OFFICE OF THE AUDITOR

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1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION (FORMERLY AMERICAN TRANS AIR, INC.) REVENUE AND CONTRACT COMPLIANCE AUDIT JUNE 2006 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX June 9, 2006 Mr. Turner West, Manager Department of Aviation City and County of Denver Mr. Erkki Gronholm Director Airport Affairs ATA Airlines, Inc W. Washington Street Indianapolis, IN Dear Mr. West and Mr. Gronholm: Attached is the Auditor s Office Internal Audit Division s report of their revenue and contract compliance audit of ATA Airlines, Inc., (Formerly American Trans Air, Inc.) Airport Use and Facilities Agreement dated June 20, 2000 for operations at Denver International Airport (DIA). The audit period was for the year ended December 31, The purpose of our audit was to determine whether ATA Airlines, Inc. and the City and County of Denver complied with the terms of the contract and whether internal controls in place were adequate in the circumstances. As indicated in their report, no material exceptions were noted as a result of their examination. If you have any questions, please call Mike Clark, Director of Internal Audit at Sincerely, DJG/kh cc: Dennis J Gallagher Auditor Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Cole Finegan, City Attorney and Acting Chief of Staff Laurie Dannemiller, Executive Staff Director, City Council Cheryl Cohen-Vader, Chief Deputy Manager of Aviation Stan Koniz, Acting Deputy Manager of Aviation Business and Technologies Division Beth Machann, Controller Pete Gingras, Assistant Deputy Manager of Aviation Property Management Laura Trujillo, Co-Assistant Deputy Manager of Aviation Finance Amy Weston, Co-Assistant Deputy Manager of Aviation Finance The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 1

3 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Background, Scope, Objective, and Methodology 4 Schedule of Amounts Due and Paid and Related Notes 6 2

4 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed a revenue and contract compliance audit of the Airport Use and Facilities Lease Agreement dated June 20, 2000, between ATA Airlines, Inc., (Formerly American Trans Air, Inc.) and the City and County of Denver. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2003 is fairly presented in accordance with the contract. We also determined whether ATA Airlines and the Department of Aviation complied with various other terms and conditions of the contract, City rules and regulations, and whether internal controls were adequate in the circumstances. This audit was included in the Auditor s Office Internal Audit Division s 2005 Annual Audit Plan, and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule. Our conclusion from the audit was that ATA Airlines, Inc. and the Department of Aviation of the City and County of Denver were in substantial compliance with the terms and conditions of the contract, City rules and regulations, and that internal controls were adequate in the circumstances. We did not identify any significant reportable conditions. Our audit of ATA Airlines, Inc. began on October 14, 2004 and was substantially completed on January 27, Issuance of this report was delayed due to changes in work priorities and changes in the audit staff. We extend our appreciation to all personnel who assisted and cooperated with us during the course of our examination. Internal Audit Division Date: June 9, 2006 Staff: Dick Wibbens, CPA, Audit Manager Stan Wilmer, CPA, Audit Supervisor Wayne Leon Sanford, Senior Auditor Michael Clark, CPA Director of Internal Audit 3

5 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2003 Background ATA Airlines, Inc. (ATA) serves major business centers and the most popular vacation destinations through its growing schedules and charter operations. ATA generates approximately 2.0% of the total passenger airline traffic at Denver International Airport (DIA). Revenue paid by ATA to the City is determined in accordance with the Airport Use and Facilities Lease Agreement dated June 20, 2000, and the Denver Municipal Airport System Rules and Regulations (DMASR&R). The Airport Use and Facilities Lease Agreement detail the airfield area facilities and the space exclusively used by ATA in the main terminal and Concourse C. The rental rate fees and other charges are established in accordance with the cost-accounting concepts and ratemaking procedures described in Exhibit F of the contract. On October 26, 2004, ATA Holdings Corp. announced that it and certain subsidiaries, including ATA Airlines, Inc., have filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Indiana. Scope Our audit of ATA at DIA (fund 73800/org ) was for the year ended December 31, Procedures performed included determining compliance with the contract between the City and County of Denver (City) and ATA as listed above and with the DMASR&R. Additionally, we reviewed ATA s independent auditors 2003 Passenger Facility Charge (PFC) Report to determine if the PFC amounts and compensation withheld were calculated properly. Objectives The objective of our audit was to determine whether ATA paid the City the correct amounts for landing fees, space rent, automatic guideway transit system fees, baggage claim fees, conventional baggage operational and maintenance fees, deicing charges, passenger facility charges, and interest on late payments in accordance with the contract stated above and the DMASR&R. Additional objectives included determining whether ATA and the Department of Aviation complied with other terms and conditions of the Contract, as well as other City rules and regulations as we considered necessary in the circumstances. The objective of our review of ATA s auditor s PFC Report was to determine if the independent auditor concluded that the report was fairly presented, and the correct formula was used in the calculation of the PFC amounts and compensation withheld. 4

