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Skywest Inc Article

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777forever

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SkyWest still rising, investing in future

Despite the predicted downturn for those relying on 50-seat jets, especially with the acquisition of ExpressJet, SkyWest is still posting increases in operating revenues and net income for both the fourth quarter and 2010.

For the year, net income rose from USD83.7 million to USD96.4 million on USD2.77 billion in operating revenues which rose from USD2.61 billion in 2009. SkyWest’s financial statistics include the results of ExpressJet for 50 days since its acquisition on 12-Nov-2010.

For the quarter, net income nearly doubled to USD37.2 million from USD19.5 million on operating revenues which rose from USD604.4 million in 4Q2009 to USD796.3 million in the 2010 fourth quarter. The quarter and year included USD10.2 million in net earnings of unusual items when compared with historical results on an 8.3% increase in block hours, excluding the new ExpressJet flying.

Expanding partnership stable
The airline acquired a new customer to its stable in the quarter with Alaska Airlines on par with its oft-stated diversification plan that has added Continental, Alaska and AirTran to its stable. Unfortunately, while its acquisition of ExpressJet, designed for diversification, it must now await the rationalisation of the regional operations at the surviving carrier. However, it has benefited from the consolidation of Delta and Northwest as has Pinnacle. In addition, CFO Brad Rich pointed out that it has diversified geographically quite significantly positioning it well for future contracts.

“One of the benefits of a growing operation is that we are strengthening our platform across the country and we think we are in the best position of any regional airline to grow,” he told analysts. “We will aggressively pursue additional codesharing and we have a strategy in place to achieve that especially as we continue working on costs and productivity. The merger of United and Continental is one of the strategies that has changed materially but, overall, our strategy of geographic diversification and increasing size for the economies of scale prepares and positions us for growth in the future. Whether it is in organic growth or success in winning flying as contracts renew at other airlines or acquisition, we will continue to grow.”

With five former Horizon CRJ 700 aircraft, SkyWest is taking on the capacity purchase jet flying once done by Alaska subsidiary Horizon Air with an anticipated start date in May.

It will eventually acquire the five aircraft but, in the meantime, it is acquiring eight of Horizon’s CRJ 700s as a result through either existing lease financing or subleasing from Horizon. The aircraft will be operated in its Delta Connection operations with SkyWest and ASA as will the four CRJ 700 NextGens it just announced it was acquiring from Bombardier. The NextGens will replace six CRJ 200s coming out of the fleet at the end of their contracts. Deliveries of the eight Horizon aircraft began this month and will be completed in June.

Interestingly, both the new Alaska and Delta flying were awarded without a request for proposal which Mr Rich said reflected its costs in relation to its peers.

Diversification includes foreign investment
SkyWest now has a 30% stake in Air Mekong, with its 3Q2010, USD7 million investment in the Vietnamese airline through Mekong Aviation Joint Stock Company. The airline began operations on 9-Oct-2010 and SkyWest is providing management and pilots as well as the acquisition of aircraft.

Mr Rich also reported that Brazilian regional Trip is growing at a faster rate than SkyWest has anticipated hitting all targets established. “They are very much on track for significant growth planned in the coming year,” he said.

The acquisition of ExpressJet and its consolidation within the Atlantic Southeast Airlines operation has made the company very large and complex with over 1000 daily flights, said Mr Rich in launching yesterdays earnings call. However, it expects to squeeze several large cost factors out of the integration. He also indicated that the company had always expected ExpressJet to be accretive but that it was contributing both positive cash flow and generating operating income including an addition USD108.7 million revenue boost.

“We have already realised USD20 million in cost savings just since we closed in November,” he said. “We expect to continue those savings, not quite at those rate this year, but the bigger potential comes with the single operating certificate in 2012. We will still have meaningful accretion from ExpressJet in 2011 and we are actually a little ahead of plan at the moment.”

Mr Rich also reported that its pro-rate operation was now profitable. In 4Q2009, the pro-rate operation posted a net loss of USD6.4 million and the airline pledged to turn that around. With a USD7.9 million swing it finished the quarter with a profit for the 61-aircraft operation of USD1.5 million. It is not expected to be as productive in the first quarter leaving executives concerned about aircraft utilisation. However, he emphasised this was in line with its current practice of being cautious despite general signs of improvement. That caution is based on current world events and the potential impact on fuel costs after the Libyan revolution drove prices higher. The company is currently working on the May-June schedule and expected a normal summer schedule. However, it is monitoring fuel and may adjust schedules in the back half.

He also expressed his usual confidence for the future. “We feel strongly about the balance sheet,” he told analysts. “It is one of the best in the industry. Our debt-to-equity ratios are at very solid levels, the economic climate is improving as is liquidity. Long-term debt is down from USD1.82 billion last year to USD1.74 million at year end."

SkyWest Airlines Inc expects to fly 8.7 billion ASMs in the first quarter, its seasonally low period, but pick that up to 9.3 billion in the second quarter, 9.6 billion in the third and 9.2 billion in 4Q2011. The new Alaska flying is baked into the second and later quarters. Year-end ASM totals are projected to be 36.8 billion, up from the 25.5 billion in 2010, given the 17 additional aircraft that will join its fleet.

