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, 2015

 

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  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 July 31, 2015

Common stock, no par value

 

50,602,727

 

 

 



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, 2015 (unaudited) and December 31, 2014

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2015 and 2014

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

14

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

Item 4.

Controls and Procedures

32

 

 

 

 

PART II

OTHER INFORMATION:

 

 

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

34

 

 

Signature

35

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer

 

Exhibit 31.2

Certification of Chief Financial Officer

 

Exhibit 32.1

Certification of Chief Executive Officer

 

Exhibit 32.2

Certification of Chief Financial 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,
2015

 

December 31,
2014

 

 

 

(unaudited)

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

171,165

 

$

132,275

 

Marketable securities

 

322,050

 

415,273

 

Restricted cash

 

11,584

 

11,582

 

Income tax receivable

 

1,378

 

2,779

 

Receivables, net

 

71,827

 

83,099

 

Inventories, net

 

139,671

 

137,452

 

Prepaid aircraft rents

 

437,193

 

397,850

 

Deferred tax assets

 

151,377

 

94,385

 

Other current assets

 

24,840

 

16,308

 

Total current assets

 

1,331,085

 

1,291,003

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Aircraft and rotable spares

 

5,060,487

 

4,608,663

 

Deposits on aircraft

 

37,700

 

40,000

 

Buildings and ground equipment

 

282,606

 

274,900

 

 

 

5,380,793

 

4,923,563

 

Less-accumulated depreciation and amortization

 

(1,975,389

)

(1,902,375

)

Total property and equipment, net

 

3,405,404

 

3,021,188

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Intangible assets, net

 

11,623

 

12,748

 

Other assets

 

90,442

 

84,989

 

Total other assets

 

102,065

 

97,737

 

Total assets

 

$

4,838,554

 

$

4,409,928

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt

 

$

263,725

 

$

211,821

 

Accounts payable

 

278,019

 

270,097

 

Accrued salaries, wages and benefits

 

138,302

 

138,902

 

Accrued aircraft rents

 

3,530

 

3,303

 

Taxes other than income taxes

 

20,598

 

17,457

 

Other current liabilities

 

40,544

 

42,775

 

Total current liabilities

 

744,718

 

684,355

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

48,603

 

49,625

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

1,800,452

 

1,533,990

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

754,195

 

669,385

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

67,373

 

72,227

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

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

 

 

 

Common stock, no par value, 120,000,000 shares authorized; 78,496,807 and 77,951,411 shares issued, respectively

 

631,078

 

626,521

 

Retained earnings

 

1,202,437

 

1,165,478

 

Treasury stock, at cost, 28,015,386 and 26,765,386 shares, respectively

 

(410,090

)

(391,364

)

Accumulated other comprehensive (loss)

 

(212

)

(289

)

Total stockholders’ equity

 

1,423,213

 

1,400,346

 

Total liabilities and stockholders’ equity

 

$

4,838,554

 

$

4,409,928

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

SKYWEST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Passenger

 

$

773,107

 

$

800,548

 

$

1,515,605

 

$

1,556,187

 

Ground handling and other

 

15,310

 

16,026

 

33,210

 

32,773

 

Total operating revenues

 

788,417

 

816,574

 

1,548,815

 

1,588,960

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

298,573

 

310,844

 

601,418

 

628,486

 

Aircraft maintenance, materials and repairs

 

156,319

 

171,722

 

314,576

 

349,984

 

Aircraft rentals

 

68,442

 

79,449

 

138,854

 

159,783

 

Depreciation and amortization

 

64,659

 

64,252

 

130,350

 

126,567

 

Aircraft fuel

 

31,192

 

58,018

 

58,492

 

105,243

 

Ground handling services

 

20,117

 

32,314

 

44,089

 

69,332

 

Special charges

 

 

4,713

 

 

4,713

 

Other operating expenses

 

79,183

 

82,018

 

157,028

 

159,382

 

Total operating expenses

 

718,485

 

803,330

 

1,444,807

 

1,603,490

 

OPERATING INCOME (LOSS)

 

69,932

 

13,244

 

104,008

 

(14,530

)

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

697

 

511

 

1,336

 

1,060

 

Interest expense

 

(18,081

)

(16,138

)

(36,546

)

(31,814

)

Other, net

 

 

(2,618

)

 

(2,891

)

Total other expense, net

 

(17,384

)

(18,245

)

(35,210

)

(33,645

)

INCOME (LOSS) BEFORE INCOME TAXES

 

52,548

 

(5,001

)

68,798

 

(48,175

)

PROVISION (BENEFIT) FOR INCOME TAXES

 

21,073

 

9,736

 

27,703

 

(10,551

)

NET INCOME (LOSS)

 

$

31,475

 

$

(14,737

)

$

41,095

 

$

(37,624

)

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

$

0.61

 

$

(0.29

)

$

0.80

 

$

(0.73

)

DILUTED EARNINGS (LOSS) PER SHARE

 

$

0.61

 

$

(0.29

)

$

0.79

 

$

(0.73

)

Weighted average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

51,357

 

51,183

 

51,407

 

51,310

 

Diluted

 

51,971

 

51,183

 

52,182

 

51,310

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

Net income (Loss)

 

$

31,475

 

$

(14,737

)

$

41,095

 

$

(37,624

)

 

 

 

 

 

 

 

 

 

 

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

 

(223

)

42

 

78

 

65

 

TOTAL COMPREHENSIVE INCOME (LOSS)

 

$

31,252

 

$

(14,695

)

$

41,173

 

$

(37,559

)

 

See accompanying notes to condensed consolidated financial statements

 

5



Table of Contents

 

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

 

 

Six Months Ended
June 30

 

 

 

2015

 

2014

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

168,807

 

$

32,489

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of marketable securities

 

(337,375

)

(112,664

)

Sales of marketable securities

 

430,688

 

215,005

 

Proceeds from the sale of equipment

 

5,719

 

3

 

Acquisition of property and equipment:

 

 

 

 

 

Aircraft and rotable spare parts

 

(503,317

)

(297,758

)

Buildings and ground equipment

 

(16,842

)

(11,644

)

Return of deposits on aircraft

 

2,300

 

 

Increase in other assets

 

(8,325

)

(13,563

)

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

(427,152

)

(220,621

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

432,568

 

187,389

 

Principal payments on long-term debt

 

(114,202

)

(88,236

)

Tax deficiency from exercise of common stock options

 

(2,012

)

(1,266

)

Net proceeds from issuance of common stock

 

3,721

 

1,933

 

Purchase of treasury stock

 

(18,726

)

(8,414

)

Payment of cash dividends

 

(4,114

)

(4,119

)

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

297,235

 

87,287

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

38,890

 

(100,845

)

Cash and cash equivalents at beginning of period

 

132,275

 

170,636

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

171,165

 

$

69,791

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest, net of capitalized amounts

 

$

37,530

 

$

33,103

 

Income taxes

 

$

613

 

$

382

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

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, 2014.  The results of operations for the three and six-month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

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.

