SkyWest, Inc. 2020 Form 10-K Summary
Business context and reporting period
SkyWest operates regional passenger service through SkyWest Airlines under code-share and capacity purchase agreements with Delta, United, American and Alaska. The filing covers the fiscal year ended December 31, 2020; quarterly data is included, but this is an annual Form 10-K rather than a standalone fourth-quarter filing.
- At year-end, SkyWest had 601 aircraft, including 452 in scheduled code-share service, and approximately 1,770 daily departures.
- Approximately 87% of flying-agreements revenue came from capacity purchase arrangements and 13% from prorate arrangements.
- United and Delta together represented approximately 76.4% of consolidated revenue, creating significant customer concentration.
- SkyWest had 12,502 full-time equivalent employees, approximately 90.5% of whom were represented by in-house labor associations.
Financial and operating metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $2,127.1 million | $2,972.0 million | Down 28.4% |
| Operating income | $108.8 million | $512.3 million | Down 78.8% |
| Operating margin | 5.1% | 17.2% | Down 12.1 percentage points |
| Net income (loss) | $(8.5) million | $340.1 million | Declined $348.6 million |
| Diluted EPS | $(0.17) | $6.62 | Declined $6.79 |
| Operating cash flow | $633.6 million | $721.0 million | Down 12.1% |
| Capital expenditures | $460.5 million | $846.5 million | Down 45.6% |
| Cash and marketable securities | $825.9 million | $520.2 million | Up 58.8% |
| Total long-term debt, including current maturities | $3,236.0 million | $3,017.5 million | Up $218.5 million |
| Stockholders’ equity | $2,139.5 million | $2,175.0 million | Down 1.6% |
- Block hours decreased 33.5% to 973,338, departures decreased 30.5% to 585,257, and passengers carried decreased 51.3% to 21.3 million.
- Passenger load factor declined to 56.4% from 82.3%.
- Capacity purchase flight-operations revenue decreased 38.6% to $945.0 million; aircraft lease and fixed revenue increased 2.0% to $846.9 million.
- Prorate revenue decreased 48.4% to $268.9 million.
- Operating expenses decreased 17.9% to $2,018.3 million, including a $345.5 million CARES Act payroll support grant recorded as a reduction of operating expenses.
- Aircraft maintenance expense increased 20.4% to $619.0 million, while depreciation and amortization increased 29.0% to $475.0 million, including approximately $74.5 million of incremental depreciation from shortened CRJ200 useful lives.
- Interest expense was $123.2 million, and 97.7% of total long-term debt had fixed interest rates at year-end.
Material changes versus the prior comparable period
- COVID-19 caused a substantial reduction in air travel demand and partner airline schedules. Average daily departures fell from approximately 2,400–2,500 expected before the pandemic to approximately 2,300 in the first quarter, 900 in the second quarter, 1,500 in the third quarter and 1,700 in the fourth quarter.
- The company removed 55 CRJ200 aircraft from the Delta Connection agreement and terminated its American prorate agreement on seven CRJ200 aircraft. Operating aircraft declined from 483 to 452.
- SkyWest added 37 E175 aircraft to service while removing 62 CRJ200 aircraft, four CRJ900 aircraft and seven CRJ700 aircraft on a net basis.
- The company deferred recognition of $110.7 million of fixed monthly capacity-purchase payments because 2020 flight activity was disproportionately low relative to expected activity over the remaining contract terms. The balance is expected to be recognized over future contract periods, potentially beginning in late 2021 or 2022.
- SkyWest adopted the expected-credit-loss standard on January 1, 2020, recording an $11.6 million after-tax reduction to opening retained earnings. Credit-loss reserves increased by $30.8 million during 2020, partly due to collectability concerns regarding a note related to the ExpressJet sale.
- Unlike 2019, which included a $46.5 million gain on the sale of ExpressJet and $21.9 million of special charges, 2020 had no comparable special items or sale gain.
Liquidity, debt and commitments
- Total available liquidity at December 31, 2020 was $1,530.4 million, consisting of $825.9 million of cash and marketable securities, $39.5 million available under a line of credit and $665.0 million available under the Treasury secured loan facility.
- The company had $3.236 billion of long-term debt before debt issuance costs, including $3.07 billion primarily related to aircraft and spare engines, $105.2 million under the CARES Act payroll support program and $60.0 million under the Treasury secured loan agreement.
- Principal maturities total $406.0 million in 2021, $407.6 million in 2022, $418.0 million in 2023, $372.3 million in 2024, $447.3 million in 2025 and $1.185 billion thereafter.
- Operating lease payments total approximately $359.7 million, including $85.9 million due in 2021.
- Firm aircraft and spare-engine commitments totaled $547.9 million, including $479.2 million scheduled for 2021.
- Management stated that available working capital and government assistance were expected to cover present requirements, planned capital expenditures, lease payments and debt service for at least the following 12 months.
Outlook, management commentary and risks
- Management expects COVID-19 to continue materially affecting results through at least 2021, and daily scheduled flights may not return to pre-pandemic levels by the end of 2021 or thereafter.
- SkyWest expects to place 25 used CRJ700 aircraft into service for American during 2021, receive one new CRJ900 financed by Delta in 2021, and receive 20 new E175 aircraft for American beginning in the third quarter of 2021 and continuing into 2022. Delivery timing remains subject to change.
- The company implemented voluntary unpaid leave, a hiring freeze, suspended non-scale pay increases, reduced administrative positions and delayed discretionary spending.
- Government assistance included $450.7 million under the 2020 CARES Act payroll support program, comprising $345.5 million of grants and $105.2 million of an unsecured ten-year loan. SkyWest expected approximately $233.1 million under the 2021 payroll support extension, including an expected $39.9 million promissory note.
- Government assistance restricts dividends, share repurchases, certain employee actions and executive compensation. SkyWest also issued warrants to the Treasury and may issue additional warrants if it draws further under the secured loan facility.
- The company’s business is dependent on its four major airline partners, which control most scheduling, ticketing and pricing under capacity purchase agreements. Partner financial weakness, schedule reductions, scope limitations or contract termination could materially affect results.
- Other significant risks include labor availability and costs, pilot and mechanic retention, aircraft residual values and impairment, substantial fixed debt and lease obligations, fuel-price exposure on prorate flying, weather and operational disruptions, regulatory compliance, cybersecurity, litigation and environmental requirements.
- No material adverse outcome was expected from routine legal proceedings as of December 31, 2020. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether passenger demand, block hours, load factors and partner schedules recover sufficiently to absorb SkyWest’s fixed aircraft, debt and labor costs.
- The timing and amount of recognition of the $110.7 million deferred capacity-purchase revenue and the assumptions supporting forecasted future block hours.
- Liquidity after government-support restrictions, including the May 28, 2021 deadline for additional Treasury Loan Agreement borrowings and the September 1, 2021 line-of-credit maturity.
- Debt maturities, aircraft delivery commitments and the company’s ability to finance planned E175 and CRJ aircraft without materially increasing leverage.
- Credit exposure to Delta, United, American and Alaska, including the collectability of receivables and the ExpressJet-related note.
- The effect of government-assistance restrictions on dividends, share repurchases, executive compensation and potential shareholder dilution from Treasury warrants.
- The pace of CRJ200 retirements, aircraft utilization and potential impairment or residual-value charges on aircraft not in scheduled service.