SkyWest, Inc. (SkyWest Airlines and ExpressJet Airlines) (St. George, UT) reported financial and operating results for the second quarter ended June 30, 2014. Highlights are as follows:

SkyWest’s net loss was $(14.7) million, or $(0.29) per diluted share, for the quarter ended June 30, 2014. This compares to net income of $20.7 million, or $0.39 per diluted share, for the same period last year.
The significant items that impacted the financial results for the quarter ended June 30, 2014 included the following:

We achieved lower than anticipated performance incentive bonuses under our flying contracts and had unfavorable flying contract settlements that negatively impacted revenue.

We experienced a significant amount of pilot training and related costs associated with compliance with FAR117 flight and duty rules, pilot attrition and introduction of the new E175 aircraft.

We wrote-off certain asset values acquired through the ExpressJet acquisition, wrote-down the carrying value of the Saltillo paint facility and recorded a loss on the disposition of ground handling fixed assets.
A change in our estimated pre-tax results for calendar 2014 resulted in the reversal of a portion of the income tax benefit we recorded in the first quarter of 2014.

2014 and the first half of 2015 will be a significant transition period for SkyWest, and to address the challenges we have made key leadership changes and fleet changes, such as:

In May 2014, SkyWest announced Russell “Chip” Childs as President, SkyWest, Wade Steel EVP, SkyWest and Michael Thompson, COO, SkyWest Airlines

In the second half of 2014, SkyWest expects 56 of its unprofitable 50-seat aircraft contracts will naturally expire and the aircraft will be returned to lessors. SkyWest also expects an additional 101 unprofitable 50-seat aircraft contracts will naturally expire and be removed from service by December 31, 2015.

SkyWest added eight E175 regional jet aircraft as of June 30, 2014, expects delivery of 13 additional E175 aircraft by December 31, 2014 and the remaining 19 additional aircraft by August 2015. With the training and other start-up costs associated with the E175 aircraft launch, SkyWest anticipates the economic benefit of the E175 aircraft will become evident by the second quarter of 2015.

SkyWest invested approximately $26.8 million for E175 specific spare parts, engines and tooling as of June 30, 2014 and anticipates investing another $10.0-$12.0 million for similar items by the end of 2014. SkyWest also invested $33.6 million into E175 ownership equity as of June 30, 2014.

Other notable items that occurred during the quarter, or subsequent to the quarter end, include the following:

We repurchased $5.3 million or 427,500 shares of outstanding common stock

We settled our outstanding IROP’s suit with Delta Air Lines with no immediate or additional further negative impact to our financial results.

Commenting on the results, Jerry C. Atkin, SkyWest’s Chairman and CEO, said, “Although we recovered somewhat from the severe weather and related impact we suffered during the first quarter of 2014, we faced additional issues in the second quarter of 2014 and our financial and operating results simply did not meet our expectations during the quarter.” He continued, “However, non-operating items accounted for about 50% of the lower results at ExpressJet Airlines while SkyWest Airlines financial performance was slightly better than plan. We believe we are on the right path and will continue to work with our major partners and internally to achieve the objectives for improving both financial and operational performance. On a positive note, SkyWest Airlines achieved a successful introduction of 11 of 40 firm ordered E175 regional jet aircraft under contract with United Airlines.”

Financial and Operating Results

Operating revenues totaled $816.6 million for the quarter ended June 30, 2014, compared to $839.1 million for the same period of 2013, a decrease of $22.5 million. The significant items impacting operating revenue, after excluding the impact of pass-through costs under our flying agreements, include missed contract performance incentives and unfavorable flying contract settlements that resulted, in the aggregate, in $9.8 million lower revenue compared to the quarter ended June 30, 2013.

The significant items that impacted our total airline expenses (consisting of total operating and interest expenses) after excluding the impact of pass-through costs under our flying agreements, include increased flight crew costs related to implementation of FAR117 flight and duty rules, pilot turnover and training costs for the introduction of the new E175 aircraft, that resulted in an increase of $20.6 million compared to the quarter ended June 30, 2013. We also wrote-off a foreign value added tax asset associated with our aircraft paint facility in Saltillo as well as wrote-down the carrying value of the facility due to changes in its value and recorded a loss on the disposition of ground handling equipment that resulted in a combined write-off of $6.8 million.

Liquidity

At June 30, 2014, SkyWest had $467.0 million in cash and marketable securities, compared to $670.1 million as of December 31, 2013. Cash and marketable securities decreased $203.1 million from December 31, 2013 to June 30, 2014, primarily due to SkyWest’s investment of approximately $60.0 million in E175 assets and E175 equity investment in the debt financing, timing of semi-annual aircraft lease payments resulting in an increase of prepaid aircraft rents of $48.0 million, incurring a pre-tax loss for the six months ended June 30, 2014 of $46.0 million and investment of approximately $20.0 million in engines for our CRJ200 aircraft. SkyWest also anticipates refinancing interim debt financed aircraft into long-term leases, and if it is successful in that process, SkyWest’s management anticipates the return of approximately $34.0 million in cash.

Copyright Photo: Michael B. Ing/AirlinersGallery.com. Operating 50-seat regional jets has been a drag on earnings for the company. According to the company, “In the second half of 2014, SkyWest expects 56 of its unprofitable 50-seat aircraft contracts will naturally expire and the aircraft will be returned to lessors. SkyWest also expects an additional 101 unprofitable 50-seat aircraft contracts will naturally expire and be removed from service by December 31, 2015.” Bombardier (Canadair) CRJ200 (CL-600-2B19) N652BR (msn 7429) in the house SkyWest colors departs from Los Angeles International Airport.

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