Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Business Overview: SkyWest operates as a major independent regional airline in the United States, providing scheduled passenger and air freight service. The company operates under code-share agreements with major carriers, primarily United Airlines (59% of capacity), Delta Air Lines (40%), and Continental Airlines (1%). As of year-end 2004, the fleet consisted of 210 aircraft (137 Canadair regional jets and 73 Embraer turboprops).
Key Financial Metrics
| Metric | 2004 | 2003 |
|---|---|---|
| Operating Revenues | $1,156.0 million | $888.0 million |
| Operating Income | $144.8 million | $108.5 million |
| Net Income | $82.0 million | $66.8 million |
| Diluted EPS | $1.40 | $1.15 |
| Operating Cash Flow | $246.9 million | $157.7 million |
| Total Assets | $1,662.3 million | $1,529.2 million |
| Long-Term Debt | $495.8 million | $493.7 million |
| Stockholders' Equity | $779.1 million | $709.1 million |
| Working Capital | $536.5 million | $518.4 million |
Operational Metrics: Available Seat Miles (ASMs) increased 28.4% to 7.55 billion. Load factor improved to 73.5% from 71.9%. Revenue per ASM was 15.3 cents, while Cost per ASM was 13.6 cents.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 30.2% year-over-year, driven primarily by a 28.4% increase in capacity (ASMs) due to fleet expansion (206 aircraft in 2004 vs. 185 in 2003).
- Profitability: Net income rose 22.7% to $82.0 million. Operating margins remained stable despite rising fuel costs, aided by operational efficiencies from newer regional jets.
- Expense Trends: Total operating and interest expenses increased 30.4%. Fuel costs per ASM rose 32.0% (from 2.5 cents to 3.3 cents) due to higher average fuel prices ($1.45/gallon vs. $1.12/gallon). However, non-fuel expenses per ASM decreased due to fleet modernization.
- Accounting Change: The company changed the estimated depreciable life of rotable spares from 5 to 10 years, increasing pretax income by $11.5 million.
Outlook, Risks, and Contingencies
- Partner Bankruptcy Risks: United Airlines remains in Chapter 11 bankruptcy. While a "United Express Agreement" is in place, liquidation or asset sales by United could jeopardize SkyWest's operations and aircraft utilization. Delta has also indicated potential bankruptcy risk if cost structures are not improved.
- Contractual Changes: SkyWest announced the termination of its Continental Connection turboprop operations by June 2005. Additionally, Delta "de-hubbed" Dallas/Fort Worth, requiring SkyWest to re-deploy flights to Salt Lake City effective January 2005.
- Capital Commitments: The company has firm orders for 20 CRJ700 aircraft with gross committed expenditures of approximately $500 million due through May 2005. Future minimum operating lease payments total approximately $2.1 billion.
- Legal Proceedings: An ongoing class-action lawsuit filed by former flight attendants regarding wage and hour violations in California has not been certified as a class; no loss is currently estimable. The SEC is investigating a prior change in accounting methods regarding engine overhaul costs.
- Unionization: Employees are not currently unionized, but pilots voted against unionization in 2004. Management anticipates continued organization efforts, which could increase labor costs or cause work stoppages.
Investor Verification Checklist
- Partner Solvency: Monitor United Airlines' progress in emerging from Chapter 11 bankruptcy and Delta's financial stability, as 95% of SkyWest's revenue depends on these two partners.
- Contract Renewals: Verify the status of rate negotiations for 2005 with Delta and United, as contract terms directly impact revenue per ASM.
- Debt and Lease Obligations: Assess the company's ability to service $495.8 million in long-term debt and meet $2.1 billion in future lease obligations amidst potential industry downturns.
- SEC Investigation: Track the resolution of the SEC investigation regarding the 2002 accounting change for CRJ200 engine overhaul costs.
- Fleet Delivery Schedule: Confirm the timely delivery of the 20 committed CRJ700 aircraft to ensure capacity targets are met without over-leveraging.