After studying various opportunities around the world, SkyWest Inc invested $5 million for a six percent stake in Brazilian regional TRIP Linhas Aéreas based in Campinas, Brazil. Vice President and Treasurer Mike Kraupp told Regional Aviation News the investment could rise to 20-25 percent of the company with the maximum dollar value at $30 million. However, the airline must meet certain economic and financial targets over the next two to three years.
The privately owned carrier currently operates 19 turboprops including the ATR 42 and 72 as well as the Embraer Brasilia, according to its web site. However, it is currently set to add eight additional ATRs as well as five new ERJ 175s next year. Kraupp indicated the carrier would not be a destination for the CRJ 200s from SkyWest, since TRIP already opted for the larger Embraer equipment because the economics were better. TRIP is also using SkyWest’s expertise in aircraft finance and acquisitions and is also working on insurance and marketing efforts, providing assistance as the Brazilian carrier grows.
For now, SkyWest’s role is more advisory, using it’s know how to help the carrier develop and to leverage its purchasing power for the carrier. “We are looking for good progress and improvement in company operations,” he said. “Our real plan is more of a financial investment that, which over time, could have some economic advantage to SkyWest.”
Currently it has a small pro-rate, code-sharing operation with TAM and SkyWest is helping them develop code sharing deals that are more consistent with U.S. capacity purchase agreements. “We are supplying the know how and information on how to negotiate such deals and what is important and what is not,” said Kraupp. “If you go outside U.S. the capacity purchase agreements and code-sharing agreements are not really understood. What we can do next is to move them forward into capacity purchase type agreements.”
Kraupp spoke to Regional Aviation News on the heels of the company’s analyst call in which the company reported operating revenues of $934.1 million for the quarter ended September 30, 2008, compared to $875.6 million for the same period last year. SkyWest also reported net income of $26.2 million or $0.45 per diluted share, for the quarter ended September 30, compared to $42.9 million of net income or $0.68 per diluted share, for the same period last year.
SkyWest reported operating revenues of $2.75 billion for the nine months ended September 30, compared to $2.52 billion for the same period last year. SkyWest reported net income of $91.7 million or $1.55 per diluted share, for the nine months ended September 30, 2008, compared to $118.3 million of net income, or $1.83 per diluted share for the same period last year.
CFO Brad Rich characterized the quarter as challenging, reporting that the monies owed from Midwest’s reduction have been rolled over into a $7.7 million unsecured loan. Interestingly, a recent financing deal between Republic and Midwest to substitute ERJ 175s for the 717s Boeing pulled out of the airline. The Republic loan is superior to all other creditors. Related Story
When asked why it couldn’t cut a similar deal, Kraupp told Regional Aviation News that Republic needed to put aircraft spun out of Frontier to work in a “pay-to-play” deal. “We felt better about minimizing our exposure to Midwest rather than increasing it as Republic has done,” he said. SkyWest pulled nine aircraft of its 21 aircraft out of Midwest. The deal it cut deferred a portion of Midwest's weekly payment obligations from July 1, 2008 through November 30, 2008. The amount SkyWest agreed to defer plus certain amounts Midwest owed to SkyWest at June 30, will be payable plus interest by Midwest in four equal payments starting on August 31, 2009. As a result of the unique modified payment terms associated with the deferred amounts, SkyWest has not recognized the revenue associated for the deferred amounts as of September 30. Specifically, SkyWest did not recognize $4.6 million of the deferred amounts in the quarter ended September 30, 2008.
Rich reported that the company is having a harder time finding financing. “We are very confident in our ability to get debt financing for the aircraft yet to be delivered,” he said. “In fact we have advanced commitments for the debt on these airplanes. Our preference, however, is to do a mix of leverage leases, single-investor leases so the aircraft are not all 100 percent financed. If we go out and take 22 brand new aircraft on balance sheet, we won’t be able to use the tax benefits. So, we’d like to spread tax benefits around to those who could use it. But equity financing remains very difficult and while we are working with some parties, we are not optimistic about our ability to place leveraged leases now."
Total operating expenses and interest per available seat mile (“ASM”) for the third quarter of 2008, excluding fuel expense of $363.7 million or $0.065 per ASM, increased approximately 6.8 percent to $0.094 from $0.088 for the comparable quarter of 2007, owing primarily to an increase in maintenance expenses. Maintenance expense increased $25.6 million from $101.2 million for the quarter ended September 30, 2007 to $126.8 million for the quarter ended September 30, 2008. Approximately $13.4 million of the maintenance expense increase was due to the timing of engine maintenance events whereby SkyWest is directly reimbursed for the engine maintenance expense under its contract flying arrangements with its major partners. Additionally, the increase in cost per ASM was the result of SkyWest incurring higher non-engine related direct maintenance costs that are due to the general aging of the fleet.
The company’s increase in CASM of 6.8 percent to 9.4 cents per ASM relates to its decision to make an investment in maintenance, a pass-through cost, in order to maintain is operational performance targets. However, $9.6 million of the $25.6 million investment were non-pass-through costs.
SkyWest also reported interest income on short-term investments decline by $4 million, quarter to quarter as the result of general reductions in interest rates on short term investments. However, it reported a significant turn around in pro-rate flying at SkyWest Airlines. Both United and Delta are not only net-income positive but significantly cash-flow positive, said
The significant items affecting SkyWest's financial performance during the third quarter of 2008 are:
Total operating revenues for the third quarter of 2008 increased primarily as a result of increased fuel cost reimbursements by SkyWest's major partners that are recorded as operating revenues under contract flying arrangements. The impact of those reimbursements was partially offset by changes in the flight schedules by our major partners resulting in block hour reductions of 7.6 percent, compared to the third quarter of 2007. Block hours produced were 348,522 hours for the quarter ended September 30, compared to 376,999 hours for the same period last year.
Total operating expenses and interest per available seat mile for the third quarter, excluding fuel expense of $363.7 million or $0.065 per ASM, increased approximately 6.8 percent to $0.094 from $0.088 for the comparable quarter of 2007, owing to an increase in maintenance expenses. Maintenance expense increased $25.6 million from $101.2 million for the quarter ended September 30, 2007 to $126.8 million for the quarter ended September 30.
Total ASMs for the third quarter of 2008 decreased 7.1 percent from the third quarter of 2007, primarily as the result of schedule changes by major partners and the reduction of nine CRJ 200 aircraft from our Midwest Connect operations, both of which resulted in reduced block hour production. During the third quarter of 2008, SkyWest generated 5.63 billion ASMs, compared to 6.06 billion ASMs during the same period of 2007.
At September 30, 2008, SkyWest's fleet totaled 440 aircraft, consisting of 371 regional jets (231 Delta, 119 United, 12 Midwest and 9 SkyWest), 57 EMB-120 aircraft (44 United and 13 Delta) and 12 ATR-72 aircraft (all Delta).
At September 30, 2008, SkyWest had approximately $729.6 million in cash and marketable securities, compared to $660.4 million as of December 31, 2007. The increase in cash and marketable securities is net of the effect of SkyWest's repurchase of $90.8 million of common stock since December 31, 2007. SkyWest's long-term debt was $1.66 billion as of September 30, 2008, compared to $1.73 billion at December 31, 2007, consistent with SkyWest's making normal recurring debt payments. 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 7.39 percent discount rate, the present value of these lease obligations was approximately $1.9 billion as of September 30, 2008.