SkyWest Airlines 2003 Annual Report Download

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To our Shareholders
In an environment where challenges abound, I’m proud to report the results and
accomplishments of 2003. We’ve achieved these results in conjunction with a large
expansion into regional jet aircraft. In spite of the challenges we maintained the
integrity of our business model, provided value to our major partners through cost
reductions and increased value to our shareholders. In summarizing the year, let me
highlight some of our most significant achievements and successes.
¾ Added 36 net new 50-seat regional jet aircraft to the fleet
¾ Negotiated a new long-term agreement with United Airlines that was
bankruptcy court approved
¾ Subsequent to year-end, negotiated an understanding with Delta Air Lines for
rates and terms going forward
¾ Maintained an aggressive approach to cost reductions and containment in
order to create value for our major partners and to remain competitive
¾ Reduced cost per available seat mile 11.4% $0.134 per available seat mile
¾ Negotiated a new purchase agreement with Bombardier Aerospace for
additional regional jet aircraft and subsequent to year-end, increased the
number of aircraft on firm order
¾ Added Continental Airlines as an additional code-sharing partner
¾ Financed all aircraft deliveries with long-term permanent lease or long-term
debt and had no aircraft under interim financing arrangements at year-end
I’m also happy to report that we were recently recognized for our outstanding quality
wherein the U.S. Department of Transportation Air Travel Consumer Report named
SkyWest Airlines as the number 1 carrier for on-time performance for calendar 2003.
We added 36 net new 50-seat regional jet aircraft during the year. As a result, our
total operating revenues increased 14.7% to $888.0 million. Additionally, our net
income was $66.8 million or $1.15 per diluted share. By adding these aircraft to our
fleet our available seat miles increased 34.9% and passengers carried increased
28.0%.
During the year we announced that we had completed negotiations and signed a long-
term, 11 year definitive contract with United Airlines. The agreement has been
approved by the U.S. Bankruptcy Court, on United’s behalf, and has received all
necessary approvals from the creditors committee and United’s pilot union. The
agreement was significant in that it strongly reaffirmed our business relationship with
United Airlines, it demonstrated to the markets that our operating costs are among the
lowest in the industry and it provides us with the opportunity for continued growth in
our regional jet operations.
Subsequent to year-end we negotiated an understanding with Delta Air Lines for
contract extension, multiple year rate resets and other improvements to the terms and

Table of contents

  • Page 1
    ...recently recognized for our outstanding quality wherein the U.S. Department of Transportation Air Travel Consumer Report named SkyWest Airlines as the number 1 carrier for on-time performance for calendar 2003. We added 36 net new 50-seat regional jet aircraft during the year. As a result, our total...

  • Page 2
    ... these orders and announcements, we plan to take delivery of 27 regional jets during 2004 and 22 during 2005. We expect these aircraft acquisitions to generate approximately 28% growth in available seat miles for 2004 and approximately 30% for 2005. We also added Continental Airlines as a third code...

  • Page 3
    ... create opportunity and believe that through the combination of our valued employees' ability to deliver a quality product and our secure financial position we will continue to develop opportunities in challenging times. Sincerely, Jerry C. Atkin Chairman, President and Chief Executive Officer

  • Page 4
    ...For the year ended December 31, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-14719 SKYWEST, INC. Incorporated under the Laws of Utah 87-0292166 (IRS Employer ID No.) 444 South River Road...

  • Page 5
    ... Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV Exhibits, Financial Statement Schedules, and Reports...

  • Page 6
    ... from those anticipated, estimated, projected or expected for a number of reasons, including, among others: developments associated with fluctuations in the economy and the demand for air travel; bankruptcy proceedings involving United Airlines, Inc.; ongoing negotiations between the Company and its...

  • Page 7
    ... supply Continental with regional airline feed into Continental's Houston hub effective on July 1, 2003. Today, SkyWest operates as a Delta Connection carrier in Salt Lake City and Dallas/Fort Worth, as a United Express carrier in Los Angeles, San Francisco, Denver, Chicago and the Pacific Northwest...

