Business Context and Reporting Period
Company: SKYWEST INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: SkyWest operates a regional airline (SkyWest Airlines) providing scheduled passenger service under code-sharing agreements with Delta Air Lines (Delta Connection) and United Airlines (United Express). As of September 30, 2002, approximately 64% of capacity was under the Delta code and 36% under the United code. The company operates an all-cabin-class fleet consisting of Embraer EMB-120 Brasilias and Canadair Regional Jets (CRJs).
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 |
|---|---|---|
| Operating Revenues | $202,713 | $566,292 |
| Operating Expenses | $168,141 | $476,542 |
| Operating Income | $34,572 | $89,750 |
| Net Income | $22,923 | $69,080 |
| Diluted EPS | $0.40 | $1.20 |
| Cash and Cash Equivalents | $85,203 | $85,203 (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $113,401 |
| Long-Term Debt | $226,389 | $226,389 (Balance Sheet) |
| Working Capital | $376,889 | N/A |
Note: Net Income for the nine months ended September 30, 2002, includes a cumulative effect of a change in accounting principle of $8.6 million (net of tax).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 30.4% for the three months and 29.8% for the nine months ended September 30, 2002, compared to the prior year periods. This growth was driven by a 66.4% increase in revenue passenger miles (three months) and a 79.2% increase (nine months), primarily due to the delivery of additional CRJs.
- Profitability: Net income increased significantly to $22.9 million (three months) and $69.1 million (nine months) compared to $8.9 million and $36.7 million in the prior year periods, respectively. Operating margins improved as expenses grew at a slower rate than revenues.
- Cost Efficiency: Airline operating costs per available seat mile (ASM) decreased 23.0% (three months) and 22.8% (nine months) year-over-year. This was attributed to the economic efficiencies of the CRJ fleet and the transition to contract flying.
- Accounting Change: The company changed its method of accounting for CRJ engine overhaul costs from the accrual method to the direct-expense method effective January 1, 2002. This resulted in a one-time cumulative effect adjustment of $8.6 million net of tax in the nine-month period.
- Restatement: Prior period financial statements for 2001 were restated to correct accounting for CRJ engine overhaul costs, engine modifications, and aircraft purchase incentives.
Guidance, Outlook, Risks, and Unusual Items
- United Airlines Bankruptcy: On December 9, 2002, United Airlines filed for Chapter 11 reorganization. SkyWest estimates United owed approximately $13.5 million for pre-petition services. While management believes collection of net receivables is likely, the bankruptcy poses a material risk to future contract revenue and operating results.
- Expansion Commitments: As of September 30, 2002, the company had agreements to acquire 81 additional CRJs (with options for 119 more) at an aggregate cost of approximately $1.7 billion. Deliveries were scheduled through January 2005.
- Liquidity: The company reported a current ratio of 4.5:1 and working capital of $376.9 million. Management believes working capital is sufficient to meet requirements for at least the next 12 months, including expansion and debt service.
- Market Risk: Fuel price risk is largely mitigated as Delta and United bear the economic risk of fuel price fluctuations under contract flying arrangements. Interest rate risk is limited, with 93.6% of long-term debt being fixed-rate.
- Government Assistance: The company received $1.4 million in U.S. government airline assistance during the quarter, its final payment under the Air Transportation Safety and System Stabilization Act.
Investor Verification Checklist
- United Airlines Exposure: Verify the status of the $13.5 million receivable from United and the potential impact of United's bankruptcy on future contract negotiations and revenue stability.
- Accounting Change Impact: Confirm the long-term implications of switching to the direct-expense method for engine overhauls and the validity of the $16.1 million maintenance contract asset/liability recorded.
- Capital Expenditures: Assess the funding strategy for the $1.7 billion in committed aircraft acquisitions and the reliance on third-party financing or leasing.
- Restatement Details: Review the specific adjustments made to 2001 financial statements regarding engine modifications and purchase incentives to ensure no further restatements are anticipated.
- Debt Structure: Analyze the composition of the $226.4 million long-term debt, specifically the portion supported by Brazilian export subsidies and the associated default risk.