1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December, 31 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-14719
SKYWEST, INC.
-------------
Incorporated under the laws of Utah 87-0292166
(I.R.S. Employer ID No.)
444 South River Road
St. George, Utah 84790
(435) 634-3000
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 5, 1999
----- -------------------------------
Common stock, no par value 24,270,596
2
SKYWEST, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of December 31, 1998 and
March 31, 1998 3
Condensed Consolidated Statements of
Income for the Three and Nine
Months Ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
2
3
PART I. FINANCIAL INFORMATION
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
December 31, March 31,
1998 1998
------------ ---------
CURRENT ASSETS:
Cash and cash equivalents $ 171,613 $ 139,772
Available-for-sale securities 1,827 14,627
Receivables, net 8,158 8,984
Inventories 12,863 8,361
Prepaid aircraft rents 6,761 12,145
Other current assets 4,926 4,286
Net current assets of discontinued operations 777 1,596
--------- ---------
Total current assets 206,925 189,771
--------- ---------
PROPERTY AND EQUIPMENT:
Flight equipment 226,410 167,482
Buildings and ground equipment 41,440 33,785
Rental vehicles 3,518 3,137
Deposits on aircraft 8,300 --
--------- ---------
279,668 204,404
Less-accumulated depreciation and
amortization (105,422) (89,716)
--------- ---------
174,246 114,688
--------- ---------
NET NONCURRENT ASSETS OF DISCONTINUED
OPERATIONS 5,334 12,647
--------- ---------
OTHER ASSETS 1,779 1,808
--------- ---------
$ 388,284 $ 318,914
========= =========
See notes to condensed consolidated financial statements.
3
4
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1998 1998
------------ ---------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,973 $ 6,300
Trade accounts payable 44,771 30,110
Accrued salaries, wages and benefits 8,572 7,317
Taxes other than income taxes 2,950 1,698
Air traffic liability 1,821 1,237
Income taxes payable 570 --
--------- ---------
Total current liabilities 66,657 46,662
--------- ---------
LONG-TERM DEBT, net of current maturities 56,817 41,109
--------- ---------
DEFERRED INCOME TAXES PAYABLE 21,499 20,010
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 159,151 155,917
Retained earnings 104,445 75,501
Treasury stock (20,285) (20,285)
--------- ---------
Total stockholders' equity 243,311 211,133
--------- ---------
$ 388,284 $ 318,914
========= =========
See notes to condensed consolidated financial statements.
4
5
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
OPERATING REVENUES:
Passenger $ 100,403 $ 65,472 $ 280,174 $ 193,783
Freight 768 756 2,168 3,099
Public service and other 648 294 1,650 852
Nonairline 436 453 1,451 1,376
------------ ------------ ------------ ------------
Total operating revenues 102,255 66,975 285,443 199,110
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Flying operations 37,686 26,765 101,823 78,550
Aircraft, traffic and passenger service 15,649 9,933 43,619 28,464
Maintenance 13,700 7,752 37,780 21,721
Promotion and sales 8,009 5,123 21,840 20,307
General and administrative 5,474 3,794 16,187 11,006
Depreciation and amortization 6,011 4,789 16,412 14,169
Nonairline 450 413 1,296 1,244
------------ ------------ ------------ ------------
Total operating expenses 86,979 58,569 238,957 175,461
------------ ------------ ------------ ------------
OPERATING INCOME 15,276 8,406 46,486 23,649
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (334) (266) (1,302) (1,354)
Interest income 2,083 1,021 5,953 2,549
Gain on sales of property and equipment 67 124 316 245
------------ ------------ ------------ ------------
1,816 879 4,967 1,440
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 17,092 9,285 51,453 25,089
PROVISION FOR INCOME TAXES (6,709) (3,520) (19,988) (9,575)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 10,383 5,765 31,465 15,514
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS, net of income taxes:
Income (loss) from operations of Scenic Airlines (1,233) (343) 280 1,763
Loss from disposition of Scenic Airlines (625) -- (625) --
------------ ------------ ------------ ------------
(1,858) (343) 345 1,763
------------ ------------ ------------ ------------
NET INCOME $ 8,525 $ 5,422 $ 31,120 $ 17,277
============ ============ ============ ============
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE:
Basic $ 0.43 $ 0.28 $ 1.30 $ 0.76
Diluted $ 0.42 $ 0.28 $ 1.28 $ 0.75
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS PER COMMON SHARE:
Basic ($ 0.08) ($ 0.01) ($ 0.01) $ 0.09
Diluted ($ 0.07) ($ 0.02) ($ 0.01) $ 0.09
NET INCOME PER COMMON SHARE:
Basic $ 0.35 $ 0.27 $ 0.29 $ 0.85
Diluted $ 0.34 $ 0.26 $ 1.27 $ 0.84
WEIGHTED AVERAGE COMMON SHARES
Basic 24,225,000 20,413,000 24,158,000 20,359,000
Diluted 24,828,000 20,853,000 24,536,000 20,595,000
See notes to condensed consolidated financial statements.
