SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company primarily operates under contract flying agreements with major partners Delta Air Lines (56.4% of capacity), United Airlines (41.2%), and Midwest Airlines (2.4%). As of March 31, 2009, the fleet consisted of 438 aircraft.

Key Financial Metrics

Key Operational Metrics:
- Revenue Passenger Miles: 3.85 billion (down 8.2%)
- Available Seat Miles (ASMs): 5.13 billion (down 8.0%)
- Passenger Load Factor: 75.0% (down 0.2 points)
- Fuel Cost per ASM: 2.8 cents (down 47.2%)

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 22.5% to $672.6 million. This was primarily driven by a 51.8% decrease in fuel reimbursements from major partners due to lower fuel prices and reduced flight volumes.
• Net Income Drop: Net income fell 67.8% to $9.4 million. Significant factors included a $7.1 million pre-tax charge for other-than-temporary impairment (OTTI) of marketable securities and a $7.6 million revenue reduction due to ASA flight cancellations.
• Cost Structure: Total operating expenses decreased 21.0% to $631.8 million. While fuel costs dropped significantly ($151.8 million decrease), maintenance costs rose 11.0% due to scheduled maintenance on aging CRJ200 and CRJ700 aircraft.
• Liquidity: Working capital increased to $818.0 million, supported by strong operating cash flow despite the decline in net income.

Outlook, Risks, and Management Commentary

• Operational Disruptions: ASA experienced significant weather-related cancellations and grounded 60 CRJ200 aircraft for engine safety inspections in March 2009, resulting in approximately 750 extra cancellations and a $7.6 million revenue impact.
• Midwest Airlines Restructuring: Midwest Airlines is undergoing financial restructuring. SkyWest reduced aircraft operations for Midwest from 21 to 12. Approximately $9.0 million in payments from Midwest are deferred until late 2009, with no assurance of payment due to Midwest's financial uncertainty.
• Legal Contingency (Delta Dispute): A dispute with Delta regarding the allocation of irregular operations (IROP) expenses remains unresolved. Delta has withheld approximately $25 million (pretax) since late 2007. SkyWest has recognized $32.4 million in revenue related to these withheld funds but has not accrued a loss as the outcome is not yet probable or estimable.
• Investment Impairment: The company recognized a $7.1 million pre-tax charge for OTTI on certain marketable securities due to market conditions.
• Capital Expenditures: SkyWest has firm commitments to acquire 22 additional regional jet aircraft through 2010, with estimated expenditures of $531.2 million. Financing is expected through a mix of operating leases and debt.
• Accounting Change: The company extended the depreciable life of ground equipment, increasing pre-tax income by $1.2 million for the quarter.

Investor Verification Checklist

• Midwest Payment Risk: Verify the likelihood of Midwest Airlines fulfilling its deferred payment obligations of $9.0 million starting August 2009.
• Delta Dispute Resolution: Monitor the status of the lawsuit regarding the $25 million+ withheld by Delta for IROP expenses and potential impact on future cash flows.
• Investment Portfolio Health: Review the composition of the $548.7 million marketable securities portfolio for further impairment risks given the $7.1 million charge already taken.
• Fleet Maintenance Costs: Assess the sustainability of rising maintenance costs (up 11%) as the CRJ200 and CRJ700 fleets age.
• Financing Availability: Confirm the company's ability to secure financing for the $531.2 million in aircraft commitments amidst tight credit markets.