1
EXHIBIT 13.1
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
March 31, March 31,
2001 2000
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 27,202 $ 24,544
Available-for-sale securities 252,827 146,804
Receivables, less allowance for doubtful accounts of
$64 in 2001 and $59 in 2000 15,928 9,512
Inventories 20,069 16,195
Prepaid aircraft rents 25,494 23,880
Other current assets 13,472 12,891
--------- ---------
Total current assets 354,992 233,826
--------- ---------
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares 303,016 230,248
Deposits on aircraft 110,452 68,372
Buildings and ground equipment 61,040 38,832
Rental vehicles -- 3,861
--------- ---------
474,508 341,313
Less-accumulated depreciation and
amortization (136,512) (107,359)
--------- ---------
Total property and equipment, net 337,996 233,954
--------- ---------
OTHER ASSETS 2,538 2,403
--------- ---------
Total assets $ 695,526 $ 470,183
========= =========
The accompanying notes are an integral part of these consolidated
balance sheets.
2
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, March 31,
2001 2000
--------- ---------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 10,247 $ 12,437
Trade accounts payable 46,499 42,385
Accrued salaries, wages and benefits 12,197 10,254
Engine overhaul accrual 13,946 9,889
Taxes other than income taxes 3,652 3,230
Air traffic liability 1,409 1,452
--------- ---------
Total current liabilities 87,950 79,647
--------- ---------
LONG-TERM DEBT, net of current maturities 73,854 48,321
--------- ---------
DEFERRED INCOME TAXES PAYABLE 35,699 29,995
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par value, 120,000,000 shares authorized;
61,999,980 and 55,370,956 shares issued, respectively 298,136 165,765
Retained earnings 221,097 168,331
Treasury stock, at cost, 5,898,400 shares (20,285) (20,285)
Accumulated other comprehensive income (loss) (925) (1,591)
--------- ---------
Total stockholders' equity 498,023 312,220
--------- ---------
Total liabilities and stockholders' equity
$ 695,526 $ 470,183
========= =========
The accompanying notes are an integral part of these consolidated
balance sheets.
3
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the year ended March 31,
--------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Operating revenues:
Passenger $ 524,892 $ 466,733 $ 381,409
Freight and other 6,201 8,045 7,217
------------ ------------ ------------
Total operating revenues 531,093 474,778 388,626
------------ ------------ ------------
Operating expenses:
Flying operations 216,746 176,159 137,231
Aircraft, traffic and passenger service 77,533 65,822 58,826
Maintenance 65,502 60,400 51,370
Promotion and sales 26,863 27,698 29,432
Depreciation and amortization 34,416 28,463 23,237
General and administrative 30,585 27,601 22,460
Other 531 1,955 1,765
------------ ------------ ------------
Total operating expenses 452,176 388,098 324,321
------------ ------------ ------------
Operating income 78,917 86,680 64,305
------------ ------------ ------------
Other income (expense):
Interest expense (1,704) (2,726) (2,376)
Interest income 15,931 8,575 7,553
Gain on sales of property and equipment 470 309 419
------------ ------------ ------------
Total other income 14,697 6,158 5,596
------------ ------------ ------------
Income from continuing operations before
provision for income taxes 93,614 92,838 69,901
Provision for income taxes 36,508 35,734 27,273
------------ ------------ ------------
Income from continuing operations 57,106 57,104 42,628
------------ ------------ ------------
Discontinued operations, net of income taxes:
Loss from operations of Scenic Airlines -- -- (168)
Loss on disposition of Scenic Airlines -- -- (625)
------------ ------------ ------------
Total discontinued operations -- -- (793)
------------ ------------ ------------
Net income $ 57,106 $ 57,104 $ 41,835
============ ============ ============
Income from continuing operations per common share:
Basic $ 1.07 $ 1.16 $ 0.88
Diluted $ 1.05 $ 1.15 $ 0.86
Loss from discontinued operations per common share:
Basic and diluted -- -- $ (0.02)
Net income per common share:
Basic $ 1.07 $ 1.16 $ 0.86
Diluted $ 1.05 $ 1.15 $ 0.84
Weighted average number of common shares outstanding:
Basic 53,205,000 49,126,000 48,398,000
Diluted 54,272,000 49,922,000 49,574,000
The accompanying notes are an integral part of these consolidated statements.
4
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Accumulated
Other
Common Stock Treasury Stock Comprehensive
------------------ Retained ------------------- Income
Shares Amount Earnings Shares Amount (loss) Total
------ -------- --------- ------ -------- ------------- ---------
Balance at March 31, 1998 53,918 $155,917 $ 75,501 (5,898) $(20,285) $ -- $ 211,133
Net income -- -- 41,835 -- -- -- 41,835
Exercise of common stock options 799 3,905 -- -- -- -- 3,905
Sale of common stock under
employee stock purchase plan 120 1,062 -- -- -- -- 1,062
Tax benefit from exercise of common
stock options -- 1,232 -- -- -- -- 1,232
Cash dividends ($.06 per share) -- -- (2,911) -- -- -- (2,911)
------ -------- --------- ------ -------- ------- ---------
Balance at March 31, 1999 54,837 162,116 114,425 (5,898) (20,285) -- 256,256
---------
Comprehensive income:
Net income -- -- 57,104 -- -- -- 57,104
Net unrealized depreciation
on available-for sale securities -- -- -- -- -- (1,591) (1,591)
---------
Total comprehensive income -- -- -- -- -- -- 55,513
Exercise of common stock options 366 1,443 -- -- -- -- 1,443
Sale of common stock under
employee stock purchase plan 168 1,816 -- -- -- -- 1,816
Tax benefit from exercise of common
stock options -- 390 -- -- -- -- 390
Cash dividends ($.07 per share) -- -- (3,198) -- -- -- (3,198)
------ -------- --------- ------ -------- ------- ---------
Balance at March 31, 2000 55,371 165,765 168,331 (5,898) (20,285) (1,591) 312,220
---------
Comprehensive income:
Net income- -- -- 57,106 -- -- -- 57,106
Net unrealized appreciation
on available-for-sale securities -- -- -- -- -- 666 666
---------
Total comprehensive income -- -- -- -- -- -- 57,772
Exercise of common stock options 658 2,268 -- -- -- -- 2,268
Sale of common stock under
employee stock purchase plan 180 2,479 -- -- -- -- 2,479
Sale of common stock, net of
offering costs of $349 5,791 122,070 -- -- -- -- 122,070
Tax benefit from exercise of common
stock options -- 5,554 -- -- -- -- 5,554
Cash dividends ($.08 per share) -- -- (4,340) -- -- -- (4,340)
------ -------- --------- ------ -------- ------- ---------
Balance at March 31, 2001 62,000 $298,136 $ 221,097 (5,898) $(20,285) $ (925) $ 498,023
====== ======== ========= ====== ======== ======= =========
The accompanying notes are an integral part of these consolidated statements.
