SkyWest, Inc. Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. reported results for the three and six months ended June 30, 2022. The company operates the largest regional airline operation in the United States through SkyWest Airlines and provides scheduled regional service primarily under capacity purchase and prorate agreements with United, Delta, American and Alaska. SkyWest Leasing owns aircraft and spare engines leased to third parties and supports aircraft operated under airline-partner contracts.
As of June 30, 2022, SkyWest had 638 aircraft, including 521 in scheduled service or under code-share contract, and approximately 2,200 daily departures. Capacity purchase agreements represented approximately 88.3% of flying-agreement revenue for the six-month period.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Total operating revenue | $799.1 million | 21.6% | $1.534 billion | 28.8% |
| Operating income | $88.6 million | (23.0%) | $140.7 million | (28.2%) |
| Net income | $54.0 million | (13.0%) | $71.7 million | (26.8%) |
| Diluted EPS | $1.07 | From $1.22 | $1.42 | From $1.93 |
| Operating margin | 11.1% | Down from 17.5% | 9.2% | Down from 16.4% |
| Net margin | 6.8% | Down from 9.4% | 4.7% | Down from 8.2% |
Revenue growth reflected higher passenger demand, 53 additional aircraft under contract versus June 30, 2021, increased departures and the absence of temporary capacity-purchase rate reductions provided in the prior-year period. Operating expenses rose 31.1% in the second quarter and 40.0% for the six-month period. The prior-year periods included $114.1 million and $307.3 million, respectively, of payroll support grants recorded as reductions of operating expenses.
- Second-quarter block hours increased 3.3%, departures increased 7.6%, passengers carried increased 19.6%, and passenger load factor improved to 86.0% from 76.4%.
- Six-month block hours increased 7.6%, departures increased 10.4%, passengers increased 32.7%, and passenger load factor improved to 82.1% from 67.6%.
- Second-quarter salaries, wages and benefits increased 23.6% to $288.6 million, primarily due to aviation-professional retention costs and higher flight activity.
- Second-quarter fuel expense increased 23.0% to $31.8 million despite a 37.9% reduction in fuel gallons purchased under prorate operations; average fuel cost increased to $4.67 per gallon from $2.36.
- Other operating expenses included a $15.2 million impairment charge for four CRJ-700 aircraft classified as held for sale.
- Other income, net increased to $12.0 million in the second quarter, including gains associated with equity investments. For the six-month period, SkyWest recognized a $9.5 million unrealized gain related to its Eve investments.
Cash Flow, Liquidity and Capital Structure
| Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|
| Cash flow from operating activities | $215.3 million | $498.7 million |
| Cash flow used in investing activities | $556.6 million | $182.4 million |
| Cash flow from financing activities | $179.0 million provided | $186.2 million used |
| Capital expenditures, including non-cash items | $328.8 million | $83.9 million |
Cash and cash equivalents were $96.1 million at June 30, 2022, compared with $258.4 million at December 31, 2021. Marketable securities increased to $878.6 million from $602.0 million, resulting in total cash and marketable securities of $974.7 million, up 13.3% from year-end. 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.
Total long-term debt, including current maturities and before debt issuance costs, was $3.320 billion, compared with $3.141 billion at December 31, 2021. Debt was primarily used to finance aircraft and spare engines. SkyWest had $68.6 million available under a $100 million line of credit after $31.4 million of letters of credit were issued. Long-term debt had fixed interest rates, and the company reported a 45.0% equity and 55.0% long-term-debt capital mix.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially as airline demand recovered, schedules expanded and the company operated more aircraft under capacity purchase agreements.
- Profitability declined despite revenue growth because the 2021 comparison included significant payroll support grants and because labor, operating and fuel costs increased.
- SkyWest Airlines segment profit declined 42.7% in the second quarter and 90.7% for the six-month period. SkyWest Leasing segment profit declined 10.9% in the quarter but increased 7.3% for the six-month period.
- Operating cash flow declined 56.8%, while investing cash use increased primarily because of 12 new E175 aircraft acquired during the period and increased purchases of marketable securities.
- Debt increased by approximately $179 million, including $248.9 million of financing for 12 new E175 aircraft and $127.9 million of promissory notes secured by spare engines.
- The deferred revenue balance related to capacity purchase agreements declined to $86.3 million from $103.9 million at year-end, while unbilled revenue increased to $17.7 million from $8.4 million.
Outlook, Risks, Contingencies and Unusual Items
SkyWest expected to add two E175 aircraft for American in the third quarter of 2022, 14 E175 aircraft for Delta during the second half of 2022, one E175 aircraft for Alaska in the first half of 2023, and 11 used CRJ-700 aircraft for American by the end of 2023. The company intended to finance 17 committed E175 aircraft with approximately 80% to 85% debt and the balance with cash.
- Management identified COVID-19 recovery uncertainty, workforce shortages, pilot availability, labor costs, inflation, fuel prices, airline-partner financial condition and schedule changes as material risks.
- The company’s pilot collective bargaining agreement becomes amendable on December 31, 2022; management expects a new agreement could increase salaries, wages and benefits expense.
- A hypothetical 25% increase in prorate fuel prices would have increased six-month fuel expense by approximately $14.2 million. A hypothetical 25% increase in salaries, wages and benefits would have increased six-month operating expenses by approximately $147.2 million.
- Future commitments included $260.8 million of operating lease payments, $471.9 million of firm aircraft and spare-engine commitments, and $3.320 billion of principal maturities on long-term debt.
- SkyWest guaranteed $17.0 million of debt for a third-party regional air carrier to support pilot recruitment. The guaranteed debt is secured by aircraft and engines and has a five-year term.
- The company reported routine legal proceedings and stated that their ultimate outcomes were not expected to have a material adverse effect on financial position, liquidity or results of operations.
- Results for interim periods may not be indicative of full-year results because of airline seasonality, economic conditions and continuing uncertainty related to COVID-19 and labor availability.
Important Facts for Investors to Verify
- Whether passenger demand and load-factor recovery continue without corresponding deterioration in labor, fuel and maintenance costs.
- The timing, financing and profitability of the 17 committed E175 aircraft and other planned fleet additions.
- The effect of pilot labor negotiations and workforce shortages on schedules, costs and prorate operations.
- The sustainability of earnings excluding prior-year payroll support grants and including the $15.2 million aircraft impairment charge.
- The liquidity impact of aircraft purchases, debt maturities, lease obligations and fixed contractual commitments.
- The concentration of operations among United, Delta, American and Alaska, including contract renewals, aircraft removals and schedule decisions controlled by those partners.
- The valuation and earnings volatility associated with the Eve investments and other marketable or equity securities.