Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2002
Business Overview: SkyWest operates a regional airline (SkyWest Airlines) providing scheduled passenger service under code-sharing agreements with Delta Air Lines and United Airlines. As of June 30, 2002, approximately 68% of capacity was under the Delta code and 32% under the United code. The company transitioned to essentially 100% contract flying effective January 1, 2002.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2002 | Six Months Ended June 30, 2001 |
|---|---|---|
| Operating Revenues | $361,742 | $280,858 |
| Operating Expenses | $309,726 | $244,640 |
| Operating Income | $52,016 | $36,218 |
| Net Income | $35,639 | $27,866 |
| Diluted EPS | $0.62 | $0.49 |
| Cash and Cash Equivalents (End of Period) | $76,078 | $38,728 |
| Marketable Securities | $287,642 | $270,520 |
| Total Debt (Current + Long-Term) | $144,429 | $125,839 |
| Working Capital | $344,750 | $279,220 |
Operating Statistics (Six Months Ended June 30, 2002):
- Revenue Passenger Miles: 1,362,910,000 (87.4% increase YoY)
- Available Seat Miles: 2,020,744,000 (62.8% increase YoY)
- Passenger Load Factor: 67.4% (8.8 point increase YoY)
- Cost per Available Seat Mile (CASM): 15.3 cents (22.3% decrease YoY)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 28.8% year-over-year, driven primarily by an 87.4% increase in revenue passenger miles due to the integration of additional Canadair Regional Jets (CRJs).
- Profitability: Net income increased 27.9% to $35.6 million. Operating margins improved as operating expenses grew at a slower rate (26.7%) than revenues.
- Cost Efficiency: CASM decreased significantly to 15.3 cents from 19.7 cents, attributed to the higher mix of fuel-efficient CRJs and lower fuel prices (average price decreased 19.8% to $0.89/gallon).
- Liquidity: Cash and cash equivalents increased by $35.9 million to $76.1 million. Net cash provided by operating activities was $67.7 million.
- Debt: Total debt increased due to new long-term debt issuances ($24.8 million proceeds) to fund aircraft acquisitions, partially offset by principal payments.
Guidance, Outlook, and Risks
Outlook and Capital Resources: Management believes working capital is sufficient to meet requirements for at least the next 12 months. The company has agreements to acquire 87 additional CRJs at an aggregate cost of approximately $1.7 billion, with deliveries scheduled from July 2002 through January 2005. Options exist for 119 additional CRJs.
Key Risks and Contingencies:
- Contractual Dependence: Substantially all revenue is generated through contract flying agreements with Delta and United. Revenue is subject to annual negotiations and performance incentives.
- Foreign Subsidy Risk: A portion of long-term debt related to Brasilia aircraft is supported by subsidy payments from the Federative Republic of Brazil. While no default is anticipated, the risk of non-payment exists.
- Insurance Costs: Liability insurance costs increased following the September 11, 2001 terrorist attacks, though this was offset by lower costs per seat mile due to fleet expansion.
- Market Risk: The company is exposed to interest rate fluctuations on variable-rate debt (11.8% of total long-term debt), though management believes interest income from securities can offset increased interest expense.
Investor Verification Checklist
- Verify the status and terms of the 87 firm CRJ aircraft commitments and the financing strategy (debt vs. lease) for these deliveries.
- Confirm the stability of the contract flying agreements with Delta and United, specifically regarding fee-per-departure rates and incentive structures.
- Monitor the status of the Brazilian export support program subsidies supporting a portion of the long-term debt.
- Review the impact of the transition to 100% contract flying on future revenue volatility compared to the previous pro-rate model.
- Assess the sustainability of the improved load factors (67.4%) as the company expands into new markets.