<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-14719
SKYWEST, INC.
Incorporated under the laws of Utah 87-0292166
(I.R.S. Employer ID No.)
444 South River Road
St. George, Utah 84790
(435) 634-3000
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 5, 1998
----- -------------------------------
Common stock, no par value 24,239,691
<PAGE> 2
SKYWEST, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
As of September 30, 1998 and
March 31, 1998 3
Condensed Consolidated Statements of
Income For the Three and Six
Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows For the Six Months Ended
September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security 14
Holders
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
ASSETS
September 30, March 31,
1998 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 166,636 $ 139,772
Available-for-sale securities 13,856 14,627
Receivables, net 12,530 10,699
Inventories 18,072 11,200
Prepaid aircraft rents 11,588 12,145
Other current assets 8,229 4,358
------------- -------------
Total current assets 230,911 192,801
------------- -------------
PROPERTY AND EQUIPMENT:
Flight equipment 200,818 185,712
Deposits on aircraft 5,800 --
Buildings and ground equipment 48,582 42,663
Rental vehicles 3,941 3,148
------------- -------------
259,141 231,523
Less-accumulated depreciation and
amortization (109,351) (98,053)
------------- -------------
149,790 133,470
------------- -------------
OTHER ASSETS 4,018 4,135
------------- -------------
$ 384,719 $ 330,406
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
(Unaudited)
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,672 $ 8,238
Trade accounts payable 54,001 31,202
Accrued payroll 9,463 7,317
Taxes other than income taxes 3,783 1,698
Air traffic liability 1,685 1,237
Income taxes payable 7,506 --
------------- -------------
Total current liabilities 85,110 49,692
------------- -------------
LONG-TERM DEBT, net of current maturities 45,066 49,571
------------- -------------
DEFERRED INCOME TAXES PAYABLE 20,320 20,010
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 157,861 155,917
Retained earnings 96,647 75,501
Treasury stock (20,285) (20,285)
------------- -------------
Total stockholders' equity 234,223 211,133
------------- -------------
$ 384,719 $ 330,406
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 99,257 $ 66,900 $ 179,771 $ 128,311
Freight 737 1,090 1,400 2,343
Public service and other 651 269 1,002 558
Nonairline 12,828 12,043 22,983 21,205
------------ ------------ ------------ ------------
Total operating revenues 113,473 80,302 205,156 152,417
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Flying operations 34,964 25,482 64,137 51,785
Aircraft, traffic and passenger service 15,217 9,655 27,970 18,531
Maintenance 14,433 7,159 24,080 13,969
Promotion and sales 7,319 7,879 13,831 15,184
General and administrative 5,513 3,897 10,713 7,212
Depreciation and amortization 5,635 4,740 10,401 9,380
Nonairline 10,922 9,242 20,192 17,405
------------ ------------ ------------ ------------
Total operating expenses 94,003 68,054 171,324 133,466
------------ ------------ ------------ ------------
OPERATING INCOME 19,470 12,248 33,832 18,951
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (895) (1,050) (1,338) (1,570)
Interest income 2,186 902 4,026 1,610
Gain on sales of property and equipment 157 33 243 156
------------ ------------ ------------ ------------
Total other income, net 1,448 (115) 2,931 196
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 20,918 12,133 36,763 19,147
PROVISION FOR INCOME TAXES (8,063) (4,623) (14,167) (7,292)
------------ ------------ ------------ ------------
NET INCOME $ 12,855 $ 7,510 $ 22,596 $ 11,855
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ 0.53 $ 0.37 $ 0.94 $ 0.59
Diluted $ 0.52 $ 0.36 $ 0.91 $ 0.58
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 24,184,974 20,362,082 24,125,030 20,331,724
Diluted 24,798,144 20,644,712 24,714,700 20,596,570
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the
Six Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,596 $ 11,855
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,401 9,380
Gain on sales of property and equipment (243) (156)
Maintenance expense related to disposition of rotable spares 79 392
Increase in deferred income taxes 310 2,250
Nonairline depreciation and amortization 2,131 2,488
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net (1,831) 906
Increase in inventories (6,872) (1,275)
(Increase) decrease in other current assets (3,314) 1,385
Increase (decrease) in trade accounts payable 22,674 (2,058)
Increase in other current liabilities 12,185 3,060
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,116 28,227
