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 September 30, 2014

 

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 October 29, 2014

Common stock, no par value

 

51,179,324

 

 

 


 

 


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 September 30, 2014 (unaudited) and December 31, 2013

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2014 and 2013

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II

OTHER INFORMATION:

33

 

Item 1.

Legal Proceedings

33

 

Item 1A.

Risk Factors

33

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

Item 6.

Exhibits

33

 

 

Signature

34

 

 

 

 

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

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(unaudited)

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

151,393

 

$

170,636

 

Marketable securities

 

392,690

 

487,239

 

Restricted cash

 

11,582

 

12,219

 

Income tax receivable

 

 

840

 

Receivables, net

 

92,662

 

111,186

 

Inventories, net

 

150,133

 

138,094

 

Prepaid aircraft rents

 

381,046

 

360,781

 

Deferred tax assets

 

132,789

 

156,050

 

Other current assets

 

24,798

 

27,392

 

Total current assets

 

1,337,093

 

1,464,437

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Aircraft and rotable spares

 

4,504,659

 

4,080,886

 

Deposits on aircraft

 

40,000

 

40,000

 

Buildings and ground equipment

 

283,350

 

279,965

 

 

 

4,828,009

 

4,400,851

 

Less-accumulated depreciation and amortization

 

(1,869,304

)

(1,749,058

)

Total property and equipment, net

 

2,958,705

 

2,651,793

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Intangible assets, net

 

13,311

 

14,998

 

Other assets

 

88,523

 

101,991

 

Total other assets

 

101,834

 

116,989

 

Total assets

 

$

4,397,632

 

$

4,233,219

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt

 

$

202,067

 

$

177,389

 

Accounts payable

 

252,180

 

245,518

 

Accrued salaries, wages and benefits

 

133,744

 

133,002

 

Accrued aircraft rents

 

2,688

 

7,492

 

Taxes other than income taxes

 

23,477

 

19,626

 

Other current liabilities

 

45,755

 

37,437

 

 

 

 

 

 

 

Total current liabilities

 

659,911

 

620,464

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

47,730

 

76,305

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

1,467,506

 

1,293,179

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

718,719

 

727,358

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

74,696

 

80,974

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

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

 

 

 

Common stock, no par value, 120,000,000 shares authorized; 78,089,208 and 77,322,304 shares issued, respectively

 

624,810

 

618,511

 

Retained earnings

 

1,195,351

 

1,197,819

 

Treasury stock, at cost, 26,765,386 and 26,095,636 shares, respectively

 

(391,364

)

(382,950

)

Accumulated other comprehensive income

 

273

 

1,559

 

Total stockholders’ equity

 

1,429,070

 

1,434,939

 

Total liabilities and stockholders’ equity

 

$

4,397,632

 

$

4,233,219

 

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Passenger

 

$

815,867

 

$

836,890

 

$

2,372,054

 

$

2,448,883

 

Ground handling and other

 

18,766

 

13,850

 

51,538

 

44,474

 

Total operating revenues

 

834,633

 

850,740

 

2,423,592

 

2,493,357

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

315,766

 

306,887

 

944,253

 

904,625

 

Aircraft maintenance, materials and repairs

 

159,920

 

176,822

 

509,905

 

515,506

 

Aircraft rentals

 

72,899

 

80,928

 

232,682

 

245,330

 

Depreciation and amortization

 

65,822

 

61,135

 

192,389

 

183,309

 

Aircraft fuel

 

49,177

 

49,656

 

154,420

 

146,139

 

Ground handling services

 

31,114

 

30,541

 

100,446

 

98,235

 

Station rentals and landing fees

 

12,290

 

29,473

 

36,729

 

100,559

 

 

 

 

 

 

 

 

 

 

 

Special charges (see Note J)

 

 

 

4,713

 

 

Other operating expenses

 

68,565

 

59,124

 

203,507

 

177,363

 

Total operating expenses

 

775,553

 

794,566

 

2,379,044

 

2,371,066

 

OPERATING INCOME

 

59,080

 

56,174

 

44,548

 

122,291

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

2,549

 

567

 

3,608

 

3,164

 

Interest expense

 

(16,883

)

(16,999

)

(48,697

)

(52,490

)

Other, net

 

23,598

 

4,625

 

20,709

 

10,477

 

Total other income (expense), net

 

9,264

 

(11,807

)

(24,380

)

(38,849

)

INCOME BEFORE INCOME TAXES

 

68,344

 

44,367

 

20,168

 

83,442

 

PROVISION FOR INCOME TAXES

 

27,006

 

17,973

 

16,455

 

33,094

 

NET INCOME

 

$

41,338

 

$

26,394

 

$

3,713

 

$

50,348

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.81

 

$

0.51

 

$

0.07

 

$

0.97

 

DILUTED EARNINGS PER SHARE

 

$

0.79

 

$

0.50

 

$

0.07

 

$

0.96

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

51,322

 

51,881

 

51,324

 

51,841

 

Diluted

 

52,036

 

52,610

 

51,562

 

52,551

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.04

 

$

0.04

 

$

0.12

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

Net income

 

$

41,338

 

$

26,394

 

$

3,713

 

$

50,348

 

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

 

(1,130

)

67

 

(1,130

)

67

 

Net unrealized appreciation (depreciation) on marketable securities, net of taxes

 

(222

)

363

 

(157

)

(137

)

TOTAL COMPREHENSIVE INCOME

 

$

39,986

 

$

26,824

 

$

2,426

 

$

50,278

 

 

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)

 

 

 

Nine Months Ended
September 30

 

 

 

2014

 

2013

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

186,369

 

$

251,406

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of marketable securities

 

(198,690

)

(328,442

)

Sales of marketable securities

 

293,056

 

443,950

 

Proceeds from the sale of equipment

 

3,468

 

270

 

Proceeds received from sale of Trip Linhas Aereas stock

 

17,237

 

16,658

 

Acquisition of property and equipment:

 

 

 

 

 

Aircraft and rotable spare parts

 

(479,451

)

(70,246

)

Deposits on aircraft

 

 

(35,629

)

Buildings and ground equipment

 

(16,017

)

(8,847

)

Increase in other assets

 

(12,218

)

(3,710

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

(392,615

)

14,004

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

323,665

 

 

Principal payments on long-term debt

 

(124,660

)

(117,850

)

Tax benefit (deficiency) from exercise of common stock options

 

(1,245

)

(150

)

Net proceeds from issuance of common stock

 

3,831

 

4,510

 

Purchase of treasury stock

 

(8,414

)

(11,739

)

Payment of cash dividends

 

(6,174

)

(6,207

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

187,003

 

(131,436

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(19,243

)

133,974

 

Cash and cash equivalents at beginning of period

 

170,636

 

133,772

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

151,393

 

$

267,746

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest, net of capitalized amounts

 

$

46,757

 

$

50,479

 

Income taxes

 

$

485

 

$

2,509

 

 

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

 

Basis of Presentation

 

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, 2013.  The results of operations for the three and nine-months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

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 likely differ, and may differ materially, from those estimates and assumptions.