6 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2003 Methodology To meet the audit objective the following evidence gathering and analysis techniques were used including, but not limited to: Review of internal controls Verification of gross landing weight Verification of rates charged Verification of evidence of receipts Confirmation of receipts Recalculation of financial transactions Discussions with management and staff Verification of evidence of insurance and performance bond Onsite physical inspections Review of ATA Airlines, Inc. independent auditor's PFC report Recalculation of PFC report to determine its conformity with 14 C.F.R

7 SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2003 Amount Due Amount Paid Balance Due (Note 1) (Note 2) Landing fees $ 684,880 $ 684,880 $ - Space rent 896, ,937 - Baggage claim fees 391, ,934 - Automatic guideway transit system 299, ,083 - Conventional baggage system operation and maintenance 72,075 72,075 - Deicing charges 33,924 33,924 - Passenger facility charge 766, ,359 - Interest charges Total $3,145,294 $3,145,294 $ - The accompanying notes are an integral part of this schedule. 6

8 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Note 1. Amounts Due Landing fees, space rent, automatic guideway transit system, and baggage claim fee components are listed as revenue-producing cost centers in Exhibit F of the Airport Use and Facilities Lease Agreement. As required by Section 5.05 of the Airport Use and Facilities Lease Agreement, the City s independent auditors annually prepare a final audit. Leigh Fisher Associates, an airport consultant company, use this audit to determine the actual fees for the revenue-producing cost centers at the airport due each year. This determination was done in Leigh Fisher Associate s Year-End Settlement of Rentals, Fees, and Charges for 2003 (Final Report) dated August 12, We obtained the actual rates from this report to determine the amounts for landing fees, space rent, automatic guideway transit system, and baggage claim fees in the accompanying schedule. Specific revenue components were as follows: Landing Fees The estimated annual landing fee for the year 2003, as listed in the 2003 Final Report, was $3.265 through August and $3.430 thereafter per 1000 pounds of landed weight for signatory carriers. There were 213,128,200 pounds of landed weight for ATA Airlines, Inc. (ATA) in The number of reported landings by ATA Airlines, Inc. was verified through records maintained by the DIA Airport Noise and Operations Monitoring System on a test basis. Space Rent The revenue-producing cost centers of ATA and the actual fees and applicable space as listed in the Final Report are as follows: Terminal Complex 536 sq. feet *$73.36 per sq. foot Landside terminal charges 536 sq. feet *$30.56 per sq. foot Concourse C exclusive preferential 6,021 sq. feet *$73.36 per sq. foot Concourse C tenant finishes and Equipment 4,886 sq. feet *$19.41 per sq. foot Joint use allocation 6,021 sq. feet *2.5% of joint use cost (Joint use cost is $5,398,043) Ramp area 195 sq. feet *$ per sq. foot Conventional baggage space 536 sq. feet *0.72% of cost (Conventional baggage system actual cost is $9,062,684) Baggage Claim and Automatic Guideway Transit System Fees (AGTS) The revenue producing cost centers include baggage claim, the AGTS and tunnels, and the conventional baggage system. The number of passengers deplaned for both originating and destination were used in the calculation of fees as follows: Baggage claim Rate is *1.7% of baggage claim cost Actual total baggage (Percent of Domestic Destination claim cost was Passengers). $14,563,224. Conventional Allocation is based on carousels Actual total cost baggage system used. ATA Airlines, Inc. uses 0.3 of 12 to allocate are (2.5%) of available carousels. $5,934,277. *These rates are rounded. 7

9 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID AGTS and tunnels Rate is *1.6% of recoverable costs Actual recoverable (Percent of origination and destination cost is $18,294,757. passengers). *These rates are rounded The remaining revenue components are based on contract requirements and/or the Denver Municipal Airport System Rules and Regulations. The specifics are as follows: Conventional Baggage System Operation and Maintenance The actual costs for outbound and inbound conventional baggage system operation and maintenance allocated to ATA Airlines, Inc. for 2003 based on origination and destination passengers amounted to $72,075. The Department of Aviation reconciles the actual budget versus the estimated budget at the end of every year. Conventional baggage system operation and maintenance is stated at cost. Deicing Charges According to Sections and of the DMASR&R, ATA Airlines, Inc. is to pay monthly estimated deicing charges based on the estimated amount of glycol usage. The estimated deicing costs and glycol usage are reconciled with the actual deicing costs and glycol used within 90 days of the close of each fiscal year ending June 30. Deicing charges are stated at amounts actually due and paid during the audit period. Interest Section 9.10 of the Airport Use and Facilities Lease Agreement, provides that any payment not made when due shall accrue interest at the rate of 18% per annum commencing five days after such due date. Note 2. Amounts Paid All amounts paid in the schedule of amounts due and paid were compiled from the Department of Aviation s cash receipts records. Amounts paid include those billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. 8

OFFICE OF THE AUDITOR

OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND CONTRACT COMPLIANCE AUDIT JUNE 2006 Dennis J. Gallagher Auditor Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept.