SkyWest Airlines 2004 Annual Report Download

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To our Shareholders
When reviewing our accomplishments for 2004, it gives me great pleasure to report on
the additional milestones achieved and our successful financial performance for the year.
It has been yet another very challenging year for the airline industry; however, we have
continued to expand our operations by continuing to acquire regional jet aircraft. In
executing our plan, we have continued to provide value to both our major partners and
our shareholders. Following are some of the milestones and significant successes
achieved since the beginning of 2004:
xAchieved over $1 billion in operating revenues
xAcquired 24 new regional jet aircraft
xAcquired 4 nearly new CRJ200 regional jet aircraft
xAcquired first CRJ700 regional jet aircraft during January 2004
xMaintained an essentially flat cost per available seat mile in spite of increased fuel
costs
xCompleted a long-term engine services agreement for engines on our CRJ700
regional jet aircraft
xAnnounced an order for 20 additional CRJ700 regional jet aircraft, subsequent to
year end
As a testament to our quality, we were named the Number “1” mainland carrier for on-
time performance for calendar year 2004 by the U.S. Department of Transportation Air
Travel Consumer Report. We were also named the Number “1” carrier for calendar year
2003, the first year in which we were included in the reporting. Recently, Regional
Airline World magazine named SkyWest Airlines as the Regional Airline of the Year for
2004.
Subsequent to year end, we announced that we had been selected by United Airlines to
acquire 20 additional CRJ700 regional jet aircraft. We anticipate that we will begin
taking delivery of these aircraft in the third quarter of 2005 and will complete the
deliveries by the end of the first quarter of 2006. All of these aircraft are currently
scheduled for operation under our existing United Express agreement. We are currently
the largest United Express operator and the additional aircraft will allow us to expand our
operations even further. We believe we were selected by United as a result of the quality
of our service and our ability to offer a cost-competitive larger regional jet solution.
It was another busy year for aircraft deliveries during 2004. We acquired 24 new regional
jets, consisting of 12 CRJ200 aircraft and 12 CRJ700 aircraft. We also acquired four
nearly new CRJ200 regional jet aircraft that were one year old or less. As a result of
acquiring the new regional jets, our total operating revenues increased to $1.2 billion, an
increase of approximately 30% from 2003. We also produced net income of $82 million
or $1.40 per diluted share, for 2004. The earnings per share amount represented a 22%
increase over 2003.

Table of contents

  • Page 1
    ... were included in the reporting. Recently, Regional Airline World magazine named SkyWest Airlines as the Regional Airline of the Year for 2004. Subsequent to year end, we announced that we had been selected by United Airlines to acquire 20 additional CRJ700 regional jet aircraft. We anticipate that...

  • Page 2
    ... fleet consisted of 125 CRJ200 aircraft, 12 CRJ700 aircraft and 73 EMB-120 Brasilia turboprop aircraft. As previously noted, we were selected by United Airlines to acquire an additional 20 CRJ700 regional jet aircraft. We anticipate that we will complete deliveries of our previously ordered aircraft...

  • Page 3
    ...For the year ended December 31, 2004 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 4
    ... and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors and Executive Officers of the Registrant Executive Compensation...

  • Page 5
    Forward-Looking Statements In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. SkyWest, Inc. (the "Company") may, from time to time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform ...

  • Page 6
    ... additional 50-seat, Bombardier Canadair CRJ200 regional jets ("CRJ200s") and two additional CRJ700s, bringing the total order for the Company's United Express operations to 32 CRJ700s and ten CRJ200s. The Company began taking delivery of these aircraft in January 2004 and has scheduled delivery of...

  • Page 7
    ...Phoenix Tucson Yuma Arkansas: Texarkana Fayetteville California: Bakersfield Burbank Carlsbad Chico Crescent City 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...

  • Page 8
    ... New York: Syracuse North Dakota: Bismarck Fargo Ohio: Dayton Canton Oklahoma: Oklahoma City Tulsa Oregon: Eugene 1998 1986 1995 2000 2001 1983 2001 1988 1982 1980 1990 1983 2003 2003 2003 2004 2004 2004 2004 2004 2001 2004 2003 2003 2004 2004 2004 2004 2004 2001 2002 2004 1988 1988 1988 2002 1988...