 

Effective December 31, 2011, the Company’s subsidiary, ExpressJet Airlines, Inc., a Delaware corporation, was merged into the Company’s subsidiary, Atlantic Southeast Airlines, Inc., a Utah corporation, with the surviving corporation named ExpressJet Airlines, Inc. (the “ExpressJet Combination”).  In these condensed consolidated financial statements, “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.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee to vest in an award upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The Company does not believe ASU 2014-12 will have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. Our management is currently evaluating the anticipated impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.

 

In April 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20.  The standard is effective in the first quarter of 2015, and the impact to the consolidated financial statements is not expected to be material.

 

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Note B — Passenger and Ground Handling Revenue

 

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”), US Airways Group, Inc. (“US Airways”), American Airlines, Inc. (“American”) 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. Other ancillary revenues commonly associated with airlines such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits are retained by the Company’s major airline partners on flights that the Company operates under its code-share agreements.

 

In the event that the contractual rates under the Company’s flying 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.

 

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.

 

In several of the Company’s contractual agreements with its major partners, the Company is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in those agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period covered by those agreements, the Company calculates the incentives achieved during that period and recognizes revenue accordingly.

 

The following table summarizes the significant provisions of each flying agreement the Company has executed with its major partners:

 

Delta Connection Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly
by major partner

 

Performance
Incentive
Structure

 

Payment Structure

SkyWest Airlines Delta Connection Agreement

 

·        CRJ 200 - 36

·        CRJ 700 - 19

·        CRJ 900 – 32

 

·        The contract expires on an individual aircraft basis beginning in 2014

 

·        The final aircraft expires in 2022

 

·        The weighted average remaining term of the aircraft under contract is 5.3 years

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Engine Maintenance

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        No financial performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

 

 

 

 

 

 

 

 

 

 

ExpressJet Delta Connection Agreement

 

·        CRJ 200 – 57

·        CRJ 700 - 41

·        CRJ 900 – 28

 

·        The contract expires on an individual aircraft basis beginning in 2014

 

·        Fuel

 

·        Engine Maintenance

 

 

·        Performance based financial incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

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Table of Contents

 

 

 

 

 

 

·        The final aircraft expires in 2022

 

·        The weighted average remaining term of the aircraft under contract is 4.1 years

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SkyWest Airlines  Prorate Agreement

 

·        EMB 120 – 7

·        CRJ 200 – 10

 

 

·        Terminable upon 120 days’ notice

 

·        None

 

·        None

 

·        Pro-rata sharing of the passenger fare revenue

 

 

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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 SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi-year rate reset provisions that became operative in 2010 and resets each fifth year thereafter. 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. SkyWest Airlines and ExpressJet have agreed with Delta on contractual rates that are effective through December 31, 2015.

 

United Express Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly by major
partner

 

Performance
Incentive Structure

 

Payment Structure

SkyWest Airlines United Express Agreement

 

·        CRJ 200 - 61

·        CRJ 700 - 70

·        EMB 120 – 9

·        E175 – 14

 

·        The contract expires on an individual aircraft basis beginning in 2015

 

·        The final aircraft expires in 2026

 

·        The weighted average remaining term of the aircraft under contract is 3.2  years

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

 

 

 

 

 

 

 

 

 

 

Atlantic Southeast United Express Agreement

 

·        CRJ 200 - 14

 

·        Terminates 2015

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

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Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly by major
partner

 

Performance
Incentive Structure

 

Payment Structure

ExpressJet Delaware United Express Agreement

 

·        ERJ 135 - 9

·        ERJ 145 - 234

 

·        The contract expires on an individual aircraft basis beginning in 2014

 

·        The final aircraft expires in 2020

 

·        The weighted average remaining term of the aircraft under contract is 3.2 years

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Engine Maintenance

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives or penalties

 

·        Rate per block hour, per departure and per aircraft under contract

 

 

 

 

 

 

 

 

 

 

 

SkyWest Airlines United Express Prorate Agreement

 

·        CRJ200 - 21

·        EMB 120 - 20

 

·        Terminable upon 120 days’ notice

 

·        None

 

·        None

 

·        Pro-rata sharing of the passenger fare revenue

 

Alaska Capacity Purchase Agreement

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly by major
partner

 

Incentive Structure

 

Payment Structure

SkyWest Airlines Capacity Purchase Agreement

 

·        CRJ 700 - 9

 

·        Terminates 2018

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

US Airways Express Agreement

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly by major
partner

 

Incentive Structure

 

Payment Structure

SkyWest Airlines US Airways Express Agreement

 

·        CRJ 200 - 10

·        CRJ 900 - 4

 

·        Terminates 2015

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

 

 

 

 

 

 

 

 

 

 

SkyWest Airlines US Airways Express Prorate Agreement

 

·        CRJ 200 - 1

 

·        Terminable upon 120 days’ notice

 

·        None

 

·        None

 

·        Pro-rata sharing of the passenger fare revenue

 

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Table of Contents

 

American Agreement

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

 

Pass through costs
or costs paid
directly by major
partner

 

Incentive Structure

 

Payment Structure

SkyWest Airlines American Capacity Purchase Agreement

 

·        CRJ 200 - 12

 

·        Terminates 2016

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

 

 

 

 

 

 

 

 

 

 

SkyWest Airlines American Prorate Agreement

 

·        CRJ 200 - 4

 

·        Terminable upon 120 days’ notice

 

·        None

 

·        None

 

·        Pro-rata sharing of the passenger fare revenue

 

 

 

 

 

 

 

 

 

 

 

ExpressJet American Capacity Purchase Agreement

 

·        CRJ 200 - 11

 

·        Terminates 2017

 

·        Upon expiration, aircraft may be renewed or extended

 

·        Fuel

 

·        Landing fees, Station Rents, De-ice

 

·        Insurance

 

·        Performance based incentives

 

·        Rate per block hour, per departure and per aircraft under contract

 

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 flying agreements with its major partners, contract modifications resulting from contract re-negotiations, the Company’s ability to earn incentive payments contemplated under the Company’s flying 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 nine months ended September 30, 2014, the Company granted options to purchase 250,175 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 nine months ended September 30, 2014.

