HARBOR DIVERSIFIED, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related condensed notes included in this Quarterly Report, and with the audited consolidated financial statements, accompanying notes, and the other financial information included within the Annual Report on Form 10-K for the year endedDecember 31, 2020 (our "2020 Annual Report"). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Quarterly Report, particularly in the sections entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." OverviewHarbor Diversified, Inc. ("Harbor") is a non-operating holding company that is the parent of a consolidated group of subsidiaries, includingAWAC Aviation, Inc. ("AWAC"), which is the sole member ofAir Wisconsin Airlines LLC ("Air Wisconsin"), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1)Lotus Aviation Leasing, LLC , which leases flight equipment toAir Wisconsin , (2)Air Wisconsin Funding LLC , which provides flight equipment financing toAir Wisconsin , and (3)Harbor Therapeutics, Inc. , which is a non-operating entity with no material assets. Because Harbor consolidatesAir Wisconsin for financial statement purposes, disclosures relating to activities ofAir Wisconsin also apply to Harbor, unless otherwise noted. When appropriate,Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as "we," "us," or "our." Where reference is intended to refer only to Harbor, it is referred to as the "Company." For the three and six months endedJune 30, 2021 ,Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the "United capacity purchase agreement") with its sole major airline partner,United Airlines, Inc. ("United"), with a significant presence at both Chicago O'Hare andWashington -Dulles, two of United's key domestic hubs. All ofAir Wisconsin's flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenues for the three and six months endedJune 30, 2021 andJune 30, 2020 , was derived from operations associated with the United capacity purchase agreement. Subject to certain limited exceptions, the United capacity purchase agreement providesAir Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United toAir Wisconsin based on scheduling benchmarks. The United capacity purchase agreement has the effect of protectingAir Wisconsin , to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement,Air Wisconsin uses United's logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United providesAir Wisconsin with ground support services and gate access. InOctober 2020 ,Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, settled certain disputes that had existed between United andAir Wisconsin over amounts owed toAir Wisconsin under the United capacity purchase agreement. InApril 2021 ,Air Wisconsin entered into a second amendment to the United capacity purchase agreement which addressed the scheduling of block hours permitted in the event United does not elect to exercise its extension rights within the agreement. 20 -------------------------------------------------------------------------------- Table of Contents Impact of the COVID-19 Pandemic on Our Business and Industry As of the date of this filing, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in whichAir Wisconsin operates. The extent to which the COVID-19 pandemic will impact our industry, business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the COVID-19 pandemic, the development of new variants of the COVID-19 virus that may be more contagious or virulent than prior versions, the scope of mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs. Focus on Safety for Employees and Passengers The safety and well-being of our employees and passengers are our priority. Throughout the COVID-19 pandemic,Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by theCenters for Disease Control and Prevention , including working with United to:
• enhance
• provide gloves, masks, and other personal protective equipment for crew
members;
• provide options to Air Wisconsin's employees who are diagnosed with
COVID-19,
including pay protection and extended leave options;
• implement workforce social distancing, mask requirements and other
protection measures, and enhanced cleaning of our facilities;
• add work from home flexibility for administrative employees; and
• provide regular, ongoing communication regarding impacts of the
COVID-19
pandemic, including health and safety protocols and procedures.
Reduction in Demand for Air Travel
Public concerns about the COVID-19 virus, as well as the various governmental
guidelines and restrictions adopted to limit the spread of the virus, have had a
material adverse impact on passenger demand for air travel since the beginning
of the pandemic. While passenger demand for air travel has increased in recent
months as a result of the easing of certain of these guidelines and
restrictions, as well as expanded availability and adoption of vaccines. United
has stated that it expects demand will remain suppressed in 2021. As an example,
United's scheduled capacity for the three months ended June 30, 2021 was
approximately 45% lower than its scheduled capacity for the three months ended
June 30, 2019 .
Air Wisconsin's monthly departures and scheduled block hours have been gradually
increasing on an absolute basis since June 2020 , and the preliminary schedules
received from United show that Air Wisconsin's monthly departures and scheduled
block hours may continue to increase through the fourth quarter. However, these
preliminary schedules are likely to be revised and there can be no assurance
that this trend will continue.
Notwithstanding the significant negative impact to our business and the airline
industry, Air Wisconsin's receipt of governmental assistance under the SBA Loan
and the Payroll Support Program, has mitigated to some extent the adverse
impacts of the
COVID-19
pandemic.
Impact on Competitive Environment
Worldwide, several regional and larger carriers have ceased operations as a
direct or indirect result of the
COVID-19
pandemic. As of the date of this filing, ExpressJet Airlines, Inc. , Miami Air
International , Trans States Airlines , and Compass Airlines , each of which are
domestic, regional, or charter airlines, have either filed for Chapter 11 or
Chapter 7 bankruptcy or ceased operations. The impact of these and other changes
to the competitive environment on our business and industry is highly uncertain.
