SkyWest, Inc. Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates SkyWest Airlines and ExpressJet, providing regional passenger service primarily under fixed-fee capacity purchase agreements and revenue-sharing arrangements with United, Delta, American, Alaska and US Airways. The filing covers the three and six months ended June 30, 2015; results are unaudited.
As of June 30, 2015, the company operated approximately 3,500 daily departures and had 737 aircraft, including 676 in scheduled service. Approximately 89% of passenger revenue came from contract flying and 11% from pro-rate flying. United represented approximately 58.0% of aggregate capacity, Delta 33.4%, American 4.3%, Alaska 2.3% and US Airways 2.0% for the six-month period.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total operating revenue | $788.4 million | $816.6 million | $1,548.8 million | $1,589.0 million |
| Operating income (loss) | $69.9 million | $13.2 million | $104.0 million | $(14.5) million |
| Net income (loss) | $31.5 million | $(14.7) million | $41.1 million | $(37.6) million |
| Diluted EPS | $0.61 | $(0.29) | $0.79 | $(0.73) |
| Operating margin | 8.9% | 1.6% | 6.7% | (0.9)% |
| Net margin | 4.0% | (1.8)% | 2.7% | (2.4)% |
| Cash flow from operating activities | — | — | $168.8 million | $32.5 million |
Operating expenses declined 10.6% in the second quarter to $718.5 million and 9.9% for the six months to $1.4448 billion. Second-quarter cost per available seat mile declined to 8.0 cents from 8.4 cents, while revenue per available seat mile increased to 8.6 cents from 8.4 cents. The passenger load factor was 84.1% in the second quarter and 82.2% for the six months.
At June 30, 2015, cash and cash equivalents were $171.2 million, marketable securities were $322.1 million and restricted cash was $11.6 million. Cash plus marketable securities and restricted cash totaled $504.8 million, down from $559.1 million at December 31, 2014.
Total long-term debt, including current maturities, was $2.064 billion, compared with $1.746 billion at December 31, 2014. The debt fair value was estimated at $2.087 billion. Approximately 14.3% of long-term debt was variable-rate at June 30, 2015. Stockholders’ equity was $1.423 billion.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 3.4%, and six-month revenue decreased 2.5%, primarily because of a smaller fleet and lower block-hour production.
- Operating income improved by $56.7 million in the second quarter and by $118.5 million for the six months, reflecting lower expenses, additional E175 operations, improved contract rates and higher performance incentives.
- Net income improved from a loss of $14.7 million to income of $31.5 million in the second quarter and from a loss of $37.6 million to income of $41.1 million for the six months.
- Fuel expense declined 46.2% in the second quarter and 44.4% for the six months, reflecting lower fuel prices, lower volume and increased direct fuel purchasing by major airline partners.
- ExpressJet’s second-quarter segment loss narrowed to $3.1 million from $34.0 million; its six-month loss narrowed to $18.3 million from $88.5 million. SkyWest Airlines’ segment profit increased to $50.4 million in the second quarter and $78.5 million for the six months.
- The company placed 18 E175 aircraft into service during the first six months and had 38 E175s in scheduled service at June 30, 2015. The fleet declined from 717 aircraft in service at December 31, 2014 to 676 at June 30, 2015, including the removal of all EMB120 aircraft from scheduled service.
- Investing cash use increased to $427.2 million, primarily due to the acquisition of 18 E175 aircraft. Financing cash flow increased to $297.2 million, including $407.6 million of aircraft-related debt issuance and a $25.0 million term loan.
- The company repurchased 1.25 million shares for $18.7 million during the six months and declared dividends of $0.08 per share.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative full-year earnings or revenue guidance. It expects the fleet transition toward larger dual-class regional jets, particularly E175 aircraft, and away from less-profitable 50-seat aircraft to reduce fleet size, block hours and year-over-year revenue at least through 2015, while improving profitability.
The company reached an agreement with Alaska to place eight additional E175 aircraft into service, increasing the total E175 aircraft under the Alaska contract to 15. Five E175s were scheduled for United delivery during July-August 2015 and two for Alaska during October-December 2015. The company had a firm purchase commitment for 17 E175 aircraft as of June 30, 2015 and firm aircraft commitments totaling $564.5 million.
Major obligations included $1.333 billion of future operating lease payments, $2.064 billion of principal debt maturities and $412.0 million of interest commitments. Total commitments and obligations were $4.374 billion. Management stated that available working capital should meet present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months.
Key risks include dependence on major airline partners, contract expirations, fleet transition execution, aircraft lease and debt obligations extending beyond certain flying contracts, fuel and interest-rate exposure, seasonal demand and weather disruptions. Contracts covering 66 CRJ700 and CRJ900 aircraft expire through the end of 2016 while related financing or lease obligations extend into 2018-2024; failure to renew these contracts on acceptable terms could result in transition costs, special charges and lower economics.
The prior-year period included a $4.7 million special charge related to the write-down of a paint facility in Saltillo, Mexico; no comparable charge was recorded in 2015. Legal matters were described as routine and not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether E175 deliveries, contract renewals and performance incentives offset the expected revenue pressure from fleet reductions.
- The renewal or alternative deployment of aircraft whose flying contracts expire before the related lease or debt obligations.
- ExpressJet’s progress toward eliminating operating losses while reducing its United ERJ145/ERJ135 fleet.
- The company’s ability to fund approximately $4.4 billion of disclosed commitments through operating cash flow, aircraft financing and liquidity.
- Exposure to major airline partners, particularly United and Delta, which together represented approximately 91.4% of aggregate capacity.
- The effect of fuel prices, variable-rate debt, seasonal demand and winter weather on future earnings and cash flow.