Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: SkyWest operates as a regional airline partner for major carriers, primarily Delta Air Lines, United Airlines, and Continental Airlines. As of June 30, 2004, the fleet consisted of 74 EMB120s, 111 CRJ200s, and 5 CRJ700s. Approximately 52% of capacity was operated under the United code, 46% under Delta, and 2% under Continental.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2004 |
Six Months Ended June 30, 2004 |
|---|---|---|
| Operating Revenues | $267,387 | $521,091 |
| Operating Expenses | $232,228 | $451,075 |
| Operating Income | $35,159 | $70,016 |
| Net Income | $20,054 | $39,424 |
| Diluted EPS | $0.34 | $0.67 |
| Cash Flow from Operations | N/A | $82,985 |
| Total Assets | $1,611,786 | N/A |
| Total Long-Term Debt | $512,444 | N/A |
| Working Capital | $524,793 | N/A |
Note: Working Capital calculated as Current Assets ($685,967) minus Current Liabilities ($161,174).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 25.7% for the quarter and 24.1% for the six months compared to the same periods in 2003. This was driven by a 27.2% increase in Available Seat Miles (ASMs) due to fleet expansion (190 aircraft in 2004 vs. 170 in 2003).
- Profitability: Net income rose 34.6% for the quarter ($20.1M vs. $14.9M) and 39.8% for the six months ($39.4M vs. $28.2M). Operating margins improved as expenses grew at a slower rate than revenues.
- Cost Structure: Fuel costs per ASM increased 24.0% for the quarter due to higher fuel prices ($1.33/gallon vs. $1.00/gallon). However, total operating expenses excluding fuel grew at a lower rate than ASM growth due to efficiencies from larger regional jets.
- Accounting Change: A change in the estimated depreciable life of rotable spares (from 5 to 10 years) increased net income by $1.7M for the quarter and $3.4M for the six months.
Guidance, Outlook, and Risks
Management Commentary:
- Contract Negotiations: SkyWest reached a conceptual understanding with Delta regarding rates for 2004 and future periods, though a definitive agreement is still being negotiated. The United Express Agreement was approved by the bankruptcy court, providing stability for United operations.
- Fleet Expansion: The company has firm orders for 27 CRJ700s and 8 CRJ200s, with deliveries scheduled through May 2005. Gross committed expenditures are estimated at $468 million through year-end 2004 and $522 million in 2005.
- Liquidity: Management believes working capital is sufficient to meet requirements for the next 12 months. The company maintains a $10 million unsecured line of credit.
Risks and Contingencies:
- Partner Financial Health: Significant risk exists regarding United Airlines' ongoing Chapter 11 bankruptcy and Delta's potential financial distress. Termination of contracts by either partner could materially adversely affect operations.
- SEC Investigation: The SEC is investigating the company's 2002 change in accounting method for CRJ200 engine overhauls. Discussions regarding resolution are ongoing but unresolved.
- Legal Proceedings: A class-action lawsuit filed by former employees alleges unpaid wages and overtime; the company intends to vigorously oppose the claims.
- Fixed Obligations: The company has significant fixed obligations, including $512.4 million in long-term debt and approximately $1.8 billion in future minimum operating lease payments.
Investor Verification Checklist
- Contract Finalization: Verify the status of the definitive agreement with Delta and the stability of the United Express Agreement post-bankruptcy.
- SEC Investigation Status: Monitor updates regarding the SEC investigation into the 2002 accounting restatement for potential fines or further restatements.
- Fleet Delivery Schedule: Confirm adherence to the delivery schedule for the 35 ordered aircraft (CRJ700s and CRJ200s) to ensure capacity targets are met.
- Fuel Price Sensitivity: Assess the impact of rising fuel costs on profitability, noting that while partners bear risk for some routes, SkyWest bears risk for EMB120s and Continental routes.
- Debt Covenants: Review compliance with debt covenants, specifically the ratio of long-term debt to tangible net worth, given the high level of fixed obligations.