Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 primarily provides contract flight services for major partners Delta Air Lines, United Air Lines, and Midwest Airlines, alongside pro-rate flying and ground handling services.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenues | $698,823 | $1,371,465 |
| Operating Income | $59,769 | $100,593 |
| Net Income | $26,219 | $35,591 |
| Diluted Earnings Per Share | $0.46 | $0.62 |
| Cash Provided by Operating Activities | N/A | $167,306 |
| Cash and Cash Equivalents (Ending) | $132,985 | $132,985 |
| Working Capital | $845,569 | $845,569 |
| Total Long-Term Debt | $1,816,739 | $1,816,739 |
| Current Ratio | 3.0:1 | 3.0:1 |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 26.5% ($252.0 million) for the three months ended June 30, 2009, compared to the same period in 2008. This was primarily driven by a 65.3% decrease in fuel reimbursements from major partners due to lower fuel prices and partners purchasing fuel directly.
- Net Income Decrease: Net income fell 28.0% to $26.2 million for the quarter, compared to $36.4 million in the prior year quarter.
- Cost Reductions: Total operating expenses decreased 27.2% ($238.8 million). Fuel costs dropped 64.8% ($237.4 million) as the average price per gallon fell from $3.89 to $1.80. Salaries and wages decreased 3.8% due to workforce reductions following the transition of ground handling stations to other providers.
- Maintenance Increase: Aircraft maintenance expenses increased 18.4% ($18.1 million) due to scheduled maintenance events on aging CRJ200 and CRJ700 aircraft.
- Midwest Termination: On June 10, 2009, SkyWest and Midwest Airlines agreed to terminate their service agreement. SkyWest will remove 12 CRJ200 aircraft from Midwest service between June 2009 and January 2010.
Guidance, Outlook, and Risks
- Outlook: Management expects to meet financial requirements for the next 12 months using current working capital. The company is pursuing opportunities to place the 12 aircraft removed from Midwest service with other carriers.
- Capital Expenditures: SkyWest has firm commitments to acquire 22 additional regional jet aircraft through 2010, with an estimated cost of $359.1 million. Financing is expected through a mix of operating leases and long-term debt.
- Legal Contingency: A significant dispute exists with Delta Air Lines regarding the allocation of liability for irregular operations (IROP) expenses. Delta has withheld approximately $25 million (pretax) since December 2007. SkyWest has recognized $32.4 million in revenue associated with these withheld funds but has not recorded a loss as the outcome is not deemed probable or estimable under SFAS No. 5.
- Market Risk: The company holds $4.5 million in auction rate securities classified as Level 3 assets due to market illiquidity. While interest is being recorded, future valuation adjustments could impact earnings if deemed other-than-temporary.
- Accounting Change: In Q1 2009, the company extended the depreciable life of ground equipment, increasing pre-tax income by $0.9 million for the quarter and $2.1 million for the six-month period.
Investor Verification Checklist
- Delta Dispute Resolution: Monitor the status of the lawsuit and withheld funds ($25 million+) with Delta regarding IROP expenses.
- Midwest Aircraft Placement: Verify the successful reassignment of the 12 CRJ200 aircraft removed from Midwest service to maintain capacity utilization.
- Fleet Maintenance Costs: Track maintenance expenses for aging CRJ200 and CRJ700 fleets, which are driving cost increases despite lower fuel prices.
- Financing for New Aircraft: Confirm the ability to secure financing for the $359 million in committed aircraft purchases given credit market volatility.
- Auction Rate Securities: Review the valuation and liquidity status of the $4.5 million investment in auction rate securities.