SkyWest Operating Revs Up, Net Down 16 Percent in Q1

Although the company could not comment on its recent offer to acquire ExpressJet, SkyWest Inc Vice President and Treasurer Brad Rich did outline for analysts the philosophy in SkyWest’s acquisition strategy. “We aren’t interested in acquiring non-competitive operations and eating the costs...

For immediate service; more information; and multi-user access (site license), non-profit organization, educational institute pricing, contact Karen Garner kgarner@accessintel.com at (301) 354-1612.

This story is only available to paid subscribers. Please login below with your username and password if you are a subscriber.

Username:
Password:
	What is my password?

Subscribe     Trial

Although the company could not comment on its recent offer to acquire ExpressJet, SkyWest Inc Vice President and Treasurer Brad Rich did outline for analysts the philosophy in SkyWest’s acquisition strategy. “We aren’t interested in acquiring non-competitive operations and eating the costs and lowering our return on investment,” he said. “We don’t see the value in growth just to grow. What is of high value is creating a return that is appropriate to the investment. We want to gain a revenue stream when it helps us create efficiencies and leverage that to gain size that we can turn into value.”
SkyWest, Inc. reported operating revenues of $868.0 million for the quarter ended March 31, a 10.0 percent increase, compared to $789.0 million for the same period last year. SkyWest also reported net income of $29.1 million for the quarter ended March 31, 2008, a decrease of 16.2 percent, or $0.47 per diluted share compared to $34.8 million of net income or $0.53 per diluted share, for the same period last year. The significant items affecting SkyWest’s financial performance during the quarter included the operating revenue increase resulting from increased fuel cost reimbursements by SkyWest’s major partners that are recorded as operating revenues under contract flying arrangements. Additionally, block hour production increased 4.3 percent to 353,637 hours compared to 338,992 hours for the same period last year.
SkyWest was able to reduce is cost per available seat mile (CASM) by two percent despite its lower production rate and higher maintenance costs. The CASM drop resulted from the company’s aggressive cost reduction program, said Rich. It is focusing those efforts on its pro-rate flying done by 34 of the 59 Embraer Brasilias remaining in its fleet. It expects to eliminate 23 of those aircraft replacing them with CRJ 700s and 900s ordered last year for its United and Delta operations.
The pro-rate operation lost $6.2 million pre-tax during the quarter and SkyWest is awaiting lease expirations in addition to the sale of the eight owned Brasilias to reduce further turboprop flying, something that would be relatively easy given the dearth of turboprops on the market. Indeed, Great Lakes announced it is looking for larger turboprops during the RAA meeting.
The company also cited various non-overhaul-related maintenance costs of approximately $10.2 million (pretax), consisting primarily of a higher volume of “C” checks on aircraft, the purchase of aircraft parts, including one-time costs to repair flap actuators on CRJ200s and damage to aircraft caused by third parties. It is now trying to recoup the cost of the damage from the responsible parties and/or through insurance. As a result of these combined items, SkyWest’s pretax profit was reduced by a total of $11.4 million for the quarter ended March 31 compared to the quarter ended March 31.
Before SkyWest can reduce its flying, however, it must consider how it will impact its partners. The total pro-rate flying is only five percent of our total ASM production,” said Rich. “It had been lower but one of the reasons we increased pro-rate ASMs is to be sensitive to the needs of partners and to create value for them so it has crept up over time.” Currently, fuel for the operation mirrors that of the average for the entire company’s operations averaging $3.08 per gallon for the quarter.
In the meantime it is aggressively pursuing other methods to stem the losses in that program by pursuing subsidies from other sources including city and state sources that will close the gap between its expenses in that flying and that provided by the Essential Air Services program. While it has been successful in achieving additional contributions from state and local sources, it those end, it intends to go back to partners to assess just how valuable the feed provided is and whether an adjustment in the pro-rate is possible.
Previously, the company has spent little time during analyst calls discussing the pro-rate operation but brought it up because of the rising fuel prices and the fact that it is now operating at a loss rather than the close to break even of the past. It has no hedging on the fuel costs for its pro-rate operation the fuel for which only cost $9 million for the quarter. In the meantime, the company is hedged on 95 percent of its fuel.
“We are looking at the markets and how many of these markets should be discontinued,” said CFO Brad Rich. “We are looking at reducing the volume of the pro rate flying we have and how many of these aircraft can be eliminated from the system, parked or sold. We are also improving the management of the cities to optimize revenue and have been successful in gaining subsidies from several cities that help mitigate some of the losses in the future. Although these cities are in the pro-rate operation they are still important in generating a lot of down-line feed. As we see it now, even with increased fuel, we don’t expect losses of the same magnitude we had in the first quarter.”
Total operating expenses and interest per available seat mile (“ASM”) for the first quarter of 2008, excluding fuel charges, of $292.4 million or $0.052 per ASM, decreased approximately 2.0 percent to $0.097 from $0.099 for the same quarter of 2007. Total ASMs for the first quarter of 2008 increased 5.4 percent from the first quarter of 2007, primarily as a result of SkyWest increasing its fleet size to 440 aircraft from 425 aircraft as of March 31, 2007. At March 31, SkyWest’s fleet consisted of 369 regional jets (229 Delta, 119 United and 21 Midwest), 59 EMB-120 aircraft (46 United and 13 Delta) and 12 ATR-72 aircraft (all Delta). During the first quarter of 2008, SkyWest generated 5.58 billion ASMs, compared to 5.29 billion ASMs during the same period of 2007.
During the quarter, SkyWest continued repurchasing outstanding shares of its common stock under a 5.0-million-share stock buyback program previously authorized by its board. At March 31, SkyWest had repurchased 3.1 million shares under the program, at an average cost of $22.04 per share and a total cost of approximately $69.0 million. Subsequent to the quarter it bought 400,000 more shares in the mid $18-per-share range. Its book value is at $21. On May 6, SkyWest’s board of directors authorized an additional stock buyback program of 5.0 million shares. As a result of the existing stock buyback program authorization and this new authorization from its directors, SkyWest has a combined authorization outstanding to repurchase up to an additional 6.9 million shares of its common stock. SkyWest currently intends to continue to purchase shares of its outstanding stock.
While it could offer nothing new on its suit against Delta over the interpretation of Irregular operations (IROP) in its contract, SkyWest said Delta continues to withhold $900,000 in monthly payments to SkyWest and Atlantic Southeast Airlines. During the December quarter, SkyWest, SkyWest Airlines, Inc. and ASA. of a dispute under the Delta Connection agreements related to the allocation of liability for certain irregular operations (“IROP”) expenses that are paid by SkyWest Airlines, Inc. and ASA to passengers.
At March 31, SkyWest had approximately $617.6 million in cash and marketable securities, compared to $660.4 million as of December 31, 2007. The reduction in cash and marketable securities was primarily the result of SkyWest repurchasing $69.0 million (3.1 million shares) of its common stock under a board-approved stock repurchase program during the quarter.