5
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the year ended March 31,
-----------------------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,106 $ 57,104 $ 41,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34,416 28,463 23,237
Nonairline depreciation and amortization 248 1,099 1,026
Maintenance expense related to disposition of rotable spares 1,330 1,880 259
Gain on sales of property and equipment (470) (309) (419)
Loss on disposition of Scenic Airlines -- -- 992
Increase (decrease) in allowance for doubtful accounts 5 (144) 79
Increase in deferred income taxes 5,704 4,747 5,238
Tax benefit from exercise of common stock options 5,554 390 1,232
Changes in operating assets and liabilities:
(Increase) decrease in receivables (6,421) 3,905 (4,368)
Increase in inventories (3,874) (2,332) (5,502)
Increase in other current assets (2,195) (9,040) (11,300)
Decrease in net current assets of discontinued operations -- -- 1,596
Increase in trade accounts payable 3,981 3,667 13,759
Increase in engine overhaul accrual 4,057 2,722 1,627
Increase (decrease) in other current liabilities 2,322 (5,263) 9,947
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101,763 86,889 79,238
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and maturities of available-for-sale
securities, net (105,357) (38,815) (94,953)
Acquisition of property and equipment:
Aircraft and rotable spares (78,603) (33,476) (58,780)
Deposits on aircraft and rotable spares (49,738) (32,709) (41,463)
Buildings and ground equipment (22,195) (5,424) (5,633)
Rental vehicles (875) (3,847) (4,989)
Proceeds from sales of property and equipment 4,442 3,698 2,899
Proceeds from sale of Scenic Airlines -- -- 21,141
Return of deposits on aircraft and rotable spares 7,658 5,800 --
Increase in net long-term assets of discontinued operations -- -- 914
Increase in other assets (389) (555) (616)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (245,057) (105,328) (181,480)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 126,817 3,258 4,967
Payment of cash dividends (4,208) (2,943) (2,778)
Principal payments on long-term debt (8,956) (9,569) (16,700)
Proceeds from issuance of long-term debt 32,299 -- 29,218
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 145,952 (9,254) 14,707
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 2,658 (27,693) (87,535)
Cash and cash equivalents at beginning of year 24,544 52,237 139,772
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,202 $ 24,544 $ 52,237
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,181 $ 2,799 $ 2,601
Income taxes $ 31,979 $ 39,849 $ 18,233
The accompanying notes are an integral part of these consolidated statements.
6
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SkyWest, Inc. (a Utah corporation) through its wholly owned subsidiary
SkyWest Airlines, Inc. ("SkyWest"), operates a regional airline offering
scheduled passenger service with over 1,000 daily departures to 66 cities in 14
western states and Canada. SkyWest has been a code-sharing partner with Delta
Air Lines, Inc. ("Delta") and United Airlines, Inc. ("United") since 1987 and
1997, respectively. SkyWest operates as the Delta Connection in Salt Lake City
and as the United Express carrier in Los Angeles, San Francisco, Denver and in
the Pacific Northwest. Revenues generated in connection with the code-sharing
relationships with Delta and United account for a significant majority of
SkyWest's passenger revenues.
Multiple code-sharing relationships have enabled SkyWest to reduce
reliance on any single major airline code and enhance and stabilize operating
results through a mix of SkyWest-controlled flying and contract flying. On
SkyWest controlled flights, SkyWest controls scheduling, ticketing, pricing and
seat inventories and receives a prorated portion of passenger fares. On contract
routes, the major partner controls scheduling, ticketing, pricing, and seat
inventories with SkyWest receiving from its major airline partners negotiated
payments per flight departure and incentives related to passenger volumes and
levels of customer service. As of March 31, 2001, approximately 69 percent of
SkyWest's capacity was in contract flying and 31 percent was in SkyWest
controlled flying.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SkyWest, Inc. and its wholly owned subsidiaries, SkyWest and National Parks
Transportation, Inc. ("NPT"), collectively (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
During fiscal 2001, the Company sold the operations of National Parks
Transportation. During fiscal 1999, the Company sold the operations of Scenic
Airlines, Inc. ("Scenic"), (see Note 7).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principals
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
AVAILABLE-FOR-SALE SECURITIES
The Company's investments in debt and equity securities have been classified as
available-for-sale securities and are recorded at fair market value. The
Company's position in available-for-sale securities consists primarily of
investment grade bonds, bond funds and commercial paper. Unrealized appreciation
and depreciation are recorded as a component of accumulated other comprehensive
income/loss in stockholders' equity.
INVENTORIES
Inventories include expendable parts, fuel and supplies and are valued at cost
(FIFO basis) less an allowance for obsolescence. Expendable inventory parts are
charged to expense as used.
7
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over their useful
lives to their estimated residual values using the straight-line method as
follows:
Aircraft and rotable spares 3 - 14 years
Buildings and ground equipment 3 - 39.5 years
Rental vehicles 4 years
During the year ended March 31, 2001, the Company capitalized $2,150,000 of
interest cost related to long-term construction projects and advanced payments
on aircraft contracts.
MAINTENANCE
The Company operates under an FAA approved continuous inspection and maintenance
program. The normal cost of recurring maintenance is charged to expense when
incurred. The Company uses the deferred method of accounting for overhauls of
Embraer EMB-120 Brasilia ("Brasilia") engines and uses the accrual method of
accounting for overhauls of Canadair Regional Jet ("CRJ") engines.
PASSENGER AND FREIGHT REVENUES
Passenger and freight revenues are recognized when service is provided.
Passenger tickets sold but not used and the liability to other airlines are
recorded as air traffic liability.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. As of March 31, 2001 and
2000, the Company had recorded current deferred tax assets of $10,510,000 and
$9,991,000, respectively (which are included in other current assets), and
deferred tax liabilities of $35,699,000 and $29,995,000, respectively.
NET INCOME PER COMMON SHARE
Basic net income per common share ("Basic EPS") excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding during the fiscal year. Diluted net income per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net income
per common share.
Following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all periods presented (in
thousands, except per share amounts):
Year ended March 31, 2001 2000 1999
------- ------- -------
Numerator:
Net income $57,106 $57,104 $41,835
======= ======= =======
Denominator:
Weighted average common shares outstanding 53,205 49,126 48,398
Effect of stock options 1,067 796 1,176
------- ------- -------
54,272 49,922 49,574
======= ======= =======
Basic EPS $ 1.07 $ 1.16 $ 0.86
Diluted EPS $ 1.05 $ 1.15 $ 0.84
======= ======= =======
8
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components in financial statements. Comprehensive income includes
charges and credits to stockholders' equity that are not the results of
transactions with shareholders. As of March 31, 2001 and 2000, comprehensive
income includes net income and adjustments, net of tax, to reflect unrealized
appreciation and depreciation on available-for-sale securities. The Company
recorded unrealized appreciation of $666,000 and unrealized depreciation of
$1,591,000 in available-for-sale securities for the years ended March 31, 2001
and 2000, respectively. These adjustments have been reflected in the
accompanying Consolidated Statements of Stockholders' Equity net of estimated
income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which was amended in June 1999 to delay the effective date. SFAS 133 establishes
new accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The Company adopted SFAS 133 as of
April 1, 2001. The adoption did not have a material impact on the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, available-for-sale securities, receivables and accounts
payable approximate fair values because of the immediate or short-term maturity
of these financial instruments. The fair value of the Company's long-term debt
is estimated based on current rates offered to the Company for similar debt and
approximates $78,175,000 as of March 31, 2001, as compared to the carrying
amount of $84,101,000.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement requires disclosures related
to components of a company for which separate financial information is available
that is evaluated regularly by the Company's chief operating decision maker in
deciding how to allocate resources and in assessing performance. Management
believes that the Company has only one operating segment in accordance with SFAS
No. 131 because the Company's business consists of scheduled airline passenger
service.