Expense Management
We have taken a number of actions in response to the financial uncertainty
resulting from the
COVID-19
pandemic. Beginning at the onset of the pandemic, we implemented cost-reduction
initiatives to mitigate the impact on our operations and financial condition,
while also protecting the safety of our customers and employees. Air Wisconsin
reduced certain planned capital and operating expenditures through actions it
took such as delaying
non-essential
planned heavy airframe maintenance events, delaying
non-essential
maintenance events associated with engines and rotable parts, seeking cost
concessions from third-party suppliers, offering voluntary short-term unpaid
leave to employees, and deferring the payment of the employer's portion of
employees' social security tax payments. Air Wisconsin has been able to
responsibly delay certain
non-essential
maintenance events primarily as a result of its reduced flight schedules. Air
Wisconsin has also reduced its labor costs as a result of voluntary departures
by certain employees and the decisions of certain furloughed employees not to
accept Air Wisconsin's recall offers. While these initiatives reduced the
Company's expenses during the three months ended June 30, 2021 , the Company
expects its expenses to increase in future periods as the number of block hours
and departures increase under the United capacity purchase agreement.
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Paycheck Protection Program
In April 2020 , Air Wisconsin received a $10.0 million loan ("SBA Loan") under
the small business Paycheck Protection Program ("PPP") established under the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and
administered by the Small Business Administration ("SBA"). The loan is
forgivable subject to certain limitations, including that the loan proceeds be
used to retain workers and for payroll, mortgage payments, leave payments, and
utility payments. Air Wisconsin has applied for loan forgiveness, but as of the
date of this filing its application is still pending.
For additional information, refer to Note 8,
Commitments and Contingencies
in our unaudited consolidated financial statements included in this Quarterly
Report.
Payroll Support Program
In April 2020 , Air Wisconsin entered into a Payroll Support Program Agreement
("PSP-1
Agreement") with respect to payroll support ("Treasury Payroll Support") from
the U.S. Department of the Treasury ("Treasury") under the payroll support
program ("Payroll Support Program") provided by the CARES Act. Pursuant to the
Payroll Support Program, Air Wisconsin received approximately $42.2 million in
the year ended December 31, 2020 . The Treasury commenced a routine audit of Air
Wisconsin's compliance with the terms of the agreement.
In December 2020 , the federal Consolidated Appropriations Act of 2021 ("PSP
Extension Law") was adopted, which provides for additional payroll support to
eligible air carriers. In March 2021 , pursuant to the PSP Extension Law, Air
Wisconsin entered into a Payroll Support Program Extension Agreement with the
Treasury (the
"PSP-2
Agreement"), which is substantially similar to the
PSP-1
Agreement. Air Wisconsin received approximately $32.9 million pursuant to the
PSP-2
Agreement.
In March 2021 , the federal American Rescue Plan Act of 2021 ("American Rescue
Plan") was adopted, which provides further payroll support to eligible air
carriers. In June 2021 , pursuant to the American Rescue Plan, the Treasury
entered into a Payroll Support Program 3 Agreement with Air Wisconsin (the
"PSP-3
Agreement" and, together with the
PSP-1
Agreement and the
PSP-2
Agreement, the "PSP Agreements"), which is substantially similar to the
PSP-1
Agreement and the
PSP-2
Agreement. Air Wisconsin received approximately $33.3 million pursuant to the
PSP-3
Agreement.
The PSP Agreements contain various covenants, including that (i) the payroll
support proceeds must be used exclusively for the payment of wages, salaries,
and benefits, (ii) Air Wisconsin cannot involuntarily terminate or furlough any
employee or reduce any employee's pay rates or benefits without that employee's
consent, in any case prior to certain dates, (iii) Air Wisconsin cannot pay
total compensation to certain employees in excess of certain total compensation
caps, (iv) Air Wisconsin cannot pay dividends or make other capital
distributions prior to certain dates, and (v) neither Air Wisconsin nor any of
its affiliates can purchase an equity security of Air Wisconsin , or any direct
or indirect parent company of Air Wisconsin , that is listed on a national
securities exchange prior to certain dates. If Air Wisconsin fails to comply
with its obligations under these agreements, it may be required to repay some or
all of the funds provided to it under these agreements. Any such default,
acceleration, insolvency or failure to comply would likely have a material
adverse effect on our business. In addition, the PSP Agreements authorize the
Secretary of the Department of Transportation to impose certain air service
obligations on recipients of payroll support until March 1, 2022 . To date, no
such service obligation has been imposed on Air Wisconsin .
For additional information, refer to Note 8,
Commitments and Contingencies
in our unaudited consolidated financial statements included in this Quarterly
Report.