 

Expected annual dividend rate

 

1.33

%

Risk-free interest rate

 

1.50

%

Average expected life (years)

 

5.8

 

Expected volatility of common stock

 

0.427

 

Forfeiture rate

 

0.0

%

Weighted average fair value of option grants

 

$

4.41

 

 

During the nine months ended September 30, 2014, the Company granted 306,704 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 share of common stock. Additionally, during the nine months ended September 30, 2014, the Company granted 44,631 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 $12.10 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 September 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $0.9 million and $1.1 million, respectively. During the nine months ended September 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $3.7 million and $3.6 million, respectively.

 

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Note D — Net Income Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income 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 per common share.  During the three and nine months ended September 30, 2014, options to acquire 2,942,000 and 3,055,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the three and nine months ended September 30, 2013, options to acquire 3,164,000 and 3,300,000 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Unaudited)

 

(Unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

Net Income

 

$

41,338

 

$

26,394

 

$

3,713

 

$

50,348

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

51,322

 

51,881

 

51,324

 

51,841

 

Effect of outstanding share-based awards

 

714

 

729

 

238

 

710

 

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

 

52,036

 

52,610

 

51,562

 

52,551

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.81

 

$

0.51

 

$

0.07

 

$

0.97

 

Diluted earnings per share

 

$

0.79

 

$

0.50

 

$

0.07

 

$

0.96

 

 

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. The following represents the Company’s segment data for the three months ended September 30, 2014 and 2013 (in thousands).

 

 

 

Three months ended September 30, 2014

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

$

493,606

 

$

340,553

 

$

474

 

$

834,633

 

Operating expense

 

430,024

 

345,606

 

(77

)

775,553

 

Depreciation and amortization expense

 

43,853

 

21,969

 

 

65,822

 

Interest expense

 

11,492

 

4,692

 

699

 

16,883

 

Segment profit (loss)(1)

 

52,090

 

(9,745

)

(148

)

42,197

 

Identifiable intangible assets, other than goodwill(2)

 

 

13,311

 

 

13,311

 

Total assets (2)

 

2,825,243

 

1,572,389

 

 

4,397,632

 

Capital expenditures (including non-cash)

 

186,678

 

6,152

 

 

192,830

 

 

 

 

Three months ended September 30, 2013

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

$

468,517

 

$

381,749

 

$

474

 

$

850,740

 

Operating expense

 

409,320

 

382,583

 

2,663

 

794,566

 

Depreciation and amortization expense

 

38,845

 

22,290

 

 

61,135

 

Interest expense

 

10,812

 

5,274

 

913

 

16,999

 

Segment profit (loss)(1)

 

48,385

 

(6,108

)

(3,102

)

39,175

 

Identifiable intangible assets, other than goodwill(3)

 

 

15,560

 

 

15,560

 

Total assets(3)

 

2,711,009

 

1,554,385

 

 

4,265,394

 

Capital expenditures (including non-cash)

 

21,977

 

8,891

 

 

30,868

 

 

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(1)                                 Segment profit (loss) is equal to operating income less interest expense

(2)                                 As of September 30, 2014

(3)                                 As of September 30, 2013

 

The following represents the Company’s segment data for the nine-month periods ended September 30, 2014 and 2013 (in thousands).

 

 

 

Nine months ended September 30, 2014

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

$

1,416,149

 

$

1,006,021

 

$

1,422

 

$

2,423,592

 

Operating expense

 

1,289,218

 

1,089,923

 

(97

)

2,379,044

 

Depreciation and amortization expense

 

125,811

 

66,578

 

 

192,389

 

Interest expense

 

32,180

 

14,309

 

2,208

 

48,697

 

Segment profit (loss)(1)

 

94,751

 

(98,211

)

(689

)

(4,149

)

Identifiable intangible assets, excluding goodwill(2)

 

 

13,311

 

 

13,311

 

Total assets(2)

 

2,825,243

 

1,572,389

 

 

4,397,632

 

Capital expenditures (including non-cash)

 

487,711

 

18,653

 

 

506,364

 

 

 

 

Nine months ended September 30, 2013

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Other

 

Consolidated

 

Operating revenues

 

$

1,380,930

 

$

1,109,085

 

$

3,342

 

$

2,493,357

 

Operating expense

 

1,236,003

 

1,128,757

 

6,306

 

2,371,066

 

Depreciation and amortization expense

 

116,309

 

67,000

 

 

183,309

 

Interest expense

 

33,535

 

16,099

 

2,856

 

52,490

 

Segment profit (loss)(1)

 

111,392

 

(35,771

)

(5,820

)

69,801

 

Identifiable intangible assets, other than goodwill(3)

 

 

15,560

 

 

15,560

 

Total assets(3)

 

2,711,009

 

1,554,385

 

 

4,265,394

 

Capital expenditures (including non-cash)

 

66,339

 

28,242

 

 

94,581

 

 


(1)                                 Segment profit (loss) is equal to operating income less interest expense

(2)                                 As of September 30, 2014

(3)                                 As of September 30, 2013

 

Note F — Commitments and Contingencies

 

As of September 30, 2014, the Company leased 544 aircraft, as well as airport facilities, office space and various other property and equipment under non-cancelable operating leases which are generally on a long-term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property.  The Company expects that, in the normal course of business, such operating leases that expire may be renewed or replaced by other leases.  The following table summarizes future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2014 (in thousands):

 

September through December 2014

 

$

96,439

 

2015

 

341,184

 

2016

 

267,626

 

2017

 

197,709

 

2018

 

153,301

 

Thereafter

 

571,781

 

 

 

$

1,628,040

 

 

During the nine months ended September 30, 2014, the Company took delivery of fourteen Embraer E175 dual-class jet aircraft (“E175s”) and initially financed the aircraft through the issuance of $323.7 million of long-term debt.  The debt associated with the E175 aircraft has a fifteen year term with a variable interest rate and is secured by the E175 aircraft.

 

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Note G — Fair Value Measurements

 

The Company holds certain assets that are required to be measured at fair value in accordance with 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. The Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities and are classified as Level 2 investments.

