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, 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.
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Incorporated under the laws of Utah |
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87-0292166 |
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(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):
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Large accelerated filer o |
Accelerated filer x |
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Non-accelerated filer o |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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.
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Class |
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Outstanding at August 1, 2014 |
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Common stock, no par value |
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51,126,819 |
SKYWEST, INC.
QUARTERLY REPORT ON FORM 10-Q
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3 | |||
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3 | ||
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Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013 |
3 |
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5 | |
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6 | |
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7 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 | |
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32 | ||
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32 | ||
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33 | |||
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33 | ||
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34 | ||
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34 | ||
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34 | ||
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36 | |
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Exhibit 31.1 |
Certification of Chief Executive Officer |
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Exhibit 31.2 |
Certification of Chief Accounting Officer |
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Exhibit 32.1 |
Certification of Chief Executive Officer |
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Exhibit 32.2 |
Certification of Chief Accounting Officer |
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SKYWEST, INC. AND SUBSIDIARIES
(Dollars in Thousands)
ASSETS
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June 30, |
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December 31, |
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(unaudited) |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
69,791 |
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$ |
170,636 |
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Marketable securities |
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384,944 |
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487,239 |
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Restricted cash |
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12,220 |
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12,219 |
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Income tax receivable |
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1,004 |
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840 |
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Receivables, net |
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118,584 |
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111,186 |
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Inventories, net |
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145,667 |
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138,094 |
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Prepaid aircraft rents |
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408,781 |
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360,781 |
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Deferred tax assets |
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155,849 |
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156,050 |
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Other current assets |
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18,880 |
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27,392 |
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Total current assets |
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1,315,720 |
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1,464,437 |
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PROPERTY AND EQUIPMENT: |
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Aircraft and rotable spares |
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4,346,323 |
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4,080,886 |
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Deposits on aircraft |
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40,000 |
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40,000 |
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Buildings and ground equipment |
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288,038 |
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279,965 |
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4,674,361 |
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4,400,851 |
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Less-accumulated depreciation and amortization |
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(1,835,386 |
) |
(1,749,058 |
) | ||
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Total property and equipment, net |
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2,838,975 |
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2,651,793 |
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OTHER ASSETS |
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Intangible assets, net |
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13,873 |
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14,998 |
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Other assets |
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111,273 |
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101,991 |
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Total other assets |
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125,146 |
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116,989 |
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Total assets |
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$ |
4,279,841 |
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$ |
4,233,219 |
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See accompanying notes to condensed consolidated financial statements.
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
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June 30, |
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December 31, |
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2014 |
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2013 |
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(unaudited) |
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CURRENT LIABILITIES: |
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Current maturities of long-term debt |
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$ |
192,415 |
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$ |
177,389 |
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Accounts payable |
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260,441 |
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245,518 |
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Accrued salaries, wages and benefits |
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131,620 |
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133,002 |
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Accrued aircraft rents |
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2,261 |
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7,492 |
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Taxes other than income taxes |
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18,059 |
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19,626 |
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Other current liabilities |
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41,030 |
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37,437 |
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Total current liabilities |
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645,826 |
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620,464 |
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OTHER LONG-TERM LIABILITIES |
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73,609 |
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76,305 |
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LONG-TERM DEBT, net of current maturities |
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1,377,306 |
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1,293,179 |
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DEFERRED INCOME TAXES PAYABLE |
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717,727 |
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727,358 |
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DEFERRED AIRCRAFT CREDITS |
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77,082 |
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80,974 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock, 5,000,000 shares authorized; none issued |
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— |
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— |
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Common stock, no par value, 120,000,000 shares authorized; 77,728,758 and 77,325,702 shares issued, respectively |
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621,956 |
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618,511 |
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Retained earnings |
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1,156,074 |
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1,197,819 |
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Treasury stock, at cost, 26,765,386 and 26,095,636 shares, respectively |
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(391,364 |
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(382,950 |
) | ||
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Accumulated other comprehensive income |
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1,625 |
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1,559 |
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Total stockholders’ equity |
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1,388,291 |
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1,434,939 |
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Total liabilities and stockholders’ equity |
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$ |
4,279,841 |
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$ |
4,233,219 |
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See accompanying notes to condensed consolidated financial statements.
SKYWEST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars and Shares in Thousands, Except per Share Amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2014 |
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2013 |
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2014 |
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2013 |
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OPERATING REVENUES: |
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Passenger |
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$ |
800,548 |
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$ |
826,122 |
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$ |
1,556,187 |
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$ |
1,611,993 |
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Ground handling and other |
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16,026 |
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13,008 |
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32,773 |
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30,624 |
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Total operating revenues |
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816,574 |
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839,130 |
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1,588,960 |
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1,642,617 |
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OPERATING EXPENSES: |
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Salaries, wages and benefits |
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310,844 |
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300,342 |
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628,486 |
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597,738 |
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Aircraft maintenance, materials and repairs |
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171,722 |
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171,528 |
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349,984 |
