27/02/2009 - 12:14

Rio contract hits Skywest Airlines

27/02/2009 - 12:14

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Skywest Airlines has booked a near $3 million half year net loss after accounting for one-off impacts including a $5.7 million cost associated with a major Rio Tinto contract.

Rio contract hits Skywest Airlines

Skywest Airlines has booked a near $3 million half year net loss after accounting for one-off impacts including a $5.7 million cost associated with a major Rio Tinto contract.

In a statement on the London Stock Exchange, the airline reported a net loss of $S2.78 million ($A2.8 million), down from the previous corresponding period's net profit of $S6.5 million.

The result includes the $S5.7 million set-up costs to facilitate the $S100 million Rio contract and a foreign exchange loss of $S3.4 million.

During the reporting period, Skywest started charter services for Rio with regular services between Perth and its Pilbara iron ore operations, comprising of 20 services per week.

Skywest also services Rio's subsidiary Argyle Diamonds, Fortescue Metals Group, Newcrest Mining, Newmont Mining and others.

"The past six months have seen a difficult period in the regular scheduled airline business that the Company operates in which flights are sold to the flying public," Skywest said.

"Deterioration in local economic conditions has seen a lowering of passenger numbers during the past six months. Regular passenger transport numbers fell by 2.3% over the same period last year.

"But dollars lost were off-set by growth in charters. There also were significant negative swings in both fuel prices and currency rates particularly between the AUD and USD.

"Despite the difficult trading conditions, the Company is taking advantage of opportunities to increase services to key markets, including airports such as Darwin, Kununurra and Karratha."

Revenue for the half year increased 31 per cent from $S74.2 million to $S97.3 million.

Earnings before rental of aircraft, depreciation, finance and tax costs was down from $S21.5 million to $S13.9 million.

Basic underlying net operating profit from airline operations was $S1.1 million.

 

 

The announcement is below:

 

 

 

CHAIRMAN'S STATEMENT

We present our interim results for the six months ended 31 December 2008. The Company's airline operations have resulted in Group revenues for the half year increasing to $97,308,717 with earnings before interest, taxation, depreciation, amortization and aircraft rentals (EBITDAR) being $13,850,283. Revenues increased by 31% a trend which continues in the current trading. The directors believe that, given set-up costs of $5.7M to facilitate the $100M RIO contract and the difficult operating environment, the result is satisfactory.

The airline operations generated an operating profit of $1,123,071. However after unrealized foreign exchanges losses of $3,388,729, one time costs and the like that were recognized during the Period the net loss attributable to shareholders was $2,786,267.

The economic conditions were challenging and were coupled with high volatility in fuel costs and currencies. However, despite the environment the operations of the airline remain profitable and operationally cash positive. In recent months the management has been focused on efficiency improvements and a timely cost reduction program that has strengthened the overall operation. These measures along with the investment that took place during the Period to ramp up for the Rio Tinto Ltd air services contract announced earlier in the year along with other charter contracts has put your Company in a robust state to take full advantage of opportunities which continue to present themselves in the charter services sector.

The Company's results are presented and prepared in accordance with IFRS and are un-audited.

TRADING

The past six months have seen a difficult period in the regular scheduled airline business that the Company operates in which flights are sold to the flying public. Deterioration in local economic conditions has seen a lowering of passenger numbers during the past six months. Regular passenger transport numbers fell by 2.3% over the same period last year. But dollars lost were off-set by growth in charters. There also were significant negative swings in both fuel prices and currency rates particularly between the AUD and USD.

Despite the difficult trading conditions, the Company is taking advantage of opportunities to increase services to key markets, including airports such as Darwin, Kununurra and Karratha.

The Company continues to pursue contracts for scheduled charter services with key resource companies. These long term scheduled charters involve flying workers from the key residential areas of Perth and other regional centres into the remote mining areas. These contracts are typically for three or more years. This area continues to grow significantly notwithstanding the global downturn. Charter services grew by 94.6% over the same period last year.