 

 

 

 

 

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 September 30, 2014 and December 31, 2013, 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):

 

 

 

Fair Value Measurements as of September 30, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

392,565

 

$

 

$

392,565

 

$

 

Asset backed securities

 

125

 

 

125

 

 

 

 

392,690

 

 

392,690

 

 

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash

 

162,975

 

162,975

 

 

 

Other Assets

 

2,272

(a)

 

 

2,272

 

Total Assets Measured at Fair Value

 

$

557,937

 

$

162,975

 

$

392,690

 

$

2,272

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

487,049

 

$

 

$

487,049

 

$

 

Asset backed securities

 

190

 

 

190

 

 

 

 

487,239

 

 

487,239

 

 

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash

 

182,855

 

182,855

 

 

 

Other Assets

 

2,245

(a)

 

 

2,245

 

Total Assets Measured at Fair Value

 

$

672,339

 

$

182,855

 

$

487,239

 

$

2,245

 

 


(a)         Comprised of auction rate securities which are reflected in “Other assets” in the Company’s unaudited condensed consolidated balance sheets

 

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 nine months ended September 30, 2014.  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 September 30, 2014 (in thousands):

 

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Table of Contents

 

Fair Value Measurements Using Significant Unobservable Inputs

 

(Level 3)

 

 

 

Auction Rate
Securities

 

Balance at January 1, 2014

 

$

2,245

 

Total realized and unrealized gains or (losses)

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

27

 

Transferred out

 

 

Settlements

 

 

Balance at September 30, 2014

 

$

2,272

 

 

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 $1,706.3 million as of September 30, 2014, as compared to the carrying amount of $1,669.6 million as of September 30, 2014. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and approximated $1,509.2 million as of December 31, 2014, as compared to the carrying amount of $1,470.6 million as of December 31, 2013.

 

Note H — Income Taxes

 

The income tax provision for the nine months ended September 30, 2014 included a valuation allowance of $5.5 million for previously generated state net operating loss benefits specific to ExpressJet that are scheduled to expire before the benefits are anticipated to be utilized.  The Company did not record a valuation allowance for the three months ended September 30, 2014.  The effective tax rate for the nine months ended September 30, 2014 is higher than the expected federal and state statutory rate due to the valuation allowance recorded during the nine months ended September 30, 2014 and a disproportionate increase in expense with limited tax deductibility relative to the Company’s pre-tax income for the nine months ended September 30, 2014.

 

Note I — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of September 30, 2014, management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. During the three months ended September 30, 2014, SkyWest Airlines and ExpressJet executed a confidential settlement agreement with Delta resolving all disputed issues of a complaint filed in the Georgia State Court of Fulton County.  The complaint related to the allocation of liability for certain irregular operation expenses paid by SkyWest Airlines and ExpressJet to their passengers and vendors under certain situations (“IROPs”).  The financial impact of the settlement approximated the amount accrued by the Company prior to the settlement agreement.  The parties also reached an agreement on the allocation of IROP liabilities for the remaining term of the Delta Connection Agreements, which the Company’s management does not believe will have a negative impact to the Company’s financial results.

 

Note J — Special charges

 

In connection with the acquisition of ExpressJet Delaware, the Company acquired an aircraft paint facility in Saltillo, Mexico, and recorded a foreign value added tax (VAT) asset attributable to the paint facility.  The realizability of the VAT asset is dependent upon the Company’s future utilization of the facility.  During the nine months ended September 30, 2014, the Company wrote-off the VAT asset value of $2.5 million as the Company was no longer using the paint facility. Additionally, during the nine months ended September 30, 2014, the Company wrote down the value of the paint facility by $2.2 million.  The Company did not record any special charges during the three months ended September 30, 2014.  On October 1, 2014, the Company sold the paint facility to a third party for an amount that approximated the net book value of the paint facility.

 

Note K — Investment in Trip Linhas Aereas S.A.

 

On July 12, 2012, the Company sold its 20% interest in Trip Linhas Aereas S.A., a Brazilian regional airline (“TRIP”), for a price of $42 million. The purchase price was scheduled to be paid in three installments payments with the final payment due in July 2014. As part of the transaction, the Company also received an option to acquire 15.38% of the ownership in Trip Investimentos Ltda. (“Trip Investimentos”), the purchaser of the Company’s TRIP shares. The Company recorded the fair value of the option as additional consideration received in the transaction. The option has an initial exercise price per share equal to the price paid by Trip Investimentos to acquire the TRIP shares from the Company. The exercise price escalates annually at a specified rate and the

 

16


 


Table of Contents

 

Company can exercise the option, at its discretion, between the second and fourth anniversaries of the Company’s receipt of the final required installment payment from Trip Investimentos. The option has been written down to a nominal amount based on the Company’s assessment of its current fair value.  Under the terms of the agreement, Trip Investimentos could not transfer the TRIP shares until the final installment payment has been made, which prevented the Company from recognizing the gain on the transaction until the final payment was received and the Trip Investimentos’ restriction to transfer the shares was removed.

 

During the three months ended September 30, 2014, the Company received the final installment payment attributable to the sale of its TRIP shares, which removed Trip Investimentos’ restriction to transfer the TRIP shares. Accordingly, during the three months ended September 30, 2014 the Company recorded a gain of $24.9 million in other income as a result of the completed transaction. Additionally, under the terms of the purchase agreement, the Company received $2.1 million of interest payments from Trip Investimentos, which the Company recorded as interest income during the three months ended September 30, 2014.

 

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 nine month periods ended September 30, 2014 and 2013. Also discussed is our financial position as of September 30, 2014 and December 31, 2013. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine-month periods ended September 30, 2014, including the notes thereto, appearing elsewhere in this Report.  This discussion and analysis contains forward-looking statements. Please refer to the following section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of the uncertainties, risks and assumptions associated with these statements.

 

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 our outlook, the revenue environment, our contract relationships and our expected financial performance.  These statements include, but are not limited to, statements about our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines and ExpressJet, our 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 our existing beliefs about present and future events outside of our 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, our actual results will likely vary, and may vary materially, from those anticipated, estimated, projected or intended.

