Business Context and Reporting Period
SkyWest, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Through SkyWest Airlines and ExpressJet, the company operated approximately 4,000 daily departures and a combined fleet of 760 regional aircraft for United, Delta, American, US Airways and Alaska. Approximately 90% of second-quarter passenger revenue came from contract flying and 10% from pro-rate flying.
Financial Performance and Position
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Operating revenue | $839.1 million | $937.2 million | -10.5% |
| Operating income | $50.6 million | $46.8 million | +8.0% |
| Operating margin | 6.0% | 5.0% | +1.0 point |
| Net income | $20.7 million | $17.0 million | +22.2% |
| Diluted EPS | $0.39 | $0.33 | +18.2% |
| Net margin | 2.5% | 1.8% | +0.7 point |
| Metric | Six months 2013 | Six months 2012 | Change |
|---|---|---|---|
| Operating revenue | $1.643 billion | $1.858 billion | -11.6% |
| Operating income | $66.1 million | $67.3 million | -1.7% |
| Operating margin | 4.0% | 3.6% | +0.4 point |
| Net income | $24.0 million | $16.3 million | +47.2% |
| Diluted EPS | $0.46 | $0.32 | +43.8% |
| Net margin | 1.5% | 0.9% | +0.6 point |
Second-quarter operating expenses were $788.6 million, down 11.4%. Fuel expense fell 69.5% to $46.8 million, primarily because United began purchasing most fuel directly for United Express flights. Excluding fuel and specified engine-overhaul items, total airline expense increased 2.5% in the quarter. Salaries, wages and benefits increased 3.3%, while aircraft maintenance increased 2.6%.
Operating statistics improved: second-quarter revenue passenger miles increased 7.6%, available seat miles increased 7.7%, block hours increased 6.1%, and passengers carried increased 5.2%. The load factor was essentially stable at 82.2% versus 82.3%. For the six months, load factor increased to 80.6% from 79.7%.
Net cash provided by operating activities was $129.3 million for the six months, compared with $109.3 million in the prior-year period. Investing activities used $34.7 million and financing activities used $87.8 million, including $86.0 million of debt principal payments and $4.1 million of dividends. Cash and cash equivalents increased to $140.5 million from $133.8 million at December 31, 2012, while marketable securities declined to $505.5 million from $556.1 million. Total cash, restricted cash and marketable securities were $665.6 million.
At June 30, 2013, total long-term debt, including current maturities, was approximately $1.556 billion, compared with $1.642 billion at December 31, 2012. The company reported a 49.5% long-term debt and 50.5% equity capital mix. The estimated fair value of long-term debt was $1.651 billion, above its $1.556 billion carrying amount.
Material Changes Versus Prior Comparable Period
- Revenue declined because lower fuel and engine-maintenance reimbursements were recorded as passenger revenue; passenger revenue excluding those reimbursements increased 3.1% in Q2 and 1.9% for the six months.
- Profitability improved in Q2 despite lower reported revenue, driven primarily by reduced fuel and engine-overhaul costs, higher block-hour production and increased partner incentive payments.
- SkyWest Airlines segment profit increased 36.3% in Q2 and 62.7% for the six months. ExpressJet remained loss-making, with its segment loss widening to $4.2 million in Q2 and $29.7 million for the six months.
- ExpressJet maintenance expense, excluding reimbursed engine overhauls, increased materially due to scheduled maintenance, contributing to its weaker results.
- Other income improved by $10.5 million for the six months, primarily from $5.1 million of maintenance deposits collected and comparison with investment losses in 2012.
- Operating cash flow benefited from a $49 million receipt from United relating to previously deferred amounts.
Guidance, Outlook, Risks and Unusual Items
Management stated that available working capital was expected to satisfy present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months, absent unusual circumstances. The filing does not provide formal earnings guidance.
SkyWest and United entered into an agreement for 40 new Embraer E175 aircraft, expected to enter service beginning in the second quarter of 2014 through mid-2015. The company also agreed to purchase 100 E175 aircraft from Embraer; 40 were firm commitments and 60 were conditional on obtaining additional capacity purchase agreements. Firm aircraft commitments totaled $1.171 billion, principally due in 2014 and 2015.
The company leased 575 aircraft and had approximately $2.047 billion of future minimum operating lease payments. Total disclosed commitments and obligations, including leases, firm aircraft commitments, interest and debt principal, were approximately $5.172 billion.
Key risks include dependence on major airline partners, contract termination or rate-reset provisions, operational performance penalties, aircraft maintenance timing, labor and weather disruptions, interest-rate exposure, access to aircraft financing, and seasonal demand. Approximately 61.0% of aggregate capacity was operated for United and 33.9% for Delta during the six months, indicating significant customer concentration.
A longstanding dispute with Delta concerns reimbursement of irregular-operations expenses. SkyWest had recognized $31.7 million of related revenue but had not recognized additional withheld reimbursements since July 2008 because collection was not reasonably assured. The estimated reasonably possible loss as of June 30, 2013 was $0 to $25.8 million. Cross-motions for partial summary judgment were filed after the quarter ended.
Management reported that routine legal matters were not expected to materially affect financial position, liquidity or results. Disclosure controls and procedures were effective as of June 30, 2013, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether ExpressJet can return to profitability and control its elevated maintenance costs.
- The status, economics and financing of the 40 firm E175 aircraft and the 60 conditional aircraft.
- Progress and potential financial exposure in the Delta IROP reimbursement litigation.
- The sustainability of earnings improvement after adjusting for lower pass-through fuel costs, engine-maintenance timing and the $49 million United cash receipt.
- Future debt maturities, lease payments and the company’s ability to finance aircraft commitments on acceptable terms.
- Renewal, termination and rate-reset provisions in the United, Delta and other major airline agreements.
- The effect of airline partner concentration and operational performance penalties on future revenue and margins.