SkyWest, Inc. 2023 Q1 SEC Filing Summary
Business context and reporting period
SkyWest filed an unaudited Form 10-Q for the three months ended March 31, 2023. The company operates regional air service primarily under capacity purchase and prorate agreements with United, Delta, American and Alaska. It reported 623 aircraft in its total fleet, including 491 aircraft in scheduled service or under contract, and approximately 1,900 daily departures.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total operating revenue | $691.8 million | $735.2 million | Down 5.9% |
| Operating income (loss) | $(4.7) million | $52.0 million | Declined $56.8 million |
| Net income (loss) | $(22.1) million | $17.7 million | Declined $39.8 million |
| Diluted EPS | $(0.45) | $0.35 | Declined $0.80 |
| Operating margin | (0.7%) | 7.1% | Down 7.8 percentage points |
| Net margin | (3.2%) | 2.4% | Down 5.6 percentage points |
| Cash flow from operations | $150.2 million | $20.5 million | Up $129.7 million |
| Cash and marketable securities | $935.9 million | $1.047 billion at Dec. 31, 2022 | Down $111.4 million |
| Total long-term debt, gross | $3.327 billion | $3.409 billion at Dec. 31, 2022 | Down $82.5 million |
Revenue consisted primarily of $663.8 million from flying agreements and $28.0 million from lease, airport services and other activities. Operating expenses increased 2.0% to $696.5 million, driven mainly by a $35.1 million, or 11.7%, increase in salaries, wages and benefits. Interest expense increased 17.6% to $33.6 million, partly reflecting higher debt and interest rates. The effective tax rate was 15.5%, compared with 28.4% in the prior-year quarter.
Material changes versus the prior comparable period
- Flying agreements revenue fell 6.2%, primarily because lower block-hour production increased deferred revenue recognition, while prorate revenue declined 2.3%.
- Block hours decreased 11.2% to 276,241, departures decreased 8.8% to 160,623, and passengers carried decreased 2.4% to 8.6 million. Management attributed the lower production principally to pilot availability constraints.
- Passenger load factor improved to 80.2% from 77.6%, despite lower departures and passengers.
- Capacity purchase agreement revenue included significant deferrals: $42.6 million of flight-operations revenue, net of unbilled revenue, and $20.6 million of allocated fixed lease payments were deferred during the quarter. Total deferred revenue was $204.6 million at March 31, 2023.
- Salaries, wages and benefits increased 11.7%, primarily due to higher employee compensation and pilot pay scales.
- Aircraft rentals increased 22.1%, partly due to accelerated lease expense for certain CRJ aircraft being stored before lease expiration.
- The company acquired 32 CRJ aircraft under an early lease buyout arrangement for $125.5 million, of which $86.9 million was capitalized as fixed assets.
- The company repurchased 5.1 million shares for $100.0 million during the quarter. Approximately $39.6 million remained available under the then-existing authorization at March 31, 2023.
Cash flow, debt and liquidity
- Operating cash flow was $150.2 million, benefiting substantially from timing of liability payments and cash received in excess of recognized revenue, including deferred revenue.
- Investing activities provided $3.0 million. Net sales of marketable securities provided $84.4 million, while aircraft and building capital expenditures totaled approximately $103.3 million in cash.
- Financing activities used $181.7 million, including $107.3 million of debt principal payments and $100.0 million of share repurchases. The company also issued $25.0 million of new debt.
- Total debt was approximately $3.3 billion, including $3.1 billion of aircraft and spare-engine financing and $200.6 million of unsecured U.S. Treasury debt. The average effective interest rate was approximately 4.0%, and debt had fixed interest rates at quarter-end.
- SkyWest Airlines had no borrowings under its $100.0 million line of credit; $29.9 million of letters of credit reduced availability to $70.1 million. Management stated that available liquidity should meet present requirements, including planned capital expenditures, lease payments and debt service, for at least the next 12 months.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects fleet changes to continue, including three E175 deliveries for Delta in 2023 and 2024 and one E175 delivery for Alaska in 2025, subject to adjustment. The company had a firm commitment for four E175 aircraft with anticipated deliveries through 2025 and expected to finance approximately 80% to 85% of that commitment with debt.
- Labor availability, particularly shortages of qualified captains, remains the principal operating constraint and could limit scheduled flying, revenue and efficiency.
- Major airline partners control schedules on capacity purchase routes; changes in schedules, contract terms, incentives, reimbursements or partner financial condition could materially affect results.
- Inflation and labor costs may not be fully recoverable through capacity purchase rates. Salaries, wages and benefits represented 48.1% of operating expenses.
- SkyWest bears fuel-price risk on prorate operations. A hypothetical 25% increase in fuel prices would have increased Q1 fuel expense by approximately $5.2 million.
- The company launched SkyWest Charter to provide public and on-demand charter service to underserved communities; its first revenue flight occurred after March 31, 2023.
- The company held 14 CRJ700 aircraft for sale with a recorded value of $56.7 million. Valuation involved Level 3 inputs and remains subject to market and residual-value uncertainty.
- Future commitments included $133.3 million of operating lease payments, $140.3 million of firm aircraft and spare-engine commitments, $537.1 million of interest commitments and $3.327 billion of principal debt maturities.
- Management stated that routine legal proceedings were not expected to have a material adverse effect on financial position, liquidity or results of operations.
Important facts for investors to verify
- Whether pilot hiring and retention improve sufficiently to restore block-hour production and scheduled aircraft utilization.
- The timing and future reversal of the $204.6 million deferred revenue balance and its effect on reported revenue and cash conversion.
- Whether higher pilot compensation, inflation and aircraft ownership costs are adequately reflected in future partner contract rates.
- The financing terms and liquidity impact of the four committed E175 aircraft and other fleet investments.
- The financial condition and strategic decisions of United, Delta, American and Alaska, including aircraft removals, schedule changes and contract amendments.
- The realizable value and timing of sales for aircraft held for sale, including the 14 CRJ700 aircraft.
- The sustainability of liquidity after debt service, capital expenditures and share repurchases, given cash and marketable securities declined 10.6% from year-end 2022.