 

There may be other factors not identified above of which we are 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.  We assume 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 September 30, 2014, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 3,700 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of September 30, 2014, we operated a combined fleet of 751 aircraft consisting of the following:

 

 

 

CRJ200

 

ERJ145

 

ERJ135

 

CRJ700

 

CRJ900

 

E175

 

EMB120

 

Total

 

United

 

96

 

234

 

9

 

70

 

 

14

 

29

 

452

 

Delta

 

110

 

 

 

60

 

60

 

 

7

 

237

 

American

 

27

 

 

 

 

 

 

 

27

 

US Airways

 

11

 

 

 

 

4

 

 

 

15

 

Alaska

 

 

 

 

9

 

 

 

 

9

 

Subleased to an un-affiliated entity

 

2

 

 

 

 

 

 

 

2

 

Unassigned (a)

 

2

 

 

 

 

 

 

7

 

9

 

Total

 

248

 

234

 

9

 

139

 

64

 

14

 

43

 

751

 

 

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Table of Contents

 


(a)         As of September 30, 2014, these aircraft were in transition between flying contracts with major partners.

 

For the nine months ended September 30, 2014, approximately 61.2% of our aggregate capacity was operated for United, approximately 31.9% was operated for Delta, approximately 3.1% was operated for American, approximately 2.1% was operated for Alaska and approximately 1.7% was operated for US Airways.

 

Under a fixed-fee flying arrangement, the major airline generally pays the regional airline a fixed fee for each departure, with additional incentives based on completion of flights, on-time performance and baggage handling performance. In addition, under the fixed-fee arrangement, the major airline bears the financial risk of changes in the price of fuel and other agreed-upon costs that are directly reimbursed by the major partner or paid directly by the major partner. Regional airlines benefit from a fixed-fee arrangement because they are sheltered from many of the elements that could cause volatility in airline financial performance, including variations in ticket prices, passenger loads and fuel prices. However, regional airlines in fixed-fee arrangements do not benefit from positive trends in ticket prices, ancillary revenue, passenger loads or fuel prices.

 

Under our fixed-fee arrangements, three compensation components have a significant impact on comparability of revenue and operating expense for the periods presented in this Report. One compensation component is the reimbursement of fuel expense, which is a directly-reimbursed expense under all of our fixed-fee arrangements. If we purchase fuel directly from vendors, our major partners reimburse us for fuel expense incurred under each respective fixed-fee contract, and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed-fee arrangements during a particular period will impact the comparability of our fuel expense and our passenger revenue during the period equally, with no impact on our operating income.

 

The second compensation component is the reimbursement of landing fees and station rents, which is a directly-reimbursed expense under all of our fixed-fee arrangements. Our major partners reimburse us for landing fees and station rent expense incurred under each of our existing fixed-fee contracts, and we record such reimbursements as passenger revenue. Over the past few years, some of our major airline partners have paid an increased volume of landing fees and station rents directly to airport authorities on flights we operated under our fixed-fee contracts, which impacts the comparability of revenue and operating expense for the periods presented in this Report.

 

The third compensation component is the compensation we receive for engine maintenance under our fixed-fee arrangements. Under our United, American, US Airways and Alaska fixed-fee contracts, a portion of our compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to compensate us for engine maintenance costs (“Fixed-Rate Engine Contracts”). Under the compensation structure for our Delta Connection and ExpressJet United CPA flying contracts, our major partner reimburses us for engine maintenance expense when the expense is incurred (“Directly-Reimbursed Engine Contracts”). We use the direct- expense method of accounting for our Bombardier CRJ200 Regional Jet (“CRJ200”) engine overhaul costs and, accordingly, we recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis. Under the direct-expense method, the maintenance liability is recorded when the maintenance services are performed (“CRJ200 Engine Overhaul Expense”).

 

Because we use the direct-expense method of accounting for our CRJ200 engine expense, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine maintenance events and related expense we incur each reporting period under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our operating income for the presented reporting periods.

 

Because we recognize revenue at the same amount and in the same period when we incur engine maintenance expense on engines operating under our Directly- Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods.

 

We have an agreement with a third-party vendor to provide long-term engine maintenance covering scheduled and unscheduled repairs for engines on our Bombardier CRJ700 Regional Jets (“CRJ700s”) operating under our Fixed-Rate Engine Contracts (the “Power by the Hour Agreement”). Under the terms of the Power by the Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power by the Hour Agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. Because we record engine maintenance expense based on the fixed hourly rate pursuant to the Power by the Hour Agreement on our CRJ700s operating under our Fixed-Rate Engine Contracts, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods. The table below summarizes how we are compensated by our major partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.

 

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Table of Contents

 

Flying 
Contract

 

Compensation of Engine Expense

 

Expense Recognition

SkyWest Delta Connection

 

Directly-Reimbursed Engine Contracts

 

Direct Expense Method

ExpressJet Delta Connection

 

Directly-Reimbursed Engine Contracts

 

Direct Expense Method

SkyWest United Express (CRJ200)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

SkyWest United Express (CRJ700)

 

Fixed-Rate Engine Contracts

 

Power by the Hour Agreement

SkyWest United Express (E175)

 

Fixed-Rate Engine Contracts

 

Power by the Hour Agreement

SkyWest United Express (EMB120)

 

Fixed-Rate Engine Contracts

 

Deferral Method

ExpressJet United Express (CRJ200)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

ExpressJet United CPA (ERJ145)

 

Directly-Reimbursed Engine Contracts

 

Power by the Hour Agreement

Alaska Agreement

 

Fixed-Rate Engine Contracts

 

Power by the Hour Agreement

American Eagle Agreement (CRJ200)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

US Airways Express (CRJ200 / CRJ900)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

 

Historically, multiple contractual relationships with major airlines have enabled us to reduce our 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 nine months ended September 30, 2014, contract flying revenue and pro-rate revenue represented approximately 88.1% and 11.9%, 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 completed block hours, flight departures and other operating measures.

 

Third Quarter Summary

 

We had total operating revenues of $834.6 million for the three months ended September 30, 2014, a 1.9% decrease, compared to total operating revenues of $850.7 million for the three months ended September 30, 2013. We generated net income of $41.3 million, or $0.79 per diluted share, for the three months ended September 30, 2014, compared to net income of $26.4 million or $0.50 per diluted share, for the three months ended September 30, 2013.

