SKYWEST INC annual report, FY2022

SkyWest, Inc. 2022 Form 10-K Summary

Business context and reporting period

SkyWest reported for the fiscal year ended December 31, 2022; the filing is an annual report rather than a standalone fourth-quarter filing. Through SkyWest Airlines, the company operated approximately 1,620 daily departures under code-share arrangements with United, Delta, American and Alaska. Approximately 88% of flying-agreements revenue came from capacity purchase agreements, which generally provide fixed-rate compensation and reduce exposure to passenger-fare and fuel-price volatility.

• Fleet: 625 aircraft, including 517 in scheduled service or under contract and 40 leased to third parties.
• Employees: 13,582, including 4,704 pilots; approximately 89.6% were represented by in-house labor associations.
• Major-airline concentration: Delta and United together represented approximately 72.5% of total revenue.
• Reporting segments: SkyWest Airlines and SkyWest Leasing.

Financial and operating metrics

Metric	2022	2021	Change
Total operating revenue	$3.005 billion	$2.713 billion	10.7% increase
Operating income	$181.2 million	$275.9 million	34.3% decrease
Operating margin	6.0%	10.2%	Down 4.2 points
Net income	$73.0 million	$111.9 million	34.8% decrease
Diluted EPS	$1.44	$2.20	Decrease
Net margin	2.4%	4.1%	Down 1.7 points
Operating cash flow	$480.4 million	$831.8 million	42.3% decrease
Investing cash flow	$(904.9) million	$(698.5) million	Greater use of cash
Financing cash flow	$269.1 million	$(90.6) million	Improved

• Flying-agreements revenue increased 10.9% to $2.900 billion. Capacity purchase flight-operations revenue increased 20.9% to $2.028 billion, while prorate revenue declined 14.7% to $349.3 million.
• Passengers carried increased 9.4% to 40.1 million and passenger load factor increased to 83.4% from 74.6%.
• Block hours declined 4.9% to 1.254 million and departures declined 1.4% to 739,388, primarily because of pilot and captain shortages.
• Salaries, wages and benefits increased 22.8% to $1.212 billion and represented 42.9% of operating expenses. Aircraft maintenance expense declined 21.2% to $644.2 million.
• Interest expense was $127.1 million, compared with $123.1 million. Interest income increased to $17.6 million from $1.1 million.
• Income before taxes was $92.6 million, and the effective tax rate was 21.2%, compared with 25.7% in 2021.
• At December 31, 2022, cash and cash equivalents were $103.0 million and marketable securities were $944.2 million, for total cash and marketable securities of $1.047 billion.
• Total available liquidity was approximately $1.1 billion, including $70.1 million available under the line of credit.
• Total long-term debt, including current maturities, was $3.409 billion, up from $3.141 billion; all long-term debt had fixed interest rates as of year-end.
• Property and equipment, net, was $5.548 billion. Total capital expenditures, including non-cash items, were $662.3 million.

Material changes versus the prior comparable period

• Revenue benefited from 25 additional E175 aircraft, higher capacity-purchase rates and the absence of the temporary COVID-19 rate reductions provided to major airline partners in 2021.
• Profitability declined because 2021 included $422.7 million of payroll-support grant benefits, while 2022 had no comparable grant. Higher pilot compensation, hiring costs, training costs and other labor costs also pressured results.
• The company recorded a $51.4 million non-cash impairment charge related to 14 CRJ700 aircraft classified as held for sale. In contrast, 2021 included an $84.6 million CRJ900 impairment charge.
• The company amended certain capacity purchase agreements, reducing future fixed monthly payments and increasing variable payments. It deferred recognition of $22.1 million of allocated fixed aircraft lease payments in 2022.
• Deferred revenue increased to $144.7 million from $103.9 million, while unbilled revenue increased to $19.9 million from $8.4 million. The valuation depends significantly on forecast future block hours.
• The pilot collective bargaining agreement was amended in September 2022. First-year first-officer pay increased from approximately $46 to $90 per flight hour, while first-year CRJ and E175 captain pay increased to $140 per flight hour.
• SkyWest formed SkyWest Charter in 2022 and expected to begin public charter operations to underserved communities in 2023 using CRJ200 aircraft in a 30-seat configuration.

Guidance, outlook, risks and unusual items

• Management indicated that 2023 block-hour production will likely be lower than 2022 levels because of captain and first-officer availability; the reduction may continue into 2024.
• Management expects elevated pilot training costs in 2023 as first officers are trained and promoted to captain.
• Planned deliveries include three Delta E175 aircraft scheduled for 2023 and 2024 and one Alaska E175 scheduled for 2025. Timing remains subject to change.
• The company believes available working capital will be sufficient for present requirements, including planned capital expenditures, lease payments and debt service, for at least the next 12 months.
• Firm aircraft and spare-engine commitments totaled $140.3 million, and principal maturities on long-term debt totaled $3.409 billion, including $442.4 million due in 2023.
• Operating lease payments totaled $202.9 million, including $74.6 million due in 2023.
• Key risks include pilot and other labor shortages, wage inflation, reduced flight schedules, dependence on four major airline partners, contract termination or renegotiation, aircraft financing and residual-value risk, fuel-price exposure on prorate and future charter operations, weather and operational disruptions, cybersecurity, regulation and economic downturns.
• The company guarantees $19.8 million of debt for a 14 CFR Part 135 air carrier intended to support its pilot hiring pipeline.
• SkyWest acquired Eve-related investments for $10.0 million; their fair value was $21.4 million at year-end, producing an $11.4 million unrealized gain. Future changes in Eve’s stock price may affect earnings.
• No dividends were declared in 2022 or 2021. No shares were repurchased in 2022, although the company stated that repurchases could resume after Treasury restrictions lapsed.
• Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The principal audit matter involved valuation of deferred revenue based on forecast block hours.

Most important facts for investors to verify

• Whether pilot hiring, retention and captain upgrades restore or further constrain 2023 flight production.
• The effect of higher labor costs and amended capacity purchase agreements on margins and fixed versus variable compensation.
• The timing and economics of the 14 CRJ700 aircraft sales and any additional aircraft impairments.
• Liquidity after aircraft purchases, debt maturities, lease payments and potential financing needs.
• The financial condition and strategic decisions of United, Delta, American and Alaska, including regional-aircraft demand and contract renewals.
• Whether deferred revenue and unbilled revenue assumptions change as actual block hours differ from forecasts.
• The launch, regulatory approval and financial performance of SkyWest Charter.
• Potential dilution from 785,226 warrants issued to the U.S. Treasury if exercised.