Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: SkyWest operates the largest regional airline in the United States through its subsidiaries, SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company operates approximately 2,300 daily departures to 217 destinations. As of December 31, 2009, the fleet consisted of 449 aircraft. The business model relies heavily on code-share agreements with major carriers, primarily Delta Air Lines (55.8% of capacity) and United Air Lines (42.4% of capacity), under fixed-fee and pro-rate arrangements.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Operating Revenues | $2,613.6 million | $3,496.2 million |
| Operating Income | $212.2 million | $255.2 million |
| Net Income | $83.7 million | $112.9 million |
| Diluted EPS | $1.47 | $1.93 |
| Total Assets | $4,310.8 million | $4,014.3 million |
| Long-Term Debt (net of current) | $1,816.3 million | $1,681.7 million |
| Stockholders' Equity | $1,352.2 million | $1,275.5 million |
| Cash and Cash Equivalents | $76.4 million | $125.9 million |
| Working Capital | $804.3 million | $834.1 million |
Operational Metrics:
- Available Seat Miles (ASMs): 22.14 billion (0.6% increase vs. 2008)
- Passenger Load Factor: 78.8% (1.1 point increase vs. 2008)
- Revenue per ASM: 11.8 cents (25.8% decrease vs. 2008)
- Cost per ASM: 11.2 cents (26.3% decrease vs. 2008)
Material Changes vs. Prior Period
Revenue Decline: Operating revenues decreased 25.2% to $2.6 billion. This decline was primarily driven by a 69.6% decrease in fuel reimbursements from major partners ($824.9 million reduction) due to lower fuel prices and changes in fuel purchasing arrangements. Excluding fuel and engine overhaul reimbursements, passenger revenue decreased only 2.4%.
Expense Reductions: Total operating expenses decreased 25.9%. Aircraft fuel costs dropped 68.0% to $390.7 million as the average price per gallon fell from $3.33 to $1.87. However, aircraft maintenance costs increased 14.3% to $436.0 million, largely due to the timing of engine overhauls on aging CRJ200 aircraft.
Net Income: Net income decreased 25.9% to $83.7 million. This was impacted by a $7.1 million pre-tax charge for other-than-temporary impairment (OTTI) on marketable securities and the revenue decline mentioned above.
Contract Changes:
- Midwest Airlines: Terminated the Midwest Services Agreement; removed 12 CRJ200 aircraft from service by January 2010.
- AirTran: Entered a new code-share agreement in November 2009 to operate five CRJ200s under a pro-rate arrangement.
- United Express: Extended rights to operate 40 regional jets and entered a new agreement for ASA to operate 14 CRJ200s starting in 2010.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy:
- SkyWest plans to deliver four remaining CRJ700s in Q1 2010 to replace older turboprops.
- ASA began operating as a United Express carrier in February 2010, with 14 aircraft expected in service by May 2010.
- Management anticipates continued maintenance cost increases as the fleet ages and warranties expire.
Key Risks:
- Partner Dependency: Approximately 98.1% of ASMs were attributable to Delta and United. The financial instability of these partners poses a significant risk.
- Contract Disputes: Delta notified SkyWest and ASA in October 2009 that contractual rates must be adjusted to the average rate of all carriers in the Delta Connection Program. SkyWest and ASA disagreed with Delta's methodology, and negotiations were ongoing as of the filing date. This dispute could negatively impact future revenues.
- Legal Proceedings: Ongoing litigation with Delta regarding the allocation of liability for Irregular Operations (IROP) expenses. Delta has withheld approximately $25 million (plus subsequent amounts) since 2007. SkyWest has recognized $32.4 million in revenue associated with these withheld funds.
- Labor Costs: Unionization efforts among SkyWest Airlines employees and upcoming contract negotiations for ASA unions could increase labor costs.
Unusual Items:
- United Loan: In October 2009, SkyWest extended an $80 million secured term loan to United at 11% interest to provide operational funding.
- Investment Impairment: Recognized a $7.1 million pre-tax charge for OTTI on investment securities.
Investor Verification Checklist
- Delta Rate Dispute: Verify the status of negotiations regarding the "average rate" methodology for Delta Connection agreements and potential revenue adjustments.
- United Loan Exposure: Assess the credit risk associated with the $80 million loan extended to United Air Lines and the $49 million in deferred payments.
- Maintenance Cost Trajectory: Monitor the trend of maintenance expenses as the CRJ200 fleet ages and warranties expire, which could compress margins.
- Liquidity Position: Review the impact of the $80 million United loan on working capital and cash flow availability.
- Legal Contingency: Track the outcome of the IROP expense litigation with Delta, which involves significant withheld funds.