  • Page 8
    ... City Arizona: Phoenix Tucson Yuma California: Bakersfield Carlsbad Chico Crescent City Eureka Fresno Imperial Inyokern Los Angeles Modesto Monterey Oakland Ontario Orange County Oxnard Palm Springs Redding San Diego San Francisco San Jose San Luis Obispo Santa Barbara Santa Maria Visalia Sacramento...

  • Page 9
    ... South Dakota: Rapid City Sioux Falls Tennessee: Knoxville Memphis Nashville Texas: Abilene Austin College Station Dallas El Paso Houston Killeen San Angelo San Antonio Texarkana Tyler Victoria Waco Utah: Cedar City Salt Lake City St. George Served Since (1) 2002 2003 2003 2000 2001 2002 1988...

  • Page 10
    ... and lost baggage claims and the overall image of the regional airline as a whole. The principal competitive factors on the Company's prorate flying are fare pricing, customer service, routes served, flight schedules, aircraft types and relationships with the Company's major partners. Generally, the...

  • Page 11
    ... 31, 2003, the Company employed 4,952 full-time equivalent employees consisting of 1,958 pilots and flight attendants, 2,084 customer service personnel, 635 mechanics and other maintenance personnel, and 275 administration and support personnel. The Company's employees are not currently represented...

  • Page 12
    ... parts on SkyWest's aircraft are under multi-year warranties and a limited number of heavy airframe and engine checks have occurred. The Company's maintenance costs will increase significantly, both on an absolute basis and as a percentage of its operating expenses, as SkyWest's fleet ages and these...

  • Page 13
    ...'s firm order contracts for the delivery of 30 70-seat CRJ700s or any change in the delivery schedule of such CRJ700s; the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for such aircraft; the issuance of FAA directives restricting or prohibiting...

  • Page 14
    any aircraft accident or incident, even if fully insured, could cause a public perception that the Company is less safe or reliable than other airlines. ITEM 2. PROPERTIES Flight Equipment As of December 31, 2003, SkyWest owned or leased the following types of aircraft: Number of Aircraft Type of ...

  • Page 15
    ... 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. The Salt Lake City facility...

  • Page 16
    ..., Salt Lake City, Utah. Dividends During 2003 and 2002, the Board of Directors declared regular quarterly dividends of $0.02 per share. On November 11, 2003, the Company's Board of Directors declared and paid a regular quarterly cash dividend of $0.02 per share payable to stockholders of record on...

  • Page 17
    ...¢ 278 131 2003 Block hours Departures Passengers carried Revenue passenger miles (000) Available seat miles (000) Load factor Break-even load factor Yield per revenue passenger mile Revenue per available seat mile Cost per available seat mile Average passenger trip length Number of aircraft at end...

  • Page 18
    ... seat miles" represents the number of seats available for passengers multiplied by the number of miles the seats are flown. "Load factor" represents the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles divided by available seat miles). "Breakeven load factor...

  • Page 19
    ... to supply Continental with regional airline feed into Continental's Houston hub effective on July 1, 2003. Today, SkyWest operates as a Delta Connection carrier in Salt Lake City and Dallas/Fort Worth, as a United Express carrier in Los Angeles, San Francisco, Denver and the Pacific Northwest...

  • Page 20
    ..., 2003 by the U.S. Bankruptcy Court. Subsequently, the United Express Agreement received all the necessary approvals from the creditors' committee operating on behalf of United under bankruptcy protection and United's pilot union, the Airline Pilot Association. Under the terms of the United Express...

  • Page 21
    ... Agreement were modified from the per-engine-hour basis, payable monthly, to a time and materials basis, payable at the maintenance event. The revised payment schedule extended through December 31, 2002, at which time monthly payments were to resume on the fixed rate perengine-hour, as adjusted for...

  • Page 22
    ... life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an...

  • Page 23
    ... of relationships with United and Delta whereby SkyWest is experiencing higher than average load factors as the Company adds CRJ200s in its new markets. The increase was also due, in part, to refinements in flight schedules made by the Company's major partners. Total Airline Expenses Excluding Fuel...

  • Page 24
    ... mix of new aircraft within SkyWest's fleet and the favorable timing of certain maintenance-related events. Under the United Express Agreement, specific amounts are included in the rates and charges for mature maintenance on the Company's CRJ200 engines that the Company records as revenue. However...