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of available-for-sale securities 771 1,769
Acquisition of property and equipment:
Aircraft and rotable spares (15,432) (14,282)
Buildings and ground equipment (5,959) (3,785)
Rental vehicles (2,161) (2,067)
Proceeds from sales of property and equipment 1,045 815
Increase in deposits on aircraft and rotable spares (5,800) --
(Increase) decrease in other assets (265) 137
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (27,801) (17,413)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock upon exercise of stock options 1,944 480
Payment of cash dividends (1,324) (1,016)
Reduction of long-term debt (4,071) (3,584)
Proceeds from long-term debt -- 11,500
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,451) 7,380
------------ ------------
Increase in cash and cash equivalents 26,864 18,194
Cash and cash equivalents at beginning of period 139,772 37,786
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 166,636 $ 55,980
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,326 $ 1,565
Income taxes 7,037 2,565
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
SKYWEST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Consolidated Financial Statements
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements reflect all adjustments which, in the opinion of management, are
necessary to present fairly the results of operations for the interim periods
presented. All adjustments are of a normal recurring nature. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
following disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the three and six months ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ending March 31, 1999.
Note B - Available-for-Sale Securities
Available-for-sale securities are recorded at fair market value.
Note C - Income Taxes
For the six months ended September 30, 1998 and 1997, the Company provided for
income taxes based upon the estimated annualized effective tax rate. At
September 30, 1998, the Company has recorded a net current deferred tax asset of
$2.3 million and a net noncurrent deferred tax liability of $20.3 million.
Note D - Net Income Per Common Share
In accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share" which became effective December 15, 1997, basic net income per common
share was computed by dividing net income by the weighted average number of
common shares outstanding during the periods. Diluted net income per common
share reflects the potential dilution that could occur if outstanding stock
options were exercised. The calculation of the weighted average number of common
shares outstanding is as follows:
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(In thousands): (In thousands):
Weighted average number of common shares outstanding ... 24,185 20,362 24,125 20,332
Effect of outstanding stock options .................... 613 283 590 265
------------ ------------ ------------ ------------
Weighted average number of shares for diluted net income
per common share ................................... 24,798 20,645 24,715 20,597
============ ============ ============ ============
</TABLE>
7
<PAGE> 8
Note E - United and Delta Agreements
On July 23, 1997, SkyWest Airlines Inc.("SkyWest") and United Airlines, Inc.
("United") announced a marketing agreement under which SkyWest has operated as
United Express in Los Angeles, Las Vegas, Phoenix, and in various
intra-California markets since October 1, 1997. The United Express code-share
arrangement provides extensive connecting opportunities for SkyWest/United
Express customers at United's Los Angeles hub where United is the largest major
carrier. At the same time, SkyWest has also re-affirmed its Delta Air Lines Inc.
("Delta") marketing agreement with a modification to its Delta contract, which
allows for a reduced number of SkyWest flights at Los Angeles which is more
consistent with the current level of Delta flights into and out of Los Angeles.
The modified agreement also strengthens SkyWest's relationship with Delta in
Salt Lake City. On January 19, 1998, SkyWest and United executed a United
Express Agreement for United's Los Angeles hub and an addendum to the United
Express Agreement pursuant to which SkyWest would operate as the United Express
carrier at United's San Francisco hub, which began June 1, 1998. On February 9,
1998, SkyWest executed an amendment to the United Express Agreement to provide
service as United Express in United's Portland and Seattle/Tacoma markets and in
additional Los Angeles markets, which began April 23, 1998. The related
financial impact for the three and six months ended September 30, 1998, has been
included in the accompanying Condensed Consolidated Financial Statements.
