Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: SkyWest operates the largest regional airline in the United States through its subsidiaries: SkyWest Airlines, Atlantic Southeast Airlines, and ExpressJet Airlines. The company provides scheduled passenger service under code-share agreements with major carriers, primarily Delta Air Lines, United Airlines, and Continental Airlines. Approximately 89% of passenger revenues are derived from contract (fixed-fee) flying, while the remainder comes from pro-rate (revenue-sharing) arrangements.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating Revenues | $2,765.1 million | $2,613.6 million | +5.8% |
| Operating Income | $201.8 million | $212.2 million | -4.9% |
| Net Income | $96.4 million | $83.7 million | +15.2% |
| Diluted EPS | $1.70 | $1.47 | +15.6% |
| Total Assets | $4,446.5 million | $4,310.8 million | +3.1% |
| Long-Term Debt (net) | $1,738.9 million | $1,816.3 million | -4.3% |
| Stockholders' Equity | $1,420.9 million | $1,352.2 million | +5.1% |
| Cash & Cash Equivalents | $112.3 million | $76.4 million | +47.0% |
| Operating Cash Flow | $347.1 million | $362.9 million | -4.3% |
Operational Statistics (2010 vs 2009):
- Available Seat Miles (ASMs): 25.5 billion (+15.2%)
- Revenue Passenger Miles: 20.2 billion (+15.9%)
- Passenger Load Factor: 79.3% (+0.5 pts)
- Cost per ASM: 10.4 cents (-7.1%)
- Fuel Cost per ASM: 1.3 cents (-27.8%)
Material Changes vs. Prior Period
- ExpressJet Acquisition: On November 12, 2010, SkyWest completed the acquisition of ExpressJet for $136.5 million in cash. This transaction added 50 days of revenue and expenses to the 2010 consolidated results and resulted in a $15.6 million purchase accounting gain.
- Revenue Growth Drivers: Revenue increased primarily due to the ExpressJet acquisition, the incremental placement of 18 new CRJ700 aircraft, and the finalization of contractual rates with Delta which added $10.3 million in revenue. Additionally, Delta paid $6.9 million in cost savings revenue.
- Expense Increases: Maintenance costs rose $51.4 million (11.8%) due to scheduled engine overhauls on aging CRJ200 fleets. Salaries and wages increased $66.6 million (9.5%) largely due to the ExpressJet integration.
- Fuel Costs: Total fuel expense decreased $50.7 million (13.0%) despite a 46.5% increase in the average price per gallon ($2.74 vs $1.87). This reduction was driven by major partners (Delta, United, Continental) purchasing fuel directly for contract flights, shifting the cost risk away from SkyWest.
- United Loan Repayment: United Airlines repaid an $80 million secured term loan extended by SkyWest in 2009, along with accrued interest, in August 2010.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
- SkyWest plans to acquire four additional regional jets and lease eight used CRJ700s in 2011, with total expenditures estimated at $193.5 million.
- On January 25, 2011, SkyWest agreed to operate five CRJ700s for Alaska Airlines.
- Management expects the effective tax rate for 2011 to be approximately 38.5%.
Key Risks:
- Partner Dependency: Approximately 99.3% of ASMs are attributable to code-share agreements with Delta, United, and Continental. Termination of these agreements would have a material adverse effect.
- Labor Relations: Approximately 40% of the workforce is unionized. Integration of ExpressJet and Atlantic Southeast workforces presents challenges regarding seniority and representation.
- Fleet Maintenance: Maintenance costs are expected to increase as the CRJ200 and ERJ145 fleets age and warranties expire.
- Regulatory Changes: The Airline Safety and Pilot Training Improvement Act of 2009 imposes new certification and training requirements that may increase costs.
Legal Contingencies:
- Delta Litigation: Ongoing dispute regarding the allocation of liability for irregular operations (IROP) expenses. Delta has withheld approximately $25 million (pretax) since 2007. SkyWest recorded a $5.9 million bad debt allowance in Q4 2010 related to this matter but continues to pursue the claim.
- ExpressJet Stockholder Litigation: Putative class action suits regarding the ExpressJet merger were filed in 2010. A memorandum of understanding was reached to settle these actions, subject to court approval.
Investor Verification Checklist
- Contractual Rate Finalization: Verify the long-term stability of the newly agreed-upon rates with Delta (through 2015) and their impact on future margins.
- ExpressJet Integration: Monitor the realization of synergies and the successful integration of ExpressJet's operations and workforce into Atlantic Southeast.
- Maintenance Cost Trajectory: Track the rising maintenance costs associated with the aging CRJ200 and ERJ145 fleets against the fixed reimbursement rates in code-share agreements.
- Partner Financial Health: Assess the financial stability of major partners (Delta, United, Continental), as their ability to pay is critical to SkyWest's revenue model.
- Debt and Lease Obligations: Review the $1.9 billion in long-term debt and $2.7 billion in future minimum lease payments to ensure liquidity remains sufficient for debt service and fleet expansion.