 

The significant items affecting our financial performance during the three months ended September 30, 2014 are summarized below:

 

Revenue

 

Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses.  Excluding the impact of the expenses incurred for fuel, landing fees, station rents and engine maintenance expense and associated reimbursements from our major partners, our passenger revenues increased from $755.4 million for the three months ended September 30, 2013 to $763.0 million for the three months ended September 30, 2014, or by $7.6 million or 1.0%.  This increase was primarily due to certain contact renewals and modifications and operation of the additional E175 aircraft during the three months ended September 30, 2014 compared to the corresponding period in 2013.  Although we had a reduction in block hour production during the three months ended September 30, 2014 compared to the corresponding period in 2013, the decrease in block hour production was significantly concentrated in the ExpressJet ERJ145 flying contract with United, which has a lower revenue per block hour than our other flying contracts as both fuel and aircraft lease payments are paid directly by United under the ExpressJet ERJ145 contract and we do not record revenue for expenses paid directly to vendors by our major partners.

 

Operating and Other Expense Related Items

 

Salaries, wages and employee benefits increased $8.9 million, or 2.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in salaries, wages and employee benefits expenses was primarily due to increased pilot costs associated with the implementation of the Airline Safety and Pilot Training Improvement Act of 2009 (the “Improvement Act”), which had a negative effect on pilot scheduling and work hours.  We anticipate that the negative impact of compliance with the Improvement Act will continue in future periods.  The increase in salaries, wages and employee benefits was also due to additional hiring and training associated with the deliveries of our E175 aircraft.

 

Other operating expenses, which primarily consist of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $9.4 million, or 16.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in other expenses during the three months ended September 30, 2014 was primarily due to an increase in crew lodging expenses resulting from our compliance with the Improvement Act. During the three months ended September 30, 2014, we received the final installment payment from Trip Investimentos related to our sale of TRIP shares.  Because Trip Investimentos was restricted from transferring the shares until we received the final payment, we did not record the gain on the

 

19



Table of Contents

 

transaction until the final payment was received.  During the three months ended September 30, 2014 we recorded a gain of $24.9 million in other income as a result of the completed transaction. Additionally, under the terms of the purchase agreement, we received $2.1 million of interest payments from Trip Investimentos, which was recorded as interest income during the three months ended September 30, 2014.

 

Other Items

 

On May 16, 2013, SkyWest Airlines and United entered into a United Express Agreement to operate 40 new E175  aircraft. Under the agreement, we acquired the first fourteen of these aircraft during the nine months ended September 30, 2014, with deliveries scheduled to continue to mid-2015. The United Express Agreement has a 12-year term for each of the aircraft subject to the agreement, and other terms which are generally consistent with the SkyWest Airlines United Express Agreement.  During the three months ended September 30, 2014, SkyWest Airlines began passenger service with six additional E175s to be operated under the United Express Agreement.  Twelve of the fourteen aircraft acquired have been placed into service as of September 30, 2014.

 

Under the ExpressJet Delaware United Express Agreement, 16 ERJ145s were removed from contract due to scheduled contract expirations during the nine months ended September 30, 2014 and the aircraft are being returned to United.  Additionally, there are ten ERJ145s and eight ERJ145s with scheduled contract expirations for the month of December 2014 and January 2015, respectively.  Nine ERJ135s are scheduled for removal in early 2015.  We do not currently anticipate that we will reach an agreement with United to extend the flying contract term with these aircraft and ExpressJet will return these aircraft to United.  We do not anticipate the termination of these aircraft will have a material negative effect on our financial results.

 

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2013, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2013.  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 likely differ, and could differ materially, from such estimates.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee to vest in an award upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award, but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not believe the implementation of ASU 2014-12 will have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. Our management is currently evaluating the impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.

 

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20.  The standard is effective in the first quarter of 2015.  We do not believe the implementation of the standard will have a material impact to the consolidated financial statements.

 

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Table of Contents

 

Results of Operations

 

Our Business Segments

 

For the three months ended September 30, 2014 and 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet.

 

 

 

For the three months ended September 30,
(dollar amounts in thousands)

 

 

 

2014

 

2013

 

$ Change

 

%
Change

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Operating Revenues

 

$

493,606

 

$

468,517

 

$

25,089

 

5.4

%

ExpressJet Operating Revenues

 

340,553

 

381,749

 

(41,196

)

(10.8

)%

Other Operating Revenues

 

474

 

474

 

 

0.0

%

Total Operating Revenues

 

$

834,633

 

$

850,740

 

$

(16,107

)

(1.9

)%

Airline Expenses:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Expense

 

$

441,516

 

$

420,132

 

$

21,384

 

5.1

%

ExpressJet Expense

 

350,298

 

387,857

 

(37,559

)

(9.7

)%

Other Airline Expense

 

622

 

3,576

 

(2,954

)

(82.6

)%

Total Airline Expense(1)

 

$

792,436

 

$

811,565

 

$

(19,129

)

(2.4

)%

Segment profit (loss):

 

 

 

 

 

 

 

 

 

SkyWest Airlines segment profit

 

$

52,090

 

$

48,385

 

$

3,705

 

7.7

%

ExpressJet segment loss

 

(9,745

)

(6,108

)

(3,637

)

59.5

%

Other profit (loss)

 

(148

)

(3,102

)

2,954

 

(95.2

)%

Total Segment profit

 

$

42,197

 

$

39,175

 

$

3,022

 

7.7

%

Interest Income

 

2,549

 

567

 

1,982

 

349.6

%

Other

 

23,598

 

4,625

 

18,973

 

410.2

%

Consolidated Income before taxes

 

$

68,344

 

$

44,367

 

$

23,977

 

54.0

%

 


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

 

SkyWest Airlines Segment Profit.  SkyWest Airlines segment profit increased $3.7 million, or 7.7%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in the SkyWest Airlines segment profit was due primarily to the following factors:

 

·                  Excluding the directly reimbursed expenses associated with our contract flying, which is reflected in operating revenues, SkyWest Airlines operating revenue increased by $31.9 million or 7.9 % during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase was primarily due to increased government subsidies applicable to certain routes we operated, improvements in the provisions of certain of our flying contracts and due to the operation of twelve new E175s placed into service by September 30, 2014.

 

·                  SkyWest Airlines salaries, wages and employee benefits increased $9.7 million or 6.8% during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, primarily due to direct labor costs associated with the E175 operations and increased expenses associated with the implementation of the Improvement Act, which had a negative effect on pilot scheduling and work hours. Additionally, pilot training costs increased due to preparation for upcoming E175 deliveries during the three months ended September 30, 2014 compared to the comparable period of 2013.

