SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: SkyWest operates the largest independent regional airline in the U.S., providing scheduled passenger and freight service under code-sharing agreements with Delta Air Lines, United Airlines, and Continental Airlines. As of September 30, 2003, the fleet consisted of 177 aircraft (76 Embraer EMB-120 Brasilias and 101 Canadair Regional Jets).

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Net income for the nine months ended Sep 30, 2002 included a one-time cumulative effect of a change in accounting principle of $8.6 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 13.7% for the quarter and 14.9% for the nine-month period compared to 2002, driven primarily by a 39.7% increase in Available Seat Miles (ASMs) due to fleet expansion (delivery of 40 CRJs over the past year).
• Profitability: Net income decreased 7.8% for the quarter and 28.5% for the nine-month period. The nine-month decline is partially attributed to the $8.6 million accounting adjustment recorded in 2002 which is not present in 2003.
• Cost Efficiency: Cost per ASM decreased 15.9% for the quarter and 10.5% for the nine-month period, reflecting the operational efficiency of the CRJ fleet compared to the older Brasilia fleet.
• Debt Expansion: Long-term debt increased significantly from $125.4 million (Dec 31, 2002) to $348.1 million (Sep 30, 2003) to finance the acquisition of new aircraft. Interest expense rose from $0.2 million to $3.4 million for the quarter.
• Load Factor: Passenger load factor improved to 73.8% for the quarter (up 4.4 points) and 71.6% for the nine months (up 3.5 points).

Guidance, Outlook, and Risks

• United Express Agreement: On September 10, 2003, SkyWest signed an 11-year definitive contract with United Airlines following United's bankruptcy proceedings. The agreement includes a positive pretax adjustment of $5.9 million for the quarter due to favorable rate adjustments.
• Fleet Expansion: The company has firm orders for 40 additional CRJs (10 50-seat and 30 70-seat) with deliveries scheduled through May 2005. Options exist for an additional 80 aircraft.
• Capital Structure: The capital mix shifted to 66.5% equity and 33.5% debt. The company utilizes interim financing for aircraft deliveries pending permanent long-term lease or debt arrangements.
• Key Risks:
  • Partner Dependency: Substantially all revenues are derived from Delta, United, and Continental. United's bankruptcy and potential liquidation pose significant risks.
  • Financing: Reliance on obtaining favorable financing for firm aircraft orders.
  • Industry Volatility: Exposure to fuel price fluctuations (though partially hedged via partner agreements), terrorist activity, and economic downturns.
  • Unionization: Potential for employee unionization could lead to work stoppages or increased costs.

Investor Verification Checklist

• United Bankruptcy Status: Verify the stability of United Airlines' reorganization and the long-term viability of the new 11-year contract.
• Debt Refinancing: Confirm the company's ability to convert interim aircraft financing into permanent long-term debt or leases as scheduled.
• Maintenance Costs: Monitor future maintenance expenses as the CRJ fleet ages, given the shift to a direct-expense accounting method.
• Government Assistance: Review the treatment of the $6.5 million received under the Emergency War Time Supplemental Appropriations Act, which is currently recorded as a liability pending partner reimbursement.
• Operating Leases: Assess the impact of $1.7 billion in future minimum operating lease payments on long-term liquidity.