SkyWest Airlines 2005 Annual Report Download - page 33

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Item 7. 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 our results of operations during the years
ended December 31, 2005, 2004 and 2003. Also discussed is our financial position as of the end of December 31, 2005 and 2004.
You should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing
elsewhere in this report or incorporated herein by reference. This discussion and analysis contains forward-looking statements.
Please refer to the sections of this Report entitled ‘‘Cautionary Statement Concerning Forward-Looking Statements’’ and “Item
1A. Risk Factors” for discussion of the uncertainties, risks and assumptions associated with these statements.
Overview
Through SkyWest Airlines and ASA, we operate the largest regional airline in the United States. As of December 31, 2005,
SkyWest Airlines and ASA offered scheduled passenger and air freight service with more than 2,400 total daily departures to 218
destinations in the United States, Canada, Mexico and the Caribbean. Additionally, we provide ground handling services for
approximately ten other airlines throughout our system. As of December 31, 2005, our consolidated fleet consisted of 229
CRJ200s (66 assigned to United and 163 assigned to Delta, including ten CRJ100s which have been upgraded to conform to the
manufacturer’s specifications for CRJ200s) 77 CRJ700s (42 assigned to United and 35 assigned to Delta), 62 Brasilia turboprops
(48 assigned to United and 14 assigned to Delta), and 12 ATR-72 turboprops (all assigned to Delta). We believes our success in
attracting multiple contractual relationships with major airline partners is attributable to our delivery of high-quality customer
service with an all cabin-class fleet at a competitive cost structure. For the month ended December 31, 2005, approximately
59.9% of our aggregate capacity was operated under the Delta code and approximately 40.1% was operated under the United
code.
SkyWest Airlines has been a partner with Delta in Salt Lake City and United in Los Angeles since 1987 and 1997,
respectively. In 1998, SkyWest Airlines expanded its relationship with United to provide service in Portland, Seattle/Tacoma,
San Francisco and additional Los Angeles markets. In 2001, SkyWest Airlines expanded its operations to serve as the Delta
Connection in Dallas/Fort Worth. However, effective January 31, 2005, SkyWest Airlines re-deployed all its Delta Connection
flights to Salt Lake City as a result of Delta’s decision 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, Denver, Chicago and the
Pacific Northwest, operating more than 1,500 total daily flights. In April 2003, SkyWest Airlines signed an agreement with
Continental to supply Continental with regional airline feed into Continental’s Houston hub beginning on July 1, 2003. The
Continental flying represented only approximately 1.5% of our “available seat miles” or “ASMs” during 2004, and generated less
than 1.0% of our 2005 operating income. In January 2005, we announced the mutual decision with Continental to end SkyWest
Airlines’ operations as a Continental Connection carrier and we completed the phase-out process on July 1, 2005.
On September 7, 2005, we completed the acquisition of ASA from Delta for $421.3 million in cash. Additionally, as part of the
purchase, we paid $5.3 million of transaction fees and ASA assumed approximately $1.25 billion in long-term debt. In addition, we
returned to Delta $50 million in deposits that Delta had previously paid on future ASA aircraft deliveries. We believe the
combination of SkyWest Airlines and ASA presents our company with new opportunities for growth through our two
geographically-focused regional airline platforms – SkyWest Airlines in the Western United States and ASA in the Eastern United
States. We now provide the vast majority of regional airline service for Delta in Atlanta, its most important eastern hub, and Salt
Lake City, its most important western hub. In connection with the ASA acquisition, we have established new, separate, but
substantially similar, long-term fixed-fee Delta Connection Agreements with Delta for both SkyWest Airlines and ASA. We also
obtained control of 26 gates in the Hartsfield-Jackson International Airport located in Atlanta, from which we currently provide
service to Delta. Delta has committed to provide to us opportunities to utilize 28 additional regional jets in our fleet by the end of
2007. Delta has also agreed that, starting in 2008, ASA is guaranteed to maintain its percentage of total Delta Connection flights that
it has in 2007, so long as its bid for additional regional flying is competitive with other regional carriers.
ASA has been a code-share partner with Delta in Atlanta since 1984. ASA expanded its operations as a Delta Connection
carrier to also include Cincinnati/Northern Kentucky and Salt Lake City in September 2002 and April 2003, respectively. ASA
operates approximately 850 daily flights, all in the Delta Connection system.