Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: SkyWest operates the largest regional airline in the United States through its subsidiaries, SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company provides scheduled passenger service with over 2,550 daily departures to 294 destinations. Operations are conducted primarily under long-term, fixed-fee code-share agreements with major carriers Delta Air Lines (approx. 59% of capacity), United Air Lines (approx. 38%), and Midwest Airlines (approx. 2%).
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Operating Revenues | $3,374.3 million | $3,114.7 million |
| Operating Income | $344.5 million | $339.2 million |
| Net Income | $159.2 million | $145.8 million |
| Diluted EPS | $2.49 | $2.30 |
| Total Assets | $3,990.5 million | $3,731.4 million |
| Long-Term Debt | $1,732.7 million | $1,675.6 million |
| Cash & Cash Equivalents | $122.8 million | $415.5 million |
| Working Capital | $811.9 million | $687.0 million |
| Current Ratio | 3.0:1 | 2.7:1 |
Operational Highlights:
- Fleet Size: 436 aircraft (up from 410 in 2006).
- Available Seat Miles (ASM): 22.97 billion (13.7% increase).
- Passenger Load Factor: 77.9% (down 0.4 percentage points from 78.3%).
- Cost per ASM: 13.7 cents (down from 14.3 cents).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 8.3% to $3.37 billion, driven primarily by a 13.7% increase in Available Seat Miles due to fleet expansion (addition of 26 aircraft).
- Profitability: Net income rose 9.2% to $159.2 million. Operating income increased 1.6% to $344.5 million.
- Cost Efficiency: Cost per ASM decreased to 13.7 cents, aided by a reduction in fuel cost per ASM (4.6 cents vs. 5.0 cents in 2006). This reduction occurred despite higher average fuel prices ($2.41/gallon vs. $2.20/gallon) because United began purchasing fuel directly for certain aircraft, reducing SkyWest's recorded fuel costs and related revenue by approximately $152.1 million.
- Liquidity: Cash and cash equivalents decreased significantly from $415.5 million to $122.8 million. This was due to $126.0 million spent on stock repurchases, $298.5 million invested in flight equipment, and $302.4 million invested in marketable securities.
- Debt: Long-term debt increased to $1.85 billion (including current maturities) to finance aircraft acquisitions.
Guidance, Outlook, Risks, and Contingencies
Outlook and Growth:
- Fleet Expansion: SkyWest has firm orders for 22 additional regional jets (18 CRJ700s, 4 CRJ900s, 4 used CRJ200s) with deliveries scheduled through Q1 2010, totaling approximately $557.8 million in commitments.
- Midwest Expansion: Announced in January 2008 an agreement to operate additional aircraft under the Midwest Services Agreement.
- United Transition: Plans to transition 23 turboprops out of the United Express contract reimbursement model and replace them with regional jets.
Material Risks:
- Customer Concentration: Delta and United combined accounted for approximately 93.3% of total revenues in 2007. Termination of these agreements would have a material adverse effect.
- Partner Financial Health: Delta and United recently emerged from bankruptcy; their continued financial stability is critical to SkyWest's operations.
- Labor Relations: ASA employees are unionized (pilots, flight attendants, controllers). SkyWest Airlines employees are not currently unionized, but unionization efforts are ongoing. New labor agreements could increase costs.
- Fuel Prices: While most fuel costs are reimbursed by partners, the company bears risk on pro-rate operations (approx. 5% of revenue).
Contingencies:
- Delta Dispute: Delta withheld approximately $25 million (pretax) in December 2007 regarding the allocation of liability for irregular operations (IROP) expenses. SkyWest filed a lawsuit in February 2008. No allowance has been recorded as the outcome is uncertain.
- Auction Rate Securities: As of February 15, 2008, auctions failed for $19 million of the company's $124 million holding in municipal notes with auction reset features. Management does not anticipate this will affect the ability to execute the current business plan.
Key Facts for Investor Verification
- Revenue Concentration: Verify the stability of the Delta and United code-share agreements, which represent over 93% of revenue.
- Delta Litigation: Monitor the resolution of the $25 million dispute regarding IROP expense allocation.
- Liquidity Position: Assess the impact of the $292.7 million decrease in cash and cash equivalents on future capital expenditures and debt service.
- Debt Obligations: Review the $1.85 billion in long-term debt and $3.3 billion in future operating lease payments.
- Labor Costs: Track ongoing union negotiations at ASA and potential unionization efforts at SkyWest Airlines.
- Auction Rate Securities: Monitor the liquidity status of the $124 million investment in auction rate securities following recent auction failures.