SkyWest Airlines 2002 Annual Report Download

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SKYWEST,
INC
.
ANNUAL REPORT 2002

Table of contents

  • Page 1
    SKYWEST, INC. A N N UA L R E P O R T 2 0 0 2

  • Page 2
    ... operated regional carrier. SkyWest operates as a Delta Connection and United Express carrier under a marketing agreement with Delta Air Lines and United Airlines respectively. SkyWest serves a total of 100 cities in 30 states and two Canadian provinces and has more than 1,000 daily departures...

  • Page 3
    ... addition of 26 new regional 50-seat jet aircraft wherein we ended the year with 73 regional jets and 76 30-seat turboprop aircraft. We worked closely with our major airline partners Delta and United, to connect small and medium-sized communities to their large hub operations as well as introducing...

  • Page 4
    ... opportunity. SkyWest and our employees are committed to provide the best quality product at the lowest possible cost. We have more financial reserves relative to our size than any airline in...your investment in the process. Sincerely, Jerry C. Atkin Chairman, President and Chief Executive Officer

  • Page 5
    ... filer (as defined in Exchange Act Rule 12b-2). Yes ፤ No អ The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price of the Common Stock on the NASDAQ National Market System) on June 28, 2002, which is the last business day of the Registrant's most...

  • Page 6
    ... Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions ...Controls and Procedures ...Principal Accountant Fees and Services ...PART IV Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...49 48 48 48 48 48 48 13 13 14 26 26 47...

  • Page 7
    ... hubs located at Los Angeles, Salt Lake City, San Francisco, Portland, Dallas/Fort Worth and Seattle/Tacoma, SkyWest offers a convenient and frequent flight schedule designed to maximize connecting and origin-destination traffic for its major code-sharing partners. As of December 31, 2002, SkyWest...

  • Page 8
    ...Arizona: Yuma ...Phoenix ...Tucson ...California: San Diego ...Palm Springs ...Los Angeles ...Imperial ...Ontario ...Santa Maria ...Santa Barbara . . Bakersfield ...Fresno ...Sacramento ...San Francisco . . San Jose ...San Luis Obispo Orange County . Monterey ...Crescent City . . ... 2001 2002 2002...

  • Page 9
    ... ...Chico ...Modesto ...Visalia ...Inyokern ...Oxnard ...Carlsbad ...Oakland ...Colorado: Grand Junction . . Colorado Springs Denver ...Durango ...Montrose ...Florida: Pensacola ...Tallahassee ...Idaho: Pocatello ...Idaho Falls ...Twin Falls ...Boise ...Sun Valley ...Iowa: Des Moines ...Kansas...

  • Page 10
    ...Portland ...Redmond ...Medford ...South Dakota: Rapid City ...Tennessee: Memphis ...Nashville ...Texas: Austin ...Dallas ...El Paso ...Houston ...Utah: Cedar City ...Salt Lake City . St. George ...Washington: Pasco ...Seattle ...Spokane ...Wyoming: Jackson Hole . Casper ...Cody ...Canada: Vancouver...

  • Page 11
    ... airline, also operates out of the Salt Lake City International Airport, which results in significant price competition at the Salt Lake City hub. Competition in the Southern California and Pacific Northwest markets, which the Company serves from its hubs in Los Angeles, Seattle/Tacoma and Portland...

  • Page 12
    ... or cancel Company code-sharing flights in order to reduce their costs. Employees As of December 31, 2002, the Company employed 5,079 full-time equivalent employees consisting of 1,930 pilots and flight attendants, 2,341 customer service personnel, 608 mechanics and other maintenance personnel, and...

  • Page 13
    ...flight operations conducted under its code-sharing agreements with Delta and United. Any material change in the Company's code-sharing relationships would impact the Company's operations and financial condition. The Company's major partners currently face significant economic, operational, financial...

  • Page 14
    ... the airline industry generally or the Company's results of operations and financial condition. The Company's reliance on only two aircraft types exposes the Company to a number of potentially significant risks As of December 31, 2002, the Company had a fleet of 76 Brasilias and 73 CRJs. During...

