SkyWest, Inc. 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. is a regional airline holding company operating primarily through SkyWest Airlines, with SkyWest Leasing and SkyWest Charter, LLC. The filing covers the quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
- SkyWest operated approximately 2,030 daily departures across the United States, Canada and Mexico.
- The fleet totaled 607 aircraft, including 493 aircraft in scheduled service or under code-share contract with United, Delta, American and Alaska.
- Capacity purchase agreements represented approximately 87.2% of flying-agreement revenue for the nine months; prorate agreements represented 12.8%.
Financial Results and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|
| Operating revenue | $766.2 million | $789.4 million | $2.184 billion | $2.324 billion |
| Operating income | $49.3 million | $75.6 million | $76.4 million | $216.2 million |
| Operating margin | 6.4% | 9.6% | 3.5% | 9.3% |
| Net income | $23.5 million | $48.4 million | $16.8 million | $120.1 million |
| Diluted EPS | $0.55 | $0.96 | $0.37 | $2.37 |
| Net margin | 3.1% | 6.1% | 0.8% | 5.2% |
- Q3 flying-agreement revenue declined 2.8% to $741.9 million, while lease, airport services and other revenue declined 6.4% to $24.3 million.
- Q3 operating expenses increased 0.4% to $716.9 million. Salaries, wages and benefits increased 8.2% to $333.0 million, primarily due to higher employee compensation and pilot pay scales.
- Aircraft rentals declined 87.0% in Q3 following early lease buyouts of 35 CRJ aircraft during 2023. Fuel expense declined 17.2%, reflecting lower flight activity and lower fuel prices.
- Nine-month operating expenses were essentially unchanged at $2.107 billion despite a 6.0% revenue decline. Salaries, wages and benefits increased 10.5% to $990.7 million.
- Interest expense was $32.5 million in Q3 and $99.9 million for the nine months. Interest income increased to $11.2 million in Q3 and $31.8 million for the nine months due to higher marketable-securities yields.
- The nine-month effective tax rate was negative 6.0%, primarily reflecting a $7.6 million release of a previously recorded uncertain tax position and a partial release of a state net operating loss valuation allowance.
Cash Flow, Debt and Liquidity
| Metric | September 30, 2023 | December 31, 2022 |
|---|
| Cash and cash equivalents | $125.3 million | $103.0 million |
| Marketable securities | $694.2 million | $944.2 million |
| Cash and marketable securities | $819.5 million | $1.047 billion |
| Total long-term debt, gross | $3.102 billion | $3.409 billion |
| Long-term debt, net of issuance costs | $3.077 billion | $3.380 billion |
- Nine-month operating cash flow was $511.9 million, up from $343.5 million, primarily because of timing of liability payments and cash received before revenue recognition.
- Investing activities provided $61.0 million, compared with $864.6 million used in the prior-year period, primarily reflecting net sales of marketable securities and lower aircraft capital expenditures.
- Financing activities used $550.6 million, including $331.2 million of debt principal payments and $246.5 million for treasury-stock purchases.
- Management stated that available working capital was sufficient for present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months.
- SkyWest Airlines had a $100.0 million secured line of credit, with $70.1 million available after $29.9 million of letters of credit. The facility expires March 25, 2025 and includes liquidity and profitability covenants.
- Debt had an average effective interest rate of approximately 4.1% and consisted primarily of aircraft and spare-engine financing, plus $200.6 million of unsecured U.S. Treasury debt.
Material Changes Versus the Prior Comparable Period
- Aircraft in scheduled service or under contract decreased to 493 from 530 a year earlier, while block hours declined 10.2% in Q3 and 12.4% for the nine months.
- Departures declined 7.5% in Q3 and 9.8% for the nine months; passengers carried declined 4.7% and 6.4%, respectively. Load factor improved by 0.5 percentage points in Q3 and 0.8 percentage points for the nine months.
- The SkyWest Airlines and SkyWest Charter segment recorded a $30.3 million Q3 loss and a $142.3 million nine-month loss, compared with losses of $2.0 million and profit of $3.5 million, respectively, in the prior-year periods.
- SkyWest Leasing remained profitable, generating $47.0 million of Q3 segment profit and $118.8 million for the nine months.
- Capacity purchase agreement amendments shifted some compensation from fixed monthly payments to variable payments. SkyWest deferred recognition of $37.2 million of flight-operations revenue in Q3 and $120.6 million for the nine months, net of unbilled revenue.
- Total deferred revenue increased to $315.9 million at September 30, 2023, from $144.7 million at December 31, 2022. Management expects the amounts to be recognized over the applicable contract terms.
- SkyWest acquired 35 CRJ aircraft through early lease buyouts for $142.4 million during the nine months, reducing aircraft rental expense but increasing owned-aircraft exposure.
- The company repurchased 9.6 million shares for $244.1 million during the nine months. The May 2023 authorization had $135.9 million remaining at September 30, 2023.
Guidance, Outlook, Commentary and Risks
- No formal quantitative earnings or revenue guidance is provided in the filing.
- SkyWest expects to add three E175 aircraft under its Delta agreement in 2023 and 2024, 19 E175 aircraft under its United agreement from 2024 through 2026, and one E175 aircraft under its Alaska agreement in 2025. Delivery and in-service dates may change.
- The company had firm purchase commitments for 23 E175 aircraft with anticipated deliveries through 2026. It intends to fund approximately 75% to 85% of the commitment with debt and the balance with cash.
- Management identified pilot and other labor shortages, particularly captain availability, as the primary constraint on production and scheduled flying. Higher labor costs may not be fully recoverable through capacity purchase agreement pricing.
- Other significant risks include dependence on major airline partners, changes in flight schedules and contract terms, aircraft financing availability, fuel prices, inflation, weather, economic conditions, residual aircraft values, regulatory requirements and geopolitical or public-health disruptions.
- A hypothetical 25% increase in prorate fuel prices would have increased nine-month fuel expense by approximately $15.6 million. A hypothetical 25% increase in salaries, wages and benefits would have increased nine-month operating expenses by approximately $247.7 million.
- Future minimum commitments included $676.8 million of firm aircraft and spare-engine commitments, $3.102 billion of debt principal maturities and $121.0 million of operating lease payments.
- Management considered routine legal matters unlikely to have a material adverse effect on financial position, liquidity or results of operations.
Most Important Facts for Investors to Verify
- Whether pilot hiring and retention improve sufficiently to restore block-hour production and aircraft utilization.
- The timing and economic effect of deferred revenue recognition under amended capacity purchase agreements.
- The profitability and cash-flow impact of planned E175 deliveries and related debt financing.
- The sustainability of liquidity after share repurchases, debt maturities, aircraft commitments and capital expenditures.
- The concentration of revenue and operating dependence on United, Delta, American and Alaska.
- The distinction between the $9.6 million-share total repurchase disclosure and the separate May 2023 authorization activity reported elsewhere in the filing.
- The impact of higher pilot compensation, inflation and fuel costs on the structurally low nine-month operating margin.
