Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
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. As of June 30, 2007, the consolidated fleet consisted of 434 aircraft.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Operating Revenues | $855.0 million | $1,644.0 million |
| Operating Income | $88.9 million | $168.4 million |
| Net Income | $40.6 million | $75.4 million |
| Diluted EPS | $0.62 | $1.15 |
| Cash Flow from Operations | N/A | $212.9 million |
| Total Assets | $3,982.5 million (as of June 30, 2007) | |
| Total Long-Term Debt | $1,908.2 million (as of June 30, 2007) | |
| Working Capital | $744.5 million (as of June 30, 2007) | |
| Current Ratio | 2.7:1 (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 8.2% for the quarter and 7.2% for the six-month period compared to the same periods in 2006. This growth was driven primarily by a fleet expansion from 397 to 434 aircraft.
- Profitability: Net income increased 3.4% for the quarter ($40.6M vs $39.3M) and 2.1% for the six-month period ($75.4M vs $73.9M). Diluted EPS remained flat at $0.62 for the quarter but decreased slightly to $1.15 for the six-month period (from $1.19) due to share count increases.
- Operational Efficiency: Cost per Available Seat Mile (ASM) decreased to 13.8 cents for the quarter and 13.9 cents for the six-month period, down from 14.4 cents and 14.5 cents respectively in 2006. This was largely due to lower fuel costs per ASM and the addition of more efficient CRJ700 and CRJ900 aircraft.
- Fleet Expansion: The company took delivery of eight new CRJ900s, ten used CRJ700s, and eight used CRJ200s during the six-month period.
Outlook, Risks, and Management Commentary
- Outlook: Management intends to take delivery of three CRJ200s (for Midwest) and two CRJ700s (for Delta) between July 1, 2007, and December 31, 2007. The company believes current working capital is sufficient to meet requirements for the next 12 months.
- Stock Repurchase: The Board authorized a repurchase of up to 5 million shares. During the quarter ended June 30, 2007, the company repurchased approximately 2.3 million shares for $60.2 million.
- Risk Factors:
- Partner Financial Health: Significant risk exists regarding the financial condition and restructuring of major partners Delta and United, both of which recently emerged from bankruptcy. Termination of code-share agreements could materially adversely affect operations.
- New Partnership: Risks associated with the new code-sharing relationship with Midwest Airlines, including potential reimbursement shortfalls if actual costs exceed pre-determined rates.
- Fuel Volatility: While contract flying partners bear fuel risk for most flights, the company bears fuel risk on pro-rate operations (approx. 5% of revenue).
- Legal Matters: The company is subject to routine legal actions, but management does not believe the outcome will have a material adverse effect.
Investor Verification Checklist
- Verify the stability and financial health of Delta and United, given SkyWest's heavy reliance on these partners for 95% of passenger revenue.
- Monitor the integration and profitability of the new Midwest Airlines code-share agreement.
- Track fuel price trends and their impact on the 5% of pro-rate revenue where SkyWest bears the fuel cost.
- Review the status of the $38.5 million in firm aircraft commitments and the company's ability to secure financing for future fleet expansion.
- Assess the impact of the $60.2 million stock repurchase on future liquidity and capital allocation strategy.