9
(2) LONG-TERM DEBT
Long-term debt consists of the following:
As of March 31,
-----------------------------
2001 2000
-------- --------
(in thousands)
Notes payable to bank, due in semi-annual
installments plus interest at 3.72% to
3.86%, net of the benefits of interest
rate subsidies through the Brazilian
Export financing program, through
February 2011, secured by aircraft $ 24,213 $ 26,167
Note payable to bank, due in semi-annual
installments plus interest at 7.18% through
December 2012, secured by aircraft 16,487 --
Note payable to bank, due in semi-annual
installments plus interest based on
six-month LIBOR (7.35% at March 31, 2001)
through November 2016, secured by aircraft 15,566 --
Notes payable to banks, due in monthly installments
including interest at 6.70% to 7.37% through
January 2006, secured by aircraft 14,932 17,936
Notes payable to bank and financing company, due
in quarterly installments plus interest at
7.64% to 8.58% through March 2005, secured
by aircraft 5,216 6,328
Note payable to bank, due in monthly installments
plus interest at 7.35% due December
2005, secured by aircraft 3,727 4,502
Note payable to bank, due in quarterly installments
plus interest based on three-month LIBOR
(6.58% at March 31, 2001) through
September 2003, secured by aircraft 1,672 2,341
Note payable to bank, due in monthly installments
plus interest based on one-month LIBOR
(7.03% at March 31, 2001) through June 2003,
secured by aircraft 1,477 2,133
Note payable to bank, due in semi-annual
installments plus interest at 8.50% through
May 2002, secured by aircraft 811 1,351
-------- --------
84,101 60,758
Less current maturities (10,247) (12,437)
-------- --------
$ 73,854 $ 48,321
======== ========
10
2. LONG-TERM DEBT (continued)
The aggregate amounts of principal maturities of long-term debt as of March 31,
2001 are as follows (in thousands):
Year ending March 31,
---------------------
2002 $ 10,247
2003 10,415
2004 9,074
2005 8,776
2006 7,263
Thereafter 38,326
--------
$ 84,101
========
The Company's long-term debt was incurred in connection with the acquisition of
Brasilia and CRJ aircraft. Certain amounts related to the Brasilia aircraft are
supported by continuing subsidy payments through the export support program of
the Federative Republic of Brazil. The subsidy payments reduce the stated
interest rates to an average effective rate of approximately 4.08 percent, on
$27.8 million of the long-term debt, at March 31, 2001. The continuing subsidy
payments are at risk to the Company if the Federative Republic of Brazil does
not meet its obligations under the export support program. While the Company has
no reason to believe, based on information currently available, that the Company
will not continue to receive these subsidy payments from the Federative Republic
of Brazil in the future, there can be no assurance that such a default will not
occur. On the remaining long-term debt related to the Brasilia aircraft of $24.2
million, the lender has assumed the risk of the subsidy payments which has
reduced the average effective rate on this debt to approximately 3.82 percent at
March 31, 2001. The average effective rate on the debt related to the CRJ
aircraft of $32.1 million was 7.26% at March 31, 2001, and is not subject to
subsidy payments.
As of March 31, 2001, the Company had available $7,474,000 in an unsecured bank
line of credit with interest payable at the bank's base rate less one-quarter
percent, which was a net rate of 7.75 percent. The line of credit provides for a
total of $10,000,000 available for borrowings or letters of credit with the same
institution. The Company had $2,526,000 of letters of credit and no borrowings
outstanding under this line of credit as of March 31, 2001.
Certain of the Company's long-term debt arrangements contain limitations on,
among other things, sale or lease of assets and ratio of long-term debt to
tangible net worth. As of March 31, 2001, the Company was in compliance with all
the debt covenants.
(3) INCOME TAXES
The provision for income taxes includes the following components (in thousands):
Year ended March 31,
---------------------------------------------
2001 2000 1999
------- ------- -------
Current tax provision:
Federal $26,570 $27,510 $22,297
State 5,601 5,484 4,348
------- ------- -------
32,171 32,994 26,645
------- ------- -------
Deferred tax provision:
Federal 3,854 2,294 528
State 483 446 100
------- ------- -------
4,337 2,740 628
------- ------- -------
Provision for income taxes $36,508 $35,734 $27,273
======= ======= =======
11
3. INCOME TAXES (continued)
The following is a reconciliation between the statutory Federal income tax rate
of 35 percent and the effective rate which is derived by dividing the provision
for income taxes by income before provision for income taxes (in thousands).
Year ended March 31,
-------------------------------------------------
2001 2000 1999
-------- -------- -------
Computed "expected" provision for income
taxes at the statutory rates $ 32,765 $ 32,493 $24,465
Increase (decrease) in income taxes
resulting from:
State income taxes, net of Federal
income tax benefit 4,007 3,565 2,777
Other, net (264) (324) 31
-------- -------- -------
Provision for income taxes $ 36,508 $ 35,734 $27,273
======== ======== =======
The significant components of the net deferred tax assets and liabilities are as
follows (in thousands):
As of March 31,
-----------------------------
2001 2000
-------- --------
Deferred tax assets:
Accrued benefits $ 1,863 $ 1,550
Engine overhaul accrual 5,578 3,955
Accrued reserves and other 3,069 4,508
-------- --------
Total deferred tax assets 10,510 10,013
-------- --------
Deferred tax liabilities:
Accelerated depreciation (34,732) (29,688)
Other (967) (329)
-------- --------
Total deferred tax liabilities (35,699) (30,017)
-------- --------
Net deferred tax liability $(25,189) $(20,004)
======== ========
(4) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases 85 aircraft, as well as airport facilities, office space, and
various other property and equipment under noncancelable operating leases which
are generally on a long-term net rent basis where the Company pays taxes,
maintenance, insurance and certain other operating expenses applicable to the
leased property. Management expects that, in the normal course of business,
leases that expire will be renewed or replaced by other leases. The following
summarizes future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
March 31, 2001 (in thousands):
Year ending March 31,
- ---------------------
2002 $ 64,381
2003 58,814
2004 54,650
2005 53,696
2006 53,767
Thereafter 322,568
--------
$607,876
========
Total rental expense for noncancelable operating leases was approximately
$61,161,000, $59,063,000, and $49,232,000 for the years ended March 31, 2001,
2000 and 1999, respectively.