Exploring Business Opportunities
In July 2021 , Air Wisconsin entered into a lease for a
CRJ-200
aircraft in freighter configuration that is estimated to be delivered in the
three months ending September 30, 2021 . Air Wisconsin has also added the
CRJ-700,
and is in the process of adding the
CRJ-900,
to its FAA Operations Specifications. Although, Air Wisconsin does not currently
have a customer for the freighter or any
CRJ-700
or
CRJ-900
aircraft, it is adding these additional aircraft capabilities to its fleet in an
attempt to position itself to explore and take advantage of other business
opportunities that may arise.
Other Economic Conditions, Challenges and Risks Impacting Financial Results
See the section entitled "
Management's Discussion and Analysis of Financial Condition and Results of
Operations
" within our 2020 Annual Report for a discussion of the general and specific
factors and trends affecting our business and results of operations.
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Results of Operations
Comparison of the Three Months Ended June 30, 2021 and the Three Months Ended
June 30, 2020
The following table sets forth our major operational statistics and the
associated percentage changes for the periods identified below.
Three Months Ended
June 30,
2021 2020 Change
Operating Data:
Available Seat Miles (ASMs) (in thousands) 273,948 78,258 195,690 250.1 %
Actual Block Hours 24,393 6,324 18,069 285.7 %
Actual Departures 17,736 4,709 13,027 276.6 %
Revenue Passenger Miles (RPMs) (in
thousands) 224,175 20,182 203,993 1,010.8 %
Average Stage Length (in miles) 316 343 (27 ) (7.9 )%
Contract Revenue Per Available Seat Mile
(CRASM) (in cents) 19.29 ¢ 21.40 ¢ (2.11 )¢ (9.9 )%
Passengers 699,987 57,192 642,795 1,123.9 %
The increase in ASMs, block hours, departures, and RPMs during the three months
ended June 30, 2021 , compared to the three months ended June 30, 2020 , was
primarily due to the increase in demand for air travel related to the recovery
from the
COVID-19
pandemic.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar
and percentage changes for the dates presented:
Three Months Ended
June 30,
2021 2020 Change
Operating Revenues ($ in thousands): Contract Revenues$ 52,845 $ 16,753 $ 36,092 215.4 % Contract Services and Other 15 22 (7 ) (31.8 )% Total Operating Revenues$ 52,860 $ 16,775 $ 36,085 215.1 % Total operating revenues increased by$36.1 million , or 215.1%, during the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. 23
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Operating Expenses
The following table sets forth our operating expenses and the associated dollar
and percentage changes for the periods presented:
Three Months Ended
June 30,
2021 2020 Change
Operating Expenses ($ in thousands):
Payroll and Related Costs $ 25,012 $ 23,407 $ 1,605 6.9 %
Aircraft Fuel and Oil 44 5 39 780.0 %
Aircraft Maintenance, Materials and Repairs 10,078 1,499 8,579 572.3 %
Aircraft Rent 44 2,411 (2,367 ) (98.2 )%
Other Rents 1,263 1,541 (278 ) (18.0 )%
Depreciation, Amortization and Obsolescence 6,500 6,666 (166 ) (2.5 )%
Payroll Support Program (22,256 ) (15,175 ) (7,081 ) 46.7 %
Purchased Services and Other 5,571 4,366 1,205 27.6 %
Total Operating Expenses $ 26,256 $ 24,720 $ 1,536 6.2 %
Payroll and Related Costs
. Payroll and related costs increased $1.6 million , or 6.9%, to $25.0 million
for the three months ended June 30, 2021 , compared to the three months ended
June 30, 2020 . The increase was primarily driven by an increase in pilot wages,
bonuses and training expenses of $2.5 million and an increase in personnel
expenses of $1.2 million . These increases were offset by a decrease in other
wages, taxes and benefits of $2.1 million .
Aircraft Fuel and Oil
. Substantially all of the fuel costs incurred as a result of flying pursuant to
the United capacity purchase agreement during the three months ended June 30,
2021 and June 30, 2020 were directly paid to suppliers by United. Aircraft fuel
and oil expense primarily reflects the costs associated with aircraft oil
purchases. These expenses were immaterial for the three months ended June 30,
2021 and June 30, 2020 .
Aircraft Maintenance, Materials and Repairs
. Aircraft maintenance, materials and repairs costs increased $8.6 million , or
572.3%, to $10.1 million for the three months ended June 30, 2021 , compared to
the three months ended June 30, 2020 . The increase was primarily driven by an
increase in required maintenance and repair activities due to an increase in
flying attributable to increased passenger demand for air transportation.
Aircraft Rent
. Aircraft rent expense decreased $2.4 million , or 98.2%, to $0.04 million for
the three months ended June 30, 2021 , compared to the three months ended
June 30, 2020 . The decrease was due to Air Wisconsin's acquisition of its
remaining leased aircraft operated during 2020.
