Table of Contents

 

 

 

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 June 30, 2012

 

OR

 

o         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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was to required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 1, 2012

Common stock, no par value

 

51,253,324

 

 

 



Table of Contents

 

SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION:

3

 

Item 1.

Financial Statements

3

 

 

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

3

 

 

Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4.

Controls and Procedures

27

 

 

 

 

PART II

OTHER INFORMATION:

28

 

 

 

 

 

Item 1.

Legal Proceedings

28

 

Item 1A.

Risk Factors

29

 

Item 6.

Exhibits

29

 

 

Signature

30

 

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer

 

Exhibit 31.2

Certification of Chief Accounting Officer

 

Exhibit 32.1

Certification of Chief Executive Officer

 

Exhibit 32.2

Certification of Chief Accounting Officer

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

108,714

 

$

129,526

 

Marketable securities

 

501,332

 

497,552

 

Restricted cash

 

19,445

 

19,434

 

Income tax receivable

 

285

 

1,568

 

Receivables, net

 

139,261

 

130,510

 

Inventories, net

 

114,076

 

115,211

 

Prepaid aircraft rents

 

329,874

 

285,737

 

Deferred tax assets

 

79,551

 

69,519

 

Other current assets

 

31,217

 

31,407

 

Total current assets

 

1,323,755

 

1,280,464

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Aircraft and rotable spares

 

3,986,412

 

3,973,027

 

Buildings and ground equipment

 

294,199

 

291,294

 

 

 

4,280,611

 

4,264,321

 

Less accumulated depreciation and amortization

 

(1,483,375

)

(1,380,846

)

Total property and equipment, net

 

2,797,236

 

2,883,475

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Intangible assets, net

 

18,373

 

19,497

 

Other assets

 

99,446

 

98,472

 

Total other assets

 

117,819

 

117,969

 

Total assets

 

$

4,238,810

 

$

4,281,908

 

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt

 

$

205,524

 

$

208,398

 

Accounts payable

 

231,196

 

220,784

 

Accrued salaries, wages and benefits

 

117,613

 

112,987

 

Accrued aircraft rents

 

18,489

 

22,285

 

Taxes other than income taxes

 

18,215

 

21,186

 

Other current liabilities

 

38,980

 

38,508

 

Total current liabilities

 

630,017

 

624,148

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

48,775

 

50,194

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

1,525,269

 

1,606,993

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

589,610

 

567,874

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

94,509

 

98,438

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized; none issued

 

 

 

Common stock, no par value, 120,000,000 shares authorized; 76,224,130 and 75,833,696 shares issued, respectively

 

603,491

 

598,985

 

Retained earnings

 

1,116,346

 

1,104,144

 

Treasury stock, at cost, 25,279,790 and 25,221,481 shares, respectively

 

(371,206

)

(370,309

)

Accumulated other comprehensive income

 

1,999

 

1,441

 

Total stockholders’ equity

 

1,350,630

 

1,334,261

 

Total liabilities and stockholders’ equity

 

$

4,238,810

 

$

4,281,908

 

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars and Shares in Thousands, Except per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Passenger

 

$

920,633

 

$

919,690

 

$

1,822,989

 

$

1,764,166

 

Ground handling and other

 

16,581

 

14,007

 

35,399

 

35,482

 

Total operating revenues

 

937,214

 

933,697

 

1,858,388

 

1,799,648

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

290,676

 

290,126

 

581,490

 

576,273

 

Aircraft maintenance, materials and repairs

 

167,150

 

176,399

 

346,786

 

339,573

 

Aircraft fuel

 

153,544

 

161,408

 

300,994

 

288,149

 

Aircraft rentals

 

83,944

 

88,072

 

168,846

 

174,494

 

Depreciation and amortization

 

64,182

 

63,697

 

128,497

 

126,890

 

Station rentals and landing fees

 

44,254

 

42,322

 

88,187

 

84,948

 

Ground handling services

 

29,615

 

32,875

 

64,930

 

69,728

 

Merger and integration related costs

 

 

1,364

 

 

2,395

 

Other

 

57,043

 

58,394

 

111,395

 

117,932

 

Total operating expenses

 

890,408

 

914,657

 

1,791,125

 

1,780,382

 

OPERATING INCOME

 

46,806

 

19,040

 

67,263

 

19,266

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

2,043

 

2,114

 

3,996

 

4,080

 

Interest expense

 

(19,387

)

(20,052

)

(39,167

)

(40,272

)

Other, net

 

(815

)

(2,859

)

(4,667

)

(3,365

)

 

 

(18,159

)

(20,797

)

(39,838

)

(39,557

)

INCOME (LOSS) BEFORE INCOME TAXES

 

28,647

 

(1,757

)

27,425

 

(20,291

)

PROVISION (BENEFIT) FOR INCOME TAXES

 

11,687

 

(3,336

)

11,147

 

(10,806

)

NET INCOME (LOSS)

 

$

16,960

 

$

1,579

 

$

16,278

 

$

(9,485

)

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

$

0.33

 

$

0.03

 

$

0.32

 

$

(0.18

)

DILUTED EARNINGS (LOSS) PER SHARE

 

$

0.33

 

$

0.03

 

$

0.32

 

$

(0.18

)

Weighted average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

50,944

 

52,698

 

50,912

 

53,271

 

Diluted

 

51,789

 

53,371

 

51,335

 

53,271

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

16,960

 

$

1,579

 

$

16,278

 

$

(9,485

)

Proportionate share of other companies foreign currency translation adjustment, net of taxes

 

141

 

130

 

448

 

290

 

Net unrealized appreciation on marketable securities, net of taxes

 

35

 

333

 

111

 

642

 

TOTAL COMPREHENSIVE INCOME (LOSS)

 

$

17,136

 

$

2,042

 

$

16,837

 

$

(8,553

)

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

 

 

Six Months Ended
June 30

 

 

 

2012

 

2011

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

109,347

 

$

51,324

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of marketable securities

 

(222,616

)

(234,342

)

Sales of marketable securities

 

219,362

 

382,351

 

Proceeds from the sale of equipment

 

630

 

191

 

Acquisition of property and equipment:

 

 

 

 

 

Aircraft and rotable spare parts

 

(27,555

)

(29,029

)

Deposits on aircraft

 

 

(13,500

)

Buildings and ground equipment

 

(3,252

)

(5,009

)

Increase in other assets

 

(9,397

)

(3,850

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

(42,828

)

96,812

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on long-term debt

 

(84,598

)

(79,363

)

Tax benefit from exercise of common stock options

 

73

 

2

 

Return of deposits on aircraft and rotable spare parts

 

 

400

 

Net proceeds from issuance of common stock

 

2,161

 

2,203

 

Purchase of treasury stock

 

(897

)

(40,259

)

Payment of cash dividends

 

(4,070

)

(4,326

)

 

 

 

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

 

(87,331

)

(121,343

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(20,812

)

26,793

 

Cash and cash equivalents at beginning of period

 

129,526

 

112,338

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

108,714

 

$

139,131

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Cash paid (received) during the year for:

 

 

 

 

 

Interest, net of capitalized amounts

 

$

39,261

 

$

41,370

 

Income taxes

 

$

(1,477

)

$

698

 

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note A — Condensed Consolidated Financial Statements

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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. These condensed consolidated financial statements reflect all adjustments that, 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, unless otherwise disclosed. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results of operations for the three and six-months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ and may differ materially from those estimates and assumptions.

 

Effective December 31, 2011, ExpressJet Airlines, Inc., a wholly-owned subsidiary of SkyWest (“ExpressJet Delaware”) was merged into Atlantic Southeast Airlines, Inc., another wholly-owned subsidiary of SkyWest (“Atlantic Southeast”).  On January 1, 2012, Atlantic Southeast, the surviving entity of such merger (the “ExpressJet Combination”), changed its name to ExpressJet Airlines, Inc.  In this Report, “Atlantic Southeast” refers to Atlantic Southeast Airlines, Inc., a Georgia corporation, for periods prior to the ExpressJet Combination, “ExpressJet Delaware” refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and “ExpressJet” refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the consummation of the ExpressJet Combination.

