SkyWest, Inc. (SkyWest Airlines and ExpressJet Airlines) (St. George, Utah) reported net income of $8.6 million, or $0.17 per diluted share, for the quarter ended December 31, 2013, compared to net income of  $13.9 million, or $0.27 per diluted share, for the same period last year.

SkyWest also reported net income of $59.0 million, or $1.12 per diluted share, for the twelve months ended December 31, 2013, compared to $51.2 million, or $0.99 per diluted share, for the same period last year.

Quarter Summary

For each of the quarters ended March, June and September of 2013, SkyWest reported improved financial results, on a year-over-year basis, in achieving increases in its fully-diluted earnings per share.  However, SkyWest experienced a decline in its financial results for the quarter ended December 31, 2013 compared to its financial results for the quarter ended December 31, 2012. During the quarter ended December 31, 2013, compared to the quarter ended December 31, 2012, SkyWest experienced increased crew training costs as a result of new regulations regarding pilots (FAR 117) that became effective January 4, 2014 of approximately $3.0 million pretax. SkyWest also experienced increased maintenance costs of approximately $5.0 million, pretax, due primarily to performing additional C-checks related to used aircraft that were added to SkyWest’s fleet during 2013.  Additionally during the quarter ended December 31, 2013, SkyWest incurred approximately $3.0 million, pretax, of costs associated with advanced pilot training and efforts to become certified to operate the new Embraer 175 regional jets scheduled for deliveries beginning in March 2014.

For the quarter ended December 31, 2013, SkyWest generated increased operating revenues (net of fuel, certain engine overhaul, landing fee and station pass-through revenues under SkyWest’s contracts with its major partners), of approximately $23.0 million, or 3.7%, compared to the quarter ended December 31, 2012,  primarily due to additional block hour production of 2.8%  and scheduled rate escalations. The increased operating revenues were offset by increased costs in several areas that resulted in a reduced amount of operating and pre-tax income for the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012.

Following are selected statistics and information from the quarter ended December 31, 2013, compared to the quarter ended December 31, 2012:

• Pre-tax income declined to $15.1 million, compared to $25.6 million
• Fully-diluted EPS declined to $0.17, compared to $0.27
• Increased block hour production 2.8% to 584,594 block hours, compared to 568,808 block hours
• Increased operating revenues by approximately $23.0 million (net of fuel, certain engine overhaul, landing fees and station pass-through revenues) primarily related to rate escalations under SkyWest’s agreements with its major partners and increased block hour production
• Increased total aircraft fleet to 757 aircraft as of December 31, 2013, compared to 744 aircraft as ofDecember 31, 2012

Commenting on the results, Jerry C. Atkin, SkyWest’s Chairman and CEO, said, “The decrease in our earnings in the fourth quarter is primarily due to advance preparations for the implementation of FAR 117, the new flight and duty time regulations, and aging maintenance costs on the 50-seat aircraft. We also invested in our future by beginning certification work on the Embraer 175 aircraft that are scheduled for delivery beginning in the first quarter of 2014.”

Financial and Operating Results

Operating revenues totaled $804.4 million for the quarter ended December 31, 2013, compared to $810.7 million for the same period last year or a decrease of $6.3 million.  The decrease was due primarily to the reduction of approximately $29.2 million in fuel expenses, certain engine overhaul amounts, landing fees and station costs which were directly reimbursed by SkyWest’s major partners and recorded as operating revenues.  However, this reduction was mostly offset by recording $23.0 million in additional operating revenues, primarily resulting from rate escalations under SkyWest’s agreements with its major partners and a 2.8% increase in total block hours for the quarter ended December 31, 2013, compared to the quarter ended December 31, 2012.

Total airline expenses (consisting of total operating and interest expenses) increased $4.0 million, or 0.5%, during the quarter ended December 31, 2013, compared to the same period in 2012.  However, after deducting pass-through costs for fuel, certain engine overhaul expenses landing fees and station costs from total operating cost and interest expenses, the remaining total airline expenses increased $33.4 million.  Management estimates that approximately $16.9 million of the increase was due primarily to the 2.8% increase in block hour production and approximately $16.4 million was primarily due to additional maintenance costs, cost increases resulting from new pilot regulations (FAR 117) and costs incurred from certifying a new E175 aircraft type.

