Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
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). The company operates approximately 1,000 daily departures to 76 cities. As of September 30, 2001, 74% of capacity was in contract flying and 26% in SkyWest-controlled flying. The company is transitioning its fiscal year-end from March 31 to December 31.
Key Financial Metrics
| Metric (Dollars in Thousands) | Three Months Ended Sep 30, 2001 |
Six Months Ended Sep 30, 2001 |
|---|---|---|
| Operating Revenues | $155,540 | $305,204 |
| Operating Expenses | $135,407 | $260,085 |
| Operating Income | $20,133 | $45,119 |
| Net Income | $14,495 | $32,168 |
| Diluted EPS | $0.25 | $0.56 |
| Cash and Equivalents | $25,905 | $25,905 |
| Available-for-Sale Securities | $260,948 | $260,948 |
| Total Current Liabilities | $97,272 | $97,272 |
| Long-Term Debt | $68,567 | $68,567 |
| Working Capital | $278,063 | $278,063 |
Note: Working Capital calculated as Total Current Assets ($375,335) minus Total Current Liabilities ($97,272).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12.2% for the quarter and 13.5% for the six-month period compared to the prior year, driven by a 37.6% increase in revenue passenger miles (RPM) and fleet expansion (delivery of 8 CRJs in the quarter, 17 in the six months).
- Profitability Decline: Net income decreased 18.6% for the quarter ($14.5M vs $17.8M) and 6.4% for the six months ($32.2M vs $34.4M). The decline is attributed to the September 11, 2001, terrorist attacks causing a three-day FAA ground stop and a weakening economy.
- Expense Increases: Total operating expenses rose 19.7% for the quarter. Specific cost drivers included a $3.7 million write-off of unamortized engine overhauls due to the early termination of eight Brasilia leases and increased infrastructure costs for new aircraft.
- Government Assistance: The company received $5.7 million in U.S. Government airline assistance (Air Transportation Safety and System Stabilization Act) as a contra-expense, with an estimated total of $11.4 million expected.
- Operational Metrics: Passenger load factor improved to 63.2% (quarter) and 62.7% (six months). However, yield per RPM decreased 18.5% for the quarter due to the change in flying mix and the impact of the September 11 events.
Guidance, Outlook, and Risks
- Outlook: Management expects to transition all Delta Connection flying to contract flying by January 1, 2002. The company plans to take delivery of 37 CRJs over the next 12 months at an aggregate cost of approximately $740 million.
- Liquidity: The company maintains a strong liquidity position with $278.1 million in working capital and a current ratio of 3.9:1. Management believes working capital is sufficient to meet requirements for the next 12 months, including expansion and debt service.
- Risks and Contingencies:
- September 11 Impact: Ongoing disruption to service and passenger demand.
- Lease Obligations: Significant long-term operating lease obligations totaling approximately $777.5 million (undiscounted) for 98 aircraft.
- Foreign Subsidy Risk: A portion of long-term debt ($24.4 million) relies on subsidy payments from the Federative Republic of Brazil; default by Brazil could increase effective interest rates.
- Fuel Price Volatility: While 78% of fuel costs are reimbursed by partners, the company remains exposed to price fluctuations on the remaining capacity.
Investor Verification Checklist
- Verify the final amount of U.S. Government assistance received under the Air Transportation Safety and System Stabilization Act.
- Confirm the status of the $3.7 million write-off related to Brasilia lease terminations and ensure no further liabilities exist.
- Monitor the execution of the transition from SkyWest-controlled flying to contract flying with Delta and United.
- Assess the impact of the planned $740 million aircraft acquisition on future debt levels and cash flow.
- Review the stability of the Brazilian export support program subsidies affecting long-term debt interest rates.