Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast. The company provides scheduled passenger and air freight services under code-share agreements with major carriers, primarily Delta Air Lines (Delta Connection) and United Airlines (United Express), as well as AirTran Airways. As of June 30, 2010, the fleet consisted of 452 aircraft.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
|---|---|---|
| Total Operating Revenues | $649,759 | $1,282,002 |
| Operating Income | $49,288 | $91,710 |
| Net Income | $18,655 | $33,671 |
| Diluted EPS | $0.33 | $0.59 |
| Operating Cash Flow (6mo) | $141,140 | |
| Cash & Cash Equivalents | $59,180 (as of June 30, 2010) | |
| Marketable Securities | $680,439 (as of June 30, 2010) | |
| Total Long-Term Debt | $1,972,542 (as of June 30, 2010) | |
| Cost per ASM (excl. fuel) | 9.1 cents | 9.3 cents |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 7.0% ($49.1 million) for the quarter and 6.5% ($89.5 million) for the six months compared to 2009. This was primarily driven by a significant reduction in fuel reimbursements from major partners (down 47.2% for the quarter) as partners began purchasing fuel directly for contract flights.
- Net Income Decrease: Net income fell 28.8% to $18.7 million for the quarter and 5.4% to $33.7 million for the six months. The year-over-year comparison for the six months is favorable due to a $7.1 million impairment charge on marketable securities recorded in 2009 that did not recur in 2010.
- Cost Reductions: Aircraft fuel expenses dropped 33.7% for the quarter and 41.0% for the six months, despite a 43.3% increase in the average price per gallon, due to the shift in fuel purchasing responsibility to major partners.
- Operational Growth: Available Seat Miles (ASMs) increased 6.4% for the quarter and 8.1% for the six months, driven by the delivery of 18 new CRJ700 aircraft.
Guidance, Outlook, and Risks
- Merger Activity: On August 3, 2010, SkyWest entered into a merger agreement to acquire ExpressJet Holdings for approximately $133 million. Completion is expected in the fourth quarter of 2010, subject to regulatory and shareholder approval.
- Contract Negotiations: Ongoing negotiations with Delta regarding rate resets under the Delta Connection Agreements. Delta has the right to require rates not to exceed the average of all carriers in the program. SkyWest is recording revenue based on management's best estimate of the settlement.
- Legal Contingency: A significant dispute exists with Delta regarding the allocation of liability for Irregular Operations (IROP) expenses. Delta has withheld approximately $25 million (plus subsequent amounts) since 2007. SkyWest has not recorded a loss as the outcome is not deemed probable or estimable, but a negative resolution could impact financial results.
- Market Risk: The company bears fuel price risk on pro-rate operations. A hypothetical 25% increase in fuel prices would have increased expenses by $5.0 million for the quarter and $9.6 million for the six months.
- Capital Expenditures: The company anticipates continued scheduled engine maintenance events through the first quarter of 2012, impacting maintenance costs and reimbursements.
Investor Verification Checklist
- Delta Rate Dispute: Verify the status of negotiations regarding the Delta Connection rate reset and the potential impact on future revenue recognition.
- ExpressJet Merger: Monitor regulatory approvals and shareholder votes required to close the $133 million acquisition of ExpressJet.
- IROP Litigation: Track developments in the lawsuit against Delta regarding the $25 million+ withheld in IROP expense reimbursements.
- Fuel Hedging/Exposure: Assess the proportion of pro-rate vs. contract flying to understand exposure to rising fuel prices, as partners cover fuel costs for contract flights.
- Debt Obligations: Review the schedule of long-term debt maturities and operating lease payments, which total over $5.3 billion in commitments.