 

Note B — Passenger and Ground Handling Revenue

 

Passenger and Ground Handling Revenues

 

The Company recognizes passenger and ground handling revenues when the service is provided. Under the Company’s contract and pro-rate flying agreements with Delta Airlines, Inc. (“Delta”), United Air Lines, Inc. (“United”), Continental Airlines, Inc. (“Continental”), US Airways Group, Inc. (“US Airways”) and Alaska Airlines (“Alaska”), revenue is considered earned when the flight is completed. Revenue is recognized under the Company’s pro-rate flying agreements based upon the portion of the pro-rate passenger fare the Company anticipates that it will receive.

 

Delta Connection Agreements

 

SkyWest Airlines and ExpressJet are each parties to a Delta Connection Agreement with Delta, pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The Delta Connection Agreements provide for fifteen-year terms, subject to early termination by Delta, SkyWest Airlines or ExpressJet, as applicable, upon the occurrence of certain events. Delta’s termination rights include (i) cross- termination rights between the two Delta Connection Agreements, (ii) the right to terminate each of the Delta Connection Agreements upon the occurrence of certain force majeure events, including certain labor-related events, that prevent SkyWest Airlines or ExpressJet from performance for certain periods, and (iii) the right to terminate each of the Delta Connection Agreements if SkyWest Airlines or ExpressJet fails to maintain competitive base rate costs, subject to certain adjustment rights. The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi-year rate reset provisions beginning in 2010 and each 5th year thereafter. In addition to the termination rights, Delta has the right to extend the term of the Delta Connection Agreements upon the occurrence of certain events or at the expiration of the initial term. SkyWest Airlines and ExpressJet have the right to terminate their respective Delta Connection Agreement upon the occurrence of certain breaches by Delta, including the failure to cure payment defaults. SkyWest Airlines and ExpressJet also have cross-termination rights between the two Delta Connection Agreements.

 

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Under the terms of the SkyWest Airlines Delta Connection Agreement, Delta has agreed to compensate SkyWest Airlines for the direct costs associated with operating the Delta Connection flights, plus a payment based on block hours flown. Under the terms of the ExpressJet Delta Connection Agreement, Delta has agreed to compensate ExpressJet for its direct costs associated with operating the Delta Connection flights, plus, if ExpressJet completes a certain minimum percentage of its Delta Connection flights, an additional percentage of such costs. Additionally, ExpressJet’s Delta Connection Agreement provides for the payment of incentive compensation upon satisfaction of certain performance goals. The incentives are defined in the ExpressJet Delta Connection Agreement as being measured and determined on a monthly and quarterly basis. At the end of each quarter, the Company calculates the incentives achieved during the quarter and recognizes revenue accordingly. The parties to the Delta Connection Agreements made customary representations, warranties and covenants, including with respect to various operational, marketing and administrative matters.

 

In the event that the contractual rates under the Delta Connection Agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of prior period’s approved rates, as adjusted to reflect any contract negotiations and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines.

 

The Delta Connection Agreements also provide that, beginning with the fifth anniversary of the execution of the agreements (September 8, 2010), Delta has the right to require that certain contractual rates under those agreements shall not exceed the second lowest of all carriers within the Delta Connection program. During the fourth quarter of 2010, SkyWest Airlines and Atlantic Southeast reached an agreement with Delta on contractual rates satisfying the 2010 rate reset provision and the second-lowest rate provision and agreed to rates through December 31, 2015. Delta additionally waived its right to require that the contractual rates payable under the Delta Connection Agreements shall not exceed the second-lowest rates of all carriers within the Delta Connection program through December 31, 2015.

 

In the event the Company has a reimbursement dispute with a major partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute. During the quarter ended December 31, 2007, Delta notified the Company, SkyWest Airlines and Atlantic Southeast of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to allocation of liability for certain irregular operations (“IROP”) expenses that are paid by SkyWest Airlines and ExpressJet to their passengers under certain situations. As a result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Delta continues to withhold a portion of the funds the Company believes are payable as weekly scheduled wire payments to SkyWest Airlines and ExpressJet (See Note I for additional details).

 

United Express Agreements

 

SkyWest Airlines and United have entered into a United Express Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ United Express operations. Under the terms of the United Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the United Express Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

On February 10, 2010, Atlantic Southeast and United entered into a United Express Agreement, pursuant to which ExpressJet, as successor to Atlantic Southeast, operates 14 CRJ200s as a United Express carrier. The ExpressJet United Express Agreement is a capacity purchase agreement with a five-year term, and other terms which are generally consistent with the SkyWest Airlines United Express Agreement.

 

On December 1, 2009, ExpressJet Delaware and United also entered into a United Express Agreement, which sets forth the principal terms and conditions governing the United Express operations presently conducted by ExpressJet. Under the terms of that United Express Agreement, to which ExpressJet became a party through the ExpressJet Combination, ExpressJet is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, ExpressJet is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in that ExpressJet United Express Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

Continental CPA

 

Effective November 12, 2010, ExpressJet Delaware entered into a Capacity Purchase Agreement with Continental (the “Continental CPA”), whereby ExpressJet Delaware agreed to provide regional airline service in the Continental flight system. Under

 

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the terms of the Continental CPA, to which ExpressJet became a party through the ExpressJet Combination, ExpressJet operates 227 aircraft in the Continental flight system and Continental has agreed to compensate ExpressJet on a monthly basis based on the block hours flown by ExpressJet and the weighted average number of aircraft operated by ExpressJet under the Continental CPA. Additionally, ExpressJet may earn incentive compensation for good operating performance, but is subject to financial penalties for poor operating performance. At the end of each month, the Company calculates the incentives achieved during the month under the Continental CPA and recognizes revenue accordingly.

 

Alaska Capacity Purchase Agreement

 

SkyWest Airlines and Alaska have entered into a Capacity Purchase Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ operations for Alaska. Under the terms of the Alaska Capacity Purchase Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the Alaska Capacity Purchase Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

US Airways Express Agreement

 

SkyWest Airlines and US Airways have entered into a US Airways Express Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ US Airways Express operations. Under the terms of the US Airways Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the US Airways Express Agreement as being measured and determined on a quarterly basis. At the end of each quarter, the Company calculates the incentives achieved during the quarter and recognizes revenue accordingly.

 

Other Revenue Items

 

The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with Delta, United, Continental, Alaska or US Airways, integration of the operations of Atlantic Southeast and ExpressJet Delaware and the implementation of the ExpressJet Combination, contract modifications resulting from contract re-negotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major partners.

 

Note C — Share-Based Compensation

 

The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. During the six months ended June 30, 2012, the Company granted options to purchase 200,115 shares of common stock under the SkyWest, Inc. 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”).  The following table shows the assumptions used and weighted average fair value for stock option grants during the six months ended June 30, 2012.

 

Expected annual dividend rate

 

1.23

%

Risk-free interest rate

 

0.81

%

Average expected life (years)

 

5.6

 

Expected volatility of common stock

 

.409

 

Forfeiture rate

 

0.0

%

Weighted average fair value of option grants

 

$

4.43

 

 

During the six months ended June 30, 2012, the Company granted 290,265 restricted stock units to the Company’s employees under the 2010 Incentive Plan.  The restricted stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries.  Upon vesting, a restricted stock unit will be replaced with a common share of stock. Additionally, during the six months ended June 30, 2012, the Company granted 27,874 fully-vested shares of common stock to the Company’s directors.  The weighted average fair value of the shares of restricted stock on the date of grant was $13.06 per share.

 

The Company records share-based compensation expense only for those options and restricted stock units that are expected to vest.  The estimated fair value of the stock options and restricted stock units is amortized over the applicable vesting periods.  During the three months ended June 30, 2012 and 2011, the Company recorded pre-tax share-based compensation expense of $1.1 million and $1.2 million, respectively. During the six months ended June 30, 2012 and 2011, the Company recorded pre-tax share-based compensation expense of $2.4 million and $3.0 million, respectively.

