Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Annual Report on Form 10-K
Period Ended: December 31, 2003
Business Overview: SkyWest operates as a major independent regional airline in the United States, providing scheduled passenger and air freight service. The company operates under code-share agreements with major partners: Delta Air Lines (51% of capacity), United Airlines (47% of capacity), and Continental Airlines (2% of capacity). As of year-end 2003, the fleet consisted of 76 Embraer EMB-120 turboprops and 109 Bombardier CRJ200 regional jets.
Key Financial Metrics
| Metric (in thousands, except per share) | 2003 | 2002 |
|---|---|---|
| Operating Revenues | $888,026 | $774,447 |
| Operating Income | $108,480 | $119,555 |
| Net Income | $66,787 | $86,866 |
| Diluted EPS | $1.15 | $1.51 |
| Total Assets | $1,529,210 | $999,384 |
| Long-Term Debt | $462,773 | $125,379 |
| Stockholders' Equity | $709,063 | $638,686 |
| Operating Cash Flow | $157,743 | $173,703 |
Operating Metrics:
- Available Seat Miles (ASMs): 5.88 billion (2003) vs. 4.36 billion (2002).
- Load Factor: 71.9% (2003) vs. 68.7% (2002).
- Cost per ASM: 13.4 cents (2003) vs. 15.1 cents (2002).
- Revenue per ASM: 15.1 cents (2003) vs. 17.8 cents (2002).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 14.6% to $888.0 million, driven primarily by a 34.9% increase in ASMs due to the delivery of 39 additional CRJ200 aircraft.
- Profitability Decline: Net income decreased 23.1% to $66.8 million. This decline was attributed to lower fee-per-departure rates from major partners and increased interest expense ($9.9 million in 2003 vs. $3.6 million in 2002) resulting from new debt financing for aircraft acquisitions.
- Debt Expansion: Long-term debt increased significantly to $493.7 million (including current maturities) from $137.9 million in 2002, reflecting $372.8 million in new financing for CRJ200s.
- Cost Efficiency: Despite higher absolute expenses, the cost per ASM decreased 11.3% due to the operational efficiency of the newer CRJ200 fleet compared to the older EMB120s.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Commitments:
- Aircraft Orders: The company has firm orders for 30 CRJ700s (deliveries Jan 2004–May 2005) and options for 80 additional aircraft. Total committed expenditures for firm orders are approximately $750 million.
- Lease Obligations: Future minimum lease payments for aircraft and facilities total approximately $1.7 billion over the remaining lease terms.
Risks and Contingencies:
- United Airlines Bankruptcy: United filed for Chapter 11 reorganization in December 2002. While SkyWest signed a long-term contract with United in September 2003, the bankruptcy proceedings introduce uncertainty regarding future operations and the utilization of new aircraft.
- Partner Dependency: Over 98% of revenues are derived from Delta and United. Termination of these contracts or changes in terms could materially impact financial results.
- Unionization: Employees are currently non-unionized, but management anticipates continued organization efforts, which could increase labor costs.
- Accounting Change: In 2002, the company changed its accounting method for CRJ200 engine overhauls from accrual to direct-expense, resulting in a cumulative effect adjustment of $8.6 million (net of tax) in 2002. No such adjustment occurred in 2003.
Investor Verification Checklist
- United Airlines Status: Verify the progress of United's Chapter 11 reorganization and the stability of the new 11-year contract signed in September 2003.
- Debt Servicing: Assess the company's ability to service the increased debt load ($493.7 million) and meet $750 million in aircraft purchase commitments.
- Contract Renewals: Monitor the expiration and renewal terms of the Delta Connection agreement (expires 2008) and the United Express agreement (expires incrementally 2012–2016).
- Fleet Transition: Track the delivery schedule and integration of the new CRJ700 fleet and the associated financing arrangements.
- Labor Relations: Watch for updates on pilot and employee unionization efforts, which could alter the cost structure.