12
4. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The above minimum rental payments do not include landing fees, which amounted to
approximately $13,076,000, $9,932,000, and 10,629,000 for the years ended March
31, 2001, 2000 and 1999, respectively.
PURCHASE COMMITMENTS AND OPTIONS
During the fiscal year ended March 31, 2001, SkyWest took delivery of six CRJs
in connection with the Delta Connection and United Express code-share
arrangements. Additionally, as of March 31, 2001 SkyWest has agreed to acquire
an additional 113 CRJs and related spare parts inventory and support equipment
through firm purchase commitments at an aggregate cost of approximately $2.4
billion. SkyWest will take delivery of these aircraft beginning in April 2001
and deliveries will continue through December 2004. Depending on the state of
the aircraft financing market at the time of delivery, management will determine
whether to acquire these aircraft through third party, long-term loans or lease
agreements. SkyWest also has options to acquire 119 additional CRJs at fixed
prices (subject to cost escalations) and delivery schedules and are exercisable
at various dates through April 2008. These aircraft will be allocated between
the United Express and Delta Connection operations.
LEGAL MATTERS
The Company is subject to certain legal actions which it considers routine to
its business activities. As of March 31, 2001, management believes, after the
consultation with legal counsel, that the ultimate outcome of such legal matters
will not have a material adverse effect on the Company's financial position,
liquidity or results of operations.
STANDBY LETTERS OF CREDIT
As of March 31, 2001, the Company has outstanding letters of credit totaling
approximately $3,607,000 related to requirements of certain airports, port
authorities and workers compensation agreements.
CASH AND CASH EQUIVALENTS
As of March 31, 2001, the Company has demand deposits and money market accounts
totaling $418,000 with Wells Fargo Bank, $153,000 with Citibank, $194,000 with
Royal Bank of Canada, and $1,526,000 with Zions First National Bank. These
balances exceed the $100,000 limit for insurance by the Federal Deposit
Insurance Corporation.
(5) CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock from time
to time in one or more series without shareholder approval. No shares of
preferred stock are presently outstanding. The Board of Directors is authorized,
without any further action by the stockholders of the Company, to (i) divide the
preferred stock into series; (ii) designate each such series; (iii) fix and
determine dividend rights; (iv) determine the price, terms and conditions on
which shares of preferred stock may be redeemed; (v) determine the amount
payable to holders of preferred stock in the event of voluntary or involuntary
liquidation; (vi) determine any sinking fund provisions; and (vii) establish any
conversion privileges.
STOCK OFFERING
On September 12, 2000, the Company completed a public offering of 5,791,000
shares of common stock which generated net proceeds of $122.1 million after
deducting underwriting commissions and other expenses.
STOCK DIVIDEND
On November 7, 2000, the Board of Directors declared a dividend distribution of
one share of common stock for each outstanding share of common stock. The stock
dividend was distributed on December 15, 2000 to shareholders of record as of
November 30, 2000. The effect of the stock dividend has been retroactively
reflected in the accompanying consolidated financial statements.
13
SUBSEQUENT CASH DIVIDEND
On May 8, 2001, the Company's Board of Directors declared a regular quarterly
cash dividend of $0.02 per share payable to stockholders of record on June 29,
2001, distributable July 13, 2001.
STOCK OPTIONS
On August 8, 2000, the stockholders approved the adoption of two new stock
option plans: the Executive Stock Incentive Plan ("Executive Plan") and the 2001
Allshare Stock Option Plan ("Allshare Plan"). Both plans became effective
January 1, 2001. These plans replaced the Company's Combined Incentive and
Non-Statutory Stock Option Plans ("Prior Plans"), however, all outstanding
options under Prior Plans remain outstanding. No further grants will be made
under the Prior Plans. As of December 31, 2000, there were approximately
2,891,000 options outstanding under the Prior Plans. The Executive Plan provides
for the issuance of up to 4,000,000 shares of common stock to officers,
directors and other management employees. The Allshare Plan provides for the
issuance of up to 4,000,000 shares of common stock to employees. The Executive
Plan and Allshare Plan are both administered by the Compensation Committee of
the Board of Directors who designate option grants as either incentive or
non-statutory. Incentive stock options are granted at not less than 100 percent
of the market value of the underlying common stock on the date of grant.
Non-statutory stock options are granted at a price as determined by the
Compensation Committee.
Options are exercisable for a period as defined by the Compensation Committee at
the date granted; however, no stock option will be exercisable before six months
have elapsed from the date it is granted and no incentive stock option shall be
exercisable after ten years from the date of grant. The following table
summarizes the stock option activity for all plans for the years ended March 31,
2001, 2000 and 1999:
2001 2000 1999
----------------------- ------------------------ ----------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at
beginning of year 2,669,076 $ 9.23 2,452,946 $ 7.45 1,981,432 $ 4.17
Granted 696,000 20.13 680,000 13.09 1,320,000 10.97
Exercised (658,408) 3.50 (366,112) 3.94 (799,212) 4.89
Canceled (68,234) 11.47 (97,758) 11.18 (49,274) 8.87
--------- --------- ---------
Outstanding at end of year 2,638,434 $13.18 2,669,076 $ 9.23 2,452,946 $ 7.45
========= ====== ========= ====== ========= ======
Options exercisable at
year-end 142,000 189,056 158,224
Weighted average fair
value of options
granted during the year $ 8.74 $ 5.69 $ 4.50
The following table summarizes information about stock options outstanding at
March 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at March 31,2001 Contractual Life Price at March 31,2001 Price
- ------------ ---------------- ------------------ ---------------- ---------------- ----------------
$3 to $6 142,000 4.6 years $ 3.65 142,000 $ 3.65
$7 to $15 1,800,434 7.5 years 11.25 -- --
$16 to $21 696,000 9.1 years 20.13 -- --
--------- -------
$3 to $21 2,638,434 7.8 years $ 13.18 142,000 $ 3.65
========= ========= ========= ======= =========
14
5. CAPITAL TRANSACTIONS (continued)
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans. SFAS No.
123, "Accounting for Stock-Based Compensation," requires pro forma information
regarding net income and net income per share as if the Company had accounted
for its stock options under the fair value method of the statement. The fair
value of these stock options was estimated at the grant date using the
Black-Scholes option pricing model with the following assumptions used for
grants in fiscal 2001, 2000 and 1999: a risk-free interest rate of 6.5 percent
for fiscal 2001, 5.5 percent for fiscal 2000 and 4.8 percent for fiscal 1999, a
dividend yield of .0001 percent for fiscal 2001, 2000 and 1999, a volatility
factor of the expected common stock price of .451 for fiscal 2001, .496 for
fiscal 2000 and .465 for fiscal 1999 and a weighted average expected life of
four years for the stock options for all the years presented. For purposes of
the pro forma disclosures, the estimated fair value of the stock options and
employee stock purchases is amortized over the vesting period of the respective
stock options and employee stock purchases.
