Airtran 1999 Annual Report Download - page 23

increased service levels, offset by a 21.7% decrease in price per gallon in 1998
from 69.0 cents per gallon to 54.0 cents per gallon. Maintenance costs increased
21.7% due to additional check lines and engine overhauls principally resulting from
an increase in the number of operating aircraft from 44 at December 31, 1997,
to 50 at December 31, 1998. Commissions expense increased 246.1% largely
due to the increase in passenger volume and the increase of travel agency bookings
through the Airline Reporting Corporation (“ARC”), which we joined in September
1997. Landing fees and other rents increased 28.2%, from $18.2 million in 1997
to $23.4 million in 1998, due to a 72% increase in number of departures. Marketing
and advertising increased 13.6% from $13.3 million in 1997 to $15.1 million in
1998. However, as a percentage of revenue, marketing and advertising decreased
2.9 percentage points from 6.3% in 1997 to 3.4% in 1998, which is more in line
with industry standards. Aircraft rent increased from $0.9 million in 1997 to
$7.2 million in 1998 due to a full year of B737 rent expense versus only six weeks
of aircraft rent expense recognized after the acquisition of Airways Corporation in
November 1997. Depreciation expense remained flat year over year. Additional capital
spending increased depreciation expense by $12 million offset by a $12 million
reduction due to revising the salvage values on our DC-9 equipment. See Note 1 to
the consolidated financial statements. Other operating expenses increased 37.3%,
or $18.0 million, in 1998 as compared to 1997, primarily as a result of increases
in passenger and aircraft servicing expenses.
In the fourth quarter of 1998, we decided to accelerate the retirement of four owned
Boeing B737 aircraft as a result of the elimination of their original route system
and continued operating losses upon their redeployment to other routes. The B737s
are intended to be replaced with B717 aircraft. In connection with our decision to
accelerate the retirement of these aircraft, which were acquired in the acquisition
of Airways Corporation, we per formed an evaluation to determine, in accordance
with SFAS No. 121, whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these aircraft
would be less than the aggregate carrying amount of these aircraft and related
assets and an allocation of cost in excess of net assets acquired resulting from
the acquisition of Airways Corporation. SFAS No. 121 requires that when a group of
assets being tested for impairment was acquired as part of a business combination
that was accounted for using the purchase method of accounting, any cost in excess
of net assets acquired that arose as part of the transaction must be included as part
of the asset grouping. As a result of the evaluation, we determined that the estimated
future cash flows expected to be generated by these aircraft would be less than their
carrying amount and allocated cost in excess of net assets acquired, and therefore
these aircraft are impaired as defined by SFAS No. 121. Consequently, the original
cost bases of these assets were reduced to reflect the fair market value at the date
the decision was made, resulting in a $27.5 million impairment loss. We considered
recent transactions and market trends involving similar aircraft in determining the
fair market value. See Note 10 to the consolidated financial statements.
During 1997, we incurred $30.1 million of costs attributable to rebranding the airline
and shutdown and other nonrecurring costs attributable to the continued effects of
the reduced schedule after the 1996 suspension of operations. No such costs were
incurred during 1998.