  • Page 9
    ...Nashville Texas: Beaumont College Station Dallas El Paso Houston Killeen San Angelo San Antonio Tyler Victoria Utah: Cedar City Salt Lake City St. George Virginia: Roanoke Washington: Pasco Seattle Spokane West Virginia: Charleston Wyoming: Casper Cody Jackson Hole Canada: Calgary Edmonton Vancouver...

  • Page 10
    ...-time arrival and departure statistics, cancellation of flights 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...

  • Page 11
    ...'s contract flying arrangements with Delta and United contain termination provisions that could adversely impact the Company's revenues. The Company's rights under the United Express Agreement expire incrementally between 2012 and 2016; however, United can terminate the agreement at any time without...

  • Page 12
    ... expires in 2010; however, Delta can terminate the agreement at any time without cause upon 180 days notice. Maintenance costs will likely increase as the age of the Company's regional jet fleet increases Because the average age of SkyWest's CRJ700s and CRJ200s is approximately 0.4 and 2.8 years...

  • Page 13
    ..., 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, 2004, SkyWest owned or leased the following types of aircraft: Number of Aircraft Type of...

  • Page 14
    ...Lake City, Utah; and Fresno, California. SkyWest owns or leases the following properties: x x SkyWest owns a 56,600 square foot maintenance facility in Palm Springs, California. SkyWest leases a 90,000 square foot aircraft maintenance and training facility at the Salt Lake City International Airport...

  • Page 15
    ...et al., v. SkyWest Airlines, Inc. In July 2003, two former employees of SkyWest commenced litigation in the Superior Court of Santa Barbara, California, alleging violations of minimum wage, meal and rest break, and overtime regulations, as well as violations of the California Labor Code and Business...

  • Page 16
    ... 13.00 20.35 16.83 Fourth 20.45 14.31 19.24 15.46 The transfer agent for the Company's common stock is Zions First National Bank, Salt Lake City, Utah. Dividends During 2004 and 2003, the Board of Directors declared regular quarterly dividends of $0.03 and $0.02 per share respectively. On November...

  • Page 17
    ... the year Selected Operating Data Year Ended December 31, 2002 405,007 351,631 8,388,935 2,990,753 4,356,053 68.7% 58.4% 25.73¢ 17.78¢ 15.12¢ 356 149 2004 Block hours Departures Passengers carried Revenue passenger miles (000) Available seat miles (000) Load factor Break-even load factor Yield...

  • Page 18
    ...available seat miles). "Breakeven load factor" is the passenger load factor that will result in operating revenues being equal to operating expenses, assuming constant revenue per passenger mile and expenses. "Yield per passenger mile" represents the average amount one passenger pays to fly one mile...

  • Page 19
    ... in Salt Lake City and as a United Express carrier in Los Angeles, San Francisco, Denver, Chicago and the Pacific Northwest. SkyWest believes its success in attracting multiple contractual relationships with major airline partners is attributable to its delivery of high-quality customer service with...

  • Page 20
    ... with regional airline feed into its Houston hub beginning on July 1, 2003. The Company announced on January 24, 2005 in conjunction with Continental Airlines to end its contractual relationship for flying turboprop aircraft as a Continental Connection carrier. The Company currently intends...

  • Page 21
    ...vendor to provide long-term engine services covering the scheduled and unscheduled repairs for engines on its CRJ700 regional jet aircraft effective January, 2004. Aircraft Leases The majority of the Company's aircraft are leased from third parties. In order to determine the proper classification of...

  • Page 22
    ... of flying new, incremental regional jet aircraft. These efficiencies are passed on to the Company's major partners through the rates contemplated by their respective contracts. Twelve CRJ700s and twelve additional CRJ200s were placed into service under the Company's United Express operations...

  • Page 23
    ... 31, 2004, from 0.9¢ the year ended December 31, 2003. The increase in cost per ASM was primarily due to the timing of certain maintenance events. Under the Company's United Express Agreement, specific amounts are included in the rates and charges for mature maintenance on regional jet engines that...