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338,684 |
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Aircraft rentals |
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79,449 |
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81,814 |
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159,783 |
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164,402 |
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Depreciation and amortization |
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64,252 |
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61,174 |
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126,567 |
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122,174 |
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Aircraft fuel |
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58,018 |
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46,802 |
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105,243 |
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96,483 |
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Station rentals and landing fees |
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12,244 |
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36,998 |
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24,438 |
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71,086 |
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Ground handling services |
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32,314 |
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33,117 |
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69,332 |
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67,694 |
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Special charges (see Note J) |
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4,713 |
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— |
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4,713 |
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— |
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Other operating expenses |
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69,774 |
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56,800 |
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134,944 |
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118,238 |
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Total operating expenses |
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803,330 |
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788,575 |
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1,603,490 |
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1,576,499 |
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OPERATING INCOME (LOSS) |
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13,244 |
|
50,555 |
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(14,530 |
) |
66,118 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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511 |
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870 |
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1,060 |
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2,597 |
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Interest expense |
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(16,138 |
) |
(17,526 |
) |
(31,814 |
) |
(35,491 |
) | ||||
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Other, net |
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(2,618 |
) |
(187 |
) |
(2,891 |
) |
5,852 |
| ||||
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Total other expense, net |
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(18,245 |
) |
(16,843 |
) |
(33,645 |
) |
(27,042 |
) | ||||
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INCOME (LOSS) BEFORE INCOME TAXES |
|
(5,001 |
) |
33,712 |
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(48,175 |
) |
39,076 |
| ||||
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PROVISION (BENEFIT) FOR INCOME TAXES |
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9,736 |
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12,992 |
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(10,551 |
) |
15,121 |
| ||||
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NET INCOME (LOSS) |
|
$ |
(14,737 |
) |
$ |
20,720 |
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$ |
(37,624 |
) |
$ |
23,955 |
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BASIC EARNINGS (LOSS) PER SHARE |
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$ |
(0.29 |
) |
$ |
0.40 |
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$ |
(0.73 |
) |
$ |
0.46 |
|
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DILUTED EARNINGS (LOSS) PER SHARE |
|
$ |
(0.29 |
) |
$ |
0.39 |
|
$ |
(0.73 |
) |
$ |
0.46 |
|
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Weighted average common shares: |
|
|
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|
|
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|
| ||||
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Basic |
|
51,183 |
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51,881 |
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51,310 |
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51,822 |
| ||||
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Diluted |
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51,183 |
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52,547 |
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51,310 |
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52,522 |
| ||||
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| ||||
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Dividends declared per share |
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$ |
0.04 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.08 |
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| ||||
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COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
|
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Net income (Loss) |
|
$ |
(14,737 |
) |
$ |
20,720 |
|
$ |
(37,624 |
) |
$ |
23,955 |
|
|
|
|
|
|
|
|
|
|
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| ||||
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Net unrealized appreciation (depreciation) on marketable securities, net of taxes |
|
42 |
|
(563 |
) |
65 |
|
(499 |
) | ||||
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TOTAL COMPREHENSIVE INCOME (LOSS) |
|
$ |
(14,695 |
) |
$ |
20,157 |
|
$ |
(37,559 |
) |
$ |
23,456 |
|
See accompanying notes to condensed consolidated financial statements
SKYWEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
|
|
|
Six Months Ended |
| ||||
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2014 |
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2013 |
| ||
|
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
32,489 |
|
$ |
129,277 |
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|
|
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|
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| ||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
|
|
| ||
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Purchases of marketable securities |
|
(112,664 |
) |
(294,649 |
) | ||
|
Sales of marketable securities |
|
215,005 |
|
344,682 |
| ||
|
Proceeds from the sale of equipment |
|
3 |
|
102 |
| ||
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Acquisition of property and equipment: |
|
|
|
|
| ||
|
Aircraft and rotable spare parts |
|
(297,758 |
) |
(44,469 |
) | ||
|
Deposits on aircraft |
|
— |
|
(24,200 |
) | ||
|
Buildings and ground equipment |
|
(11,644 |
) |
(4,442 |
) | ||
|
Increase in other assets |
|
(13,563 |
) |
(11,719 |
) | ||
|
|
|
|
|
|
| ||
|
NET CASH USED IN INVESTING ACTIVITIES |
|
(220,621 |
) |
(34,695 |
) | ||
|
|
|
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|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
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Proceeds from issuance of long-term debt |
|
187,389 |
|
— |
| ||
|
Principal payments on long-term debt |
|
(88,236 |
) |
(85,971 |
) | ||
|
Tax benefit (deficiency) from exercise of common stock options |
|
(1,266 |
) |
(175 |
) | ||
|
Net proceeds from issuance of common stock |
|
1,933 |
|
2,666 |
| ||
|
Purchase of treasury stock |
|
(8,414 |
) |
(196 |
) | ||
|
Payment of cash dividends |
|
(4,119 |
) |
(4,132 |
) | ||
|
|
|
|
|
|
| ||
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
87,287 |
|
(87,808 |
) | ||
|
|
|
|
|
|
| ||
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Increase (decrease) in cash and cash equivalents |
|
(100,845 |
) |
6,774 |
| ||
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Cash and cash equivalents at beginning of period |
|
170,636 |
|
133,772 |
| ||
|
|
|
|
|
|
| ||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
69,791 |
|
$ |
140,546 |
|
|
|
|
|
|
|
| ||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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|
|
|
| ||
|
|
|
|
|
|
| ||
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Cash paid during the year for: |
|
|
|
|
| ||
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Interest, net of capitalized amounts |
|
$ |
33,103 |
|
$ |
36,633 |
|
|
Income taxes |
|
$ |
382 |
|
$ |
880 |
|
See accompanying notes to condensed consolidated financial statements.
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 six-months ended June 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.
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 the agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of period, the Company calculates the incentives achieved during that period and recognizes revenue accordingly.
The following table summarizes the significant provisions of each code share agreement the Company has executed with its major partners:
Delta Connection Agreements
|
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Performance |
|
Payment Structure |
|
SkyWest Airlines |
|
· CRJ 200 - 38 · 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 5.5 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 |
|
· CRJ 200 - 64 · CRJ 700 - 41 · CRJ 900 - 28 |
|
· 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 4.3 years
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Engine Maintenance
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based financial incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines |
|
· EMB 120 - 9 · CRJ 200 - 10 |
|
· Terminable upon 120 days’ notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue |
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 beginning in 2010 and continuing each 5th 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. During the fourth quarter of 2010, SkyWest Airlines and ExpressJet reached an agreement with Delta on contractual rates satisfying the 2010 rate reset provision and the second-lowest rate provision and agreed to rates through December 31, 2015. Delta additionally waived its right to require that the contractual rates payable under the Delta Connection Agreements shall not exceed the second-lowest rates of all carriers within the Delta Connection program through December 31, 2015.
United Express Agreements
|
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Performance |
|
Payment Structure |
|
SkyWest Airlines |
|
· CRJ 200 - 61 · CRJ 700 - 70 · EMB 120 – 9 · E175 – 8 |
|
· 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 3.8 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 |
|
· 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
ExpressJet Delaware United Express Agreement |
|
· ERJ 145 - 22 |
|
· 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 |
|
ExpressJet Delaware United Express Agreement |
|
· ERJ 135 - 9 · ERJ 145 - 220 |
|
· 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 3.8 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 - 20 · EMB 120 - 27 |
|
· Terminable upon 120 days’ notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue |
Alaska Capacity Purchase Agreement
|
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Incentive Structure |
|
Payment Structure |
|
SkyWest Airlines |
|
· 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 |
|
Term / Termination |
|
Pass through costs |
|
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 |
American Agreement
|
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
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 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
The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. During the six months ended June 30, 2014, the Company granted options to purchase 248,008 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, 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 six months ended June 30, 2014, the Company granted 305,212 restricted stock units to the Company’s employees under the 2010 Incentive Plan. The restricted stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries. Upon vesting, a restricted stock unit will be replaced with a common share of stock. Additionally, during the six months ended June 30, 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 June 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $1.1 million and $1.1 million, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $2.8 million and $2.4 million, respectively.
