SkyWest, Inc. 2012 Form 10-K Summary
Business context and reporting period
SkyWest, Inc. reported for the fiscal year ended December 31, 2012. Through SkyWest Airlines and ExpressJet, the company operated approximately 4,000 daily departures across the United States, Canada, Mexico and the Caribbean under code-share and capacity-purchase agreements with United, Delta, American, Alaska and US Airways.
- Combined fleet: 744 aircraft at year-end, including 445 assigned to United and 261 to Delta.
- Approximately 91% of passenger revenue came from contract flying, while approximately 9% came from pro-rate flying.
- Approximately 94.8% of total revenue was attributable to Delta and United.
- The ExpressJet combination was completed effective December 31, 2011; operational and workforce integration continued during 2012.
Key financial and operating metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $3.534 billion | $3.655 billion | (3.3%) |
| Operating income | $166.0 million | $41.1 million | +303.8% |
| Operating margin | 4.7% | 1.1% | +3.6 pts |
| Net income (loss) | $51.2 million | $(27.3) million | Improved |
| Diluted EPS | $0.99 | $(0.52) | Improved |
| Net margin | 1.4% | (0.7%) | +2.1 pts |
| Cash flow from operations | $288.8 million | $162.1 million | +78.1% |
| Cash and cash equivalents | $133.8 million | $129.5 million | +3.3% |
| Marketable securities | $556.1 million | $497.6 million | +11.8% |
| Long-term debt, including current maturities | $1.642 billion | $1.815 billion | Down $173.4 million |
| Stockholders’ equity | $1.387 billion | $1.334 billion | +4.0% |
Fourth-quarter 2012 revenue was $810.7 million, operating income was $43.8 million and net income was $13.9 million, or $0.27 diluted EPS, compared with a fourth-quarter 2011 net loss of $18.0 million, or $0.35 diluted EPS.
- Revenue passenger miles increased 3.4%, available seat miles increased 1.6%, block hours increased 2.1% and passengers carried increased 5.3%.
- Passenger load factor increased to 80.7% from 79.3%.
- Revenue per available seat mile declined to 9.5 cents from 10.0 cents, while cost per available seat mile improved to 9.2 cents from 10.1 cents.
- Fuel expense declined 28.1% to $426.4 million, primarily because United began purchasing most fuel directly for United Express flights beginning July 1, 2012. The average fuel price nevertheless increased to $3.59 per gallon from $3.48.
- Salaries, wages and benefits increased 1.4% to $1.172 billion and represented approximately 35% of total operating costs.
- Aircraft maintenance expense decreased 7.4% to $659.9 million, including a $22.4 million decline in CRJ200 engine overhaul expense.
Material changes versus the prior comparable period
- Profitability improved materially as operating expenses fell 6.8%, exceeding the 3.3% revenue decline. Lower fuel and maintenance costs, fewer engine events, cost-reduction measures and the absence of 2011 acquisition-related costs were key contributors.
- SkyWest Airlines segment profit increased 82.8% to $106.1 million.
- ExpressJet’s segment loss narrowed to $18.5 million from $98.8 million, reflecting higher non-pass-through revenue, lower labor and maintenance costs, and integration benefits.
- Operating cash generation increased by $126.7 million, while net debt repayments increased. Share repurchases fell to $0.9 million from $60.7 million in 2011.
- During 2012, the company agreed with Delta to add 34 used dual-class aircraft, consisting of 29 CRJ900s and five CRJ700s, in exchange for the early removal of 66 CRJ200s from Delta agreements. Twenty of the 34 aircraft had been delivered by year-end.
- SkyWest and ExpressJet entered into American agreements covering 23 CRJ200 aircraft. SkyWest began operating 12 aircraft in November 2012, and ExpressJet began operating 11 aircraft in February 2013.
- The company sold its interest in Brazilian regional airline TRIP for $42 million, payable in installments. It had received the first installment of approximately $8.1 million at year-end, with remaining installments due in 2013 and 2014.
Liquidity, debt and commitments
- Total cash, restricted cash and marketable securities were $709.4 million at December 31, 2012, compared with $646.5 million a year earlier.
- Current assets were $1.434 billion versus current liabilities of $591.4 million. The filing states that available working capital and projected operating cash flow were expected to cover requirements, capital expenditures, lease payments and scheduled debt service for at least the next 12 months, absent unusual circumstances.
- Long-term debt obligations totaled $1.642 billion, with approximately 31.7% represented by variable-rate notes. The average effective interest rate on CRJ-related debt was approximately 4.5%.
- Aircraft and facility operating lease commitments totaled approximately $2.201 billion, with an estimated present value of approximately $1.8 billion using a 4.7% discount rate.
- Scheduled 2013 obligations included $388.0 million of operating lease payments, $71.7 million of interest commitments and $171.5 million of debt principal maturities.
- The company had a $25 million credit facility with no amount outstanding at year-end; the facility was scheduled to expire March 31, 2013. Letters of credit and surety bonds totaled $75.1 million.
- Management reported compliance with all debt covenants as of December 31, 2012.
Outlook, commentary, risks and unusual items
- Management expected to complete the operational integration of the former Atlantic Southeast and ExpressJet Delaware operations during 2013 and 2014, but stated that workforce integration and labor negotiations remained challenging.
- The company expected to receive the remaining 14 CRJ900 aircraft from Delta by June 2013 and to remove all 66 CRJ200 aircraft from Delta agreements by December 31, 2015.
- Management expected to reduce scheduled CRJ200 engine maintenance events during 2013, but acknowledged that maintenance costs are likely to rise as the regional jet fleet ages.
- Major risks include dependence on Delta and United, which represented approximately 97% of available seat miles and approximately 94.8% of revenue; partner schedule reductions or contract renegotiations; performance-based termination provisions; labor costs and potential work disruptions; fuel prices for pro-rate flying; aircraft redeployment risk; and substantial debt and lease obligations.
- A significant unresolved dispute with Delta concerns reimbursement of irregular-operation expenses. The company had recognized $31.7 million of related revenue but had not recognized additional disputed reimbursements since July 2008. The estimated reasonably possible loss range was $0 to $25.8 million, and no loss was accrued because a probable and estimable loss had not been established.
- The company had $49 million of amounts deferred by United under a financing arrangement, accruing an 8% deferral fee. United’s right to defer payments continued through October 2019, subject to conditions.
- The company’s investments included approximately $1.7 million in Air Mekong and installment receivables from the TRIP sale. Collection of the remaining TRIP installments was not assured.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Actual utilization, profitability and renewal terms under the Delta and United agreements, including the effect of 50-seat aircraft reductions and partner schedule changes.
- Progress and cost of ExpressJet workforce and operational integration, including collective bargaining outcomes and any disruption risk.
- Cash generation after scheduled debt maturities, aircraft lease payments and fleet replacement spending.
- Whether maintenance expense rises as CRJ200, ERJ145 and Brasilia fleets age and whether replacement aircraft can be financed on acceptable terms.
- Developments in the Delta IROP litigation, including potential recovery, settlement exposure or counterclaim losses.
- Collection of the remaining TRIP sale installments and the financial condition of Air Mekong.
- Exposure to fuel and interest-rate changes in pro-rate operations and variable-rate debt.