Business Context and Reporting Period
SkyWest, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2012. Through SkyWest Airlines and ExpressJet, the company operated approximately 4,000 daily departures and a fleet of 727 aircraft. Approximately 93% of passenger revenue came from contract flying, primarily for United and Delta, with the remainder from pro-rate operations.
ExpressJet became a reportable segment following the December 31, 2011 merger of Atlantic Southeast Airlines and ExpressJet Delaware. The company reported two operating segments: SkyWest Airlines and ExpressJet.
Financial and Operating Highlights
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total operating revenue | $921.2 million | $866.0 million | 6.4% increase |
| Operating income | $20.5 million | $0.2 million | $20.2 million increase |
| Operating margin | 2.2% | Near zero | Improved |
| Net loss | $0.7 million | $11.1 million | 93.8% improvement |
| Diluted loss per share | $0.01 | $0.21 | Improved |
| Net cash used in operating activities | $1.9 million | $8.4 million | Improved by $6.5 million |
Passenger revenue increased 6.9% to $902.4 million, including $124.3 million of fuel reimbursements and $49.1 million of engine-overhaul reimbursements. Revenue excluding these reimbursements increased 3.5%. Ground handling and other revenue declined 12.4% to $18.8 million.
Operating expenses increased 4.0% to $900.7 million. Fuel expense rose 16.3% to $147.5 million as the average fuel price increased to $3.63 per gallon from $3.33. Maintenance expense increased 10.1% to $179.6 million, while salaries, wages and benefits increased 1.6% to $290.8 million. Aircraft rentals declined 1.8%, and acquisition-related costs decreased by $1.0 million because comparable ExpressJet transaction costs were not incurred in 2012.
Operating statistics improved: revenue passenger miles increased 7.6%, available seat miles increased 4.6%, passengers carried increased 6.4%, and the passenger load factor rose to 77.1% from 74.9%. Cost per available seat mile decreased to 10.2 cents from 10.3 cents; excluding fuel, it decreased to 8.6 cents from 8.8 cents.
As of March 31, 2012, cash and cash equivalents were $98.9 million, marketable securities were $464.9 million, and restricted cash was $19.4 million. Cash and marketable securities totaled $563.9 million, compared with $627.1 million at December 31, 2011. Total current assets were $1.30 billion versus current liabilities of $634.2 million.
Long-term debt, including current maturities, totaled approximately $1.78 billion, compared with $1.82 billion at December 31, 2011. Debt represented 54.2% of the capital mix, while equity represented 45.8%. The estimated fair value of long-term debt was $1.89 billion versus a carrying amount of $1.78 billion.
Cash used in financing activities was $34.4 million, including $33.7 million of debt principal payments, $2.0 million of dividends, and $0.9 million of treasury-stock purchases. Investing activities provided $5.7 million, principally reflecting net sales of marketable securities.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher fleet utilization, a 4.6% increase in capacity, and improved ExpressJet utilization.
- ExpressJet’s segment loss improved to $9.0 million from $30.5 million, while SkyWest Airlines’ segment profit declined to $9.4 million from $10.1 million.
- Operating income increased substantially despite higher fuel and maintenance costs, reflecting revenue growth and improved utilization.
- Net loss narrowed to $0.7 million from $11.1 million, although other expense increased by $3.3 million, primarily from losses at equity-method investments in TRIP and Air Mekong.
- Operating cash outflow decreased materially, but total cash and marketable securities declined by $63.2 million from year-end.
- Share repurchases declined to $0.9 million from $19.6 million. The company repurchased 58,309 shares during the quarter and had approximately 1.51 million shares remaining under the board authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that, absent unusual circumstances, available working capital should be sufficient for at least the next 12 months, including planned capital expenditures, lease payments, debt service, and anticipated expansion.
Future minimum operating-lease payments totaled approximately $2.44 billion, including $907.3 million due after 2016. Principal maturities on long-term debt totaled $1.78 billion and contractual interest commitments totaled $498.1 million. Management expected to finance future aircraft acquisitions primarily through operating leases and debt financing, but noted that credit-market volatility could restrict availability or increase costs.
The company’s results are seasonal and may be affected by winter weather, economic conditions, partner contract changes, aircraft utilization, labor matters, fuel prices, maintenance timing, and the financial condition or decisions of major airline partners. Approximately 32.7% of long-term debt was variable rate. A hypothetical 25% increase in fuel prices would have increased first-quarter fuel expense by an estimated $5.8 million on pro-rate operations.
SkyWest and ExpressJet continued litigation with Delta regarding reimbursement and allocation of irregular-operation expenses. The company had recognized $31.7 million of related revenue through December 31, 2011 but has not recognized additional disputed reimbursement revenue since July 1, 2008. The estimated reasonably possible loss range was $0 to $25.8 million; no loss was accrued because a loss was not considered probable and reasonably estimable. Delta also asserted a counterclaim alleging damages exceeding $4.5 million, for which the range of reasonably possible loss was not determinable.
Management reported that disclosure controls and procedures were effective as of March 31, 2012 and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether improved ExpressJet utilization and profitability continued after the first quarter and after the ExpressJet combination.
- The sustainability of the 2.2% operating margin in light of fuel prices, maintenance events, labor costs, and seasonal demand.
- The status and financial effect of the Delta litigation, including disputed receivables, potential recoveries, and the asserted counterclaim.
- Liquidity relative to approximately $4.72 billion of combined lease, interest, and debt-principal commitments.
- Future aircraft financing availability and the effect of interest-rate changes on variable-rate debt and new aircraft financing.
- Dependence on United, Delta, Continental, Alaska, and US Airways agreements, including rate resets, termination rights, incentives, and reimbursement provisions.
- Whether cash generation improves sufficiently to support debt service, lease obligations, dividends, capital expenditures, and any additional aircraft acquisitions.