5
6
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
December 31,
-------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,120 $ 17,277
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,412 14,169
Nonairline depreciation and amortization 705 713
Gain on sales of property and equipment (316) (245)
Loss on sale of discontinued operations 992 --
Maintenance expense related to disposition of rotable spares 130 269
Increase in deferred income taxes 1,489 3,498
Changes in operating assets and liabilities:
Decrease in receivables, net 826 4,004
Increase in inventories (4,502) (571)
Decrease in other current assets 4,744 4,119
Decrease (increase) in net current assets of discontinued operations 819 (641)
Increase in trade accounts payable 14,535 543
Increase in other current liabilities 3,661 78
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 70,615 43,213
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of available-for-sale securities 12,800 83
Acquisition of property and equipment:
Aircraft and rotable spares (59,413) (4,847)
Buildings and ground equipment (7,655) (5,112)
Rental vehicles (2,772) (2,146)
Proceeds from sales of property and equipment 1,910 1,667
Proceeds from sale of discontinued operations 16,178 --
Increase in deposits on aircraft and rotable spares (8,300) --
(Increase) decrease in net long-term assets of discontinued operations (895) 5,804
(Increase) decrease in other assets (230) 79
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (48,377) (4,472)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 22,220 --
Issuance of common stock upon exercise of stock options 2,330 2,246
Tax benefit of options exercised 904 --
Payment of cash dividends (2,050) (1,526)
Reduction of long-term debt (13,801) (6,829)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,603 (6,109)
--------- ---------
Increase in cash and cash equivalents 31,841 32,632
Cash and cash equivalents at beginning of period 139,772 37,786
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 171,613 $ 70,418
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,786 $ 1,962
Income taxes $ 15,995 $ 5,757
See notes to condensed consolidated financial statements.
6
7
SKYWEST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Consolidated Financial Statements
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements reflect all adjustments which, in the opinion of management, are
necessary to present fairly the results of operations for the interim periods
presented. All adjustments are of a normal recurring nature. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
following disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the three and nine months ended December 31, 1998,
are not necessarily indicative of the results that may be expected for the year
ending March 31, 1999.
Note B - Available-for-Sale Securities
Available-for-sale securities are recorded at fair market value.
Note C - Income Taxes
For the nine months ended December 31, 1998 and 1997, the Company provided for
income taxes based upon the estimated annualized effective tax rate. At December
31, 1998, the Company has recorded a net current deferred tax asset of $2.1
million and a net noncurrent deferred tax liability of $21.5 million.
Note D - Net Income Per Common Share
In accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share", basic net income per common share is computed by dividing net income
by the weighted average number of common shares outstanding during the periods.
Diluted net income per common share reflects the potential dilution that could
occur if outstanding stock options were exercised. The calculation of the
weighted average number of common shares outstanding is as follows:
For the For the
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands): (In thousands):
Weighted average number of common shares outstanding 24,225 20,413 24,158 20,359
Effect of outstanding stock options 603 440 378 236
------ ------ ------ ------
Weighted average number of shares for diluted net income
per common share 24,828 20,853 24,536 20,595
====== ====== ====== ======
7
8
Note E - United and Delta Agreements
On July 23, 1997, SkyWest Airlines Inc.,("SkyWest") and United Airlines, Inc.