Note F- Stock Dividend
On May 5, 1998, the Company's Board of Directors declared a 100 percent stock
dividend (one share for each share outstanding) payable to stockholders of
record on May 20, 1998. The dividend was distributed on June 8, 1998. The
Company paid cash in lieu of issuing fractional shares. All common shares and
per share information in the accompanying Condensed Consolidated Financial
Statements have been retroactively adjusted to reflect this stock dividend.
Note G- Asset Purchase Agreement
On August 26, 1998, the Company entered into an Asset Purchase Agreement
("Agreement") with Eagle Canyon Airlines, Inc., ("Eagle") to sell certain of the
assets of Scenic Airlines, Inc. for cash of $12.4 million. Included under the
Agreement are all of the assets, properties, rights and business of Scenic
related to its Las Vegas based tour and scheduled flight operations. Under the
terms, of the Agreement Eagle made a $3.0 million deposit to the Company upon
execution of the Agreement. The Agreement was to be consummated on or around
October 31, 1998, subject to Eagle successfully obtaining applicable regulatory
approvals and the operating certificate for the aircraft. The Agreement also
provides for time extensions of the closing date, upon the receipt of additional
deposits, but not past December 31, 1998. The original deposit and extension
amounts are only refundable based on breach of terms as defined in the Agreement
and on consummation of the Agreement will be applied to the purchase price. The
purchase price of $12.4 million will be adjusted, at the closing date, based on
changes in the value of the assets during the extension period and certain other
items as defined in the Agreement. Management anticipates a closing on December
1, 1998 and that this transaction will result in an immaterial loss.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
<TABLE>
<CAPTION>
Operating Statistics
------------------------------------------------------
For the
Three Months Ended
September 30,
------------------------------------------------------
1998 1997 % Change
----------- ----------- -----------
<S> <C> <C> <C>
Passengers carried 1,321,955 735,354 79.8%
Revenue passenger miles (000s) 278,281 195,752 42.2%
Available seat miles (000s) 473,025 377,448 25.3%
Passenger load factor 58.8% 51.9% 6.9pts
Passenger breakeven load factor 49.0% 45.3% 3.7pts
Yield per revenue passenger mile 35.7(cent) 34.2(cent) 4.4%
Revenue per available seat mile 21.3(cent) 18.1(cent) 17.7%
Cost per available seat mile 17.7(cent) 15.8(cent) 12.0%
Average passenger trip (miles) 211 266 (20.7%)
</TABLE>
<TABLE>
<CAPTION>
Operating Statistics
---------------------------------------------------------
For the
Six Months Ended
September 30,
---------------------------------------------------------
1998 1997 % Change
----------- ----------- -----------
<S> <C> <C> <C>
Passengers carried 2,339,267 1,447,707 61.6%
Revenue passenger miles (000s) 494,007 384,792 28.4%
Available seat miles (000s) 866,780 750,349 15.5%
Passenger load factor 57.0% 51.3% 5.7pts
Passenger breakeven load factor 47.6% 45.8% 1.8pts
Yield per revenue passenger mile 36.4(cent) 33.3(cent) 9.3%
Revenue per available seat mile 21.0(cent) 17.5(cent) 20.0%
Cost per available seat mile 17.5(cent) 15.6(cent) 12.2%
Average passenger trip (miles) 211 266 (20.7%)
</TABLE>
For the Three Months Ended September 30, 1998 and 1997
For the quarter ended September 30, 1998, the Company enplaned a record number
of passengers and reported record consolidated net income of $12.9 million, or
$0.52 per share on a diluted basis, compared to $7.5 million, or $0.36 per share
on a diluted basis for the same period last year. Consolidated operating
revenues increased 41.3 percent to $113.5 million for the quarter ended
September 30, 1998 from $80.3 million for the quarter ended September 30, 1997.
