Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast. As of September 30, 2010, the company operated a fleet of 466 aircraft with over 2,800 daily departures. The company primarily operates under capacity purchase agreements with major partners Delta Air Lines (approx. 49.5% of capacity) and United Airlines (approx. 49.7% of capacity), with a smaller portion under AirTran Airways.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Operating Revenues | $686,858 | $1,968,861 |
| Operating Income | $58,282 | $149,991 |
| Net Income | $25,474 | $59,144 |
| Diluted EPS | $0.45 | $1.04 |
| Operating Cash Flow (9 months) | $280,115 | |
| Cash and Cash Equivalents (Sep 30, 2010) | $82,774 | |
| Marketable Securities (Sep 30, 2010) | $793,954 | |
| Total Long-Term Debt (Sep 30, 2010) | $1,943,031 | |
| Operating Margin (3 months) | 8.5% | 7.6% (9 months) |
Material Changes vs. Prior Period
- Revenue: For the three months ended September 30, 2010, operating revenues increased 7.7% to $686.9 million compared to $637.7 million in the prior year period. This increase was driven by higher fuel reimbursements from major partners. However, for the nine-month period, total operating revenues decreased 2.0% to $1.97 billion, primarily due to a significant decrease in fuel reimbursements compared to the prior year.
- Net Income: Net income for the three months ended September 30, 2010, decreased 10.8% to $25.5 million ($0.45 diluted EPS) from $28.6 million ($0.50 diluted EPS) in the prior year. For the nine-month period, net income decreased 7.8% to $59.1 million ($1.04 diluted EPS) from $64.2 million ($1.13 diluted EPS).
- Expenses: Aircraft fuel costs increased 41.1% for the quarter due to higher average fuel prices ($2.55/gallon vs. $2.23/gallon). However, for the nine-month period, fuel costs decreased 25.7% because major partners (Delta and United) purchased the majority of fuel for contract flights, reducing the company's direct fuel expense exposure.
- Operational Statistics: Available Seat Miles (ASMs) increased 6.4% for the quarter and 7.5% for the nine-month period, driven by the incremental placement of 18 new CRJ700 aircraft into service.
Guidance, Outlook, Risks, and Unusual Items
- Merger Activity: On August 3, 2010, SkyWest entered into an agreement to acquire ExpressJet Holdings, Inc. for approximately $133 million in cash. The merger is expected to close in the fourth quarter of 2010, subject to regulatory and shareholder approvals.
- Contract Disputes (Delta): SkyWest is in ongoing negotiations with Delta Air Lines regarding contractual rate resets under the Delta Connection Agreements. Delta has asserted rights to adjust rates to the "average" and "second lowest" rates of carriers in the program. SkyWest disagrees with Delta's methodology. As a result, passenger revenues decreased by $4.9 million in the quarter due to these rate provisions.
- Legal Proceedings:
- Delta IROP Dispute: SkyWest is litigating with Delta over the allocation of liability for irregular operations (IROP) expenses. Delta has withheld approximately $25 million (plus additional amounts) since 2007. SkyWest has not recognized revenue related to these withheld funds since July 2008.
- ExpressJet Litigation: Shareholder class action suits were filed regarding the proposed ExpressJet merger. A memorandum of understanding was reached in October 2010 to settle these actions, contingent on the merger's completion.
- Investments: SkyWest invested $7 million for a 30% stake in Air Mekong (Vietnam) in September 2010 and increased its investment in Trip Linhas Aereas (Brazil) by $10 million during the nine-month period.
- Outlook: Management anticipates that the average quarterly number of scheduled engine maintenance events experienced in Q3 2010 will likely continue through 2010, 2011, and Q1 2012, impacting maintenance expenses and reimbursements.
Key Facts for Investor Verification
- Delta Rate Negotiations: Verify the status of negotiations with Delta regarding the "average rate" and "second lowest rate" provisions, as the resolution will directly impact future revenue recognition.
- ExpressJet Merger Closing: Confirm the completion of the ExpressJet acquisition and any associated regulatory conditions or integration costs.
- Fuel Hedging/Reimbursement Structure: Monitor the proportion of fuel costs reimbursed by partners versus those borne directly by SkyWest, as this significantly impacts reported revenue and expense volatility.
- Legal Exposure: Track the outcome of the IROP expense litigation with Delta, which involves approximately $25 million in withheld funds plus ongoing withholdings.
- Debt Obligations: Review the schedule of long-term debt maturities ($1.94 billion total) and operating lease commitments ($2.79 billion total) to assess liquidity requirements.