Following are the pro forma disclosures and the related impact on net income and
net income per share (in thousands, except per share information):
Year Ended March 31,
------------------------------------------------------
2001 2000 1999
---------- ---------- ----------
Net income:
As reported $ 57,106 $ 57,104 $ 41,835
Pro forma $ 54,212 $ 54,990 $ 40,194
Net income per common share:
Diluted as reported $ 1.05 $ 1.14 $ 0.84
Diluted pro forma $ 1.00 $ 1.10 $ 0.81
(6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN
RETIREMENT PLAN
The Company sponsors the SkyWest Airlines Employee's Retirement Plan (the
"Plan"). Employees who have completed ninety days of service and are 21 years of
age are eligible for participation in the Plan. Employees may elect to make
contributions to the Plan. The Company matches 100 percent of such contributions
up to 2 percent, 4 percent or 6 percent of the individual participant's
compensation, based upon length of service. Additionally, a discretionary
contribution may be made by the Company. The Company's combined contributions to
the Plan was approximately $5,740,000, $4,207,000 and $3,800,000 for the years
ended March 31, 2001, 2000 and 1999, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In February 1996, the Company's Board of Directors approved the SkyWest, Inc.
1996 Employee Stock Purchase Plan ("the Stock Purchase Plan"). All employees who
have completed 90 days of employment are eligible to participate, except
employees who own five percent or more of the Company's common stock. The Stock
Purchase Plan enables employees to purchase shares of the Company's common stock
at a 15 percent discount, through payroll deductions. Employees can contribute
two to 15 percent of their base pay, not to exceed $21,250 each calendar year,
for the purchase of shares. For the fiscal year ended March 31, 2001, 179,786
shares were purchased by employees at prices of $11.90 and $15.75. For the
fiscal year ended March 31, 2000, 167,656 shares were purchased by employees at
prices of $10.60 and $11.04. For the fiscal year ended March 31, 1999, 119,756
shares were purchased by employees at prices of $6.19 and $12.59. In addition,
as of March 31, 2001, $1,061,000 had been withheld for the future purchase of
shares. Shares are purchased semi-annually at the lower of the beginning or the
end of the period price. Employees can terminate their participation in the
Stock Purchase Plan at anytime upon written notice.
15
(7) DISCONTINUED OPERATIONS
On August 26, 1998, the Company entered into an Asset Purchase Agreement
("Agreement") with Eagle Canyon Airlines, Inc. ("Eagle") to sell a majority of
the assets of Scenic Airlines, Inc. ("Scenic"). Included under the Agreement
were all of the assets, properties, rights and business of Scenic related to its
Las Vegas based tour and scheduled flight operations. The agreement was
consummated on December 23, 1998 with the Company receiving cash proceeds of
$16.2 million. Additionally, the Company recorded a pretax loss of approximately
$0.3 million on the sale during fiscal 1999.
On January 11, 1999, the Company entered into an agreement ("Page Agreement")
with JCMI, LLC, to sell the remainder of the assets and business of Scenic. The
Page Agreement includes all of the assets, properties, rights and business of
Scenic related to its Page, Arizona tour operations. The agreement was
consummated on March 2, 1999 with the Company receiving total proceeds of $5.0
million consisting of cash and a secured promissory note of $1.9 million. The
Company recorded a pretax loss of approximately $0.7 million on the sale during
fiscal 1999.
The accompanying condensed consolidated financial statements reflect the
operations of Scenic as Discontinued Operations. Accordingly, the revenues,
costs and expenses, assets and liabilities of Scenic have been excluded from the
respective captions in the financial statements and have been reported through
the date of disposition as income (loss) from discontinued operations, net of
income taxes and net assets of discontinued operations. The revenues of Scenic
amounted to $28.0 million for the year ended March 31, 1999.
(8) RELATED-PARTY TRANSACTIONS
As of March 31, 2001, NewSky, Ltd., a subsidiary of Delta, owned 6,215,596
shares of common stock which represents 11.1 percent of the outstanding common
stock of the Company. The Company leases various terminal facilities from Delta
and Delta provides certain services to the Company, including advertising,
reservation and ground handling services. Expenses paid to Delta under these
arrangements were approximately $7,481,000, $6,475,000 and $8,409,000 during the
years ended March 31, 2001, 2000 and 1999, respectively. United also provides
services to the Company consisting of reservation, passenger and ground
handling-services. The Company paid $7,433,000, $7,578,000 and $5,294,000 to
United for their services for the years ended March 31, 2001, 2000 and 1999,
respectively.
The Company had a net payable to Delta of $1,987,000 and $1,546,000 as of March
31, 2001 and 2000, respectively. The Company had a net payable to United of
$175,000 as of March 31, 2001 and a net receivable from United of $144,000 as of
March 31, 2000.
16
SUMMARY FINANCIAL AND OPERATING DATA
Year Ended March 31,
--------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Operating revenues (000) $ 531,093 $ 474,778 $ 388,626 $ 266,135 $ 245,766
Operating income (000) $ 78,917 $ 86,680 $ 64,305 $ 32,819 $ 16,025
Net income (000) $ 57,106 $ 57,104 $ 41,835 $ 21,944 $ 10,111
Net income per common share (1):
Basic $ 1.07 $ 1.16 $ 0.86 $ 0.53 $ 0.25
Diluted $ 1.05 $ 1.15 $ 0.84 $ 0.52 $ 0.25
Weighted average shares (000) (1):
Basic 53,205 49,126 48,398 41,598 40,340
Diluted 54,272 49,922 49,574 42,336 40,496
Total assets (000) 695,526 $ 470,183 $ 417,660 $ 318,914 $ 231,934
Current assets (000) 354,992 $ 233,826 $ 216,684 $ 189,771 $ 89,336
Current liabilities (000) 87,950 $ 79,647 $ 74,326 $ 46,662 $ 44,058
Long-term debt (000) 73,854 $ 48,321 $ 61,830 $ 41,109 $ 47,337
Stockholders' equity (000) 498,023 $ 312,220 $ 256,256 $ 211,133 $ 124,552
Return on average equity 13.7% 20.1% 17.9% 14.8% 8.3%
OPERATING DATA
Passengers carried 5,677,322 5,503,290 4,900,921 2,989,062 2,656,602
Revenue passenger miles (000) 1,311,583 1,196,680 1,015,872 745,386 717,322
Available seat miles (000) 2,303,457 2,165,380 1,844,123 1,463,975 1,413,170
Load factor 56.9% 55.3% 55.1% 50.9% 50.8%
Break-even load factor 48.7% 45.5% 46.3% 45.0% 47.9%
