SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended December 31, 1998 (Fiscal Year ending March 31, 1999)
Business Overview: SkyWest operates as a regional airline, primarily under code-sharing agreements with United Airlines (United Express) and Delta Air Lines. The period was marked by significant expansion into new markets including Los Angeles, San Francisco, Portland, and Seattle/Tacoma, alongside the divestiture of its non-airline subsidiary, Scenic Airlines.

Key Financial Metrics

Operating Statistics (Nine Months):
- Revenue Passenger Miles (RPMs): 760.2 million (up 34.0%)
- Passenger Load Factor: 55.8% (up 4.8 points)
- Yield per RPM: 36.9 cents (up 7.9%)
- Cost per Available Seat Mile (CASM): 17.5 cents (up 10.8%)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 43.4% year-over-year, driven by a 34.0% increase in RPMs and a 7.9% increase in yield. Passenger revenues accounted for 98.2% of total operating revenues.
• Profitability: Net income from continuing operations rose to $31.5 million from $15.5 million. Despite higher operating expenses, the operating margin improved as revenue growth outpaced cost increases.
• Discontinued Operations: The company sold the majority of Scenic Airlines assets in December 1998 for $16.2 million, recording a pretax loss of approximately $0.9 million. A second agreement to sell remaining Scenic assets was signed in January 1999, with an estimated pretax loss of $0.7 million accrued.
• Cost Structure: Total operating expenses increased 35.9% to $239.0 million. Salaries and wages increased due to a 43% rise in full-time equivalent employees (2,744 vs. 1,916) to support United Express expansion. Fuel costs as a percentage of revenue decreased to 7.9% from 11.2% due to lower fuel prices.
• Liquidity: Cash and cash equivalents increased by $31.8 million during the period, supported by strong operating cash flows and proceeds from debt issuance and asset sales.

Guidance, Outlook, and Risks

• Expansion Strategy: SkyWest executed an agreement in January 1999 to acquire 25 Canadair Regional Jets for approximately $560 million, with deliveries scheduled from June 2000 to December 2002. The company also has options for 20 additional Brasilia aircraft.
• Capital Requirements: Management anticipates expending an additional $5.0 million on ground facilities and support equipment for the United Express expansion. The company maintains a $10.0 million unsecured bank line of credit.
• Year 2000 Compliance: The company is modifying systems for Y2K compliance, with completion scheduled for March 31, 1999. Risks include potential failures in third-party systems (e.g., FAA, reservation systems) which could materially affect operations.
• Forward-Looking Risks: Results depend on code-sharing relationships, economic fluctuations, competition, and the ability to maintain profit margins amidst pricing pressures.

Investor Verification Checklist

• Debt Financing: Verify the terms and interest rates of the new $560 million Canadair Regional Jet acquisition agreement and the funding source (debt vs. lease).
• Scenic Airlines Disposition: Confirm the final closing date and actual loss realized on the sale of the remaining Scenic Airlines assets (Page, Arizona operations).
• United Express Expansion: Monitor the integration of new markets (San Francisco, Portland, Seattle) and the impact on load factors and yields in the upcoming quarters.
• Y2K Contingency: Review the status of third-party system compliance (FAA, Delta, United) and the effectiveness of SkyWest's business interruption plans.
• Maintenance Costs: Track maintenance expenses related to the used Brasilia aircraft acquired for expansion to ensure they decline as management expects.