 

Note B — Passenger and Ground Handling Revenue

 

The Company recognizes passenger and ground handling revenues when the service is provided under its code-share agreements.  Ground handling revenue primarily consists of customer service functions such as gate and ramp agent services at applicable airports where the Company provides such services to other airlines.  Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements, “contract flying” or “capacity purchase agreements”) with Delta Airlines Inc. (“Delta”), United Airlines Inc. (“United”), US Airways Group, Inc. (“US Airways”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”), the major airline generally pays the Company a fixed-fee for each departure, flight or block time incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as fuel expense and landing fee expenses. Under the fixed-fee arrangements, revenue is earned when each flight is completed.

 

Under the Company’s revenue-sharing arrangements (referred to as “revenue-sharing” or “pro-rate” arrangements), the major airline and the Company negotiate a passenger fare proration formula when a passenger has a connecting flight operated by both the Company and the major airline partner, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for the portion of their trip operated by the Company, and the major airline retains the ticket revenues for the other portion of their trip on the major airline. Revenue is recognized under the Company’s pro-rate flying agreements when each flight is completed based upon the portion of the pro-rate passenger fare the Company anticipates that it will receive for each completed flight.

 

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 the 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 agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or

 

7



Table of Contents

 

semi-annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly.

 

The following table summarizes the significant provisions of each code share agreement the Company has with each major partner:

 

Delta Connection Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

SkyWest Airlines
Delta Connection Agreement (fixed-fee arrangement)

 

·        CRJ 200—48

·        CRJ 700—19

·        CRJ 900—32

 

·        The contract expires on an individual aircraft basis with expirations commencing in 2015

·        The final aircraft expires in 2022

·        The average remaining term of the aircraft under contract is 4.3 years

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

ExpressJet Delta
Connection Agreement (fixed-fee arrangement)

 

·        CRJ 200—59

·        CRJ 700—41

·        CRJ 900—28

 

·        The contract expires on an individual aircraft basis with expirations commencing in 2015

·        The final aircraft expires in 2022

·        The average remaining term of the aircraft under contract is 3.7 years

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

SkyWest Airlines
Pro-rate Agreement (revenue-sharing arrangement)

 

·        CRJ 200—13

 

·        Terminates with 30-day notice

 

United Express Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

SkyWest Airlines
United Express Agreements (fixed-fee arrangement)

 

·        CRJ 200—49

·        CRJ 700—70

·        E175—35

 

·        The contract expires on an individual aircraft basis with expirations commencing in 2015

·        The final aircraft expires in 2026

·        The average remaining term of the aircraft under contract is 3.8 years

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

ExpressJet United
ERJ Agreement (fixed-fee arrangement)

 

·        ERJ 135—5

·        ERJ 145—180

 

·        The contract expires on an individual aircraft basis with expirations commencing in 2015

·        The final aircraft expires in 2017

·        The average remaining term of the aircraft under contract is 1.5 years

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

SkyWest Airlines
United Express Pro-rate Agreement (revenue-sharing arrangement)

 

·        CRJ 200—23

 

·        Terminates with 120-day notice

 

8



Table of Contents

 

Alaska Capacity Purchase Agreement

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

SkyWest Airlines
Alaska Agreement (fixed-fee arrangement)

 

·        CRJ 700—9

·        E175—3

 

·        CRJ 700 Terminates 2018

E175 Terminates 2027

·        Upon expiration, aircraft may be renewed or extended

 

US Airways Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

SkyWest Airlines US
Airways Agreement (fixed-fee arrangement)

 

·        CRJ 200—10

·        CRJ 900—4

 

·        Terminates by the end of 2015

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

SkyWest Airlines US
Airways Pro-rate Agreement (revenue-sharing arrangement)

 

·        CRJ 200—1

 

·        Terminates with 120- day notice

 

American Agreements

 

Agreement

 

Number of
aircraft under
contract

 

Term / Termination
Dates

SkyWest Airlines
American Agreement (fixed-fee arrangement)

 

·        CRJ 200—12

 

·        Terminates 2016

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

SkyWest Airlines American
Pro-rate Agreement (revenue-sharing arrangement)

 

·        CRJ 200—5

 

·        Terminates with 120- day notice

 

 

 

 

 

ExpressJet American
Agreement (fixed-fee arrangement)

 

·        CRJ 200—11

·        ERJ 145—16

 

·        Terminates 2017

·        Upon expiration, aircraft may be renewed or extended

 

 

 

 

 

ExpressJet American Pro-rate
Agreement (revenue-sharing arrangement)

 

·        CRJ 200—3

 

·        Terminates with 120- day notice

 

In June 2015, SkyWest Airlines reached an agreement with Alaska to place eight additional E175 aircraft into service pursuant to the SkyWest Airlines Alaska Agreement, which would result in a total of 15 E175 aircraft under contract with Alaska.

 

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 its major partners, 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 and Stock Repurchases

 

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. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s

 

9



Table of Contents

 

traded stock and other factors.  During the six months ended June 30, 2015, the Company granted options to purchase 261,473 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, 2015.

 

Expected annual dividend rate

 

1.18

%

Risk-free interest rate

 

1.62

%

Average expected life (years)

 

5.7

 

Expected volatility of common stock

 

0.401

 

Forfeiture rate

 

0.0

%

Weighted average fair value of option grants

 

$

4.75

 

 

During the six months ended June 30, 2015, the Company granted 403,917 restricted stock units and 218,493 performance restricted stock units to employees of the Company and its subsidiaries under the 2010 Incentive Plan.  Both the restricted stock and performance 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.  In addition to the three-year vesting period, certain profit metrics of the Company must be met before the recipient will receive any shares of stock attributable to the performance restricted stock units.  Upon vesting, a restricted stock unit and a performance restricted stock unit will be replaced with a share of common stock. Additionally, during the six months ended June 30, 2015, the Company granted 36,950 fully-vested shares of common stock to the Company’s directors.  The fair value of the shares of restricted stock on the date of grant was $13.51 per share.

 

The Company records share-based compensation expense only for those options and restricted and performance 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, 2015 and 2014, the Company recorded pre-tax share-based compensation expense of $1.3 million and $1.1 million, respectively.  During the six months ended June 30, 2015 and 2014, the Company recorded pre-tax share-based compensation expense of $2.8 million and $2.8 million, respectively.

 

The Company repurchased 1.25 million shares of its common stock for $18.7 million during the six months ended June 30, 2015.  The Company repurchased 670,000 shares of its common stock for $8.4 million during the six months ended June 30, 2014.