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, 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. During the three and six months ended June 30, 2013, options to acquire 3,298,000 and 3,368,000 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, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(Unaudited) |
|
(Unaudited) |
| ||||||||
|
Numerator |
|
|
|
|
|
|
|
|
| ||||
|
Net Income (loss) |
|
$ |
(14,737 |
) |
$ |
20,720 |
|
$ |
(37,624 |
) |
$ |
23,955 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Denominator |
|
|
|
|
|
|
|
|
| ||||
|
Weighted average number of common shares outstanding |
|
51,183 |
|
51,881 |
|
51,310 |
|
51,822 |
| ||||
|
Effect of outstanding share-based awards |
|
— |
|
666 |
|
— |
|
700 |
| ||||
|
Weighted average number of shares for diluted net income per common share |
|
51,183 |
|
52,547 |
|
51,310 |
|
52,522 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Basic earnings (loss) per share |
|
$ |
(0.29 |
) |
$ |
0.40 |
|
$ |
(0.73 |
) |
$ |
0.46 |
|
|
Diluted earnings (loss) per share |
|
$ |
(0.29 |
) |
$ |
0.39 |
|
$ |
(0.73 |
) |
$ |
0.46 |
|
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, 2014 and 2013 (in thousands).
|
|
|
Three months ended June 30, 2014 |
| ||||||
|
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
|
|
Operating revenues |
|
475,501 |
|
340,599 |
|
474 |
|
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(2) |
|
— |
|
13,873 |
|
— |
|
13,873 |
|
|
Total assets (2) |
|
2,688,143 |
|
1,591,698 |
|
— |
|
4,279,841 |
|
|
Capital expenditures (including non-cash) |
|
234,986 |
|
7,374 |
|
— |
|
242,360 |
|
|
|
|
Three months ended June 30, 2013 |
| ||||||
|
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
|
|
Operating revenues |
|
463,068 |
|
375,588 |
|
474 |
|
839,130 |
|
|
Operating expense |
|
411,917 |
|
374,431 |
|
2,227 |
|
788,575 |
|
|
Depreciation and amortization expense |
|
38,839 |
|
22,335 |
|
— |
|
61,174 |
|
|
Interest expense |
|
11,227 |
|
5,362 |
|
937 |
|
17,526 |
|
|
Segment profit (loss)(1) |
|
39,924 |
|
(4,205 |
) |
(2,690 |
) |
33,029 |
|
|
Identifiable intangible assets, other than goodwill(3) |
|
— |
|
16,123 |
|
— |
|
16,123 |
|
|
Total assets(3) |
|
2,656,855 |
|
1,583,215 |
|
— |
|
4,240,070 |
|
|
Capital expenditures (including non-cash) |
|
21,952 |
|
11,473 |
|
— |
|
33,425 |
|
(1) Segment profit (loss) is equal to operating income less interest expense
(2) As of June 30 ,2014
(3) As of June 30, 2013
The following represents the Company’s segment data for the six-month periods ended June 30, 2014 and 2013 (in thousands).
|
|
|
Six months ended June 30, 2014 |
| ||||||
|
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
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, excluding goodwill(2) |
|
— |
|
13,873 |
|
— |
|
13,873 |
|
|
Total assets(2) |
|
2,688,143 |
|
1,591,698 |
|
— |
|
4,279,841 |
|
|
Capital expenditures (including non-cash) |
|
282,842 |
|
14,666 |
|
— |
|
297,508 |
|
|
|
|
Six months ended June 30, 2013 |
| ||||||
|
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
|
|
Operating revenues |
|
912,413 |
|
727,336 |
|
2,868 |
|
1,642,617 |
|
|
Operating expense |
|
826,683 |
|
746,174 |
|
3,642 |
|
1,576,499 |
|
|
Depreciation and amortization expense |
|
77,464 |
|
44,710 |
|
— |
|
122,174 |
|
|
Interest expense |
|
22,723 |
|
10,825 |
|
1,943 |
|
35,491 |
|
|
Segment profit (loss)(1) |
|
63,007 |
|
(29,663 |
) |
(2,717 |
) |
30,627 |
|
|
Identifiable intangible assets, other than goodwill(3) |
|
— |
|
16,123 |
|
— |
|
16,123 |
|
|
Total assets(3) |
|
2,656,855 |
|
1,583,215 |
|
— |
|
4,240,070 |
|
|
Capital expenditures (including non-cash) |
|
44,362 |
|
19,351 |
|
— |
|
63,713 |
|
(1) Segment profit (loss) is equal to operating income less interest expense
(2) As of June 30, 2014
(3) As of June 30, 2013
Note F — Commitments and Contingencies
As of June 30, 2014, the Company leased 554 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, 2014 (in thousands):
|
July through December 2014 |
|
$ |
151,855 |
|
|
2015 |
|
342,342 |
| |
|
2016 |
|
267,269 |
| |
|
2017 |
|
197,603 |
| |
|
2018 |
|
153,301 |
| |
|
Thereafter |
|
571,781 |
| |
|
|
|
$ |
1,684,151 |
|
During the six months ended June 30, 2014, the Company took delivery of eight E175 aircraft and initially financed the aircraft through the issuance of $187.4 million of interim debt. The Company anticipates it will refinance these eight E175 under long-term lease arrangements by the end of 2014 and the interim debt will be retired. When the interim debt on these eight E175s is retired and the aircraft are financed with long-term lease arrangements, the Company anticipates it will receive back approximately $34.0 million of initial down payments associated with the interim debt financing.