Passenger revenues, which represented 87.5 percent of consolidated operating
revenues, increased 48.4 percent to $99.3 million for the quarter ended
September 30,1998 from $66.9 million or 83.3 percent of consolidated operating
revenues for the quarter ended September 30, 1997. The increase was primarily
the result of a 42.2 percent increase in revenue passenger miles ("RPMs") as
well as a 4.4 percent increase in yield per RPM. SkyWest began operating as
United Express in Los Angeles, California beginning October 1, 1997. In
addition, SkyWest began operating as United Express in Portland, Oregon and
Seattle/Tacoma, Washington on April 23, 1998 and in San Francisco, California
beginning June 1, 1998. This new code-sharing relationship has resulted in both
increased RPMs and increased yield per RPM. The increased yield per RPM also
resulted from an increase in SkyWest's portion of prorated fares with Delta in
certain markets. SkyWest has also previously acquired a state-of-the-art revenue
management and control system which utilizes historical booking data to optimize
revenue. Together these factors have resulted in a 17.7 percent increase in
revenue per available seat mile to 21.3(cent) for the quarter ended September
30,1998 from 18.1(cent) for the quarter ended September 30,1997.
Passenger load factor increased 6.9 points to 58.8 percent for the quarter ended
September 30, 1998 from 51.9 percent for the quarter ended September 30, 1997.
The increase in load factor is due primarily to the new code-sharing
relationship with United whereby SkyWest has almost a 90 percent share of the
San Francisco regional market and is experiencing high load factors on United
flights connecting to and from San Francisco. SkyWest has also experienced an
increase in load factors in the Los Angeles market place as a result of the
United Code. The increase in regional jet load factor is primarily from
refinements in the flight schedules and continued operational improvements.
Total operating expenses and interest increased 37.3 percent to $94.9 million
for the quarter ended September 30, 1998 compared to $69.1 million for the
quarter ended September 30, 1997. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 83.6 percent for
the quarter ended September 30, 1998 from 86.1 percent for the comparable
quarter ended September 30, 1997. For the quarter ended September 30, 1998,
total airline operating expenses and interest (excluding nonairline expenses)
were 83.3 percent of airline operating revenues compared to 87.4 percent for the
quarter ended September 30, 1997. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Airline operating costs per available seat mile (including interest expense)
increased 12.0 percent to 17.7(cent) for the quarter ended September 30, 1998
from 15.8(cent) for the quarter ended September 30, 1997, primarily as a result
of decreasing stage lengths. Factors relating to the change in operating
expenses are discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 25.6 percent for the quarter ended September 30, 1998 from
24.9 percent for the quarter ended September 30, 1997. The average number of
full-time equivalent employees for the quarter ended September 30, 1998 was
2,850 compared to 2,194 for the quarter ended September 30, 1997. The increase
in number of personnel was due to the United Express expansion. Salaries, wages
and employee benefits per ASM increased to 5.4(cent) for the quarter ended
September 30, 1998 compared to 4.5(cent) for the quarter ended September 30,
1997 as a result of the decreasing stage lengths as well as higher employee
incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 17.7 percent for the quarter ended
September 30, 1998 from 18.7 percent for the quarter ended September 30, 1997.
The decrease is due to airline operating revenues increasing at a faster rate
than aircraft costs. Aircraft costs per ASM increased slightly to 3.8(cent) for
the quarter ended September 30, 1998 from 3.4(cent) for the quarter ended
September 30, 1997 as a result of decreasing stage lengths.
Maintenance expense increased as a percentage of airline operating revenues to
10.4 percent for the quarter ended September 30, 1998 compared to 7.3 percent
for the quarter ended September 30, 1997. This increase was the result of an
increase in flight hours which results in higher maintenance expense as well as
maintenance expense incurred on used Brasilia aircraft which were acquired in
connection with the United Express expansion. Management expects these costs to
decrease since the costs incurred were expended to bring the used aircraft up to
SkyWest maintenance standards. As a result, maintenance expense per ASM
increased to 2.2(cent) for the quarter ended September 30, 1998 from 1.3(cent)
for the quarter ended September 30, 1998.
Fuel costs decreased as a percentage of airline operating revenues to 7.8
percent for the quarter ended September 30, 1998 from 10.3 percent for the
quarter ended September 30, 1997, primarily due to a decrease in the average
fuel price per gallon to $0.68 from $0.84. Fuel costs per ASM decreased to
1.7(cent) for the quarter ended September 30, 1998 from 1.9(cent) for the
quarter ended September 30, 1997.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
decreased as a percentage of airline operating revenues to 21.1 percent for the
quarter ended September 30, 1998 from 24.9 percent for the quarter ended
September 30, 1997. The decrease is primarily the result of the airline not
incurring commissions on United Express contract related passenger revenues.
Nonairline revenues increased slightly to $12.8 million for the quarter ended
September 30,1998 from $12.0 million for the quarter ended September 30, 1997.
Nonairline expenses increased 18.2 percent to $10.9 million for the quarter
ended September 30, 1998 from $9.2 million for the quarter ended September 30,
1997 due to higher passenger volumes. Additionally, the average number of
full-time equivalent employees was 292 for the quarter ended September 30, 1998
compared to 279 for the quarter ended September 30, 1997. The Las Vegas based
operations of Scenic generated $9.9 million in operating revenues and $8.9
million in operating expenses for the quarter ended September 30, 1998 and
based on the potential sale, as indicated in Note G, will not be included in
future operations. Additionally, these operations are seasonal in nature and
usually generate operating losses the last six months of the fiscal year. As a
result, prior to the sale, management estimated an operating profit of
approximately $1.0 million for the fiscal year ending March 31, 1999.
For the Six Months Ended September 30, 1998 and 1997
For the six months ended September 30, 1998, the Company enplaned a record
number of passengers and reported record consolidated net income of $22.6
million, or $0.91 per share on a diluted basis, compared to $11.9 million, or
$0.58 per share on a diluted basis for the same period last year. Consolidated
operating revenues increased 34.6 percent to $205.2 million for the six months
ended September 30, 1998 from $152.4 million for the six months ended September
30, 1997.
Passenger revenues, which represented 87.6 percent of the consolidated operating
revenues, increased 40.1 percent to $179.8 million for the six months ended
September 30, 1998 from $128.3 million or 84.2 percent of consolidated operating
revenues for the six months ended September 30, 1997. The increase was primarily
the result of a 28.4 percent increase in RPMs as well as a 9.3 percent increase
in yield per RPM. SkyWest entered into a new code-sharing relationship with
United and began operating as United Express in Los Angeles, California
beginning June 1, 1998. In addition, SkyWest began operating as United Express
in Portland, Oregon and Seattle/Tacoma, Washington on April 23, 1998 and in San
Francisco, California beginning June 1, 1998. This new code-sharing
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
relationship has resulted in both increased RPMs and increased yield per RPM.
The increased yield per RPM also resulted from an increase in SkyWest's portion
of prorated fares with Delta in certain markets. SkyWest has also previously
acquired a state-of-the-art revenue management and control system which utilizes
historical booking data to optimize revenue. Together these factors have
resulted in a 20.0 percent increase in revenue per available seat mile to
21.0(cent) for the six months ended September 30, 1998 from 17.5(cent) for the
six months ended September 30, 1997.
Passenger load factor increased 5.7 points to 57.0 percent for the six months
ended September 30,1998 from 51.3 percent for the six months ended September 30,
1997. The increase in load factor is due primarily to the new code-sharing
relationship with United whereby SkyWest has almost a 90 percent share of the
San Francisco regional market and is experiencing high load factors on flights
connecting to and from San Francisco. SkyWest has also experienced an increase
in load factors in the Los Angeles market place as a result of the United code.
As a result of reallocating regional jets, from lower load factor markets to
higher load factor markets, load factors have also increased in certain jet
markets.
Total operating expenses and interest increased 27.9 percent to $172.7 million
for the six months ended September 30, 1998 compared to $135.0 for the six
months ended September 30, 1997. As a percentage of consolidated operating
revenues, total operating expenses and interest decreased to 84.2 percent for
the six months ended September 30, 1998 from 88.6 percent for the six months
ended September 30, 1997. For the six months ended September 30, 1998, total
airline operating expenses and interest (excluding nonairline expenses) were
83.5 percent of airline operating revenues compared to 89.3 percent for the six
months ended September 30, 1997. The improved margin is the result of increased
passenger enplanements and operating revenues which have outpaced the increase
in operating expenses. Primarily as a result of decreasing stage lengths,
airline operating costs per ASM (including interest expense) increased to
17.5(cent) for the six months ended September 30, 1998 from 15.6(cent) for the
six months ended September 30, 1997. Factors relating to the change in operating
expenses are discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 25.9 percent for the six months ended September 30, 1998
from 24.9 percent for the six months ended September 30, 1997. The average
number of full-time equivalent employees for the six months ended September 30,
1998 was 2,595 compared to 2,168 for the six months ended September 30, 1997.
