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SKYW > SEC Filings for SKYW > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for SKYWEST INC


8-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. ("SkyWest" "we" or "us") during the three and nine month periods ended September 30, 2012 and 2011. Also discussed is our financial position as of September 30, 2012 and December 31, 2011. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine month periods ended September 30, 2012, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled "Cautionary Statement Concerning Forward-Looking Statements" for discussion of the uncertainties, risks and assumptions associated with these statements.

Effective December 31, 2011, our subsidiary, ExpressJet Airlines, Inc. was merged into our subsidiary, Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the "ExpressJet Combination"). In this Report, "Atlantic Southeast" refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, "ExpressJet Delaware" refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and "ExpressJet" refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the consummation of the ExpressJet Combination.

Cautionary Statement Concerning Forward-Looking Statements

Certain of the statements contained in this Report should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan," "project," "could," "should," "hope," "likely," and "continue" and similar terms used in connection with statements regarding SkyWest's outlook, the revenue environment, SkyWest's contract relationships, and SkyWest's expected financial performance. These statements include, but are not limited to, statements about SkyWest's future growth and development plans, including SkyWest's future financial and operating results, SkyWest's plans for SkyWest Airlines and ExpressJet, SkyWest's objectives, expectations and intentions, and other statements that are not historical facts. You should also keep in mind that all forward-looking statements are based on SkyWest's existing beliefs about present and future events outside of SkyWest's control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, SkyWest's actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended.

There may be other factors not identified above of which SkyWest is not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed. SkyWest assumes no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by law.

Overview

Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of September 30, 2012, SkyWest Airlines and ExpressJet offered scheduled passenger and air freight service with approximately 4,000 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of September 30, 2012, we operated a combined fleet of 739 aircraft consisting of the following:

                                       CRJ     ERJ              CRJ   EMB
                                       200   135/145   CRJ700   900   120   Total
Delta                                  158         -       57    44     8     267
United Continental                      92       249       70     -    34     445
US Airways                              15         -        -     -     -      15
Alaska                                   -         -        5     -     -       5
Maintenance spare                        1         -        -     -     -       1
Subleased to an un-affiliated entity     2         -        -     -     -       2
Subleased to an affiliated entity        -         -        -     4     -       4
Total                                  268       249      132    48    42     739

For the three months ended September 30, 2012, approximately 65.8% of our aggregate capacity was operated under United Express Agreements executed between United Airlines, Inc. ("United") and each of SkyWest Airlines and ExpressJet and a Capacity Purchase Agreement between Continental Airlines, Inc. ("Continental") and ExpressJet, approximately 31.2% of our aggregate capacity was operated under Delta Connection Agreements executed between Delta Airlines, Inc. ("Delta") and each of SkyWest Airlines and ExpressJet (as successor to Atlantic Southeast), approximately 1.4% of our aggregate capacity was operated under a capacity purchase agreement with Alaska Airlines ("Alaska") and approximately 1.6% of our aggregate capacity was operated under a code-share agreement with U.S. Airways Group, Inc. ("US Airways").


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SkyWest Airlines has been a code-share partner with Delta in Salt Lake City and United in Los Angeles since 1987 and 1997, respectively. In 1998, SkyWest Airlines expanded its relationship with United to provide service in Portland, Seattle/Tacoma, San Francisco and additional Los Angeles markets. In 2004, SkyWest Airlines expanded its United Express operations to provide service in Chicago. In May 2011, SkyWest Airlines entered into a capacity purchase agreement with Alaska. In November 2011, SkyWest Airlines entered into a code share agreement with US Airways. In September, 2012, SkyWest Airlines and ExpressJet entered into code share agreements (the "American Agreements") with American Airlines, Inc. ("American"). As of September 30, 2012, SkyWest Airlines operated as a Delta Connection carrier in Salt Lake City and Minneapolis, a United Express carrier in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an Alaska carrier in Seattle/ Tacoma and Portland and a US Airways carrier in Phoenix.

On November 17, 2011, Atlantic Southeast and ExpressJet Delaware consolidated their operations under a single operating certificate, and on December 31, 2011, Atlantic Southeast and ExpressJet Delaware completed the ExpressJet Combination. At the time of the ExpressJet Combination, Atlantic Southeast had been a code-share partner with Delta in Atlanta since 1984 and a code-share partner with United since February 2010. As of September 30, 2012, ExpressJet operated as a Delta Connection carrier in Atlanta and Cincinnati and a United Express carrier in Chicago (O'Hare), Washington, D.C. (Dulles International Airport), Cleveland, Newark and Houston.