 

Note D — Net Income (Loss) 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 six months ended June 30, 2015, options to acquire 459,000 and 2,019,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the three and six months ended June 30, 2014, options to acquire 3,279,000 and 3,112,000 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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

(Unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

31,475

 

$

(14,737

)

$

41,095

 

$

(37,624

)

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

51,357

 

51,183

 

51,407

 

51,310

 

Effect of outstanding share-based awards

 

614

 

 

775

 

 

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

 

51,971

 

51,183

 

52,182

 

51,310

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.61

 

$

(0.29

)

$

0.80

 

$

(0.73

)

Diluted earnings (loss) per share

 

$

0.61

 

$

(0.29

)

$

0.79

 

$

(0.73

)

 

10



Table of Contents

 

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 June 30, 2015 and 2014 (in thousands).

 

 

 

Three months ended June 30, 2015

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Corporate /
Consolidating

 

Consolidated

 

Operating revenues

 

$

478,121

 

$

305,092

 

$

5,204

 

$

788,417

 

Operating expense

 

412,244

 

305,590

 

651

 

718,485

 

Depreciation and amortization expense

 

42,716

 

21,681

 

262

 

64,659

 

Interest expense

 

15,440

 

2,641

 

 

18,081

 

Segment profit (loss)(1)

 

50,437

 

(3,139

)

4,553

 

51,851

 

Identifiable intangible assets, other than goodwill

 

 

11,623

 

 

11,623

 

Total assets

 

3,406,620

 

1,431,934

 

 

4,838,554

 

Capital expenditures (including non-cash)

 

246,322

 

7,478

 

 

253,800

 

 

 

 

Three months ended June 30, 2014

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Corporate /
Consolidating

 

Consolidated

 

Operating revenues

 

$

475,501

 

$

340,599

 

$

74

 

$

816,574

 

Operating expense

 

433,551

 

369,891

 

(112

)

803,330

 

Depreciation and amortization expense

 

41,958

 

22,294

 

 

64,252

 

Interest expense

 

10,661

 

4,743

 

734

 

16,138

 

Segment profit (loss)(1)

 

31,289

 

(34,035

)

(148

)

(2,894

)

Identifiable intangible assets, other than goodwill

 

 

13,873

 

 

13,873

 

Total assets

 

2,688,143

 

1,591,698

 

 

4,279,841

 

Capital expenditures (including non-cash)

 

234,986

 

7,374

 

 

242,360

 

 


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

 

The following represents the Company’s segment data for the six-month periods ended June 30, 2015 and 2014 (in thousands).

 

 

 

Six months ended June 30, 2015

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Corporate /
Consolidating

 

Consolidated

 

Operating revenues

 

$

926,191

 

$

613,649

 

$

8,975

 

$

1,548,815

 

Operating expense

 

818,263

 

624,841

 

1,703

 

1,444,807

 

Depreciation and amortization expense

 

86,484

 

43,342

 

524

 

130,350

 

Interest expense

 

29,466

 

7,080

 

 

36,546

 

Segment profit (loss)(1)

 

78,462

 

(18,272

)

7,272

 

67,462

 

Identifiable intangible assets, excluding goodwill

 

 

11,623

 

 

11,623

 

Total assets

 

3,406,620

 

1,431,934

 

 

4,838,554

 

Capital expenditures (including non-cash)

 

508,347

 

14,723

 

 

523,070

 

 

 

 

Six months ended June 30, 2014

 

 

 

SkyWest
Airlines

 

ExpressJet

 

Corporate /
Consolidating

 

Consolidated

 

Operating revenues

 

$

922,543

 

$

665,469

 

$

948

 

$

1,588,960

 

Operating expense

 

859,193

 

744,317

 

(20

)

1,603,490

 

Depreciation and amortization expense

 

81,958

 

44,609

 

 

126,567

 

Interest expense

 

20,687

 

9,618

 

1,509

 

31,814

 

Segment profit (loss)(1)

 

42,663

 

(88,466

)

(541

)

(46,344

)

Identifiable intangible assets, other than goodwill

 

 

13,873

 

 

13,873

 

Total assets

 

2,688,143

 

1,591,698

 

 

4,279,841

 

Capital expenditures (including non-cash)

 

282,842

 

14,666

 

 

297,508

 

 


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

 

11



Table of Contents

 

Note F — Commitments and Contingencies

 

As of June 30, 2015, the Company leased 510 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 will 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 June 30, 2015 (in thousands):

 

July through December 2015

 

$

131,544

 

2016

 

268,307

 

2017

 

201,693

 

2018

 

157,203

 

2019

 

120,257

 

Thereafter

 

453,812

 

 

 

$

1,332,816

 

 

During the three months ended June 30, 2015, the Company took delivery of nine Embraer E175 dual-class jet aircraft (“E175s”) and financed the aircraft through the issuance of $204.5 million of long-term debt.  During the six months ended June 30, 2015, the Company took delivery of 18 E175s and financed the aircraft through the issuance of $407.6 million of long-term debt.  The debt associated with the E175 aircraft delivered during the six months ended June 30, 2015 has a twelve-year term with a fixed annual interest rate ranging from 3.4% to 3.9% and is secured by the 18 E175 aircraft.

 

As of June 30, 2015 and December 31, 2014, the Company had accrued future lease obligations of $2.9 million and $3.8 million, respectively, associated with Embraer Brasilia EMB120 aircraft (“EMB120s”) removed from service.  The lease payments for the EMB120s are scheduled to continue through June 2016.

 

As of June 30, 2015, the Company had a firm purchase commitment for 17 Embraer E175 aircraft with scheduled delivery dates from July 2015 to October 2016.

 

During the three months ended June 30, 2015, the Company borrowed $25 million in debt from a bank.  The debt has a four year term with a fixed annual interest rate of 3.3% with monthly payments and is secured by spare engines.

 

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. 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, 2015 and December 31, 2014, 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 June 30, 2015

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

313,961

 

$

 

$

313,961

 

$

 

Asset backed securities

 

8,089

 

 

8,089

 

 

 

 

322,050

 

 

322,050

 

 

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash

 

182,749

 

182,749

 

 

 

Other Assets

 

2,295

(a)

 

 

2,295

 

Total Assets Measured at Fair Value

 

$

507,094

 

$

182,749

 

$

322,050

 

$

2,295

 

 

12



Table of Contents

 

 

 

Fair Value Measurements as of December 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

410,163

 

$

 

$

410,163

 

$

 

Asset backed securities

 

5,110

 

 

5,110

 

 

 

 

415,273

 

 

415,273

 

 

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash

 

143,857

 

143,857

 

 

 

Other Assets

 

2,309

(a)

 

 

2,309

 

Total Assets Measured at Fair Value

 

$

561,439

 

$

143,857

 

$

415,273

 

$

2,309

 

 


(a)         Comprised of auction rate securities which is 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 six months ended June 30, 2015.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

As of June 30, 2015 and December 31, 2014, the Company classified $322.1 million and $415.3 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year.  As of June 30, 2015 and December 31, 2014, the amortized cost in the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash and auction rate securities recorded as other assets) was $493.4 million and $548.0 million, respectively.  As of June 30, 2015 and December 31, 2014, the fair value of the Company’s total cash and cash equivalents and available for sale securities (excluding restricted cash and auction rate securities recorded as other assets), was $493.2 million and $547.5 million, respectively.