  • Page 15
    ...) Type of Aircraft Brasilia ...Canadair Regional Jet ... 21 6 55 67 30 50 300 850 300 530 7.4 2.0 SkyWest's aircraft are turboprop and jet aircraft designed to operate more economically over short-haul routes with lower passenger load factors than larger jet aircraft. These factors make it...

  • Page 16
    ... in Palm Springs, California; Salt Lake City, Utah; and Fresno, California. SkyWest owns a 56,600 square foot maintenance facility in Palm Springs, California and leases a 90,000 square foot aircraft maintenance and training facility at the Salt Lake City International Airport under an operating...

  • Page 17
    ...'s common stock is Zions First National Bank, Salt Lake City, Utah. During 2002 and 2001, the Board of Directors declared regular quarterly dividends of $0.02 per share. On November 12, 2002, the Company's Board of Directors declared a regular quarterly cash dividend of $0.02 per share payable to...

  • Page 18
    ..., through SkyWest, operates a regional airline offering scheduled passenger service with approximately 1,000 daily departures to 91 cities in 27 states and Canada. All of SkyWest's flights are operated as either Delta Connection or United Express under code-sharing arrangements with Delta or United...

  • Page 19
    ... June 1998. In November 2001, SkyWest expanded its operations to serve as the Delta Connection carrier in Dallas Ft. Worth. Today, SkyWest operates as The Delta Connection in Salt Lake City and Dallas Ft. Worth and as United Express in Los Angeles, San Francisco, Denver and in the Pacific Northwest...

  • Page 20
    ...-year agreements with Delta and United, respectively, to fly routes under contract flying arrangements. The Company is compensated on a fee-per-departure basis plus incentive payments based on operational performance. The fee-per-departure and incentive amounts are adjusted on an annual basis based...

  • Page 21
    ... its major partners agreed to modify the method of reimbursement for CRJ engine overhaul costs under their contract flying arrangement beginning in 2002 from reimbursement based on engine flight hours to reimbursement based on actual engine overhaul costs at the maintenance event. In April 2002, the...

  • Page 22
    ...-off of unamortized engine overhauls as a result of United reducing its flight schedule after the September 11, 2001 terrorist attacks. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (''FASB'') released Statement of Financial Accounting Standards (''SFAS'') No...

  • Page 23
    ...No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 as of December 31, 2002. The effect of the adoption of...

  • Page 24
    ... months. The Company continued to increase its services with its code-sharing partners and placed 26 additional CRJs in service during the year ended December 31, 2002. Nine of these aircraft were placed in service under the Delta Connection operations and 17 were placed in service under the 20

  • Page 25
    ... further development of code-sharing relationships with United and Delta whereby SkyWest is experiencing higher load factors as the Company transitions to CRJs in its new markets. The increase was also due, in part, to refinements in SkyWest's flight schedules. Total operating expenses and interest...

  • Page 26
    ... code-sharing partners and placed 33 CRJs in service. Eighteen were scheduled deliveries and 15 were remarketed by the aircraft manufacturer. Twenty-seven of these aircraft were placed in service under the Delta Connection operations and six were placed in service under the United Express operations...

  • Page 27
    load factors as the Company transitioned to CRJs in additional markets. The increase was also due, in part, to refinements in SkyWest's flight schedules. Total operating expenses and interest increased 22.9% to $536.3 million for the year ended December 31, 2001, compared to $436.5 million for the ...

  • Page 28
    ...million from the sale of common stock in connection with the exercise of stock options and the Company's Employee Stock Purchase Plan and $4.5 million in net deposits on aircraft and rotables. During 2002, the Company invested $82.8 million in flight equipment, $26.3 million in marketable securities...

  • Page 29
    ... $960,592 During the year ended December 31, 2002, SkyWest took delivery of 26 CRJs in connection with the Delta Connection and United Express expansion. Additionally, as of December 31, 2002, SkyWest had agreed to acquire an additional 70 CRJs and related spare parts inventory and support equipment...

