Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2007
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company primarily operates under code-share agreements with Delta Air Lines (approx. 60% of capacity), United Airlines (approx. 39%), and Midwest Airlines (approx. 1%). As of September 30, 2007, the consolidated fleet consisted of 437 aircraft.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Operating Revenues | $875,601 | $2,519,617 |
| Operating Income | $92,469 | $260,900 |
| Net Income | $42,927 | $118,338 |
| Diluted EPS | $0.68 | $1.83 |
| Cash Flow from Operations | N/A | $366,134 |
| Total Assets | $3,975,038 | N/A |
| Total Debt (Long-term + Current) | $1,885,362 | N/A |
| Working Capital | $757,890 | N/A |
Liquidity: Cash and cash equivalents were $170.2 million, with an additional $543.5 million in marketable securities. The current ratio was 2.8:1.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 10.6% for the quarter and 8.4% for the nine-month period compared to 2006. This was driven primarily by a fleet expansion from 402 to 437 aircraft.
- Profitability: Net income rose 5.5% for the quarter and 3.3% for the nine-month period year-over-year.
- Operational Efficiency: Cost per Available Seat Mile (ASM) decreased to 13.5 cents (quarter) and 13.7 cents (nine months) compared to 13.9 cents and 14.3 cents in 2006, respectively. This improvement was largely due to lower fuel costs per ASM and efficiencies from operating larger aircraft on longer routes.
- Fleet Expansion: The company took delivery of eight new CRJ900s, ten used CRJ700s, and eleven used CRJ200s during the nine-month period.
- Stock Repurchases: The company repurchased approximately 4.2 million shares of common stock for $103.9 million during the nine months ended September 30, 2007.
Outlook, Risks, and Management Commentary
- Future Fleet Plans: SkyWest plans to acquire 22 additional regional jet aircraft through 2009. This includes 18 jets for United Express to replace turboprops and a swap of four CRJ200s for four 76-seat regional jets for Delta Connection. Deliveries are expected to begin in late 2008.
- Labor Agreements: ASA reached a tentative labor agreement with the Air Line Pilots Association (ALPA). If approved, this will result in a $13.5 million payment to pilots and potentially higher future labor costs. SkyWest Airlines employees are currently non-unionized, but unionization efforts are a noted risk.
- Partner Risks: A significant portion of revenue depends on Delta and United, both of which recently emerged from bankruptcy. Risks include potential future bankruptcies, contract terminations, or demands for cost reductions that could impact SkyWest's margins.
- Fuel Risk: While contract flying agreements with Delta and United largely pass fuel price risk to the partners, SkyWest bears the risk on its pro-rate operations (approx. 5% of revenue).
- Capital Resources: Management believes current working capital is sufficient to meet requirements for the next 12 months, including expansion and debt service.
Investor Verification Checklist
- Contract Renewals: Verify the status of the Delta Connection and United Express agreements, specifically regarding rate resets and termination clauses.
- Labor Cost Impact: Monitor the ratification of the tentative ASA pilot agreement and its long-term impact on operating margins.
- Partner Financial Health: Assess the ongoing financial stability of Delta and United post-bankruptcy and their ability to maintain current contract volumes.
- Debt Maturities: Review the schedule of long-term debt maturities ($1.88 billion total) and the company's ability to refinance or service this debt given interest rate fluctuations.
- Fleet Financing: Confirm the financing terms for the planned acquisition of 22 new aircraft and the impact on future cash flows.