SkyWest, Inc. — 2015 Q1 Form 10-Q Summary
Business context and reporting period
SkyWest operates regional airlines through SkyWest Airlines and ExpressJet. For the quarter ended March 31, 2015, the company operated approximately 3,600 daily departures and a combined fleet of 754 aircraft. Approximately 89% of passenger revenue came from contract flying and 11% from pro-rate flying. Major airline partners included United, Delta, American, Alaska and US Airways.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total operating revenue | $760.4 million | $772.4 million | (1.6%) |
| Operating income (loss) | $34.1 million | $(27.8) million | Improved $61.8 million |
| Operating margin | 4.5% | (3.6%) | Improved |
| Net income (loss) | $9.6 million | $(22.9) million | Improved $32.5 million |
| Diluted EPS | $0.18 | $(0.44) | Improved |
| Net margin | 1.3% | (3.0%) | Improved |
| Operating cash flow | $35.2 million | $(34.3) million | Improved $69.5 million |
- Passenger revenue declined 1.7% to $742.5 million, while ground handling and other revenue increased 6.9% to $17.9 million.
- Operating expenses declined 9.2% to $726.3 million. Major reductions included fuel expense of 42.2%, aircraft maintenance of 11.2%, salaries and benefits of 4.7%, aircraft rentals of 12.4%, and ground handling services of 35.2%.
- Fuel expense benefited from lower average fuel cost per gallon, which declined to $2.23 from $3.49. Fuel costs on contracted flying are generally reimbursed or borne directly by major airline partners; SkyWest bears fuel-price risk primarily on pro-rate operations.
- Revenue passenger miles declined 4.2%, available seat miles declined 3.3%, and block hours declined 5.5%. The passenger load factor decreased to 80.2% from 80.9%.
- Cash and cash equivalents were $91.1 million at March 31, 2015, compared with $132.3 million at December 31, 2014. Marketable securities were $377.6 million, producing cash and marketable securities of $480.3 million.
- Long-term debt, including current maturities, totaled approximately $1.9 billion, compared with $1.75 billion at December 31, 2014. The estimated fair value of long-term debt was $2.0 billion versus a carrying amount of $1.9 billion.
- The company financed nine E175 aircraft with $203.1 million of new long-term debt. The debt has 12-year terms and fixed annual interest rates ranging from 3.5% to 3.7%.
- Future minimum operating lease payments totaled $1.4 billion. Principal maturities on long-term debt totaled $1.9 billion, and total stated commitments and obligations were $4.3 billion.
Material changes versus the prior comparable period
- Results improved substantially from a Q1 2014 loss to a Q1 2015 profit, primarily because of lower operating expenses, improved flight completion rates, lower fuel prices, reduced weather-related inefficiencies and operational improvements at ExpressJet.
- Flight cancellations decreased to 2.2% of scheduled flights from 7.7%, partially offsetting the effect of fewer scheduled flights. Actual completed block hours declined 5.5%, less than the 10.3% decline in scheduled block hours.
- SkyWest Airlines segment profit increased to $28.0 million from $11.4 million. ExpressJet’s segment loss narrowed to $15.1 million from $54.4 million.
- Twenty-nine E175 aircraft were placed into service between March 31, 2014 and March 31, 2015, increasing depreciation and training costs but supporting contract revenue and performance incentives.
- Operating cash flow turned positive, but investing cash use increased to $238.7 million because of aircraft purchases. Financing cash flow was positive $162.4 million, primarily from new aircraft debt.
- Total cash and marketable securities declined $78.8 million, or 14.1%, from year-end 2014 despite improved operating cash flow.
Outlook, risks, contingencies and unusual items
- Management stated that available working capital should be sufficient for present requirements, anticipated expansion, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- The company expected delivery of the remaining 11 E175 aircraft under the existing United agreement through the third quarter of 2015 and seven E175 aircraft for Alaska between mid-2015 and the first quarter of 2016.
- SkyWest expected to place nine remaining used ERJ145 aircraft into service for American during Q2 2015. It also planned to remove all EMB120 aircraft from service by the end of Q2 2015.
- ExpressJet’s United ERJ agreement was accelerated to expire in 2017, and management expected ExpressJet to operate 157 ERJ145 aircraft with United at December 31, 2015, compared with 202 ERJ145s at March 31, 2015.
- A key disclosed risk is that flying contracts for 66 CRJ700 and CRJ900 aircraft expire between mid-2015 and the end of 2016, while related lease or debt obligations extend from 2018 through 2024. Failure to renew contracts on acceptable terms could result in reduced economics, transition costs, cash charges or non-cash impairment-related charges.
- Approximately 17.2% of long-term debt was variable-rate debt at March 31, 2015. A hypothetical one-percentage-point rate increase would have increased quarterly interest expense by approximately $1.4 million, partly offset by approximately $1.3 million of additional interest income.
- Legal proceedings were described as routine, with management concluding they were not likely to materially affect financial position, liquidity or results of operations.
- The company held $2.3 million of auction-rate securities classified as other assets and measured using Level 3 valuation inputs.
- No material changes were reported to previously disclosed risk factors other than the aircraft contract-expiration risk described above. Disclosure controls were evaluated as effective.
Important facts for investors to verify
- Confirm whether improved ExpressJet profitability and flight completion rates are sustainable after the fleet reductions and contract changes.
- Monitor renewals, replacements or alternative uses for the 66 CRJ700 and CRJ900 aircraft whose flying contracts expire before related debt and lease obligations.
- Reconcile aircraft delivery schedules, financing terms and the company’s ability to fund remaining firm E175 commitments.
- Assess liquidity after considering $1.9 billion of debt principal maturities, $1.4 billion of operating lease payments and additional aircraft commitments.
- Separate recurring operating improvement from benefits attributable to lower fuel prices, favorable weather, reduced production and reimbursed partner costs.
- Track dependence on major airline partners, as contract flying represented approximately 89% of passenger revenue and contract terms control aircraft deployment and compensation.