Other Rents
. Other rents expense decreased $0.3 million , or 18.0%, to $1.3 million for the
three months ended June 30, 2021 , compared to the three months ended June 30,
2020 . The decrease was primarily due to a decrease of $0.3 million in flight
training simulator rental expense.
Depreciation, Amortization and Obsolescence
. Depreciation, amortization and obsolescence expense decreased $0.2 million , or
2.5%, to $6.5 million for the three months ended June 30, 2021 , compared to the
three months ended June 30, 2020 . The decrease was primarily due to the
retirement of leasehold improvements on formerly leased aircraft and a decrease
in the obsolescence reserve related to our inventory of aircraft parts.
Payroll Support Program
.
The proceeds of the Treasury Payroll Support received pursuant to the PSP
Agreements are recorded in cash and cash equivalents when received and were
recognized as a reduction in expense over the periods that the funds are
intended to offset payroll expenses. In the three months ended June 30, 2021 ,
Air Wisconsin received approximately $34.1 million under the Payroll Support
Program and the Company recorded a receivable in the amount of $0.5 million
representing covered expenses incurred under the Payroll Support Program as of
June 30, 2021 . The Company recognized approximately $22.3 million under the
Payroll Support Program as a contra-expense on its consolidated statements of
operations for the three months ended June 30, 2021 .
Purchased Services and Other
. Purchased services and other expense increased $1.2 million , or 27.6%, to
$5.6 million for the three months ended June 30, 2021 , compared to the three
months ended June 30, 2020 . This increase was primarily due to an increase in
outside services, consisting primarily of aircraft line maintenance, of
$1.5 million , and an increase in insurance expense of $0.3 million , partially
offset by a decrease in legal expense of $0.5 million .
24
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Other (Expense) Income
Interest Income
. Interest income increased by $0.4 million for the three months ended June 30,
2021 , compared to the three months ended June 30, 2020 . The increase was
primarily due to an increase in interest earned on the long-term notes
receivable due from United.
Interest Expense
. Interest expense decreased by $0.1 million for the three months ended June 30,
2021 , compared to the three months ended June 30, 2020 , primarily due to the
prepayment of debt in June 2021 and the repayment of debt in December 2020 . For
additional information, refer to the section entitled "
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Debt and Credit Facilities
" within our 2020 Annual Report and Note 6,
Debt
, in our unaudited consolidated financial statements included in this Quarterly
Report.
Gain on Marketable Securities
.
Gain on marketable securities was $0.04 million for the three months ended
June 30, 2021 . The gain reflects the change in market value and sales of
securities as of the three months ended June 30, 2021 . There were no marketable
securities held during the three months ended June 30, 2020 .
Other, Net
. Other income increased by $0.07 million for the three months ended June 30,
2021 , compared to the three months ended June 30, 2020 . The other income
consists of dividend income from investments in marketable securities.
Net Income
Net income for the three months ended June 30, 2021 was $20.5 million , or $0.37
per basic share and $0.28 per diluted share, compared to net loss of
$8.3 million , or a loss of $0.16 per basic and diluted share for the three
months ended June 30, 2020 . For additional information, refer to Note 10,
Earnings per Share
, in our unaudited consolidated financial statements included in this Quarterly
Report.
The increase in net income for the three months ended June 30, 2021 primarily
resulted from increased revenues as a result of the increase in demand for air
travel, which was partially offset by an overall increase in operating expenses.
Within operating expenses, aircraft maintenance and repair costs, as well as
payroll and related costs, increased due to increased flying levels. These
increases were partially offset by an increase in the contra-expense related to
the Payroll Support Program and a reduction in aircraft rent due to Air
Wisconsin owning all of its aircraft.
Income Taxes
In the three months ended June 30, 2021 , our effective tax rate was 24.2%,
compared to 0.2% for the three months ended June 30, 2020 . Our tax rate can vary
depending on changes in tax laws, adoption of accounting standards, the amount
of income we earn in each state and the state tax rate applicable to such
income, as well as any valuation allowance required on our federal and state net
operating losses.
We recorded an income tax expense of $6.6 million and an income tax benefit of
$0.002 million for the three months ended June 30, 2021 and June 30, 2020 ,
respectively.
The income tax expense for the three months ended June 30, 2021 resulted in an
effective tax rate of 24.2%, which differed from the U.S. federal statutory rate
of 21%, primarily due to the impact of state income taxes and permanent
differences between financial statement and taxable income.
The income tax provision for the three months ended June 30, 2020 resulted in an
effective tax rate of 0.2%, which differed from the U.S. federal statutory rate
of 21%, primarily due to the impact of state income taxes, the reversal of
valuation allowances on federal and state deferred tax assets, and permanent
differences between financial statement and taxable income.