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, 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 June 30, 2014 |
| ||||||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Marketable Securities |
|
|
|
|
|
|
|
|
| ||||
|
Bonds and bond funds |
|
$ |
384,800 |
|
$ |
— |
|
$ |
384,800 |
|
$ |
— |
|
|
Asset backed securities |
|
144 |
|
— |
|
144 |
|
— |
| ||||
|
|
|
384,944 |
|
— |
|
384,944 |
|
— |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Cash, Cash Equivalents and Restricted Cash |
|
82,011 |
|
82,011 |
|
— |
|
— |
| ||||
|
Other Assets |
|
2,265 |
|
— |
|
— |
(a) |
2,265 |
| ||||
|
Total Assets Measured at Fair Value |
|
$ |
469,220 |
|
$ |
82,011 |
|
$ |
384,944 |
|
$ |
2,265 |
|
|
|
|
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) Comprises 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, 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 June 30, 2014 (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
|
Auction Rate |
| |
|
Balance at January 1, 2014 |
|
$ |
2,245 |
|
|
Total realized and unrealized gains or (losses) |
|
|
| |
|
Included in earnings |
|
— |
| |
|
Included in other comprehensive income |
|
20 |
| |
|
Transferred out |
|
— |
| |
|
Settlements |
|
— |
| |
|
Balance at June 30, 2014 |
|
$ |
2,265 |
|
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 $1,605.7 million as of June 30, 2014, as compared to the carrying amount of $1,569.7 million as of June 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, 2013, as compared to the carrying amount of $1,470.6 million as of December 31, 2013.
Note H — Income Taxes
For various reasons, including the disproportionate increase in expenses with limited tax deductibility relative to the Company’s projected pre-tax results for the year ending December 31, 2014, the Company is currently unable to make a reliable estimate of its annual effective tax rate (“ETR”). As a result, the Company has utilized its actual ETR for the six months ended June 30, 2014. Utilizing this approach, the Company recorded an income tax benefit of $10,551 for the six months ended June 30, 2014. Because the Company previously recorded an income tax benefit of $20,287 during the three months ended March 31, 2014, income tax expense of $9,736 was recorded during the three months ended June 30, 2014. The income tax provision for the three months ended June 30, 2014 includes a valuation allowance of $4,988 for previously generated state net operating loss benefits specific to ExpressJet that are scheduled to expire before the benefits are anticipated to be utilized.
Note I — Legal Matters
The Company is subject to certain legal actions which it considers routine to its business activities. As of June 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. However, the following is a significant outstanding legal matter.
SkyWest Airlines and ExpressJet v. Delta
During the quarter ended December 31, 2007, Delta notified the Company, SkyWest Airlines and Atlantic Southeast of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to the allocation of liability for certain irregular operation (“IROP”) expenses paid by SkyWest Airlines and Atlantic Southeast to their passengers and vendors under certain situations. During the period between the execution of the Delta Connection Agreements in September 2005 and December 2007, SkyWest Airlines and Atlantic Southeast passed through to Delta IROP expenses that were paid pursuant to Delta’s policies, and Delta accepted and reimbursed those expenses. Delta now claims it is obligated to reimburse only a fraction of those IROP expenses. As a result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Since December 2007, Delta has continued to withhold payments from the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast (now ExpressJet), and has disputed subsequent billings for IROP expenses. On February 1, 2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton County, Georgia (“Superior Court”) challenging Delta’s treatment of the matter and seeking recovery of the payments withheld by Delta and any future withholdings related to this issue. Delta filed an Answer to the SkyWest Airlines and Atlantic Southeast Complaint and a Counterclaim against SkyWest Airlines and Atlantic Southeast on March 24, 2008. Delta’s Counterclaim alleged that SkyWest Airlines and Atlantic Southeast breached the Delta Connection Agreements by invoicing Delta for IROP expenses that were paid pursuant to Delta’s policies, and claims only a portion of those expenses may be invoiced to Delta. Since July 1, 2008, the Company has not recognized revenue related to IROP expense reimbursements withheld by Delta because collection of those reimbursements is the subject of litigation and is not reasonably assured. As of June 30, 2014, the Company had recognized a cumulative total of $31.7 million of revenue associated with the funds withheld by Delta prior to July 1, 2008.
During 2010, the Company and Delta began preliminary settlement discussions related to the IROP dispute. Notwithstanding the legal merits of the case, the Company offered to settle the claim for approximately $5.9 million less than the cumulative total of revenue recognized related to this matter. Those settlement discussions were not successful; however, as a result of the settlement offer, the Company wrote off $5.9 million of related receivables in 2010.
After proceedings that included contested motions, document discovery, and depositions, Delta voluntarily dismissed its Counterclaim. Discovery in that action was not complete at the time of dismissal. On February 14, 2011, SkyWest Airlines and Atlantic Southeast voluntarily dismissed their claims in the Superior Court, and filed a new complaint (the “State Court Complaint”) in the Georgia State Court of Fulton County (the “State Court”). The claims continue to include breach of contract, breach of contract based on mutual departure, breach of contract based on voluntary payment, and breach of the duty of good faith and fair dealing. Delta moved for partial dismissal of the State Court Complaint, which motion was denied in its entirety.
On August 4, 2014, the parties executed a confidential settlement agreement resolving all disputed issues in the State Court Complaint. The financial impact of the settlement approximated the amount accrued by the Company prior to the settlement agreement.
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 attributed to the paint facility. The realizability of the VAT asset is dependent upon the Company’s future utilization of the facility. During the three months ended June 30, 2014, the Company wrote-off the VAT asset value of $2.5 million as the Company is no longer using the paint facility. Additionally, the Company is actively marketing the paint facility for sale and during the three months ended June 30, 2014, based on the Company’s estimated realizable value of the facility, the Company wrote down the value of the paint facility by $2.2 million.
Note K — Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board 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. It 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. The Company’s management is currently evaluating the impact, if any, the adoption of this standard will 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, 2014 and 2013. Also discussed is our financial position as of June 30, 2014 and December 31, 2013. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and six-month periods ended June 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 June 30, 2014, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 4,000 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of June 30, 2014, we operated a combined fleet of 757 aircraft consisting of the following:
|
|
|
CRJ200 |
|
ERJ145 |
|
ERJ135 |
|
CRJ700 |
|
CRJ900 |
|
E175 |
|
EMB120 |
|
Total |
|
|
United |
|
95 |
|
242 |
|
9 |
|
70 |
|
— |
|
8 |
|
36 |
|
460 |
|
|
Delta |
|
112 |
|
— |
|
— |
|
60 |
|
60 |
|
— |
|
9 |
|
241 |
|
|
American |
|
27 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
27 |
|
|
US Airways |
|
11 |
|
— |
|
— |
|
— |
|
4 |
|
— |
|
— |
|
15 |
|
|
Alaska |
|
— |
|
— |
|
— |
|
9 |
|
— |
|
— |
|
— |
|
9 |
|
|
Subleased to an un-affiliated entity |
|
2 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
2 |
|
|
Unassigned (a) |
|
3 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
3 |
|
|
Total |
|
250 |
|
242 |
|
9 |
|
139 |
|
64 |
|
8 |
|
45 |
|
757 |
|
(a) As of June 30, 2014, these aircraft were in transition between flying contracts with major partners.
