SkyWest, Inc. Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airline subsidiaries SkyWest Airlines and ExpressJet. The company provided approximately 4,000 daily departures across the United States, Canada, Mexico and the Caribbean with a combined fleet of 758 aircraft as of March 31, 2014. Approximately 90% of passenger revenue came from contract flying for major airline partners, primarily United and Delta.
This quarterly report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The interim financial statements are unaudited.
Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total operating revenue | $772.4 million | $803.5 million | Down 3.9% |
| Operating income (loss) | $(27.8) million | $15.6 million | Down $43.3 million |
| Income (loss) before taxes | $(43.2) million | $5.4 million | Down $48.5 million |
| Net income (loss) | $(22.9) million | $3.2 million | Down $26.1 million |
| Diluted EPS | $(0.44) | $0.06 | Down $0.50 |
| Operating margin | (3.6%) | 1.9% | Down 5.5 points |
| Net margin | (3.0%) | 0.4% | Down 3.4 points |
| Net cash used in operating activities | $(34.3) million | $(13.8) million | Use increased $20.5 million |
Passenger revenue decreased 3.8% to $755.6 million, while ground handling and other revenue decreased 4.9% to $16.7 million. Revenue passenger miles increased 0.4%, but available seat miles declined 2.2%, departures declined 7.1%, and passengers carried declined 2.8%. Passenger load factor improved to 80.9% from 78.8%.
Total operating expenses increased 1.6% to $800.2 million. Salaries, wages and benefits increased 6.8% to $317.6 million, and aircraft maintenance increased 6.6% to $178.3 million. Station rentals and landing fees declined 64.2% to $12.2 million, primarily because major airline partners paid more costs directly to vendors. Aircraft fuel expense declined 4.9% to $47.2 million.
At March 31, 2014, cash and cash equivalents were $82.6 million, marketable securities were $447.9 million, and restricted cash was $12.2 million. Cash plus marketable securities totaled $542.7 million, down from $670.1 million at December 31, 2013. Total assets were $4.20 billion and stockholders’ equity was $1.41 billion.
Current maturities of long-term debt were $181.4 million and long-term debt, net of current maturities, was $1.29 billion. The carrying amount of total long-term debt was approximately $1.47 billion, compared with an estimated fair value of $1.51 billion. Management stated that available working capital should meet present financial requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Severe winter weather resulted in approximately 15,800 additional flight cancellations, a 144.3% increase from the prior-year period, reducing revenue and performance incentives.
- Block hours declined 4.4%, departures declined 7.1%, and available seat miles declined 2.2%, despite a 2.1-point improvement in load factor.
- SkyWest Airlines segment profit declined 50.7% to $11.4 million, primarily due to higher labor and maintenance costs.
- ExpressJet’s segment loss more than doubled to $54.4 million from $25.5 million, driven by weather-related cancellations, higher pilot training and staffing costs, and increased lodging, per diem and simulator expenses.
- Operating cash flow worsened to a $34.3 million use, while investing cash flow shifted to a $45.5 million use from $54.4 million provided in the prior year, reflecting aircraft purchases and lower net sales of marketable securities.
- The company acquired one E175 and one used CRJ700 during the quarter and received the first aircraft under its agreement to operate 40 new E175 aircraft for United. The broader Embraer agreement includes 40 firm aircraft and 60 conditional aircraft.
- The company repurchased 242,250 shares for approximately $3.1 million during the quarter and declared a quarterly dividend of $0.04 per share.
Outlook, Risks, Contingencies and Unusual Items
Management expects available working capital to be sufficient for at least the next 12 months and intends to finance aircraft acquisitions through a combination of operating leases and long-term debt. The filing does not provide formal earnings or revenue guidance.
Major risks include dependence on contract relationships with United, Delta, American, US Airways and Alaska; contract expirations and rate resets; performance-based incentives; severe weather and flight cancellations; pilot hiring, training and scheduling constraints; maintenance costs; aircraft financing and lease obligations; and interest-rate exposure. Approximately 30.1% of long-term debt was variable rate at March 31, 2014.
Future minimum operating lease payments totaled approximately $1.76 billion, firm aircraft commitments totaled approximately $1.14 billion, and total disclosed commitments and obligations were approximately $4.66 billion. The company operated 565 leased aircraft, with future minimum lease payments of approximately $1.8 billion.
SkyWest and ExpressJet continued litigation against Delta regarding reimbursement of irregular-operation expenses. The company had recognized $31.7 million of related revenue before July 1, 2008, but has not recognized additional disputed reimbursements since then. As of March 31, 2014, management estimated a reasonably possible loss range of $0 to $25.8 million.
The company reported a $20.3 million income-tax benefit in the quarter. Management attributed the nonstandard effective tax rate primarily to lower estimated pretax income and a higher proportion of expenses with limited tax deductibility. Management stated that routine legal matters were not expected to have a material adverse effect, and disclosure controls were considered effective at a reasonable assurance level.
Important Facts for Investors to Verify
- Whether weather-related disruption was temporary or reflects ongoing operational and crew-scheduling constraints.
- The sustainability of ExpressJet’s losses and the actions required to restore segment profitability.
- The renewal, pricing and performance provisions of major airline partner agreements as aircraft contracts begin expiring.
- Funding sources and timing for the E175 fleet expansion, including the 60 conditional aircraft.
- Liquidity after aircraft purchases, debt maturities, lease payments, dividends and share repurchases.
- The status and potential financial impact of the Delta litigation and disputed reimbursements.
- Exposure to variable interest rates, maintenance-event timing and other costs not directly reimbursed by airline partners.