  • Page 24
    ... $23.3 million (pretax) under the United Express Agreement, with no corresponding offset for CRJ200 engine maintenance overhauls since none were incurred. Because the "Maintenance" line in the table set forth above does not include salaries, wages and employee benefits associated with the Company...

  • Page 25
    ... efficiencies of flying new, incremental regional jet aircraft. These efficiencies are passed on to the major partners through decreases in the rates contemplated by their respective contracts. Twenty-eight additional CRJ200s were placed into service under the Company's United Express operations and...

  • Page 26
    ... by CRJ200s, a higher mix of new aircraft with SkyWest's fleet and the 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 regional jet engines that the Company records as revenue...

  • Page 27
    ...and $7.8 million from the sale of common stock in connection with the exercise of stock options under the Company's stock option and employee stock purchase plans. During the year ended December 31, 2004, the Company invested $193.4 million in flight equipment, $69.6 million in marketable securities...

  • Page 28
    ... for the Company's United Express operations to 32 CRJ700s and 10 additional CRJ200s. The Company began taking delivery of these aircraft in January 2004 and has scheduled delivery of the remaining aircraft covered by the order through May 2005. The Company's firm aircraft orders, as of December...

  • Page 29
    ... sufficient to meet its future needs. Pursuant to the Company's contract flying arrangements, United will bear the economic risk of fuel price fluctuations on the Company's United Express flights. On the Company's Delta Connection regional jet flights, Delta will bear the economic risk of fuel price...

  • Page 30
    ...this Report. The Company decreased interest expense by $209,000 during the year ended December 31, 2004 and increased interest expense by $225,000 for the year ended December 31, 2003 in accordance with the interest swap agreement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information...

  • Page 31
    ... have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SkyWest, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by...

  • Page 32
    ... respects, 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...

  • Page 33
    SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS December 31, 2004 December 31, 2003 CURRENT ASSETS: Cash and cash equivalents Marketable securities Restricted cash Income tax receivable Receivables, net Inventories Prepaid aircraft rents Other current assets...

  • Page 34
    ...long-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 COMMITMENTS AND CONTINGENCES...

  • Page 35
    ... 31, 2003 2004 2002 OPERATING REVENUES: Passenger Ground handling 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 36
    ... securities net of tax of $607 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 Treasury stock purchases Cash dividends declared ($0.12 per share) Balance at December 31, 2004 62...

  • Page 37
    ... Increase (decrease) in allowance for doubtful accounts Net increase in deferred income taxes Tax benefit from exercise of common stock options Deferred aircraft credits, net of accretion Changes in operating assets and liabilities: Increase in restricted cash Decrease (increase) in receivables...

  • Page 38
    ... in Salt Lake City and as a United Express carrier in Los Angeles, San Francisco, Denver, Chicago and the Pacific Northwest. SkyWest believes its success in attracting multiple contractual relationships with major airline partners is attributable to its delivery of high-quality customer service with...

  • Page 39
    ...is provided for spare parts currently identified as excess to reduce the carrying costs to net realizable value. These allowances are...Assets Aircraft Rotable spares Ground equipment Office equipment Leasehold improvements Buildings Change in Accounting Estimates During the first quarter of 2004, the...

  • Page 40
    ...with a third party vendor to provide long-term engine services covering the scheduled and certain unscheduled repairs for engines on its CRJ700 regional jet aircraft effective January, 2004. Under the terms of the agreement, the Company will pay a set dollar amount per engine hour flown on a monthly...

  • Page 41
    ..., essentially all EMB120 flights conducted by the Company under the Delta code were transitioned from contract flying to "prorate" flying. Under the prorate flying arrangement, the Company controls scheduling, ticketing, pricing and seat inventories and receives a prorated portion of passenger fares...

  • Page 42
    ... effect of accounting change Stock Options The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma information regarding net income and...

  • 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
    ... No. 131 because the Company's business consists of scheduled airline service. New Accounting Standard As contemplated by SFAS Statement 123, Accounting for Stock-Based Compensation, the Company currently accounts for sharebased payments to employees using intrinsic value method set forth in Opinion...

