SkyWest Inc. — Form 10-Q Summary
Business Context and Reporting Period
SkyWest operates regional airlines SkyWest Airlines and ExpressJet, providing scheduled service primarily under capacity-purchase and code-share agreements with United, Delta, American, Alaska, and US Airways. The filing covers the three and six months ended June 30, 2014. The company operated approximately 4,000 daily departures and a combined fleet of 757 aircraft at quarter-end. Approximately 89% of passenger revenue for the first six months came from contract flying and 11% from pro-rate flying.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Operating revenue | $816.6 million | $839.1 million | $1,589.0 million | $1,642.6 million |
| Operating income (loss) | $13.2 million | $50.6 million | $(14.5) million | $66.1 million |
| Net income (loss) | $(14.7) million | $20.7 million | $(37.6) million | $24.0 million |
| Diluted EPS | $(0.29) | $0.39 | $(0.73) | $0.46 |
| Operating margin | 1.6% | 6.0% | (0.9)% | 4.0% |
| Net margin | (1.8)% | 2.5% | (2.4)% | 1.5% |
| Cash flow from operations | Six-month measure: $32.5 million | 2013: $129.3 million |
At June 30, 2014, cash and cash equivalents were $69.8 million, marketable securities were $384.9 million, and restricted cash was $12.2 million. Total cash, marketable securities, and restricted cash were approximately $467.0 million, down 30.3% from December 31, 2013. Long-term debt, including current maturities, was approximately $1.57 billion, compared with $1.47 billion at year-end 2013. Total assets were $4.28 billion and stockholders’ equity was $1.39 billion.
Six-month investing cash use was $220.6 million, primarily reflecting aircraft acquisitions. Financing cash flow was positive $87.3 million, including $187.4 million of interim debt issued to finance eight E175 aircraft. The company paid $4.1 million in dividends and repurchased $8.4 million of treasury stock during the period.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 2.7%; six-month revenue declined 3.3%.
- Second-quarter net results shifted from $20.7 million of income to a $14.7 million loss; six-month results shifted from $24.0 million of income to a $37.6 million loss.
- ExpressJet’s second-quarter segment loss increased to $34.0 million from $4.2 million, while its six-month loss increased to $88.5 million from $29.7 million. Lower fleet size, reduced block-hour production, weather cancellations, lower incentives, unfavorable invoice true-ups, and higher training and crew-related costs were key factors.
- SkyWest Airlines’ second-quarter segment profit fell 21.6% to $31.3 million; its six-month profit fell 32.3% to $42.7 million.
- Departures decreased 6.8% in the quarter and 7.0% year to date; block hours decreased 5.0% and 4.7%, respectively. Passenger load factor improved to 83.9% in the quarter and 82.4% year to date.
- Cost per available seat mile increased 5.0% in the quarter and 3.6% year to date. Salaries, wages, and benefits rose 3.5% in the quarter and 5.1% year to date, while other operating expenses rose 22.8% and 14.1%, respectively.
- Station rental and landing-fee expense declined substantially because major airline partners paid more of these costs directly. These reimbursements are recorded in passenger revenue, reducing reported revenue and expense without necessarily changing operating economics.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that available working capital should be sufficient for present requirements, planned capital expenditures, lease payments, and debt service for at least the next 12 months, absent unusual circumstances.
- The company expected to refinance the interim debt on eight E175 aircraft through long-term lease arrangements by the end of 2014, with approximately $34.0 million of associated initial down payments expected to be returned.
- SkyWest had firm aircraft commitments totaling approximately $946.1 million and operating lease obligations of approximately $1.68 billion. Total disclosed commitments and obligations were approximately $4.56 billion.
- The company planned to receive the remaining firm-order E175 aircraft through August 2015. Sixty additional E175 aircraft were conditional on securing capacity-purchase agreements.
- ExpressJet expected to return 26 ERJ145 and nine ERJ135 aircraft to United following contract terminations scheduled for the second half of 2014; management did not expect a material negative financial effect.
- Pilot training, attrition, scheduling inefficiencies, simulator costs, and crew lodging expenses increased because of the Airline Safety and Pilot Training Improvement Act and related regulations.
- Second-quarter special charges totaled $4.7 million, including a $2.5 million write-off of a Saltillo, Mexico, paint-facility VAT asset and a $2.2 million write-down of the facility. The company also recorded approximately $2.6 million of losses on asset disposals.
- Management could not reliably estimate the annual effective tax rate. A six-month tax benefit of $10.6 million was recorded, while second-quarter tax expense was $9.7 million, including a valuation allowance for certain ExpressJet state tax benefits.
- Fuel-price exposure primarily related to pro-rate operations. A hypothetical 25% increase in fuel prices would have increased first-half fuel expense by approximately $14.5 million.
- Variable-rate debt represented 36.2% of total long-term debt at June 30, 2014, compared with 29.5% at December 31, 2013.
- On August 4, 2014, after quarter-end, SkyWest and Delta executed a confidential settlement resolving the IROP reimbursement litigation. The filing states that the financial impact approximated the amount previously accrued.
- The company adopted no new revenue standard in the period but was evaluating the potential impact of ASU 2014-09, effective for annual periods beginning after December 15, 2016.
Important Facts for Investors to Verify
- Verify the sustainability of profitability after the significant first-half loss, particularly at ExpressJet.
- Review the timing, financing, and contractual coverage of E175 deliveries and the potential effect of conditional aircraft commitments.
- Assess liquidity after aircraft purchases, debt maturities, lease obligations, dividends, and share repurchases.
- Examine dependence on major airline partners, contract expirations, incentive provisions, and reimbursement arrangements.
- Confirm the accounting and cash impact of the post-quarter-end Delta settlement.
- Monitor pilot staffing, training costs, weather-related disruption, maintenance timing, fuel exposure, and variable-rate debt.
- Review the company’s annual report risk factors and the eventual effect of ASU 2014-09; the filing does not provide a quantified adoption impact.