 

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, 2015 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs

 

(Level 3)

 

 

 

Auction Rate
Securities

 

Balance at January 1, 2015

 

$

2,309

 

Total realized and unrealized gains or (losses)

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(14

)

Transferred out

 

 

Settlements

 

 

Balance at June 30, 2015

 

$

2,295

 

 

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 $2,087.1 million as of June 30, 2015, as compared to the carrying amount of $2,064.2 million as of June 30, 2015. The fair value of

 

13



Table of Contents

 

the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and approximated $1,813.1 million as of December 31, 2014, as compared to the carrying amount of $1,745.8 million as of December 31, 2014.

 

Note H — Income Taxes

 

The Company’s estimated annual effective tax rate for the three and six months ended June 30, 2015 varied from the federal statutory rate of 35% primarily due to the provision for state income taxes and the impact of non-deductible crew per diem meal expenses.

 

Note I — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of June 30, 2015, 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.

 

Note J Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (ASU No. 2015-03”). This update amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company’s management is currently evaluating the impact the adoption of ASU No. 2015-03 is anticipated to have on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”   (ASU No. 2014-09”).  Under ASU No. 2014-09, 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. In July 2015, the FASB deferred the effective date to January 1, 2018.  The FASB also proposed permitting early adoption of the standard, but not before January 1, 2017.  Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company’s management is currently evaluating the impact the adoption of ASU No. 2014-09 is anticipated to have on the Company’s consolidated financial statements.

 

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, 2015 and 2014. Also discussed is our financial position as of June 30, 2015 and December 31, 2014. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 2015, 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.

 

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.  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.

 

14



Table of Contents

 

Overview

 

Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of June 30, 2015, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 3,500 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of June 30, 2015, SkyWest Airlines and ExpressJet had a total fleet of 737 aircraft, of which 676 were in scheduled service summarized as follows:

 

 

 

CRJ200

 

ERJ145

 

ERJ135

 

CRJ700

 

CRJ900

 

E175

 

EMB120

 

Total

 

United

 

72

 

180

 

5

 

70

 

 

 

35

 

 

 

362

 

Delta

 

120

 

 

 

 

 

60

 

60

 

 

 

 

 

240

 

American

 

31

 

16

 

 

 

 

 

 

 

 

 

 

 

47

 

US Airways

 

11

 

 

 

 

 

 

 

4

 

 

 

 

 

15

 

Alaska

 

 

 

 

 

 

 

9

 

 

 

3

 

 

 

12

 

Aircraft in scheduled service

 

234

 

196

 

5

 

139

 

64

 

38

 

 

 

676

 

Subleased to an un-affiliated entity

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Unassigned (a)

 

11

 

12

 

4

 

 

 

 

 

 

 

32

 

53

 

Total

 

247

 

208

 

9

 

139

 

64

 

38

 

32

 

737

 

 


(a)         As of June 30, 2015, these aircraft have been removed from service and are in the process for lease returns or are transitioning between flying code share agreements with our major airline partners.

 

For the six months ended June 30, 2015, approximately 58.0% of our aggregate capacity was operated for United, approximately 33.4% was operated for Delta, approximately 4.3% was operated for American, approximately 2.3% was operated for Alaska and approximately 2.0% was operated for US Airways.

 

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 arrangements and our pro-rate flying arrangements. For the six months ended June 30, 2015, contract flying revenue and pro-rate revenue represented approximately 89% and 11%, 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.

 

Second Quarter Summary

 

We had total operating revenues of $788.4 million for the three months ended June 30, 2015, a 3.4% decrease, compared to total operating revenues of $816.6 million for the three months ended June 30, 2014. We had net income of $31.5 million, or $0.61 per diluted share, for the three months ended June 30, 2015, compared to a net loss of $14.7 million or $0.29 per diluted share, for the three months ended June 30, 2014.

 

The significant items affecting our financial performance during the three months ended June 30, 2015 are outlined below:

 

Revenue

 

The number of aircraft we have under contract and the number of actual block hours we incur on completed flights are significant revenue drivers under our fixed-fee arrangements.  We are currently in the process of a fleet transition that involves increasing the number of large dual-class regional jets we operate, including the E175 aircraft, while reducing the number of less-profitable 50-seat regional jets we operate, including a portion of our ERJ145/ERJ135 and CRJ200 aircraft.  Additionally, during the three months ended June 30, 2015, we completed the removal of all EMB120 turboprop aircraft from our scheduled service.  We anticipate our fleet transition will result in net decreases in our total fleet size, block hour production, and total revenue in quarterly year-over-year comparisons at least through 2015.  Our objective in the fleet transition is to improve our profitability through the additional new dual class aircraft placed into service, including the E175 aircraft, while removing aircraft from service that have been operating under less profitable fixed-fee flying contracts.

 

The reduction in our fleet size and the related reduction in our block hour production were the primary drivers for the reduction in our total revenue of $28.2 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.  However, the revenue reduction was partially offset by revenue improvements of approximately $32 million from our

 

15



Table of Contents

 

additional E175 operations, improved contract rates from flying contract renewals and extensions, achieving higher operating performance incentives, and earning approximately $11 million from higher flight completion rates.

 

Operating Income and Operating Expenses

 

Our operating income increased $56.7 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.  The increase in our operating income was primarily due to placement of 30 E175 aircraft into service subsequent to June 30, 2014, higher operational performance incentives earned under our flying contracts and rate increases received under new and extended flying contracts subsequent to June 30, 2014. Our total operating expenses decreased $84.8 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.  This decrease was primarily due to the reduction in our fleet size and a reduction in the related number of departures and completed block hours, improved operating efficiencies, and cost reduction initiatives in maintenance for the comparable period.  Additional details regarding the reduction to our operating expenses are described in more detail in the section of this Report entitled “Results of Operations in this Report.”

 

Fleet activity

 

The following table summarizes our fleet scheduled for service as of December 31, 2014, March 31, 2015 and June 30, 2015:

 

Aircraft in Service

 

December 31, 2014

 

March 31, 2015

 

June 30, 2015

 

CRJ200s

 

242

 

234

 

234

 

CRJ700s

 

139

 

139

 

139

 

CRJ900s

 

64

 

64

 

64

 

ERJ145/135s

 

225

 

215

 

201

 

E175s

 

20

 

29

 

38

 

EMB120s

 

27

 

12

 

 

Total

 

717

 

693

 

676

 

 

Our fleet activity during the six months ended June 30, 2015 is summarized as follows:

 

·                  SkyWest Airlines placed 15 E175 aircraft into service with United

·                  SkyWest Airlines placed three E175 aircraft into service with Alaska

·                  SkyWest Airlines placed five used CRJ200 aircraft into service with Delta (aircraft are leased from Delta)

·                  ExpressJet placed 16 used ERJ145 aircraft into service with American (aircraft are leased from American)

·                  SkyWest Airlines removed 27 EMB120 aircraft from service

·                  ExpressJet removed 40 ERJ145/135 aircraft from service with United

·                  SkyWest Airlines and ExpressJet removed 13 CRJ200 aircraft from service previously operated with various partners.