For additional information, refer to Note 5,
Income Taxes
, in our audited consolidated financial statements included within our 2020
Annual Report.
25
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Comparison of the Six Months Ended June 30, 2021 and the Six Months Ended
June 30, 2020
The following table sets forth our major operational statistics and the
associated percentage changes for the periods identified below.
Six Months Ended
June 30,
2021 2020 Change
Operating Data:
Available Seat Miles (ASMs) (in thousands) 479,686 519,162 (39,476 ) (7.6 )%
Actual Block Hours 43,993 44,202 (209 ) (0.5 )%
Actual Departures 31,597 29,901 1,696 5.7 %
Revenue Passenger Miles (RPMs) (in
thousands) 350,533 313,702 36,831 11.7 %
Average Stage Length (in miles) 312 351 (39 ) (11.1 )%
Contract Revenue Per Available Seat Mile
(CRASM) (in cents) 21.39 ¢ 16.14 ¢ 5.25 ¢ 32.5 %
Passengers 1,100,604 865,246 235,358 27.2 %
The increase in departures and RPMs during the six months ended June 30, 2021 ,
compared to the six months ended June 30, 2020 , was primarily due to the
increase in demand for air travel related to the recovery from the
COVID-19
pandemic. The reduction in ASMs resulted from a reduction in the average stage
length of flights.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar
and percentage changes for the dates presented:
Six Months Ended
June 30,
2021 2020 Change
Operating Revenues ($ in thousands): Contract Revenues$ 102,601 $ 83,815 $ 18,786 22.4 % Contract Services and Other 33 39 (6 ) (15.4 )% Total Operating Revenues$ 102,634 $ 83,854 $ 18,780 22.4 % Total operating revenues increased by$18.8 million , or 22.4%, during the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. Operating Expenses The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented: Six Months Ended June 30, 2021 2020 Change Operating Expenses ($ in thousands): Payroll and Related Costs$ 47,763 $ 55,033 $ (7,270 ) (13.2 )% Aircraft Fuel and Oil 57 36 21 58.3 %
Aircraft Maintenance, Materials, and Repairs 18,532 15,510
3,022 19.5 %
Aircraft Rent 67 5,763 (5,696 ) (98.8 )%
Other Rents 2,185 3,050 (865 ) (28.4 )%
Depreciation, Amortization, and Obsolescence 13,000 13,607 (607 ) (4.5 )%
Payroll Support Program (50,170 ) (15,175 ) (34,995 ) 230.6 %
Purchased Services and Other 11,339 10,411 928 8.9 %
Total Operating Expenses $ 42,773 $ 88,235 Payroll and Related Costs . Payroll and related costs decreased$7.3 million , or 13.2%, to$47.8 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The decrease was primarily driven by a decrease in other wages, taxes and benefits of$6.3 million , a decrease in personnel expenses of$0.5 million , and a decrease in pilot wages, bonuses, and training expenses of$0.4 million . 26 -------------------------------------------------------------------------------- Table of Contents Aircraft Fuel and Oil . Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the six months endedJune 30, 2021 andJune 30, 2020 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the six months endedJune 30, 2021 andJune 30, 2020 . Aircraft Maintenance, Materials and Repairs . Aircraft maintenance, materials and repairs costs increased$3.0 million , or 19.5%, to$18.5 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase was primarily driven by an increase in required maintenance and repair activities due to an increase in flying attributable to increased passenger demand for air transportation. Aircraft Rent . Aircraft rent expense decreased$5.7 million , or 98.8%, to$0.06 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The decrease was due toAir Wisconsin's acquisition of its remaining leased aircraft operated during 2020. Other Rents . Other rents expense decreased$0.9 million , or 28.4%, to$2.2 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The decrease was primarily due to a decrease of$0.07 million in flight training simulator rental expense. Depreciation, Amortization and Obsolescence . Depreciation, amortization and obsolescence expense decreased$0.6 million , or 4.5%, to$13.0 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The decrease was primarily due to the retirement of leasehold improvements on formerly leased aircraft and a decrease in the obsolescence reserve related to our inventory of aircraft parts. Payroll Support Program . The proceeds of the Treasury Payroll Support received pursuant to the PSP Agreements are recorded in cash and cash equivalents when received and were recognized as a reduction in expense over the periods that the funds are intended to offset payroll expenses. In the six months endedJune 30, 2021 ,Air Wisconsin received approximately$49.7 million under the Payroll Support Program and the Company recorded a receivable in the amount of$0.5 million representing covered expenses incurred under the Payroll Support Program as ofJune 30, 2021 . The Company recognized approximately$50.2 million under the Payroll Support Program as a contra-expense on its consolidated statements of operations for the six months endedJune 30, 2021 . Purchased Services and Other . Purchased services and other expense increased$0.9 million , or 8.9%, to$11.3 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . This increase was primarily due to an increase in outside services, consisting primarily of aircraft line and on call maintenance, of$2.1 million , and an increase in insurance expense of$0.5 million , partially offset by a decrease in legal expense of$0.3 million , a decrease in professional and technical fees, consisting primarily of consulting and auditing services, of$0.5 million , a decrease in interrupted trip expense of$0.2 million , and a decrease in miscellaneous expenses of$0.5 million . Other (Expense) Income Interest Income . Interest income increased by$0.6 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase was primarily due to an increase in interest earned on the long-term notes receivable due from United. Interest Expense . Interest expense decreased slightly to$0.7 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to the prepayment of debt inJune 2021 and the repayment of debt inDecember 2020 . For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. Loss onMarketable Securities . Loss on marketable securities was$0.01 million for the six months endedJune 30, 2021 . The loss reflects the change in market value and sales of securities as of the six months endedJune 30, 2021 . There were no marketable securities held during the six months endedJune 30, 2020 . Other, Net . Other income increased by$0.09 million for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The other income consists of dividend income from investments in marketable securities. 