Historically, multiple contractual relationships have enabled us to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of contract flying and our controlled or "pro-rate" flying. For the three months ended September 30, 2012, contract flying revenue and pro-rate revenue represented approximately 90% and 10%, respectively, of our total passenger revenues. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours, flight departures and other operating measures.

Third Quarter Summary

We had revenues of $865.3 million for the three months ended September 30, 2012, a 9.4% decrease, compared to revenues of $955.4 million for the three months ended September 30, 2011. Our operating income increased to $55.0 million for the three months ended September 30, 2012, or $28.2 million, from $26.8 million for the three months ended September 30, 2011. We had a net income of $20.9 million, or $0.40 per diluted share, for the three months ended September 30, 2012, compared to $0.1 million of net income, or $0.00 per diluted share, for the three months ended September 30, 2011.

The significant items affecting our financial performance during the three months ended September 30, 2012 are outlined below:

Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue, including fuel and certain engine maintenance expenses. Our fuel expense and directly reimbursed engine expense decreased by $88.0 million and $6.0 million, respectively during the three months ended September 30, 2012 from the three months ended September 30, 2011, due primarily to United purchasing an increased volume of fuel directly from vendors on flights we operated under the United contract and due to a reduction in the number of engine events from the prior year. Excluding the impact of the decrease in direct fuel and engine maintenance expense and associated reimbursements, our passenger revenues increased $6.2 million for three months ended September 30, 2012 compared to the three months ended September 30, 2011, which was primarily due to an increase in block hour production, which is a significant revenue driver under our flying contracts.

Under certain of our flying contracts, our major partners reimburse us a fixed hourly rate for engine maintenance costs, rather than directly reimbursing the expense. Under the flying contracts, the number of engine events and related costs we incur each quarter directly impacts our operating income. The engine expense subject to reimbursement under a fixed hourly rate decreased $15.1 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2012. The decrease in engine maintenance expense was primarily due to a reduction in the number of scheduled engine maintenance events.

Aircraft maintenance expense, excluding reimbursed engine overhauls and engine overhauls for our Bombardier CRJ200 regional jet aircraft ("CRJ200s"), which are reimbursed at fixed hourly rates, decreased $4.9 million, or 4.2%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The decrease in aircraft maintenance expense, excluding engine overhaul costs, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, was principally due to fewer scheduled maintenance events.


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Additionally, we experienced a $3.0 million reduction in other operating expenses, including new hire crew training related costs and simulator and lodging costs, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Operating expense incurred during the three months ended September 30, 2011 were higher than the corresponding period of 2012, due primarily to crew training required to support incremental aircraft placed into service during the second half of 2011.

The items identified above were the principal factors that contributed to the significant improvement in our financial results during the three months ended September 30, 2012, compared to the three months ended September 30, 2011.

On August 2, 2012, we announced that we reached an understanding with Delta to add 34 additional used dual-class Bombardier regional jet aircraft in exchange for the early termination of 66 CRJ200 aircraft under our Delta Connection Agreements. The additional dual-class aircraft were previously operated for Delta by other regional carriers. The Company anticipates the 34 additional dual-class aircraft will be subleased from Delta for a nominal amount. The 34 additional aircraft consist of five Bombardier CRJ700 regional jet aircraft ("CRJ700s") and 29 Bombardier CRJ900 regional jet aircraft ("CRJ900s"). As of September 30, 2012, we had taken delivery of 13 CRJ900s and two CRJ700s. We anticipate that the remaining aircraft will be delivered by June 2013. We anticipate that the all 66 CRJ200 aircraft will be removed from the Delta Connection Agreements by December 31, 2015. Of the 66 CRJ200s to be removed, 41 CRJ200s are subleased from Delta for a nominal amount, which are scheduled to be returned to Delta without obligation to the Company. As of September 30, 2012, three of the 66 CRJ200 aircraft have been removed.

During the three months ended September 30, 2012, we signed the American Agreements, which provide for us to operate 23 CRJ200s. We anticipate that the aircraft to be flown for American will be removed from existing contracts SkyWest Airlines and ExpressJet have with another major carrier. We anticipate that our operations under the American Agreements will commence on November 14, 2012, with all 23 aircraft being placed in service by February 14, 2013. We anticipate that 12 of the aircraft will be flown by SkyWest Airlines and 11 aircraft will be flown by ExpressJet. We also anticipate that the aircraft will be operated out of Los Angeles International Airport and Dallas/Fort Worth International Airport.