During the six months, Skywest commenced charter services for Rio Tinto Ltd for regular services between Perth and its iron ore operations in the Pilbara region of Western Australia. This contract involves the provision of 20 services per week. Additionally, the Company rolled over its contract with Rio Tinto's subsidiary Argyle Diamonds for the transport of employees between Perth and the mine in the Kimberley. Scheduled charters for other clients continue, including Fortescue Metals Group Ltd, Newcrest Mining, Newmont Mining and others. Furthermore, Skywest often sells regular passenger tickets combined with block space bookings for resource companies on regular passenger transport routes thus maximizing its revenue potential per flight.

ONE TIME IMPACTS

Included in the current Period's results is a material adjustment from exchange losses equal to $3,388,729. These adjustments are due to recent movements in the exchange rate, particularly the significant deterioration in the exchange rate between the Australian Dollar and currencies such as the Singapore & US Dollars. The Australian Dollar has deteriorated by 24% against the Singapore Dollar and 28% against the US Dollar over the Period. For the sake of clarity, the Company holds many assets valued in Australian dollars, yet reports in Singapore dollars and therefore any diminution in the value of the Australian dollar may cause an exchange loss, albeit such loss may not have been realized. Indeed should the Australian Dollar increase in value during the second half of this financial year the unrealized exchange rate losses may be reversed.

One time costs associated with the gearing up for the major Rio Tinto air services contract were estimated to be approximately AUD $5.7M. All of these costs have been expensed during the Period.

OPERATIONAL OUTLOOK AND OPERATIONAL INITIATIVES

Difficult economic conditions are having a significant impact on the business. Despite this extraordinary environment and a noticeable decline in customer consumer confidence, the Company is well positioned to grow and prosper; due in part to its two segment strategy of targeting both regular scheduled passenger transport and scheduled charter services. The ability of the Company to redeploy assets between the two operating business segments is a significant advantage during current times.

Strategically, the Company has been determined to embark on a major cost saving initiative with the aim of stripping at least $10M per annum from the operating cost base of the Company. The Board is pleased to report that this program is on schedule. Cost-saving initiatives have included: significant reductions in supply costs from major suppliers, staff savings due to greater efficiency in human resources management, changes to aircraft parts procurement processes, pay freezes for senior management, reduction in capacity on some routes and relinquishment of inefficient office space.

The 2009 financial year will remain challenging for the Company; however the Board feels that a number of positive factors will ultimately see an improved second half year of the 2008-2009 financial year for the Company. These include the cost-saving initiatives currently being actioned, the continued strong performance of the Scheduled Charter sector and the significant decline in the price of fuel over the past few months.

The Company continues to aggressively compete for major scheduled charter work throughout Western Australia. The resources industry, in particular the gas sector, is continuing to expand, and will provide further opportunities for scheduled charter services.

Additional opportunities for profitable regular passenger transport services are also being undertaken, including increased flights to Darwin, Kununurra and Karratha.

The Company's wholly owned Singapore subsidiary has been approved by the Economic Development Board of Singapore (the "EDB") for incentive under the EDB's Aircraft Leasing Scheme. This scheme primarily involves the provision of concessional tax rates associated with the leasing of aircraft. At this time, the Company cannot provide reliable guidance on the tax savings which could result from participation in the EDB scheme, however, the Company is thankful for the opportunity and believes that over the next 5 years participation in the scheme may produce tangible benefits to shareholders.

RISK AND COMMENTS ON FUEL COSTS

Risks faced by the business are normal commercial risks and typical airline industry related risks.

While fluctuations in fuel costs have unpredictable consequences to the bottom line, it may be that increasing fuel costs could assist our returns rather than diminish them. The reason for this focuses on the decision making process when a passenger chooses to either travel in an automobile or to fly. Air travel in Australia is a more cost effective option for the consumer than an automobile over the vast distances of Skywest's routes. This is because the amount of fuel used by an aircraft on a per passenger basis and its cost is typically less than that used by a single passenger on a similar trip in an automobile. This set of circumstances is only applicable when the airline has the economic freedom to directly pass to the end user changes in fuel cost.

To mitigate the fuel cost issues, the Company operates an ethical and transparent fuel levy policy on pricing of ticket sales to the public. The Company also has rise and fall provisions in its contracts with mining companies where on the basis of a transparent formula, in so far as possible, the Company passes on increases in fuel.

We would like to take this opportunity of thanking you - the shareholders and owners of the enterprise - for your continued support and your encouragement. We look forward to keeping you updated on the progress of our Company.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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