 

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Note D — Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income (loss) per common share.  During the three months ended June 30, 2012 and 2011, options to acquire 3,952,000 and 3,282,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the six months ended June 30, 2012 and 2011, options to acquire 3,971,000 and 4,510,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive.

 

The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

16,960

 

$

1,579

 

$

16,278

 

$

(9,485

)

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

50,944

 

52,698

 

50,912

 

53,271

 

Effect of outstanding share-based awards

 

845

 

673

 

423

 

 

Weighted average number of shares for diluted net income (loss) per common share

 

51,789

 

53,371

 

51,335

 

53,271

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.33

 

$

0.03

 

$

0.32

 

$

(0.18

)

Diluted earnings (loss) per share

 

$

0.33

 

$

0.03

 

$

0.32

 

$

(0.18

)

 

Note E — Segment Reporting

 

Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to and regularly evaluated by the company’s chief operating decision maker (“CODM”) when deciding how to allocate resources and in assessing performance.

 

The Company’s two operating segments consist of the operations of its two operating subsidiaries, SkyWest Airlines and ExpressJet. On December 31, 2011, ExpressJet Delaware and Atlantic Southeast merged through the ExpressJet Combination. In conjunction with the ExpressJet Combination, ExpressJet became a reportable segment. Prior year amounts have been revised to conform to the current year segment presentation. Corporate overhead expense incurred by the Company is allocated to the operating expenses of its two operating subsidiaries. The following represents the Company’s segment data for the three months ended June 30, 2012 and 2011 (in thousands).

 

 

 

Three months ended June 30,2012

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

509,135

 

425,445

 

2,634

 

937,214

 

Operating expense

 

467,497

 

421,640

 

1,271

 

890,408

 

Depreciation and amortization expense

 

38,646

 

25,536

 

 

64,182

 

Interest expense

 

12,353

 

5,959

 

1,075

 

19,387

 

Segment profit (loss)(1)

 

29,285

 

(2,154

)

288

 

27,419

 

Identifiable intangible assets, other than goodwill

 

 

18,373

 

 

18,373

 

Total assets

 

2,604,012

 

1,634,798

 

 

4,238,810

 

Capital expenditures (including non-cash)

 

6,700

 

4,579

 

 

11,279

 

 

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Three months ended June 30, 2011

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

513,326

 

417,497

 

2,874

 

933,697

 

Operating expense

 

479,905

 

433,371

 

1,381

 

914,657

 

Depreciation and amortization expense

 

36,825

 

26,872

 

 

63,697

 

Interest expense

 

12,621

 

6,332

 

1,099

 

20,052

 

Segment profit (loss) (1)

 

20,800

 

(22,206

)

394

 

(1,012

)

Identifiable intangible assets, other than goodwill

 

 

20,622

 

 

20,622

 

Total assets

 

2,545,336

 

1,794,405

 

 

4,339,741

 

Capital expenditures (including non-cash)

 

11,318

 

7,729

 

 

19,047

 

 


(1)                                 Segment profit is operating income less interest expense

 

The following represents the Company’s segment data for the six-months periods ended June 30, 2012 and 2011 (in thousands).

 

 

 

Six months ended June 30, 2012

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

1,004,046

 

849,074

 

5,268

 

1,858,388

 

Operating expense

 

940,403

 

848,192

 

2,530

 

1,791,125

 

Depreciation and amortization expense

 

77,429

 

51,068

 

 

128,497

 

Interest expense

 

24,915

 

12,005

 

2,247

 

39,167

 

Segment profit (loss)(1)

 

38,728

 

(11,123

)

491

 

28,096

 

Identifiable intangible assets, other than goodwill

 

 

18,373

 

 

18,373

 

Total assets

 

2,604,012

 

1,634,798

 

 

4,238,810

 

Capital expenditures (including non-cash)

 

21,953

 

8,541

 

 

30,494

 

 

 

 

Six months ended June 30, 2011

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

992,944

 

800,956

 

5,748

 

1,799,648

 

Operating expense

 

936,720

 

840,962

 

2,700

 

1,780,382

 

Depreciation and amortization expense

 

73,280

 

53,610

 

 

126,890

 

Interest expense

 

25,351

 

12,711

 

2,210

 

40,272

 

Segment profit (loss) (1)

 

30,873

 

(52,717

)

838

 

(21,006

)

Identifiable intangible assets, other than goodwill

 

 

20,622

 

 

20,622

 

Total assets

 

2,545,336

 

1,794,405

 

 

4,339,741

 

Capital expenditures (including non-cash)

 

21,618

 

15,048

 

 

36,666

 

 


(1)                                 Segment profit is operating income less interest expense

 

Note F — Fair Value Measurements

 

The Company holds certain assets that are required to be measured at fair value in accordance with United States GAAP. The Company determined fair value of these assets based on the following three levels of inputs:

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities.

Level 2

 

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities.

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

 

As of June 30, 2012, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):

 

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Fair Value Measurements as of June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Bond and bond fund

 

$

497,410

 

$

 

$

497,410

 

$

 

Commercial paper

 

3,543

 

 

3,543

 

 

Asset backed securities

 

379

 

 

379

 

 

 

 

501,332

 

 

501,332

 

 

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash

 

128,159

 

128,159

 

 

 

Other Assets (a)

 

3,825

 

 

 

3,825

 

Total Assets Measured at Fair Value

 

$

633,316

 

$

128,159

 

$

501,332

 

$

3,825

 

 


(a)         Auction rate securities included in “Other assets” in the unaudited Consolidated Balance Sheet

 

Based on market conditions, the Company uses a discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing condensed consolidated financial statements, these securities were categorized as Level 3 securities. The Company’s “Marketable Securities” classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.

 

The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the six months ended June 30, 2012.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2012 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs

(Level 3)

 

 

 

Auction Rate
Securities

 

Balance at January 1, 2012

 

$

3,793

 

Total realized and unrealized gains or (losses)

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

32

 

Transferred out

 

 

Settlements

 

 

Balance at June 30, 2012

 

$

3,825

 

 

The fair value of the Company’s long-term debt classified as Level 2 was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $1,834.5 million as of June 30, 2012, as compared to the carrying amount of $1,730.8 million as of June 30, 2012.

 

Note G — Income Taxes

 

Primarily as a result of decreases in the Company’s estimated pre-tax income, the Company’s estimated annual effective tax rate for the three and six-month periods ended June 30, 2011 varied from the federal statutory rate of 35%.  The variance also reflected proportionate increase in expenses with limited tax deductibility relative to the Company’s pre-tax income for the year ended December 31, 2011.

 

Note H — Investment in Other Companies

 

In September 2008, the Company entered into an agreement to acquire a 20% interest in Trip Linhas Aereas, a regional airline operating in Brazil (“TRIP”).  As of June 30 2012, the Company’s investment balance in TRIP was $24.1 million, which represented a 20% voting ownership interest in TRIP common stock and a 6% non-voting ownership interest in TRIP preferred stock. In connection with the investment in TRIP, the Company entered into a put option agreement with the majority shareholder of TRIP that allows the Company to put its investment to TRIP’s majority shareholder at an established price based on a 5% annual rate of return over the investment period.

 

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As a subsequent event, on July 12, 2012, the Company sold its interest in TRIP for a price of $42 million.  The purchase price is scheduled to be paid in three installments over a two-year period and may be accelerated upon the occurrence of certain conditions identified in the purchase agreement.  As part of the sale transaction, the Company also received an option to acquire 15.38% of the ownership in Trip Investimentos Ltda., the purchaser of the Company’s TRIP shares.  The option has an initial exercise price per share, the exercise price escalates annually at a specified rate and the Company can exercise the option, in its discretion, between the fourth and sixth anniversaries of the Company’s receipt of the required installment payments from Trip Investimentos Ltda. under the purchase agreement.