  • Page 30
    ...partners obligate its major partners to bear the economic risk of fuel price fluctuations. As such, during the terms of those contracts the Company anticipates that its results from operations... 2002 and 87.3% at December 31, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information ...

  • Page 31
    ... respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for CRJ engine overhaul costs from the accrual method to the direct expense method in 2002. /s/ KPMG LLP Salt Lake City, Utah March 27, 2003...

  • Page 32
    ... December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/Arthur Andersen LLP Salt Lake City, Utah February, 22, 2002 28

  • Page 33
    SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS December 31, 2002 December 31, 2001 CURRENT ASSETS: Cash and cash equivalents Marketable securities ...Receivables, net ...Inventories ...Prepaid aircraft rents ...Other current... current ...net ...MAINTENANCE...

  • Page 34
    ... in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2002 December 31, 2001 CURRENT LIABILITIES: Current maturities of long-term debt . Accounts payable ...Accrued salaries, wages and benefits . Accrued aircraft rents ...Engine overhaul accrual ...Taxes other than income taxes ...Other...

  • Page 35
    ... 31, 2002 2001 2000 OPERATING REVENUES: Passenger ...Freight and other ...Total operating revenues ...OPERATING EXPENSES: Flying operations ...Customer service ...Maintenance ...Depreciation and amortization . . Promotion and sales ...General and administrative ...US Government airline assistance...

  • Page 36
    ... on marketable securities . Total comprehensive income ...Exercise of common stock options ...Sale of common stock under employee stock purchase plan ...Sale of common stock, net of offering costs of $349 Tax benefit from exercise of common stock options . Cash dividends declared ($0.08 per share...

  • Page 37
    ......Tax benefit from exercise of common stock options ...Deferred aircraft credits, net of accretion ...Changes in operating assets and liabilities: (Increase) decrease in receivables ...Increase in inventories ...Increase in other current assets ...Increase (decrease) in accounts payable ...Increase...

  • Page 38
    ... (''United''). SkyWest operates as the Delta Connection in Salt Lake City and Dallas Fort Worth and as the United Express carrier in Los Angeles, San Francisco, Denver and in the Pacific Northwest. Revenues generated in connection with the code-sharing relationships with Delta and United account for...

  • Page 39
    ...31, 2002, 2001 and 2000, the Company capitalized interest costs of approximately $7,041,000, $5,185,000, and $788,000, respectively. Maintenance The Company operates under an FAA-approved continuous inspection and maintenance program. The Company's historical maintenance accounting policy for engine...

  • Page 40
    ... for Brasilia engines and was using the accrual method for Canadair Regional Jet (CRJ) engines through December 31, 2001. As discussed below, during the quarter ended March 31, 2002, the Company elected to change its method of accounting for CRJ engine overhauls to expensing overhaul maintenance...

  • Page 41
    ...-year agreements with Delta and United, respectively, to fly routes under contract flying arrangements. The Company is compensated on a fee-per-departure basis plus incentive payments based on operational performance. The fee-per-departure and incentive amounts are adjusted on an annual basis based...

  • Page 42
    ...spare parts and pay for training and other expenses. In connection with the Company's commitment to acquire 119 CRJs (see Note 4), the manufacturer agreed to pay for certain CRJ engine modifications and to provide additional purchase incentives. During the years ended December 31, 2002 and 2001, the...

  • Page 43
    ... respective stock options and employee stock purchases. Following are the pro forma disclosures and the related impact on net income and net income per share (in thousands, except per share information): Year Ended December 31, 2002 2001 2000 Net income: As reported ...Pro forma ...Net income per...

  • Page 44
    ... and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. Marketable securities are reported at fair value in the consolidated balance sheets. The fair value of the Company's long-term debt is estimated based on current rates...

  • Page 45
    ... of December 31, 2002 and 2001 (in thousands): 2002 2001 Notes payable to banks, due in semi-annual installments plus interest at 6.06% to 6.45% through 2018, secured by aircraft Notes payable to banks, due in semi-annual installments plus interest at 3.72% to 3.86%, net of the benefits of interest...