 

Anticipated significant fleet changes for period between June 30, 2015 and December 31, 2015 is summarized as follows:

 

·                  SkyWest Airlines is scheduled to take delivery of five E175 aircraft for United between July 2015 and August 2015.

·                  SkyWest Airlines is scheduled to take delivery of two E175 aircraft for Alaska between October 2015 and December 2015.

·                  ExpressJet is scheduled to remove 23 ERJ145s/ERJ135s from service with United reducing its ERJ145s/ERJ135s fleet with United to a total of 162 aircraft by December 31, 2015.

·                  ExpressJet is scheduled to remove 6 CRJ200 aircraft from service with Delta by December 31, 2015.

 

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2014, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2014.  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.

 

16



Table of Contents

 

Other Accounting Items

 

Directly reimbursed expenses under our fixed-fee arrangements. Under our fixed-fee arrangements, our major airline partners directly reimburse us for certain operating expenses such as fuel, station rents and landing fees.  When we incur directly-reimbursed expenses under our fixed-fee arrangements, we record the reimbursement as passenger revenue. Thus, the price and volume volatility of directly-reimbursed expenses may impact the comparability of revenue to previous periods and may impact the comparability of operating expenses to previous periods, without impacting the comparability of our operating income to the same periods. Over the past few years, some of our major airline partners have paid for fuel, landing fees and station rents directly to vendors on flights we operated under our fixed-fee arrangements, which has decreased both revenue and operating expenses as compared to previous periods presented in this Report.

 

Reimbursement for engine overhaul expenses under our fixed-fee arrangements. Under certain of our fixed fee arrangements, we are directly reimbursed for engine overhaul costs when incurred (“Directly-Reimbursed Engine Contracts”).  Under our other fixed-fee flying arrangements, we are paid fixed hourly rates intended to cover certain operating expenses, including engine overhaul costs (“Fixed-Rate Engine Contracts”).  Under our Fixed-Rate Engine Contracts, the timing and amount of our engine overhaul expenses may impact the comparability of our operating expenses and operating income as compared to previous periods presented in this Report.

 

Engine maintenance expense. We use the direct-expense method of accounting for our regional jet aircraft engine overhaul costs.  Under this method, the maintenance liability is recorded when the maintenance services are performed.  For a portion of our engines, a third-party vendor provides our long-term engine maintenance services covering scheduled and unscheduled repairs for covered engines.  Under the terms of the vendor agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions (“Power-by-the-Hour” Contracts).  Under our Power-by-the-Hour Contracts, we expense the engine maintenance cost as flight hours are incurred on the engines using the contractual rate set forth in the applicable Power-by-the-Hour Contract.

 

We used the “deferral method” of accounting for our EMB120 engine overhauls, which provides for engine overhaul costs to be capitalized and depreciated to the next estimated overhaul event or to the remaining useful life.  We ceased operating the EMB120 aircraft during the quarter ended June 30, 2015.

 

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.

 

Fixed-fee 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

ExpressJet United (ERJ145)

 

Directly-Reimbursed Engine Contracts

 

Power by the Hour Agreement

Alaska Agreement (CRJ700s)

 

Fixed-Rate Engine Contracts

 

Power by the Hour Agreement

SkyWest American Agreement (CRJ200)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

ExpressJet American Agreement (CRJ200)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

ExpressJet American Agreement (ERJ145)

 

Partner pays directly to vendor

 

Not applicable

US Airways Agreement (CRJ200 / CRJ900)

 

Fixed-Rate Engine Contracts

 

Direct Expense Method

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (ASU No. 2015-03”). This update amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. Our management is currently evaluating the impact the adoption of ASU No. 2015-03 is anticipated to have on our consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”   (ASU No. 2014-09”).  Under ASU No. 2014-09, 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. In July 2015, the FASB deferred the effective date to January 2, 2018.  The FASB also proposed permitting early adoption of the standard, but not before January 2, 2017.  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 the adoption of ASU No. 2014-09 is anticipated to have on our consolidated financial statements.

 

17



Table of Contents

 

Results of Operations

 

Three Months Ended June 30, 2015 and 2014

 

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 June 30,

 

 

 

2015

 

2014

 

% Change

 

Revenue passenger miles (000)

 

7,718,342

 

8,165,616

 

(5.5

)%

Available seat miles (“ASMs”) (000)

 

9,176,581

 

9,736,819

 

(5.8

)%

Block hours

 

531,373

 

579,072

 

(8.2

)%

Departures

 

314,086

 

349,022

 

(10.0

)%

Passengers carried

 

14,665,756

 

15,358,722

 

(4.5

)%

Passenger load factor

 

84.1

%

83.9

%

0.20

Pts

Revenue per available seat mile

 

8.6

¢

8.4

¢

2.4

%

Cost per available seat mile

 

8.0

¢

8.4

¢

(4.8

)%

Cost per available seat mile excluding fuel

 

7.7

¢

7.8

¢

(1.3

)%

Fuel cost per available seat mile

 

0.3

¢

0.6

¢

(50.0

)%

Average passenger trip length (miles)

 

526

 

532

 

(1.1

)%

 

Revenues.  Total operating revenues decreased $28.2 million, or 3.4%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014, primarily due to the reduction in our fleet size and the related reduction in our block hour production.  Our total operating revenue includes passenger revenues, which primarily consist of revenue earned on flights we operate under our fixed-fee and pro-rate arrangements, and airport customer service revenue, including airport counter, gate, and ramp services, on flights we operate under our flying arrangements.  Our total operating revenue also includes ground handling and other revenues, which primarily consist of revenue earned from providing airport counter, gate and ramp services to other airlines on flights operated by other airlines, and  government subsidy revenue we receive for providing flight service to certain locations.

 

Passenger revenues.  Under our fixed-fee flying contracts, we are directly-reimbursed for certain expenses from our major partners and we record such reimbursements as passenger revenue. The price and volume volatility of directly-reimbursed expenses may impact the comparability of revenue to previous periods without impacting the comparability of our operating income to the same periods.  The following table summarizes our passenger revenues less certain directly-reimbursed expenses that impact the comparability for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Passenger revenues

 

$

773,107

 

$

800,548

 

(27,441

)

(3.4

)%

Less: Fuel reimbursement from major partners

 

10,526

 

24,621

 

(14,095

)

(57.2

)%

Less: Landing fee and station rent reimbursements from major partners

 

1,310

 

6,359

 

(5,049

)

(79.4

)%

Less: Engine overhaul reimbursement from major partners

 

27,098

 

29,381

 

(2,283

)

(7.8

)%

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

 

$

734,173

 

$

740,187

 

(6,014

)

(0.8

)%

 

Passenger revenues (excluding fuel, landing fee, station rent and engine overhaul directly-reimbursed expenses from our major partners) decreased $6.0 million, or 0.8%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.   The decrease in passenger revenues (excluding fuel, landing fees, station rents and engine overhaul reimbursements) was primarily related to the anticipated revenue decrease from the reduced fleet size, including an 8.2% reduction in block hours.  However, the expected reduction in revenue from a reduced fleet size was partially offset by approximately $32 million from the additional E175 operations, improved contract rates from flying contract renewals and extensions,  higher operating performance incentives earned under our fixed-fee arrangements, and approximately $11 million earned from higher flight completion rates.

