Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: SkyWest operates the largest independent regional airline in the United States, providing scheduled passenger and air freight services. The company operates exclusively under code-sharing agreements with Delta Air Lines (Delta Connection) and United Airlines (United Express). As of January 1, 2002, the company transitioned to operating essentially all flights under contract flying arrangements, where major partners control scheduling and pricing, and SkyWest receives negotiated payments per departure.
Key Financial Metrics (Year Ended Dec 31, 2001)
| Metric | 2001 | 2000 |
|---|---|---|
| Operating Revenues | $601.9 million | $523.0 million |
| Operating Income | $75.3 million | $89.0 million |
| Net Income | $56.4 million | $60.9 million |
| Diluted EPS | $0.99 | $1.16 |
| Total Assets | $816.6 million | $676.4 million |
| Long-Term Debt | $113.7 million | $75.8 million |
| Working Capital | $279.2 million | $279.7 million |
| Current Ratio | 3.7:1 | 4.4:1 |
| Cash & Cash Equivalents | $40.2 million | $66.2 million |
| Operating Cash Flow | $137.9 million | $82.5 million |
Operational Metrics:
- Passengers Carried: 6.23 million (up from 5.60 million in 2000)
- Load Factor: 61.1% (up from 56.6% in 2000)
- Revenue per Available Seat Mile (RASM): 21.21 cents (down from 23.18 cents)
- Cost per Available Seat Mile (CASM): 18.56 cents (down from 19.23 cents)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 15.1% to $601.9 million, driven by a 35.6% increase in revenue passenger miles due to fleet expansion (33 new CRJs delivered) and expanded code-sharing relationships.
- Profitability Decline: Net income decreased 7.3% to $56.4 million. This decline was primarily attributed to the disruption of service following the September 11, 2001 terrorist attacks and a subsequent decrease in demand and yields.
- Expense Increases: Total operating expenses rose 20.6% to $526.6 million. Increases were driven by infrastructure build-up costs for new aircraft and a $3.7 million write-off of unamortized engine overhauls due to the early termination of seven leased Brasilia aircraft following United's schedule reduction post-9/11.
- Government Assistance: The company recognized $8.2 million in assistance under the Air Transportation Safety and System Stabilization Act, which partially offset losses from the September 11 events.
- Debt Expansion: Long-term debt increased by approximately $38 million to $113.7 million to finance aircraft acquisitions.
Outlook, Risks, and Management Commentary
- Strategic Transition: The company has successfully transitioned to a nearly 100% contract flying model, reducing reliance on single partners and stabilizing revenue streams through fee-per-departure agreements.
- Expansion Commitments: SkyWest has firm commitments to acquire 96 additional CRJs at an aggregate cost of approximately $1.9 billion, with deliveries scheduled through January 2005. Options exist for an additional 119 aircraft.
- Key Risks:
- Partner Dependency: Over 95% of revenues are derived from Delta and United. Economic downturns or schedule reductions by these partners directly impact SkyWest's fixed fees and flight volumes.
- Fuel Price Volatility: While contract flying mitigates fuel risk for most flights, the company remains exposed to price fluctuations on non-contracted segments.
- Interest Rate Risk: Approximately 12.7% of long-term debt is variable rate.
- Subsidy Risk: A portion of debt related to Brasilia aircraft relies on subsidy payments from the Federative Republic of Brazil; default by Brazil would increase effective interest rates.
- Liquidity: Management believes working capital and cash flow from operations are sufficient to meet expansion and debt service requirements for the next 12 months. The company holds $270.5 million in marketable securities.
Investor Verification Checklist
- Contract Renewals: Verify the status of contract negotiations with Delta and United for 2002, specifically regarding fee-per-departure rates and incentive structures.
- 9/11 Impact Duration: Assess the long-term recovery of passenger yields and load factors in the Pacific Northwest and Southern California markets following the September 11 disruptions.
- Capital Expenditure Funding: Confirm the financing strategy (debt vs. lease) for the $1.9 billion aircraft commitment and its impact on future leverage ratios.
- Engine Maintenance Costs: Review the impact of the new 16-year engine services agreement with GE on future maintenance expense volatility.
- Unionization Efforts: Monitor ongoing collective bargaining efforts, particularly among pilots, which could increase labor costs and operational risks.