Business Context and Reporting Period
SkyWest, Inc. filed its unaudited Form 10-Q for the quarter ended March 31, 2019. The company operates regional airline services primarily under fixed-fee capacity purchase agreements and prorate arrangements with Delta, United, American and Alaska. As of March 31, 2019, SkyWest Airlines had 522 aircraft, including 476 in scheduled service and approximately 2,150 daily departures.
On January 22, 2019, SkyWest completed the sale of ExpressJet. The 2019 results include ExpressJet through the sale date, and the 2018 comparison includes the full quarter. The sale was not presented as a discontinued operation.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $723.7 million | $783.4 million | Down 7.6% |
| Operating income | $96.4 million | $88.2 million | Up 9.3% |
| Operating margin | 13.3% | 11.3% | Up approximately 2.1 points |
| Net income | $88.2 million | $54.4 million | Up 62.2% |
| Diluted EPS | $1.69 | $1.03 | Up 64.1% |
| Net margin | 12.2% | 6.9% | Improved |
| Cash flow from operations | $154.9 million | $165.9 million | Down 6.6% |
Flying-agreement revenue was $700.0 million, down 8.8%. Capacity purchase revenue from flight operations declined 17.6% to $386.5 million, while aircraft lease revenue increased 9.7% to $207.4 million. Airport customer service and other revenue increased 53.5% to $23.7 million.
Operating expenses declined 9.8% to $627.3 million. Salaries, wages and benefits decreased 16.0%, aircraft maintenance decreased 16.5%, and aircraft rentals decreased 54.9%. Depreciation and amortization increased 16.0% due primarily to additional E175 aircraft. Interest expense increased 23.9% to $32.5 million.
Net income benefited materially from $46.7 million of other income, primarily the $46.6 million pretax gain on the ExpressJet sale. Excluding the disclosed gain and special items, the filing does not provide a single clearly stated adjusted earnings figure.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $290.9 million at March 31, 2019, compared with $328.4 million at December 31, 2018.
- Marketable securities were $253.4 million, down from $360.9 million. Combined cash and marketable securities were $544.3 million, down 21.0% from year-end.
- Investing activities used $76.9 million, including $249.4 million of aircraft, rotable-spare-parts, buildings and ground-equipment expenditures, partly offset by marketable-security activity and $53.2 million of net cash from the ExpressJet sale.
- Financing activities used $115.5 million, including $98.2 million of debt principal repayments, $34.3 million for treasury-stock purchases and employee equity-award tax payments, and $5.1 million of dividends.
- Total long-term debt, including current maturities and before debt issuance costs, was $3.12 billion. The average effective interest rate was approximately 4.2%; only 0.2% of debt was variable rate.
- Debt maturities totaled $3.12 billion, including $279.9 million due from April through December 2019 and $357.2 million due in 2020.
- Management stated that available working capital should meet present requirements, planned capital expenditures, lease payments and debt-service obligations for at least the next 12 months, absent unusual circumstances.
Material Changes Versus the Prior Comparable Period
- The sale of ExpressJet reduced consolidated revenue and expenses, with ExpressJet revenue falling from $161.1 million to $24.1 million and its segment loss improving from $6.6 million to $4.6 million.
- SkyWest Airlines revenue increased 5.3% to $585.8 million, but segment profit decreased 31.9% to $36.0 million because of higher labor, maintenance and other operating costs, including a special item.
- SkyWest Leasing revenue increased 72.5% to $113.9 million and segment profit increased 108.8% to $32.5 million, primarily due to additional E175 aircraft and third-party leasing activity.
- The fleet in scheduled service declined from 580 to 476 aircraft. SkyWest added 35 E175s and eight CRJ900s while removing older or less profitable aircraft, including 100 ERJ145/135s.
- Total block hours decreased 16.1%, primarily because of the ExpressJet sale, while SkyWest Airlines block hours increased 6.2%. SkyWest Airlines passengers carried increased 6.1%, and its load factor was 78.6% versus 78.8%.
- SkyWest adopted the new lease accounting standard, Topic 842, on January 1, 2019. It recognized $341.9 million of operating lease right-of-use assets and $348.6 million of operating lease liabilities, and recorded a $13.1 million after-tax reduction to opening retained earnings for a previously unrecognized impairment.
Guidance, Outlook, Risks and Unusual Items
- Management expects to add 11 E175 aircraft and 12 CRJ900 aircraft to existing fixed-fee agreements through 2021, replacing older CRJ700 and CRJ900 aircraft. The company expects to finance the 11 E175 commitments with approximately 85% debt and the remainder with cash.
- SkyWest had firm aircraft and spare-engine commitments of $329.3 million, operating lease obligations of $442.1 million, and total disclosed commitments and obligations of $4.52 billion.
- Q1 2019 included a $18.5 million non-cash write-off of aircraft manufacturer part credits in connection with terminating an agreement and obtaining release from future lease-return obligations. It also included $3.4 million of ExpressJet-related employee severance costs.
- SkyWest’s fixed-fee agreements generally transfer fuel-price risk to major airline partners; the company bears fuel-price risk on prorate operations, which represented 15.2% of flying-agreement revenue. A hypothetical 25% increase in prorate fuel prices would have increased Q1 fuel expense by approximately $6.4 million.
- Key risks include dependence on Delta, United, American and Alaska; partner-controlled schedules; competition; labor availability and costs, particularly pilots; aircraft residual values and impairment; fuel prices; weather and economic conditions; substantial debt, lease and aircraft commitments; and contract renegotiations or terminations.
- The company repurchased 476,277 shares for $25.0 million during the quarter. In February 2019, the board authorized a new $250.0 million repurchase program.
- Management reported no pending legal proceedings expected to have a material adverse effect on financial position, liquidity or results of operations. Disclosure controls were considered effective as of March 31, 2019.
Important Facts for Investors to Verify
- Assess reported earnings quality by separating the $46.6 million ExpressJet sale gain and $21.9 million of special items from recurring operating performance.
- Reconcile the year-over-year revenue decline with the ExpressJet divestiture and evaluate whether new E175 and CRJ900 placements can offset lost capacity and improve margins.
- Review the $3.12 billion debt balance, near-term maturities, $442.1 million of operating lease commitments and planned aircraft financing needs.
- Monitor labor costs, pilot availability, fleet utilization and the profitability of SkyWest Airlines, whose segment profit declined despite revenue growth.
- Evaluate concentration risk in the four major airline partners and the scheduled removal or renewal dates of aircraft under fixed-fee agreements.
- Confirm the effects of Topic 842 adoption and the $13.1 million opening retained-earnings adjustment when comparing 2019 balance-sheet metrics with prior periods.