("United") announced a marketing agreement under which SkyWest has operated as
United Express in Los Angeles, Las Vegas, Phoenix, and in various
intra-California markets since October 1, 1997. The United Express code-share
arrangement provides extensive connecting opportunities for SkyWest/United
Express customers at United's Los Angeles hub where United is the largest major
carrier. At the same time, SkyWest has also re-affirmed its Delta Air Lines
Inc.,("Delta") marketing agreement with a modification to its Delta contract,
which allows for a reduced number of SkyWest flights at Los Angeles which is
more consistent with the current level of Delta flights into and out of Los
Angeles. The modified agreement also strengthens SkyWest's relationship with
Delta in Salt Lake City. On January 19, 1998, SkyWest and United executed a
United Express Agreement for United's Los Angeles hub and an addendum to the
United Express Agreement pursuant to which SkyWest would operate as the United
Express carrier at United's San Francisco hub, which began June 1, 1998. On
February 9, 1998, SkyWest executed an amendment to the 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 April 23, 1998. The
related financial impact for the three and nine months ended December 31, 1998,
has been included in the accompanying condensed consolidated financial
statements.
Note F- Stock Dividend
On May 5, 1998, the Company's Board of Directors declared a 100 percent stock
dividend (one share for each share outstanding) payable to stockholders of
record on May 20, 1998. The dividend was distributed on June 8, 1998. The
Company paid cash in lieu of issuing fractional shares. All common shares and
per share information in the accompanying condensed consolidated financial
statements have been retroactively adjusted to reflect this stock dividend.
Note G- 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
$0.9 million on the sale.
On January 11, 1999, the Company entered into an asset purchase Agreement ("Page
Agreement") with JCMI, LLC, to sell the remainder of the assets of Scenic.
The Page Agreement includes all of the assets, properties, rights and business
of Scenic related to its Page, Arizona tour operations. The purchase price is
$5.1 million, which includes cash and a secured promissory note of $1.9 million.
The purchase price of $5.1 million will be adjusted at the closing date based on
changes in the value of the assets at the closing date. Management anticipates a
closing on February 28, 1999. The Company has accrued an estimated pretax loss
of approximately $0.7 million to be incurred related to this sale.
The accompanying condensed consolidated financial statements reflect the
dispositions of the assets of Scenic as discontinued operations. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of
these discontinued operations 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 $5.8
million, $27.7 million, $6.3 million and $26.6 million for the three and nine
months ended December 31, 1998 and 1997, respectively.
8
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Operating Statistics
-----------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------------- ---------------------------------------
1998 1997 % Change 1998 1997 % Change
--------- --------- -------- --------- --------- --------
Passengers carried 1,322,740 781,034 69.4% 3,662,007 2,228,741 64.3%
Revenue passenger miles (000s) 266,216 182,645 45.8% 760,223 567,437 34.0%
Available seat miles (000s) 495,063 363,137 36.3% 1,361,844 1,113,486 22.3%
Passenger load factor 53.8% 50.3% 3.5pts 55.8% 51.0% 4.8pts
Passenger breakeven load factor 45.9% 44.2% 1.7pts 47.0% 45.3% 1.7pts
Yield per revenue passenger mile 37.7cents 35.8cents 5.3% 36.9cents 34.2cents 7.9%
Revenue per available seat mile 20.6cents 18.3cents 12.6% 20.9cents 17.8cents 17.4%
Cost per available seat mile 17.5cents 16.1cents 8.7% 17.5cents 15.8cents 10.8%
Average passenger trip (miles) 201 234 (14.1%) 208 255 (18.4%)
For the Three Months Ended December 31, 1998 and 1997
- -----------------------------------------------------
For the quarter ended December 31, 1998, the Company enplaned a record number of
passengers and reported record consolidated income from continuing operations of
$10.4 million, or $0.42 per diluted common share, compared to $5.8 million, or
$0.28 per diluted common share for the same period last year. After recording a
loss from discontinued operations, related to the sale of Scenic Airlines, Inc.,
the Company recorded record net income of $8.5 million, or $0.34 per diluted
common share, compared to $5.4 million, or $0.26 per diluted common share for
the same period last year. Consolidated operating revenues increased 52.7
percent to $102.2 million for the quarter ended December 31, 1998 from $67.0
million for the quarter ended December 31, 1997.
