While most other regionals were reporting drops in net income, SkyWest, Inc. (SKYW) reported a slight increase during the second quarter when net income reached $40.6 million compared to $39.3 million for the year-ago period.
Executive Vice President and CFO Brad Rich indicated operating revenues for the quarter were not correlating well with the normal operating indicators such as ASM and block hour growth. “We are having difficulty with period-to-period comparisons because of changes not only in the pricing of fuel but how it is being handled by our major partners,” he said. “There is some distortion because United (UAUA) began purchasing fuel for us in January in Chicago and then, on June 1, it added San Francisco and Los Angeles. This has caused some distortion in our top line revenue performance but has had little, if any impact on net income. It amounts to about $25 million in revenues that was previously grossed up in both top line operating revenues and expenses and that is not there any more which has had some impact on the margin.”
Operating revenues rose 8.2 percent to $855 million for the second quarter primarily as a result of a 14.5 percent increase in available seat miles (ASMs) to 5.8 billion, which was partially offset by a reduction in yield per revenue passenger miles of 5.7 percent to 18.2 cents and by increased fuel cost reimbursements by SkyWest’s major partners. Operating income reached $88.8 million compared to $89.6 million in the year-ago period.
Total operating expenses and interest per ASM for the second quarter, excluding fuel charges of $276.2 million or $0.048 per ASM, decreased approximately 2.2 percent to $0.090 from $0.092 for the same quarter of 2006.
In the expense category, Rich noted that maintenance expense was higher than expected because of the addition of 21 used aircraft being brought into the fleet which requires additional expenses to since it is the first time in its 35-year history that it has sourced from the used markets. In addition, it has aircraft now coming off warranty and coming into A and C checks which also require additional maintenance expenditure. “There is some distortion in that maintenance category from the timing of some expenses that flows through contract and is grossed up in both expenses and revenues.” He noted that the timing of maintenance, as well as performance incentives, is causing some volatility.
The cost of the transition of ground operations to Delta cost SkyWest, Inc. $30 million “of top line revenues that will come out,” although Rich indicated it had no impact on net income. The major carrier has also opened up additional gates for its Delta Connection partner. (See related story on DOT statistics in this issue.)
Rich predicted a seven percent growth rate next year if the airline does nothing but execute what it has thus far. “We are pretty optimistic,” he said. “I know there is been a lot of talk about the growth for this sector slowing down but we don’t see it that way. We see a lot of opportunity with our core business, for developing new business and within our sector in general. We have a lot on our plates with what we are evaluating now.” He hopes to see more RFPs released before year end. “We think the major carriers are looking for regional growth.”
It did not bid on the Continental’s (CAL) Q400 RFP which ultimately went to Colgan. Rich said the volume of business was not enough to warrant a new aircraft type, especially in the location – the Northeast. “I know other may have expressed preference for avoiding turboprops; that is not us,” he said. “We like the Q400.”
While the carrier is looking at international opportunities to spur growth, and SkyWest is no different. However, its requirement is for a 15 percent return on equity in order for them to do it. “We have a higher expectation than our normal return on equity for such operations,” said Rich.
SkyWest President and COO Chip Childs reported that pilot attrition was about eight percent. “Our classes are filled and we’ve had good luck getting qualified aviation professionals. Atlantic Southeast Airlines President and COO Bryan LeBrecque said its attrition rate was running at 18 percent. However, both reported that hiring is keeping ahead of attrition and neither lowered standards for their current recruitment programs. “The drain on the system is a little higher than we expected,” he said. Rich added that the airline’s rapid expansion at the beginning of the year caused higher that normal training costs but now they were back to normal covering attrition, recurrent and upgrade training.
Enplanements rose 9.7 percent to 8.9 million for the quarter and for the first half rose 7.7 percent to 16.7 million. RPMs rose 15 percent to 4.6 billion while load factor for the quarter dropped 0.3 points to 80.3 percent. For the first half, RPMs rose 12.8 percent to 8.6 billion and load factor dropped 0.5 points to 78.9. Break even load factor for the quarter and first half are 74.9 and 73.2 percent, respectively. RASM for the quarter was down 5.8 percent to 14.7 cents while CASM declined 4.2 percent to 13.8 cents.
For the sixth months, net income was $75.4 million, up from $73.9 million for the same period last year. Operating revenues reached $1.64 billion, a 7.2 percent increase from the first half of 2006. Operating expenses totaled $1.4 billion while operating income was $168.4 million.
At June 30, SkyWest’s fleet consisted of: 362 regional jets (233 Delta, 117 United and 12 Midwest); 60 EMB-120 aircraft (48 United, and 12 Delta); and 12 ATR72 aircraft (all Delta). During the second quarter of 2007 SkyWest generated 5.8 billion ASMs, compared to 5.1 billion ASMs during the same period of 2006.
During the quarter, SkyWest began repurchasing outstanding shares of its common stock under a five-million-share stock buyback program as part of an effort to avoid dilution through its stock-based compensation program. As of June 30, SkyWest had repurchased approximately 2.3 million shares at a cost of approximately $60.2 million. SkyWest recorded stock based compensation expense of approximately $3.9 million ($2.5 million after tax) for the quarter ended June 30, 2007. At June 30, SkyWest had $676.9 million in cash and marketable securities compared to $651.9 million as of December 31, 2006.