Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company provides scheduled passenger and air freight services under code-share agreements with major partners, primarily Delta Air Lines (approx. 50.7% of capacity) and United Air Lines (approx. 48.5% of capacity), with a smaller portion for AirTran Airways. As of March 31, 2010, the fleet consisted of 454 aircraft.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Operating Revenues | $632.2 million | $672.6 million |
| Operating Income | $42.4 million | $40.8 million |
| Net Income | $15.0 million | $9.4 million |
| Diluted Earnings Per Share | $0.26 | $0.16 |
| Operating Cash Flow | $62.5 million | $67.3 million |
| Cash and Cash Equivalents | $64.4 million | $137.3 million |
| Total Long-Term Debt | $2,019.5 million | $1,964.9 million |
| Working Capital | $816.3 million | N/A |
| Current Ratio | 2.8:1 | N/A |
Note: Q1 2009 cash balance reflects year-end 2008 position adjusted for Q1 activity; Q1 2009 working capital not explicitly stated in summary text.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 6.0% to $632.2 million. This was primarily driven by a $81.4 million (59.6%) decrease in fuel reimbursements from major partners, as partners began purchasing fuel directly for contract flights. Excluding fuel and engine overhaul reimbursements, passenger revenue increased 5.9%.
- Profitability Increase: Net income rose 60.2% to $15.0 million. This improvement was largely due to a $7.1 million impairment charge on marketable securities recorded in Q1 2009 that did not recur in 2010, alongside lower fuel costs and interest expenses.
- Expense Fluctuations:
- Fuel: Fuel expense dropped 47.7% to $73.5 million due to partner fuel purchasing arrangements, despite a 52.7% increase in the average price per gallon ($2.52 vs $1.65).
- Maintenance: Maintenance costs increased 15.8% to $106.8 million, driven by scheduled CRJ200 engine overhauls under United Express agreements.
- Interest: Interest expense decreased 6.0% to $21.6 million due to lower LIBOR rates.
- Operational Growth: Available Seat Miles (ASMs) increased 9.9% to 5.64 billion, and passenger load factor improved to 77.1% from 75.0%.
Guidance, Outlook, Risks, and Contingencies
- Contract Disputes (Delta): SkyWest is in ongoing negotiations with Delta regarding the calculation of average rates for the Delta Connection Program. Delta previously demanded rate adjustments or termination; SkyWest elected to adjust rates but disputes Delta's methodology. Revenue is currently recorded based on management's best estimate of the settlement.
- Legal Proceedings (IROP Dispute): A significant lawsuit exists regarding the allocation of liability for Irregular Operations (IROP) expenses. Delta has withheld approximately $25 million (plus subsequent amounts) since 2007. SkyWest has recognized $31.7 million in revenue related to these withheld funds. No loss has been accrued as the outcome is not deemed probable or estimable, but a negative resolution could impact financial results.
- Market Risk:
- Fuel: SkyWest bears fuel price risk on pro-rate operations. A hypothetical 25% increase in fuel prices would have added $4.6 million to Q1 2010 expenses.
- Interest Rates: 36.8% of long-term debt is variable rate. A 1% increase in rates would increase interest expense by $1.9 million, though most of this is passed through to partners as revenue.
- Capital Expenditures: The company invested $106.2 million in flight equipment during the quarter, including four new CRJ700s financed with $81.7 million in new debt.
Investor Verification Checklist
- Delta Rate Settlement: Verify the status of negotiations regarding the Delta Connection average rate methodology and potential impact on future revenue recognition.
- IROP Litigation Outcome: Monitor the legal proceedings regarding the $25+ million withheld by Delta for IROP expenses; assess the risk of revenue reversal or additional damages.
- Maintenance Cost Sustainability: Confirm if the elevated maintenance costs due to CRJ200 engine overhauls are temporary or indicative of a recurring quarterly expense through 2012.
- Fleet Expansion: Review the integration of new aircraft (CRJ700s and CRJ900s) and the commencement of ASA's United Express operations (14 CRJ200s) on capacity and cost structures.
- Liquidity Position: Assess the adequacy of the $64.4 million cash balance and $654.5 million in marketable securities against upcoming debt maturities and lease obligations.