SkyWest, Inc. 2017 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airlines through SkyWest Airlines and ExpressJet, with SkyWest Leasing activities. The company provided approximately 3,000 daily departures and operated a 649-aircraft fleet as of June 30, 2017, including 626 aircraft in scheduled service. Approximately 88.6% of first-half passenger revenue came from fixed-fee capacity purchase agreements with United, Delta, American and Alaska; the remaining 11.4% came from prorate arrangements.
This filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2017 | Year-over-Year Change | Six Months Ended June 30, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Total operating revenue | $809.8 million | +1.1% | $1.575 billion | +0.8% |
| Operating income | $106.6 million | +26.7% | $182.9 million | +25.3% |
| Net income | $50.5 million | +25.4% | $85.3 million | +26.6% |
| Diluted EPS | $0.95 | Up from $0.77 | $1.61 | Up from $1.29 |
| Operating margin | 13.2% | Up from 10.5% | 11.6% | Up from 9.3% |
| Net margin | 6.2% | Up from 5.0% | 5.4% | Up from 4.3% |
Second-quarter operating expenses declined 2.0% to $703.2 million despite higher maintenance, fuel and depreciation costs. Salaries, wages and benefits declined 2.7%, aircraft rentals declined 23.6%, and other operating expenses declined 5.1%. Interest expense increased 48.0% to $27.1 million because of debt financing for additional E175 aircraft.
For the six months, operating expenses declined 1.8% to $1.392 billion, while interest expense increased 43.3% to $51.6 million. The effective tax rate was 37.6% for the quarter and 36.0% for the six-month period, compared with 39.3% in the prior-year periods. The six-month tax rate benefited from a $3.3 million discrete tax benefit related to employee equity transactions.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $331.8 million, up 45.5% from $228.0 million in 2016.
- Investing cash use was $528.3 million, primarily reflecting aircraft purchases and net purchases of marketable securities.
- Financing cash flow was $193.2 million, including $384.8 million of aircraft debt issuance and $169.6 million of principal payments.
- Cash and cash equivalents were $143.4 million, restricted cash was $8.3 million, and marketable securities were $482.8 million at June 30, 2017. Total cash and marketable securities were $634.5 million, up 12.3% from December 31, 2016.
- Total long-term debt, including current maturities and before debt issuance costs, was $2.786 billion; net debt on the balance sheet was $2.760 billion.
- Debt represented 63.3% of total capital at June 30, 2017, compared with 62.4% at December 31, 2016. Management stated that available working capital should meet anticipated requirements, capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- Future operating lease payments totaled $842.3 million, and total disclosed commitments and obligations were $4.262 billion, including debt principal, interest, aircraft commitments and leases.
Material Changes Versus the Prior Comparable Period
- The company continued a fleet transition toward larger dual-class E175 aircraft and away from less profitable 50-seat aircraft. Scheduled-service aircraft declined from 655 to 626, while E175 aircraft increased by 47 to 103.
- Block hours declined 5.3% in the quarter and 6.2% year to date; departures declined 5.4% and 6.6%, respectively. Passenger load factor declined 1.4 percentage points in the quarter and 0.8 percentage points year to date.
- Revenue growth was driven primarily by the 47 additional E175 aircraft and increased ground-handling activity, while 76 CRJ200, ERJ145 and CRJ700 aircraft were removed from flying arrangements.
- ExpressJet’s second-quarter revenue declined 20.4%, but its segment loss improved to $4.1 million from $10.2 million. SkyWest Airlines’ segment profit increased 3.1% in the quarter, and SkyWest Leasing profit increased 78.9%.
- Second-quarter 2016 included an $11.5 million favorable resolution of a flying-agreement matter and $6.8 million of early lease termination costs; there was no comparable item in 2017.
- Aircraft maintenance expense increased 7.1% in the quarter, primarily due to E175-related engine maintenance. Fuel expense increased 15.1%, and average fuel cost rose from $1.69 to $1.89 per gallon.
- The company delivered 17 E175 aircraft during the first half and financed them with $384.8 million of long-term debt. One remaining E175 from the firm order was expected to be delivered by year-end 2017.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit full-year revenue, earnings or margin guidance. Management expects to complete its assessment of the new revenue-recognition standard during the third quarter of 2017 and anticipates adoption using the full retrospective method. Management did not expect a material impact on net income but noted that presentation of certain directly reimbursed expenses, including fuel, could change. The company was also evaluating the future lease-accounting standard, which is expected to require most leases to be recognized on the balance sheet.
Management’s stated objective for the fleet transition is to improve profitability by adding dual-class aircraft and removing aircraft operating under unprofitable or less-profitable agreements. Contractual aircraft removal dates, contract renegotiations, partner reimbursement disputes, incentive payments and the ability to redeploy or sell aircraft may affect future revenue and earnings.
- Key operating risks include dependence on United, Delta, American and Alaska for schedules, contract economics and reimbursements; changes in partner financial condition; competitive and economic conditions; fuel prices; labor relations and pilot availability; weather and other disruptions; and aircraft residual values or impairment charges.
- Fuel-price exposure is concentrated in prorate operations, which represented 11.4% of first-half passenger revenue. A hypothetical 25% fuel-price increase would have increased first-half fuel expense by approximately $9.6 million.
- Only 3.3% of long-term debt was variable-rate at June 30, 2017. A hypothetical one-percentage-point increase in rates would have increased first-half interest expense by approximately $0.5 million and interest income by approximately $2.9 million, before contractual pass-through effects.
- Routine legal proceedings were not expected to have a material adverse effect. Internal disclosure controls were deemed effective, with no material changes in internal control during the quarter.
- The company repurchased 281,000 shares for $10.0 million during the first half and repurchased an additional 108,000 shares through tax withholding settlements. No additional shares were repurchased during the second quarter.
Most Important Facts for Investors to Verify
- Whether the E175 fleet transition continues to improve unit economics and offsets declining block hours and the removal of older aircraft.
- The sustainability of margin expansion after excluding the prior-year $11.5 million favorable contract matter and other unusual comparison items.
- ExpressJet’s path from a segment loss to sustained profitability.
- Future aircraft financing needs, debt maturities, interest expense and total fixed commitments of approximately $4.3 billion.
- Exposure to airline-partner contract renewals, aircraft removal dates and concentration of scheduled flying among four major partners.
- The effect of fuel prices, pilot availability, labor costs and maintenance requirements on future cash flow.
- The eventual presentation and financial statement effects of the revenue-recognition and lease-accounting standards.