SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company operates under code-share agreements primarily with Delta Air Lines (approx. 60% of capacity) and United Air Lines (approx. 40% of capacity), with a new agreement with Midwest Airlines commencing in April 2007. As of March 31, 2007, the fleet consisted of 425 aircraft.

Key Financial Metrics

Note: Cash and marketable securities combined for Q1 2007 is $666.85 million ($442.02M cash + $224.83M securities). Q1 2006 cash figure is from the cash flow statement ending balance.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 6.2% year-over-year, driven primarily by a 12.6% increase in Available Seat Miles (ASMs) due to fleet expansion from 395 to 425 aircraft.
• Profitability: Net income increased slightly by 0.6% to $34.79 million. However, Operating Income decreased by 4.0% to $79.58 million due to higher operating expenses.
• Cost Efficiency: Cost per ASM decreased 4.1% to 14.0 cents, primarily due to a 14.6% reduction in fuel cost per ASM (average fuel price dropped to $2.01/gallon from $2.09/gallon). Conversely, maintenance costs per ASM increased to 1.3 cents due to the timing of engine overhauls.
• Load Factor: Passenger load factor decreased 1.6 percentage points to 76.0%, attributed to changes in partner scheduling and seat inventory management.
• Liquidity: Cash provided by operating activities more than doubled to $100.72 million. Total cash and marketable securities increased significantly to $666.85 million.

Outlook, Risks, and Management Commentary

• Guidance & Outlook: Management intends to take delivery of 15 additional aircraft between April 1, 2007, and December 31, 2007 (11 CRJ200s for Midwest, 2 CRJ900s for Delta, 2 CRJ700s for Delta). The company believes current working capital is sufficient to meet requirements for the next 12 months.
• New Partnerships: SkyWest began service with Midwest Airlines in April 2007, operating up to 25 CRJ200s. Risks include potential negative financial impact if actual costs exceed pre-determined reimbursement rates under the new agreement.
• Key Risks:
  • Partner Financial Health: Significant exposure to Delta and United, both of which recently emerged from bankruptcy. Risks include potential future restructurings, cost-cutting mandates, or termination of code-share agreements.
  • Fuel Volatility: While partners bear fuel risk on contract flights, SkyWest bears the risk on pro-rate operations (primarily Brasilia turboprops).
  • Interest Rates: Approximately 51.6% of long-term debt is variable rate. A 1% increase in rates would increase interest expense by approximately $2.5 million per quarter.
• Commitments: Total firm aircraft commitments are estimated at $193.5 million through October 2007. Future minimum operating lease payments total approximately $3.35 billion.

Investor Verification Checklist

• Partner Stability: Verify the ongoing financial stability and operational plans of Delta and United post-bankruptcy.
• Midwest Agreement Terms: Review the specific reimbursement mechanisms in the new Midwest Airlines Services Agreement to assess margin risk.
• Fleet Financing: Confirm the ability to secure financing for the $193.5 million in committed aircraft deliveries without eroding working capital.
• Fuel Hedging/Exposure: Assess the proportion of pro-rate flying versus contract flying to understand exposure to fuel price spikes.
• Debt Maturities: Review the schedule of debt maturities and lease obligations to ensure liquidity coverage for the next 12-24 months.