 

Our directly reimbursed fuel expense, landing fee, station rent and engine overhaul expenses decreased by $21.4 million, or 35.5%, during the three months ended June 30, 2015, from the three months ended June 30, 2014, due primarily to our major airline partners paying for such expenses directly to third party vendors.

 

18



Table of Contents

 

Ground handling and other.  Total ground handling and other revenues decreased $0.7 million, or 4.5%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  The decrease was primarily related to decreases in flight activity at locations that provide government subsidies.

 

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

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Cents Per

 

Cents Per

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

ASM

 

ASM

 

Salaries, wages and benefits

 

$

298,573

 

310,844

 

(12,271

)

(3.9

)%

3.3

 

3.2

 

Aircraft maintenance, materials and repairs

 

156,319

 

171,722

 

(15,403

)

(9.0

)%

1.7

 

1.8

 

Aircraft rentals

 

68,442

 

79,449

 

(11,007

)

(13.9

)%

0.7

 

0.8

 

Depreciation and amortization

 

64,659

 

64,252

 

407

 

0.6

%

0.7

 

0.7

 

Aircraft fuel

 

31,192

 

58,018

 

(26,826

)

(46.2

)%

0.3

 

0.6

 

Ground handling services

 

20,117

 

32,314

 

(12,197

)

(37.7

)%

0.2

 

0.3

 

Special charges

 

 

4,713

 

(4,713

)

(100.0

)%

 

 

 

 

Other operating expenses

 

79,183

 

82,018

 

(2,835

)

(3.5

)%

0.9

 

0.8

 

Total operating expenses

 

718,485

 

803,330

 

(84,845

)

(10.6

)%

7.8

 

8.2

 

Interest

 

18,081

 

16,138

 

1,943

 

12.0

%

0.2

 

0.2

 

Total airline expenses

 

$

736,566

 

819,468

 

(82,902

)

(10.1

)%

8.0

 

8.4

 

 

Salaries wages and employee benefits.  Salaries, wages and employee benefits decreased $12.3 million, or 3.9%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  The decrease in salaries, wages and employee benefits was primarily due to the decrease in our fleet size and related level of departures and block hours compared to the June 30, 2014, which was partially offset by additional training costs for the E175 aircraft deliveries.

 

Aircraft maintenance, materials and repairs.  Aircraft maintenance expense decreased $15.4 million, or 9.0%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our applicable major partner at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amount and during the same period we recognized the expense in our consolidated statements of comprehensive income (loss).The following table summarizes our aircraft maintenance, materials and repairs less the directly-reimbursed engine overhaul costs under our fixed-fee arrangements for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Aircraft maintenance, materials and repairs

 

$

156,319

 

$

171,722

 

$

(15,403

)

(9.0

)%

Less: Directly-reimbursed engine overhaul costs from major partners

 

27,098

 

29,381

 

(2,283

)

(7.8

)%

Aircraft maintenance, materials and repairs excluding directly reimbursed engine overhaul costs from major partners

 

$

129,221

 

$

142,341

 

$

(13,120

)

(9.2

)%

 

Other aircraft maintenance, materials and repairs, excluding our directly-reimbursed engine overhaul costs, decreased $13.1 million, or 9.2%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. The decrease in aircraft maintenance expense (excluding directly reimbursed engine overhaul costs) was primarily due to a decrease in our fleet size and related level of scheduled maintenance events.  Additionally, our expense associated with engine overhauls not subject to direct-reimbursement under our Directly-Reimbursed Engine Contracts, decreased $3.5 million during the three months ended June 30, 2015 compared to the three months engine June 30, 2014, primarily due to a decrease in the number of engine overhaul events incurred under our Fixed-rate Engine Contracts.

 

Aircraft rentals.  Aircraft rentals decreased $11.0 million, or 13.9%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. The decrease in aircraft rentals was primarily due to a reduction of our fleet subsequent to June 30, 2014 that were financed through leases.

 

Depreciation and amortization.  Depreciation and amortization expense increased $0.4 million, or 0.6%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  The increase in depreciation and amortization expense was primarily due to the purchase of 32 E175 aircraft and spare engines subsequent to June 30, 2014, which was partially offset by the removal of owned aircraft during the same period.

 

19



Table of Contents

 

Aircraft Fuel.  Fuel costs decreased $26.8 million, or 46.2%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  Under our fixed-fee flying arrangements, fuel is a directly-reimbursed expense.  The following table summarizes our aircraft fuel expenses (less directly-reimbursed fuel expense under our fixed-fee flying arrangements) for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Aircraft fuel expenses

 

$

31,192

 

$

58,018

 

$

(26,826

)

(46.2

)%

Less: Directly-reimbursed fuel from major partners

 

10,526

 

24,621

 

(14,095

)

(57.2

)%

Aircraft fuel less fuel reimbursement from major partners

 

$

20,666

 

$

33,397

 

$

(12,731

)

(38.1

)%

 

The decrease in fuel cost was primarily due to the decrease in the average fuel cost per gallon and a decrease in the volume in gallons purchased.  In the event one of our major airline partners purchases fuel directly from vendors on flights we operate pursuant to the fixed-fee arrangement, we do not incur the fuel expense.  The average fuel cost per gallon was $2.35 and $3.47 for the three months ended June 30, 2015 and 2014, respectively. The following table summarizes the gallons of fuel we purchased directly from fuel vendors and our fuel expense, for the periods indicated:

 

 

 

For the three months ended June 30,

 

(in thousands, except per gallon amounts)

 

2015

 

2014

 

% Change

 

Fuel gallons purchased

 

13,283,875

 

16,715,892

 

(20.5

)%

Fuel expense

 

$

31,192

 

$

58,018

 

(46.2

)%

 

Ground handling service.  Ground handling service expense decreased $12.2 million, or 37.7%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. Ground handling service expense includes airport related customer service costs, such as outsourced airport agent service, airport ramp services, airport security fees and passenger interruption costs. The decrease in ground handling service expense was primarily due to a reduction in the volume of departures and the reduction in the number of locations for which SkyWest Airlines provides ground handling services subsequent to June 30, 2014.

 

Special charges.  During the three months ended June 30, 2014, we initiated the sale of a paint facility we owned in Saltillo, Mexico and we wrote down the value of assets to our estimated net realizable value of the facility.  We subsequently sold the facility in 2014 for an amount that approximated our estimated net realizable value as of June 30, 2014.