The increase in number of personnel was due to the United Express expansion.
Salaries, wages and employee benefits per ASM increased to 5.4(cent) for the six
months ended September 30, 1998 from 4.3(cent) for the six months ended
September 30, 1997 as a result of decreasing stage lengths as well as higher
employee incentives based on increased profitability.
Aircraft costs, including aircraft rent and depreciation, decreased as a
percentage of airline operating revenues to 18.1 percent for the six months
ended September 30, 1998 from 19.8 percent for the six months ended September
30, 1997. The decrease is due to airline operating revenues increasing at a
faster rate than aircraft costs. Aircraft costs per ASM increased slightly to
3.8(cent) for the six months ended September 30, 1998 from 3.5(cent) for the six
months ended September 30, 1997.
Maintenance expense increased as a percentage of airline operating revenues to
9.5 percent for the six months ended September 30, 1998 from 7.4 percent for the
six months ended September 30, 1997. The increase was the result of an increase
in flight hours, which results in higher maintenance expense, as well as
maintenance expense incurred on used Brasilia aircraft which were acquired in
connection with the United Express expansion. Management expects these costs to
decrease since the costs incurred were expended to bring the used aircraft up to
SkyWest maintenance standards. Maintenance expense per ASM increased to
2.0(cent) for the six months ended September 30, 1998 from 1.3(cent) for the six
months ended September 30, 1997.
Fuel costs decreased as a percentage of airline operating revenues to 7.7
percent for the six months ended September 30, 1998 from 11.1 percent for the
six months ended September 30, 1997, primarily due to a decrease in the average
fuel price per gallon to $.67 from $.85. Fuel costs per ASM decreased to
1.6(cent) for the six months ended September 30, 1998 from 1.9(cent) for the six
months ended September 30, 1997.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
decreased as a percentage of airline operating revenues to 21.8 percent for the
six months ended September 30, 1998 from 25.3 percent for the six months ended
September 30, 1997. The decrease is primarily the result of the airline not
incurring commissions on United Express contract related passenger revenues.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Nonairline revenues increased to $23.0 million for the six months ended
September 30, 1998 from $21.2 million for the six months ended September 30,
1997. The increase is due to selling a higher volume of lower priced tour
packages, as part of a competitive strategy, rather than lower volumes of higher
priced premium tour packages as had been sold in the past. Nonairline expenses
increased 16.0 percent to $20.2 million for the six months ended September 30,
1998 from $17.4 million for the six months ended September 30, 1997 due to
higher passenger volumes. Additionally, the average number of full-time
equivalent employees was 281 for the six months ended September 30, 1998
compared to 283 for the six months ended September 30, 1997. The Las Vegas based
operations of Scenic generated $17.8 million in operating revenues and $16.3
million in operating expenses for the six months ended September 30, 1998 and
based on the potential sale, as indicated in Note G, will not be included in
future operations. Additionally, these operations are seasonal in nature and
usually generate operating losses the last six months of the fiscal year. As a
result, prior to the sale, management estimated an operating profit of
approximately $1.0 million for the fiscal year ending March 31, 1999.
Liquidity and Capital Resources
The Company had working capital of $145.8 million and a current ratio of 2.7:1
at September 30, 1998 compared to working capital of $143.1 million and a
current ratio of 3.9:1 at March 31, 1998. During the six months ended September
30, 1998, the principal sources of funds were $58.1 million generated from
operations, $1.9 million from the issuance of common stock, $1.0 million of
proceeds from the sale of property and equipment and $.6 million of proceeds
from sale of available-for-sale securities and other. During the six months
ended September 30, 1998 the Company invested $15.4 million in flight equipment,
$5.8 million in aircraft deposits, $5.9 million in buildings and ground
equipment, $2.2 million in rental vehicles, reduced long-term debt by $4.1
million and paid cash dividends of $1.3 million. These factors resulted in an
increase of $26.9 million in cash and cash equivalents.