Total available seat miles ("ASMs") for the three months ended September 30, 2012 increased 0.1%, compared to the three months ended September 30, 2011. During the three months ended September 30, 2012, we generated 9.70 billion ASMs, compared to 9.68 billion ASMs during the three months ended September 30, 2011.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2011, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2011. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, maintenance, aircraft leases, impairment of long-lived assets and intangibles, stock-based compensation expense and fair value. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will differ, and could differ materially, from such estimates.

Results of Operations

Our Business Segments

For the three months ended September 30, 2012, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet (which reflects the combined operations of Atlantic Southeast and ExpressJet Delaware). On December 31, 2011, we completed the ExpressJet Combination, which ended ExpressJet Delaware's existence as a separate entity.

                                                                                  %
                                            2012        2011       $ Change    Change
                                           Amount      Amount       Amount     Percent
Operating Revenues:
SkyWest Airlines Operating Revenue        $ 475,662   $ 524,286   $  (48,624 )    (9.3 )%
ExpressJet Operating Revenues               386,803     428,265      (41,462 )    (9.7 )%
Other Operating Revenues                      2,794       2,874          (80 )    (2.8 )%
Total Operating Revenues                  $ 865,259   $ 955,425   $  (90,166 )    (9.4 )%
Airline Expenses:
SkyWest Airlines Expense                  $ 438,803   $ 502,647   $  (63,844 )   (12.7 )%
ExpressJet Expense                          388,464     443,614      (55,150 )   (12.4 )%
Other Airline Expense                         2,492       2,423           69       2.8 %
Total Airline Expense(1)                  $ 829,759   $ 948,684   $ (118,925 )   (12.5 )%
Segment profit (loss):
SkyWest Airlines segment profit           $  36,859   $  21,639   $   15,220      70.3 %
ExpressJet segment loss                      (1,661 )   (15,349 )     13,688      89.2 %
Other profit                                    302         451         (149 )   (33.3 )%
Total Segment profit (loss)               $  35,500   $   6,741   $   28,759     426.6 %
Interest Income                               2,053       2,215         (162 )    (7.3 )%
Adjustment to purchase accounting gain            -      (5,711 )      5,711       N/A
Other                                        (4,638 )    (5,351 )        713     (13.3 )%
Consolidated Income (Loss) before taxes   $  32,915   $  (2,106 ) $   35,021       N/A


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(1) Total Airline Expense includes operating expense and interest expense

Three Months Ended September 30, 2012 and 2011



Operational Statistics.  The following table sets forth our major operational
statistics and the associated percentages-of-change for the periods identified
below.



                                                    For the three months ended September 30,
                                                       2012              2011         % Change
Revenue passenger miles (000)                          7,968,623         7,885,058         1.1 %
Available seat miles ("ASMs") (000)                    9,695,079         9,683,859         0.1 %
Block hours                                              596,901           585,146         2.0 %
Departures                                               378,013           363,841         3.9 %
Passengers carried                                    15,687,908        15,003,068         4.6 %
Passenger load factor                                       82.2 %            81.4 %       0.8 Pts
Revenue per available seat mile                              8.9              9.9      (10.1 )%
Cost per available seat mile                                 8.6              9.8      (12.2 )%
Cost per available seat mile excluding fuel                  7.9              8.1       (2.5 )%
Fuel cost per available seat mile                            0.7              1.7      (58.8 )%
Average passenger trip length (miles)                        508               526        (3.4 )%

Revenues. Operating revenues decreased $90.2 million, or 9.4%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. For financial reporting purposes, we record these reimbursements as operating revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expenses as incurred. We also record those engine overhaul reimbursements as operating revenue. The following table summarizes the amount of fuel and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).

                                                  For the three months ended September 30,
                                                2012           2011        $ Change     % Change
Passenger revenues                           $   848,578    $   936,363    $ (87,785 )      (9.4 )%
Less: Fuel reimbursement from major
partners                                          46,279        134,272      (87,993 )     (65.5 )%
Less: Engine overhaul reimbursement from
major partners                                    40,446         46,450       (6,004 )     (12.9 )%
Passenger revenues, excluding fuel and
engine overhauls reimbursements              $   761,853    $   755,641    $   6,212         0.8 %

Passenger revenues. Passenger revenues decreased $87.8 million, or 9.4%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Our passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, increased $6.2 million, or 0.8%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The increase in passenger revenues, excluding fuel and engine overhaul reimbursements, was primarily due to the increase in block hour production, which is a significant revenue driver in our flying contracts with our major partners.