The company also continues its litigation on irregular operations with Delta and, in fact, proposed to settle the dispute for USD5.9 million in order to avoid further court impacts. Mr Rich said this in no way changes its opinion on the merits of its case. However, the offer was rejected by Delta. It put aside a USD5.9 million reserve in the 4Q-2010, less that the cumulative total of the revenue it had previously recognised for the dispute. As of December 31, 2010, SkyWest had recognised a cumulative total of USD31.7 million of revenue associated with this matter for which Delta has withheld payment

During the quarter ended December 31, 2010, SkyWest recorded a purchase accounting gain of USD15.6 million, which was not tax affected, and was related to the acquisition of ExpressJet. Additionally, SkyWest incurred approximately USD8.8 million (pre-tax) of acquisition-related costs which includes professional fees and employee severance costs. Mr Rich noted that the gain offset the USD8.8 million acquisition-related costs.

SkyWest Airlines and Atlantic Southeast reached agreement with Delta on several Delta Connection open rate issues, resulting in a USD17.2 million settlement. SkyWest and Atlantic Southeast airlines were able to amend their agreements with Delta under the settlement, agreeing on new rates, eliminating the volatility on rates for the five-year length of the new rates.

“The reduction in the Delta rates was intended to match the market,” said Mr Rich, who added the rate reduction amounted to about USD25 million. “That means the expectation is that our costs have to be at market. We still have work to do at ASA to get costs to market so we have specific plans in place to achieve that. We are looking at a USD25 million cost reduction, much of which was accomplished with the USD17.2 million true up. On a steady, run-rate basis there is more to be had with ExpressJet and as well as reduction in redundancy, increasing efficiency, increased buying power and renegotiating buying contracts.”

It is still suffering from higher than expected maintenance costs under its United Express agreement which, historically, have been positive, but the timing of events have turned it negative to the tune of USD11.4 million. This will continue over the next 12-18 months, said Mr Rich, adding that after that it will flip to positive again and stay there until the aircraft leave the fleet.

During the quarter ended December 31, 2010, block hours increased 8.3%, excluding the block hours produced by ExpressJet, rising to USD11.3 million in additional revenue, compared to the same period last year which contributed to the increase in net income quarter over quarter.

Total airline expenses (total operating and interest expenses) increased USD188.9 million, or 32.7%, during the quarter. Excluding ExpressJet expenses from acquisition, fuel and engine overhaul costs directly reimbursed under SkyWest's flying contracts, total airline expenses increased USD25.7 million, or 5.0%, during the quarter. on the USD11.5 million CRJ engine expense as well as flying additional block hours.

Continued below...........
 
Acutely aware that its price is undervalued, SkyWest continued its stock repurchase program and has plans for more. During the quarter, it repurchased 1,114,043 shares of its common stock for USD17.5 million. Its stock purchase authorization has authorization totaling an additional 5.72 million shares of its common stock. Since 2007, SkyWest has repurchased 14.3 million shares of its common stock at a total cost of $277.1 million under stock repurchase programs.

At year end, SkyWest had approximately USD804.9 million in cash and marketable securities, compared with approximately USD732.4 million at the end of 2009. Long-term debt was as of December 31, 2010, compared to USD1.82 billion as of December 31, 2009. The decrease in long-term debt was due to SkyWest's payment of normal recurring debt obligations.

Additionally, during the quarter, SkyWest extinguished the entire outstanding principal amount of convertible debt of approximately USD33.5 million that was assumed as part of the ExpressJet acquisition. SkyWest has significant long-term lease obligations that are recorded as operating leases and are not reflected as liabilities on SkyWest's consolidated balance sheets. At a 6.2% discount rate, the present value of these lease obligations was approximately USD2.0 billion as of December 31, 2010.

At year end, SkyWest's fleet totaled 704 aircraft, consisting of 656 regional jets (236 assigned to Delta, 416 assigned to United and Continental, four assigned to AirTran Airways Inc, and 48 EMB-120 turboprop aircraft, 38 assigned to United and 10 assigned to Delta.

Interesting article. It'll be nice if we get another Air Mekong type operation in Brazil. Plenty of people will sign up for that
 
This is a good summary of the conference call. I wouldn't expect the same type of Air Mekong style agreement in Brazil. The airline is already operating.
 
SkyWest, Inc, certainly wont have any problems sending the ERJs back to Brazil though. Sorry, ExpressJet-ers. :)
 
SkyWest, Inc, certainly wont have any problems sending the ERJs back to Brazil though. Sorry, ExpressJet-ers. :)

Yep send those XR's back to The Amazon. After all the Crj is a superior aircraft just based on the fact it doesn't roll until a SKYW dispatcher says so.
 
Yep send those XR's back to The Amazon. After all the Crj is a superior aircraft just based on the fact it doesn't roll until a SKYW dispatcher says so.

Just figured there would be less red-tape sending Brazilian-made aircraft back to Brazil than it would be to send the Canadian-made aircraft. That's all.
 
Warren Buffett just pointed out in his letter that net income means nothing, as it is easily manipulated to show whatever management wants. Also, If I'm reading it right,
they've booked 31 million in revenue even though Delta hasn't paid them...
 

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