Passenger revenues, which represented 98.2 percent of consolidated operating
revenues, increased 53.4 percent to $100.4 million for the quarter ended
December 31, 1998 from $65.5 million or 97.8 percent of consolidated operating
revenues for the quarter ended December 31, 1997. The increase was primarily the
result of a 45.8 percent increase in revenue passenger miles ("RPMs") as well as
a 5.3 percent increase in yield per RPM. SkyWest began operating as United
Express in Los Angeles, California on October 1, 1997. In addition, SkyWest
began operating as United Express in Portland, Oregon and Seattle/Tacoma,
Washington on April 23, 1998 and in San Francisco, California beginning June 1,
1998. This new code-sharing relationship has resulted in both increased RPMs and
increased yield per RPM. The increased yield per RPM also resulted from an
increase in SkyWest's portion of prorated fares with Delta in certain markets.
SkyWest has also previously acquired a state-of-the-art revenue management and
control system which utilizes historical booking data to optimize revenue.
Together these factors have resulted in a 12.6 percent increase in revenue per
available seat mile to 20.6cents for the quarter ended December 31, 1998 from
18.3cents for the quarter ended December 31, 1997.
Passenger load factor increased 3.5 points to 53.8 percent for the quarter ended
December 31, 1998 from 50.3 percent for the quarter ended December 31, 1997. The
increase in load factor is due primarily to the new code-sharing relationship
with United whereby SkyWest has approximately 90 percent of the San Francisco
regional market share and is experiencing high load factors on United flights
connecting to and from San Francisco. SkyWest has also experienced an increase
in load factors in the Los Angeles market place as a result of the United Code.
The increase is also from refinements in the flight schedules and continued
operational improvements to and from the Salt Lake City hub.
Total operating expenses and interest increased 48.4 percent to $87.3 million
for the quarter ended December 31, 1998 compared to $58.8 million for the
quarter ended December 31, 1997. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 85.4 percent for
the quarter ended December 31, 1998 from 87.9 percent for the comparable quarter
ended December 31, 1997. For the quarter ended December 31, 1998, total airline
operating expenses and interest (excluding nonairline expenses) were 85.3
percent of airline operating revenues compared to 87.8 percent for the quarter
ended December 31, 1997. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses.
9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Airline operating costs per available seat mile (including interest expense)
increased 8.7 percent to 17.5cents for the quarter ended December 31, 1998 from
16.1cents for the quarter ended December 31, 1997, primarily as a result of a
14.1 percent decrease in the average stage length. Factors relating to the
change in operating expenses are discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 26.1 percent for the quarter ended December 31, 1998 from
25.8 percent for the quarter ended December 31, 1997. The average number of
full-time equivalent employees for the quarter ended December 31, 1998 was 3,027
compared to 1,947 for the quarter ended December 31, 1997. The increase in
number of personnel was due to the United Express expansion. Salaries, wages and
employee benefits per ASM increased to 5.4cents for the quarter ended December
31, 1998 compared to 4.7cents for the quarter ended December 31, 1997 as a
result of additional employees, decreasing stage lengths, and higher employee
incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 18.8 percent for the quarter ended
December 31, 1998 from 19.9 percent for the quarter ended December 31, 1997. The
decrease is due to airline operating revenues increasing at a faster rate than
aircraft costs. Aircraft costs per ASM increased slightly to 3.9cents for the
quarter ended December 31, 1998 from 3.6cents for the quarter ended December 31,
1997 as a result of decreasing stage lengths.
Maintenance expense increased as a percentage of airline operating revenues to
9.5 percent for the quarter ended December 31, 1998 compared to 8.2 percent for
the quarter ended December 31, 1997. This increase was the result of an increase
in flight hours which results in higher maintenance expense as well as
maintenance expense incurred on used Brasilia aircraft which were acquired in
connection with the United Express expansion. Management expects these costs to
decrease since the costs incurred were expended to bring the used aircraft up to
SkyWest maintenance standards. Maintenance expense per ASM increased to 1.9cents
for the quarter ended December 31, 1998 from 1.5cents for the quarter ended
December 31, 1998.
