Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
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 and United Airlines. A material event during this period was the acquisition of ASA on September 7, 2005, for an aggregate purchase price of approximately $1.681 billion, significantly expanding the fleet to 376 aircraft.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 | Dec 31, 2004 (Balance Sheet) |
|---|---|---|---|
| Operating Revenues | $497.3 million | $1,221.7 million | N/A |
| Net Income | $30.1 million | $73.6 million | N/A |
| Diluted EPS | $0.51 | $1.26 | N/A |
| Operating Cash Flow (9mo) | N/A | $147.3 million | N/A |
| Total Assets | N/A | N/A | $3,376.2 million |
| Total Liabilities | N/A | N/A | $2,526.1 million |
| Long-Term Debt | N/A | N/A | $1,524.1 million (excl. current) |
| Cash & Equivalents | N/A | N/A | $110.6 million |
| Working Capital | N/A | N/A | $62.2 million |
Note: Balance sheet figures reflect the post-acquisition position as of September 30, 2005, compared to December 31, 2004.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 61.4% for the quarter and 47.3% for the nine months ended September 30, 2005, compared to the prior year periods. This growth is primarily attributed to the acquisition of ASA, which added 151 aircraft to the fleet for the final 23 days of the quarter.
- Profitability: Net income rose 41.3% for the quarter ($30.1M vs. $21.3M) and 21.2% for the nine months ($73.6M vs. $60.7M). Diluted EPS increased from $0.37 to $0.51 for the quarter and from $1.04 to $1.26 for the nine months.
- Debt Expansion: Total long-term debt increased significantly to approximately $1.78 billion as of September 30, 2005, from $463.2 million at year-end 2004. This increase was driven by the assumption of approximately $1.0 billion in debt related to the ASA acquisition and new aircraft financing.
- Liquidity Shift: Working capital decreased from $536.5 million at December 31, 2004, to $62.2 million at September 30, 2005, due to the cash outflow required to fund the ASA acquisition. Marketable securities dropped from $427.5 million to $193.2 million.
- Cost Structure: Fuel costs per available seat mile (ASM) increased 42.9% for the quarter and 38.7% for the nine months due to rising fuel prices. However, non-fuel operating costs per ASM decreased due to the efficiency of new regional jets.
Guidance, Outlook, Risks, and Contingencies
- Management Commentary: Management expects to realize benefits from the ASA acquisition through improved equipment utilization and economies of scale. The company anticipates completing deliveries of 37 committed CRJ700s and 6 CRJ200s by March 2007.
- Key Risks:
- Partner Bankruptcy: Both major code-share partners, Delta Air Lines and United Airlines, are undergoing Chapter 11 reorganization. While their agreements were assumed by the bankruptcy courts, there is a risk of termination or liquidation which could materially harm SkyWest's operations.
- Fuel Volatility: Rising fuel prices continue to pressure margins, although a significant portion of fuel costs are reimbursed by partners under contract agreements.
- SEC Investigation: The SEC is investigating SkyWest's 2002 change in accounting method for engine overhaul expenses. The company has offered a cease and desist order, but the outcome remains uncertain.
- Capital Obligations: The company has significant fixed obligations, including $1.1 billion in firm aircraft purchase commitments and approximately $3.2 billion in future operating lease payments.
- Unusual Items: The financial statements include 23 days of ASA operations for the quarter. The purchase price allocation for ASA is preliminary and expected to be finalized by December 31, 2005.
Investor Verification Checklist
- Verify the status of Delta Air Lines and United Airlines' Chapter 11 reorganizations and the stability of the assumed code-share agreements.
- Confirm the final purchase price allocation for the ASA acquisition and any potential adjustments to goodwill or intangible assets.
- Monitor the resolution of the SEC investigation regarding historical accounting restatements for engine overhaul costs.
- Assess the company's ability to service $1.78 billion in debt and meet $1.1 billion in aircraft purchase commitments given the reduced working capital position.
- Review the impact of rising fuel prices on non-reimbursable cost components and overall operating margins.