 

On September 29, 2010, the Company invested $7 million for a 30% ownership interest in Mekong Aviation Joint Stock Company, an airline operating in Vietnam (“Air Mekong”). During 2011, the Company invested an additional $3 million in Air Mekong. As of June 30, 2012, the Company’s investment balance in Air Mekong was $2.1 million. These investments were recorded as an “Other asset” on the Company’s consolidated balance sheet. The Company accounts for its interest in Trip and Air Mekong using the equity method of accounting. The Company records its equity in Trip’s and Air Mekong’s earnings on a one-quarter lag. The Company’s portion of the losses incurred by Trip and Air Mekong for the six months ended June 30, 2012 was $5.3 million.

 

Note I — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of June 30, 2012, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters is not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, the following is a significant outstanding legal matter.

 

SkyWest Airlines and ExpressJet v. Delta

 

During the quarter ended December 31, 2007, Delta notified the Company, SkyWest Airlines and Atlantic Southeast, of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to the allocation of liability for certain irregular operation (“IROP”) expenses paid by SkyWest Airlines and Atlantic Southeast (now ExpressJet) to their passengers and vendors under certain situations. During the period between the execution of the Delta Connection Agreements in September 2005 and December 2007, SkyWest Airlines and Atlantic Southeast passed through to Delta IROP expenses that were paid pursuant to Delta’s policies, and Delta accepted and reimbursed those expenses. Delta now claims it is obligated to reimburse only a fraction of those IROP expenses. As a result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Since December 2007, Delta has continued to withhold payments from the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast (now ExpressJet), and has disputed subsequent billings for IROP expenses. As of June 30, 2012, the Company had recognized a cumulative total of $31.7 million of revenue associated with the funds withheld by Delta. Since July 1, 2008, the Company has not recognized revenue related to IROP expense reimbursements withheld by Delta because collection of those reimbursements is the subject of litigation and is not reasonably assured. On February 1, 2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton County, Georgia (“Superior Court”) challenging Delta’s treatment of the matter and seeking recovery of the payments withheld by Delta and any future withholdings related to this issue. Delta filed an Answer to the SkyWest Airlines and Atlantic Southeast Complaint and a Counterclaim against SkyWest Airlines and Atlantic Southeast on March 24, 2008. Delta’s Counterclaim alleged that SkyWest Airlines and Atlantic Southeast breached the Delta Connection Agreements by invoicing Delta for IROP expenses that were paid pursuant to Delta’s policies, and claims only a portion of those expenses may be invoiced to Delta.

 

After proceedings that included contested motions, document discovery, and depositions, Delta voluntarily dismissed its Counterclaim. Discovery in that action was not complete at the time of dismissal. On February 14, 2011, SkyWest Airlines and Atlantic Southeast exercised their statutory rights to voluntarily dismiss their claims in the Superior Court, and filed a new complaint (the “State Court Complaint”) in the Georgia State Court of Fulton County (the “State Court”). The claims continue to include breach of contract, breach of contract based on mutual departure, breach of contract based on voluntary payment, and breach of the duty of good faith and fair dealing. Delta moved for partial dismissal of the State Court Complaint, which motion was denied in its entirety. Delta also filed a separate action in the Superior Court containing claims for declaratory judgment and breach of the confidentiality provisions of the Delta Connection Agreements. SkyWest Airlines and Atlantic Southeast moved for dismissal of Delta’s claims in the Superior Court. The Superior Court dismissed Delta’s complaint in its entirety. Discovery in the lawsuit is ongoing.

 

On October 18, 2011, Delta filed a counterclaim (the “Counterclaim”) against SkyWest Airlines and Atlantic Southeast. The Counterclaim contains claims for unjust enrichment and breach of contract related to alleged non-revenue positive space flying by SkyWest and Atlantic Southeast employees for non-Delta related business. Delta’s Counterclaim does not specify an amount of damages, but the Counterclaim alleges, on information and belief, that Delta’s damages exceed $4.5 million. SkyWest and Atlantic Southeast filed their reply to the Counterclaim on November 21, 2011, stating the allegations contained in the Counterclaim stand

 

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denied by operation of law and asserting SkyWest’s and Atlantic Southeast’s affirmative defenses. An estimated loss is accrued if the loss is probable and reasonably estimable. Because these conditions have not been satisfied, the Company has not recorded a loss in its consolidated financial statements with respect to the dispute. As of June 30, 2012, a range of reasonably possible loss is not determinable related to this Counterclaim.

 

During 2010, the Company and Delta began preliminary settlement discussions related to the dispute. Notwithstanding the legal merits of the case, the Company offered to settle the claim for approximately $5.9 million less than the cumulative total of revenue recognized related to this matter. Those settlement discussions were not successful; however, as a result of the settlement offer, the Company wrote off $5.9 million of related receivables as of December 31, 2010. As of June 30, 2012, the Company’s estimated range of reasonably possible loss related to the dispute was $0 to $25.8 million.

 

SkyWest Airlines and ExpressJet continue to vigorously pursue their claims set forth in the State Court Complaint and their defenses against Delta’s Counterclaim.

 

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ITEM 2:         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three and six month periods ended June 30, 2012 and 2011. Also discussed is our financial position as of June 30, 2012 and December 31, 2011. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and six month periods ended June 30, 2012, including the notes thereto, appearing elsewhere in this Report.  This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of the uncertainties, risks and assumptions associated with these statements.

 

Effective December 31, 2011, our subsidiary, ExpressJet Airlines, Inc. was merged into our subsidiary, Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the “ExpressJet Combination”).  In this Report, “Atlantic Southeast” refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, “ExpressJet Delaware” refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and “ExpressJet” refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the consummation of the ExpressJet Combination.

 

Cautionary Statement Concerning Forward-Looking Statements

 

Certain of the statements contained in this Report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding SkyWest’s outlook, the revenue environment, SkyWest’s contract relationships, and SkyWest’s expected financial performance.  These statements include, but are not limited to, statements about SkyWest’s future growth and development plans, including SkyWest’s future financial and operating results, SkyWest’s plans for SkyWest Airlines and ExpressJet, SkyWest’s objectives, expectations and intentions, and other statements that are not historical facts.  You should also keep in mind that all forward-looking statements are based on SkyWest’s existing beliefs about present and future events outside of SkyWest’s control and on assumptions that may prove to be incorrect.  If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, SkyWest’s actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended.

 

There may be other factors not identified above of which SkyWest is not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed.  SkyWest assumes no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by law.

 

Overview

 

Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of June 30, 2012, SkyWest Airlines and ExpressJet offered scheduled passenger and air freight service with approximately 4,000 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of June 30, 2012, we operated a combined fleet of 725 aircraft consisting of the following:

 

 

 

CRJ
200

 

ERJ
135/145

 

CRJ700

 

CRJ
900

 

EMB
120

 

Total

 

Delta

 

158

 

 

55

 

31

 

9

 

253

 

United Continental

 

92

 

249

 

70

 

 

34

 

445

 

US Airways

 

15

 

 

 

 

 

15

 

Alaska

 

 

 

5

 

 

 

5

 

Maintenance spare

 

1

 

 

 

 

 

1

 

Subleased to an un-affiliated entity

 

2

 

 

 

 

 

2

 

Subleased to an affiliated entity

 

 

 

 

4

 

 

4

 

Total

 

268

 

249

 

130

 

35

 

43

 

725

 

 

For the three months ended June 30, 2012, approximately 65.3% of our aggregate capacity was operated under United Express Agreements executed between United Airlines, Inc. (“United”) and each of SkyWest Airlines and ExpressJet and a Capacity Purchase Agreement between Continental Airlines, Inc. (“Continental”) and ExpressJet, approximately 31.7%  of our aggregate

 

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capacity was operated under Delta Connection Agreements executed between Delta Airlines, Inc. (“Delta”) and each of SkyWest Airlines and ExpressJet (as successor to Atlantic Southeast), approximately 1.4% of our aggregate capacity was operated under capacity purchase agreement with Alaska Airlines (“Alaska”) and approximately 1.6% of our aggregate capacity was operated under code-share agreement with U.S. Airways Group, Inc. (US Airways”).

