Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: SkyWest operates the largest regional airline in the United States through subsidiaries SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company primarily provides regional service under code-share agreements with Delta Air Lines and United Airlines. A significant business event during this period was the acquisition of ASA, completed in September 2005, which expanded the fleet from 219 to 395 aircraft by the end of the quarter.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Operating Revenues | $742,855 | $340,292 |
| Operating Income | $82,863 | $34,446 |
| Net Income | $34,588 | $18,765 |
| Diluted Earnings Per Share | $0.57 | $0.32 |
| Operating Cash Flow | $44,823 | $(12,929) |
| Cash and Cash Equivalents (End of Period) | $147,407 | $99,784 |
| Total Debt (Long-term + Current) | $1,740,281 | Filing text does not provide clear Q1 2005 total debt |
| Working Capital | $192,389 | Filing text does not provide clear Q1 2005 working capital |
Note: All figures are in thousands of dollars unless otherwise noted. Debt figures represent total long-term debt including current maturities.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 118.3% year-over-year, driven primarily by the acquisition of ASA and a 110.8% increase in Available Seat Miles (ASMs).
- Profitability: Net income increased 84.3% to $34.6 million. Operating income more than doubled to $82.9 million.
- Expense Increases: Total operating expenses rose 115.8% to $660.0 million. Fuel costs per ASM increased 29.7% due to rising fuel prices ($2.09/gallon in Q1 2006 vs. $1.61/gallon in Q1 2005). Interest expense surged to $28.5 million from $6.6 million due to debt assumed in the ASA acquisition.
- Cash Flow: Operating cash flow turned positive, providing $44.8 million compared to a use of $12.9 million in the prior year quarter.
- Accounting Change: The company adopted SFAS No. 123(R) effective January 1, 2006, recognizing stock-based compensation expense. This reduced net income by approximately $1.3 million for the quarter compared to the previous accounting method (APB 25).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management expects working capital to be sufficient for operations, expansion, and debt service for the next 12 months. The company anticipates delivering 17 CRJ900 aircraft between April 2006 and April 2007, with commitments totaling approximately $463 million. Delta has committed to providing opportunities to utilize 28 additional regional jets by the end of 2007.
Risks and Contingencies
- Partner Bankruptcy: Delta Air Lines is in Chapter 11 reorganization, and United Airlines recently emerged from bankruptcy. While code-share agreements were assumed by the bankruptcy courts, there is a risk of termination or liquidation of assets by partners, which would materially impact SkyWest's revenue.
- SEC Investigation: The SEC is investigating a change in accounting methods for CRJ200 engine overhaul expenses made in 2002. SkyWest has offered a cease and desist order, but the outcome remains uncertain.
- Dependence on Partners: The company is highly dependent on Delta and United for revenue. Termination of these agreements would require significant time and resources to replace.
- Fuel Volatility: While contract flying arrangements pass fuel risk to partners for regional jets, the company bears fuel risk for Brasilia turboprops flown for Delta.
Unusual Items
- Subsequent Event: On April 17, 2006, SkyWest completed a public offering of 4,000,000 shares of common stock at $26.05 per share, raising approximately $99.3 million to reduce revolving lines of credit and fund working capital.
Investor Verification Checklist
- ASA Integration: Verify the successful operational and financial integration of Atlantic Southeast Airlines (ASA) and the realization of projected synergies.
- Partner Stability: Monitor the progress of Delta Air Lines' Chapter 11 reorganization and United Airlines' post-bankruptcy performance to assess the stability of SkyWest's primary revenue sources.
- SEC Investigation Status: Track the resolution of the SEC investigation regarding the 2002 accounting restatement for engine overhaul costs.
- Fleet Financing: Confirm the ability to secure financing for the $463 million in committed aircraft purchases and the 70 optioned aircraft.
- Fuel Cost Exposure: Assess the impact of rising fuel prices on the portion of the fleet (Brasilia turboprops) where SkyWest retains fuel price risk.