Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: SkyWest is the largest regional airline in the United States, operating through two wholly-owned subsidiaries: SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company operates over 2,400 daily departures to 229 destinations. Substantially all flights are operated under code-share agreements with Delta Air Lines (Delta) and United Air Lines (United). Approximately 94% of flights are structured as fixed-fee contract flights, where partners reimburse direct operating costs (including fuel) and pay a fee for operations.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 Value | 2005 Value |
|---|---|---|
| Operating Revenues | $3,114.7 million | $1,964.0 million |
| Operating Income | $339.2 million | $220.4 million |
| Net Income | $145.8 million | $112.3 million |
| Diluted EPS | $2.30 | $1.90 |
| Total Assets | $3,731.4 million | $3,320.6 million |
| Long-Term Debt (net of current) | $1,675.6 million | $1,422.8 million |
| Working Capital | $687.0 million | $77.7 million |
| Cash & Cash Equivalents | $415.5 million | $140.6 million |
| Operating Cash Flow | $491.6 million | $207.5 million |
Operational Metrics:
- Available Seat Miles (ASMs): 20.2 billion (58.9% increase vs. 2005)
- Passenger Load Factor: 78.3% (vs. 75.0% in 2005)
- Fleet Size: 410 aircraft (235 CRJ200s, 92 CRJ700s, 9 CRJ900s, 62 Brasilia turboprops, 12 ATR-72 turboprops)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 58.6% to $3.11 billion, driven primarily by a 58.9% increase in ASMs resulting from the acquisition of ASA (completed Sept 2005) and the addition of new aircraft.
- Profitability: Net income rose 30% to $145.8 million. Operating income increased 54% to $339.2 million.
- Cost Structure: Total operating and interest expenses increased 61.0% to $2.89 billion. Fuel costs per ASM increased 8.7% to 5.0 cents due to rising fuel prices ($2.20/gal average in 2006 vs. $2.05/gal in 2005). However, non-fuel operating expenses per ASM decreased 2.1% due to operational efficiencies.
- Liquidity: Working capital improved significantly from $77.7 million in 2005 to $687.0 million in 2006, aided by strong operating cash flow and a public offering of common stock in April 2006.
- Debt: Long-term debt increased to $1.78 billion, primarily due to debt assumed in the ASA acquisition and financing for new aircraft.
Guidance, Outlook, Risks, and Contingencies
Outlook and Growth:
- The company has firm orders for 8 new CRJ900s and plans to place 35 additional aircraft into service in 2007 (11 CRJ200s via third-party lease, 12 CRJ700s subleased from Delta, and 4 owned CRJ200s).
- New contracts were secured in late 2006 to operate 12 CRJ700s for Delta (previously operated by Comair) and up to 25 CRJ200s for Midwest Airlines.
- Delta has committed to providing opportunities for 20 additional regional jets by the end of 2007.
Key Risks:
- Partner Dependency: The company is highly dependent on Delta and United, which accounted for approximately 95.6% of total revenues in 2006. Delta was in Chapter 11 bankruptcy reorganization during the period; while agreements were assumed by the court, the risk of termination or restructuring remains.
- Fuel Prices: While Delta and United bear the fuel risk for most regional jet flights, the company bears the risk for Brasilia turboprop flights. Rising fuel prices generally increase operating costs and can reduce partner demand.
- Labor Relations: ASA employees are unionized (pilots, flight attendants, flight controllers) with contracts amendable or under negotiation. SkyWest Airlines employees are non-unionized but face ongoing unionization efforts.
- Contractual Obligations: The company has significant fixed obligations, including approximately $3.5 billion in future minimum lease payments and $1.78 billion in long-term debt.
Investor Verification Checklist
- Delta Bankruptcy Status: Verify the final confirmation and implementation of Delta's Chapter 11 reorganization plan and its impact on the long-term stability of the Delta Connection agreements.
- Fleet Delivery Schedule: Confirm the timely delivery and financing of the 35 aircraft committed for 2007 service, as delays could impact revenue growth targets.
- Labor Negotiations: Monitor the outcome of ongoing collective bargaining negotiations with ASA unions, as new contracts could materially increase labor costs.
- Fuel Hedging/Pass-Through: Review the specific terms of fuel cost pass-through for the Brasilia turboprop fleet to assess exposure to volatile fuel prices.
- Midwest Airlines Agreement: Assess the financial terms and stability of the new agreement with Midwest Airlines, a smaller partner compared to Delta and United.