SkyWest, Inc. Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airline and aircraft leasing businesses through SkyWest Airlines and SkyWest Leasing. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Results remained affected by COVID-19, although flight activity and passenger demand recovered substantially from 2020 levels. The company operated 486 aircraft under code-share agreements and had 615 aircraft in its total fleet at September 30, 2021.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total operating revenue | $744.8 million | $457.5 million | $1.936 billion | $1.537 billion |
| Operating income | $47.1 million | $74.6 million | $242.9 million | $136.5 million |
| Net income | $9.7 million | $33.7 million | $107.6 million | $37.9 million |
| Diluted EPS | $0.19 | $0.66 | $2.12 | $0.75 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $687.0 million | $548.7 million |
- Q3 operating revenue increased 62.8%; nine-month revenue increased 25.9%.
- Q3 operating margin was approximately 6.3%, versus 16.3% in 2020. Nine-month operating margin was approximately 12.5%, versus 8.9%.
- Q3 net margin was approximately 1.3%, versus 7.4% in 2020. Nine-month net margin was approximately 5.6%, versus 2.5%.
- Q3 departures increased 52.9% to 210,251, block hours increased 66.5% to 370,462, and passengers carried increased 120.9% to 10.9 million. The 79.1% load factor was 25.0 percentage points above 2020.
- Capacity purchase and prorate revenue increased in Q3 by 53.7% and 111.1%, respectively. For the nine months, they increased 17.5% and 52.1%.
- Operating expenses increased 82.2% in Q3 and 20.9% for the nine months, driven by higher activity, increased maintenance and fuel costs, and an $84.6 million non-cash CRJ900 impairment charge.
- Payroll support grants reduced operating expenses by $115.4 million in Q3 and $422.7 million for the nine months. The company had recognized all payroll grants received as of September 30, 2021.
- Cash and marketable securities totaled $912.5 million, up from $825.9 million at December 31, 2020. Total available liquidity was $953.5 million, including $41.0 million available under a credit line.
- Total debt, net of debt issuance costs, was $2.965 billion, down from $3.204 billion at year-end 2020. Net debt after cash and marketable securities was approximately $2.053 billion.
- Cash flow used in investing activities was $396.8 million, including $223.6 million for aircraft and rotable spare parts, $100.1 million in aircraft deposits, and a net $30.5 million investment in marketable securities.
- Financing activities used $234.1 million, primarily reflecting $448.5 million of debt principal payments, partly offset by $213.3 million of new debt issuance.
Material Changes Versus the Prior Comparable Period
- Revenue recovery and increased aircraft utilization materially improved nine-month profitability, but Q3 profitability declined because expense growth exceeded revenue growth and the company recorded the CRJ900 impairment.
- Maintenance expense increased 39.7% in Q3 and 40.0% for the nine months, reflecting work on older CRJ700 and CRJ200 fleets. Q3 fuel expense increased 138.7%, also reflecting a higher average fuel price.
- SkyWest Airlines generated a Q3 segment loss of $20.9 million versus segment profit of $32.0 million in 2020, primarily due to the impairment and higher operating costs. For the nine months, the segment returned to a $38.7 million profit from a $9.4 million loss.
- SkyWest Leasing segment profit increased to $39.0 million in Q3 and $109.9 million for the nine months, supported by additional aircraft and third-party leasing activity.
- Deferred revenue related to fixed capacity-purchase payments was $118.4 million at September 30, 2021. The company recognized $19.2 million of previously deferred revenue in Q3.
- The company repaid its U.S. Treasury secured loan, including interest, for $61.2 million and made $80.1 million of early aircraft-debt repayments during Q3.
- The company did not repurchase shares in the first nine months of 2021 and remains restricted from repurchasing shares through September 30, 2022 under the PSP 3 Agreement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide formal financial guidance. It stated that available working capital was expected to satisfy present requirements, planned capital expenditures, scheduled lease payments, and debt service for at least the next 12 months.
- Flight activity remained below 2019 levels: Q3 2021 departures were 210,251 versus 219,272 in Q3 2019, and nine-month 2021 flights were below the 2019 level cited in the filing.
- COVID-19 recovery remains uncertain because of new variants, vaccine efficacy and mandates, government travel restrictions, passenger demand, and schedules controlled by major airline partners.
- The company expects to add 39 new E175 aircraft and seven used CRJ700 aircraft under existing commitments. It plans to finance the E175 commitments with approximately 80% to 85% debt and the balance with cash, while funding the used CRJ700 purchases with cash.
- Total commitments and obligations were $4.849 billion, including $3.0 billion of debt principal, $1.063 billion of firm aircraft and spare-engine commitments, $480.1 million of interest commitments, and $309.4 million of operating lease payments.
- The company recorded an $84.6 million non-cash impairment charge on CRJ900 aircraft because 16 new Delta-contracted E175 aircraft are expected to replace 16 CRJ900 aircraft beginning in 2022 and redeployment value was uncertain.
- In October 2021, a cyberattack led to malware remediation and a server outage that caused approximately 1,700 flight cancellations. Management estimated a $15 million to $20 million pre-tax adverse impact on fourth-quarter 2021 results.
- Fuel-price risk is concentrated in prorate operations. A hypothetical 25% increase in fuel prices would have increased nine-month 2021 fuel expense by approximately $19.4 million.
- Management assessed disclosure controls as effective and stated that routine legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether COVID-19 recovery and airline-partner schedules sustain or exceed 2019 operating levels.
- The effect of the $84.6 million CRJ900 impairment and future residual-value or impairment risk as the fleet transitions to E175 aircraft.
- The sustainability of reported earnings and cash flow excluding payroll support grants and other government assistance.
- Execution, financing, and delivery timing for the committed E175 and CRJ700 aircraft.
- Compliance with U.S. Treasury program restrictions, including share repurchase, dividend, executive compensation, and employment-related limitations.
- The actual financial impact of the October 2021 cyberattack and flight cancellations.
- Exposure to maintenance costs for older aircraft, fuel prices on prorate routes, labor availability, and the financial condition of United, Delta, American, and Alaska.