Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: SkyWest operates the largest independent regional airline in the United States, providing scheduled passenger and air freight service. The company operates exclusively under code-sharing agreements with Delta Air Lines (Delta Connection) and United Air Lines (United Express). As of December 31, 2002, the fleet consisted of 76 Embraer EMB-120 Brasilia turboprops and 73 Canadair Regional Jets (CRJs). Substantially all flights operate as contract flying, where major partners control scheduling and pricing.
Key Financial Metrics
| Metric (in thousands, except per share) | 2002 | 2001 |
|---|---|---|
| Operating Revenues | $774,447 | $601,865 |
| Operating Income | $119,555 | $65,564 |
| Net Income | $86,866 | $50,516 |
| Diluted EPS | $1.51 | $0.88 |
| Total Assets | $999,384 | $831,566 |
| Stockholders' Equity | $638,686 | $545,840 |
| Long-term Debt (net of current) | $125,379 | $113,688 |
| Net Cash Provided by Operating Activities | $173,703 | $150,791 |
| Working Capital | $391,845 | $270,818 |
Operating Efficiency: Cost per available seat mile (ASM) decreased to 15.1 cents in 2002 from 18.9 cents in 2001. Load factor increased to 68.7% from 61.1%.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 28.7% to $774.4 million, driven primarily by a 72.7% increase in revenue passenger miles due to the addition of 26 new CRJs.
- Profitability: Net income increased 72% to $86.9 million. This includes a one-time cumulative effect of a change in accounting principle of $8.6 million (net of tax) related to CRJ engine overhaul costs.
- Cost Structure: Total operating expenses increased 22.8% to $658.5 million. However, expenses as a percentage of revenue decreased from 89.1% to 85.0% due to the efficiency of the CRJ fleet.
- Accounting Change: The company switched from the accrual method to the direct-expense method for CRJ engine overhaul costs effective January 1, 2002, reversing a $14.1 million accrual.
Guidance, Outlook, Risks, and Contingencies
United Air Lines Bankruptcy
On December 9, 2002, United Air Lines filed for Chapter 11 reorganization. This created significant uncertainty:
- Unpaid Fees: United failed to pay approximately $14 million in pre-petition service fees. The company did not recognize $9.7 million of this as revenue due to collection uncertainty and established a reserve against the remainder.
- Contract Status: United may elect to affirm or reject the United Express agreement. Management anticipates that financial performance and margins will be less predictable as partners restructure.
Expansion Commitments
The company has firm commitments to acquire 70 additional CRJs at an aggregate cost of approximately $1.4 billion, with deliveries scheduled through January 2005. Options exist for an additional 119 aircraft.
Other Risks
- Industry Volatility: Continued impact from the September 11, 2001 attacks, the war in Iraq, and economic slowdowns affecting passenger demand.
- Unionization: Employees are currently non-union, but management anticipates continued organization efforts which could increase costs or cause work stoppages.
- Fleet Reliance: Operations rely on only two aircraft types (Brasilia and CRJ), exposing the company to risks related to maintenance, FAA directives, or manufacturer delivery issues.
Investor Verification Checklist
- United Bankruptcy Resolution: Verify the status of the $14 million receivable from United and the terms of the reaffirmed or new operating agreement.
- Accounting Change Impact: Confirm the long-term sustainability of the cost savings realized from the shift to the direct-expense method for engine overhauls.
- Capital Expenditure Funding: Assess the company's ability to finance the $1.4 billion in committed aircraft acquisitions without diluting equity or over-leveraging the balance sheet.
- Contract Renewals: Monitor the renewal negotiations for code-sharing agreements with Delta and United, particularly regarding fee-per-departure rates.
- Labor Relations: Track any developments regarding unionization efforts among pilots and flight attendants.