 

·                  Excluding the directly reimbursed expenses associated with our contract flying and salaries wages and employee benefits, SkyWest Airlines’ remaining airline expense increased by $18.5 million, or 8.8%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  The increase was primarily attributable to an increase in direct operating costs associated with the additional E175 operations and additional crew hotel expenses due to crew scheduling resulting from the Improvement Act.

 

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Table of Contents

 

ExpressJet Segment Loss.  ExpressJet segment loss increased $3.6 million, or 59.5%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in ExpressJet segment loss was due primarily to the following factors:

 

·                  Excluding the directly reimbursed expenses associated with our contract flying, which is reflected in operating revenues, ExpressJet Airlines operating revenue decreased by $18.9 million, or 6.8%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  The decrease in operating revenue was primarily due to a reduction in the ExpressJet fleet size and related decrease in block hour production of approximately 27,000 block hours, or 7.7%, from the three months ended September 30, 2013 to the three months ended September 30, 2014.  Block hour production is a significant driver of revenue in our flying contracts with our major partners.

 

·                  Excluding the directly reimbursed expenses associated with our contract flying, ExpressJet’s other airline expenses decreased $15.3 million, or 5.4%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  The decrease was primarily related to the reduction in ExpressJet fleet size, related block hour production and direct operating expenses.  The ExpressJet airline expenses for the three months ended September 30, 2014 were negatively influenced by inefficiencies associated with the implementation of the Improvement Act, which negatively impacted crew wages and crew lodging expenses.

 

Three Months Ended September 30, 2014 and 2013

 

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

 

 

 

For the three months ended September 30,

 

 

 

2014

 

2013

 

% Change

 

Revenue passenger miles (000)

 

8,342,394

 

8,384,129

 

(0.5

)%

Available seat miles (“ASMs”) (000)

 

10,037,729

 

10,256,027

 

(2.1

)%

Block hours

 

590,534

 

613,821

 

(3.8

)%

Departures

 

355,273

 

378,063

 

(6.0

)%

Passengers carried

 

15,630,168

 

15,929,930

 

(1.9

)%

Passenger load factor

 

83.1

%

81.7

%

1.4

Pts

Revenue per available seat mile

 

8.3

¢

8.3

¢

0.0

%

Cost per available seat mile

 

7.9

¢

7.9

¢

0.0

%

Cost per available seat mile excluding fuel

 

7.4

¢

7.4

¢

0.0

%

Fuel cost per available seat mile

 

0.5

¢

0.5

¢

0.0

%

Average passenger trip length (miles)

 

534

 

526

 

1.5

%

 

Revenues.  Total operating revenues decreased $16.1 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. The most significant reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Our fuel expense, landing fees, station rents and directly-reimbursed engine expense decreased by $28.6 million, during the three months ended September 30, 2014, from the three months ended September 30, 2013, due primarily to our major partners paying an increased volume of landing fees and station rents directly to airport authorities on flights we operated under our code-share agreements. The following table summarizes the amount of fuel, landing fees, station rents and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended September 30,

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Passenger revenues

 

$

815,867

 

$

836,890

 

$

(21,023

)

(2.5

)%

Less: Fuel reimbursement from major partners

 

16,666

 

22,527

 

(5,861

)

(26.0

)%

Less: Landing fee and station rent reimbursements from major partners

 

4,699

 

25,021

 

(20,322

)

(81.2

)%

Less: Engine overhaul reimbursement from major partners

 

31,470

 

33,922

 

(2,452

)

(7.2

)%

Passenger revenue excluding fuel, landing fee, station rent and engine overhaul reimbursements

 

$

763,032

 

$

755,420

 

$

7,612

 

1.0

%

 

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Table of Contents

 

Passenger revenues.  Passenger revenues decreased $21.0 million, or 2.5%, during three months ended September 30, 2014, compared to the three months ended September 30, 2013. Our passenger revenues, excluding fuel, landing fee, station rent and engine overhaul reimbursements from major partners, increased $7.6 million, or 1.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Passenger revenues excluding fuel, landing fee, station rent and engine overhaul reimbursements increased primarily due to an increase in E175 operations and certain contract renewals and modifications at SkyWest Airlines, partially offset by a reduction in the ERJ145 fleet and related revenue at ExpressJet.

 

Ground handling and other.  Total ground handling and other revenues increased $4.9 million, or 35.5%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Revenue attributed to ground handling services for our aircraft is reflected in our consolidated statements of comprehensive income under the heading “Operating Revenues—Passenger” and revenue attributed to ground handling services we provide for third-party aircraft and government subsidies we receive related to our pro-rate operations is reflected in our consolidated statements of comprehensive income under the heading “Operating Revenues—Ground handling and other.” The increase in ground handling and other revenues we generated during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily related to an increase in government subsidies we received for providing service to certain locations under our pro-rate operations.

 

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 three months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Cents Per

 

Cents Per

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

ASM

 

ASM

 

Aircraft fuel

 

$

49,177

 

$

49,656

 

$

(479

)

(1.0

)%

0.5

 

0.5

 

Salaries, wages and benefits

 

315,766

 

306,887

 

8,879

 

2.9

%

3.1

 

3.0

 

Aircraft maintenance, materials and repairs

 

159,920

 

176,822

 

(16,902

)

(9.6

)%

1.6

 

1.7

 

Aircraft rentals

 

72,899

 

80,928

 

(8,029

)

(9.9

)%

0.7

 

0.8

 

Depreciation and amortization

 

65,822

 

61,135

 

4,687

 

7.7

%

0.7

 

0.6

 

Ground handling services

 

31,114

 

30,541

 

573

 

1.9

%

0.3

 

0.3

 

Station rentals and landing fees

 

12,290

 

29,473

 

(17,183

)

(58.3

)%

0.1

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special charges

 

 

 

 

 

 

 

Other operating expenses

 

68,565

 

59,124

 

9,441

 

16.0

%

0.7

 

0.5

 

Total operating expenses

 

775,553

 

794,566

 

(19,013

)

(2.4

)%

7.7

 

7.7

 

Interest

 

16,883

 

16,999

 

(116

)

(0.7

)%

0.2

 

0.2

 

Total airline expenses

 

$

792,436

 

$

811,565

 

$

(19,129

)

(2.4

)%

7.9

 

7.9

 

 

FuelAircraft fuel expense decreased $.5 million, or 1.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  The decrease in fuel cost was primarily due to a reduction in fuel expense associated with our contract flying due to the major airline partners purchasing more fuel directly from vendors, primarily offset by an increase in fuel used in our increased pro-rate flying operations during the three months ended September 30, 2014, compared to the prior period of 2013.  The average fuel cost per gallon was $3.42 and $3.48 for the three month periods ended September 30, 2014 and 2013, respectively.

