SkyWest Inc. 2022 Q3 Form 10-Q Summary
Business Context and Reporting Period
SkyWest operates regional airline and aircraft leasing businesses through SkyWest Airlines and SkyWest Leasing. It provides scheduled regional service primarily under capacity purchase and prorate agreements with United, Delta, American and Alaska. The filing covers the unaudited three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
As of September 30, 2022, the company had 642 aircraft, including 530 in scheduled service or under code-share contract, approximately 2,100 daily departures and 50.6 million common shares outstanding at October 28, 2022.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Operating revenue | $789.4 million | $744.8 million | 6.0% increase |
| Operating income | $75.6 million | $47.1 million | 60.6% increase |
| Operating margin | 9.6% | 6.3% | Approximately 3.3 points higher |
| Net income | $48.4 million | $9.7 million | 399.5% increase |
| Diluted EPS | $0.96 | $0.19 | Increase |
| Net margin | 6.1% | 1.3% | Approximately 4.8 points higher |
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Operating revenue | $2.324 billion | $1.936 billion | 20.0% increase |
| Operating income | $216.2 million | $242.9 million | 10.6% decrease |
| Operating margin | 9.3% | 12.5% | Approximately 3.2 points lower |
| Net income | $120.1 million | $107.6 million | 11.6% increase |
| Diluted EPS | $2.37 | $2.12 | Increase |
| Net cash from operating activities | $343.5 million | $687.0 million | 50.0% decrease |
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $38.9 million and marketable securities were $965.3 million at September 30, 2022, for total cash and marketable securities of approximately $1.004 billion, up 16.7% from December 31, 2021.
- Total assets were $7.454 billion and stockholders’ equity was $2.396 billion.
- Long-term debt, including current maturities and before unamortized debt issuance costs, was $3.442 billion, compared with $3.141 billion at December 31, 2021. The reported carrying value net of debt issuance costs was $3.411 billion.
- The company had $68.6 million available under its $100 million line of credit after $31.4 million of letters of credit. No borrowings were outstanding under the facility.
- Long-term debt had fixed interest rates and an average effective rate of approximately 4.0%. Capitalization was 44.6% equity and 55.4% long-term debt.
- Management stated that available working capital was sufficient to meet present requirements, including planned capital expenditures, lease payments and debt service, for at least the next 12 months.
Cash Flow and Capital Expenditures
- Operating cash flow was $343.5 million for the first nine months, down from $687.0 million in 2021.
- Investing cash flow used $864.6 million, including $522.7 million for aircraft and rotable spare parts, $48.5 million for buildings and ground equipment and a net $367.9 million investment in marketable securities.
- Financing cash flow provided $301.5 million, reflecting $601.4 million of new debt issuance and $299.8 million of principal repayments.
- The company took delivery of 21 new E175 aircraft financed with $430.9 million of long-term debt and issued $167.9 million of promissory notes secured by spare engines.
- Future commitments included approximately $238.0 million of operating lease payments, $244.4 million of firm aircraft and spare engine commitments, $565.7 million of interest commitments and $3.442 billion of principal maturities.
Material Changes Versus the Prior Comparable Period
- Q3 revenue growth was driven by the absence of temporary capacity purchase rate reductions provided in 2021, 33 additional E175 aircraft, and higher capacity purchase revenue. Prorate revenue declined 26.2% because of fewer departures and passengers.
- Q3 block hours declined 12.6% and departures declined 7.4%, primarily because of pilot availability constraints. Passenger load factor improved to 84.6% from 79.1%.
- Q3 salaries, wages and benefits increased 15.9% to $307.7 million, primarily due to costs to attract and retain aviation professionals. Maintenance expense declined 12.7% because significant reliability work had been performed in 2021.
- Q3 results benefited from the absence of the $84.6 million non-cash CRJ900 impairment charge recorded in 2021, but were burdened by the absence of the $115.4 million payroll support grant recognized in 2021.
- For the nine months, revenue increased 20.0%, but operating margin declined because the $422.7 million payroll support grant recognized in 2021 did not recur and labor and other operating costs increased.
- The SkyWest Airlines segment generated $3.5 million of profit for the nine months, down from $38.7 million, while SkyWest Leasing segment profit increased to $120.4 million from $109.9 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects to add seven E175 aircraft for Delta through 2024, one E175 for Alaska in 2025 and 11 used CRJ700 aircraft for American by the end of 2023, subject to changes in delivery and in-service timing.
- Management expects to finance eight firm E175 commitments with approximately 80% to 85% debt and the remaining amount with cash.
- The company identified pilot and other labor shortages as a significant operating constraint. An amended pilot collective bargaining agreement increased first-year first officer pay from approximately $46 per flight hour to $90 and first-year captain pay to $140 per flight hour for CRJ and E175 captains.
- Fuel-price exposure is concentrated in prorate operations. A hypothetical 25% increase in fuel prices would have increased nine-month 2022 fuel expense by approximately $21.3 million.
- The company classified four CRJ700 aircraft as held for sale and recorded a $15.2 million impairment charge during the nine months.
- Other income included $16.1 million of unrealized gains on Eve Investments and $1.2 million of earnings from the Aero Engines joint venture. These items may not recur and are subject to valuation risk.
- The effective tax rate was reduced by a $7.4 million release of a previously recorded uncertain tax position liability.
- Key risks include COVID-19 and travel-demand uncertainty, dependence on major airline partners, pilot availability and labor costs, fuel prices, aircraft residual values and impairments, significant debt and lease obligations, inflation, weather and geopolitical conditions.
- The company guaranteed $19.8 million of debt for a third-party air carrier to support its pilot hiring pipeline. Management stated that routine legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether pilot hiring and retention improve sufficiently to restore scheduled block hours and fully utilize the expanded E175 fleet.
- The sustainability of profitability after excluding nonrecurring 2021 payroll support grants, 2022 investment gains and the tax-liability release.
- The timing, financing and economics of the remaining E175 and CRJ700 deliveries.
- Compliance with debt and line-of-credit liquidity and profitability covenants, including scheduled principal maturities.
- Future aircraft residual values, the outcome of CRJ700 sales and any additional impairment charges.
- Changes to capacity purchase and prorate agreements, flight schedules and the financial condition of United, Delta, American and Alaska.