27 -------------------------------------------------------------------------------- Table of Contents Net Income Net income for the six months endedJune 30, 2021 was$45.7 million , or$0.83 per basic share and$0.63 per diluted share, compared to net loss of$3.9 million , or a loss of$0.08 per basic and diluted share for the six months endedJune 30, 2020 . For additional information, refer to Note 10, Earnings per Share , in our consolidated financial statements included in this Quarterly Report. The increase in net income for the six months endedJune 30, 2021 primarily resulted from increased revenues due to increased demand for air travel and lower operating expenses as a result of the increase in the contra-expense related to funds received under the Payroll Support Program. Income Taxes In the six months endedJune 30, 2021 , our effective tax rate was 24.1%, compared to 21.7%, for the six months endedJune 30, 2020 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our federal and state net operating losses. We recorded an income tax expense of$14.5 million and an income tax benefit of$1.1 million for the six months endedJune 30, 2021 andJune 30, 2020 , respectively. The income tax expense for the six months endedJune 30, 2021 resulted in an effective tax rate of 24.1%, which differed from theU.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. The income tax provision for the six months endedJune 30, 2020 resulted in an effective tax rate of 21.7%, which differed from theU.S. federal statutory rate of 21%, primarily due to the impact of state taxes, the reversal of valuation allowances on federal and state deferred tax assets, and permanent differences between financial statement and taxable income, offset by a discrete tax benefit from a refund of alternative minimum tax credits available under a provision of the CARES Act that occurred during the period. For additional information, refer to Note 5, Income Taxes , in our consolidated financial statements included within our 2020 Annual Report. Liquidity and Capital ResourcesAlthough Air Wisconsin's departures and block hours have increased through the six months endedJune 30, 2021 and the date of this filing, the COVID-19 pandemic continues to evolve. As such, the ongoing impact that the COVID-19 pandemic will have on our financial condition, results of operations, and liquidity remains highly uncertain. Management is actively monitoring the impact on our operations, airline partner, suppliers, industry, and workforce. We are taking actions based on currently available information to address the changing business environment; however, we cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on our business. Sources and Uses of Cash Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities,Air Wisconsin's cash flows from operations, and its receipt of governmental assistance under the SBA Loan and the Payroll Protection Program. As ofJune 30, 2021 , our cash and cash equivalents balance was$34.1 million and we held$118.3 million of marketable securities. For the six months endedJune 30, 2021 , we generated cash flows from operations of$52.7 million , which included$49.7 million received pursuant to the Payroll Support Program. In the near term,Air Wisconsin expects to fund its liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances. InJuly 2021 ,Air Wisconsin received an additional$16.7 million in funds under the Payroll Support Program representing the final payment pursuant to the PSP-3 Agreement.Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, maintenance, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment forAir Wisconsin . During the six months endedJune 30, 2021 , we paid$0.2 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted. 28 -------------------------------------------------------------------------------- Table of ContentsAir Wisconsin's ability to service its long-term debt obligations and business development efforts depends on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. IfAir Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As ofJune 30, 2021 ,Air Wisconsin had$14.6 million of short-term debt, and$74.1 million of long-term debt. This includes$78.7 million in secured indebtedness incurred in connection with the aircraft credit agreements described within our 2020 Annual Report. For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. The United capacity purchase agreement andAir Wisconsin's credit agreements with its lender contain restrictions that limitAir Wisconsin's ability to pay, or prohibit it from paying, dividends or distributions to the Company. In addition, the PSP Agreements preventAir Wisconsin from paying dividends prior to certain dates. We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. Restricted Cash As ofJune 30, 2021 , in addition to cash and cash equivalents of$34.1 million , the Company had$0.9 million in restricted cash which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker's compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under the Company's stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secure the credit facility. Cash Flows The following table presents information regarding our cash flows for each of the dates presented: Six Months Ended June 30, 2021 2020 Change Net cash provided by operating activities$ 52,700 $ 27,532 $ 25,168 91.4 %