  • Page 25
    ... of relationships with United and Delta whereby SkyWest experienced higher than average load factors as the Company added CRJ200s in its new markets. The increase was also due, in part, to refinements in flight schedules made by the Company's major partners. Total Airline Expenses Excluding Fuel...

  • Page 26
    ... by the CRJ200s, a higher mix of new aircraft within the fleet and the favorable timing of certain maintenance-related events. Under the Company's United Express Agreement, specific amounts are included in the rates and charges for mature maintenance on its CRJ200 engines as it incurred. As a result...

  • Page 27
    ... in an unsecured bank line of credit through January 31, 2005, with interest payable at the bank's base rate less one-quarter percent, which was a net rate of 3.75% at December 31, 2003. The Company believes that in the absence of unusual circumstances, the working capital available to the Company...

  • Page 28
    ...on its prorate routes, historically occurring in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. New Accounting...

  • Page 29
    ...a component of its revenue under the agreement discussed above is rental income, inasmuch as the United agreement identifies the "right of use" of a specific type and number of aircraft over a stated period of time. The amount deemed to be rental income during the year since the date of inception of...

  • Page 30
    ... financial position of SkyWest, Inc. and subsidiaries at December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Salt Lake City, Utah...

  • Page 31
    ..., the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for CRJ200 engine overhaul costs from the accrual method to the direct expense method in 2002. /s/ KPMG LLP Salt Lake City, Utah March 27, 2003 28

  • Page 32
    SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS December 31, 2003 December 31, 2002 CURRENT ASSETS: Cash and cash equivalents Marketable securities Restricted cash Income tax receivable Receivables, net Inventories Prepaid aircraft rents Other current assets...

  • Page 33
    ...-term debt Accounts payable Accrued salaries, wages and benefits Accrued aircraft rents Taxes other than income taxes Other current liabilities Total current liabilities LONG-TERM DEBT, net of current maturities DEFERRED INCOME TAXES PAYABLE DEFERRED AIRCRAFT CREDITS MAINTENANCE CONTRACT LIABILITY...

  • Page 34
    ... December 31, 2002 2003 2001 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 Total operating...

  • Page 35
    ...net of tax of $813 Total comprehensive income Exercise of common stock options Sale of common stock under employee stock purchase plan Tax benefit from exercise of common stock options Cash dividends declared ($0.08 per share) Balance at December 31, 2003... to consolidated financial statements. 32

  • Page 36
    ...917) Increase in accounts payable and accrued aircraft rents 5,641 (Decrease) increase in engine overhaul accrual - Increase in other current liabilities 6,574 NET CASH PROVIDED BY OPERATING ACTIVITIES 157,743 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities, net of sales (63...

  • Page 37
    ... Continental to supply Continental with regional airline feed into Continental's Houston hub effective on July 1, 2003. Today, SkyWest operates as the Delta Connection in Salt Lake City and Dallas/Fort Worth, as United Express in Los Angeles, San Francisco, Denver, Chicago and the Pacific Northwest...

  • Page 38
    ... Lived Assets As of December 31, 2003, the Company had $742.8 million of flight equipment and related long-lived assets, net of accumulated depreciation and amortization. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by the...

  • Page 39
    ... assets. During 2001, the Company recorded a $3.4 million write-off of unamortized engine overhauls as a result of United reducing its flight schedule after the September 11, 2001 terrorist attacks. Capitalized Interest Interest is capitalized on aircraft purchase deposits and long-term construction...

  • Page 40
    ..., 2003 by the U.S. Bankruptcy Court. Subsequently, the United Express Agreement received all the necessary approvals from the creditors' committee operating on behalf of United under bankruptcy protection and United's pilot union, the Airline Pilot Association. Under the terms of the United Express...

  • Page 41
    ...'s actual operating results from flights under the United Express Agreement, which were more favorable to the Company than the rates and expenses estimated by the Company prior to the execution of the United Express Agreement. Deferred Aircraft Credits The Company accounts for incentives provided by...

  • Page 42
    ...related impact on net income and net income per share (in thousands, except per share information): $ 66,787 $ 78,277 $ 50,516 57,745 58,127 57,229 57,551 56,365 57,237 1.16 1.37 0.90 1.15 1.36 0.88 Year Ended December 31, 2002 2001 2003 Net income: As reported Pro forma Net income per...

