SkyWest, Inc. 2013 Q1 Form 10-Q Summary
Business context and reporting period
SkyWest operates regional airlines through SkyWest Airlines and ExpressJet. For the quarter ended March 31, 2013, the company operated approximately 4,000 daily departures and a combined fleet of 752 aircraft, primarily for United, Delta, American, US Airways, and Alaska. Approximately 91% of passenger revenue came from contract flying and 9% from pro-rate flying.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $803.5 million | $921.2 million | Down 12.8% |
| Operating income | $15.6 million | $20.5 million | Down 23.9% |
| Operating margin | 1.9% | 2.2% | Down approximately 0.3 points |
| Net income (loss) | $3.2 million | $(0.7) million | Improved by $3.9 million |
| Diluted EPS | $0.06 | $(0.01) | Improved |
| Net cash used in operating activities | $(13.8) million | $(1.9) million | Higher use of $11.9 million |
| Cash and cash equivalents | $143.1 million | $98.9 million | Q1 2012 comparative period |
Operating expenses were $787.9 million, down 12.5%. Aircraft fuel expense declined 66.3% to $49.7 million, principally because United began purchasing most fuel directly for United Express flights. Fuel and certain engine costs are reimbursed by major partners and recorded in both revenue and expense, so these changes have limited direct effect on operating income.
Passenger revenue excluding fuel and engine-overhaul reimbursements increased 0.5% to $732.9 million. Operating statistics improved: revenue passenger miles increased 4.4%, available seat miles 2.1%, block hours 2.8%, departures 2.7%, passengers carried 5.0%, and load factor increased to 78.8% from 77.1%. Revenue per available seat mile declined to 8.7 cents from 10.2 cents, while cost per available seat mile declined to 8.8 cents from 10.2 cents.
At March 31, 2013, total cash, restricted cash, and marketable securities were $631.5 million, down from $709.4 million at December 31, 2012. Marketable securities declined $87.3 million, while cash and cash equivalents increased $9.3 million. Long-term debt, including current maturities, was approximately $1.6 billion, with an estimated fair value of $1.7 billion. Variable-rate notes represented 31.5% of long-term debt.
Material changes versus the prior comparable period
- Reported revenue decreased primarily because partner fuel reimbursements fell $99.6 million and engine-overhaul reimbursements fell $20.9 million.
- SkyWest Airlines segment profit increased to $23.1 million from $9.4 million, aided by lower CRJ200 engine-overhaul costs, higher non-pass-through revenue, and increased incentive payments.
- ExpressJet’s segment loss widened to $25.5 million from $9.0 million, primarily because of higher scheduled maintenance costs and reduced maintenance-planning efficiency.
- Aircraft maintenance expense excluding reimbursed engine overhauls increased 14.1%, or $16.0 million, largely due to increased scheduled maintenance at ExpressJet.
- Other income improved by approximately $9.9 million year over year. Q1 2013 included $5.1 million of income from terminating the Air Mekong sublease; Q1 2012 included investment losses, primarily related to TRIP and Air Mekong.
- The company delivered 21 of 29 additional CRJ900 aircraft and all five additional CRJ700 aircraft under its Delta fleet exchange arrangement. Remaining aircraft were expected by June 2013.
Outlook, risks, contingencies, and unusual items
Management stated that available working capital should be sufficient for at least the next 12 months to meet current requirements, planned capital expenditures, lease payments, and debt service, absent unusual circumstances. No quantitative earnings guidance was provided.
Future minimum operating lease payments totaled approximately $2.05 billion, including $236.9 million from April through December 2013. Principal maturities on long-term debt totaled approximately $1.61 billion, and interest commitments totaled approximately $421.3 million.
The company remains exposed to the financial condition and contract decisions of major airline partners. Delta, United, American, US Airways, and Alaska control substantial portions of the company’s flying arrangements; contract termination, rate resets, performance penalties, or changes in capacity could materially affect results. Airline operations are also seasonal and subject to weather, maintenance timing, labor matters, fuel costs on pro-rate flying, interest rates, and capital-market availability.
The Delta IROP reimbursement dispute remains outstanding. SkyWest had recognized $31.7 million of related revenue but has not recognized additional withheld reimbursements since July 2008 because collection is not reasonably assured. As of March 31, 2013, the estimated reasonably possible loss range was $0 to $25.8 million. Separately, Delta’s counterclaim concerning employee travel was settled for $3.0 million, which was accrued at March 31, 2013, and dismissed in April 2013.
The company terminated its Air Mekong sublease and recognized $5.1 million of other income. It also adopted updated accounting guidance for amounts reclassified out of accumulated other comprehensive income; management considered the impact immaterial. Disclosure controls and procedures were evaluated as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether ExpressJet’s maintenance costs and operating losses improve and whether the American and other capacity purchase agreements generate expected incentives.
- The status and ultimate recovery potential of the Delta IROP reimbursement claims, including the possible loss range of up to $25.8 million.
- Whether the company can finance planned aircraft additions without materially reducing liquidity, particularly amid credit-market volatility.
- The schedule and economics of the Delta fleet transition, including removal of 66 CRJ200 aircraft and delivery of the remaining CRJ900 aircraft.
- The company’s ability to service approximately $1.6 billion of debt and $2.05 billion of operating lease commitments.
- The sustainability of reported earnings given the $5.1 million Air Mekong-related gain and the favorable timing of engine-overhaul expenses.
- Continued reliance on major airline partners, including the concentration of capacity operated for United and Delta.