  • Page 46
    ... of long-term debt to tangible net worth. As of December 31, 2002, the Company was in compliance with...2002 2000 2001 Computed ''expected'' provision for income taxes at the statutory rates ...Increase in income taxes resulting from: State income taxes, net of Federal income tax benefit ...Other, net...

  • Page 47
    ... aircraft, as well as airport facilities, office space, and various other property and equipment under noncancelable 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...

  • Page 48
    ... During the year ended December 31, 2002, SkyWest took delivery of 26 CRJs in connection with the Delta Connection and United Express contract flying arrangements. Additionally, as of December 31, 2002 SkyWest had agreed to acquire an additional 70 CRJs and related spare parts inventory and support...

  • Page 49
    ... Plan provides for the issuance of options to purchase up to 4,000,000 shares of common stock to officers, directors and other management employees of which 1,119,879 options had been issued as of December 31, 2002. The Allshare Plan provides for the issuance of options to purchase up to 4,000,000...

  • Page 50
    ... its flight schedule by approximately 20%. As a result, SkyWest began to reduce its Brasilia fleet flown under the United code. During the year ended December 31, 2001, the Company terminated certain Brasilia aircraft leases early and recorded a $3.4 million write-off of unamortized engine overhauls...

  • Page 51
    ... Executive Officer, serves on the Board of Directors for Zion's Bancorporation (''Zion's'') and The Regence Group (''Regence''). The Company maintains a line of credit (see Note 2) and certain bank accounts with Zion's, Zion's is an equity participant in leveraged leases on two CRJ aircraft operated...

  • Page 52
    ... filing date of this report. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required...

  • Page 53
    ... 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc. Lease Agreement dated December 1,1989 between Salt Lake City Corporation and SkyWest Airlines, Inc. SkyWest, Inc. 1995 Employee Stock Purchase Plan SkyWest, Inc. Executive Stock Incentive Plan SkyWest, Inc. Allshare Stock Option Plan Master...

  • Page 54
    Number Exhibit Incorporated by Reference Filed Herewith 99.1 99.2 Certification of Chief Executive Officer Certification of Chief Financial Officer X X (1) Incorporated by reference to Registration Statement on Form S-1, File No. 33-5823. (2) Incorporated by reference to Registrant's 10-Q ...

  • Page 55
    ... in their report. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To SkyWest, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in SkyWest, Inc.'s Annual Report to Shareholders...

  • Page 56
    SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2002, 2001 and 2000 (In thousands) Additions Charged to Costs and Expenses Description Balance at Beginning of Year Deductions Balance at End of Year Year Ended December 31, 2002: ...

  • Page 57
    ...Atkin /s/ MERVYN K. COX Mervyn K. Cox /s/ IAN M. CUMMING Ian M. Cumming Chairman of the Board, President and Chief Executive Officer Vice Chairman of the Board And Director Executive Vice President, Chief Financial Officer And Treasurer (principal financial and accounting officer) Director Director...

  • Page 58
    Names Capacities Date /s/ STEVEN F. UDVAR-HAZY Steven F. Udvar-Hazy /s/ HENRY J. EYRING Henry J. Eyring /s/ HYRUM W. SMITH Hyrum W. Smith /s/ ROBERT G. SARVER Robert G. Sarver Director Director Director Director March 28, 2003 March 28, 2003 March 28, 2003 March 28, 2003 54

  • Page 59
    CERTIFICATIONS I, Jerry C. Atkin, certify that: 1. I have reviewed this Annual Report on Form 10-K of SkyWest, Inc. for the Year Ended December 31, 2002; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary ...

  • Page 60
    ... management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly...

  • Page 61
    ... 30 years CORPORATE INFORMATION Stock Information NASDAQ Stock Symbol: SKYW Registrar and Transfer Agent Zions First National Bank Stock Transfer Department PO Box 9088 Salt Lake City, Utah 84130 Independent Public Accountants KPMG LLP Salt Lake City, Utah Corporate Headquarters SkyWest, Inc. 444...

  • Page 62
    444 SOUTH RIVER ROAD l ST. GEORGE, UTAH 84790 (435) 634-3000 l www.skywest.com