Fuel costs decreased as a percentage of airline operating revenues to 8.2
percent for the quarter ended December 31, 1998 from 11.4 percent for the
quarter ended December 31, 1997, primarily due to a decrease in the average fuel
price per gallon to $0.65 from $0.83. Fuel costs per ASM decreased to 1.7cents
for the quarter ended December 31, 1998 from 2.1cents for the quarter ended
December 31, 1997.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
increased slightly as a percentage of airline operating revenues to 22.4 percent
for the quarter ended December 31, 1998 from 22.2 percent for the quarter ended
December 31, 1997.
During the quarter ended December 31, 1998, the majority of nonairline
operations, consisting of Scenic, were disposed of. The loss on disposal has
been recorded in the accompanying condensed consolidated financial statements
together with explanations of the sale in Note G.
For the Nine Months Ended December 31, 1998 and 1997
- ----------------------------------------------------
For the nine months ended December 31, 1998, the Company enplaned a record
number of passengers and reported record consolidated income from continuing
operations of $31.5 million, or $1.28 per diluted common share, compared to
$17.3 million, or $0.75 per diluted common share for the same period last year.
After recording a loss from discontinued operations, related to the sale of
Scenic Airlines, Inc., the Company recorded record net income of $31.1 million,
or $1.27 per diluted common share, compared to $17.3 million, or $0.84 per
diluted common share for the same period last year. Consolidated operating
revenues increased 43.4 percent to $285.4 million for the nine months ended
December 31, 1998 from $199.1 million for the nine months ended December 31,
1997.
Passenger revenues, which represented 98.2 percent of the consolidated operating
revenues, increased 44.6 percent to $280.2 million for the nine months ended
December 31, 1998 from $193.8 million or 97.3 percent of consolidated operating
revenues for the nine months ended December 31, 1997. The increase was primarily
the result of a 34.0 percent increase in RPMs as well as a 7.9 percent increase
in yield per RPM. SkyWest entered into a new code-sharing relationship with
United and began operating as United Express in Los Angeles, California
beginning October 1, 1997. In addition, SkyWest began operating as United
Express in
10
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Portland, Oregon and Seattle/Tacoma, Washington on April 23, 1998 and in San
Francisco, California beginning June 1, 1998. This new code-sharing relationship
has resulted in both increased RPMs and increased yield per RPM. The increased
yield per RPM also resulted from an increase in SkyWest's portion of prorated
fares with Delta in certain markets. SkyWest has also previously acquired a
state-of-the-art revenue management and control system which utilizes historical
booking data to optimize revenue. Together these factors have resulted in a 17.4
percent increase in revenue per available seat mile to 20.9cents for the nine
months ended December 31, 1998 from 17.8cents for the nine months ended December
31, 1997.
Passenger load factor increased 4.8 points to 55.8 percent for the nine months
ended December 31,1998 from 51.0 percent for the nine months ended December 31,
1997. The increase in load factor is due primarily to the new code-sharing
relationship with United whereby SkyWest has approximately 90 percent of the San
Francisco regional market share and is experiencing high load factors on flights
connecting to and from San Francisco. SkyWest has also experienced an increase
in load factors in the Los Angeles market place as a result of the United code.
The increase is also from refinements in the flight schedules and continued
operational improvements to and from the Salt Lake City hub.
Total operating expenses and interest increased 35.9 percent to $240.3 million
for the nine months ended December 31, 1998 compared to $176.8 for the nine
months ended December 31, 1997. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 84.2 percent for
the nine months ended December 31, 1998 from 88.8 percent for the nine months
ended December 31, 1997. For the nine months ended December 31, 1998, total
airline operating expenses and interest (excluding nonairline expenses) were
84.7 percent of airline operating revenues compared to 88.8 percent for the nine
months ended December 31, 1997. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses. Primarily as a result of decreasing stage lengths,
airline operating costs per ASM (including interest expense) increased to
17.5cents for the nine months ended December 31, 1998 from 15.8cents for the
nine months ended December 31, 1997. Factors relating to the change in operating
expenses are discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 26.0 percent for the nine months ended December 31, 1998
from 25.2 percent for the nine months ended December 31, 1997. The average
number of full-time equivalent employees for the nine months ended December 31,
1998 was 2,744 compared to 1,916 for the nine months ended December 31, 1997.
The increase in number of personnel was due to the United Express expansion.
