SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: SkyWest operates the largest regional airline in the United States through its subsidiaries, SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company provides regional service primarily under code-share agreements with Delta Air Lines and United Airlines. A significant event impacting this period was the acquisition of ASA in September 2005, which nearly doubled the company's fleet size from 223 to 397 aircraft by June 30, 2006.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($866,821) minus Total Current Liabilities ($515,478).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 105.8% for the quarter and 111.7% for the six months compared to the prior year periods. This growth is primarily attributed to the acquisition of ASA and a 99.9% increase in Available Seat Miles (ASMs).
• Profitability: Net income rose 58.7% for the quarter ($39.3M vs. $24.8M) and 69.7% for the six months ($73.9M vs. $43.5M). Operating margins remained stable despite volume increases.
• Cost Structure: Total operating expenses increased 106.4% for the quarter. Fuel costs per ASM increased 23.8% due to rising fuel prices ($2.26/gallon vs. $1.87/gallon). However, non-fuel operating costs per ASM decreased due to efficiencies from longer stage lengths and the addition of more efficient CRJ700 aircraft.
• Liquidity: Cash and cash equivalents increased by $99.1 million during the six-month period, driven by strong operating cash flows and a $99.3 million equity offering in April 2006 used to pay down lines of credit.
• Debt: Long-term debt increased significantly due to the assumption of ASA's debt ($1.25 billion) and new financing for aircraft, though the company repaid $90 million in lines of credit during the period.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Changes: Effective January 1, 2006, the company adopted SFAS No. 123(R) for stock-based compensation. This resulted in a pre-tax expense of $3.1 million for the quarter and $4.7 million for the six months, reducing net income compared to prior accounting methods.
• Capital Expenditures: The company has firm commitments of approximately $463 million to purchase 17 CRJ900s and lease four CRJ200s, with deliveries expected through April 2007. Options exist for an additional 70 aircraft.
• Key Risks:
  • Partner Dependency: The company is highly dependent on Delta and United. Delta is currently in Chapter 11 bankruptcy reorganization, and United recently emerged from bankruptcy. Termination of these agreements or failure of partners to reorganize successfully poses a material risk.
  • Fuel Volatility: While Delta and United bear fuel risk for regional jet flights, SkyWest bears the risk for Brasilia turboprop flights. Rising fuel prices remain a concern for the industry.
  • Labor Costs: ASA employees are unionized, and SkyWest Airlines faces potential unionization efforts, which could increase labor costs.
• Legal Proceedings: An SEC investigation regarding a 2002 accounting restatement was terminated in the quarter with no enforcement action recommended.

Investor Verification Checklist

• Delta Bankruptcy Status: Monitor Delta Air Lines' progress in Chapter 11 reorganization and the stability of the Delta Connection agreements.
• Fleet Financing: Verify the company's ability to secure financing for the $463 million in committed aircraft purchases without eroding working capital.
• Fuel Hedging/Reimbursement: Confirm the extent of fuel cost pass-throughs in contracts with Delta and United versus exposure on turboprop routes.
• Integration Synergies: Assess whether the anticipated cost savings and operational efficiencies from the ASA acquisition are being realized as projected.
• Stock-Based Compensation: Review the impact of SFAS 123(R) on future earnings and the remaining unrecognized compensation costs ($17.1 million).