SkyWest, Inc. 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc., through SkyWest Airlines and ExpressJet, operated the largest U.S. regional airline platform, with approximately 2,900 daily departures and 668 aircraft as of March 31, 2017. The company served United, Delta, American and Alaska under primarily fixed-fee capacity purchase agreements. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Approximately 89.7% of passenger revenue came from contract flying and 10.3% from prorate arrangements. Approximately 95.9% of available seat miles were flown under fixed-fee arrangements.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total operating revenue | $765.4 million | $762.1 million | 0.4% |
| Operating income | $76.3 million | $61.8 million | 24.9% |
| Operating margin | 10.0% | 8.1% | +1.9 pts |
| Net income | $34.8 million | $27.1 million | 28.4% |
| Diluted EPS | $0.65 | $0.52 | 25.0% |
| Net margin | 4.5% | 3.6% | +1.0 pt |
| Cash flow from operations | $143.9 million | $34.5 million | 316.7% |
| Capital expenditures, including non-cash items | $223.1 million | $98.4 million | 127.5% |
Operating expenses declined 1.6% to $689.1 million, despite higher fuel, depreciation and interest costs. Interest expense increased 38.5% to $24.5 million, primarily because of debt financing for additional E175 aircraft. The effective tax rate was 33.6%, compared with 39.1% in the prior-year quarter, including a $3.0 million discrete tax benefit from employee equity transactions.
At March 31, 2017, cash and cash equivalents were $95.4 million, marketable securities were $482.8 million, and restricted cash was $8.3 million. Total cash and marketable securities, including restricted cash, were $586.5 million, up from $564.9 million at December 31, 2016.
Total long-term debt, including current maturities and before debt issuance costs, was $2.64 billion, compared with $2.57 billion at December 31, 2016. Net debt after cash and marketable securities was approximately $2.05 billion. The company reported total capital of 37.2% equity and 62.8% long-term debt.
Material Changes Versus the Prior Comparable Period
- Fleet in scheduled service decreased from 656 to 632 aircraft. The company added 45 E175 aircraft and removed 69 less-profitable CRJ200, ERJ145 and CRJ700 aircraft.
- Available seat miles declined 6.4%, block hours declined 7.0%, departures declined 7.9%, and passengers carried declined 5.1%. The passenger load factor decreased from 79.0% to 78.6%.
- Revenue increased modestly despite lower production, primarily because of the addition of E175 aircraft. Revenue per available seat mile increased from 9.0 cents to 9.6 cents, while cost per available seat mile increased from 8.4 cents to 9.0 cents.
- Fuel expense increased 35.4% to $34.3 million, with average fuel cost rising from $1.49 to $1.97 per gallon. Most fuel costs on fixed-fee flights were reimbursed by airline partners.
- Aircraft rentals declined 14.0%, salaries and benefits declined 1.8%, and maintenance expense declined 4.7%, primarily because of the smaller fleet and lower flying levels.
- SkyWest Airlines revenue increased 3.6%, but segment profit declined 8.3% to $41.8 million because of higher labor, E175 maintenance and fuel costs.
- ExpressJet revenue declined 14.6%, but its segment loss narrowed from $7.9 million to $1.9 million as costs declined faster than revenue.
- SkyWest Leasing profit increased 84.2% to $11.9 million, primarily due to the addition of 45 E175 aircraft.
- Operating cash flow improved substantially because of working-capital movements, including lower receivables and prepaid aircraft rents and higher accounts payable and accrued aircraft rents.
Outlook, Commitments, Risks and Unusual Items
Management stated that available working capital was expected to be sufficient for present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months. The filing does not provide specific earnings or revenue guidance.
The company had firm commitments for 11 additional E175 aircraft scheduled for delivery through the end of 2017. Total disclosed commitments included $888.5 million of operating lease payments, $350.0 million of firm aircraft and spare-engine commitments, $526.3 million of interest commitments and $2.64 billion of debt principal maturities.
The company is transitioning toward larger dual-class regional aircraft while removing older 50-seat aircraft from less-profitable arrangements. Aircraft scheduled for removal may be extended, placed with another airline partner, returned to lessors, sold or moved to prorate operations.
- Results depend substantially on United, Delta, American and Alaska, which control schedules, pricing and seat inventory under fixed-fee contracts.
- Contract expirations and potential renegotiations could affect aircraft utilization and revenue. Several aircraft arrangements had scheduled expirations in 2017 and later years.
- The company bears fuel-price risk on prorate operations. A hypothetical 25% increase in fuel prices would have increased Q1 2017 fuel expense by an estimated $18.7 million.
- Labor availability and costs, including the ability to attract and retain qualified pilots, remain material operating risks.
- Debt, lease and aircraft purchase commitments are significant, and aircraft residual values or impairment charges could affect results.
- The company adopted accounting guidance affecting deferred-tax classification and stock compensation. The stock-compensation adoption increased diluted EPS by $0.05 in the quarter.
- The company changed useful lives and residual values for certain aircraft and other assets, expected to increase 2017 depreciation expense by approximately $1.8 million annually.
- The company repurchased 281,000 shares for $10.0 million under a newly authorized $100 million repurchase program.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the E175 fleet transition improves profitability after accounting for higher depreciation, maintenance, training, financing and fuel costs.
- The renewal, termination and economics of contracts with the four major airline partners, particularly arrangements involving aircraft scheduled for removal.
- ExpressJet’s progress toward eliminating segment losses and the profitability of remaining 50-seat aircraft operations.
- Funding sources and interest rates for the 11 remaining E175 deliveries and the company’s ability to manage its $2.64 billion debt balance and substantial lease obligations.
- The sustainability of the unusually strong operating cash flow, which benefited materially from working-capital changes.
- The effect of fuel prices, pilot availability, weather, airline-partner schedules and passenger demand on future operating results.
- The impact of adopting the revenue-recognition standard, including possible principal-versus-agent presentation changes for reimbursed expenses; the company was still evaluating the effect at quarter-end.