SkyWest Airlines 2005 Annual Report Download

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Table of contents

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    ...For the year ended December 31, 2005 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 6
    ...Procedures Other Information PART III Directors and Executive 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...

  • Page 7
    ...impact and outcome of labor negotiations; unionization efforts among SkyWest Airlines' employees; and other risks and uncertainties listed from time to time in our reports filed with the SEC. There may be other factors not identified above of which we are not currently aware that may affect...

  • Page 8
    ... United Express flights and approximately 400 were Delta Connection flights. SkyWest Airlines' operations are conducted from hubs located in Chicago (O'Hare), Denver, Los Angeles, San Francisco, Portland, Seattle/Tacoma and Salt Lake City. SkyWest Airlines' fleet as of December 31, 2005 consisted...

  • Page 9
    ... were Delta Connection flights. ASA's operations are conducted primarily from hubs located in Atlanta, Salt Lake City and Cincinnati. ASA's fleet as of December, 2005, all of which were flown for Delta, consisted of 35 70-seat CRJ700s, 106 40 and 50seat CRJ200s, and twelve ATR-72 turboprops (which...

  • Page 10
    ...factors for code-share partner regional airlines are code-share agreement terms, customer service, aircraft types, fare pricing, flight schedules and markets and routes served. Based on the size of the combined operations of SkyWest Airlines and ASA, we are the largest regional airline in the United...

  • Page 11
    ...and/or logos of its code-share partner and to market and advertise its status as a carrier for the code-share partner. For example, SkyWest Airlines flies out of Chicago (O'Hare), Denver, Los Angeles, San Francisco, Portland and Seattle/Tacoma as United Express and out of Salt Lake City as The Delta...

  • Page 12
    ... aircraft with their colors and logos and to market our status as The Delta Connection or United Express. Under each of our code-share agreements, our passengers participate in the major partner's frequent flyer program, and the major partner provides additional services such as reservations, ticket...

  • Page 13
    ...100 United Express flights per day between Chicago (O'Hare), Denver, Los Angeles, San Francisco, Portland and Seattle/Tacoma and designated outlying destinations. Generally, under the United Express Agreement, United retains all air fares, cargo rates, mail charges and other revenues associated with...

  • Page 14
    ...United to provide hub service at United's hubs in Chicago (O'Hare), Denver, Los Angeles, San Francisco, Seattle/Tacoma, or Washington, D.C. (Dulles International Airport). • • Markets and Routes As of December 31, 2005, SkyWest Airlines scheduled the following daily flights as a United Express...

  • Page 15
    ... we consider SkyWest Airlines' relationships with its employees to be good. As of December 31, 2005, ASA employed approximately 5,552 full-time equivalent employees consisting of 2,481 pilots and flight attendants, 1,747 customer service personnel, 895 mechanics and other maintenance personnel, and...

  • Page 16
    ... flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. SkyWest Airlines and ASA do not operate at any airports where landing slots are restricted. All air carriers are required to comply with federal laws and regulations pertaining...

  • Page 17
    ...since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased travel on our pro-rate routes, historically occurring in the summer months, and are unfavorably affected by decreased business travel during the...

  • Page 18
    ..., ticketing and reservations, scheduling, dispatching, fuel purchasing and ground handling services. If Delta or United were to cease any of these operations or no longer provide these services to us, due to termination of one of our code-share agreements, a strike by Delta or United personnel or...

  • Page 19
    ... be able to operate successfully under the terms of its confirmed plan. In light of the importance of our code-share agreements with Delta and United to our business, the termination of these agreements or the failure of Delta to ultimately emerge from its bankruptcy proceeding could jeopardize our...

  • Page 20
    ...to our code-share agreements that reduce certain benefits to us in order to obtain additional aircraft, or for other reasons. Furthermore, the troubled financial condition, bankruptcies and restructurings of Delta and United may reduce the growth of regional flying within their flight systems. Given...

  • Page 21
    ... ASA Delta Connection Agreement, our growth is restricted in Atlanta, Cincinnati, New York (John F. Kennedy International Airport), Orlando and Salt Lake City. Under SkyWest Airlines' United Express Agreement, growth is restricted in Chicago (O'Hare International Airport), Denver, Los Angeles, San...

