SkyWest Inc. Form 10-Q Summary
Business context and reporting period
SkyWest, Inc. operates regional airline services through SkyWest Airlines and ExpressJet and provides aircraft leasing activities. The company operated approximately 2,800 daily departures with 617 aircraft, including 583 aircraft in scheduled service, as of June 30, 2018. The report covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Approximately 84.7% of six-month flying-agreement revenue came from fixed-fee capacity purchase agreements and 15.3% from prorate arrangements. Major airline partners were United, Delta, American and Alaska.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenue | $805.5 million; up 1.8% | $1.589 billion; up 3.3% |
| Operating income | $126.7 million | $214.9 million |
| Operating margin | 15.7% | 13.5% |
| Net income | $75.9 million, versus $50.5 million | $130.2 million, versus $85.3 million |
| Diluted EPS | $1.43, versus $0.95 | $2.46, versus $1.61 |
| Net margin | 9.4% | 8.2% |
| Cash flow from operations | Not separately provided | $350.8 million, versus $331.8 million |
Six-month revenue consisted of $1.562 billion from flying agreements and $27.3 million from airport customer service and other activities. Six-month interest expense was $55.0 million, and the effective tax rate was 21.3%.
At June 30, 2018, cash and cash equivalents were $175.7 million and marketable securities were $473.4 million, for total cash and marketable securities of $649.1 million. Total assets were $5.913 billion and stockholders’ equity was $1.861 billion.
Long-term debt, including current maturities and before debt issuance costs, was $2.995 billion, compared with $2.712 billion at December 31, 2017. Debt net of issuance costs was $2.969 billion. Management stated that available working capital was expected to meet present requirements, planned capital expenditures, lease payments and scheduled debt service for at least the next 12 months.
Material changes versus the prior comparable period
- Second-quarter operating revenue increased $14.0 million, while operating expenses declined $6.1 million, producing a $20.1 million increase in operating income.
- Six-month operating revenue increased $50.2 million, while operating expenses increased $18.3 million. Operating income increased $32.0 million.
- Revenue growth was driven primarily by 23 additional E175 aircraft and improved economics on certain agreements, partly offset by the removal of 66 older or less-profitable aircraft.
- Scheduled-service aircraft declined from 626 to 583 year over year. Block hours declined 6.0% in the second quarter and 4.8% for the six-month period; passengers carried declined 7.7% and 6.8%, respectively.
- Prorate revenue increased 13.9% in the second quarter and 17.3% for the six-month period, while fixed-fee aircraft lease revenue declined 3.5% and 4.1%, respectively.
- Second-quarter aircraft fuel expense increased 49.5%, and the average prorate fuel cost increased from $1.93 to $2.63 per gallon. Depreciation and amortization increased 16.2% due primarily to E175 additions.
- Aircraft rentals declined 32.3% in the second quarter and 27.3% for the six-month period as leased aircraft were removed from the fleet.
- SkyWest Airlines generated second-quarter segment profit of $89.1 million, compared with $71.4 million. ExpressJet recorded a segment loss of $5.6 million, compared with a $4.1 million loss.
- Operating cash flow increased 5.7% to $350.8 million. Capital investment included $553.9 million for aircraft and rotable spare parts and $19.1 million for buildings and ground equipment.
- The company adopted Topic 606 retrospectively. The adoption changed revenue and expense classifications but did not materially affect operating income, net income, EPS or cash flows.
Guidance, outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects available liquidity to support operations, planned expansion, capital expenditures and scheduled obligations for at least 12 months.
- The company anticipated placing six additional E175 aircraft with Alaska and 17 E175 or E175 SC aircraft with Delta, generally by the end of 2018 or early 2019; three Alaska aircraft were deferred to 2021.
- SkyWest agreed to operate 20 new CRJ900 aircraft for Delta beginning in late 2018 through 2020, place 20 used CRJ700 aircraft with American, and extend the United contract for 19 CRJ700 aircraft through mid-2022.
- Future commitments totaled $4.780 billion, including $558.2 million of operating lease payments, $627.0 million of firm aircraft and spare-engine commitments, $600.4 million of interest commitments and $2.995 billion of debt principal maturities.
- The company had 273 leased aircraft and firm commitments for 23 E175/E175 SC aircraft. Management intended to finance approximately 85% of the committed aircraft with debt and the balance with cash.
- Key risks include dependence on major airline partners, changes in flight schedules and code-share contracts, partner financial condition, fuel prices on prorate operations, labor costs and pilot availability, aircraft residual values, weather, competition and substantial lease and debt obligations.
- A hypothetical 25% increase in prorate fuel prices would have increased six-month fuel expense by approximately $14.2 million. A one-percentage-point increase in variable interest rates would have increased six-month interest expense by approximately $0.3 million.
- The company recorded a $4.3 million discrete tax benefit from excess tax deductions related to employee equity transactions and a $0.9 million benefit from releasing a capital-loss valuation allowance. The Tax Cuts and Jobs Act analysis remained subject to a measurement-period review, including potential treatment of $13.9 million of alternative minimum tax credits.
- Routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were considered effective as of June 30, 2018.
Important facts for investors to verify
- Whether the E175 additions, Delta and United contract extensions, and planned aircraft placements occur on the expected schedules and economics.
- ExpressJet’s ability to reduce or reverse its recurring segment losses as its fleet and contractual operations change.
- The effect of fuel-price increases, crew compensation, engine maintenance agreements and pilot availability on margins.
- Liquidity and refinancing capacity relative to approximately $3.0 billion of debt, $558.2 million of lease payments and $627.0 million of firm aircraft and spare-engine commitments.
- Exposure to United, Delta, American and Alaska, including contract termination, rate-reset, reimbursement and schedule risks.
- The final accounting impact of the pending lease standard adoption, expected in the first quarter of 2019, which management stated would significantly affect the balance sheet.