SkyWest, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2018. SkyWest operates regional passenger service through SkyWest Airlines and ExpressJet and also has a SkyWest Leasing segment. As of September 30, 2018, the company operated approximately 2,800 daily departures with a total fleet of 625 aircraft, including 574 aircraft in scheduled service. Major airline partners were United, Delta, American and Alaska.
Approximately 84.3% of nine-month flying-agreements revenue came from fixed-fee capacity purchase agreements and 15.7% from prorate arrangements. The company was transitioning toward larger dual-class E175 aircraft and away from lower-profit regional jets.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total operating revenue | $829.3 million | $812.7 million | $2.418 billion | $2.351 billion |
| Operating income | $137.9 million | $112.4 million | $352.8 million | $295.3 million |
| Net income | $83.0 million | $53.7 million | $213.3 million | $139.0 million |
| Diluted EPS | $1.57 | $1.01 | $4.03 | $2.62 |
| Operating margin | 16.6% | 13.8% | 14.6% | 12.6% |
| Net margin | 10.0% | 6.6% | 8.8% | 5.9% |
| Net cash from operating activities | — | — | $573.1 million | $532.3 million |
Q3 revenue increased 2.0%, while operating income rose 22.8% and net income rose 54.6%. For the first nine months, revenue increased 2.8%, operating income increased 19.5% and net income increased 53.5%. The effective tax rate declined to 24.5% in Q3 and 22.6% for nine months, versus 38.0% and 36.8%, respectively, in the comparable 2017 periods, primarily reflecting the lower federal rate under the Tax Cuts and Jobs Act and discrete tax benefits.
At September 30, 2018, cash and cash equivalents were $324.6 million and marketable securities were $380.2 million, for total cash and liquid securities of $704.8 million. Total current assets were $1.052 billion versus current liabilities of $913.4 million.
Long-term debt, including current maturities and before debt issuance costs, was $3.135 billion, compared with $2.712 billion at December 31, 2017. Net debt after cash and marketable securities was approximately $2.430 billion. Equity represented 41.2% of capital and long-term debt represented 58.8% at quarter-end. Variable-rate notes were approximately 1.0% of total long-term debt.
Operating cash flow was $573.1 million for the first nine months. Investing activities used $742.4 million, including $848.7 million for aircraft and rotable spare parts. Financing activities provided $312.0 million, including $626.2 million of new long-term debt and $262.9 million of principal payments.
Material changes versus the prior comparable period
- Scheduled-service aircraft declined from 604 to 574, while E175 aircraft increased from 104 to 138. Block hours declined 4.7% in Q3 and 4.8% for nine months; Q3 passenger load factor improved to 82.2% from 80.0%.
- Revenue growth was driven by 34 additional E175 aircraft, one additional CRJ900, improved contract economics and higher prorate revenue, despite the removal of 65 lower-revenue aircraft.
- Q3 operating expenses declined 1.3%, primarily from lower aircraft rentals, maintenance and airport-related costs. These savings were partly offset by a 32.8% increase in fuel expense, a 16.2% increase in depreciation and amortization, and a 16.0% increase in interest expense.
- For nine months, operating expenses increased 0.5% and interest expense increased 9.9%. Fuel expense increased 42.3%, while aircraft rentals declined 29.2%.
- SkyWest Airlines segment profit increased to $90.7 million in Q3 from $81.7 million. ExpressJet’s segment loss narrowed to $0.2 million from $10.0 million. SkyWest Leasing profit increased to $16.0 million from $13.5 million.
- The company repurchased 250,289 shares for $15.1 million during Q3. For the first nine months, it repurchased 427,869 shares for $25.2 million and had $54.8 million remaining under its $100 million authorization.
Guidance, outlook, risks and unusual items
Management stated that available working capital was expected to be sufficient for present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months. No formal earnings guidance was provided.
The company expected to place three additional E175 aircraft with Alaska and eight with Delta by the end of 2018 or early 2019, with three Alaska aircraft deferred to 2021. It also expected to transition 20 CRJ700 aircraft to American and 20 CRJ200 aircraft to United by early 2019. Eleven E175 aircraft were subject to firm purchase commitments, with total firm aircraft and spare-engine commitments of $352.9 million.
Future commitments totaled $4.584 billion, including $3.135 billion of debt principal maturities, $600.4 million of interest commitments, $495.8 million of operating lease payments and $352.9 million of firm aircraft and spare-engine commitments. The company had 265 leased aircraft and approximately $84.8 million of letters of credit and surety bonds outstanding.
Key risks include dependence on major airline partners and their schedules and financial condition, contract renegotiations and incentive performance, fuel costs on prorate operations, pilot availability and labor costs, aircraft residual values and impairment, weather and economic conditions, fleet-transition execution, substantial debt and lease obligations, and competition. A hypothetical 25% increase in prorate fuel prices would have increased nine-month fuel expense by approximately $21.8 million.
The company adopted ASC 606 retrospectively in 2018. The adoption changed revenue and expense classifications but did not materially affect operating income, net income, EPS or cash flows. The company expected ASC 842 lease adoption in the first quarter of 2019 to significantly affect the balance sheet, although it did not expect a significant effect on lease revenue or expense presentation. Q3 included $1.2 million of other income, primarily from the sale of excess rotable spare parts; nine-month other income of $3.5 million also included a mark-to-market gain on trading securities.
Management reported that routine legal matters were not expected to have a material adverse effect, and disclosure controls and procedures were effective as of September 30, 2018.
Important facts for investors to verify
- Whether the E175 deliveries, aircraft transitions and contract placements with Delta, Alaska, American and United occur on schedule and at expected economics.
- Progress in reducing ExpressJet losses and the sustainability of improved SkyWest Airlines and Leasing segment profitability.
- Fuel-price exposure on prorate flying and the effect of higher labor, maintenance, depreciation and interest costs.
- Availability and cost of financing for aircraft commitments, debt maturities and lease obligations.
- The balance-sheet and retained-earnings effects of ASC 842 adoption in 2019.
- Final tax accounting under the Tax Cuts and Jobs Act, including the potential treatment of $13.9 million of alternative minimum tax credits.
- Dependence on major airline partners, including contract renewals, rate resets, flight schedules, reimbursements and incentive payments.