SkyWest reports still impressive results


SkyWest Inc reported USD19.5 million profit in 4Q2009, down from the USD21.2 million profit reported in the corresponding period last year. For the full year, the company reported USD83.7 million in net income, compared to USD118.7 million in 2008, reflecting a change in the way fuel is bought, according to CFO Brad Rich, who spoke to analysts yesterday.

Rich reiterated his statements at the recent Raymond James Airline Growth conference in which he expressed confidence in the number opportunities the company still sees in the regional sector, without disclosing details.

He also reiterated the company’s interest in the C-Series, but said it was all about scope and whether or not that could be liberalised, unlikely as mainline pilots grapple with trying to restore what they have lost in the past few years. Pilots are also growing increasingly restive about the outsourcing of jobs to regional partners.

Operating revenues for the quarter dropped more than USD100 million to USD604.4 million compared to the USD743.3 million in the year-ago quarter. Similarly, for the year, operating revenues slipped to USD2.61 billion from USD3.50 billion posted for 2008.

Rich reported that major partners Delta and United are purchasing fuel directly, avoiding a mark up to SkyWest, a change from past practices in which SkyWest was reimbursed for fuel expenses which were reported as operating revenues. Excluding fuel cost reimbursements, the company’s total operating revenues for 4Q2009 were USD555.8 million compared to USD551.2 million for the same period last year, resulting from an increase in block hours, as well as the pro-rate flying it is doing, including that for AirTran from Milwaukee.

Under the Other Income line was a net USD483,000, the majority of which was earned from its investment in Brazilian regional Trip. Year-to-date, the company earned USD1.8 million in other revenues, mostly from Trip and, as in the fourth quarter was largely related to foreign currency exchange rates. Rich also reported the Trip operation was making money and was “really close to what the company projected its Brazilian counterpart would be doing at this time.”

The company flew 335,776 block hours, a 4.6% increase, for the Dec-2009 quarter. For the year, block hours were down 1% to 1.36 million.  “Last year the utilisation on the CRJ 200 fleet was a bit concerning because it was below nine hours at both SkyWest and ASA,” said Rich. “But the good news is the CRJ 700s and the CRJ 900 flying is averaging closer to ten hours a day.

Utilisation is a bit of a concern

It operated 5.5 billion ASMs in 4Q2009 and expects to operate 5.5 billion in 1Q2010 and 5.9 billion ASMs in the second quarter. For the year, it is estimating 23.1 billion ASMs, a 4.3% increase year-on-year.

Costs were down 6.9% in the quarter as total operating expense and interest per available seat mile (ASM) excluding fuel expense or USD0.011 per ASM, totaled USD0.094 from USD0.101 in 4Q2008. The company cited an 8.1% reduction in FTEs for the decline, while a 7.5% increase in ASM production occurred at the same time. The company was down 1,077 FTEs quarter on quarter, largely in the customer service area as well as some ASA furloughs. However, he cited SkyWest Airlines’ voluntary leave program as well as attrition.

In addition, SkyWest cited the increase in flying for its CRJ 700s and CRJ 900. Total operating expense and interest, excluding fuel expense, was virtually flat at USD517.9 million for the quarter ended December 31, 2009, compared to USD517.1 million for the quarter ended December 31, 2008.

During the quarter, SkyWest incurred USD2.6 million pretax expense in related engine maintenance costs in excess of amounts collected and recorded as revenue. In addition, interest expenses rose owing the addition of 14 CRJ 700s and one CRJ 900 which were debt financed. However, a large percentage of this is floating rate debt, which coupled with interest rate declines, is the primary reason for the decline in year on year interest rate drops of USD4.6 million. On the other hand it reported USD3.8 million in interest income which included USD2.5 million from the United funding transactions.

Stock-based compensation expense declined, said Rich, to USD1.8 million (USD1.1 million after tax) in the quarter resulting from a move to more performance-based compensation.

Rich noted its flexibility in working with United on two financial transactions that gained it a contract extension for SkyWest AirlinesUnited flying, as well as brought subsidiary Atlantic Southeast Airlines under the United umbrella, thereby diversifying its revenue. The operational funding totaling USD80 million extended the contract for 50 CRJ200s for SkyWest and 14 for ASA which launched its United Express operations yesterday. That operation, schedule to complete rollout in May, is similar to the SkyWest Airlines contract.  Rich reported the USD80 million was a term loan bearing an 11% interest rate amortised over a ten-year period, secured by spares and slot rights held by United. In addition, SkyWest agreed to defer a maximum of USD49 million which incurs an 8% annual deferral fee payable weekly.

“We believe that transaction is an excellent example of using the strengths of both United and SkyWest to create value for both companies,” he said. “We took strength of our liquidity at a time when United needed liquidity returned and, in return, got flying extensions, covered some tail risk on the SkyWest Airlines side and also obtained rights for ASA to diversify to bring on additional flying partners and expansion as a United Express carrier.”

Rich also discussed the company’s new deal with AirTran under which two CRJ 200s were in operation in the fourth quarter with another three joining the fleet in January. He indicated that while it was under a pro-rate model, the majority of aircraft used in the operation were under renegotiated, short term leases, increasing the company’s flexibility if it does not work out.

The company reported approximately USD732.4 million in cash and marketable securities as of 31-Dec-2009, up from the USD705.2 million in the year-ago period. However, its long-term debt rose USD1.82 billion from USD1.68 billion on the financing of larger CRJ aircraft that were financed with long-term debt. That was offset, however, by SkyWest’s payment of normal recurring debt obligations.  SkyWest reported USD2.1 billion in long-term lease obligations that are recorded as operating leases and are not reflected as liabilities on SkyWest's consolidated balance sheets.

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