Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: SkyWest operates as a regional airline, primarily under code-sharing agreements with major carriers, most notably United Airlines (United Express) and Delta. The quarter marked a period of significant expansion, including new operations in Portland, Seattle/Tacoma, and San Francisco under the United Express brand.
Key Financial Metrics
| Metric (in thousands, except per share) | Q2 1999 | Q2 1998 |
|---|---|---|
| Operating Revenues | $111,562 | $81,959 |
| Operating Income | $20,476 | $13,503 |
| Net Income | $13,581 | $9,741 |
| Diluted EPS | $0.55 | $0.40 |
| Operating Cash Flow | $18,401 | $25,011 |
| Cash and Equivalents (End of Period) | $26,003 | $118,468 |
| Total Debt (Current + Long-Term) | $67,851 | N/A |
| Working Capital | $136,092 | N/A |
Note: Total Debt calculated as Current maturities ($8,581) + Long-term debt ($59,270). Working Capital calculated as Current Assets ($219,009) - Current Liabilities ($82,917).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 36.1% to $111.6 million, driven by a 34.7% increase in Revenue Passenger Miles (RPMs) and a 1.3% increase in yield per RPM.
- Profitability: Net income rose 39.4% to $13.6 million. Operating margins improved as revenues outpaced expense growth; total operating expenses increased 33.4% but represented a lower percentage of revenue (82.2% vs. 83.8% prior year).
- Operational Efficiency: Passenger load factor improved to 55.3% from 54.8%. Cost per available seat mile (CASM) increased only 0.6% to 17.4 cents, despite higher fuel prices and maintenance costs on new aircraft.
- Liquidity: Cash and cash equivalents decreased by $26.2 million to $26.0 million. This decline was primarily due to $17.1 million in aircraft deposits and $17.5 million invested in available-for-sale securities.
Outlook, Risks, and Management Commentary
- Expansion Strategy: Management highlighted the success of the United Express expansion. SkyWest has agreements to purchase 35 Canadair Regional Jets (CRJs) at an aggregate cost of approximately $787.5 million, with options for 35 additional units.
- Capital Requirements: The company expects to fund future capital expenditures, lease payments, and debt service through operating cash flows and existing working capital for at least the next 12 months.
- Year 2000 Compliance: Systems modification is scheduled for completion by September 30, 1999. Management notes a risk that third-party systems (e.g., FAA, reservation systems) may fail, potentially suspending operations.
- Market Risks:
- Fuel: Approximately 65% of fuel costs are hedged via contractual arrangements with major airlines. A hypothetical 10% fuel price increase would raise expenses by only $323,000.
- Interest Rates: 92% of long-term debt is fixed-rate. A 1% increase in rates would increase interest expense by $14,000 but increase interest income by $383,000.
- Foreign Subsidy Risk: A portion of long-term debt relies on subsidy payments from the Federative Republic of Brazil. Default by Brazil could increase effective interest rates.
Investor Verification Checklist
- Verify the status and delivery schedule of the 35 CRJ aircraft orders totaling $787.5 million.
- Monitor the progress of Year 2000 compliance for third-party systems (FAA, Delta, United) upon which SkyWest relies.
- Assess the stability of the Brazilian export support program subsidies affecting debt interest rates.
- Review the trend in maintenance expenses for used Brasilia aircraft acquired for the United Express expansion to ensure costs decrease as projected.
- Confirm the utilization of the $10.0 million unsecured bank line of credit and current liquidity ratios.