 

Other operating expenses.  Other operating expenses, primarily consisting of property taxes, hull and liability insurance, landing fees, station rents, crew simulator training, crew per diem, and crew hotel costs, decreased $2.8 million, or 3.5%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  Under our fixed-fee flying arrangements, landing fee and station rent expense are directly-reimbursed expenses.  The following table summarizes our other operating expenses (less directly-reimbursed landing fees and station under our fixed-fee flying arrangements) for the periods indicated (dollar amounts in thousands).

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Other operating expenses

 

$

79,183

 

$

82,018

 

$

(2,835

)

(3.5

)%

Less: Landing fee and station rent reimbursements from major partners

 

1,310

 

6,359

 

(5,049

)

(79.4

)%

Other operating expenses less landing fee and station rent reimbursements from major partners

 

$

77,873

 

$

75,659

 

$

2,214

 

2.9

%

 

The increase in other operating expense (less directly reimbursed landing fee and station rent, expenses) was primarily related to the additional training costs associated with the E175 deliveries including the use of simulators, hotels and crew per diem costs.

 

Total airline expense.  Total airline expense (consisting of total operating expense and interest expense) decreased $82.9 million, or 10.1%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  The following table summarizes our total airline expense less the directly-reimbursed expenses with significant changes impacting comparability for the periods indicated (dollar amounts in thousands).

 

20



Table of Contents

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Total airline expense

 

$

736,566

 

$

819,468

 

$

(82,902

)

(10.1

)%

Less: Directly-reimbursed fuel

 

10,526

 

24,621

 

(14,095

)

(57.2

)%

Less: Directly-reimbursed engine overhauls

 

27,098

 

29,381

 

(2,283

)

(7.8

)%

Less: Directly-reimbursed landing fees and station rents

 

1,310

 

6,359

 

(5,049

)

(79.4

)%

Total airline expense excluding directly reimbursed fuel, landing fee, station rent and engine overhaul reimbursements

 

$

697,632

 

$

759,107

 

$

(61,475

)

(8.1

)%

 

Total airline expenses (excluding directly-reimbursed fuel, engine overhaul, landing fees and station rents) decreased $61.5 million, or 8.1%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. The overall decrease was primarily related to the reduction in fleet size, including an 8.2% reduction in block hours during the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

 

Income taxes, our estimated annual effective tax rate for the three months ended June 30, 2015 varied from the federal statutory rate of 35% primarily due to the provision for state income taxes and the impact of non-deductible crew per diem meal expenses.  The income tax provision for the three months ended June 30, 2014 included a valuation allowance of $5.0 million for previously generated state net operating loss benefits specific to ExpressJet that are scheduled to expire before the benefits are expected to be utilized.

 

Net income (loss).  Primarily due to factors described above, we generated net income of $31.5 million, or $0.61 per diluted share, for the three months ended June 30, 2015, compared to a net loss of $14.7 million, or $0.29 per diluted share, for the three months ended June 30, 2014.

 

Six Months Ended June 30, 2015 and 2014

 

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,

 

 

 

2015

 

2014

 

% Change

 

Revenue passenger miles (000)

 

14,686,253

 

15,441,216

 

(4.9

)%

Available seat miles (“ASMs”) (000)

 

17,868,698

 

18,729,769

 

(4.6

)%

Block hours

 

1,048,147

 

1,125,885

 

(6.9

)%

Departures

 

618,685

 

674,346

 

(8.3

)%

Passengers carried

 

27,856,293

 

28,992,137

 

(3.9

)%

Passenger load factor

 

82.2

%

82.4

%

(0.2

)Pts

Revenue per available seat mile

 

8.7

¢

8.5

¢

2.4

%

Cost per available seat mile

 

8.3

¢

8.7

¢

(4.6

)%

Cost per available seat mile excluding fuel

 

8.0

¢

8.1

¢

(1.2

)%

Fuel cost per available seat mile

 

0.3

¢

0.6

¢

(50.0

)%

Average passenger trip length (miles)

 

527

 

533

 

(1.1

)%

 

Revenues.  Total operating revenues decreased $40.1 million, or 2.5%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  Our total operating revenue includes Passenger revenues, which primarily consists of revenue earned on flights we operate under our fixed-fee and pro-rate arrangements and airport customer service revenue, including airport counter, gate and ramp services, on flights we operate under our flying arrangements.  Our total operating revenue also includes ground handling and other revenues, which primarily consists of revenue earned from providing airport counter, gate and ramp services to other airlines on flights operated by other airlines and  government subsidy revenue we receive for providing flight service to certain locations.

 

Passenger revenues.  Under our fixed-fee flying contracts, we are directly-reimbursed for certain expenses from our major partners and we record such reimbursements as passenger revenue. The price and volume volatility of directly-reimbursed expenses may impact the comparability of revenue to previous periods without impacting the comparability of our operating income to the same periods.  The following table summarizes our passenger revenues less certain directly-reimbursed expenses that impact the comparability for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Passenger revenues

 

1,515,605

 

$

1,556,187

 

(40,582

)

(2.6

)%

Less: Fuel reimbursement from major partners

 

19,479

 

47,110

 

(27,631

)

(58.7

)%

Less: Landing fee and station rent reimbursements from major partners

 

7,063

 

13,166

 

(6,103

)

(46.4

)%

Less: Engine overhaul reimbursement from major partners

 

56,882

 

63,554

 

(6,672

)

(10.5

)%

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

 

$

1,432,181

 

$

1,432,357

 

(176

)

0.0

%

 

21



Table of Contents

 

Passenger revenues (excluding fuel, landing fee, station rent, and engine overhaul directly-reimbursed expenses from our major partners), decreased $0.2 million during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.   Although our passenger revenues (excluding fuel, landing fees, station rents, and engine overhaul reimbursements) were essentially consistent for the comparable periods, we had anticipated a decrease in passenger revenues due to a reduction in our fleet size, including a related 6.9% reduction in block hours incurred.  This anticipated reduction in passenger revenue was significantly offset by $65 million from the additional E175 operations, improved contract rates from flying contract renewals and extensions, higher operating performance incentives earned under our fixed-fee arrangements, and approximately $32 million from higher flight completion rates.

 

Our directly reimbursed fuel expense, landing fee, station rent and engine overhaul expenses decreased by $40.4 million, or 32.6%, during the six months ended June 30, 2015, from the six months ended June 30, 2014, due primarily to our major airline partners paying for such expenses directly to third party vendors.

 

Ground handling and other.  Total ground handling and other revenues increased $0.4 million, or 1.3%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  The increase was primarily related to additional flight activity at locations that provide government subsidies.

