5S4SO