Skywest Airlines, the Australian and South East Asia regional airline operator, has announced a 96% increase in pre-tax profit to £2.87 million (S$8.67 million) on turnover up over 26% to £24.58 million (S$74.19 million) for the six months to 31st December 2007. Skywest generated earnings per share of 1.08p (3.26 cents) and this facilitated a 133% increase in the interim dividend to 0.23p (0.70 cents).

The balance sheet showed net assets of S$51.51 million, up from S$45.71 million at the end of calendar 2006, with S$10.36 million of cash comparing with S$7.41 million of borrowings – the cash position remaining strong despite systematic repurchases of shares for cancellation during the 2007 calendar year as significant cash flows continued to be generated from operating activities.

The reported performance was achieved on the back of significant growth in both the regular airline and scheduled charter areas of the company’s business.

On the regular passenger side, the company reported that revenue passenger kilometres (the number of paying passengers carried multiplied by the number of kilometres flown) increased by 12.75% and that it believes the current growth, in revenue terms, on this side of the business is 20%. Growth here looks set to continue as a focus on tourism together with the stable operating environment provided by the exclusive nature of many of the company’s routes provide an excellent platform. During the period Skywest variously demonstrated that it sees tourism as a key area of expansion - signing an interline agreement with European operator Hahn Air to deliver seamless ticket transactions and joining Virgin Blue’s Velocity loyalty program.

Since the period end the company has continued in this vein as it announced on 17th January 2008 a code-share contract with Virgin Blue as well as the appointment of a new operator of its packaged holidays division. The contract with Virgin Blue offers Skywest access to that company’s large scale sales network, increasing Skywest’s sales exposure to the east coast of Australia and enabling seamless travel and connectivity between the East and West coasts. Meanwhile the outsourcing of day-to-day packaged holiday operations to major tourism provider Creative Holidays, effective from 1st April, should further aid development as the company works with Creative’s team of tourism specialists.

While the regular passenger side of the business thus looks set for continued, robust growth, it is the scheduled charter area where the company is enjoying the largest growth in revenues. On the back of a burgeoning mining and resource sector all over Western Australia, demand for services currently exceeds the ability of the company to secure aircraft, pilots and flight attendants. Recently announced operating statistics for February 2008 showed a 150% increase in the number of charter services compared to the same month in 2007 and with contracts continuing to be won – a three year deal with a member of major gold producer the Newcrest Mining Group was announced in January – the company is actively seeking to match the growth in demand with growth in its resource base. In line with this, during the period a further two jets were leased to bring the total fleet to 12 aircraft and the results statement notes that two further jets are anticipated to be added to the fleet within 60 to 90 days.

From the stable operating base afforded it by the exclusive nature of many routes and the multiple year nature of its scheduled charters, the company will look to continue to take advantage of its growing market by adding new routes and providing additional services. Threats, including the cost of fuel, the need to secure additional aircraft, pilots and flight attendants and a significant dependency on an expanding resources sector, persist. However, a fuel levy on ticket sales to the public and provisions in charter contracts, further leasing of aircraft and an on-going recruitment program and the continuing strength of world commodities markets are expected to continue to provide mitigating influences. Indeed the company speculates that increasing fuel costs could assist its returns rather than diminish them as air travel becomes more competitive against road travel.

Because of the significant developments since the period end, the company reflects “a material increase in group revenues for the full year above and beyond the prior year is inevitable.” Our forecasts could therefore prove conservative but even on the basis of 2.3p of forecast earnings per share for the full year, the prospective price earnings multiple is a lowly 6.8. Considering the growth being delivered and forward prospects, we continue to regard a price/earnings ratio of around 18.5 as far from unreasonable and as such maintain our 42.6p price target and stance of buy.

Forecast Table Year to 30th June Sales (S$million) Pre-tax Profit (S$million) Earnings Per Share (p) Price Earnings Ratio 2006A 98.95 5.80 1.03    15.3 2007A 130.49 12.70 1.21    13.0 2008E 159.60 21.50 2.30    6.8

*Skywest Airlines is a corporate client of Bishopsgate Communications which is owned by Rivington Street Holdings, the ultimate owner of GE&CR.