  • Page 43
    ...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 offered...

  • Page 44
    ...because the Company's business consists of scheduled airline passenger service. New Accounting Standard: In January 2003, the FASB ...2003 through 2019, 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 rate...

  • Page 45
    ... to subsidy payments. As of December 31, 2003, the Company had available $10,000,000 in an unsecured bank line of credit through January 31, 2005, with interest payable at the bank's base rate less one-quarter percent, which was a net rate of 4.0%. The line of credit provides for a total of $10,000...

  • Page 46
    ... Obligations The Company leases 134 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...

  • Page 47
    ... for its United Express operations. The Company presently anticipates that it will begin taking delivery of these aircraft in January 2004 and continue through May 2005. The Company's firm aircraft orders, as of December 31, 2003, consisted of orders for 30, 70-seat CRJ700s scheduled for delivery...

  • Page 48
    ... Prior Plans. The Executive 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 1,736,794 options had been issued as of December 31, 2003. The Allshare Plan provides for the issuance of options to...

  • Page 49
    .... United reduced its flight schedule by approximately 20%. As a result, SkyWest began to reduce its EMB120s flown under the United code. During the year ended December 31, 2001, the Company terminated certain EMB120 leases early and recorded a $3.4 million write-off of unamortized engine overhauls...

  • Page 50
    ... 31, 2003, 2002 and 2001, respectively. The Company's President, Chairman and Chief Executive Officer, serves on the Board of Directors for Zion's Bancorporation ("Zion's") and the Utah State Board of Regents. The Company maintains a line of credit (see Note 2) and certain bank accounts with Zion...

  • Page 51
    ... 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 52
    ... 10, 11, 12, 13 and 14 in Part III are incorporated herein by reference to the Company's definitive proxy statement for its 2003 annual meeting of shareholders scheduled for May 4, 2004. The Company's definitive proxy statement will be filed with the Commission not later than 120 days after December...

  • Page 53
    ... Airlines, Inc. United Express Agreement dated October 1, 1997 and subsequent amendments dated January 15, 1998 and February 9, 1998 Stock Option agreement dated January 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc. Lease Agreement dated December 1,1989 between Salt Lake City Corporation...

  • Page 54
    ... (9) (10) _____ Exhibit Master Purchase Agreement between Bombardier and SkyWest Airlines, Inc. United Express Agreement dated , 2003 between United Airlines, Inc. and SkyWest Airlines, Inc. Supplement to Master Purchase Agreement Between Bombardier, and SkyWest Airlines, Inc. Subsidiaries of the...

  • Page 55
    ... express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Salt Lake City...

  • Page 56
    SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2003, 2002 ... for doubtful accounts receivable $ Year Ended December 31, 2001: Engine overhaul accrual $ Allowance for inventory obsolescence Allowance for doubtful accounts receivable $ ...

  • Page 57
    ... No. 1 to Annual Report of Form 10-K/A for the year ended December 31, 2003, to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2004. SKYWEST, INC. By /s/ Jerry C. Atkin Jerry C. Atkin Chairman, President and Chief Executive Officer ADDITIONAL SIGNATURES Pursuant...

  • Page 58
    ... and subsidiaries, of our reports dated February 9, 2004, with respect to the consolidated financial statements and schedule of SkyWest, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Salt Lake City, Utah March 9, 2004 55

  • Page 59
    ... report appears in the Annual Report on Form 10-K of SkyWest, Inc. for the year ended December 31, 2003. Our report dated March 27, 2003, refers to a change in accounting for CRJ200 engine overhaul costs from the accrual method to the direct expense method in 2002. /s/ KPMG LLP Salt Lake City, Utah...

  • Page 60
    ... operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 61
    ... operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 62
    ... with the Amendment No. 1 to Annual Report on From 10-K/A of SkyWest, Inc. (the "Company") for the Year Ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry C. Atkin, Chief Executive Officer of the Company, certify, pursuant to...

  • Page 63
    ... with the Amendment No. 1 to Annual Report on From 10-K/A of SkyWest, Inc. (the "Company") for the Year Ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bradford R. Rich, Chief Financial Officer of the Company, certify, pursuant to...