  • Page 22
    ... allow Delta or United to terminate their respective code-share agreements. We may be unable to obtain all of the aircraft, engines, parts or related maintenance and support services we require, which could have a material adverse impact on our business. We rely on a limited number of aircraft types...

  • Page 23
    ... Atlanta, Los Angeles, San Francisco, Salt Lake City, Chicago, Denver, Cincinnati/Northern Kentucky and the Pacific Northwest. Nearly all of our flights will either originate or fly into one of these hubs. Our revenues depend primarily on our completion of flights and secondarily on service factors...

  • Page 24
    ... as code-share partners of major airlines, but we also face competition from low-cost carriers and major airlines on many of our routes. Low-cost carriers such as Southwest, JetBlue, US Airways, and AirTran, among others, operate at many of our hubs, resulting in significant price competition...

  • Page 25
    ... Employee Stock Purchase Plan. On February 8, 2006, after reviewing the issues associated with the over issuance, the staff of The Nasdaq Stock Market notified us that the over issuance violated the shareholder approval rule set forth in Nasdaq Marketplace Rule 4350(i)(1)(A). The Nasdaq staff letter...

  • Page 26
    ... interest in or control of our company. Additionally, our code-share agreements contain termination and extension trigger provisions related to change in control type transactions that may have the effect of deterring a change in control of our company. ITEM 1B. UNRESOLVED STAFF COMMENTS None 22

  • Page 27
    ... where passenger load and other factors make the operation of a Bombardier Regional Jet impractical. As of December 31, 2005, SkyWest Airlines operated 62 Brasilia turboprops out of Los Angeles, San Francisco, Salt Lake City, Seattle/Tacoma and Portland. SkyWest Airlines' Brasilia turboprops are...

  • Page 28
    ...with SkyWest Airlines personnel. Other airlines, including Delta and United, provide ticket handling and/or ground support services for SkyWest Airlines in 54 of the 121 airports to which SkyWest Airlines flies. We own the corporate headquarters facilities of SkyWest and SkyWest Airlines, located in...

  • Page 29
    ... 1, 2005. ASA leases ticket counters, check-in and boarding and other facilities in the passenger terminal areas in the majority of the airports it serves and staffs those facilities with ASA personnel. Other airlines, including Delta, provide ticket handling and/or ground support services for...

  • Page 30
    ... 14.49 The transfer agent for our common stock is Zions First National Bank, Salt Lake City, Utah. Dividends During 2005 and 2004, our Board of Directors declared regular quarterly dividends of $0.03 per share. On November 2, 2005, our Board of Directors declared a regular quarterly cash dividend of...

  • Page 31
    ... Stock Purchase Plan, the amounts paid by the participating employees for the shares were withheld as payroll deductions from compensation we would have otherwise paid to such employees during the six-month period preceding the month of each sale. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA...

  • Page 32
    ... 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 33
    ...to "de-hub" its Dallas/Fort Worth operations. In 2004, SkyWest Airlines expanded its United Express operations to provide service in Chicago. As of December 31, 2005, SkyWest Airlines operated as a Delta Connection carrier in Salt Lake City, and a United Express carrier in Los Angeles, San Francisco...

  • Page 34
    ... we control scheduling, ticketing, pricing and seat inventories and receive a pro-rated portion of passenger fares. Since August 1, 2003, substantially all of our flights have been contract flights. For the year ended December 31, 2005, essentially all of our Brasilia turboprops flown for Delta were...

  • Page 35
    ... and ground handling revenues are recognized when service is provided. Under our contract and pro-rate flying agreements with our code-share partners, revenue is considered earned when the flight is completed. In the event that our contractual rates have not been finalized at quarterly or annual...

  • Page 36
    ... in load factor was due primarily to the further development of our relationships with United and Delta whereby SkyWest supplements mainline service in previously established and developed markets. Additionally, we are experiencing higher passenger acceptance of our regional jet aircraft. 32

  • Page 37
    ... The increase in number of employees was due, in large part, to the acquisition of ASA and addition of personnel required for the new regional jet flying and ground handling operations within our United Express operations. The cost per ASM for aircraft costs, including aircraft rent and depreciation...

  • Page 38
    ... efficiencies of flying new, incremental regional jet aircraft. These efficiencies are passed on to our major partners through the rates contemplated by their respective contracts. Twelve CRJ700s and twelve additional CRJ200s were placed into service under our United Express operations during the...

