Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: SkyWest operates regional airline services and nonairline tourism businesses. The quarter was defined by a significant expansion of its code-sharing relationship with United Airlines (United Express), adding operations in San Francisco, Portland, and Seattle/Tacoma, alongside existing Los Angeles and Delta partnerships.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 |
|---|---|---|
| Operating Revenues | $91.7 million | $72.1 million |
| Net Income | $9.7 million | $4.3 million |
| Diluted EPS | $0.40 | $0.22 |
| Operating Cash Flow | $25.0 million | $17.2 million |
| Cash and Equivalents (End) | $118.5 million | $48.6 million |
| Long-Term Debt | $55.6 million | Filing text does not provide clear Q2 1997 total |
| Current Ratio | 2.7:1 | Filing text does not provide Q2 1997 ratio |
Operational Statistics:
- Passengers Carried: 1,017,312 (42.8% increase)
- Revenue Passenger Miles (RPM): 215.7 million (14.1% increase)
- Passenger Load Factor: 54.8% (4.1 point increase)
- Yield per RPM: 37.3 cents (14.8% increase)
- Cost per Available Seat Mile (ASM): 17.3 cents (12.3% increase)
Material Changes vs. Prior Period
Revenue Growth: Consolidated operating revenues increased 27.1% to $91.7 million. Passenger revenues rose 31.1% to $80.5 million, driven by a 14.1% increase in RPMs and a 14.8% increase in yield per RPM. The new United Express code-share agreements significantly boosted both volume and yield.
Profitability: Net income more than doubled to $9.7 million. Operating income increased to $14.4 million from $6.7 million. Total operating expenses increased 17.9% to $77.8 million, but as a percentage of revenue, expenses decreased from 91.4% to 84.8%.
Cost Dynamics:
- Fuel: Costs decreased as a percentage of revenue (7.6% vs 12.0%) due to lower average fuel prices ($0.66/gal vs $0.87/gal).
- Labor: Salaries and benefits increased to 26.3% of revenue due to hiring for expansion and profitability-based incentives.
- Maintenance: Increased to 8.4% of revenue due to higher flight hours and maintenance on used Brasilia aircraft acquired for the United expansion.
Liquidity: Working capital decreased from $143.1 million (March 31, 1998) to $112.0 million (June 30, 1998) primarily due to interim financing of four Brasilia aircraft using internal funds. Cash and cash equivalents decreased by $21.3 million during the quarter due to heavy capital expenditures ($44.9 million net cash used in investing activities).
Guidance, Outlook, and Risks
Expansion Outlook: SkyWest is in the midst of a major expansion. As of June 30, 1998, the company had agreed to purchase 14 Brasilia aircraft and 7 used Brasilia aircraft, with options for 30 additional Brasilia and 10 CRJ aircraft. Remaining aircraft for the Los Angeles, San Francisco, and Pacific Northwest expansion are expected to be delivered prior to October 1, 1998.
Capital Requirements: The company anticipates expending an additional $3.0 million on ground facilities and support equipment for the United Express expansion. Management believes current working capital is sufficient to meet requirements for the next 12 months.
Risks and Contingencies:
- Year 2000 Compliance: Systems modification is scheduled for completion by March 31, 1999. Risks exist regarding the compliance of third-party systems (FAA, reservation systems) upon which SkyWest relies.
- Market Factors: Results are subject to changes in code-sharing relationships, economic fluctuations, demand for air travel, and competition.
- Debt Structure: $45.7 million of long-term debt is subject to subsidy payments from Brazil; interest rates on $6.8 million of this debt are floating based on LIBOR.
Investor Verification Checklist
- Stock Dividend Adjustment: Verify that all per-share data and share counts reflect the 100% stock dividend distributed on June 8, 1998.
- United Express Expansion: Confirm the operational status and revenue contribution of the new San Francisco, Portland, and Seattle/Tacoma hubs initiated in Q2 1998.
- Capital Expenditures: Monitor the delivery schedule and financing terms for the remaining Brasilia aircraft required for the October 1, 1998 expansion deadline.
- Year 2000 Status: Track progress on system modifications and the compliance status of critical third-party vendors (FAA, Delta, United).
- Debt Servicing: Review the impact of floating interest rates on the $6.8 million portion of the Brazilian-subsidized debt.