Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company provides scheduled passenger and air freight services under code-share agreements with major carriers, primarily Delta Air Lines (56% of capacity) and United Air Lines (42% of capacity). As of September 30, 2009, the fleet consisted of 444 aircraft.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Operating Revenues | $637.7 million | $2,009.2 million |
| Net Income | $28.6 million | $64.2 million |
| Diluted Earnings Per Share | $0.50 | $1.13 |
| Operating Cash Flow | N/A | $309.0 million |
| Cash and Cash Equivalents | $108.2 million | $108.2 million (Ending Balance) |
| Working Capital | $876.7 million | N/A |
| Long-Term Debt | $1,845.3 million (Total) | $1,845.3 million (Total) |
| Current Ratio | 3.0:1 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 31.7% ($296.4 million) for the three months ended September 30, 2009, compared to the same period in 2008. This was primarily driven by an 85.4% decrease in fuel reimbursements from major partners due to lower fuel prices and changes in fuel purchasing arrangements.
- Net Income Increase: Despite lower revenues, net income increased 9.2% to $28.6 million for the quarter. This was largely due to a significant reduction in fuel costs (down 83.0%) and lower interest expenses resulting from decreased LIBOR rates.
- Expense Fluctuations: Aircraft maintenance costs increased 19.9% due to scheduled maintenance on aging CRJ200 and CRJ700 aircraft. Conversely, salaries and wages decreased 3.6% due to workforce reductions following the transition of ground handling stations to other providers.
- Operational Metrics: Available Seat Miles (ASMs) increased 5.6% for the quarter, while the passenger load factor improved to 81.3% from 78.8% in the prior year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Recent Developments
- United Express Expansion: On October 16, 2009, SkyWest entered into agreements to extend its United Express rights and enable ASA to operate 13 regional jets for United starting in Q1 2010.
- United Loan: SkyWest extended an $80 million secured term loan to United at 11% interest to provide operational funding.
- New Partnership: On November 4, 2009, SkyWest signed a code-share agreement with AirTran Airways to operate five CRJ200s.
- Midwest Termination: SkyWest is winding down its Midwest Services Agreement, removing 12 CRJ200 aircraft from service by January 2010.
Risks and Contingencies
- Delta Rate Dispute: Delta notified SkyWest and ASA in October 2009 to adjust contractual rates or face termination. SkyWest elected to adjust rates but disputes Delta's calculation methodology. Revenue is currently recorded based on management's best estimate.
- Legal Proceedings: SkyWest and ASA are in litigation with Delta regarding the allocation of liability for irregular operations (IROP) expenses. Delta has withheld approximately $25 million (plus subsequent amounts) since December 2007. SkyWest has recognized $32.4 million in revenue related to these withheld funds but has not accrued a loss as the outcome is not estimable.
- Partner Financial Health: The company faces risks related to the financial stability of Delta and United, which account for 98.2% of its capacity. Bankruptcy or termination of these agreements would materially impact operations.
- Marketable Securities: The company recognized a $7.1 million pre-tax impairment charge on marketable securities during the nine-month period. It also holds $4.5 million in auction rate securities classified as Level 3 assets due to market illiquidity.
Investor Verification Checklist
- Delta Contract Rates: Verify the final resolution of the Delta Connection Agreement rate reset and the potential impact on future revenue recognition.
- United Loan Security: Assess the credit risk and collateral value associated with the $80 million loan extended to United Air Lines.
- Midwest Transition: Confirm the timeline and financial impact of removing 12 aircraft from Midwest service and the status of the $4.0 million settlement payment.
- Liquidity Position: Monitor cash flow sufficiency given the $3.0 billion in future operating lease commitments and $1.8 billion in long-term debt obligations.
- Legal Exposure: Track the status of the IROP expense litigation with Delta, specifically regarding the recovery of the $25 million+ withheld funds.