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Ground handling and other. Total ground handling and other revenues decreased $2.4 million, or 12.5%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Revenue attributed to ground handling services for our aircraft is reflected in our condensed consolidated statements of comprehensive income (loss) under the heading "Passenger revenues" and revenue attributed to handling third party aircraft is reflected in our condensed consolidated statements of comprehensive income
(loss) under the heading "Ground handling and other." The decrease was primarily related to the decrease in the amount of ground handling services we provided to other airlines.

Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. ASM is a common metric used in the airline industry to measure an airline's passenger capacity. ASMs reflect both the number of aircraft in an airline's fleet and the aggregate seat capacity for the aircraft in the fleet. As the size and utilization of our fleet are the principal underlying drivers of our operating costs, the primary basis for our presentation of the following information on a cost per ASM basis is to discuss significant changes in our costs not proportionate to the relative changes in our fleet size and utilization (dollar amounts in thousands).

                                                 For the three months ended September 30,
                                                                                      2012         2011
                                   2012         2011       $ Change     % Change    Cents Per    Cents Per
                                  Amount       Amount       Amount      Percent        ASM          ASM
Aircraft fuel                    $  71,477    $ 160,252    $ (88,775 )     (55.4 )%       0.7          1.7
Salaries, wages and benefits       297,106      288,401        8,705         3.0 %        3.1          3.0
Aircraft maintenance,
materials and repairs              163,825      189,762      (25,937 )     (13.7 )%       1.7          2.0
Aircraft rentals                    82,592       86,510       (3,918 )      (4.5 )%       0.9          0.9
Depreciation and amortization       62,703       63,393         (690 )      (1.1 )%       0.6          0.6
Station rentals and landing
fees                                45,336       45,902         (566 )      (1.2 )%       0.5          0.5
Ground handling services            28,414       30,326       (1,912 )      (6.3 )%       0.3          0.3
Merger and
integration-related costs                -        2,207       (2,207 )       N/A            -            -
Other                               58,832       61,845       (3,013 )      (4.9 )%       0.6          0.6
Total operating expenses           810,285      928,598     (118,313 )     (12.7 )%       8.4          9.6
Interest expense                    19,474       20,086         (612 )      (3.0 )%       0.2          0.2
Total airline expenses           $ 829,759    $ 948,684     (118,925 )     (12.5 )%       8.6          9.8

Fuel. Fuel costs decreased $88.8 million, or 55.4%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The average cost per gallon of fuel increased to $3.68 per gallon during the three months ended September 30, 2012, from $3.49 during the three months ended September 30, 2011. Effective July 1, 2012, United began directly purchasing the majority of the fuel for flights we operated under our United Express contracts. The following table summarizes the gallons of fuel we purchased directly, and the change in fuel price per gallon on our fuel expense, for the periods indicated:

                                                For the three months ended September 30,
(in thousands, except per gallon amounts)       2012              2011            % Change
Fuel gallons purchased                             19,438             45,904            (57.7 )%
Average price per gallon                    $        3.68    $          3.49              5.4 %
Fuel expense                                $      71,477    $       160,252            (55.4 )%

Salaries Wages and Employee Benefits. Salaries, wages and employee benefits increased $8.7 million, or 3.0%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The average number of full-time equivalent employees was 18,590 for the three months ended September 30, 2012, compared to 18,593 for the three months ended September 30, 2011. The increase in labor costs for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, was due primarily to the increase in block hour production between the two periods, which is a significant compensation driver for a portion of our workforce.


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Aircraft maintenance, materials and repairs. Aircraft maintenance expense decreased $25.9 million, or 13.7%, during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The following table summarizes the amount of engine overhauls and engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).

                                                For the three months ended September 30,
                                              2012           2011        $ Change     % Change
Aircraft maintenance, materials and
repairs                                    $   163,825    $   189,762    $ (25,937 )     (13.7 )%
Less: Engine overhaul reimbursement
from major partners                             40,445         46,450       (6,005 )     (12.9 )%
Less: CRJ 200 engine overhauls
reimbursed at fixed hourly rates                13,124         28,197      (15,073 )     (53.5 )%
Aircraft maintenance excluding
reimbursed engine overhauls and CRJ 200
engine overhauls reimbursed at fixed
hourly rate                                $   110,256    $   115,115    $  (4,859 )      (4.2 )%

Aircraft maintenance expense, excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rates, decreased $4.9 million, or . . .

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