  • Page 39
    ... load factor was due primarily to the further development of our relationships with United and Delta whereby SkyWest supplements mainline service in previously established and developed markets. Additionally, we are experiencing higher passenger acceptance of our regional jet aircraft. Total Airline...

  • Page 40
    ...timing of certain maintenance events. Under our United Express Agreement, specific amounts are included in the rates and charges for mature maintenance on regional jet engines that we record as revenue. However, consistent with the change to a direct expense maintenance policy, we record maintenance...

  • Page 41
    ...356,252 $ 375,769 Purchase Commitments and Options On February 4, 2005, we announced that SkyWest Airlines had been selected by United to operate 20 new CRJ700s in its United Express operations, and that SkyWest Airlines had placed a firm order for these CRJ700s with Bombardier. Deliveries of these...

  • Page 42
    ... this Report. Long-term Debt Obligations Our total long-term debt at December 31, 2005 was $1,753.9 million, of which $1,746.5 million related to the acquisition of Brasilia turboprop, CRJ200 and CRJ700 aircraft and $7.4 million related to our corporate office building. The average effective rate on...

  • Page 43
    ... contract flying arrangements, United will bear the economic risk of fuel price fluctuations on our United Express flights. On our Delta Connection regional jet flights, Delta will bear the economic risk of fuel price fluctuations. On the majority of our Delta Connection routes flown using Brasilia...

  • Page 44
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information set forth below should be read together with the "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere herein. 40

  • Page 45
    ...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, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of...

  • Page 46
    ...Restricted cash Income tax receivable Receivables, net Inventories Prepaid aircraft rents Deferred tax assets Other current assets Total current assets PROPERTY AND EQUIPMENT: Aircraft and rotable spares Deposits on aircraft Buildings and ground... notes to consolidated financial statements. 42

  • Page 47
    ... of long-term debt Accounts payable Line of credit Accrued salaries, wages and benefits Accrued aircraft rents Taxes other than income taxes Other current liabilities Total current liabilities OTHER LONG TERM LIABILITIES LONG TERM LINE OF CREDIT LONG-TERM DEBT, net of current maturities DEFERRED...

  • Page 48
    SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Year Ended December 31, 2004 2005 2003 OPERATING REVENUES: Passenger Ground handling and other Total operating revenues OPERATING EXPENSES: Flying operations Customer service Maintenance ...

  • Page 49
    ... securities net of tax of $219 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, 2005 63...

  • Page 50
    ... of marketable securities 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...

  • Page 51
    ...December 31, 2005, SkyWest Airlines operated approximately 1,500 total daily flights as a Delta Connection carrier in Salt Lake City, and a United Express carrier in Chicago (O'Hare), Denver, Los Angeles, San Francisco, Portland and Seattle/Tacoma. SkyWest Airlines believes its success in attracting...

  • Page 52
    Use of Estimates The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets ...

  • Page 53
    ... the expense is recorded when the overhaul event occurs. In 2004, the Company entered into an engine services agreement with a third party vendor to provide long-term engine services covering the scheduled and unscheduled repairs for engines certain of its CRJ700 regional jet aircraft. Under the...

  • Page 54
    ... of Delta. ASA is a regional airline with primary hub operations in Atlanta, Salt Lake City and Cincinnati. In connection with the acquisition of ASA, SkyWest Airlines and ASA entered into Delta Connection Agreements, which became effective September 8, 2005. On September 14, 2005, Delta filed...

  • Page 55
    ... of use" of a specific type and number of aircraft over a stated period of time. The amounts deemed to be rental income under the United Express Agreement for the years ended December 31, 2005 and 2004 were $168.4 and $114.5 million, respectively. These amounts were recorded in passenger revenue on...

  • Page 56
    ... Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stockbased compensation plans. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, requires pro forma information regarding net income and...

  • Page 57
    ...No. 131 because the Company's business consists of scheduled regional airline service. New Accounting Standard As contemplated by SFAS Statement 123, Accounting for Stock-Based Compensation("SFAS 123"), we currently account for share-based payments to employees using intrinsic value method set forth...