Yield per revenue passenger mile 40.0(C) 39.0(C) 37.5(C) 34.8(C) 33.3(C)
Revenue per available seat mile 23.0(C) 21.8(C) 21.0(C) 18.1(C) 17.3(C)
Cost per available seat mile 19.7(C) 18.0(C) 17.6(C) 16.0(C) 16.3(C)
Average passenger trip length 231 217 207 249 270
Number of aircraft at end of year 108 103 99 60 60
17
QUARTERLY FINANCIAL AND STOCK PRICE DATA
Fiscal Year 2001
---------------------------------------------------------------------------------------
First Second Third Fourth Year
----------- ----------- ----------- ----------- -----------
Operating revenues (000) $ 130,387 $ 138,631 $ 130,881 $ 131,194 $ 531,093
Operating income (000) $ 25,174 $ 26,673 $ 15,838 $ 11,232 $ 78,917
Net income (000) $ 16,547 $ 17,815 $ 12,551 $ 10,193 $ 57,106
Net income per common share (1):
Basic $ 0.34 $ 0.35 $ 0.23 $ 0.18 $ 1.07
Diluted $ 0.33 $ 0.34 $ 0.22 $ 0.18 $ 1.05
Stock price data (1): High $ 23.25 $ 25.86 $ 29.97 $ 28.81 $ 29.97
Low $ 16.94 $ 18.68 $ 23.37 $ 17.75 $ 16.94
Fiscal Year 2000
---------------------------------------------------------------------------------------
First Second Third Fourth Year
----------- ----------- ----------- ----------- -----------
Operating revenues (000) $ 111,562 $ 122,737 $ 117,381 $ 123,098 $ 474,778
Operating income (000) $ 20,476 $ 24,661 $ 20,180 $ 21,363 $ 86,680
Net income (000) $ 13,581 $ 15,944 $ 13,618 $ 13,961 $ 57,104
Net income per common share:
Basic $ 0.28 $ 0.33 $ 0.27 $ 0.28 $ 1.16
Diluted $ 0.28 $ 0.32 $ 0.27 $ 0.28 $ 1.15
Stock price data : High $ 15.13 $ 13.82 $ 14.50 $ 19.57 $ 19.57
Low $ 10.75 $ 10.07 $ 10.72 $ 13.75 $ 10.07
(1) On November 7, 2000, the Board of Directors declared a 100 percent stock
dividend (one share for each share outstanding) payable to stockholders of
record on November 30, 2000. The dividend was distributed on December 15, 2000.
The Company paid cash in lieu of issuing fractional shares. All common shares
and per share information in the accompanying consolidated financial statements
have been retro actively adjusted to reflect the stock dividend.
As of April 30, 2001, there were 989 holders of common stock. Cash dividends of
$.08 and $.07 per share of outstanding common stock were accrued in fiscal years
2001 and 2000, respectively.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company, through SkyWest Airlines, Inc. ("SkyWest"), operates a regional
airline offering scheduled passenger service with over 1,000 daily departures to
66 cities in 14 western states and Canada. All of our flights are operated as
either Delta Connection or United Express under code-sharing arrangements with
Delta Air Lines, Inc., ("Delta") or United Airlines, Inc. ("United"). Total
operating revenues and passengers carried have grown consistently from fiscal
1997 through fiscal 2001, at compounded annual growth rates of approximately
21.2 percent and 20.9 percent, respectively. In fiscal 1997, SkyWest generated
approximately 1.4 billion available seat miles ("ASMs") and had a fleet of fifty
30-seat Embraer EMB-120 Brasilia turboprops ("Brasilias") and ten Canadair
Regional Jets ("CRJs") at fiscal year end. As a result of additional aircraft
acquisitions, SkyWest generated approximately 2.3 billion ASMs in fiscal 2001
with a fleet of 91 Brasilias and 17 CRJs at fiscal year end.
SkyWest has been a code-sharing partner with Delta in Salt Lake City and United
in Los Angeles since 1987 and 1997, respectively. In April 1998, SkyWest
expanded its United Express Agreement to provide service as United Express in
United's Portland and Seattle/Tacoma markets and in additional Los Angeles
markets which began in April 1998. In January 1998, SkyWest expanded its
SkyWest's operations to serve as the United Express carrier in San Francisco
which began in June 1998. Today, SkyWest operates as the Delta Connection in
Salt Lake City and as United Express in Los Angeles, San Francisco, Denver and
in the Pacific Northwest. SkyWest believes that its success in attracting
multiple code-sharing relationships is attributed to its delivery of high
quality customer service with an all cabin-class fleet.
The Company generated net income of $57.1 million in both fiscal 2001 and 2000
and $41.8 million in fiscal 1999. During fiscal 1999, the Company sold the
operations of Scenic Airlines, Inc., and recorded a loss on the sale of $0.8
million net of income taxes. The amount has been reflected as Discontinued
Operations in the accompanying consolidated financial statements. Additionally,
during the 2001 fiscal year the Company sold the operations of National Parks
Transportation in order to focus on the core airline business and continue
development of our Delta and United relationships. The sale resulted in an
immaterial gain to the overall consolidated financial statements. The
improvement since fiscal 1999 reflects, among other factors, the expansion of
service as a Delta Connection or United Express carrier in the western United
States.
Multiple code-sharing relationships have enabled SkyWest to reduce reliance on
any single major airline code and to enhance and stabilize operating results
through a mix of SkyWest-controlled flying and contract flying. On
SkyWest-controlled flights, SkyWest controls scheduling, ticketing, pricing and
seat inventories and receives a prorated portion of passenger fares. On contract
routes, the major airline partner controls scheduling, ticketing, pricing and
seat inventories with SkyWest receiving from its major airline partners
negotiated payments per flight departure and incentives related to passenger
volumes and levels of customer service. As of March 31, 2001, approximately 69
percent of SkyWest's capacity was in contract flying and 31 percent was in
SkyWest-controlled flying. Another benefit of the multiple code-sharing
relationships is the ability to grow within two major airline systems. The
Company has agreements to acquire an additional 113 CRJs with options for an
additional 119 aircraft with deliveries which began in April 2001. These
aircraft will be allocated between the Delta Connection and United Express
operations.
19
RESULTS OF OPERATIONS
The following table sets forth information regarding the Company's operating
expense components. Airline operating expenses are expressed as a percentage of
total airline operating revenues. Nonairline expenses are expressed as a
percentage of total nonairline revenues. Total operating expenses and interest
are expressed as a percentage of total consolidated revenues. Individual expense
components are also expressed as cents per ASM.
