SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: SkyWest operates the largest independent regional airline in the U.S., providing scheduled passenger and freight service primarily under contract flying agreements with Delta Air Lines and United Airlines. As of March 31, 2003, the fleet consisted of 75 Embraer EMB-120 Brasilia turboprops and 86 Canadair Regional Jets (CRJs).

Key Financial Metrics

Note: Q1 2002 Net Income included a one-time cumulative effect of a change in accounting principle of $8.6 million (net of tax).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 19.0% to $207.4 million, driven by a 34.5% increase in Available Seat Miles (ASMs) due to fleet expansion (13 new CRJs added). This was partially offset by a 15.4% decrease in yield per revenue passenger mile.
• Profitability Decline: Net income decreased 45.6% to $13.3 million. Excluding the one-time accounting adjustment in 2002, the decline is attributed to higher operating expenses and interest costs relative to revenue growth.
• Expense Increases: Total operating expenses rose 23.3%. Fuel costs increased significantly (50.6% price increase per gallon), though fuel is largely reimbursable by partners. Interest expense jumped from $52,000 to $1.3 million due to new debt financing for aircraft acquisitions.
• Balance Sheet Shift: Total assets increased to $1.2 billion from $1.0 billion, primarily due to aircraft acquisitions. Long-term debt increased substantially to fund fleet expansion, shifting the capital mix from 83.6% equity (Dec 2002) to 67.4% equity (Mar 2003).
• Cash Flow: Net cash provided by operating activities was $2.9 million, compared to a use of $1.0 million in the prior year. However, investing activities used $92.8 million for aircraft purchases, resulting in a net decrease in cash of $29.6 million for the quarter.

Guidance, Outlook, and Risks

• Contract Negotiations: As of March 31, 2003, SkyWest had not completed fee-per-departure rate negotiations with Delta or United for the 2003 fiscal year. Revenues for Q1 2003 were recorded based on prior rates reduced by management's estimates of negotiation outcomes.
• United Airlines Bankruptcy: United filed for Chapter 11 bankruptcy in December 2002. SkyWest faces risks regarding the affirmation or rejection of its United Express agreement and potential non-payment of approximately $14 million in fees owed at the time of filing.
• Fleet Expansion: The company has firm orders for 57 additional CRJs and options for 119 more. Committed expenditures are approximately $560 million for the remainder of 2003, $300 million in 2004, and $280 million in 2005.
• Accounting Changes: In March 2003, SkyWest amended its engine services agreement with GE, reversing a $22.8 million maintenance contract liability and asset previously recorded. The company now pays for services on a time-and-materials basis.
• Market Risks: The company is exposed to fuel price volatility (though partners bear the risk), interest rate fluctuations on variable-rate debt, and potential unionization of its workforce.

Investor Verification Checklist

• United Bankruptcy Impact: Verify the status of United Airlines' bankruptcy proceedings and the likelihood of recovering the $14 million in unpaid fees.
• Contract Rate Finalization: Monitor the outcome of 2003 fee-per-departure negotiations with Delta and United to confirm if estimated revenues hold.
• Debt Refinancing: Confirm the company's ability to refinance the $141 million in temporary debt for new CRJs into long-term lease agreements as planned.
• Fuel Cost Pass-Through: Verify that the contractual mechanisms for passing fuel cost increases to major partners remain effective despite industry turbulence.
• United Express Agreement: Assess the risk of United rejecting the contract flying agreement, which would materially impact SkyWest's revenue base (43% of capacity).