While SkyWest ranked third among the top ten regional carriers in operating income for 2006,
its operating margin of 9.1% this same year placed it sixth among these same carriers. This
9.1% operating margin, while relatively low compared to some other regional carriers, is still
very high compared to most passenger carriers. Southwest, the most profitable mainline
carrier last year, had an operating margin of 10.3% in 2006. No other mainline passenger
carrier had an operating margin greater than 6%.
Pre-tax margins, defined as pre-tax income divided by total operating revenues, also provide an
insight to the financial performance of any company as it shows how leveraged a company may
be given interest expense obligations. Similar to its operating margin trends, SkyWest’s pre-tax
margins have been declining since 2002 because of the revised terms of the contracts they have
with mainline partners, but they still compare very well to those of most other regional carriers
during this decade.
SkyWest’s 7.8% pre-tax margin in 2006 placed it fifth among the top ten regional U.S. carriers.
Again, while this pre-tax margin appears relatively modest in comparison to some of the other
regional airlines, it is a very good result when compared with most mainline passenger
carriers. Southwest had a passenger mainline industry leading pre-tax margin of 8.7% in 2006,
less than a full percentage point above SkyWest’s margin, while all other mainline passenger
carriers had pre-tax margins below 4%.
Balance Sheet:
Balance sheet strength can be measured in many ways, but no matter which measure one uses
in comparing SkyWest to its competitors, SkyWest fares very well. Since SEC filings are the
preferred data source for balance sheet information, this report will focus on SKYW rather
than SkyWest in reporting balance sheet data. SKYW’s $677 million in cash at the end of the
second quarter of 2007 is much greater than any other regional carrier. In accounting for the
size disparity among the various regional carriers, a review of how many months of cash each
carrier has on hand to potentially cover its monthly operating expenses is a valuable measure.
As of June 30, 2007, SKYW has nearly three months of cash on hand, second only to Pinnacle
which has nearly four months of cash on hand.
SKYW’s balance sheet strength is also apparent by looking at its current ratio, the ratio of
current assets to current liabilities, another measure of a firm’s liquidity and its ability to meet
short-term debt obligations. Current assets are assets that can be readily converted into cash
within a year or less, and current liabilities are debts due expected within a year or less.
SKYW’s current ratio of 2.7:1 as of June 30, 2007, is equal to the industry leading ratio at Mesa
Air Group. In other words, SKYW has $2.70 for every $1.00 in current liabilities. Since any
value greater than 1:1 is an indication that the firm has enough cash to meet existing liabilities
and more, SKYW’s 2.7:1 current ratio shows that it has more than sufficient funds to meet its
short-term liabilities.
A firm’s ability to meet its long term obligations is also critical in determining its financial
strength. The total debt ratio, defined as the ratio of total liabilities to total assets, measures
the degree to which a company is employing financial leverage, the degree to which a company
uses borrowed money. Companies that are too highly leveraged may have problems paying off
debts, which could lead to difficulties in obtaining additional capital necessary to grow and can
lead to financial difficulties when a company is not producing enough cash to cover large
obligations. Typical total debt ratios in the airline industry are around 70-80%. As the chart
below shows, SKYW’s total debt ratio of 69% as of June 30, 2007 is just below these typical
levels and is another solid indicator of its strong balance sheet.
As these measures indicate, SKYW has a very strong balance sheet as compared among all
regional carriers with solid cash balances and better than average current and total debt
ratios. This strong balance sheet should serve SKYW and SkyWest well in its future.