At September 30, 1998, the Company's long-term debt to equity position was 16
percent debt and 84 percent equity compared to 19 percent debt and 81 percent
equity at March 31, 1998.
During the six months ended September 30, 1998, SkyWest took delivery of 34
Brasilia aircraft, consisting of 10 new and 24 used aircraft, in connection with
SkyWest's expansion in Los Angeles, San Francisco and the Pacific Northwest. As
of September 30, 1998, SkyWest had agreed to purchase 10 additional new Brasilia
aircraft and related spare parts and support equipment at an aggregate cost of
approximately $80.0 million, including estimated cost escalations. SkyWest also
has options to acquire 30 additional Brasilia aircraft at fixed prices (subject
to cost escalation and delivery schedules) exercisable through fiscal 2000.
Depending on the state of the aircraft financing market at the time of delivery,
management will determine whether to acquire the remaining 10 Brasilia aircraft
through third-party, long-term loans or lease arrangements.
SkyWest originally anticipated that the United Express expansion would require
capital expenditures of approximately $24.0 million consisting of additional
ground and maintenance facilities, support equipment and spare parts inventory.
As of September 30, 1998, SkyWest had expended $13.5 million associated with
these items and anticipates that an additional $5.0 million will be expended
related to the expansion.
The Company has significant long-term lease obligations primarily relating to
its aircraft fleet. These leases are classified as operating leases and
therefore are not reflected as liabilities in the Company's consolidated balance
sheets. At September 30, 1998, SkyWest leased 77 aircraft and Scenic Airlines,
Inc.("Scenic") leased nine aircraft under leases with an average remaining term
of approximately 8.8 years. Future minimum lease payments due under all
long-term operating leases were approximately $557.1 million at September 30,
1998. Concurrent with the sale of certain Scenic assets, as described in Note G,
approximately $2.9 million of future minimum lease payments under long-term
operating leases will no longer be required.
At September 30, 1998, the Company had outstanding long-term debt, including
current maturities, of approximately $53.7 million. Of the long-term debt, $44.2
million was incurred in connection with the acquisition of Brasilia aircraft and
is subject to subsidy payments through the export support program of the Federal
Republic of Brazil. The interest rates on $6.5 million of the $44.2 million of
the long-term debt are floating based on one month and three month Libor The
subsidy payments reduced the stated interest rates on the $44.2 million of
long-term debt to an average effective rate of approximately 4.0 percent as of
September 30, 1998. The debt is payable in either monthly or quarterly
installments through 2003. The remaining $9.5 million of long-term debt was
incurred to purchase ten VistaLiner aircraft operated by Scenic.
Concurrent with the sale of certain Scenic assets, as described in Note G, the
$9.5 million of long-term debt related to the VistaLiner aircraft will be
retired.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company spent approximately $8.1 million for nonaircraft capital
expenditures during the six months ended September 30, 1998, consisting
primarily of aircraft engine overhauls, buildings and ground equipment and
rental vehicles.
The Company has available $5.0 million in an unsecured bank line of credit with
interest payable at the bank's base rate less one-quarter percent, which was 8.0
at September, 30, 1998. The Company believes that, in the absence of unusual
circumstances, the working capital available to the Company will be sufficient
to meet its present requirements, including expansion, capital expenditures,
lease payments and debt service requirements for at least the next 12 months.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements and information that are
based on management's belief, as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate", "estimate", "project", "expect", and similar expressions are
intended to identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that have a direct bearing on the Company's operating results
include, among other things, changes in SkyWest's code-sharing relationships,
fluctuations in the economy and the demand for air travel, the degree and nature
of competition and SkyWest's ability to expand services in new and existing
markets and to maintain profit margins in the face of pricing pressures.