For the six months ended June 30, 2014, approximately 60.7% of our aggregate capacity was operated for United, approximately 32.5% was operated for Delta, approximately 3.0% was operated for American, approximately 2.0% 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 (a “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.
|
Flying |
|
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 (EMB120) |
|
Fixed-Rate Engine Contracts |
|
Deferral Method |
|
ExpressJet United Express (CRJ200) |
|
Fixed-Rate Engine Contracts |
|
Direct Expense Method |
|
ExpressJet United Express (ERJ145) |
|
Fixed-Rate Engine Contracts |
|
Power by the Hour Agreement |
|
ExpressJet United CPA |
|
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 six months ended June 30, 2014, 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 $816.6 million for the three months ended June 30, 2014, a 2.7% decrease, compared to total operating revenues of $839.1 million for the three months ended June 30, 2013. We had a net loss of $14.7 million, or $0.29 per diluted share, for the three months ended June 30, 2014, compared to net income of $20.7 million or $0.39 per diluted share, for the three months ended June 30, 2013.
The significant items affecting our financial performance during the three months ended June 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 decreased from $742.5 million for the three months ended June 20, 2013 to $740.2 million for the three months ended June 30, 2014, or by $2.3 million or 0.3%. This decrease was primarily due to a decrease in production, including a 6.8% decrease in the number of departures and an accompanying decrease in block hour production of 5.0% for the three months ended June 30, 2014 compared to the same period for 2013. Block hour production is a significant driver of revenue in our flying contracts with our major partners. We also achieved lower contract performance incentives in 2014 under our flying contracts and had negative invoice reconciliation true-ups under our flying contracts. The decrease in passenger revenues was not as significant as the decrease in production and these other items, due primarily to annual inflation rate increases included in our flying contracts.
Operating and Other Expense Related Items
Salaries, wages and employee benefits increased $10.5 million, or 3.5%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in salaries, wages and employee benefits was primarily due to
increased pilot training costs associated with the implementation of the Airline Safety and Pilot Training Improvement Act of 2009 (the “Improvement Act”) and due to higher pilot attrition. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and in turn, had a negative effect on pilot scheduling and work hours, which we expect will continue in future periods.
Other operating expenses, which primarily consist of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $13.0 million, or 22.8%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in other expenses during the three months ended June 30, 2014 was primarily due to an increase in crew hotels and simulator training due to the Improvement Act. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and, in turn, increased our pilot simulator training costs and lodging expenses required for our crews.
For various reasons, including the disproportionate increase in expenses with limited tax deductibility relative to our projected pre-tax results for the year ending December 31, 2014, we are currently unable to make a reliable estimate of our annual effective tax rate (“ETR”). As a result, we have utilized our actual ETR for the six months ended June 30, 2014. Utilizing this approach, we recorded an income tax benefit of $10.6 million for the six months ended June 30, 2014. Because we previously recorded an income tax benefit of $20.3 million during the three months ended March 31, 2014, income tax expense of $9.7 million was recorded during the three months ended June 30, 2014. The income tax provision for the three months ended June 30, 2014 includes 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 anticipated to be utilized.
Additionally, during the three months ended June 30, 2014, we wrote-off $2.5 million of a foreign value added tax asset associated with our aircraft paint facility in Saltillo as we are no longer using the paint facility and we are actively marketing the paint facility for sale and wrote down the value of the paint facility by $2.2 million based on our estimated realizable value of the facility. We also incurred a loss on disposal of $2.6 million of ground handling equipment and other long-term assets during the three months ended June 30, 2014.
Other Items
On May 16, 2013, SkyWest Airlines and United entered into a United Express Agreement to operate 40 new Embraer E175 dual-class regional jet aircraft (“E175”). Under the agreement, we introduced the first six of the aircraft into service during the three months ended June 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 June 30, 2014, SkyWest Airlines took delivery of seven E175 to be operated under the United Express Agreement.
Under the ExpressJet Delaware United Express Agreement, 26 ERJ145 aircraft and 9 ERJ135 aircraft have contract terminations scheduled for the second half of 2014. 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 May 2014, the Financial Accounting Standards Board 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. It 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.
Results of Operations
Our Business Segments
For the three months ended June 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 June 30, |
| |||||||||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% |
| |||
|
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
| |||
|
Operating Revenues: |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines Operating Revenue |
|
$ |
475,501 |
|
$ |
463,068 |
|
$ |
12,433 |
|
2.7 |
% |
|
ExpressJet Operating Revenues |
|
340,599 |
|
375,588 |
|
(34,989 |
) |
(9.3 |
)% | |||
|
Other Operating Revenues |
|
474 |
|
474 |
|
— |
|
0.0 |
% | |||
|
Total Operating Revenues |
|
$ |
816,574 |
|
$ |
839,130 |
|
$ |
(22,556 |
) |
(2.7 |
)% |
|
Airline Expenses: |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines Expense |
|
$ |
444,212 |
|
$ |
423,144 |
|
$ |
21,068 |
|
5.0 |
% |
|
ExpressJet Expense |
|
374,634 |
|
379,793 |
|
(5,159 |
) |
(1.4 |
)% | |||
|
Other Airline Expense |
|
622 |
|
3,164 |
|
(2,542 |
) |
(80.3 |
)% | |||
|
Total Airline Expense(1) |
|
$ |
819,468 |
|
$ |
806,101 |
|
$ |
13,367 |
|
1.7 |
% |
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines segment profit |
|
$ |
31,289 |
|
$ |
39,924 |
|
$ |
(8,635 |
) |
(21.6 |
)% |
|
ExpressJet segment loss |
|
(34,035 |
) |
(4,205 |
) |
(29,830 |
) |
709.4 |
% | |||
|
Other profit |
|
(148 |
) |
(2,690 |
) |
2,542 |
|
(94.5 |
)% | |||
|
Total Segment profit (loss) |
|
$ |
(2,894 |
) |
$ |
33,029 |
|
$ |
(35,923 |
) |
(108.8 |
)% |
|
Interest Income |
|
511 |
|
870 |
|
(359 |
) |
(41.3 |
)% | |||
|
Other |
|
(2,618 |
) |
(187 |
) |
(2,431 |
) |
1,300.0 |
% | |||
|
Consolidated Income (Loss) before taxes |
|
$ |
(5.001 |
) |
$ |
33,712 |
|
$ |
(38,713 |
) |
(114.8 |
)% |
(1) Total Airline Expense includes operating expense and interest expense
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit decreased $8.6 million, or 21.6%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The decrease 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 $20.6 million or 5.3 % during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase was primarily due to increased pro-rate operations, and includes government subsidies. This increase in revenue related to our pro-rate operations was substantially offset by direct operating costs associated with the pro-rate operations.