 

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

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Cents Per

 

Cents Per

 

 

 

Amount

 

Amount

 

Amount

 

Percent

 

ASM

 

ASM

 

Salaries, wages and benefits

 

$

601,418

 

$

628,486

 

(27,068

)

(4.3

)%

3.4

 

3.4

 

Aircraft maintenance, materials and repairs

 

314,576

 

349,984

 

(35,408

)

(10.1

)%

1.8

 

1.9

 

Aircraft rentals

 

138,854

 

159,783

 

(20,929

)

(13.1

)%

0.8

 

0.9

 

Depreciation and amortization

 

130,350

 

126,567

 

3,783

 

3.0

%

0.7

 

0.7

 

Aircraft fuel

 

58,492

 

105,243

 

(46,751

)

(44.4

)%

0.3

 

0.6

 

Ground handling services

 

44,089

 

69,332

 

(25,243

)

(36.4

)%

0.2

 

0.4

 

Special charges

 

 

4,713

 

(4,713

)

(100.0

%

 

 

 

Other operating expenses

 

157,028

 

159,382

 

(2,354

)

(1.5

)%

0.9

 

0.6

 

Total operating expenses

 

1,444,807

 

1,603,490

 

(158,683

)

(9.9

)%

8.1

 

8.5

 

Interest

 

36,546

 

31,814

 

(4,732

)

14.9

%

0.2

 

0.2

 

Total airline expenses

 

$

1,481,353

 

$

1,635,304

 

(153,951

)

(9.4

)%

8.3

 

8.7

 

 

Salaries wages and employee benefits.  Salaries, wages and employee benefits decreased $27.1 million, or 4.3%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  The decrease in salaries, wages and employee benefits was primarily due to the decrease in our fleet size and related decrease in the number of departures and block hours compared to the June 30, 2014, which was partially offset by additional training costs for the E175 aircraft deliveries.

 

Aircraft maintenance, materials and repairs.  Aircraft maintenance expense decreased $35.4 million, or 10.1%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014. Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our applicable major airline partner at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amount and during the same period we recognized the expense in our consolidated statements of comprehensive income (loss).The following table summarizes our aircraft maintenance, materials and repairs less the directly-reimbursed engine overhaul costs under our fixed-fee arrangements for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Aircraft maintenance, materials and repairs

 

$

314,576

 

$

349,984

 

$

(35,408

)

(10.1

)%

Less: Directly-reimbursed engine overhaul costs from major partners

 

56,882

 

63,554

 

(6,672

)

(10.5

)%

Aircraft maintenance, materials and repairs excluding directly reimbursed engine overhaul costs from major partners

 

$

257,694

 

$

286,430

 

$

(28,736

)

(10.0

)%

 

22


 


Table of Contents

 

Other aircraft maintenance, materials, and repairs, excluding our directly-reimbursed engine overhaul costs, decreased $28.7 million, or 10.0%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014. The decrease in aircraft maintenance expense (excluding directly reimbursed engine overhaul costs) was primarily due to a decrease in our fleet size and a related decrease in the number of scheduled maintenance events.  Additionally, our expense associated with engine overhauls not subject to direct-reimbursement under our Directly-Reimbursed Engine Contracts, decreased $6.1 million during the six months ended June 30, 2015 compared to the six months engine June 30, 2014, primarily due to a decrease in the number of engine overhaul events incurred under our Fixed-rate Engine Contracts.

 

Aircraft rentals.  Aircraft rentals decreased $20.9 million, or 13.1%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014. The decrease in aircraft rentals was primarily due to a reduction in the number of aircraft that were financed through leases subsequent to June 30, 2014.

 

Depreciation and amortization.  Depreciation and amortization expense increased $3.8 million, or 3.0%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  The increase in depreciation and amortization expense was primarily due to the purchase of 30 E175 aircraft and spare engines subsequent to June 30, 2014, which was partially offset by the removal of owned aircraft during the same period.

 

Aircraft Fuel.  Fuel costs decreased $46.8 million, or 44.4%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  Under our fixed-fee flying arrangements, fuel is a directly-reimbursed expense.  The following table summarizes our aircraft fuel expenses (less directly-reimbursed fuel expense under our fixed-fee flying arrangements) for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Aircraft fuel expenses

 

$

58,492

 

$

105,243

 

$

(46,751

)

(44.4

)%

Less: Directly-reimbursed fuel from major partners

 

19,479

 

47,111

 

(27,632

)

(58.7

)%

Aircraft fuel less fuel reimbursement from major partners

 

$

39,013

 

$

58,132

 

(19,119

)

(32.9

)%

 

The decrease in fuel cost was primarily due to the decrease in the average fuel cost per gallon in 2015 compared to 2014 and a decrease in the volume in gallons purchased.  In the event the major airline partner purchases fuel directly from vendors on flights we operate pursuant to the fixed-fee arrangement, we do not incur the fuel expense.  The average fuel cost per gallon was $2.29 and $3.48 for the six months ended June 30, 2015 and 2014, respectively. The following table summarizes the gallons of fuel we purchased directly from fuel vendors and our fuel expense, for the periods indicated:

 

 

 

For the six months ended June 30,

 

(in thousands, except per gallon amounts)

 

2015

 

2014

 

% Change

 

Fuel gallons purchased

 

25,524,251

 

30,239,334

 

(15.6

)%

Fuel expense

 

$

58,492

 

$

105,243

 

(44.4

)%

 

Ground handling service.  Ground handling service expense decreased $25.2 million, or 36.4%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014. Ground handling services includes airport related customer service costs, such as outsourced airport agent service, airport ramp services, airport security fees, and passenger interruption costs. The decrease in ground handling service expense was primarily due to a reduction in the volume of departures and the reduction in the number of locations at which SkyWest Airlines provides ground handling services subsequent to June 30, 2014.

 

Special charges.  During the six months ended June 30, 2014, we initiated the sale of a paint facility we owned in Saltillo, Mexico and we wrote down the value of assets to our estimated net realizable value of the facility.  We subsequently sold the facility in 2014 for an amount that approximated our estimated net realizable value as of June 30, 2014.

 

Other operating expenses.  Other operating expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training, crew per diem, crew hotel costs, landing fees and station rents, decreased $2.4 million, or 1.5%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  Under our fixed-fee flying arrangements, landing fee and station rent expense are directly-reimbursed expenses.  The following table summarizes our other operating expenses (less directly-reimbursed landing fees and station under our fixed-fee flying arrangements) for the periods indicated (dollar amounts in thousands).

 

23



Table of Contents

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Other operating expenses

 

$

157,028

 

$

159,382

 

$

(2,534

)

(1.5

)%

Less: Landing fee and station rent reimbursements from major partners

 

7,063

 

13,166

 

(6,103

)

(46.4

)%

Other operating expenses less landing fee and station rent reimbursements from major partners

 

$

149,965

 

$

146,216

 

$

3,749

 

2.6

%

 

The increase in other operating expense (less directly reimbursed landing fee and station rent expenses) was primarily related to the additional training costs associated with the E175 deliveries including the use of simulators, hotels and crew per diem costs.

 

Total airline expenses.  Total airline expenses (consisting of total operating and interest expenses) decreased $154.0 million, or 9.4%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  The following table summarizes our total airline expense less the directly-reimbursed expenses with significant changes impacting comparability for the periods indicated (dollar amounts in thousands).

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

</