SKYWEST INC quarterly report, Q3 FY2015

SkyWest, Inc. 2015 Q3 Form 10-Q Summary

Business Context and Reporting Period

SkyWest, Inc. operates regional airline subsidiaries SkyWest Airlines and ExpressJet. For the nine months ended September 30, 2015, the company operated approximately 3,500 daily departures and had 715 aircraft, including 656 in scheduled service. Approximately 88% of passenger revenue came from fixed-fee contract flying for United, Delta, American and Alaska; the balance came primarily from pro-rate arrangements.

The filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The financial statements are unaudited interim statements.

Key Financial Metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total operating revenue	$794.0 million	$834.6 million	$2.343 billion	$2.424 billion
Operating income	$78.3 million	$59.1 million	$182.3 million	$44.5 million
Operating margin	9.9%	7.1%	7.8%	1.8%
Net income	$36.3 million	$41.3 million	$77.4 million	$3.7 million
Diluted EPS	$0.71	$0.79	$1.49	$0.07
Operating cash flow	Not separately provided	Not separately provided	$313.5 million	$186.4 million
Capital expenditures	Not separately provided	Not separately provided	$654.7 million	$495.5 million

Q3 net margin was approximately 4.6%, compared with 5.0% in Q3 2014. Nine-month net margin was approximately 3.3%, compared with 0.2% in the prior-year period.

Q3 operating expenses declined 7.7% to $715.7 million, while operating income increased 32.5%.
Nine-month operating expenses declined 9.2% to $2.161 billion, producing a substantial improvement in operating income.
Q3 interest expense increased 18.0% to $19.9 million; nine-month interest expense increased 15.9% to $56.5 million.
Q3 other income declined sharply because 2014 included a $24.9 million gain on the sale of TRIP stock and related interest income. Q3 2015 included approximately $1.1 million of gains, primarily from early debt repayment.

Liquidity, Debt and Capital Resources

Cash and cash equivalents were $126.7 million at September 30, 2015, compared with $132.3 million at December 31, 2014.
Marketable securities increased to $429.8 million from $415.3 million. Cash, restricted cash and marketable securities totaled $568.1 million.
Long-term debt, including current maturities, was approximately $2.108 billion, compared with $1.746 billion at year-end 2014. The estimated fair value was $2.130 billion.
Long-term debt represented 55.9% of the capital mix at September 30, 2015, compared with 52.3% at December 31, 2014. The average effective interest rate on aircraft and spare-engine financing was approximately 3.9%.
The company generated $313.5 million of operating cash flow, used $660.8 million in investing activities and received $341.7 million from financing activities. Net cash and cash equivalents declined by $5.5 million.
Operating lease obligations totaled approximately $1.298 billion, and firm aircraft purchase commitments totaled approximately $1.459 billion.
Management stated that available working capital should be sufficient for present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months, absent unusual circumstances.

Material Changes Versus the Prior Comparable Period

Total revenue declined 4.9% in Q3 and 3.3% for the first nine months, primarily because of the smaller fleet and lower block-hour production.
Despite lower revenue, operating profitability improved because of the introduction of E175 aircraft, improved contract rates, higher performance incentives, lower fuel prices and reduced operating costs.
Q3 block hours declined 10.9%, departures declined 11.4% and available seat miles declined 7.7%. The passenger load factor improved to 83.7% from 83.1%.
Nine-month block hours declined 8.3% and departures declined 9.3%, while the load factor remained 82.7%. Revenue per available seat mile increased to 8.6 cents from 8.4 cents.
The fleet declined from 717 aircraft at December 31, 2014 to 656 aircraft in scheduled service at September 30, 2015. E175 aircraft in service increased from 20 to 43, while EMB120 aircraft were completely removed from scheduled service and older regional jets were reduced.
SkyWest Airlines nine-month segment profit increased 45.5% to $137.8 million. ExpressJet’s segment loss narrowed to $25.0 million from $98.2 million.
Fuel expense declined 41.6% for the first nine months, partly reflecting lower fuel prices. The average fuel cost per gallon declined to $2.19 from $3.46.
Operating cash flow increased 68.2%, while investing cash usage increased because of the acquisition of 23 E175 aircraft and related assets.
The company issued $546.2 million of long-term debt and repaid $184.3 million during the first nine months. It also repurchased 1.25 million shares for $18.7 million and paid $6.2 million of dividends.

Outlook, Commentary, Risks and Unusual Items

Management expects the fleet transition toward larger dual-class regional aircraft, particularly E175s, to improve profitability, but expects fleet size, block hours and revenue to remain lower in year-over-year comparisons at least through 2015.
SkyWest had 49 E175 aircraft under firm purchase commitment as of September 30, 2015, with deliveries scheduled from October 2015 through mid-2017. Agreements announced in 2015 contemplated additional E175 aircraft for Alaska, United and Delta.
Contract concentration is material: approximately 57.6% of aggregate capacity was operated for United and 33.1% for Delta during the first nine months. Changes, nonrenewals or unfavorable renegotiations of code-share agreements could materially affect results.
The company identified aircraft lease and debt commitments extending beyond fixed-fee contract terms for 64 CRJ700 aircraft. Failure to renew those contracts on acceptable terms could result in reduced economics, transition costs, impairment or other cash and non-cash charges.
At September 30, 2015, the company had $5.286 billion of disclosed commitments and obligations, including lease payments, aircraft purchases, interest and debt principal maturities.
Fuel-price exposure is limited on contract flying because major airline partners generally bear the economic risk; pro-rate flying remains exposed. A hypothetical 25% increase in fuel prices would have increased nine-month 2015 fuel expense by approximately $14.8 million.
Variable-rate notes represented 12.5% of total long-term debt, down from 41.3% at year-end 2014. A hypothetical one-percentage-point rate increase would have increased nine-month interest expense by approximately $3.8 million and interest income by approximately $3.9 million.
Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
The company was evaluating the impact of the forthcoming revenue-recognition standard and anticipated presenting debt issuance costs as a deduction from debt upon adoption of the applicable accounting update.

Important Facts for Investors to Verify

Whether E175 deliveries and new capacity purchase agreements produce the expected profitability improvement as older, less-profitable aircraft are retired.
The renewal terms and economics of major-airline contracts, particularly United, Delta and contracts covering CRJ700 aircraft.
Ability to finance approximately $1.459 billion of firm aircraft purchases while servicing approximately $2.108 billion of debt and $1.298 billion of operating lease obligations.
ExpressJet’s progress toward eliminating its remaining segment losses.
The sustainability of improved margins after the benefit of lower fuel prices and reduced operating activity.
Potential cash, impairment, transition or other charges related to aircraft whose financing or leases extend beyond their current flying contracts.
The effect of contract reimbursements, performance incentives, fuel prices, maintenance events and revenue-recognition estimates on period-to-period comparability.