· SkyWest Airlines salaries, wages and employee benefits increased $8.6 million or 6.1% during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to increased inefficiencies associated with the implementation of the Improvement Act. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and, in turn, had a negative effect on pilot
scheduling and work hours. Additionally, pilot training costs increased during the three months ended June 30, 2014 compared to the prior comparable period due to the deliveries of eight E175 through June 30, 2014.
· SkyWest Airlines’ aircraft maintenance expense, excluding reimbursed engine overhauls increased by $6.8 million, or 11.3%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase was primarily attributable to an increase in scheduled maintenance events and the replacement and repair of aircraft parts and components.
ExpressJet Segment Loss. ExpressJet segment loss increased $29.8 million, or 709.4%, during the three months ended June 30, 2014, compared to the three months ended June 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 $17.7 million, or 6.5%, during the three months ended June 30, 2014, compared to the three months ended June 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 25,000, or 7.6%, from the three months ended June 30, 2013 to the three months ended June 30, 2014. Block hour production is a significant driver of revenue in our flying contracts with our major partners. ExpressJet also achieved lower contract performance incentives in 2014 under its flying contracts and had negative invoice reconciliation true-ups under those contracts.
· ExpressJet’s salaries, wages and employee benefits increased $1.9 million, or 1.2%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to increased pilot inefficiencies associated with the implementation of the Improvement Act (and associated regulations) and due to higher training costs caused by higher pilot attrition during the three months ended June 30, 2014 compared to the prior comparable period.
· ExpressJet’s lodging, per diem and simulator expenses increased $6.4 million, or 29.1%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to increased training costs to comply with the Improvement Act and higher weather cancellations that resulted in higher lodging and crew per diem costs.
· ExpressJet wrote-off $2.5 million of a foreign value added tax asset associated with our aircraft paint facility in Saltillo and ExpressJet wrote down the value of the paint facility by $2.2 million.
Three Months Ended June 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 June 30, |
| ||||
|
|
|
2014 |
|
2013 |
|
% Change |
|
|
Revenue passenger miles (000) |
|
8,165,616 |
|
8,274,906 |
|
(1.3 |
)% |
|
Available seat miles (“ASMs”) (000) |
|
9,736,819 |
|
10,065,109 |
|
(3.3 |
)% |
|
Block hours |
|
579,072 |
|
609,711 |
|
(5.0 |
)% |
|
Departures |
|
349,022 |
|
374,486 |
|
(6.8 |
)% |
|
Passengers carried |
|
15,358,722 |
|
15,789,276 |
|
(2.7 |
)% |
|
Passenger load factor |
|
83.9 |
% |
82.2 |
% |
1.7 |
Pts |
|
Revenue per available seat mile |
|
8.4 |
¢ |
8.3 |
¢ |
1.2 |
% |
|
Cost per available seat mile |
|
8.4 |
¢ |
8.0 |
¢ |
5.0 |
% |
|
Cost per available seat mile excluding fuel |
|
7.8 |
¢ |
7.5 |
¢ |
4.0 |
% |
|
Fuel cost per available seat mile |
|
0.6 |
¢ |
0.5 |
¢ |
20.0 |
% |
|
Average passenger trip length (miles) |
|
532 |
|
524 |
|
1.5 |
% |
Revenues. Total operating revenues decreased $22.6 million, or 2.7%, during the three months ended June 30, 2014, compared to the three months ended June 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. These 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 $23.3 million, during the three months ended June 30, 2014, from the three months ended June 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, de-ice and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).
|
|
|
For the three months ended June 30, |
| |||||||||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
Passenger revenues |
|
$ |
800,548 |
|
$ |
826,122 |
|
$ |
(25,574 |
) |
(3.1 |
)% |
|
Less: Fuel reimbursement from major partners |
|
24,621 |
|
22,604 |
|
2,017 |
|
8.9 |
% | |||
|
Less: Landing fee and station rent reimbursements from major partners |
|
6,359 |
|
32,204 |
|
(25,845 |
) |
(80.3 |
)% | |||
|
Less: Engine overhaul reimbursement from major partners |
|
29,381 |
|
28,831 |
|
550 |
|
1.9 |
% | |||
|
Passenger revenue excluding fuel, landing fee, station rent and engine overhaul reimbursements |
|
$ |
740,187 |
|
$ |
742,483 |
|
$ |
(2,295 |
) |
(0.3 |
)% |
Passenger revenues. Passenger revenues decreased $25.6 million, or 3.1%, during three months ended June 30, 2014, compared to the three months ended June 30, 2013. Our passenger revenues, excluding fuel, landing fee, station rent and engine overhaul reimbursements from major partners, decreased $2.3 million, or 0.3%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The balance of the decrease in passenger revenues was primarily due to a decrease in production, including a decrease in the number of departures of 6.8% and accompanying decrease in block hour production of 5.0% for the three months ended June 30, 2014 compared to the same period for 2013. Block hour production is a significant driver of revenue in our flying contracts with our major partners. We also achieved lower contract performance incentives in 2014 under our flying contracts and had negative invoice reconciliation true-ups under our flying contracts.
Ground handling and other. Total ground handling and other revenues increased $3.0 million, or 23.2%, during the three months ended June 30, 2014, compared to the three months ended June 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 is reflected in our consolidated statements of comprehensive loss under the heading “Operating Revenues—Ground handling and other.” The increase in ground handling and other revenues we generated during the quarter was primarily related to an increase in our ground handling for other airlines.
Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. (dollar amounts in thousands).
|
|
|
For the three months ended June 30, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
| |||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
|
Cents Per |
|
Cents Per |
| |||
|
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
|
ASM |
|
ASM |
| |||
|
Aircraft fuel |
|
$ |
58,018 |
|
$ |
46,802 |
|
$ |
11,216 |
|
24.0 |
% |
0.6 |
|
0.5 |
|
|
Salaries, wages and benefits |
|
310,844 |
|
300,342 |
|
10,502 |
|
3.5 |
% |
3.2 |
|
3.0 |
| |||
|
Aircraft maintenance, materials and repairs |
|
171,722 |
|
171,528 |
|
194 |
|
0.1 |
% |
1.8 |
|
1.7 |
| |||
|
Aircraft rentals |
|
79,449 |
|
81,814 |
|
(2,365 |
) |
(2.9 |
)% |
0.8 |
|
0.8 |
| |||
|
Depreciation and amortization |
|
64,252 |
|
61,174 |
|
3,078 |
|
5.0 |
% |
0.7 |
|
0.6 |
| |||
|
Station rentals and landing fees |
|
12,244 |
|
36,998 |
|
(24,754 |
) |
(66.9 |
)% |
0.1 |
|
0.3 |
| |||
|
Ground handling services |
|
32,314 |
|
33,117 |
|
(803 |
) |
(2.4 |
)% |
0.3 |
|
0.3 |
| |||
|
Special charges |
|
4,713 |
|
— |
|
4,713 |
|
100.0 |
% |
0.0 |
|
— |
| |||
|
Other operating expenses |
|
69,774 |
|
56,800 |
|
12,974 |
|
22.8 |
% |
0.7 |
|
0.6 |
| |||
|
Total operating expenses |
|
803,330 |
|
788,575 |
|
14,755 |
|
1.9 |
% |
8.2 |
|
7.8 |
| |||
|
Interest |
|
16,138 |
|
17,526 |
|
(1,388 |
) |
(7.9 |
)% |
0.2 |
|
0.2 |
| |||
|
Total airline expenses |
|
$ |
819,468 |
|
$ |
806,101 |
|
$ |
13,367 |
|
1.7 |
% |
8.4 |
|
8.0 |
|
Fuel. Aircraft fuel increased $11.2 million, or 24.0%, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in fuel cost was primarily due to the volume of fuel used in our increased pro-rate flying operation during the three months ended June 30, 2014 compared to the prior period of 2013. The average fuel cost per gallon was $3.47 and $3.54 for the three month periods ended June 30, 2014 and 2013, respectively.
Salaries wages and employee benefits. Salaries, wages and employee benefits increased $10.5 million, or 3.5%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in salaries, wages and employee benefits was primarily due to increased training costs associated with the deliveries of 8 E175s as of June 30, 2014 and the implementation of the Improvement Act and higher pilot attrition rates. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and, in turn, had a negative effect on pilot scheduling and work hours and resulted in an increase in pilot counts.
Aircraft maintenance, materials and repairs. Aircraft maintenance expense increased $0.2 million, or 0.1%, during the three months ended June 30, 2014, compared to the three months ended June 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).
|
|
|
For the three months ended June 30, |
| |||||||||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
Aircraft maintenance, materials and repairs |
|
$ |
171,722 |
|
$ |
171,528 |
|
$ |
194 |
|
0.1 |
% |
|
Less: Engine overhaul reimbursed from major partners |
|
29,381 |
|
28,831 |
|
550 |
|
1.9 |
% | |||
|
Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
4,571 |
|
10,626 |
|
(6,055 |
) |
(57.0 |
)% | |||
|
Other aircraft maintenance, materials and repairs |
|
$ |
137,770 |
|
$ |
132,071 |
|
$ |
5,699 |
|
4.3 |
% |
Other aircraft maintenance, materials and repairs, increased $5.7 million, or 4.3%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in aircraft maintenance expense excluding engine overhaul costs, for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, was primarily due to an increase in the number of scheduled maintenance events and aircraft parts replacement primarily concentrated at SkyWest Airlines.
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 June 30, 2014, our CRJ200 engine expense under our Fixed-Rate Engine Contracts decreased $6.0 million compared to the three months ended June 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 amount and during the same period we recognized the expense in our Consolidated Statements of Comprehensive Income (Loss).
Aircraft rentals. Aircraft rentals decreased $2.4 million, or 2.9%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The decrease was primarily due to a decline in aircraft lease renewals subsequent to July 1, 2013.
Depreciation and amortization. Depreciation and amortization expense increased $3.1 million, or 5.0%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in depreciation and amortization expense was primarily due to our purchase of new and used aircraft and engines since July 1, 2013.
Station rentals and landing fees. Station rentals and landing fees expense decreased $24.8 million, or 66.9%, during the three months ended June 30, 2014, compared to the three months ended June 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.
Ground handling service. Ground handling service expense decreased $0.8 million, or 2.4%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The decrease in ground handling service expense was primarily due to our major partners paying an increased amount of ground handling service fees directly to the applicable airports.
Special charges. In connection with the acquisition of ExpressJet Delaware, we 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 our future utilization of the facility. During the three months ended June 30, 2014, we wrote-off the VAT asset value of $2.5 million as we are no longer using the paint facility. Additionally, we are actively marketing the paint facility for sale and we wrote down the value of the paint facility by $2.2 million based on our estimated realizable value of the facility.
Other operating expenses. Other operating expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $13.0 million, or 22.8%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase in other expenses during the three months ended June 30, 2014 was primarily due to an increase in expense attributable to crew hotels and simulator training due to the Improvement Act. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and, in turn, had a negative effect on pilot scheduling and work hours.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) increased $13.4 million, or 1.7%, during the three months ended June 30, 2014, compared to the three months ended June 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 June 30, |
| |||||||||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
Total airline expense |
|
$ |
819,468 |
|
$ |
806,101 |
|
$ |
13,367 |
|
1.7 |
% |
|
Less: Fuel expense |
|
58,018 |
|
46,802 |
|
11,216 |
|
24.0 |
% | |||
|
Less: Engine overhaul reimbursement from major partners |
|
29,381 |
|
28,831 |
|
550 |
|
1.9 |
% | |||
|
Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
4,571 |
|
10,626 |
|
(6,055 |
) |
(57.0 |
)% | |||
|
Total airline expense excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
$ |
727,498 |
|
$ |
719,842 |
|
$ |
7,656 |
|
1.1 |
% |
Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses increased $7.7 million, or 1.1%, during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The percentage increase 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 expense, net. Other expense, net, increased $2.4 million during the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The increase was primarily attributable to losses incurred on the disposal of ground handling equipment and other long term assets of $2.6 million during the three months ended June 30, 2014.
