Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: SkyWest operates the largest regional airline in the United States through its subsidiaries, SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company provides scheduled passenger service under code-share agreements with major carriers, primarily Delta Air Lines (56.3% of capacity), United Air Lines (40.3%), and Midwest Airlines (3.4%). As of year-end 2008, the consolidated fleet consisted of 442 aircraft, including Bombardier CRJ200, CRJ700, and CRJ900 regional jets, as well as Embraer Brasilia and ATR-72 turboprops.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Operating Revenues | $3,496.2 million | $3,374.3 million |
| Operating Income | $255.2 million | $344.5 million |
| Net Income | $112.9 million | $159.2 million |
| Diluted EPS | $1.93 | $2.49 |
| Total Assets | $4,014.3 million | $3,990.5 million |
| Long-Term Debt (net of current) | $1,681.7 million | $1,732.7 million |
| Cash & Cash Equivalents | $125.9 million | $122.8 million |
| Working Capital | $834.1 million | $811.9 million |
| Current Ratio | 3.2:1 | 3.0:1 |
Operational Metrics: Available Seat Miles (ASMs) decreased 4.1% to 22.0 billion. Block hours decreased 4.3%. Revenue per ASM increased to 15.9 cents, while Cost per ASM rose to 15.2 cents.
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 29.1% to $112.9 million. This was driven by a 4.3% reduction in block hours scheduled by major partners, which reduced profitability as fixed costs could not be reduced proportionally.
- Revenue Composition: While total operating revenue increased 3.6%, this was largely due to higher fuel and engine overhaul reimbursements from partners. Passenger revenue excluding these reimbursements actually decreased 3.5%.
- Cost Increases: Maintenance costs surged 28.1% ($83.7 million increase), primarily due to the timing of engine overhauls on aging CRJ200 and CRJ700 fleets. Fuel costs increased 14.9% due to higher average prices ($3.33/gallon vs. $2.41/gallon in 2007), though the majority of fuel risk is passed through to partners.
- Midwest Restructuring: Following Midwest Airlines' financial restructuring, SkyWest reduced aircraft assigned to Midwest from 21 to 12 and deferred $9.0 million in payments, which were not recognized as revenue in 2008.
Guidance, Outlook, Risks, and Contingencies
- Outlook & Growth: SkyWest has firm orders for 19 new aircraft (18 CRJ700s and 1 CRJ900) and announced an agreement to operate 10 additional CRJ900s for Delta in 2009. The company plans to replace older CRJ200s with these newer jets.
- Key Risks:
- Partner Dependency: Approximately 96.6% of revenue is derived from Delta and United. The financial instability of these partners poses a significant risk.
- Midwest Airlines: Continued uncertainty regarding Midwest's financial restructuring and potential bankruptcy could impact the 3.4% of revenue generated from this partner.
- Labor: ASA employees are unionized, and SkyWest Airlines faces ongoing unionization efforts. Increased labor costs or work stoppages could materially affect operations.
- Fleet Aging: Maintenance costs are expected to rise as the CRJ200 fleet ages and warranties expire.
- Legal Contingency: SkyWest is engaged in litigation with Delta 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 recorded a loss allowance as the outcome is not yet probable.
Investor Verification Checklist
- Partner Financial Health: Verify the current financial status and restructuring progress of Delta, United, and specifically Midwest Airlines.
- Midwest Revenue Recognition: Confirm the status of the $9.0 million deferred payments from Midwest and the timeline for collection.
- Delta Litigation Status: Monitor the resolution of the IROP expense dispute with Delta, which involves withheld payments totaling approximately $25 million.
- Maintenance Cost Trajectory: Assess the impact of aging CRJ200 fleets on future maintenance expenses and whether reimbursement rates from partners will keep pace.
- Labor Negotiations: Track unionization efforts at SkyWest Airlines and upcoming contract negotiations for ASA pilots and flight attendants.