 

Salaries wages and employee benefits.  Salaries, wages and employee benefits expense increased $8.9 million, or 2.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in salaries, wages and employee benefits was primarily due the implementation of the Improvement Act (and associated regulations) which had a negative effect on pilot scheduling and work hours and resulted in an increase in crew costs.  The increase was also due, in part, to additional E175 operations and training costs associated with the commencement of our E175 flight operations.

 

Aircraft maintenance, materials and repairs.  Aircraft maintenance, materials and repair expense decreased $16.9 million, or 9.6%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. 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).

 

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Table of Contents

 

 

 

For the three months ended September 30,

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Aircraft maintenance, materials and repairs

 

$

159,920

 

$

176,822

 

$

(16,902

)

(9.6

)%

Less: Engine overhaul reimbursed from major partners

 

31,470

 

33,922

 

(2,452

)

(7.2

)%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

6,830

 

9,069

 

(2,239

)

(24.7

)%

Other aircraft maintenance, materials and repairs

 

$

121,620

 

$

133,831

 

$

(12,211

)

(9.1

)%

 

Other aircraft maintenance, materials and repair expense decreased $12.2 million, or 9.1%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in aircraft maintenance expense excluding engine overhaul costs, for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily due to a decrease in the number of scheduled maintenance events and aircraft parts replacement.

 

We recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis as maintenance expense. Under our Fixed-Rate Engine Contracts, 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 Fixed-Rate Engine Contracts can have a significant impact on our financial results. During the three months ended September 30, 2014, our CRJ200 engine expense under our Fixed-Rate Engine Contracts decreased $2.2 million compared to the three months ended September 30, 2013. The decrease in CRJ200 engine overhauls reimbursed under our Fixed-Rate Engine Contracts was principally due to fewer scheduled engine maintenance events.

 

Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our major partners at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amounts and during the same periods we recognized the corresponding expenses in our consolidated statements of comprehensive income.

 

Aircraft rentals.  Aircraft rentals decreased $8.0 million, or 9.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease was primarily due to a decline in aircraft lease renewals subsequent to October 1, 2013.

 

Depreciation and amortization.  Depreciation and amortization expense increased $4.7 million, or 7.7%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  The increase in depreciation and amortization expense was primarily due to our purchase of new and used aircraft and spare engines since October 1, 2013.

 

Ground handling services.  Ground handling service expense increased $0.6 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in ground handling service expense was primarily due to SkyWest Airlines outsourcing customer service and ramp functions at several pro-rate stations.

 

Station rentals and landing fees.  Station rentals and landing fees expense decreased $17.2 million, or 58.3%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in station rentals and landing fees expense was primarily due to our major partners paying an increased amount of station rents and landing fees directly to the applicable airports related to our contract flying arrangements.

 

Other operating expenses.  Other operating expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $9.4 million, or 16.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in other expenses during the three months ended September 30, 2014 was primarily due to additional crew lodging expenses attributable to the requirements of the Improvement Act.   Other operating expenses increased due to additional pro-rate flying.

 

Total airline expenses.  Total airline expenses (consisting of total operating and interest expenses) decreased $19.1 million, or 2.4%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. 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 our Directly-Reimbursed Engine Contracts, 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 September 30,

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Total airline expense

 

$

792,436

 

$

811,565

 

$

(19,129

)

(2.4

)%

Less: Fuel expense

 

49,177

 

49,656

 

(479

)

(1.0

)%

Less: Engine overhaul reimbursement from major partners

 

31,470

 

33,922

 

(2,452

)

(7.2

)%

Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate

 

6,830

 

9,069

 

(2,239

)

(24.7

)%

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

 

$

704,959

 

$

718,918

 

$

(13,959

)

(1.9

)%

 

24



Table of Contents

 

Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses decreased $14.0 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. 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 primarily to the factors described above.

 

Other income (expense), net.  Other income, net, increased $21.1 million during the three months ended September 30, 2014, compared to the three months ended September 30, 2013.  We recorded a gain of $24.9 million recorded during the three months ended September 30, 2014 resulting from the sale of TRIP stock and recorded interest income of $2.1 million received in conjunction with the TRIP transaction.  During the three months ended September 30, 2013, we recorded a gain of $5.0 million associated with the sale of our investment in Mekong Aviation Joint Stock Company, an airline that operated in Vietnam (Air Mekong”).

 

Net income.  Primarily due to factors described above, we generated a net income of $41.3 million, or $0.79 per diluted share, for the three months ended September 30, 2014, compared to net income of $26.4 million, or $0.50 per diluted share, for the three months ended September 30, 2013.

 

Nine Months Ended September 30, 2014 and 2013

 

Our Business Segments

 

For the nine months ended September 30, 2014 and 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet.

 

 

 

For the nine months ended September 30,
(dollar amounts in thousands)

 

 

 

2014

 

2013

 

$ Change

 

%
Change

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

Operating Revenues:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Operating Revenue

 

$

1,416,149

 

$

1,380,930

 

$

35,219

 

2.6

%

ExpressJet Operating Revenues

 

1,006,021

 

1,109,085

 

(103,064

)

(9.3

)%

Other Operating Revenues

 

1,422

 

3,342

 

(1,920

)

(57.5

)%

Total Operating Revenues

 

$

2,423,592

 

$

2,493,357

 

$

(69,765

)

(2.8

)%

Airline Expenses:

 

 

 

 

 

 

 

 

 

SkyWest Airlines Expense

 

$

1,321,398

 

$

1,269,538

 

$

51,860

 

4.1

%

ExpressJet Expense

 

1,104,232

 

1,144,857

 

(40,625

)

(3.5

)%

Other Airline Expense

 

2,111

 

9,161

 

(7,050

)

(77.0

)%

Total Airline Expense(1)

 

$

2,427,741

 

$

2,423,556

 

$

4,185

 

0.2

%

Segment profit (loss):

 

 

 

 

 

 

 

 

 

SkyWest Airlines segment profit

 

$

94,751

 

$

111,392

 

$

(16,641

)

(14.9

)%

ExpressJet segment loss

 

(98,211

)

(35,772

)

(62,439

)

174.5

%

Other profit (l