 

SkyWest Airlines has been a code-share partner with Delta in Salt Lake City and United in Los Angeles since 1987 and 1997, respectively. In 1998, SkyWest Airlines expanded its relationship with United to provide service in Portland, Seattle/Tacoma, San Francisco and additional Los Angeles markets. In 2004, SkyWest Airlines expanded its United Express operations to provide service in Chicago. In May 2011, SkyWest Airlines entered into a capacity purchase agreement with Alaska. In addition, during November 2011 SkyWest Airlines entered into a code share agreement with US Airways. As of June 30, 2012, SkyWest Airlines operated as a Delta Connection carrier in Salt Lake City and Minneapolis, a United Express carrier in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an Alaska carrier in Seattle/ Tacoma and Portland and a US Airways carrier in Phoenix.

 

On November 17, 2011, Atlantic Southeast and ExpressJet Delaware consolidated their operations under a single operating certificate, and on December 31, 2011, Atlantic Southeast and ExpressJet Delaware completed the ExpressJet Combination. At the time of the ExpressJet Combination, Atlantic Southeast had been a code-share partner with Delta in Atlanta since 1984 and a code-share partner with United since February 2010. As of June 30, 2012, ExpressJet operated as a Delta Connection carrier in Atlanta and Cincinnati and a United Express carrier in Chicago (O’Hare), Washington, D.C. (Dulles International Airport), Cleveland, Newark and Houston.

 

Historically, multiple contractual relationships have enabled us to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of contract flying and our controlled or “pro-rate” flying. For the three months ended June 30, 2012, contract flying revenue and pro-rate revenue represented approximately 92% and 8%, respectively, of our total passenger revenues. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on the completed block hours, flight departures and other operating measures.

 

Second Quarter Summary

 

We had revenues of $937.2 million for the three months ended June 30, 2012, a 0.4% increase, compared to revenues of $933.7 million for the three months ended June 30, 2011. We had a net income of $17.0  million, or $0.33 per diluted share, for the three months ended June 30, 2012, an increase of 974.1%, compared to $1.6 million of net income, or $0.03 per diluted share, for the three months ended June 30, 2011.

 

The significant items affecting our financial performance during the three months ended June 30, 2012 are outlined below:

 

Our passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, increased $14.1 million, or 1.9%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The increase in passenger revenues, excluding fuel and engine overhaul reimbursements, was primarily due to our receipt of higher incentive payments and favorable settlements with our major partners.

 

Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses decreased $7.0 million, or 1.0%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011.  During the three months ended June 30, 2012, SkyWest Airlines and ExpressJet experienced improved efficiencies with respect to labor and pilot training costs compared to the three months ended June 30, 2011.  During the three months ended June 30, 2011, SkyWest Airlines and ExpressJet incurred higher than normal pilot training costs for aircraft deliveries scheduled for the last six months of 2011 and experienced labor inefficiencies in order to accommodate significant scheduling changes made by our major partners.

 

During the three months ended June 30, 2012, our CRJ200 engine expense under our SkyWest Airlines and ExpressJet United Express Agreements decreased $1.6 million compared to the three months ended June 30, 2011. The decrease in CRJ 200 engine overhauls reimbursed at a fixed hourly rate was principally due to fewer scheduled engine maintenance events.

 

The combination of the factors identified above was the principal source of the significant improvement in our financial results during the three months ended June 30, 2012, compared to the three months ended June 30, 2011.

 

Other expenses, net decreased $2.0 million during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Other expense primarily consist of earnings and losses from our investments in Trip Linhas Aereas (“TRIP”) and Mekong Aviation Joint Stock Company (“Air Mekong”), which we account for under the equity method of accounting. The decrease in other expense was due primarily to our recognition of our portion of the losses incurred by TRIP and Air Mekong that we

 

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recognized during the three months ended June 30, 2012, compared to the amount of such losses that we recognized for the three months ended June 30, 2011.

 

Total available seat miles (“ASMs”) for the three months ended June 30, 2012 decreased 0.5%, compared to the three months ended June 30, 2011. During the three months ended June 30, 2012, we generated 9.3 billion ASMs, compared to 9.4 billion ASMs during the three months ended June 30, 2011.

 

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2011, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2011.  Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, maintenance, aircraft leases, impairment of long-lived assets and intangibles, stock-based compensation expense and fair value. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will differ, and could differ materially, from such estimates.

 

Results of Operations

 

Our Business Segments

 

For the three months ended June 30, 2012, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet (which reflects the combined operations of Atlantic Southeast and ExpressJet Delaware). On December 31, 2011, we completed the ExpressJet Combination, which ended ExpressJet Delaware’s existence as a separate entity.

 

 

 

2012

 

2011

 

$ Change

 

%
Change

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Operating Revenue

 

$

509,135

 

$

513,326

 

$

(4,191

)

(0.8

)%

ExpressJet Operating Revenues

 

425,445

 

417,497

 

7,948

 

1.9

%

Other Operating Revenues

 

2,634

 

2,874

 

(240

)

(8.4

)%

Total Operating Revenues

 

$

937,214

 

$

933,697

 

$

3,517

 

0.4

%

Airline Expenses:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Expense

 

$

479,850

 

$

492,526

 

$

(12,676

)

(2.6

)%

ExpressJet Expense

 

427,599

 

439,703

 

(12,104

)

(2.8

)%

Other Airline Expense

 

2,346

 

2,480

 

(134

)

(5.4

)%

Total Airline Expense(1)

 

$

909,795

 

$

934,709

 

$

(24,914

)

(2.7

)%

Segment profit (loss):

 

 

 

 

 

 

 

 

 

SkyWest Airlines segment profit

 

$

29,285

 

$

20,800

 

$

8,485

 

40.8

%

ExpressJet segment loss

 

(2,154

)

(22,206

)

20,052

 

90.3

%

Other profit

 

288

 

394

 

(106

)

(26.9

)%

Total Segment profit (loss)

 

$

27,419

 

$

(1,012

)

$

28,431

 

N/A

 

Interest Income

 

2,043

 

2,114

 

(71

)

(3.4

)%

Other

 

(815

)

(2,859

)

2,044

 

71.5

%

Consolidated Income (Loss) before taxes

 

$

28,647

 

$

(1,757

)

$

30,404

 

N/A

 

 


(1)                                 Total Airline Expense includes operating expense and interest expense

 

Three Months Ended June 30, 2012 and 2011

 

Operational Statistics.  The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.

 

17



Table of Contents

 

 

 

For the three months ended June 30,

 

 

 

2012

 

2011

 

% Change

 

Revenue passenger miles (000)

 

7,689,573

 

7,546,662

 

1.9

 

Available seat miles (“ASMs”) (000)

 

9,344,407

 

9,393,724

 

(0.5

)

Block hours

 

574,884

 

574,372

 

0.1

 

Departures

 

360,733

 

354,880

 

1.6

 

Passengers carried

 

15,014,037

 

14,491,292

 

3.6

 

Passenger load factor

 

82.3

%

80.3

%

2.0

Pts

Revenue per available seat mile

 

10.0

¢

9.9

¢

1.0

 

Cost per available seat mile

 

9.7

¢

10.0

¢

(3.0

)

Cost per available seat mile excluding fuel

 

8.1

¢

8.3

¢

(2.4

)

Fuel cost per available seat mile

 

1.6

¢

1.7

¢

(5.9

)

Average passenger trip length (miles)

 

512

 

521

 

(1.7

)

 

Revenues.  Operating revenues increased $3.5 million, or 0.4%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. For financial reporting purposes, we record these reimbursements as operating revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expenses as incurred. We also record those engine overhaul reimbursements as operating revenue. The following table summarizes the amount of fuel and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Passenger revenues

 

$

920,633

 

$

919,690

 

$

943

 

0.1

%

Less: Fuel reimbursement from major partners

 

129,293

 

133,927

 

(4,634

)

(3.5

)%

Less: Engine overhaul reimbursement from major partners

 

40,160

 

48,642

 

(8,482

)

(17.4

)%

Passenger revenues, excluding fuel and engine overhauls reimbursements

 

$

751,180

 

$

737,121

 

$

14,059

 

1.9

%

 

Passenger revenues.  Passenger revenues increased $0.9 million, or 0.1%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Our passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, increased $14.1 million, or 1.9%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The increase in passenger revenues, excluding fuel and engine overhaul reimbursements, was primarily due to our receipt of higher incentive payments, favorable settlements with our major partners and annual contractual inflation increases in our flying contracts.

