Business Context and Reporting Period
Company: SkyWest, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: SkyWest operates as a regional airline partner for major carriers, primarily Delta Air Lines, United Airlines, and Continental Airlines. As of March 31, 2005, the fleet consisted of 219 aircraft (69 EMB120s, 125 CRJ200s, and 25 CRJ700s). The company operates under both contract flying (partner-controlled) and prorate flying (SkyWest-controlled) arrangements.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Operating Revenues | $340.3 million | $253.7 million |
| Operating Income | $34.4 million | $34.9 million |
| Net Income | $18.8 million | $19.4 million |
| Diluted Earnings Per Share | $0.32 | $0.33 |
| Operating Cash Flow | $(12.9) million | $23.0 million |
| Total Assets | $1,751.5 million | $1,662.3 million (Dec 31, 2004) |
| Total Long-Term Debt | $575.9 million | $495.8 million (Dec 31, 2004) |
| Working Capital | $566.7 million | $536.5 million (Dec 31, 2004) |
| Current Ratio | 4.2:1 | 4.1:1 (Dec 31, 2004) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 34.1% year-over-year, driven by a 33.8% increase in Available Seat Miles (ASMs) due to fleet expansion (13 new CRJ700s delivered in Q1 2005).
- Profitability: Net income decreased slightly by 3.1% to $18.8 million. Operating income remained relatively flat despite revenue growth, as operating expenses increased 39.9% due to fleet expansion and rising fuel costs.
- Fuel Costs: Fuel cost per ASM increased 37.0% to 3.7 cents, reflecting a 36.9% rise in the average price of fuel ($1.61/gallon vs. $1.18/gallon in Q1 2004). While contract flying partners reimburse fuel costs, prorate flying exposes SkyWest to this volatility.
- Cash Flow: Operating cash flow turned negative ($12.9 million used) compared to a positive $23.0 million in Q1 2004, primarily due to the timing of lease payments and increased receivables from fuel reimbursements.
- Debt Levels: Long-term debt increased by approximately $80 million to $575.9 million to finance new aircraft acquisitions.
Guidance, Outlook, and Risks
- Contractual Uncertainty: SkyWest and Delta had not finalized 2005 rate agreements as of March 31, 2005; revenues were recorded based on 2004 rates. SkyWest and Continental announced a mutual decision to end operations by June 2005.
- Partner Financial Health: Significant risk exists regarding United Airlines' ongoing Chapter 11 bankruptcy and Delta's potential financial distress. United's bankruptcy could jeopardize operations or asset utilization.
- Capital Commitments: The company has firm commitments of approximately $675 million to purchase 27 CRJ700 aircraft through January 2006, plus options for 60 additional aircraft.
- Legal Proceedings: An ongoing SEC investigation regarding a 2002 accounting restatement for CRJ200 engine overhaul expenses remains unresolved. Additionally, a class-action lawsuit regarding employee wages in California is pending.
- Operational Risks: Weather-related cancellations in January 2005 (approx. 1,100 more than normal) impacted revenue and increased costs. Future maintenance costs are expected to rise as the fleet ages and warranties expire.
Investor Verification Checklist
- Delta Rate Agreement: Verify the finalization of the 2005 Delta contract rates and any retroactive adjustments to Q1 2005 revenue.
- United Bankruptcy Status: Monitor United Airlines' emergence from Chapter 11 and the stability of the United Express agreement.
- Continental Exit Strategy: Confirm the timeline and financial impact of terminating Continental Connection operations by June 2005.
- SEC Investigation: Track the status of the SEC investigation into the 2002 accounting restatement.
- Fleet Financing: Assess the company's ability to secure financing for the $675 million in committed aircraft purchases without eroding working capital.