SkyWest, Inc. 2021 Form 10-K Summary
Business context and reporting period
SkyWest operates the largest U.S. regional airline through SkyWest Airlines, providing scheduled passenger service under code-share and capacity purchase agreements with United, Delta, American and Alaska. The filing covers the fiscal year ended December 31, 2021; it is an annual filing rather than a quarterly report. SkyWest operated approximately 2,080 daily departures and had 629 aircraft, including 509 in scheduled service or under contract.
Approximately 84% of flying-agreements revenue came from capacity purchase arrangements, which generally provide fixed compensation and reduce exposure to passenger-fare and fuel-price volatility. The remaining revenue primarily came from prorate flying, where SkyWest bears more operating and fuel-price risk.
Financial and operating metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total operating revenue | $2,713.5 million | $2,127.1 million | 27.6% |
| Operating income | $275.9 million | $108.8 million | 156.5% |
| Operating margin | 10.2% | 5.1% | Improved |
| Net income (loss) | $111.9 million | $(8.5) million | Returned to profitability |
| Diluted EPS | $2.20 | $(0.17) | Improved |
| Net margin | 4.1% | (0.4)% | Improved |
| Operating cash flow | $831.8 million | $633.6 million | 31.3% |
| Cash used in investing | $(698.5) million | $(683.5) million | Higher use |
| Cash used in financing | $(90.6) million | $178.4 million provided | Change driven by debt repayment |
Capacity purchase revenue increased 23.1% to $2,205.4 million, while prorate revenue increased 52.4% to $409.7 million. Departures rose 28.1% to 749,943, block hours increased 35.6% to 1.32 million, passengers carried increased 72.2% to 36.6 million, and passenger load factor increased to 74.6% from 56.4%.
Total operating expenses increased 20.8% to $2,437.6 million. Salaries, wages and benefits were $986.7 million, aircraft maintenance was $817.8 million, and fuel expense was $107.1 million. Labor costs represented approximately 40.5% of operating costs. The filing does not present a company-defined adjusted EBITDA measure.
At December 31, 2021, cash and marketable securities totaled $860.4 million, with an additional $43.6 million available under a line of credit, for total available liquidity of $904.0 million. Total debt, including current maturities, was approximately $3.14 billion, consisting primarily of aircraft-related debt and $200.6 million of Treasury payroll-support loans. Net debt after cash and marketable securities was approximately $2.25 billion.
Material changes versus the prior comparable period
- Demand and flying activity recovered from the pandemic-disrupted 2020 period, but 2021 block hours remained approximately 9.9% below 2019 levels.
- SkyWest returned to profitability, reporting $111.9 million of net income versus an $8.5 million loss in 2020.
- Payroll support grants recognized as an operating-expense reduction increased to $422.7 million from $345.5 million.
- SkyWest recorded an $84.6 million non-cash impairment charge on CRJ900 aircraft expected to be displaced by 16 new Delta E175 aircraft.
- Aircraft maintenance expense increased 32.1%, partly because of engine and component work on older CRJ700 and CRJ200 aircraft.
- Fuel expense increased 73.4%, reflecting higher prorate flying and an increase in average fuel cost from $1.89 to $2.49 per gallon.
- SkyWest acquired 18 new E175 aircraft and 11 used CRJ700 aircraft, and aircraft in scheduled service or under contract increased from 452 to 509.
- Operating cash flow increased to $831.8 million, while capital spending and aircraft deposits contributed to $698.5 million of investing cash outflow.
- The company repaid the $60 million secured Treasury loan, made $80.1 million of early aircraft-debt repayments and issued $95.4 million of additional unsecured Treasury loans.
- Deferred revenue related to fixed monthly capacity-purchase payments was $103.9 million at year-end, down from $110.7 million deferred during 2020; the balance depends substantially on future block-hour production.
Guidance, outlook, commentary and risks
Management stated that available working capital was expected to cover present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months. The filing provides no formal earnings or revenue guidance.
SkyWest expected to place two American E175s, 16 Delta E175s and 11 Alaska E175s into service during 2022 and 2023, subject to delivery timing, demand and labor availability. The Delta E175s are expected to replace 16 CRJ900s. The company also had firm commitments for 29 E175 aircraft and approximately $791.1 million of total firm aircraft and spare-engine commitments.
- COVID-19 variants, travel restrictions and uncertain passenger demand could reduce schedules and revenue.
- Pilot attrition and shortages of pilots, mechanics and other operational employees could restrict flight schedules, increase training costs and trigger contractual penalties or lower compensation.
- The business is highly dependent on four major airline partners; Delta and United together represented approximately 73.5% of total revenue in 2021.
- Capacity purchase agreements may be terminated or not renewed, while prorate agreements may be terminated with 30 to 120 days’ notice.
- Fixed aircraft debt, lease obligations and planned aircraft purchases create substantial cash requirements. Principal maturities totaled $395.4 million in 2022 and $3.14 billion through all periods.
- A 25% increase in fuel prices would have increased 2021 prorate fuel expense by an estimated $26.8 million.
- A 2021 cyberattack and subsequent server outage caused approximately 1,700 flight cancellations and an estimated $18 million pre-tax adverse impact.
- Government payroll-support agreements restrict dividends and share repurchases through September 30, 2022 and impose other operating and executive-compensation restrictions. Treasury warrants covering 785,226 shares remained outstanding and unexercised at year-end.
- Revenue recognition depends on forecasts of future block hours; the deferred-revenue valuation was identified as the critical audit matter because of COVID-19-related estimation uncertainty.
Most important facts for investors to verify
- Whether passenger demand and block hours return to pre-pandemic levels and whether major partners maintain or expand contracted flying.
- The pace and cost of pilot recruitment, captain upgrades, retention and related schedule reductions.
- Utilization, redeployment or sale proceeds for the displaced CRJ900 fleet and the carrying values of other older aircraft.
- Funding sources and refinancing capacity for the $791.1 million aircraft and spare-engine commitments and upcoming debt maturities.
- The sustainability of earnings excluding $422.7 million of payroll-support grants and the effect of higher labor, maintenance and fuel costs.
- The timing of recognition of the $103.9 million deferred-revenue balance and the assumptions used for future block hours.
- Terms and potential dilution from Treasury warrants, as well as the resumption of dividends or share repurchases after restrictions expire.