Under certain of its agreements with its major partners, SkyWest recognizes revenue at fixed hourly rates for mature engine maintenance on regional jet engines and recognizes engine maintenance expense on its CRJ200 regional jet engines on an as-incurred basis as maintenance expense.  During the quarter ended December 31, 2013, CRJ200 engine expense under these agreements decreased $1.0 million to$9.6 million, compared to $10.6 million for the quarter ended December 31, 2012, primarily as a result of decreased engine overhaul expense due to the timing of scheduled engine maintenance events.  SkyWest was reimbursed approximately $12.7 million and $10.3 million for engine overhaul expense, under its agreements with its major partners, during the quarters ended December 31, 2013 and 2012, respectively.

Liquidity

At December 31, 2013, SkyWest had $670.1 million in cash and marketable securities, compared to$709.4 million as of December 31, 2012.  Cash and marketable securities decreased $39.3 million during the quarter ended December 31, 2013 compared to the balance as of December 31, 2012, due primarily to SkyWest’s payment of $40.0 million (total amount required under agreement) related to deposits on its new order for E175 regional jet aircraft.  SkyWest’s long-term debt was $1.29 billion as of December 31, 2013, compared to $1.47 billion as of December 31, 2012.  The decrease in long-term debt for the twelve-months ended December 31, 2013 was due primarily to SkyWest’s payment of normal recurring debt obligations.  SkyWest has significant long-term lease obligations that are recorded as operating leases and are not reflected as liabilities on SkyWest’s consolidated balance sheets.  At a 5.8% discount rate, the present value of these lease obligations was approximately $1.5 billion as of December 31, 2013.

Business Developments

On May 21, 2013, SkyWest announced it had entered into a Capacity Purchase Agreement (CPA) with United Airlines, Inc. to operate 40 new Embraer 175 dual-class regional jet aircraft. The CPA is for 12 years and the new aircraft will be operated by SkyWest’s wholly-owned subsidiary, SkyWest Airlines, Inc. (St. George). Deliveries for these aircraft are scheduled to begin in March 2014 and continue through July 2015.

Additionally, on May 21, 2013 SkyWest announced it reached an agreement with Embraer S.A. for the purchase of 100 new E175 dual-class regional jet aircraft, 40 of which are considered firm orders and the remaining 60 aircraft remain conditional upon SkyWest entering into capacity purchase agreements with other major airlines. SkyWest intends to place the 40 new E175 aircraft into service under the terms of the United CPA discussed above.

On June 17, 2013, SkyWest and Embraer jointly announced an aircraft purchase agreement covering 100 E175-E2 dual-class regional jet aircraft and an option to purchase an additional 100 of the same aircraft.  Deliveries for these E2 aircraft are tentatively planned to start in 2020.

During 2012, SkyWest announced the award of 34 additional dual-class aircraft and the removal of 66 CRJ200 aircraft under its Delta Connection Agreements with Delta Airlines, Inc. (Atlanta).  As of May 2013, all 34 of these additional dual-class aircraft had been delivered. As of December 31, 2013 SkyWest had removed 33 (22 placed in contract with another major partner and 11 removed from SkyWest’s fleet) of the 66 CRJ200 aircraft from service and currently anticipates removing another 29 CRJ200 aircraft during 2014.  SkyWest believes the remaining four CRJ200 aircraft will be removed from its fleet in early 2015.  Additionally, 41 of the 66 CRJ200 aircraft have been financed by Delta and will be returned to Delta with no further obligation by SkyWest.

Copyright Photo: Michael B. Ing/AirlinersGallery.com. Even though SkyWest is shrinking its Bombardier CRJ200 fleet, it was fortunate to place some of the grounded CRJ200s with American Airlines as an American Eagle carrier. SkyWest’s Bombardier CRJ200 (CL-600-2B19) N864AS (msn 7502) departs the runway at Los Angeles International Airport.

American Eagle-SkyWest: