SkyWest, Inc. 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, including fourth-quarter results. SkyWest operates regional passenger service primarily under fixed-fee and prorate code-share agreements with United, Delta, American and Alaska. The filing includes ExpressJet’s 2018 results because its sale closed on January 22, 2019 and did not qualify for discontinued-operations presentation.
- Approximately 2,770 daily departures and 596 aircraft in scheduled service at year-end.
- Approximately 84.3% of flying-agreements revenue came from fixed-fee contract flying and 15.7% from prorate arrangements.
- United and Delta together represented approximately 81.4% of consolidated revenue.
Financial and operating metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $3.222 billion | $3.123 billion | +3.2% |
| Operating income | $474.3 million | $388.2 million | +22.2% |
| Operating margin | 14.7% | 12.4% | +2.3 points |
| Net income | $280.4 million | $428.9 million | -34.6% |
| Diluted EPS | $5.30 | $8.08 | -34.4% |
| Net margin | 8.7% | 13.7% | -5.0 points |
| Operating cash flow | $802.5 million | $684.1 million | +17.3% |
| Cash and marketable securities | $689.3 million | $685.3 million | +0.6% |
| Long-term debt, including current maturities | $3.185 billion | $2.712 billion | +17.4% |
| Stockholders’ equity | $1.964 billion | $1.754 billion | +12.0% |
- Fourth-quarter 2018 revenue was $803.5 million, operating income was $121.5 million and net income was $67.1 million, or $1.28 diluted EPS.
- Block hours declined 4.5%, departures declined 7.1% and passengers carried declined 6.1%; passenger load factor was 80.5%, versus 80.4% in 2017.
- Flying-agreements revenue increased 3.0% to $3.170 billion. Capacity-purchase flight-operations revenue rose 2.8%, aircraft-lease revenue declined 2.4%, and prorate revenue increased 13.8%.
- Operating expenses increased only 0.5% to $2.747 billion. Depreciation and amortization increased 14.3% to $334.6 million, while aircraft rentals declined 28.2% to $154.9 million.
- Fuel expense increased 38.2% to $117.7 million, reflecting higher prorate fuel volumes and average fuel cost of $2.60 per gallon versus $2.06.
- Net cash used in investing activities was $983.4 million, primarily reflecting aircraft and spare-parts purchases. Net cash provided by financing activities was $327.5 million.
- The company had $65.3 million available under its $75 million credit facility after letters of credit.
Material changes versus the prior comparable period
- Profitability improved at the operating level, largely because of 39 new E175 aircraft, five new CRJ900 aircraft, improved contract economics and the removal of less profitable aircraft arrangements.
- SkyWest Airlines segment profit increased 16.5% to $306.7 million, while ExpressJet’s segment loss narrowed to $15.7 million from $32.5 million. SkyWest Leasing profit increased 19.9% to $62.9 million.
- Net income declined despite higher operating income because 2017 included a $246.8 million tax benefit from the Tax Cuts and Jobs Act. The 2018 effective tax rate was approximately 23%.
- Total assets increased to $6.313 billion, primarily reflecting aircraft acquisitions. Property and equipment, net, increased to $5.006 billion.
- The company acquired 39 E175 aircraft in 2018, financing approximately 85% of the purchase price with debt. Aircraft available for scheduled service increased from 595 to 596.
- SkyWest repurchased approximately 1.0 million shares for $54.4 million and declared quarterly dividends of $0.10 per share, compared with $0.08 per share in 2017.
- ASC 606 was adopted retrospectively in 2018. The adoption changed revenue and expense classifications but did not materially affect operating income, net income, EPS or cash flow.
Guidance, outlook, risks and unusual items
- The company expected to add 12 E175 aircraft and 15 CRJ900 aircraft under existing fixed-fee agreements through 2021. It also expected to replace older CRJ700 and CRJ900 aircraft with newer aircraft.
- SkyWest sold ExpressJet for total stated cash consideration of $76 million before purchase-price adjustments, consisting of a $60 million asset sale to United and a $16 million stock sale to ManaAir. SkyWest retained 16 CRJ200 aircraft, which it agreed to lease to ExpressJet, and 10 CRJ700 aircraft for which alternative uses were being pursued.
- After year-end, the company agreed to an early lease buyout involving 16 CRJ700s and 36 CRJ200s, expected to require $111.7 million of cash.
- Management believed available working capital and projected operating cash flow would satisfy operating needs, planned capital expenditures, lease payments and debt service for at least the next 12 months.
- Future obligations included approximately $3.185 billion of debt principal, $477.9 million of operating lease payments, $364.0 million of firm aircraft and spare-engine commitments, and $660.3 million of interest commitments.
- Topic 842 lease accounting was adopted January 1, 2019. Management expected recognition of an aircraft operating-lease liability of approximately $450 million to $500 million and a right-of-use asset of approximately $600 million to $650 million.
- Key risks include dependence on four major airline partners, concentration with United and Delta, contract termination or reduced aircraft utilization, pilot and labor costs, aircraft residual values and impairment, fuel costs on prorate flying, weather and operational disruptions, regulatory requirements, cybersecurity, and substantial debt and lease commitments.
- No long-lived-asset impairment charges were recorded in 2018. The filing reported routine legal matters that management did not expect to have a material adverse effect.
Important facts for investors to verify
- Post-sale revenue, earnings and cash-flow trends after ExpressJet was removed from operations.
- Renewal and utilization of aircraft contracts expiring in 2019 and 2020, including obligations for 53 CRJ700/CRJ900 aircraft whose financing extends beyond contract terms.
- Execution and financing of committed E175 and CRJ900 deliveries, as well as the $111.7 million lease buyout.
- Actual effects of ASC 842 on reported assets, liabilities, leverage ratios and debt covenants.
- Exposure to United and Delta, including their financial condition, regional-capacity strategies and potential schedule reductions.
- Ability to recruit and retain pilots and control labor, maintenance and training costs while preserving fixed-fee contract margins.
- Remaining authorization and future use of the $250 million share-repurchase program approved in February 2019.