SkyWest, Inc. 2022 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airline and aircraft leasing businesses. SkyWest Airlines provides scheduled regional service primarily under capacity purchase and prorate agreements with United, Delta, American and Alaska. SkyWest Leasing owns aircraft and spare engines leased to the airline business and third parties.
This filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. As of March 31, 2022, the company had 633 aircraft, including 513 in scheduled service or under code-share contract, and approximately 1,960 daily departures.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total operating revenue | $735.2 million | $534.6 million | 37.5% increase |
| Operating income | $52.0 million | $80.8 million | 35.6% decrease |
| Operating margin | 7.1% | 15.1% | Down 8.0 percentage points |
| Net income | $17.7 million | $35.9 million | 50.6% decrease |
| Diluted EPS | $0.35 | $0.71 | 50.7% decrease |
| Net margin | 2.4% | 6.7% | Down 4.3 percentage points |
| Cash from operating activities | $20.5 million | $231.6 million | 91.1% decrease |
Flying agreements revenue increased 38.5% to $708.1 million. Capacity purchase revenue increased 42.1% to $628.9 million, while prorate revenue increased 15.3% to $79.2 million. Lease, airport services and other revenue increased 15.9% to $27.1 million.
Total operating expenses increased 50.6% to $683.1 million. Salaries, wages and benefits rose 36.5% to $300.1 million, while aircraft maintenance expense declined 27.2% to $148.4 million. Fuel expense increased 30.7% to $25.1 million as the average fuel price rose from $2.13 to $3.40 per gallon. Q1 2021 included a $193.2 million payroll support grant recorded as an operating expense offset; no comparable grant was recognized in Q1 2022.
At March 31, 2022, cash and cash equivalents were $246.0 million and marketable securities were $610.5 million, for total cash and marketable securities of $856.5 million. Total liquidity declined modestly from $860.4 million at December 31, 2021.
Total long-term debt, including current maturities and before debt issuance costs, was $3.232 billion, compared with $3.141 billion at December 31, 2021. Debt was primarily fixed-rate, with an average effective rate of approximately 3.9% on aircraft-related debt. The company had $68.6 million available under a $100 million revolving credit facility after outstanding letters of credit.
Investing activities used $124.7 million, including $114.0 million for property and equipment. Financing activities provided $91.7 million, including $185.7 million of debt issuance proceeds and $94.0 million of principal repayments. Capital expenditures, including non-cash items, were $127.6 million.
Material Changes Versus the Prior Comparable Period
- Aircraft in scheduled service or under contract increased to 513 from 468, while block hours increased 12.6% to 310,993, departures increased 13.8% to 176,211 and passengers carried increased 53.9% to 8.8 million.
- The passenger load factor increased to 77.6% from 56.7%.
- Revenue growth reflected higher flight activity, demand recovery, the absence of temporary capacity purchase rate reductions provided in Q1 2021, and recognition of previously deferred revenue.
- SkyWest Airlines reported a segment loss of $19.8 million compared with segment profit of $15.5 million in Q1 2021. SkyWest Leasing segment profit increased 27.0% to $43.2 million.
- Operating cash flow fell sharply, primarily because of working-capital timing, changes in deferred and unbilled revenue, and lower net income.
- The company took delivery of four new E175 aircraft and issued $82.8 million of aircraft debt. It also executed a $102.9 million, three-year promissory note secured by spare engines at a fixed annual interest rate of 3.6%.
- Deferred revenue related to capacity purchase agreements was $96.4 million at March 31, 2022, while unbilled revenue was $12.0 million. The company recognized $7.5 million of previously deferred revenue and $3.6 million of unbilled revenue during the quarter.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that available liquidity was sufficient for present requirements, including planned capital expenditures, scheduled lease payments and debt service, for at least the next 12 months.
The company expects to add two E175 aircraft for American in the third quarter of 2022, seven E175 aircraft for Alaska by the first half of 2023, 16 E175 aircraft for Delta by the end of 2022 and 11 used CRJ700 aircraft for American by the end of 2023. Delivery and in-service dates may change.
SkyWest had a firm commitment for 25 E175 aircraft from Embraer, with anticipated deliveries through the first half of 2023. Firm aircraft and spare-engine commitments totaled $679.8 million, and total commitments and obligations were $4.679 billion, including debt principal, interest and operating leases.
Key risks include the uncertain effects of COVID-19 and travel demand recovery, workforce shortages and pilot availability, labor costs, fuel prices, dependence on major airline partners and their flight schedules and financial condition, aircraft residual values, substantial debt and lease obligations, aircraft delivery timing, inflation, weather and geopolitical instability, including the Russia-Ukraine conflict. A hypothetical 25% increase in prorate fuel prices would have increased Q1 2022 fuel expense by approximately $6.3 million.
The company recognized no comparable payroll support grant in Q1 2022, whereas Q1 2021 benefited from a $193.2 million grant. Management stated that routine legal proceedings were not expected to have a material adverse effect. Disclosure controls and procedures were considered effective as of March 31, 2022.
Important Facts for Investors to Verify
- Whether higher flight activity and passenger demand persist without materially higher labor, fuel and other operating costs.
- The timing, financing and profitability of the 25 committed E175 aircraft and other planned fleet additions.
- The sustainability and timing of recognizing the $96.4 million deferred revenue balance and $12.0 million unbilled revenue balance.
- Liquidity after scheduled debt maturities, aircraft purchases, lease payments and other commitments, particularly given sharply lower operating cash flow.
- Exposure to United, Delta, American and Alaska, including contract renewals, aircraft removals, schedule changes and reimbursement disputes.
- Ability to recruit and retain pilots and other aviation professionals without further wage pressure or capacity constraints.
- Credit quality of airline-partner receivables and notes receivable; the allowance for credit losses was $42.1 million at March 31, 2022.