 

Ground handling and other.  Total ground handling and other revenues increased $2.6 million, or 18.4%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Revenue attributed to ground handling services for our aircraft is reflected in our consolidated statements of operations and comprehensive loss under the heading “Passenger revenues” and revenue attributed to handling third party aircraft is reflected in our consolidated statements of operations and comprehensive loss under the heading “Ground handling and other.”  The increase was primarily related to the increase in our ground handling for other airlines.

 

Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. ASM is a common metric used in the airline industry to measure an airline’s passenger capacity. ASMs reflect both the number of aircraft in an airline’s fleet and the seat capacity for the aircraft in the fleet. As the size of our fleet is the underlying driver of our operating costs, the primary basis for our presentation of the following information on a cost per ASM basis is to discuss significant changes in our costs not proportionate to the relative changes in our fleet size (dollar amounts in thousands).

 

18



Table of Contents

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Cents Per

 

Cents Per

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

ASM

 

ASM

 

Aircraft fuel

 

$

153,544

 

$

161,408

 

$

(7,864

)

(4.9

)%

1.6

 

1.7

 

Salaries, wages and benefits

 

290,676

 

290,126

 

550

 

0.2

%

3.1

 

3.1

 

Aircraft maintenance, materials and repairs

 

167,150

 

176,399

 

(9,249

)

(5.2

)%

1.8

 

1.9

 

Aircraft rentals

 

83,944

 

88,072

 

(4,128

)

(4.7

)%

0.9

 

0.9

 

Depreciation and amortization

 

64,182

 

63,697

 

485

 

0.8

%

0.7

 

0.7

 

Station rentals and landing fees

 

44,254

 

42,322

 

1,932

 

4.6

%

0.5

 

0.5

 

Ground handling services

 

29,615

 

32,875

 

(3,260

)

(9.9

)%

0.3

 

0.3

 

Merger and integration-related costs

 

 

1,364

 

(1,364

)

(100.0

)%

 

 

Other

 

57,043

 

58,394

 

(1,351

)

(2.3

)%

0.6

 

0.7

 

Total operating expenses

 

890,408

 

914,657

 

(24,249

)

(2.7

)%

9.5

 

9.8

 

Interest

 

19,387

 

20,052

 

(665

)

(3.3

)%

0.2

 

0.2

 

Total airline expenses

 

$

909,795

 

$

934,709

 

(24,914

)

(2.7

)%

9.7

 

10.0

 

 

Fuel.  Fuel costs decreased $7.9 million, or 4.9%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The average cost per gallon of fuel decreased to $3.44 per gallon during the three months ended June 30, 2012, from $3.64 during the three months ended June 30, 2011. The following table summarizes the gallons of fuel we purchased directly, and the change in fuel price per gallon on our fuel expense, for the periods indicated:

 

 

 

For the three months ended June 30,

 

(in thousands, except per gallon amounts)

 

2012

 

2011

 

% Change

 

Fuel gallons purchased

 

44,585

 

44,369

 

0.5

%

Average price per gallon

 

$

3.44

 

$

3.64

 

(5.5

)%

Fuel expense

 

$

153,544

 

$

161,408

 

(4.9

)%

 

Salaries Wages and Employee Benefits.  Salaries, wages and employee benefits increased $0.6 million, or 0.2%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The average number of full-time equivalent employees increased 2.7% to 18,813 for the three months ended June 30, 2012, from 18,322 for the three months ended June 30, 2011. The increase in labor costs for the three months ended June 30, 2012, compared to the three months ended June 30, 2011, was less than the increase in block hour production between the two periods, due primarily to improved scheduling efficiencies and lower acquisition related transition expenses incurred during the three months ended June 30, 2012, compared to the three months ended June 30, 2011.

 

Aircraft maintenance, materials and repairs.  Maintenance costs decreased $9.3 million, or 5.2%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The following table summarizes the amount of engine overhauls and engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Aircraft maintenance, materials and repairs

 

$

167,150

 

$

176,399

 

$

(9,249

)

(5.2

)%

Less: Engine overhaul reimbursement from major partners

 

40,160

 

48,642

 

(8,482

)

(17.4

)%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rates

 

13,850

 

15,451

 

(1,601

)

(10.4

)%

Aircraft maintenance excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

$

113,140

 

$

112,306

 

$

834

 

0.7

%

 

Aircraft maintenance expense, excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rates, increased $0.8 million, or 0.7%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Aircraft maintenance expense excluding engine overhaul costs remained relatively flat for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 primarily due to a consistent level of scheduled maintenance events during the two quarters.

 

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Table of Contents

 

We recognize engine maintenance expense on our CRJ200 regional jet engines on an as-incurred basis as maintenance expense. Under the SkyWest Airlines and ExpressJet United Express Agreements, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the SkyWest Airlines and ExpressJet United Express Agreements can have a significant impact on our financial results. During the three months ended June 30, 2012, our CRJ200 engine expense under our SkyWest Airlines and ExpressJet United Express Agreements decreased $1.6 million compared to the three months ended June 30, 2011. The decrease in CRJ 200 engine overhauls reimbursed at a fixed hourly rate was principally due to fewer scheduled engine maintenance events. We expect a relatively steady reduction in the number of scheduled engine maintenance events after September 30, 2012 compared to the three months ended June 30, 2012.

 

Under our Delta Connection Agreements we are reimbursed for engine overhaul costs by Delta at the time the maintenance event occurs. Under our Continental Express Agreement, we are also reimbursed for actual engine overhaul costs by Continental at the time the expense is incurred. Such reimbursements are reflected as passenger revenue in our consolidated statements of operations and comprehensive loss.

 

Aircraft rentals.  Aircraft rentals decreased $4.1 million, or 4.7%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The decrease was primarily due to aircraft lease renewals at lower rates subsequent to July 1, 2011 and the return of certain aircraft at the lease expiration.

 

Depreciation and amortization.  Depreciation and amortization expense increased $0.5 million, or 0.8%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011.  The increase in depreciation expense was primarily due to the acquisition of four CRJ700s between July 1, 2011 and June 30, 2012 that were financed through long-term debt.

 

Station rentals and landing fees.  Station rentals and landing fees expense increased $1.9 million, or 4.6%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The increase in station rentals and landing fees expense was primarily due to increase in departures for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

 

Ground handling service.  Ground handling service expense decreased $3.3 million, or 9.9%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The decrease in ground handling service expense was primarily due to the termination of a code share agreement SkyWest Airlines previously maintained with AirTran Airways, Inc. (“AirTran”), which was terminated in September 2011.

 

Acquisition-related costs.  During the three months ended June 30, 2011, we incurred $1.4 million of direct severance, legal and advisor fees associated with Atlantic Southeast’s acquisition of ExpressJet Delaware in November 2010. We did not incur comparable expenses during the three months ended June 30, 2012.

 

Other expenses.  Other expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, decreased $1.4 million, or 2.3%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The decrease in other expenses was primarily due to the reduction in simulator training expense during the three months ended June 30, 2012.

