SkyWest, Inc. — Form 10-Q Summary
Business context and reporting period
SkyWest operates regional airline services primarily under capacity purchase and prorate agreements with Delta, United, American and Alaska. The filing covers the three and nine months ended September 30, 2020. Results were materially affected by COVID-19-related reductions in travel demand and flight schedules. The 2019 comparable period includes limited ExpressJet results before its January 2019 sale.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Operating revenue | $457.5 million | $760.3 million | $1,537.5 million | $2,228.4 million |
| Operating income | $74.6 million | $146.4 million | $136.5 million | $387.0 million |
| Net income | $33.7 million | $91.3 million | $37.9 million | $267.6 million |
| Diluted EPS | $0.66 | $1.79 | $0.75 | $5.19 |
| Operating margin | 16.3% | 19.3% | 8.9% | 17.4% |
| Net margin | 7.4% | 12.0% | 2.5% | 12.0% |
| Operating cash flow | — | — | $548.7 million | $582.5 million |
At September 30, 2020, cash and cash equivalents were $418.2 million and marketable securities were $403.8 million, for total cash and marketable securities of $822.0 million. Total available liquidity was $1.3748 billion, including $39.8 million available under the SkyWest Airlines credit facility and $513.0 million available under the CARES Act secured loan facility at that date.
Total long-term debt, including current maturities, was $3.1 billion, compared with $3.0 billion at December 31, 2019. Operating lease liabilities totaled $305.1 million, consisting of $83.3 million current and $221.8 million noncurrent liabilities. Stockholders’ equity was $2.185 billion.
Net cash used in investing activities was $261.4 million, including $180.4 million of aircraft, rotable-spare-parts, buildings and equipment expenditures. Financing activities provided $43.8 million, supported by $201.3 million of debt issuance and partially offset by $117.2 million of principal repayments and $13.1 million of dividends.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 39.8%, operating income decreased 49.1% and net income decreased 63.1% year over year.
- Nine-month revenue decreased 31.0%, operating income decreased 64.7% and net income decreased 85.8% year over year.
- Third-quarter departures declined 37.3%, block hours declined 40.8%, passengers carried declined 57.5% and load factor fell to 54.1% from 83.9%.
- Nine-month departures declined 31.9%, block hours declined 35.6%, passengers carried declined 52.2% and load factor fell to 56.7% from 82.3%.
- Prorate revenue declined 58.3% in the third quarter and 49.0% for the nine-month period. Capacity purchase agreement flight-operations revenue declined 54.4% and 41.7%, respectively.
- Payroll costs declined, but aircraft maintenance increased 12.5% in the third quarter and 14.6% for the nine-month period. Depreciation and amortization increased 30.9% and 33.7%, respectively.
- The company recognized $190.2 million of CARES Act payroll support as a third-quarter reduction of labor expense and $342.1 million for the nine-month period. A further $3.4 million was expected to be recognized by year-end.
- The estimated useful lives of owned CRJ200 aircraft were shortened, producing incremental depreciation of approximately $20.2 million in the third quarter and $66.0 million for the nine-month period. Additional fourth-quarter depreciation was estimated at $8.5 million.
- The company recorded $24.3 million of additions to its credit-loss reserve during the nine-month period, primarily related to uncertainty over a note receivable associated with the ExpressJet sale. The reserve totaled $39.6 million at September 30, 2020.
- Revenue deferrals related to fixed monthly aircraft payments under capacity purchase agreements totaled $29.6 million in the third quarter and $98.6 million for the nine-month period.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 to continue materially reducing results at least through the remainder of 2020 and into 2021. October 2020 departures were approximately 1,600 to 1,700 per day versus approximately 2,600 anticipated before the pandemic.
- As of September 30, 2020, 448 of the company’s 577 aircraft were in scheduled service. The company removed 38 CRJ200 aircraft from service and expected to remove another 17 during the fourth quarter.
- The company had a firm commitment for 24 new E175 aircraft with deliveries expected through 2022. It expected to finance approximately 85% of those purchases with debt. Subsequent to quarter-end, it secured arrangements involving 21 used CRJ700 aircraft and a separate contract for 20 additional used CRJ700 aircraft with American.
- Under the CARES Act payroll support program, the company received $450.7 million, consisting of a $345.5 million grant and a $105.2 million ten-year unsecured loan. The program restricts dividends and share repurchases through September 30, 2021 and imposes other service and compensation requirements.
- The company had drawn $60 million under a Treasury secured loan facility as of September 30, 2020. The facility was subsequently amended on October 28, 2020 to increase total borrowing capacity from $573 million to $725 million. Warrants for 211,416 shares were issued in connection with the $60 million borrowing; separate payroll-support warrants covered 370,720 shares.
- Management stated that available working capital and government assistance were expected to meet present financial requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months. This assessment depends materially on uncertain recovery in air travel and partner schedules.
- Key risks include prolonged COVID-19 effects, dependence on major airline partners for schedules and payments, partner credit quality, aircraft residual values and impairment, substantial debt and lease obligations, labor availability and costs, fuel prices on prorate operations, and possible aircraft delivery deferrals.
- The company reported no material legal proceedings and no special-item expense in 2020. The 2019 comparable period included a $21.9 million special-items expense and a $46.5 million pre-tax gain from the ExpressJet sale.
Important facts for investors to verify
- Whether flight schedules, load factors and prorate demand recover sufficiently to support deferred revenue recognition and aircraft utilization.
- The timing and terms of additional Treasury facility borrowings, related warrants and the resulting effect on leverage and shareholder dilution.
- Compliance with CARES Act restrictions, including dividend, repurchase, scheduled-service and executive-compensation limitations.
- The collectability of the ExpressJet-related note receivable and the adequacy of the $39.6 million credit-loss allowance.
- The financial condition and contractual commitments of Delta, United, American and Alaska, which control most schedules and represent key sources of revenue.
- Future CRJ200 retirements, incremental depreciation, potential impairment charges and the company’s ability to redeploy or lease removed aircraft.
- Funding requirements for $655.9 million of firm aircraft and spare-engine commitments, $380.9 million of operating lease payments and $3.1 billion of debt principal maturities and obligations.