Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: SkyWest operates the largest independent regional airline in the U.S., providing scheduled passenger and freight service through code-sharing agreements with Delta Air Lines, United Airlines, and Continental Airlines. As of June 30, 2003, the fleet consisted of 74 Embraer Brasilia turboprops and 96 Canadair Regional Jets (CRJs).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2003 | Six Months Ended June 30, 2003 |
|---|---|---|
| Operating Revenues | $212.7 million | $420.1 million |
| Operating Income | $24.3 million | $44.4 million |
| Net Income | $14.9 million | $28.2 million |
| Diluted EPS | $0.26 | $0.49 |
| Cash and Cash Equivalents | $96.9 million | $96.9 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $77.0 million |
| Total Debt (Long-term + Current) | $483.1 million | $483.1 million |
| Working Capital | $391.7 million | $391.7 million |
Operating Statistics (Six Months): Revenue Passenger Miles increased 38.5% to 1.89 billion; Available Seat Miles increased 32.9% to 2.69 billion; Passenger Load Factor improved to 70.3%.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12.6% for the quarter and 15.5% for the six months compared to the prior year periods, driven primarily by a 31.5% increase in Available Seat Miles (ASMs) due to fleet expansion (delivery of 40 CRJs over the past year).
- Profitability Decline: Net income decreased 32.0% for the quarter ($14.9M vs. $21.9M) and 38.9% for the six months ($28.2M vs. $46.2M). The prior year's six-month results included a one-time $8.6 million gain from a change in accounting principle regarding engine overhaul costs.
- Expense Increases: Total operating expenses and interest increased 22.0% for the quarter and 23.0% for the six months. This was primarily due to fleet growth, though cost per ASM decreased 7.4% (quarter) and 7.8% (six months) due to the efficiency of CRJs compared to Brasilias.
- Debt Expansion: Long-term debt increased significantly from $137.9 million at year-end 2002 to $483.1 million at June 30, 2003, reflecting $359.7 million in temporary financing for 23 new CRJs.
- Yield Compression: Revenue per ASM decreased 14.4% (quarter) and 13.3% (six months) due to the mix shift toward CRJs, which generate lower revenue per ASM under current contract terms.
Guidance, Outlook, and Risks
- United Airlines Bankruptcy: United filed for Chapter 11 reorganization in December 2002. SkyWest faces uncertainty regarding the assumption or rejection of their code-sharing agreement and potential non-payment of approximately $14 million in fees owed by United at the time of filing.
- Contractual Changes: SkyWest signed a new Memorandum of Understanding (MOU) with United in May 2003 and a new code-sharing agreement with Continental effective July 1, 2003. Delta Connection Brasilia flights are transitioning from contract flying to prorate flying effective August 1, 2003.
- Capital Commitments: The company has firm commitments to acquire 47 additional CRJs (totaling $960 million) through 2005, with options for 119 more. Significant operating lease obligations total approximately $1.4 billion.
- Industry Risks: Management cites risks related to terrorist activities, the war in Iraq, fuel price volatility (though partners bear risk on most CRJ flights), and potential unionization of employees.
- Liquidity: Management believes working capital is sufficient for the next 12 months. The company maintains a $10 million unsecured bank line of credit.
Investor Verification Checklist
- United Bankruptcy Impact: Verify the status of the $14 million receivable from United and the final terms of the restructured United Express agreement.
- Debt Refinancing: Confirm the conversion of $359.7 million in interim debt for new CRJs into long-term lease agreements or permanent financing.
- Revenue Mix Shift: Monitor the financial impact of the transition of Delta Brasilia flights to "prorate flying" (revenue sharing) starting August 2003.
- Fleet Delivery Schedule: Track the delivery of 47 committed CRJs and the potential conversion of 50-seat orders to 70-seat models.
- Cost Control: Assess the sustainability of cost reductions (e.g., hiring freeze) amidst continued fleet expansion and rising fuel costs.