  • Page 45
    ...banks, due in monthly installments plus interest of 6.09% through 2020, 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 subsidies through the Brazilian Export financing program, through 2011, secured by...

  • Page 46
    ...'s new corporate office building. The average effective rate on the debt related to the CRJ200 aircraft of $467.5 million was approximately 4.4% at December 31, 2004. The Company has available $10.0 million in an unsecured bank line of credit through January 31, 2005, with interest payable at the...

  • Page 47
    ... Obligations The Company leases 153 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 48
    ... Company's actual experience. Purchase Commitments and Options On September 15, 2003, the Company announced the completion of a firm order for 30, 70-seat CRJ700s for its United Express operations. The Company began taking delivery of these aircraft in January 2004 and has scheduled delivery of the...

  • Page 49
    ... 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 2,384,827 options had been issued as of December 31, 2004. The Allshare Plan provides for the issuance of options to...

  • Page 50
    ...years ended December 31, 2004, 2003 and 2002, respectively. Employee Stock Purchase Plan In February 1996, the Company's Board of Directors approved the SkyWest, Inc. 1995 Employee Stock Purchase Plan ("The Stock Purchase Plan"). All employees who have completed 90 days of employment are eligible to...

  • Page 51
    ... internal financial objectives. The Company currently intends to phase out of its Continental Connection turbo-prop flying from March to June 2005. This flying consisted of approximately 1.5% of SkyWest's annual ASM production for 2004 and accounted for less than 1.0% of SkyWest's annual operating...

  • 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
    ... Committee of the Company's Board of Directors. Based on this assessment, the Company's management determined that, as of December 31, 2004, the Company maintained effective internal control over financial reporting. Ernst & Young LLP, independent registered public accounting firm, who audited and...

  • Page 54
    ... consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the years then ended of SkyWest, Inc. and subsidiaries and our report dated March 9, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Salt Lake City, Utah March 9, 2005 52

  • Page 55
    ITEM 9B. OTHER INFORMATION None. 53

  • Page 56
    ...for its 2004 annual meeting of shareholders scheduled for May 3, 2005. The ...Directors" and "Executive Officers" ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE COMPENSATION ITEM 11. "Executive Compensation" and "Report of the Compensation Committee" "Election of Directors...

  • Page 57
    .... 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 (1) (1) (3) (2) (6) (2) (4) (5) (7) (7) 4.2 10.1 10.2 10.3 10...

  • Page 58
    ... SkyWest Airlines, Inc. United Express Agreement dated September 9, 2003 between United Airlines, Inc. and SkyWest Airlines, Inc. Supplement to Master Purchase Agreement Between Bombardier, and SkyWest Airlines, Inc. Subsidiaries of the Registrant Consent of Independent Registered Public Accounting...

  • Page 59
    ...on our audits. 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, Utah March 9, 2005 57

  • Page 60
    ...AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands) Additions Charged to Costs and Expenses Description Balance at Beginning of Year Deductions Balance at End of Year Year Ended December 31, 2004: Allowance...

  • Page 61
    ...of the Board And Director Executive Vice President, Chief Financial Officer And Treasurer Director Director Director Director Director Director Director Date March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March 10, 2005 March...

  • Page 62
    ... of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of SkyWest, Inc., included in this Annual Report (Form10-K) for the year ended December 31, 2004. /s/ Ernst & Young LLP Salt Lake City, Utah March 9, 2005 60

  • Page 63
    ... report appears in the December 31, 2004 annual report on Form 10-K of SkyWest, Inc. 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 March 9, 2005 61

  • Page 64
    ... and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant...

  • Page 65
    ... and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant...

  • Page 66
    ... Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jerry C. Atkin Jerry C. Atkin Chief Executive Officer March 10, 2005 This certification accompanies the Amendment pursuant to...

  • Page 67
    ... Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Bradford R. Rich Bradford R. Rich Chief Financial Officer March 10, 2005 This certification accompanies the Amendment...

  • Page 68
    ...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 Ernst & Young LLP Salt Lake City, Utah Corporate Headquarters SkyWest, Inc. 444 South River Road St. George, UT...