Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 contract flying agreements with major partners Delta Air Lines, United Air Lines, and Midwest Airlines, providing scheduled passenger and air freight service.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Operating Revenues | $934.1 million | $2,753.0 million |
| Operating Income | $60.3 million | $201.4 million |
| Net Income | $26.2 million | $91.7 million |
| Diluted EPS | $0.45 | $1.55 |
| Operating Cash Flow | N/A | $348.8 million |
| Cash & Cash Equivalents | $152.2 million | $152.2 million (Balance Sheet) |
| Total Debt (Long-term + Current) | $1,786.4 million | $1,786.4 million (Balance Sheet) |
| Working Capital | $833.0 million | $833.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.7% for the quarter and 9.3% for the nine-month period compared to 2007. This growth was primarily driven by increased fuel and engine overhaul reimbursements from major partners, which are recorded as revenue.
- Profitability Decline: Despite revenue growth, Net Income decreased 39.1% for the quarter and 22.5% for the nine-month period. This was due to reduced block hours from partners, higher maintenance costs, and fuel price risks on pro-rate operations.
- Cost Increases:
- Fuel: Fuel costs rose 28.0% (quarter) and 31.4% (nine months) due to higher average prices per gallon ($3.92 vs $2.50 in Q3).
- Maintenance: Maintenance expenses increased 30.5% (quarter) and 28.9% (nine months), largely due to the timing of engine overhauls and higher costs associated with used aircraft added to the fleet.
- Operational Volume: Available Seat Miles (ASMs) decreased 7.1% in the quarter and 1.3% for the nine months, reflecting reduced utilization by major partners and a reduction in aircraft operated for Midwest Airlines.
Outlook, Risks, and Contingencies
- Midwest Airlines Restructuring: Midwest Airlines is undergoing financial restructuring. SkyWest agreed to reduce aircraft from 21 to 12 and defer $8.9 million in payments. There is a risk that Midwest may reject the agreement in bankruptcy, leaving SkyWest with residual aircraft ownership risk.
- Delta Dispute: A significant legal dispute exists with Delta Air Lines regarding the allocation of liability for irregular operations (IROP) expenses. Delta has withheld approximately $25 million in payments. SkyWest has recognized $32.4 million in revenue related to these withheld funds but has not accrued a loss as the outcome is not yet probable or estimable.
- Auction Rate Securities: Due to credit market instability, auctions for $8.9 million of SkyWest's securities failed. These are now valued using discounted cash flow analysis (Level 3 inputs) rather than market quotes. The company believes these fluctuations are temporary.
- Capital Expenditures: SkyWest has firm commitments to acquire 22 new regional jets through 2010, with estimated expenditures of $528 million. Financing is expected through a mix of operating leases and debt, though credit market volatility poses a risk to funding availability.
- Investment in Trip Linhas Aereas: SkyWest invested $5 million for a 6.7% stake in Brazilian airline Trip, with potential additional investments of $25 million contingent on financial targets.
Investor Verification Checklist
- Midwest Exposure: Verify the status of Midwest Airlines' restructuring and the likelihood of contract rejection or bankruptcy.
- Delta Litigation: Monitor the progress of the IROP expense dispute and potential impact on cash flow if withheld funds are not recovered.
- Liquidity of Investments: Assess the liquidity risk associated with the $8.9 million in failed auction rate securities.
- Fuel Hedging: Review the extent of fuel price risk exposure on pro-rate operations where SkyWest bears the cost.
- Financing Terms: Confirm the ability to secure financing for the $528 million aircraft commitment given current credit market conditions.