Salaries, wages and employee benefits per ASM increased to 5.4cents for the nine
months ended December 31, 1998 from 4.5cents for the nine months ended December
31, 1997 as a result of additional employees, decreasing stage lengths, and
higher employee incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 18.3 percent for the nine months
ended December 31, 1998 from 19.8 percent for the nine months ended December 31,
1997. The decrease is due to airline operating revenues increasing at a faster
rate than aircraft costs. Aircraft costs per ASM increased slightly to 3.8cents
for the nine months ended December 31, 1998 from 3.5cents for the nine months
ended December 31, 1997.
Maintenance expense increased as a percentage of airline operating revenues to
9.5 percent for the nine months ended December 31, 1998 from 7.7 percent for the
nine months ended December 31, 1997. The increase was the result of an increase
in flight hours, which results in higher maintenance expense, as well as
maintenance expense incurred on used Brasilia aircraft which were acquired in
connection with the United Express expansion. Management expects these costs to
decrease since the costs incurred were expended to bring the used aircraft up to
SkyWest maintenance standards. Maintenance expense per ASM increased to 2.0cents
for the nine months ended December 31, 1998 from 1.4cents for the nine months
ended December 30, 1997.
Fuel costs decreased as a percentage of airline operating revenues to 7.9
percent for the nine months ended December 31, 1998 from 11.2 percent for the
nine months ended December 31, 1997, primarily due to a decrease in the average
fuel price per gallon to $.66 from $.85. Fuel costs per ASM decreased to
1.6cents for the nine months ended December 31, 1998 from 2.0cents for the nine
months ended December 31, 1997.
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
decreased as a percentage of airline operating revenues to 22.0 percent for the
nine months ended December 31, 1998 from 24.2 percent for the nine months ended
December 31, 1997. The decrease is primarily the result of the airline not
incurring commissions on United Express passenger revenues.
During the nine months ended December 31, 1998, the majority of nonairline
operations, consisting of Scenic, were disposed of. The loss on disposal has
been recorded in the accompanying condensed consolidated financial statements
together with explanations of the sale in Note G.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $140.3 million and a current ratio of 3.1:1
at December 31, 1998 compared to working capital of $143.1 million and a current
ratio of 4.1:1 at March 31, 1998. During the nine months ended December 31,
1998, the principal sources of funds were $70.6 million generated from
operations, $22.2 million from issuance of long-term debt, $18.0 million of
proceeds from the sale of property and equipment and discontinued operations,
$12.8 million of proceeds from sale of available-for-sale securities and $3.2
million from the issuance of common stock upon exercise of stock options,
including tax benefit. During the nine months ended December 31, 1998 the
Company invested $59.4 million in flight equipment, $8.3 million in aircraft
deposits, $8.6 million in buildings and ground equipment and other, $2.8 million
in rental vehicles, reduced long-term debt by $13.8 million, and paid cash
dividends of $2.1 million. These factors resulted in an increase of $31.8
million in cash and cash equivalents.
At December 31, 1998 and March 31, 1998, the Company's long-term debt to equity
position was 19 percent debt and 81 percent equity.
During the nine months ended December 31, 1998, SkyWest took delivery of 37
Brasilia aircraft, consisting of 13 new and 24 used aircraft, in connection with
SkyWest's expansion in Los Angeles, San Francisco and the Pacific Northwest. In
December 1998, the Company also took delivery of one used Canadair Regional Jet.
As of December 31, 1998, SkyWest had agreed to purchase 7 additional new
Brasilia aircraft and related spare parts and support equipment at an aggregate
cost of approximately $56.0 million, including estimated cost escalations.
SkyWest also has options to acquire 20 additional Brasilia aircraft at fixed
prices (subject to cost escalation and delivery schedules) exercisable through
fiscal 2000. Depending on the state of the aircraft financing market at the time
of delivery, management will determine whether to acquire the remaining 7
Brasilia aircraft through third-party, long-term loans or lease arrangements.
On January 15, 1999, SkyWest executed an agreement to acquire 25 Canadair
Regional Jets and related spare parts and support equipment for approximately
$560.0 million, including estimated cost escalations. Deliveries of these
aircraft will begin June 2000 and continue through December 2002. In conjunction
with the agreement, SkyWest paid deposits of $34.4 million which will be applied
to the purchase price of aircraft as they are delivered. Depending on the state
of the aircraft financing market at the time of delivery, management will
determine whether to acquire these regional jet aircraft through third party,
long-term loans or lease agreements.