  • Page 58
    ...is a regional airline with primary hub operations in Atlanta, Salt Lake City and Cincinnati. The consolidated statements of income reported herein contain 114 days of operations relating to ASA from September 8, 2005 to December 31, 2005. Pursuant to the terms of the Stock Purchase Agreement entered...

  • Page 59
    ... in monthly installments plus interest of 6.05% to 7.38% 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 60
    ... to prime less 0.25%, which was a net rate of 7.0% on December 31, 2005. Additionally, SkyWest Airlines entered into another borrowing facility with a financing company and borrowed $60.0 million. The facility expires on March 21, 2006, with interest payable on a floating basis which was 6.87% at...

  • Page 61
    ... December 31, 2004 2003 2005 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 Provision for income taxes $ 62,869 $ 47,805 $ 38,320 4,338 42 $ 42,700 6,387 5,313 (1,897...

  • Page 62
    ... Purchase Commitments and Options On February 4, 2005, the Company announced that SkyWest Airlines had been selected by United to operate 20 new CRJ700s in its United Express operations, and that SkyWest Airlines had placed a firm order for these CRJ700s with Bombardier. Deliveries of these aircraft...

  • Page 63
    ... Delta and United combined accounted for approximately 98.5% of the Company's total revenues. Employees As of December 31, 2005 SkyWest and SkyWest Airlines collectively employed 8,095 full-time equivalent employees consisting of 3,480 pilots and flight attendants, 3,303 customer service personnel...

  • Page 64
    ... 4,000,000 shares of common stock to officers, directors and other management employees of which 3,696,477 options had been issued as of December 31, 2005. The Allshare Plan provides for the issuance of options to purchase up to 4,000,000 shares of common stock to employees of the Company, of which...

  • Page 65
    ...42 Number Outstanding 1,463,176 3,412,440 1,425,386 6,301,002 (7) Retirement Plan and Employee Stock Purchase Plan SkyWest Retirement Plan The Company sponsors the SkyWest, Inc. Employees' Retirement Plan (the "SkyWest Plan"). Employees who have completed 90 days of service and are 18 years of age...

  • Page 66
    ... for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and...

  • Page 67
    ... Committee of our Board of Directors. Based on this assessment, our management determined that, as of December 31, 2005, we maintained effective internal control over financial reporting. Ernst & Young LLP, independent registered public accounting firm, who audited and reported on our consolidated...

  • Page 68
    ..., in our opinion, SkyWest, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the...

  • Page 69
    ..." "Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PRINCIPAL ACCOUNTANT FEES AND SERVICES ITEM 13...

  • Page 70
    ... United Air Lines, Inc., and SkyWest Airlines, Inc. 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 and SkyWest Airlines, Inc. Master Purchase Agreement between Bombardier and...

  • Page 71
    ... Master Purchase Agreement Between Bombardier, and SkyWest Airlines, Inc. Subsidiaries of the Registrant Consent of Independent Registered Public Accounting Firm Consent of Independent Registered Public Accounting Firm Certification of Chief Executive Officer Certification of Chief Financial Officer...

  • Page 72
    ... 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, 2006 68

  • Page 73
    ...SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2005, 2004 and 2003 (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, 2005: Allowance for...

  • Page 74
    ... duly authorized, on March 13, 2006. SKYWEST, INC. By /s/ Bradford R. Rich Bradford R. Rich Executive Vice President, Chief Financial Officer and Treasurer ADDITIONAL SIGNATURES Pursuant to the requirement of the Securities Act of 1934, as amended, this Annual Report on Form 10-K has been signed...

  • Page 75
    ... 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, 2005. /s/ Ernst & Young LLP Salt Lake City, Utah March 9, 2006 71

  • Page 76
    ... information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2006 /s/ Jerry C. Atkin Jerry C. Atkin Chairman of the Board and Chief Executive Officer...

  • Page 77
    ... weaknesses in the design or 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...

  • Page 78
    ... ACT OF 2002 In connection with the Annual Report on From 10-K of SkyWest, Inc. (the "Company") for the year ended December 31, 2005 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 79
    ... OF 2002 In connection with the Annual Report on Form 10-K of SkyWest, Inc. (the "Company") for the year ended December 31, 2005 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...

  • Page 80
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  • Page 83
    ... the Board since 2003 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 Ernst & Young LLP Salt Lake City, Utah Corporate Headquarters...

  • Page 84