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Monday, March 29, 2004

Auditor Doubts Great Lakes' Claim It Will Survive

Carrier Misses Debt Payments In 2003 While Posting Small Profit

Although Great Lakes Aviation [GLUX] managed to post a small net profit last year, its auditor has serious concerns that the company can continue to operate.

Ending a three-year run of losses, Great Lakes last year posted a net profit of $1.7 million, or a penny a share, on $75.7 million in revenues. In 2002, the company posted a net loss of $10.8 million, or $1.24 per share, on sales of $84.7 million. The last time Great Lakes posted a profit, in 1999, it had sales of $131.3 million.

In a filing last week with the Securities and Exchange Commission, Great Lakes admits that it did not have the cashflow from operations to meet its debt payments, including an extensive aircraft financing deal negotiated in 2002 with Raytheon [RTN]. "Furthermore, the company cannot determine with a high degree of confidence that it will be able during 2004 to generate sufficient cashflow in order to make required payments or remain in compliance with its aircraft debt and lease agreements," the carrier told the SEC.

Auditor KPMG in a note to the annual audit wrote: "The company's liquidity problems, in addition to its dependence on United [UALAQ], raise significant doubts about the company's ability to continue as a going concern. Because the company currently has no financing agreements in place that would allow the company to secure additional funds, the company's ability to continue as a going concern will ultimately depend upon the company's ability to increase profitability and cash flow or obtain new sources of financing."

Great Lakes' cash balance, as of Dec. 31, stood at $3.7 million. However, it had negative working capital of $128.6 million.

Great Lakes CEO Charles Howell IV said KPMG's cautionary language paints a "gloom and doom" picture that ignores the company's ongoing turnaround. Great Lakes has been current on its debt payments since last spring, Howell told CRAN. Last year's problems at Great Lakes were the same dramatic drop in traffic that the whole industry suffered in the run up to the Iraq War.

The same business plan that last year yielded the first profit in three years, Howell said, is the current prescription for recovery. In addition, he said, the carrier continues to tighten its operations to trim operating costs.

Based in Cheyenne, Wyo., Great Lakes flies connecting flights for both bankrupt United Airlines and Frontier Airlines [FRNT]. It also flies some routes on its own. Five flights out of Denver bear the codes for both rival carriers. Great Lakes was forced by United's bankruptcy to renegotiate its operating agreement in 2003. It now earns less than before, but it did not disclose how much less. Howell notes that the carrier has diversified over the last six years from its total reliance on United.

The regional carrier in 2003 sustained a drop in revenue from two government contracts.

Last year, Great Lakes dropped service to six communities that had been subsidized under the Essential Air Service (EAS) program. The decision cut EAS revenues by $5 million to $25.1 million. The EAS contracts to 24 communities generate about 33 percent of the carrier's income. Howell said in some cases the EAS routes were dropped because the community no longer qualified for the government subsidy. Other routes were tied to its Chicago operations. Great Lakes had to end service to Chicago O'Hare when the airport banned turboprop flights.

Great Lakes last year also decided to let its contracts with the U.S. Postal Service lapse since it felt it could not be competitive in a new round of contract bidding. In 2002 - the last full year of mail delivery - the postal contract generated 3.2 percent of the company's sales.

As part of a restructuring deal it struck in 2002 with Raytheon, Great Lakes last year returned seven Beechcraft 1900Ds that had been leased. It also refinanced the debt on 30 1900Ds. However, last year it fell $1.7 million behind on principal and interest payments on this new debt. As part of the deal, Raytheon became Great Lakes' second largest shareholder. It now holds 38.2 percent of the stock.

Great Lakes Chairman Douglas Voss is the largest shareholder with 40.5 percent.

After additional planes are returned or retired this year, Great Lakes will be flying 30 19-passenger Beechcraft 1900Ds and seven 30-passenger Embraer Brasilia 120s. It now flies 186 weekly flights from hubs in Denver, Minneapolis and Phoenix.

>>Contact: Charles Howell, Great Lakes, (307) 432-7000.<<


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