SkyWest, Inc. 2019 Form 10-K Summary
Business context and reporting period
SkyWest operates regional passenger service under code-share and fixed-fee capacity purchase agreements with Delta, United, American and Alaska. The filing covers the fiscal year ended December 31, 2019, including fourth-quarter results. ExpressJet was sold on January 22, 2019; its results remain included in continuing operations for periods owned because the sale did not qualify for discontinued-operations presentation.
- Approximately 2,300 daily departures and 483 aircraft in scheduled service at year-end.
- Approximately 82% of flying-agreements revenue came from fixed-fee contracts and 18% from prorate arrangements.
- Delta and United together represented approximately 77.6% of total 2019 revenue.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $2.972 billion | $3.222 billion | Down 7.8% |
| Operating income | $512.3 million | $474.3 million | Up 8.0% |
| Net income | $340.1 million | $280.4 million | Up 21.3% |
| Diluted EPS | $6.62 | $5.30 | Up 24.9% |
| Operating margin | 17.2% | 14.7% | Up approximately 2.5 points |
| Net margin | 11.4% | 8.7% | Up approximately 2.7 points |
| Net cash from operations | $721.0 million | $802.5 million | Down 10.2% |
| Cash and marketable securities | $520.2 million | $689.3 million | Down 24.5% |
| Long-term debt obligations | $3.018 billion | $3.185 billion | Down 5.3% |
Fourth-quarter 2019 revenue was $743.6 million, operating income was $125.3 million and net income was $72.5 million, or $1.43 diluted EPS. The filing does not provide a clear fourth-quarter comparison for operating cash flow or balance-sheet liquidity.
- Block hours decreased 15.7% to 1.481 million, total departures decreased 15.7% to 851,488, and passengers carried decreased 8.9% to 44.0 million, primarily due to the ExpressJet sale.
- Passenger load factor increased to 82.3% from 80.5%.
- Operating expenses decreased 10.5% to $2.460 billion, while interest expense increased 6.1% to $127.8 million.
- Salary, wage and benefit costs were $1.002 billion, or approximately 40.7% of total operating costs.
- Capital expenditures, including non-cash items, were $846.5 million. Cash used in investing activities was $657.0 million.
- Current assets were $760.3 million versus current liabilities of $924.7 million. Liquidity included $87.2 million of cash, $433.0 million of marketable securities and $66.2 million available under the credit facility.
- All long-term debt carried fixed interest rates at year-end, with an average effective rate of approximately 4.2%.
Material changes versus the prior comparable period
- ExpressJet revenue fell from $564.2 million in 2018 to $24.1 million in 2019, while ExpressJet operating expenses fell from $577.6 million to $28.7 million.
- SkyWest Airlines revenue increased 5.6% to $2.479 billion, but segment profit declined 18.3% to $250.5 million because of higher labor, maintenance and operating costs.
- SkyWest Leasing revenue increased 50.8% to $469.2 million and segment profit increased 120.2% to $138.6 million, supported by additional E175 aircraft and third-party leasing activity.
- The fleet declined from 596 to 483 aircraft in scheduled service. SkyWest added 10 E175s and seven CRJ900s, while removing 100 ERJ145s and other older or less profitable aircraft.
- The company acquired 56 CRJ aircraft through early lease buyouts and reduced aircraft rental expense by $82.9 million.
- Operating income included $21.9 million of special charges, primarily an $18.5 million non-cash write-off of aircraft manufacturer part credits and $3.4 million of ExpressJet-related employee severance.
- Net income included a $46.5 million pre-tax gain on the ExpressJet sale.
- SkyWest adopted the new lease standard, recognizing $336.0 million of operating lease right-of-use assets and $354.0 million of operating lease liabilities at year-end, including current and noncurrent amounts.
Guidance, outlook, commentary and risks
- Management expected to add 26 new E175 aircraft, six used E175 aircraft and one CRJ900 under existing or new fixed-fee agreements through 2021. Delivery timing could change.
- The company expected a slight reduction in CRJ200 aircraft in service during 2020 and planned to place additional used CRJ700s with American.
- Management stated that available working capital and projected operating cash flow should cover anticipated requirements, capital expenditures, lease payments and debt service for at least the following 12 months, absent unusual circumstances.
- SkyWest had approximately $4.815 billion of total commitments and obligations, including $3.018 billion of debt principal, $443.7 million of operating lease payments, $779.4 million of firm aircraft and spare-engine commitments, and $574.6 million of interest commitments.
- The principal risks are dependence on four major airline partners, concentration with Delta and United, partner-controlled schedules, pilot and technician availability, labor cost inflation, maintenance requirements, aircraft residual values, contract expirations, leverage, weather, fuel prices on prorate flying, cybersecurity, regulatory compliance and aviation accidents.
- Major airline partners generally bear fuel-price risk under fixed-fee contracts, but SkyWest bears that risk on prorate operations. A hypothetical 25% increase in prorate fuel prices would have increased 2019 fuel expense by approximately $29.8 million.
- The company disclosed routine litigation that management did not expect to have a material adverse effect. Workers’ compensation liabilities were $23.9 million and remain sensitive to actuarial assumptions.
- Beginning January 1, 2020, SkyWest expected adoption of the credit-loss standard to reduce retained earnings by an estimated $7 million to $12 million after tax effects.
Most important facts for investors to verify
- Whether Delta, United, American and Alaska renew or reduce regional flying contracts as aircraft contracts expire, particularly for older CRJ aircraft.
- Whether new E175 and CRJ900 deliveries enter service on schedule and generate the expected fixed-fee economics.
- Whether labor, pilot availability and maintenance costs remain within contract reimbursement rates.
- Whether operating cash flow can fund aircraft commitments, scheduled debt maturities and lease obligations while maintaining liquidity.
- The sustainability of reported earnings after excluding the $46.5 million ExpressJet-sale gain and considering the $21.9 million special charge.
- The effect of continued customer concentration, with Delta and United accounting for approximately 77.6% of 2019 revenue.
- Future aircraft impairment, residual-value and lease-return exposure, including the 19 CRJ700s with flying-contract expirations in 2020 and debt or lease obligations extending beyond those contracts.