Fiscal Year Ended March 31,
--------------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Percent Cents Percent Cents
of per of per
Amount Revenue ASM Amount Revenue ASM
-------- -------- -------- -------- -------- --------
Salaries, wages and employee
benefits ..................... $143,315 27.0% 6.2 $122,617 25.9% 5.7
Aircraft costs .................. 91,516 17.3 4.0 82,102 17.4 3.8
Maintenance ..................... 44,554 8.4 1.9 42,611 9.0 2.0
Fuel ............................ 69,985 13.2 3.1 48,424 10.2 2.2
Other airline expenses .......... 102,275 19.3 4.4 90,389 19.1 4.2
Interest ........................ 1,704 .3 .1 2,726 .6 .1
-------- -------- -------- -------- -------- --------
Total airline expenses .......... 453,349 85.5 19.7 388,869 82.2 18.0
-------- -------- ======== -------- -------- ========
Other ........................... 531 92.8 1,955 93.8
-------- -------- -------- --------
Total operating expenses and
interest ..................... $453,880 85.6% $390,824 82.3%
======== ======== ======== ========
Fiscal Year Ended March 31,
-------------------------------------
1999
-------------------------------------
Percent Cents
of per
Amount Revenue ASM
-------- -------- --------
Salaries, wages and employee
benefits ..................... $101,243 26.2% 5.5
Aircraft costs .................. 70,561 18.2 3.8
Maintenance ..................... 36,563 9.5 2.0
Fuel ............................ 29,477 7.6 1.6
Other airline expenses .......... 84,712 21.9 4.6
Interest ........................ 2,376 .6 .1
-------- -------- --------
Total airline expenses .......... 324,932 84.0 17.6
-------- -------- ========
Other ........................... 1,765 94.1
-------- --------
Total operating expenses and
interest ..................... $326,697 84.1%
======== ========
FISCAL 2001 COMPARED TO FISCAL 2000
During fiscal 2001, SkyWest continued to improve upon its code-sharing
arrangements with its major code-sharing partners and took delivery of six CRJ's
in connection with the Delta Connection and United Express expansion. As a
result, SkyWest experienced growth in available seat miles ("ASMs"), revenue
passenger miles ("RPMs"), passengers carried and load factors. Consolidated
operating revenues increased 11.9 percent to a record $531.1 million in fiscal
2001 compared to $474.8 million in fiscal 2000. In fiscal 2001 and 2000 net
income remained constant at $57.1 million. However, diluted earnings per share
decreased to $1.05 for the year ended March 31, 2001 from $1.15 for the year
ended March 31, 2000, due to the Company issuing 5,791,000 shares of common
stock on September 12, 2000.
Passenger revenues, which represented 98.8 percent of total operating revenues
in fiscal 2001, increased 12.5 percent to $524.9 million in fiscal 2001 compared
to $466.7 million or 98.3 percent of total operating revenues in fiscal 2000.
The increase was due to a 9.6 percent increase in RPMs. The increase in RPMs was
primarily the result of six additional regional jet aircraft deliveries.
Additionally, the Company implemented selected fare increases during 2001 which
have remained in effect. Fuel surcharges have also been added to fares in an
effort to mitigate the effect of the increased fuel prices. On
SkyWest-controlled flights, SkyWest also continued to use a sophisticated
revenue management and control system which utilizes historical booking data to
optimize revenue. In spite of the 12.5 percent increase in passenger revenues,
the increase did not keep pace with operating costs due to the impact of
inclement weather and air traffic control flight cancellations during the winter
months. Notwithstanding the effect of increased operating costs, SkyWest
recorded a 5.5 percent increase in revenue per ASM to 23.0 [cents] for the year
ended March 31, 2001 from 21.8 [cents] for the year ended March 31, 2000.
During fiscal 2001, total airline operating revenues increased 11.9 percent and
total airline operating expenses increased 16.6 percent. As a result, total
airline operating expenses and interest were 85.5 percent of total airline
operating revenues in fiscal 2001 compared to 82.2 percent in fiscal 2000.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 27.0 percent in fiscal 2001 from 25.9 percent in fiscal
2000. The increase was primarily the result of the increase in the number of
personnel associated with the current and future expansion with United Express
and Delta Connection. The average number of employees was 3,772 for fiscal 2001
compared to 3,302 for fiscal 2000, an increase of 14.2 percent. Salaries, wages
and employee benefits per ASM increased to 6.2 [cents] in fiscal 2001 from 5.7
[cents] in fiscal 2000.
20
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.3 percent in fiscal 2001 from
17.4 percent in fiscal 2000. The decrease is due to airline operating revenues
increasing 12.5 percent year over year and aircraft costs increasing only 11.4
percent year over year. Aircraft costs per ASM increased to 4.0 [cents] in
fiscal 2001 from 3.8 [cents] in fiscal 2000, primarily due to the addition of
six new CRJs in fiscal 2001.
Maintenance expense decreased as a percentage of airline operating revenues to
8.4 percent in fiscal 2001 from 9.0 percent in fiscal 2000. The decrease is due
to airline operating revenues increasing 12.5 percent year over year and
maintenance expenses increasing only 4.5 percent year over year along with
adding six new CRJs to the existing fleet. Maintenance cost decreased slightly
per ASM to 1.9 [cents] in fiscal 2001 from 2.0 [cents] in fiscal 2000.
Fuel costs increased as a percentage of airline operating revenues to 13.2
percent in fiscal 2001 from 10.2 percent in fiscal 2000. The increase is due to
an increase in the average cost of fuel per gallon to $1.18 in fiscal 2001 from
$0.93 in fiscal 2000. As a result, fuel costs per ASM increased to 3.1 [cents]
in fiscal 2001 from 2.2 [cents] in fiscal 2000. Fuel surcharges also have been
added to fares in an effort to mitigate the effect of increased fuel prices.
Other airline expenses, which consist primarily of commissions, landing fees,
station rents, computer reservation systems and hull and liability insurance,
increased as a percentage of airline operating revenues to 19.3 percent in
fiscal 2001 compared to 19.1 percent in fiscal 2000. Cost per ASM increased to
4.4 [cents] in fiscal 2001 from 4.2 [cents] in fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
During fiscal 2000, SkyWest continued to develop its code-sharing agreements
with its code-sharing partners and took delivery of the last five Brasilias
ordered. SkyWest experienced growth in ASMs, RPMs, passengers carried and load
factors. In fiscal 2000, net income increased 36.5 percent to $57.1 million, or
$1.15 per diluted share, compared to $41.8 million, or $.86 per diluted share in
fiscal 1999. Consolidated operating revenues increased 22.2 percent to a record
$474.8 million in fiscal 2000 compared to $388.6 million in fiscal 1999.
Passenger revenues, which represented 98.3 percent of total operating revenues,
increased 22.4 percent to $466.7 million in fiscal 2000 compared to $381.4
million or 98.1 percent of total operating revenues in fiscal 1999. The increase
was due to a 17.8 percent increase in RPMs and a 4.0 percent increase in yield
per RPM. The increase in yield per RPM was principally the result of competitors
eliminating or reducing scheduled service in the San Francisco and Los Angeles
markets. Additionally, SkyWest implemented several fare increases during the
2000 fiscal year, which have remained intact. Fuel surcharges were also added to
fares to mitigate the increase in fuel prices the last half of the year. With
respect to SkyWest-controlled flying, SkyWest continued to use a sophisticated
revenue management and control system which utilizes historical booking data and
trends to optimize revenue. Together, these factors increased revenue per ASM
3.8 percent to 21.8 [cents] in fiscal 2000, compared to 21.0 [cents] in fiscal
1999.