Provision for income taxes. For the three and six months ended June 30, 2014, we recorded an income tax provision of $9.7 million and an income tax benefit of $10.6 million, respectively. Due to various factors, including the disproportionate increase in expenses with limited tax deductibility relative to our projected pre-tax results for the year ending December 31, 2014, we cannot make a reliable estimate of our effective tax rate. As a result, we utilized our actual effective tax rate for the six months ended June 30, 2014. Under this approach, we recorded an income tax benefit of $10.6 million for the six months ended June 30, 2014. Because we previously recorded an income tax benefit of $20.3 million during the three months ended March 31, 2014, we recorded an income tax provision of $9.7 million during the three months ended June 30, 2014. The income tax provision for the three months ended June 30, 2014 includes 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 anticipated to be utilized. See note H - Income Taxes, in Item 1 of this Report for more information regarding our effective tax rate.
Net income (loss). Primarily due to factors described above, we generated a net loss of $14.7 million, or $0.29 per diluted share, for the three months ended June 30, 2014, compared to net income of $20.7 million, or $0.39 per diluted share, for the three months ended June 30, 2013.
Six Months Ended June 30, 2014 and 2013
Our Business Segments
For the six months ended June 30, 2014 and 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet.
|
|
|
For the six months ended June 30, |
| |||||||||
|
|
|
2014 |
|
2013 |
|
$ Change |
|
% |
| |||
|
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
| |||
|
Operating Revenues: |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines Operating Revenue |
|
$ |
922,543 |
|
$ |
912,413 |
|
$ |
10,130 |
|
1.1 |
% |
|
ExpressJet Operating Revenues |
|
665,469 |
|
727,336 |
|
(61,867 |
) |
(8.5 |
)% | |||
|
Other Operating Revenues |
|
948 |
|
2,868 |
|
(1,920 |
) |
(66.9 |
)% | |||
|
Total Operating Revenues |
|
$ |
1,588,960 |
|
$ |
1,642,617 |
|
$ |
(53,657 |
) |
(3.3 |
)% |
|
Airline Expenses: |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines Expense |
|
$ |
879,880 |
|
$ |
849,406 |
|
$ |
30,474 |
|
3.6 |
% |
|
ExpressJet Expense |
|
753,935 |
|
756,999 |
|
(3,064 |
) |
(0.4 |
)% | |||
|
Other Airline Expense |
|
1,489 |
|
5,585 |
|
(4,096 |
) |
(73.3 |
)% | |||
|
Total Airline Expense(1) |
|
$ |
1,635,304 |
|
$ |
1,611,990 |
|
$ |
23,314 |
|
1.4 |
% |
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
|
SkyWest Airlines segment profit |
|
$ |
42,663 |
|
$ |
63,007 |
|
$ |
(20,344 |
) |
(32.3 |
)% |
|
ExpressJet segment loss |
|
(88,466 |
) |
(29,663 |
) |
(58,803 |
) |
198.2 |
% | |||
|
Other profit |
|
(541 |
) |
(2,717 |
) |
2,176 |
|
(80.1 |
)% | |||
|
Total Segment profit (loss) |
|
$ |
(46,344 |
) |
$ |
30,627 |
|
$ |
(76,971 |
) |
(244.2 |
)% |
|
Interest Income |
|
1,060 |
|
2,597 |
|
(1,537 |
) |
(59.2 |
)% | |||
|
Other |
|
(2,891 |
) |
5,852 |
|
(8,743 |
) |
(149.4 |
)% | |||
|
Consolidated Income (Loss) before taxes |
|
$ |
(48,175 |
) |
$ |
39,076 |
|
$ |
(87,251 |
) |
(217.7 |
)% |
(1) Total Airline Expense includes operating expense and interest expense
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit decreased $20.3 million, or 32.3%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The decrease in the SkyWest Airlines segment profit was due primarily to the following factors:
· Excluding the directly reimbursed expenses associated with contract flying, which is reflected in operating revenues, SkyWest Airlines operating revenue increased by $28.7 million or 3.8%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The increase was primarily due increased pro-rate operations, which includes government subsidies. This increase in revenue was substantially offset by direct operating costs associated with the pro-rate operations.
· SkyWest Airlines salaries, wages and employee benefits increased $18.0 million, or 6.4% during the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to increased pilot counts and related training costs and the implementation of the Improvement Act. The implementation of the Improvement Act (and associated regulations) increased our compliance and FAA reporting obligations, and, in turn, had a negative effect on pilot scheduling and work hours.
· SkyWest Airlines’ aircraft maintenance expense, excluding reimbursed engine overhauls increased by $12.3 million, or 8.6%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The increase was primarily attributable to an increase in scheduled maintenance events and the replacement and repair of aircraft parts and components.
ExpressJet Segment Loss. ExpressJet segment loss increased $58.8 million, or 198.2%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The increase in ExpressJet segment loss was due primarily to the following factors:
· Excluding the directly reimbursed expenses associated with contract flying, which is reflected in operating revenues, ExpressJet’s operating revenue decreased by $33.9 million, or 6.4%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The decrease in operating revenue was primarily due to a decrease of approximately 37,000 flights, or 9.2%, and approximately 46,000 block hours, or 7.1%, from the six months ended June 30, 2013 to the six months ended June 30, 2014. The decrease in completed flights was primarily due to severe weather experienced during the six months ended June 30, 2014. ExpressJet also achieved lower performance incentives under its contract flying arrangements and had negative invoice reconciliation true-ups under our flying contracts during the six months ended June 30, 2014, compared to the six months ended June 30, 2013.
· ExpressJet’s salaries, wages and employee benefits increased $12.8 million, or 4.0%, during the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to increased pilot counts and related training costs to comply with the Improvement Act. Additionally, the increased number of weather cancellations resulted in significant crew inefficiencies, during the six months ended June 30, 2014.