Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company primarily operates under code-share agreements with Delta Air Lines, United Air Lines, and Midwest Airlines, providing contract flying and pro-rate services.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Operating Revenues | $868.0 million | $789.0 million |
| Operating Income | $68.2 million | $79.6 million |
| Net Income | $29.1 million | $34.8 million |
| Diluted EPS | $0.47 | $0.53 |
| Operating Cash Flow | $136.5 million | $100.7 million |
| Cash and Cash Equivalents | $240.1 million | $442.0 million (Q1 2007) |
| Total Debt (Long-term + Current) | $1,827.6 million | N/A |
| Working Capital | $733.4 million | N/A |
Key Ratios: Current ratio of 2.7:1. Revenue per available seat mile (RASM) was 15.6 cents; Cost per available seat mile (CASM) was 14.9 cents.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 10.0% year-over-year, driven by a 5.4% increase in available seat miles (ASMs) due to fleet expansion to 440 aircraft.
- Profitability Decline: Net income decreased 16.2% to $29.1 million. Operating income fell 14.3% to $68.2 million.
- Fuel Costs: Fuel cost per ASM surged 26.8% to 5.3 cents, reflecting a 52.9% increase in the average price per gallon ($3.08 vs. $2.01). However, United and Delta absorbed fuel risk for most contract flights, mitigating the full impact.
- Cost Structure: Maintenance costs per ASM increased to 1.5 cents due to engine overhaul timing and the integration of used aircraft. Salaries and wages per ASM decreased to 3.3 cents, largely due to Delta assuming ground handling responsibilities in Atlanta.
- Liquidity: Cash and cash equivalents increased by $117.3 million during the quarter, despite significant capital expenditures and stock repurchases.
Guidance, Outlook, and Risks
- Outlook: SkyWest plans to acquire 22 additional regional jet aircraft through 2010 to transition United Express from turboprops to regional jets. The company also intends to exchange four CRJ200s for four CRJ900s in Delta operations.
- Acquisition Attempt: On April 7, 2008, SkyWest proposed acquiring ExpressJet Holdings, Inc. for $3.50 per share. This proposal was rejected by ExpressJet's Special Committee on April 25, 2008.
- Legal Contingency: A dispute with Delta Air Lines regarding the allocation of irregular operations (IROP) expenses resulted in Delta withholding approximately $28.5 million as of March 31, 2008. SkyWest has filed a lawsuit; no loss has been accrued as the outcome is not deemed probable.
- Investment Risk: The company holds $34.9 million in auction rate securities. Due to credit market instability, auctions failed in Q1 2008, causing a temporary unrealized loss of $0.7 million. These are classified as Level 3 fair value measurements.
- Contract Renewals: Contractual rate resets with United were not finalized as of March 31, 2008. Revenues are currently recorded based on prior rates plus adjustment factors.
Investor Verification Checklist
- Delta Dispute Resolution: Monitor the status of the $28.5 million withholding by Delta and the outcome of the Georgia state court lawsuit.
- Auction Rate Securities: Verify the liquidity status of the $34.9 million investment in auction rate securities and potential for further write-downs if the decline is deemed other than temporary.
- Fuel Hedging and Pass-through: Confirm the extent to which fuel price increases are passed through to major partners (Delta/United) versus absorbed by SkyWest on pro-rate routes.
- United Rate Reset: Track the finalization of the United Express contractual rate reset, which impacts future revenue recognition.
- Capital Allocation: Review the impact of the $69.0 million stock repurchase program and $48.1 million in aircraft purchases on future liquidity and working capital.