 

Total Airline Expenses.  Total airline expenses (consisting of total operating and interest expenses) decreased $24.9 million, or 2.7%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. We record the amount of those reimbursements as revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expense, which we record as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Total airline expense

 

$

909,795

 

$

934,709

 

$

(24,914

)

(2.7

)%

Less: Fuel expense

 

153,544

 

161,408

 

(7,864

)

(4.9

)%

Less: Engine overhaul reimbursement from major partners

 

40,160

 

48,642

 

(8,482

)

(17.4

)%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

13,850

 

15,451

 

(1,601

)

(10.4

)%

Total airline expense excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

$

702,241

 

$

709,208

 

$

(6,967

)

(1.0

)%

 

20



Table of Contents

 

Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses decreased $7.0 million, or 1.0%, during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The percentage decrease in total airline expenses excluding fuel and engine overhauls, was different than the percentage increase in passenger revenues, excluding fuel and engine overhaul reimbursements from major partners due to factors described above.

 

Other expenses, net.  Other expenses, net decreased $2.0 million during the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Our other expenses for the three months ended June 30, 2012 primarily consisted of earnings and losses attributable to our investments in TRIP and Air Mekong, which we account for under the equity method of accounting. The increase in other expenses for the quarter ended June 30, 2012, compared to the quarter ended June 30, 2011, was due primarily to our recognition of our portion of the losses incurred by TRIP and Air Mekong.

 

As a subsequent event, on July 12, 2012, we sold our interest in TRIP for a price of $42 million.  The purchase price is scheduled to be paid in three installments over a two-year period and may be accelerated upon the occurrence of certain conditions identified in the purchase agreement.  As part of the sale transaction, we also received an option to acquire 15.38% of the ownership in Trip Investimentos Ltda., the purchaser of our TRIP shares.  The option has an initial exercise price per share, the exercise price escalates annually at a specified rate and we can exercise the option, in our discretion, at any time between the forth and the sixth anniversaries of our receipt of the required installment payments from Trip Investimentos Ltda., under the purchase agreement.

 

Income Taxes Expense. Our effective tax rate for the three months ended June 30, 2012  was higher than the federal statutory rate of 35%, primarily because we incurred expenses with limited tax deductibility relative to our pre-tax income for the three-month period, which was lower than we had previously estimated.  We also incurred state income taxes, shich contributed to a higher effective tax rate.  Our annual effective tax rate for the three months ended June 30, 2011 varied from the federal statutory rate of 35% , primarily as a result of lower pre-tax income for 2011 than we had estimated. The variance also reflected a proportionate increase in expenses with limited tax deductibility relative to our pre-tax income for the year ended December 31, 2011.

 

Net Income.  Primarily due to factors described above, net income increased to $17.0 million, or $0.33 per diluted share, for the three months ended June 30, 2012, compared to $1.6 million, or $0.03 per diluted share, for the three months ended June 30, 2011.

 

Six Months Ended June 30, 2012 and 2011

 

Our Business Segments

 

For the six months ended June 30, 2012, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet (which reflects the combined operations of Atlantic Southeast and ExpressJet Delaware). On December 31, 2011, we completed the ExpressJet Combination, which ended ExpressJet Delaware’s existence as a separate entity.

 

 

 

2012

 

2011

 

$ Change

 

%
Change

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Operating Revenue

 

$

1,004,046

 

$

992,944

 

$

11,102

 

1.1

%

ExpressJet Operating Revenues

 

849,074

 

800,956

 

48,118

 

6.0

%

Other Operating Revenues

 

5,268

 

5,748

 

(480

)

(8.4

)%

Total Operating Revenues

 

$

1,858,388

 

$

1,799,648

 

$

58,740

 

3.3

%

Airline Expenses:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Expense

 

$

965,318

 

$

962,071

 

$

3,247

 

0.3

%

ExpressJet Expense

 

860,197

 

853,673

 

6,524

 

0.8

%

Other Airline Expense

 

4,777

 

4,910

 

(133

)

(2.7

)%

Total Airline Expense(1)

 

$

1,830,292

 

$

1,820,654

 

$

9,638

 

0.5

%

Segment profit (loss):

 

 

 

 

 

 

 

 

 

SkyWest Airlines segment profit

 

$

38,728

 

$

30,873

 

$

7,855

 

25.4

%

ExpressJet segment loss

 

(11,123

)

(52,717

)

41,594

 

78.9

%

Other profit

 

491

 

838

 

(347

)

(41.4

)%

Total Segment profit (loss)

 

$

28,096

 

$

(21,006

)

$

49,102

 

233.8

%

Interest Income

 

3,996

 

4,080

 

(84

)

(2.1

)%

Other

 

(4,667

)

(3,365

)

(1,302

)

(38.7

)%

Consolidated Income (Loss) before taxes

 

$

27,425

 

$

(20,291

)

$

47,716

 

235.2

%

 

21



Table of Contents

 


(1)                                 Total Airline Expense includes operating expense and interest expense

 

Operational Statistics.  The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.

 

 

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

% Change

 

Revenue passenger miles (000)

 

14,628,486

 

13,994,818

 

4.5

 

Available seat miles (000)

 

18,347,889

 

17,956,917

 

2.2

 

Block hours

 

1,131,305

 

1,114,327

 

1.5

 

Departures

 

701,873

 

687,255

 

2.1

 

Passengers carried

 

28,380,283

 

27,048,352

 

4.9

 

Passenger load factor

 

79.7

%

77.9

%

1.8

Pts

Revenue per available seat mile

 

10.1

¢

10.0

¢

1.0

 

Cost per available seat mile

 

10.0

¢

10.1

¢

(1.0

)

Cost per available seat mile excluding fuel

 

8.4

¢

8.5

¢

(1.2

)

Fuel cost per available seat mile

 

1.6

¢

1.6

¢

0.0

 

Average passenger trip length (miles)

 

515

 

517

 

(0.4

)

 

Revenues.  Operating revenues increased $58.7 million, or 3.3%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. For financial reporting purposes, we record these reimbursements as operating revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expenses as incurred. We also record those engine overhaul reimbursements as operating revenue. The following table summarizes the amount of fuel and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Passenger revenues

 

$

1,822,989

 

$

1,764,166

 

$

58,823

 

3.3

%

Less: Fuel reimbursement from major partners

 

253,585

 

236,088

 

17,497

 

7.4

%

Less: Engine overhaul reimbursement from major partners

 

89,307

 

86,575

 

2,732

 

3.2

%

Passenger revenue excluding fuel and engine overhauls reimbursements

 

$

1,480,097

 

$

1,441,503

 

$

38,594

 

2.7

%

 

Passenger revenues.  Passenger revenues increased $58.8 million, or 3.3%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. Our passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, increased $38.6 million, or 2.7%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The increase in passenger revenues, excluding fuel and engine overhaul reimbursements, was primarily due to an increase in block hours of 1.5% during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.  In addition, our passenger revenues for the six months ended June 30, 2012 were higher than our passenger revenues for the six months ended June 30, 2011, primarily due to our receipt of higher incentive payments, favorable settlements with our major partners and contractual inflation increases in our flying contracts.

 

Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Cents Per

 

Cents Per

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

ASM

 

ASM

 

Aircraft fuel

 

$

300,994

 

$

288,149

 

$

12,845

 

4.5

%

1.6

 

1.6

 

Salaries, wages and benefits

 

581,490

 

576,273

 

5,217

 

0.9

%

3.2

 

3.2

 

Aircraft maintenance, materials and repairs

 

346,786

 

339,573

 

7,213

 

2.1

%

1.9

 

1.9

 

Aircraft rentals

 

168,846

 

174,494

 

(5,648

)

(3.2

)%

0.9

 

1.0

 

Depreciation and amortization

 

128,497

 

126,890

 

1,607

 

1.3

%

0.7

 

0.7

 

Station rentals and landing fees

 

88,187

 

84,948

 

3,239

 

3.8

%

0.5

 

0.5

 

Ground handling services

 

64,930

 

69,728

 

(4,798

)

(6.9

)%

0.4

 

0.4

 

Merger and integration-related costs

 

 

2,395

 

(2,395

)

(100.0

)%

 

 

Other

 

111,395

 

117,932

 

(6,537

)

(5.5

)%

0.6

 

0.6

 

Total operating expenses

 

1,791,125

 

1,780,382

 

