Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2004
Business Overview: SkyWest operates as a regional airline partner for major carriers, primarily Delta Air Lines, United Airlines, and Continental Airlines. As of September 30, 2004, the fleet consisted of 74 EMB120s, 121 CRJ200s, and 7 CRJ700s. Approximately 57% of capacity was operated under the United code, 42% under Delta, and 1% under Continental.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2004 |
|---|---|---|
| Operating Revenues | $308,265 | $829,356 |
| Operating Expenses | $270,323 | $721,398 |
| Operating Income | $37,942 | $107,958 |
| Net Income | $21,279 | $60,703 |
| Diluted Earnings Per Share | $0.37 | $1.04 |
| Cash Flow from Operations | N/A | $129,143 |
| Total Assets | $1,631,882 | N/A |
| Total Long-Term Debt | $507,657 | N/A |
| Working Capital | $546,642 | N/A |
Note: Working Capital calculated as Current Assets ($716,467) minus Current Liabilities ($169,825).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 33.7% for the quarter and 27.5% for the nine months compared to the prior year periods. This growth was driven by a 30.4% increase in Available Seat Miles (ASMs) due to fleet expansion (202 aircraft in 2004 vs. 177 in 2003).
- Profitability: Net income increased slightly for the quarter (0.7%) to $21.3 million and significantly for the nine months (23.1%) to $60.7 million.
- Expense Increases: Total operating expenses rose 38.6% for the quarter and 27.1% for the nine months. Fuel costs per ASM increased 45.8% for the quarter due to higher fuel prices ($1.53/gallon vs. $1.04/gallon).
- Accounting Change: The Company changed the estimated depreciable life of rotable spares from five to ten years in Q1 2004. This increased pretax income by $2.9 million for the quarter and $8.5 million for the nine months.
- Liquidity: Cash and cash equivalents decreased by $68.0 million during the nine-month period, primarily due to investing activities (aircraft purchases and marketable securities) and financing activities (debt payments and stock repurchases).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
- Contract Negotiations: Rates for 2004 with Delta were finalized with no material adjustments. Negotiations for 2005 rates are ongoing, focusing on multi-year automatic rate resets.
- United Bankruptcy: United Airlines remains in Chapter 11 bankruptcy. While a reorganization plan was approved, risks remain regarding potential liquidation or asset sales that could jeopardize SkyWest's United Express operations.
- Delta Restructuring: Delta announced a transformation plan including the dehubbing of Dallas/Fort Worth. SkyWest anticipates redeploying seven CRJ-200s to Salt Lake City by February 2005.
- Capital Expenditures: The Company has firm orders for 25 CRJ700s and 10 CRJ200s, with gross committed expenditures estimated at $125 million through 2004 and $647 million in 2005.
Risks and Contingencies
- Partner Financial Health: Significant reliance on Delta, United, and Continental. Delta has indicated potential bankruptcy risk if cost structures are not improved.
- SEC Investigation: The SEC staff is investigating the Company's 2002 change in accounting method for CRJ200 engine overhaul expenses and the subsequent restatement of financials. Discussions for resolution are ongoing but unresolved.
- Legal Proceedings: A class-action lawsuit filed by former employees regarding unpaid wages and overtime is pending; no accrual has been made as the loss is not probable or estimable.
- Fleet Risks: Reliance on only three aircraft types exposes the Company to risks regarding maintenance, FAA directives, and manufacturer delivery schedules.
Investor Verification Checklist
- United Airlines Bankruptcy Status: Monitor United's progress in emerging from Chapter 11 and the stability of the United Express Agreement.
- SEC Investigation Resolution: Track the outcome of the SEC inquiry regarding the 2002 accounting restatement for potential fines or further restatements.
- Delta Contract Renewal: Verify the terms of the 2005 rate negotiations with Delta, specifically regarding rate resets and contract extensions.
- Fuel Price Sensitivity: Assess the impact of rising fuel costs on operating margins, noting that fuel risk is borne by SkyWest on EMB120 and Continental routes but passed through on United and Delta regional jet routes.
- Capital Commitments: Confirm the Company's ability to secure financing for the $772 million in firm aircraft orders scheduled for delivery through 2005.