Year 2000 Compliance
The Company is currently modifying computer systems and application programs, as
well as imbedded technology in the Company's equipment, for year 2000
compliance, with project completion scheduled for March 31, 1999. The Company
believes that the cost to modify its systems or applications will not have a
material effect on its financial position or results of operations. Any
expenditure will be funded through operating cash flows while any cost for new
software will be capitalized and amortized over the software's useful life.
Although the Company is working cooperatively with third parties with systems
upon which the Company must rely, the Company can not give any assurances that
the systems of other parties will be year 2000 compliant on a timely basis.
Systems operated by others which the Company would use and/or rely on would
include: Federal Aviation Administration Air Traffic Control, computer
reservation systems for travel agent sales ans well as Delta and United
reservation, passenger check-in and ticketing systems. The Company business,
financial condition and/or results of operations could be materially adversely
affected by the failure of its system and application or those operated by
others. The Company believes that the risk related to these systems will be
mitigated by ongoing assessment and correction of the systems.
The Company is reviewing and revising our business interruption contingency
plans. The review, together with any necessary revisions, will be completed
concurrent with the modifications to existing systems and application programs
by March 31, 1999. The review of these plans will include how to maintain safety
as well as performing certain functions and processes manually. Due to the
uncertainty, related to year 2000 issues, the Company's contingency plan will be
ongoing in nature and may require further modifications to existing systems as
new information is made available and the Company further assess the readiness
of third parties upon which the Company relies.
13
<PAGE> 14
PART II. OTHER INFORMATION
SKYWEST, INC.
Item 4: Submission of Matters to a Vote of Security Holders
The registrant held its Annual Meeting of Shareholders on August 11, 1998. The
shareholders elected the following Board of Directors to serve for one year:
<TABLE>
<CAPTION>
Name Shares Voted For
---- ----------------
<S> <C>
Jerry C. Atkin 16,901,158
Sidney J. Atkin 16,900,958
J. Ralph Atkin 16,901,208
Mervyn K. Cox 16,902,984
Ian M. Cumming 16,901,404
Steven F. Udvar-Hazy 16,903,508
Hyrum W. Smith 16,898,014
Henry J. Eyring 16,900,404
</TABLE>
The shareholders also ratified the appointment of Arthur Andersen LLP as
independent auditors for fiscal year 1999 by a vote of 16,899,054 shares for and
2,684 against.
Item 5: Other Information
If a shareholder desiring to raise a proposal at the next annual meeting of
shareholders does not seek inclusion of the proposal in the Company's proxy
statement and fails to notify the Company at least 45 days prior to the month
and day of mailing of the prior year's proxy statement, management proxies will
be allowed to use their discretionary voting authority when the proposal is
raised at the annual meeting, without any discussion of the proposal in the
proxy statement.
Item 6: Exhibits and Reports on Form 8-K
a. Exhibits - Financial Data Schedule Exhibit 27
b. Reports on Form 8-K - There were no reports on Form 8-K filed during the
quarter ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYWEST, INC.
Registrant
November 5, 1998 BY: /s/ Bradford R. Rich
-----------------------
Bradford R. Rich
Executive Vice President,
Chief Financial Officer and Treasurer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 166,636
<SECURITIES> 13,856
<RECEIVABLES> 12,640
<ALLOWANCES> 110
<INVENTORY> 18,672
<CURRENT-ASSETS> 230,911
<PP&E> 259,141
<DEPRECIATION> 109,351
<TOTAL-ASSETS> 384,719
<CURRENT-LIABILITIES> 85,110
<BONDS> 45,066
0
0
<COMMON> 137,576
<OTHER-SE> 96,647
<TOTAL-LIABILITY-AND-EQUITY> 384,719
<SALES> 113,473
<TOTAL-REVENUES> 113,473
<CGS> 0
<TOTAL-COSTS> 94,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 895
<INCOME-PRETAX> 20,918
<INCOME-TAX> 8,063
<INCOME-CONTINUING> 12,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,855
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
</TABLE>