During fiscal 2000, total airline operating revenues increased 22.2 percent and
total airline operating expenses increased on 19.7 percent. As a result, total
airline operating expenses and interest were 82.2 percent of total airline
operating revenues in fiscal 2000 compared to 84.0 percent in fiscal 1999.
Salaries, wages and employee benefits decreased as a percentage of airline
operating revenues to 25.9 percent in fiscal 2000 from 26.2 percent in fiscal
1999. The decrease was the result of airline operating revenues increasing 22.2
percent year over year and salaries, wages and employee benefits increasing only
21.1 percent year over year. The average number of employees was 3,302 for
fiscal 2000 compared to 3,092 for fiscal 1999, an increase of 6.8 percent. The
increase was due to the addition of personnel required for Sky West's expansion.
Salaries, wages and employee benefits per ASM increased to 5.7 [cents] in fiscal
2000 from 5.5 [cents] in fiscal 1999.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.4 percent in fiscal 2000 from
18.2 percent in fiscal 1999. The decrease was due to airline operating revenues
increasing at 22.2 percent year over year and aircraft costs increasing only
16.4 percent year over year. Aircraft costs per ASM were 3.8 for both fiscal
2000 and 1999.
21
Maintenance expense decreased slightly as a percentage of airline operating
revenues to 9.0 percent in fiscal 2000 from 9.5 percent in fiscal 1999. The
decrease was due to airline operating revenues increasing 22.2 percent year over
year and maintenance expenses increasing only 16.5 percent year over year.
Maintenance cost per ASM was 2.0 [cents] for both fiscal 2000 and 1999.
Fuel costs increased as a percentage of airline operating revenues to 10.2
percent in fiscal 2000 from 7.6 percent in fiscal 1999. The increase was due to
an increase in the average cost of fuel per gallon to .93 [cents] in fiscal 2000
from .64 [cents] in fiscal 1999. As a result, fuel costs per ASM increased to
2.2 [cents] in fiscal 2000 from 1.6 [cents] in fiscal 1999.
Other expenses, which consist primarily of commissions, landing fees, station
rents, computer reservation systems and hull and liability insurance, decreased
as a percentage of airline operating revenues to 19.1 percent in fiscal 2000
compared to 21.9 percent in fiscal 1999. The decrease was primarily the result
of the Company not incurring commissions on United Express related passenger
revenues. As a result, cost per ASM decreased to 4.2 [cents] in fiscal 2000 from
4.6 [cents] in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $267.0 million and a current ratio of 4.0:1
at March 31, 2001 compared to working capital of $154.2 million and a current
ratio of 2.9:1 at March 31, 2000. The improvement in working capital was
primarily the result of our public common stock offering completed in September
2000, from which we generated net proceeds of $122.1 million. The other
principal sources of funds during fiscal 2001 were $101.7 million generated from
operations, $32.2 million of proceeds from the issuance of long-term debt, $4.7
million from the sale of common stock in connection with the exercise of stock
options and the Employee Stock Purchase Plan, and $4.4 million of proceeds from
the sale of property and equipment. During fiscal 2001, the Company invested
$105.4 million in available-for-sale securities, $78.6 million in flight
equipment, $42.1 million in net deposits on aircraft, and $23.1 million in
buildings, ground equipment and other assets. The Company also reduced long-term
debt by $9.0 million and paid $4.2 million in cash dividends. These factors
resulted in a $2.7 million decrease in cash and cash equivalents during fiscal
2001.
The Company's position in available--for-sale securities, consisting primarily
of bonds, bond funds and commercial paper, increased to $252.8 million at March
31, 2001 compared to $146.8 million at March 31, 2000. At March 31, 2001, the
Company's ratio of long-term debt to stockholders' equity was 14.8 percent
compared to 15.5 percent at March 31, 2000.
During the 2001 fiscal year, SkyWest took delivery of six CRJs in connection
with the Delta Connection and United Express expansion. Additionally, as of
March 31, 2001 SkyWest had agreed to acquire an additional 113 CRJs and related
spare parts inventory and support equipment at an aggregate cost of
approximately $2.4 billion. SkyWest commenced delivery of these aircraft in
April 2001 and deliveries are scheduled to continue through December 2004.
Depending on the state of the aircraft financing market at the time of delivery,
management will determine whether to acquire these aircraft through third party,
long-term loans or lease agreements. SkyWest also has options to acquire 119
additional CRJs at fixed prices (subject to cost escalations) and delivery
schedules and are exercisable at various dates through April 2008.
The Company has significant long-term lease obligations primarily relating to
its aircraft fleet. These leases are classified as operating leases and
therefore are not reflected as liabilities in the Company's consolidated balance
sheets. At March 31, 2001, the Company leased 85 aircraft with remaining lease
terms ranging from 1 to 16.5 years. Future minimum lease payments due under all
long-term operating leases were approximately $607.9 million at March 31, 2001.
At a 7.5 percent discount factor, the present value of these lease obligations
would be equal to approximately $403.9 million at March 31, 2001.
The Company's long-term debt was incurred in connection with the acquisition of
Brasilia and CRJ aircraft. Certain amounts related to the Brasilia aircraft are
supported by continuing subsidy payments through the export support program of
the Federative Republic of Brazil. The subsidy payments reduce the stated
interest rates to an average effective rate of approximately 4.08 percent, on
$27.8 million of the long-term debt, at March 31, 2001. The continuing subsidy
payments are at risk to the Company if the Federative Republic of Brazil does
not meet its obligations under the export support program. While the Company has
no reason to believe, based on information currently available, that the Company
will not continue to receive these subsidy payments from the Federative Republic
of Brazil in the future, there can be no assurance that such a default will not
occur. On the remaining long-term debt related to the Brasilia aircraft of $24.2
million, the lender has assumed the risk of the subsidy payments and the average
effective rate on this debt is approximately 3.82 percent at March 31, 2001. The
average effective rate on the debt related to the CRJ aircraft of $32.1 million
was 7.26% at March 31, 2001, and is not subject to subsidy payments.
22
The Company expended approximately $62.7 million for non-aircraft capital
expenditures during the year ended March 31, 2001. These expenditures consisted
primarily of $22.2 million for buildings and ground equipment, $21.2 million for
aircraft engine overhauls, $12.9 million for rotable spares, $5.5 million for
aircraft improvements, and $0.9 million for rental vehicles.
The Company has available $10.0 million in an unsecured bank line of credit with
interest payable at the bank's base rate less one-quarter percent, which was a
net rate of 7.75 percent at March 31, 2001. The Company believes that in the
absence of unusual circumstances the working capital available to the Company
will be sufficient to meet its present requirements, including expansion,
capital expenditure, lease payment and debt service requirements for at least
the next 12 months.
SEASONALITY
As is common in the airline industry, SkyWest's operations are favorably
affected by increased travel, historically occurring in the summer months, and
are unfavorably affected by decreased business travel during the months from
November through January and by inclement weather which occasionally results in
cancelled flights, principally during the winter months. However, SkyWest does
expect some mitigation of the historical seasonal trends due to an increase in
the portion of its operations in contract flying.