SKYW

Business Context and Reporting Period

Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
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 and air freight service under code-share agreements primarily with Delta Air Lines and United Airlines. As of September 30, 2006, the consolidated fleet consisted of 402 aircraft.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($1,022,998) minus Total Current Liabilities ($532,121).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 59.2% for the quarter and 90.3% for the nine months ended September 30, 2006, compared to the same periods in 2005. This growth is primarily attributed to the full-year inclusion of ASA (acquired September 2005) and fleet expansion.
• Profitability: Net income rose 35.3% for the quarter ($40.7M vs. $30.1M) and 55.7% for the nine months ($114.6M vs. $73.6M). Diluted EPS increased from $0.51 to $0.63 (quarter) and $1.26 to $1.82 (nine months).
• Cost Structure: Total airline expenses increased 61.9% for the quarter and 93.7% for the nine months, driven by the acquisition of ASA and higher fuel costs. However, cost per available seat mile (ASM) excluding fuel decreased due to operating efficiencies.
• Liquidity: Cash and cash equivalents increased significantly from $140.6 million at year-end 2005 to $380.3 million at September 30, 2006, bolstered by operating cash flows and a public stock offering in April 2006.
• Debt: Long-term debt increased to $1.76 billion, largely due to debt assumed in the ASA acquisition and new aircraft financing.

Guidance, Outlook, and Risks

Management Commentary: Management attributes success to high-quality service and a competitive cost structure. The company expects to meet financial requirements for the next 12 months using current working capital. Future growth is tied to the integration of ASA and fleet expansion.

Key Risks and Contingencies:

• Partner Dependency: SkyWest is highly dependent on Delta and United. Delta is currently in Chapter 11 bankruptcy reorganization, and United recently emerged from bankruptcy. Termination of code-share agreements or failure of partners to reorganize successfully poses a material risk.
• Fuel Prices: While Delta and United bear fuel risk for most regional jet flights, SkyWest bears the risk for Brasilia turboprop flights. Rising fuel costs remain a concern for the industry.
• Capital Commitments: The company has firm commitments of approximately $301 million to purchase 11 CRJ900s and lease four CRJ200s, with deliveries expected through April 2007.
• Labor Relations: Ongoing negotiations with unions representing ASA employees and potential unionization efforts among SkyWest Airlines employees present risks of increased costs or work stoppages.
• Accounting Changes: Adoption of SFAS No. 123(R) for stock-based compensation reduced net income by $1.7 million (quarter) and $4.7 million (nine months) compared to prior accounting methods.

Investor Verification Checklist

• Delta Bankruptcy Status: Monitor Delta Air Lines' progress in Chapter 11 reorganization and the stability of the Delta Connection Agreements.
• Fleet Delivery Schedule: Verify the timing and financing of the $301 million aircraft commitment (11 CRJ900s and 4 CRJ200s).
• Labor Negotiations: Track outcomes of collective bargaining agreements with ASA unions and unionization efforts at SkyWest Airlines.
• Fuel Cost Exposure: Assess the impact of fuel price volatility on the portion of the fleet (Brasilia turboprops) where SkyWest retains fuel risk.
• Stock-Based Compensation: Review the impact of SFAS No. 123(R) on future earnings and cash flow classifications.