10,743

 

0.6

%

9.8

 

9.9

 

Interest

 

39,167

 

40,272

 

(1,105

)

(2.7

)%

0.2

 

0.2

 

Total airline expenses

 

$

1,830,292

 

$

1,820,654

 

9,638

 

0.5

%

10.0

 

10.1

 

 

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Fuel.  Fuel costs increased $12.8 million, or 4.5%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The average cost per gallon of fuel increased to $3.53 during the six months ended June 30, 2012, from $3.49 during the six months ended June 30, 2011. The following table summarizes the gallons of fuel we purchased directly, and the change in fuel price per gallon on our fuel expense, for the periods indicated:

 

 

 

For the six months ended June 30,

 

(in thousands, except per gallon amounts)

 

2012

 

2011

 

% Change

 

Fuel gallons purchased

 

85,253

 

82,461

 

3.4

%

Average price per gallon

 

$

3.53

 

$

3.49

 

1.1

%

Fuel expense

 

$

300,994

 

$

288,149

 

4.5

%

 

Salaries Wages and Employee Benefits.  Salaries, wages and employee benefits increased $5.2 million, or 0.9%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The average number of full-time equivalent employees increased 3.7% to 18,821 for the six months ended June 30, 2012, from 18,151 for the six months ended June 30, 2011. The slight increase in labor costs for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was less than the increase in block hour production between the two periods, due primarily to improved scheduling efficiencies and lower acquisition related transition expense incurred during the six months ended June 30, 2012, compared to the six months ended June 30, 2011.

 

Aircraft maintenance, materials and repairs.  Maintenance costs increased $7.2 million, or 2.1%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The following table summarizes the amount of engine overhauls and engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Aircraft maintenance, materials and repairs

 

$

346,786

 

$

339,573

 

$

7,213

 

2.1

%

Less: Engine overhaul reimbursement from major partners

 

89,307

 

86,575

 

2,732

 

3.2

%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

31,465

 

30,060

 

1,405

 

4.7

%

Aircraft maintenance excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

$

226,014

 

$

222,938

 

$

3,076

 

1.4

%

 

Aircraft maintenance expense, excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rates, increased $3.1 million, or 1.4%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The increase in aircraft maintenance expense excluding engine overhaul costs, was due primarily to the increase in aircraft departures and block hours for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

 

We recognize engine maintenance expense on our CRJ200 regional jet engines on an as-incurred basis as maintenance expense. Under the SkyWest Airlines and ExpressJet United Express Agreements, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the SkyWest Airlines and ExpressJet United Express Agreements can have a significant impact on our financial results. During the six months ended June 30, 2012, our CRJ200 engine expense under our SkyWest Airlines and ExpressJet United Express Agreements increased $1.4 million compared to the six months ended June 30, 2011. The increase in CRJ 200 engine overhauls reimbursed at a fixed hourly rate was principally due to fewer scheduled engine maintenance events. We expect a relatively steady reduction in the number of scheduled engine maintenance events after September 30, 2012 compared to the six months ended June 30, 2012.

 

Under our Delta Connection Agreements we are reimbursed for engine overhaul costs by Delta at the time the maintenance event occurs. Under our Continental Express Agreement, we are also reimbursed for actual engine overhaul costs by Continental at the time the expense is incurred. Such reimbursements are reflected as passenger revenue in our consolidated statements of operations and comprehensive loss.

 

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Table of Contents

 

Aircraft rentals.  Aircraft rentals decreased $5.6 million, or 3.2%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The decrease was primarily due to aircraft lease renewals at lower rates subsequent to July 1, 2011.

 

Depreciation and amortization.  Depreciation and amortization expense increased $1.6 million, or 1.3%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011.  The increase in depreciation expense was primarily due to the acquisition of four CRJ700s between July 1, 2011 and June 30, 2012  that were financed through long-term debt.

 

Station rentals and landing fees.  Station rentals and landing fees expense increased $3.2 million, or 3.8%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The increase in station rentals and landing fees expense was primarily due to increase in departures for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

 

Ground handling service.  Ground handling service expense decreased $4.8 million, or 6.9%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The decrease in ground handling service expense was primarily due to the termination of SkyWest Airlines’ AirTran code share agreement during the three months ended September 30, 2011.

 

Acquisition-related costs.  During the six months ended June 30, 2011, we incurred $2.4 million of direct severance, legal and advisor fees associated with Atlantic Southeast’s acquisition of ExpressJet Delaware in November 2010. We did not incur comparable expenses during the six months ended June 30, 2012.

 

Other expenses.  Other expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, decreased $6.5 million, or 5.5%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The decrease in other expenses was primarily due to the reduction in property tax expense due to refunds received during the six months ended June 30, 2012.

 

Total Airline Expenses.  Total airline expenses (consisting of total operating and interest expenses) increased $9.6 million, or 0.5%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. We record the amount of those reimbursements as revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expense, which we record as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Total airline expense

 

$

1,830,292

 

$

1,820,654

 

$

9,638

 

0.5

%

Less: Fuel expense

 

300,994

 

288,149

 

12,845

 

4.5

%

Less: Engine overhaul reimbursement from major partners

 

89,307

 

86,575

 

2,732

 

3.2

%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

31,465

 

30,060

 

1,405

 

4.7

%

Total airline expense excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

$

1,408,526

 

$

1,415,870

 

$

(7,344

)

(0.5

)%

 

Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses decreased $7.3 million, or 0.5%, during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The percentage decrease in total airline expenses excluding fuel and engine overhauls, was different than the percentage increase in passenger revenues, excluding fuel and engine overhaul reimbursements from major partners due to factors described above.

 

Other Expenses, net.  Other expenses, net increased $1.3 million during the six months ended June 30, 2012, compared to the six months ended June 30, 2011. Other expenses primarily consist of earnings and losses from our investments in TRIP and Air Mekong, which we account for under the equity method of accounting. The increase in other expenses was due primarily to our recognition of our portion of the losses incurred by TRIP and Air Mekong.

 

As a subsequent event, on July 12, 2012, we sold our interest in TRIP for a price of $42 million.  The purchase price is scheduled to be paid in three installments over a two-year period and may be accelerated upon occurrence of certain conditions identified in the purchase agreement.  As part of the sale transaction, we also received an option to acquire 15.38% of the ownership in Trip Investimentos Ltda., the purchaser of our TRIP shares.  The option has an initial exercise price per share, the exercise price

 

24



Table of Contents

 

escalates annually at a specified rate and we can exercise the option, in our discretion, at any time between the fourth and sixth anniversaries or our receipt of the required installment payments from Trip Investimentos Ltda.,  under the purchase agreement.

 

Income Taxes Expense. Our effective tax rate for the six months ended June 30, 2012 was higher than the federal statutory rate of 35%, primarily because we incurredexpenses with limited tax deductibility relative to our pre-tax income for the six-month period, which was lower than we had previously estimated.  We also incurred state income taxes, which contributed to a higher effective tax rate.  Our annual effective tax rate for the six months ended June 30, 2011 varied from the federal statutory rate of 35%, primarily as a result of lower pre-tax income for 2011 than we had estimated. The variance also reflected a proportionate increase in expenses with limited tax deductibility relative to our pre-tax income for the year ended December 31, 2011.

 

Net Income (loss).  Primarily due to factors described above, we had net income of $16.3 million, or $0.32 per diluted share, for the six months ended June 30, 2012, compared to net loss of $9.5 million, or ($0.18) per diluted share, for the six months ended June 30, 2011.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2012 and 2011 and total cash  and marketable securities position as of June 30, 2012 and December 31, 2011 (in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Net cash provided by operating activities

 

$

109,347

 

$

51,324

 

$

58,023

 

113.1

%

Net cash provided by (used in) investing  activities

 

(42,828

)

96,812

 

(136,640

)

(144.2

)%

Net cash used in financing  activities

 

(87,331

)

(121,343

)

34,012

 

28.0

%

 

 

 

June 30, 2012

 

December 31,
2011

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

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