Net cash used in investing activities (118,728 ) (6,374 )
(112,354 ) 1,762.7 %
Net cash (used in) provided by financing
activities (30,157 ) 9,835 (39,992 ) (406.6 )%
Net Cash Flows Provided by Operating Activities During the six months endedJune 30, 2021 , our net cash flows provided by operating activities was$52.7 million . We had net income of$45.7 million , which primarily resulted from increased revenues as a result of the increase in demand for air travel, and lower expenses as a result of payroll support received under the Payroll Support Program, further adjusted for increases in cash primarily related to depreciation and engine overhaul amortization of$13.7 million , contract liabilities of$20.0 million , and accounts payable of$1.7 million , partially offset by decreases in cash primarily related to long-term deferred revenues of$5.3 million , accounts receivable of$3.5 million , notes receivable of$13.0 million , prepaid expenses of$4.5 million , and accrued payroll and benefits of$1.3 million . During the six months endedJune 30, 2020 , our cash flows provided by operating activities was$27.5 million . We had a net loss of$3.9 million due to significantly reduced block hours during the period as a result of the COVID-19 pandemic, further adjusted for increases in cash primarily related to long-term deferred revenues of$21.0 million , depreciation and engine overhaul amortization of$14.4 million , deferred credits related to the Payroll Support Program of$5.3 million , and$3.4 million related to operating lease right-of-use assets, partially offset by decreases in cash primarily related to accounts payable of$8.2 million , amortization of contract costs of$1.9 million , prepaid expenses of$1.8 million , and contract liabilities of$1.7 million .Net Cash Used in Investing Activities During the six months endedJune 30, 2021 , our net cash used in investing activities was$118.7 million resulting primarily from investments in marketable securities. 29 -------------------------------------------------------------------------------- Table of Contents During the six months endedJune 30, 2020 , our net cash used in investing activities was$6.4 million resulting primarily from an investment in rotable parts and engine overhauls to supportAir Wisconsin's fleet under the United capacity purchase agreement.Net Cash (Used in) Provided by Financing Activities During the six months endedJune 30, 2021 , our net cash used in financing activities was$30.2 million , reflecting$28.9 million in repayments of long-term debt,$0.4 million of dividends paid on the Series C Preferred, and$0.9 million to repurchase shares of our common stock. During the six months endedJune 30, 2020 , our net cash provided by financing activities was$9.8 million , reflectingAir Wisconsin's receipt of a$10.0 million loan under the PPP established pursuant to the CARES Act, partially offset by a dividend payment of$0.2 million on the Series C Preferred. Commitments and Contractual Obligations For additional information regarding our commitments and contractual obligations, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Commitments and Contractual Obligations " within our 2020 Annual Report. InJune 2021 ,Air Wisconsin prepaid approximately$10,500 of the principal amount, and$910 of capitalized interest, outstanding under the Notes dueDecember 31, 2025 , and approximately$16,991 of the principal amount outstanding under the Credit Agreement due 2022 along with all interest due as ofJune 30, 2021 . The prepayment resulted in a$228 gain on extinguishment of debt due to the decrease in previously expected future interest that was capitalized. The following table sets forth our cash obligations as ofJune 30, 2021 : July through December Total 2021 2022 2023 2024 2025 Thereafter Aircraft Notes Principal$ 59,500 $ -$ 3,500 $ 7,000 $ 7,000 $ 42,000 $ - Aircraft Notes Interest 9,240 1,190 2,380 2,170 1,890 1,610 - Other Loans Principal 19,997 894 12,697 2,727 2,754 925 - Other Loans Interest 823 282 328 51 24 138 - Operating Lease Obligations 20,898 2,949 5,897 5,712 3,236 2,525 579 Total$ 110,458 $ 5,315 $ 24,802 $ 17,660 $ 14,904 $ 47,198 $ 579 The principal amount of the Aircraft Notes is payable in semi-annual installments of$3,500 and certain additional amounts may be due based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes inJune 2021 , no semi-annual installments are due prior toDecember 31, 2022 . As ofJune 30, 2021 , all ofAir Wisconsin's long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations" within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. Acquisition from Southshore InJanuary 2020 , the Company completed an acquisition fromSouthshore Aircraft Holdings, LLC and its affiliated entities ("Southshore") of three CRJ-200 regional jets, each having two General Electric ("GE") engines, plus five additionalGE engines, in exchange for the issuance of 4,000,000 shares of the Company's Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") with an aggregate value of$13.2 million , or$3.30 per share (the "Series C Issue Price").Air Wisconsin had leased each of these CRJ-200 regional jets andGE engines from Southshore under lease arrangements. For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Economic Conditions, Challenges and Risks Impacting Results - Aircraft Leases " within our 2020 Annual Report. 30 -------------------------------------------------------------------------------- Table of Contents InJanuary 2020 , the Company filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock ("Certificate of Designations") with the Secretary of State of theState of Delaware , which establishes the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series C Preferred. Series C Convertible Redeemable Preferred Stock The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors (the "Preferential Dividends"). From and afterDecember 31, 2023 , upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the "Dividend Ratchet"). