Business Context and Reporting Period
SkyWest, Inc. operates regional airlines through SkyWest Airlines and ExpressJet, with additional aircraft ownership and financing activities in SkyWest Leasing. The company provided approximately 3,000 daily departures across the United States, Canada, Mexico and the Caribbean as of September 30, 2017. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
SkyWest had 637 aircraft in total, including 604 in scheduled service. Fixed-fee capacity purchase arrangements represented approximately 87.8% of passenger revenue for the first nine months of 2017, while prorate arrangements represented approximately 12.2%.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Operating revenue | $831.9 million | $799.8 million | $2.407 billion | $2.363 billion |
| Operating income | $112.4 million | $85.8 million | $295.3 million | $231.8 million |
| Net income | $53.7 million | $41.3 million | $139.0 million | $108.7 million |
| Diluted EPS | $1.01 | $0.79 | $2.62 | $2.08 |
| Operating margin | 13.5% | 10.7% | 12.3% | 9.8% |
| Net margin | 6.5% | 5.2% | 5.8% | 4.6% |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $532.3 million | $399.3 million |
Q3 operating revenue increased 4.0%, operating income increased 30.9%, net income increased 30.0%, and diluted EPS increased 27.8%. For the first nine months, revenue increased 1.9%, operating income increased 27.4%, net income increased 27.9%, and diluted EPS increased 26.0%.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $98.1 million at September 30, 2017, compared with $146.8 million at December 31, 2016.
- Marketable securities increased to $569.1 million from $409.9 million. Including restricted cash, total cash and marketable securities were $675.4 million versus $564.9 million at year-end 2016.
- Operating cash flow was $532.3 million for the first nine months, up 33.3% year over year.
- Investing cash outflow was $695.1 million, including $563.5 million for aircraft and rotable spare parts and $46.7 million for aircraft deposits.
- Financing cash inflow was $114.1 million, including $384.8 million of new long-term debt and $245.7 million of principal repayments.
- Total long-term debt, including current maturities and before debt issuance costs, was $2.710 billion, compared with $2.571 billion at December 31, 2016. Management reported a capital mix of 61.7% debt and 38.3% equity.
- Management stated that available working capital should meet present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material Changes Versus the Prior Comparable Period
- The fleet transitioned toward larger dual-class E175 aircraft and away from less profitable 50-seat aircraft. E175 aircraft in scheduled service increased from 67 to 104, while total aircraft in scheduled service declined from 642 to 604.
- Thirty-seven E175 aircraft were added to flying arrangements since September 30, 2016, while 76 CRJ200, ERJ135/145 and CRJ900 aircraft were removed.
- Despite 4.8% lower Q3 block hours, 5.1% fewer departures and 3.9% fewer passengers, revenue increased, primarily because of the higher revenue contribution from E175 aircraft.
- Q3 total operating expenses increased 0.8% to $719.6 million. Aircraft fuel expense increased 26.8%, and aircraft maintenance expense increased 3.6%; aircraft rentals decreased 16.4%.
- Interest expense increased 36.4% in Q3 and 40.9% for the first nine months, primarily because the additional E175 aircraft were largely debt financed.
- SkyWest Airlines segment profit increased 37.3% in Q3 and 11.8% for the first nine months. ExpressJet reported a Q3 segment loss of $10.0 million, compared with a $2.2 million loss in the prior year, although its nine-month loss improved to $16.1 million from $20.4 million.
- The first nine months of 2016 included an $11.5 million favorable resolution of a flying agreement matter; no comparable item occurred in 2017. The 2016 periods also included early lease termination costs that were not repeated in 2017.
Outlook, Commentary, Risks and Unusual Items
- The company did not provide a specific quantitative earnings or revenue guidance range in the filing.
- SkyWest anticipated placing an additional 14 E175 aircraft with Alaska and 31 E175 or E175 SC aircraft with Delta, with deliveries expected by the end of 2018. It had a firm commitment for 45 E175/E175 SC aircraft through the end of 2018.
- Management’s fleet strategy is intended to improve profitability by adding dual-class aircraft and removing aircraft operating under unprofitable or less profitable contracts.
- Future results depend materially on contract terms, schedules and reimbursement arrangements with United, Delta, American and Alaska. These partners control scheduling, pricing and seat inventories under fixed-fee arrangements.
- Major risks include airline-partner financial condition, contract terminations or renegotiations, fuel prices on prorate operations, labor costs and pilot availability, weather and other disruptions, aircraft residual values, lease and debt commitments, and competitive and economic conditions.
- A hypothetical 25% increase in fuel prices for prorate operations would have increased nine-month 2017 fuel expense by approximately $15.3 million. A hypothetical one-percentage-point increase in variable interest rates would have increased nine-month interest expense by approximately $0.8 million.
- Operating lease commitments totaled $753.3 million, firm aircraft and spare-engine commitments totaled $1.156 billion, and total disclosed commitments and obligations were $5.158 billion.
- The company changed estimated useful lives and residual values for certain aircraft and other assets effective January 1, 2017, which was expected to increase 2017 depreciation expense by approximately $1.8 million annually.
- Management concluded that routine legal proceedings were not likely to have a material adverse effect, and disclosure controls were effective as of September 30, 2017.
Important Facts for Investors to Verify
- Whether the planned E175 deliveries and placements with Delta and Alaska occur on schedule and generate the expected returns.
- Whether ExpressJet can reduce or eliminate its continuing segment losses as older 50-seat aircraft are removed.
- The sustainability of improved margins after considering higher aircraft ownership, maintenance, labor and interest costs.
- Remaining debt maturities, lease payments and aircraft purchase commitments, particularly the $1.464 billion of debt principal maturities due after 2021.
- Exposure to fuel prices on prorate flying, variable-rate debt and changes in reimbursement economics under capacity purchase agreements.
- The effect of pending revenue-recognition and lease-accounting standards, including the expected balance-sheet impact of the new lease standard.
- The availability of the company’s $90.0 million remaining stock-repurchase authorization and the impact of future repurchases on liquidity and share count.