Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: SkyWest is a holding company operating two wholly-owned regional airline subsidiaries: SkyWest Airlines and Atlantic Southeast Airlines (ASA). The company operates the largest regional airline in the United States, providing scheduled passenger service under code-share agreements primarily with Delta Air Lines and United Air Lines. As of December 31, 2005, the consolidated fleet consisted of 380 aircraft operating over 2,400 daily departures.
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Operating Revenues | $1,964.0 million | $1,156.0 million |
| Operating Income | $220.4 million | $144.8 million |
| Net Income | $112.3 million | $82.0 million |
| Diluted EPS | $1.90 | $1.40 |
| Total Assets | $3,320.6 million | $1,662.3 million |
| Long-Term Debt (net of current) | $1,422.8 million | $463.2 million |
| Working Capital | $77.7 million | $536.5 million |
| Current Ratio | 1.1:1 | 4.1:1 |
| Operating Cash Flow | $207.5 million | $246.9 million |
Operational Metrics: Available Seat Miles (ASMs) increased 68.5% to 12.7 billion. Load factor improved to 75.0% from 73.5%. Cost per ASM was 14.1 cents, while Revenue per ASM was 15.4 cents.
Material Changes vs. Prior Period
- Acquisition of ASA: The most significant change was the acquisition of Atlantic Southeast Airlines (ASA) from Delta on September 7, 2005. SkyWest paid $421.3 million in cash, assumed approximately $1.25 billion in long-term debt, and paid $5.3 million in transaction fees. The 2005 results include 114 days of ASA operations.
- Revenue Growth: Operating revenues increased 69.9% year-over-year, driven primarily by the ASA acquisition and fleet expansion.
- Debt Load: Long-term debt increased significantly due to the debt assumed in the ASA acquisition and financing for new aircraft. Total long-term debt obligations reached approximately $1.8 billion.
- Liquidity Position: Working capital decreased from $536.5 million to $77.7 million, and the current ratio dropped from 4.1:1 to 1.1:1, reflecting the cash outflow used to fund the ASA acquisition.
- Fuel Costs: Fuel cost per ASM increased 39.4% to 4.6 cents due to rising fuel prices (average $2.05/gallon in 2005 vs. $1.45/gallon in 2004).
Guidance, Outlook, Risks, and Contingencies
Outlook and Growth
Management anticipates growth through the delivery of 32 additional regional jets (CRJ700s and CRJ900s) under firm orders totaling approximately $838 million. The company also holds options for 70 additional aircraft. Delta has committed to providing opportunities to utilize 28 additional regional jets by the end of 2007.
Key Risks
- Partner Bankruptcy: Delta Air Lines filed for Chapter 11 reorganization in September 2005. While the bankruptcy court approved the assumption of SkyWest's code-share agreements, there is a risk that Delta's reorganization could fail or lead to liquidation, which would materially adversely affect SkyWest's operations.
- United Air Lines Restructuring: United emerged from bankruptcy in early 2006, but its financial stability remains a risk factor for SkyWest's United Express operations.
- Dependence on Partners: Approximately 98.5% of revenues are derived from Delta and United. Termination of these agreements would have a material adverse effect.
- Labor Relations: ASA employees are unionized, and negotiations are ongoing. SkyWest Airlines employees are not currently unionized, but unionization efforts are a risk.
- SEC Investigation: The SEC is investigating SkyWest's accounting treatment of engine overhaul expenses and related restatements. SkyWest has offered a cease and desist order, which is under review.
- Stock Issuance Error: The company discovered it issued 329,606 shares of common stock in excess of the authorized limit under its Employee Stock Purchase Plan. Nasdaq staff has closed the matter following corrective amendments to other stock plans.
Investor Verification Checklist
- ASA Integration: Verify the successful integration of ASA's operations and the realization of anticipated cost synergies.
- Delta Bankruptcy Status: Monitor Delta Air Lines' progress in emerging from Chapter 11 bankruptcy and the stability of the Delta Connection agreements.
- SEC Investigation Outcome: Confirm the final resolution of the SEC investigation regarding engine overhaul accounting and any potential penalties.
- Labor Negotiations: Track the status of collective bargaining agreements with ASA's unions and potential unionization efforts at SkyWest Airlines.
- Debt Servicing: Assess the company's ability to service its increased debt load ($1.8 billion) and meet lease obligations ($3.2 billion future minimum payments) given the reduced liquidity buffer.
- Fuel Hedging: Review strategies for managing fuel price volatility, as fuel costs represent a significant portion of operating expenses.