SkyWest originally anticipated that the United Express expansion would require
capital expenditures of approximately $24.0 million consisting of additional
ground and maintenance facilities, support equipment and spare parts inventory.
As of December 31, 1998, SkyWest had expended $13.5 million associated with
these items and anticipates that an additional $5.0 million will be expended
related to the expansion.
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 December 31, 1998, SkyWest leased 77 aircraft under leases with an
average remaining term of approximately 8.6 years. Future minimum lease payments
due under all long-term operating leases were approximately $591.6 million at
December 31, 1998.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
At December 31, 1998, the Company had outstanding long-term debt, including
current maturities, of approximately $64.8 million. All of the long-term debt,
was incurred in connection with the acquisition of Brasilia aircraft and is
subject to subsidy payments through the export support program of the Federal
Republic of Brazil. The interest rates on $6.1 million of the $64.8 million of
the long-term debt are floating based on one month and three month libor. The
subsidy payments reduced the stated interest rates on the long-term debt to an
average effective rate of approximately 3.9 percent as of December 31, 1998. The
debt is payable in either monthly, quarterly or semi-annual installments through
2010.
The Company spent approximately $26.4 million for nonaircraft capital
expenditures during the nine months ended December 31, 1998, consisting
primarily of aircraft engine overhauls, rotable spare parts, buildings and
ground equipment and 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 7.5
percent at December, 31, 1998. 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
expenditures, lease payments and debt service requirements for at least the next
12 months.
Forward-Looking Statements
- --------------------------
This Form 10-Q contains forward-looking statements and information that are
based on management's belief, as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate", "estimate", "project", "expect", and similar expressions are
intended to identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that have a direct bearing on the Company's operating results
include, among other things, changes in SkyWest's code-sharing relationships,
fluctuations in the economy and the demand for air travel, the degree and nature
of competition and SkyWest's ability to expand services in new and existing
markets and to maintain profit margins in the face of pricing pressures.
Year 2000 Compliance
- --------------------
The Company is currently modifying computer systems and application programs, as
well as imbedded technology in the Company's equipment, for year 2000
compliance, with project completion scheduled for March 31, 1999. The Company
believes that the cost to modify its systems or applications will not have a
material effect on its financial position or results of operations. Any
expenditures will be funded through operating cash flows while any costs for new
software will be capitalized and amortized over the software's useful life.
Although the Company is working cooperatively with third parties with systems
upon which the Company must rely, the Company can not give any assurances that
the systems of other parties will be year 2000 compliant on a timely basis.
Systems operated by others which the Company would use and/or rely on would
include: Federal Aviation Administration Air Traffic Control, computer
reservation systems for travel agent sales as well as Delta and United
reservation, passenger check-in and ticketing systems. The Company's business,
financial condition and/or results of operations could be materially adversely
affected by the failure of its systems and applications or those operated by
others. The Company believes that the risk related to these systems will be
mitigated by ongoing assessment and correction of the systems.
The Company is reviewing and revising its business interruption contingency
plans. The review, together with any necessary revisions, will be completed
concurrent with the modifications to existing systems and application programs
by June 30, 1999. The review of these plans will include how to maintain safety
as well as performing certain functions and processes manually. Due to the
uncertainty, related to year 2000 issues, the Company's contingency plan will be
ongoing in nature and may require further modifications to existing systems as
new information is made available and the Company further assess the readiness
of third parties upon which the Company relies.
13
14
PART II. OTHER INFORMATION
SKYWEST, INC.
Item 6: Exhibits and Reports on Form 8-K
a. Exhibits - Financial Data Schedule Exhibit 27
b. Reports on Form 8-K - There were no reports on Form 8-K filed
during the quarter ended December 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYWEST, INC.
-------------
Registrant
February 5, 1998 BY: /s/ Bradford R. Rich
----------------------------------
Bradford R. Rich
Executive Vice President,
Chief Financial Officer and Treasurer
14
15
SKYWEST, INC.
444 SOUTH RIVER ROAD
ST. GEORGE, UTAH 84790
(435) 634-3000