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the "PIK Dividends"). OnJune 30, 2021 , the Board of Directors declared a dividend of approximately$0.2 million on the Series C Preferred, which was paid onJune 30, 2021 . Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by$0.80 , subject to certain adjustments set forth in the Certificate of Designations (the "Conversion Price"). The Certificate of Designations requires that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The "Reporting Adjustment Period" was the first 90-trading day period commencing on or afterAugust 28, 2020 (which was the first trading day following the day that was 45 days following the date on which the Company provided notice to its stockholders of the filing of its Annual Report on Form 10-K for the year endedDecember 31, 2019 ) during which an aggregate of at least 5.0% of the outstanding shares of common stock were traded. The Conversion Price was adjusted as ofJanuary 7, 2021 to be$0.15091 . The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii)$0.80 (the "Conversion Cap"), plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii)$0.80 . Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the "Conversion Cap Excess Shares"), from and afterDecember 31, 2022 , in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter afterDecember 31, 2022 , and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the "Conversion Cap Excess Dividends"). As of the date of this filing, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 23.4% of the fully diluted shares of capital stock of the Company), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the "Series C Liquidation Amount"). At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800,000 shares of Series C Preferred are outstanding, and (d)December 31, 2024 , the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (the "Redemption Price"). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price. Based on the applicable accounting guidance, the Company is required to apply the "if-converted" method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity . Based on this guidance, preferred stock that is conditionally redeemable is classified as temporary or "mezzanine" equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders' equity section of the consolidated balance sheets. 31 -------------------------------------------------------------------------------- Table of Contents Aircraft Operating Leases As ofJune 30, 2021 ,Air Wisconsin had no operating aircraft remaining on lease. Debt and Credit Facilities For additional information regarding our debt and credit facilities, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report. Paycheck Protection Program InApril 2020 ,Air Wisconsin entered into an agreement with a lender for a$10.0 million loan under the PPP established pursuant to the CARES Act and administered by the SBA, which was received byAir Wisconsin onApril 13, 2020 . The SBA Loan may be forgiven subject to meeting certain conditions, including the requirement that the proceeds be used to pay for the salaries and benefits ofAir Wisconsin's employees. As of the date of this filing,Air Wisconsin has applied for loan forgiveness and is awaiting a determination from the SBA. Payroll Support Program InApril 2020 ,Air Wisconsin entered into the PSP-1 Agreement with theTreasury for payroll support under the CARES Act and received approximately$42.2 million in the year endedDecember 31, 2020 pursuant to that agreement. InMarch 2021 ,Air Wisconsin entered into the PSP-2 Agreement with theTreasury for payroll support under the PSP Extension Law and in the six months endedJune 30, 2021 received approximately$32.9 million pursuant to that agreement. InJune 2021 theTreasury entered into the PSP-3 Agreement withAir Wisconsin for payroll support under the American Rescue Plan, and has received approximately$33.3 million pursuant to that agreement. The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, (ii)Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee's pay rates or benefits without that employee's consent, in any case prior to certain dates, (iii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv)Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neitherAir Wisconsin nor any of its affiliates can purchase an equity security ofAir Wisconsin or any direct or indirect parent company ofAir Wisconsin that is listed on a national securities exchange prior to certain dates. IfAir Wisconsin fails to comply with its obligations under the PSP Agreements, it may be required to repay some or all of the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. In addition, the PSP Agreements authorize the Secretary of theDepartment of Transportation to impose certain air service obligations on recipients of payroll support untilMarch 1, 2022 . To date, no such service obligation has been imposed onAir Wisconsin . For additional information, refer to Note 8, Commitments and Contingencies , in our consolidated financial statements included in this Quarterly Report. Maintenance Commitments For additional information regarding our maintenance commitments, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Maintenance Commitments " within our 2020 Annual Report. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that would have a material current or future effect on the Company's financial condition, results of operations or liquidity. Critical Accounting Policies Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, leases, and income tax. The application of these accounting policies involve the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. For additional information regarding our critical accounting policies, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies " within our 2020 Annual Report. 32
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