Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended December 31, 1999
Business Overview: SkyWest operates as a regional airline, primarily under code-share agreements with United Airlines (United Express) in markets including Los Angeles, San Francisco, Portland, and Seattle/Tacoma. The company focuses on passenger transport, with freight and other services comprising a minor portion of revenue.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 1999 | Nine Months Ended Dec 31, 1999 |
|---|---|---|
| Operating Revenues | $117.4 million | $351.7 million |
| Net Income | $13.6 million | $43.1 million |
| Diluted EPS | $0.54 | $1.73 |
| Operating Cash Flow | N/A (Quarterly not provided) | $83.2 million |
| Cash and Equivalents (Ending) | $35.7 million | $35.7 million |
| Total Debt (Current + Long-Term) | $62.5 million | $62.5 million |
| Working Capital | $160.5 million | $160.5 million |
| Current Ratio | 3.0:1 | 3.0:1 |
Note: All figures in millions unless otherwise noted. Debt figures derived from Balance Sheet current maturities ($8.6M) and long-term debt ($53.9M).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 14.8% for the quarter and 23.2% for the nine-month period compared to the prior year. This was driven by a 9.8% (quarter) and 19.2% (nine-month) increase in Revenue Passenger Miles (RPMs) and improved yields.
- Profitability: Net income surged 59.7% for the quarter and 38.6% for the nine-month period. Operating margins improved as revenue growth outpaced expense increases.
- Cost Structure: Total operating expenses increased 11.9% (quarter) and 20.0% (nine-month). However, expenses as a percentage of revenue decreased to 83.2% (quarter) and 82.0% (nine-month) from 85.4% and 84.2% respectively in the prior year.
- Fuel Costs: Fuel costs as a percentage of revenue rose significantly (to 10.3% for the quarter) due to a sharp increase in the average fuel price per gallon ($0.97 vs $0.65 in the prior year quarter).
- Liquidity: Cash and cash equivalents decreased by $16.6 million during the nine-month period, primarily due to investments in available-for-sale securities ($50.9M) and flight equipment ($22.9M), partially offset by strong operating cash flow.
Guidance, Outlook, and Risks
- Expansion Plans: SkyWest has agreed to purchase 55 Canadair Regional Jets (CRJs) at an aggregate cost of approximately $1.2 billion, with deliveries scheduled from June 2000 through October 2003. The company also holds options for 75 additional CRJs.
- Financing Strategy: Management intends to fund future aircraft acquisitions through third-party loans or lease agreements, depending on market conditions. The company currently maintains a 15% debt-to-equity ratio.
- Year 2000 Compliance: The company reported no disruptions to air service or automated systems during the date change. All mission-critical systems were certified compliant by December 1, 1999.
- Key Risks:
- Fuel Price Volatility: While 65% of fuel costs are hedged via contractual arrangements with major airlines, the company remains exposed to price fluctuations on the remaining volume.
- Foreign Subsidy Risk: A portion of long-term debt ($36.1M) benefits from subsidy payments by the Federative Republic of Brazil. Default by Brazil could increase effective interest rates.
- Operational Dependencies: Continued reliance on third-party service providers and airline partners for system functionality and market access.
Investor Verification Checklist
- Aircraft Delivery Schedule: Verify the timeline and financing terms for the 55 CRJs and potential exercise of options for 75 additional jets.
- Fuel Hedging Effectiveness: Confirm the extent of fuel cost protection under United Express contracts and exposure to spot market prices.
- Brazilian Subsidy Status: Monitor the creditworthiness of the Federative Republic of Brazil regarding export support payments on aircraft debt.
- Capital Expenditure Funding: Assess the company's ability to fund the $1.2 billion aircraft purchase without diluting equity or significantly increasing leverage.
- Discontinued Operations: Note that Scenic Airlines was sold in the prior fiscal year; ensure future comparisons exclude these discontinued operations.