SkyWest Inc. 2012 Q3 SEC Filing Summary
Business context and reporting period
SkyWest filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. Through SkyWest Airlines and ExpressJet, the company operated approximately 4,000 daily departures and a combined fleet of 739 aircraft. Approximately 90% of passenger revenue was generated from contract flying, primarily for United, Delta, Continental, Alaska and US Airways.
The results reflect the December 31, 2011 combination of Atlantic Southeast Airlines and ExpressJet Delaware into ExpressJet Airlines. Prior-period segment information was revised to conform to the current presentation.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Operating revenue | $865.3 million | $955.4 million | Down 9.4% |
| Operating income | $55.0 million | $26.8 million | Up $28.2 million |
| Operating margin | 6.4% | 2.8% | Up 3.6 points |
| Net income | $20.9 million | $0.1 million | Improved substantially |
| Diluted EPS | $0.40 | $0.00 | Improved |
| Operating cash flow | Not separately provided for the quarter |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Operating revenue | $2.724 billion | $2.755 billion | Down 1.1% |
| Operating income | $122.2 million | $46.1 million | Up $76.1 million |
| Operating margin | 4.5% | 1.7% | Up 2.8 points |
| Income before taxes | $60.3 million | $(22.4) million | Improved $82.7 million |
| Net income (loss) | $37.2 million | $(9.4) million | Turned profitable |
| Diluted EPS | $0.72 | $(0.18) | Improved |
| Cash flow from operations | $244.2 million | $161.4 million | Up 51.3% |
Liquidity, debt and balance sheet
- Cash and cash equivalents were $136.5 million at September 30, 2012, compared with $129.5 million at December 31, 2011.
- Marketable securities increased to $583.2 million from $497.6 million. Cash, restricted cash and marketable securities totaled $739.1 million, up 14.3% from year-end 2011.
- Long-term debt, including current maturities, was approximately $1.702 billion, compared with $1.815 billion at December 31, 2011. The estimated fair value of long-term debt was $1.779 billion.
- Stockholders’ equity was $1.372 billion, compared with $1.334 billion at year-end 2011. Management reported a capital mix of 47.3% equity and 52.7% long-term debt.
- Nine-month investing cash outflow was $121.0 million, including net purchases of marketable securities and $38.5 million of property and equipment acquisitions. Financing cash outflow was $116.2 million, primarily due to $113.5 million of debt principal payments and $6.1 million of dividends.
- Contractual commitments totaled $4.467 billion, including $2.303 billion of aircraft and facility operating lease payments, $462.1 million of interest commitments and $1.702 billion of principal maturities.
- Management stated that available working capital should meet present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material changes versus the prior comparable period
- Revenue declined largely because fuel and engine-overhaul reimbursements recorded as revenue were lower. Passenger revenue excluding those reimbursements increased 0.8% in the quarter and 2.0% year to date.
- Operating performance improved as total operating expenses declined 12.7% in the quarter and 4.0% year to date. Fuel expense fell 55.4% in the quarter and 16.9% year to date, primarily because United began directly purchasing most fuel for United Express flights beginning July 1, 2012.
- Aircraft maintenance expense declined 13.7% in the quarter and 3.5% year to date, principally due to fewer scheduled maintenance events. Merger and integration costs of $2.2 million in Q3 2011 and $4.6 million for the first nine months of 2011 did not recur.
- SkyWest Airlines generated segment profit of $36.9 million in Q3 and $75.6 million year to date, compared with $21.6 million and $52.5 million, respectively, in the prior periods. ExpressJet’s segment loss narrowed to $1.7 million in Q3 and $12.8 million year to date, from $15.3 million and $68.1 million.
- Operating statistics improved: Q3 passenger load factor rose to 82.2% from 81.4%, revenue passenger miles increased 1.1%, block hours increased 2.0%, and passengers carried increased 4.6%. Cost per available seat mile declined to 8.6 cents from 9.8 cents.
- The company paid $0.9 million for treasury stock repurchases in the first nine months of 2012, compared with $56.2 million in the prior-year period. Dividends declared remained $0.04 per share quarterly.
Guidance, outlook, commentary and unusual items
- No formal earnings or revenue guidance was provided. Management stated that interim results are subject to airline seasonality and are not necessarily indicative of full-year results.
- SkyWest reached an understanding with Delta to add 34 used dual-class aircraft—five CRJ700s and 29 CRJ900s—in exchange for early termination of 66 CRJ200 aircraft under Delta agreements. As of September 30, 2012, 15 replacement aircraft had been delivered; the remaining aircraft were expected by June 2013. The CRJ200 removals were expected by December 31, 2015.
- SkyWest and ExpressJet entered four-year American capacity purchase agreements covering 23 CRJ200 aircraft. Operations were expected to begin in November 2012, with all aircraft in service by February 2013.
- The company expects scheduled CRJ200 engine maintenance events to decline relatively steadily during 2013, which may reduce related expenses but also affects the timing of fixed-rate reimbursement economics.
- SkyWest sold its investment in TRIP for $42 million, payable in three installments. It had received the first $8.4 million installment by September 30, 2012; additional installments of $16.8 million were due in 2013 and 2014. Accounting for the sale was deferred until all installments are paid because of transfer restrictions.
- SkyWest remains involved in litigation with Delta concerning withheld irregular-operations reimbursements. The company had recognized $31.7 million of related revenue cumulatively, had not recognized additional amounts since July 2008, and estimated a reasonably possible loss range of $0 to $25.8 million. No loss was accrued because the loss was not considered probable and reasonably estimable.
- Key market risks include fuel prices, interest rates, partner contract changes, reimbursement disputes, capital availability and dependence on major airline partners. Approximately 32% of long-term debt was variable rate at September 30, 2012.
Most important facts for an investor to verify
- Whether the improvement in profitability is sustainable after separating true operating growth from reimbursed fuel and engine-maintenance flows.
- Progress and economics of the Delta aircraft transition and the American capacity purchase agreements.
- ExpressJet’s path to sustained profitability after its materially reduced, but still negative, segment results.
- Debt maturities, lease obligations and access to aircraft financing, particularly amid tighter credit markets.
- Status and potential financial exposure of the Delta litigation and withheld reimbursements.
- Revenue concentration and contract-renewal, termination, rate-reset and performance-penalty provisions with major airline partners.
- Exposure to fuel prices on pro-rate operations; management estimated that a hypothetical 25% fuel-price increase would have added $6.4 million to Q3 fuel expense and $18.3 million to nine-month fuel expense.