Business Context and Reporting Period
Company: SKYWEST INC
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended September 30, 1999
Business Overview: SkyWest operates as a regional airline, primarily under code-sharing agreements with United Airlines (United Express) and Delta Air Lines. The company reported record passenger enplanements and net income for the period, driven by expansion into new United Express markets including Los Angeles, San Francisco, Portland, and Seattle/Tacoma.
Key Financial Metrics
| Metric | 3 Months Ended Sep 30, 1999 | 6 Months Ended Sep 30, 1999 |
|---|---|---|
| Operating Revenues | $122.7 million | $234.3 million |
| Operating Income | $24.7 million | $45.1 million |
| Net Income | $15.9 million | $29.5 million |
| Diluted EPS | $0.64 | $1.18 |
| Cash from Operations (6mo) | $59.0 million | |
| Cash and Equivalents (Sep 30, 1999) | $23.4 million | |
| Working Capital | $149.6 million | |
| Current Ratio | 2.8:1 | |
| Long-Term Debt | $56.4 million (net of current maturities) | |
| Debt-to-Equity | 16% Debt / 84% Equity |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 21.2% for the quarter and 27.9% for the six-month period compared to the prior year. This was driven by a 16.2% (quarter) and 24.3% (six-month) increase in Revenue Passenger Miles (RPMs) and improved yields.
- Profitability: Net income rose 23.9% for the quarter and 30.7% for the six-month period. Operating margins improved as revenue growth outpaced expense increases.
- Cost Structure: Total operating expenses increased 17.5% (quarter) and 24.6% (six-month). However, expenses as a percentage of revenue decreased to 80.6% (quarter) and 81.4% (six-month) from 83.2% and 83.5% respectively in the prior year.
- Fuel Costs: Fuel costs as a percentage of revenue increased to 9.9% (quarter) and 9.1% (six-month) due to higher average fuel prices ($0.87/gallon vs $0.68/gallon in the prior quarter).
- Liquidity: Cash and cash equivalents decreased by $28.8 million during the six-month period, primarily due to significant investments in available-for-sale securities ($50.2 million) and flight equipment ($13.8 million).
Outlook, Risks, and Management Commentary
- Expansion: SkyWest continues to expand its United Express network. The company has agreed to purchase 35 Canadair Regional Jets (CRJs) at an aggregate cost of approximately $787.5 million, with options for 35 additional units.
- Capital Resources: Management believes current working capital is sufficient to meet requirements for the next 12 months, including expansion and debt service. The company maintains a $10.0 million unsecured bank line of credit.
- Year 2000 Compliance: The company reports that internal mission-critical systems are compliant. However, risks remain regarding the readiness of third-party providers (government agencies, utilities, partners), which could materially affect operations if failures occur.
- Market Risks:
- Fuel: Approximately 65% of fuel costs are hedged via contractual arrangements with major airlines. A hypothetical 10% fuel price increase would impact expenses by approximately $0.74 million for the six-month period.
- Interest Rates: 8% of long-term debt is variable rate. A 1% rate increase would result in a net positive impact due to higher interest income on securities.
- Subsidy Risk: A portion of long-term debt ($37.9 million) benefits from Brazilian export subsidy payments reducing the effective interest rate to 3.90%. Default by the Brazilian government would increase interest costs.
Investor Verification Checklist
- Verify the execution and delivery schedule of the 35 CRJ aircraft purchase agreement valued at $787.5 million.
- Monitor the status of Brazilian export subsidy payments supporting the $37.9 million debt tranche.
- Assess the impact of rising fuel prices on future margins, noting that only 65% of fuel costs are currently hedged.
- Review the Year 2000 contingency plans and the readiness of critical third-party service providers.
- Confirm the sustainability of the improved operating margin (80.6% expense ratio) as the company scales operations.