Business Context and Reporting Period
SkyWest, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015, covering SkyWest Airlines, ExpressJet and SkyWest Leasing. The company operated approximately 3,400 daily departures through Delta Connection, United Express, American Eagle and Alaska arrangements, with 702 aircraft in its combined fleet, including 660 aircraft in scheduled service.
The business is predominantly contract-based: approximately 86.3% of passenger revenue came from fixed-fee contract flying, while approximately 12% of total passenger revenue came from pro-rate arrangements. Delta and United together represented approximately 86.9% of total revenue.
Financial and Operating Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $3,095.6 million | $3,237.4 million | Down 4.4% |
| Operating income | $234.5 million | $24.8 million | Up $209.7 million |
| Operating margin | 7.6% | 0.8% | Improved |
| Net income (loss) | $117.8 million | $(24.2) million | Returned to profitability |
| Diluted EPS | $2.27 | $(0.47) | Improved |
| Net cash from operations | $420.1 million | $285.5 million | Up 47.1% |
| Cash and cash equivalents | $203.0 million | $132.3 million | Up 53.5% |
| Marketable securities | $286.7 million | $415.3 million | Down 31.0% |
| Total liquidity including restricted cash | $497.9 million | $559.1 million | Down 10.9% |
| Long-term debt, including current maturities | $1,948.8 million | $1,745.8 million | Up 11.6% |
| Stockholders’ equity | $1,506.4 million | $1,400.3 million | Up 7.6% |
Operating expenses declined 10.9% to $2,861.0 million. Salaries, wages and benefits were $1,203.3 million, aircraft maintenance was $604.9 million, aircraft rentals were $273.7 million, depreciation and amortization was $264.5 million, and fuel expense was $118.1 million. Cost per available seat mile declined to 8.2 cents from 8.6 cents, while revenue per available seat mile increased to 8.6 cents from 8.5 cents. The passenger load factor was 82.6%, compared with 82.4%.
Operating activity generated $420.1 million of cash, while investing activities used $569.7 million, principally for aircraft and rotable spare parts. Financing activities provided $220.4 million, including $591.9 million of new debt issuance, partially offset by $354.3 million of principal payments and $18.7 million of share repurchases.
Current assets were $1,017.6 million and current liabilities were $751.4 million, implying a current ratio of approximately 1.35. The company had a $25 million credit facility with no borrowings outstanding, although $6 million of letters of credit reduced availability to $19 million. Letters of credit and surety bonds totaled $88.9 million.
Material Changes Versus the Prior Comparable Period
- The fleet declined from 717 aircraft in scheduled service at December 31, 2014 to 660 at December 31, 2015. The company added 46 aircraft and removed 103, including all 27 EMB120 aircraft and 54 ERJ135/145 aircraft.
- The company added 25 E175 aircraft during 2015 and shifted capacity toward newer aircraft and fixed-fee arrangements with improved economics.
- Block hours declined 8.8%, departures declined 9.6%, passengers carried declined 4.6%, and available seat miles declined 6.1%. The load factor nevertheless increased by 0.2 percentage points.
- Fuel expense decreased 38.9%, reflecting lower fuel prices and lower purchased volume. Average fuel cost declined to $2.09 per gallon from $3.33.
- 2014 included $74.8 million of special items, primarily impairments and obligations related to EMB120 and ERJ145 aircraft and a paint facility. No special items were recorded in 2015.
- SkyWest Airlines segment profit increased to $182.0 million from $76.1 million, while ExpressJet’s segment loss narrowed to $34.2 million from $117.9 million. SkyWest Leasing segment profit increased to $10.9 million from $0.7 million.
- Other income in 2015 included a $33.7 million pre-tax gain from the early payoff of $145.4 million of debt using $110.8 million of cash. The 2014 comparison included a $24.9 million gain from the sale of the company’s TRIP investment.
- The company declared quarterly dividends of $0.04 per share, or $0.16 per share for the year, and repurchased approximately 1.3 million shares for $18.7 million. No additional repurchases had been authorized as of year-end.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a clear consolidated earnings or revenue forecast. It stated that available working capital and projected operating cash flow should be sufficient for present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months, absent unusual circumstances.
The company expected delivery of 37 E175 aircraft in 2016 and 17 in 2017. It anticipated placing additional aircraft with United, Alaska and Delta. The fleet plan projected total aircraft declining from 660 at year-end 2015 to 631 in 2016, 557 in 2017 and 457 in 2018, primarily because of contract expirations and aircraft retirements. These projections depend on contract extensions and may change materially.
- Contract concentration is substantial: 599 of 660 aircraft available for scheduled service operated under arrangements with Delta or United, and the two partners accounted for approximately 86.9% of total revenue.
- Several flying contracts expire or begin aircraft-by-aircraft expirations in 2016. The ExpressJet United ERJ agreement is scheduled to terminate in December 2017, and the SkyWest Airlines American agreement is scheduled to terminate in 2016.
- SkyWest faces significant fixed obligations, including approximately $1.9 billion of long-term debt, $1.2 billion of future operating lease payments, $1.6 billion of firm aircraft commitments and $1.9 billion of principal maturities.
- Approximately 38% of employees were union-represented. Pilot shortages, attrition, training requirements and potential labor disputes could reduce scheduled flying or increase costs. Labor represented approximately 42.1% of operating costs.
- Major partners control scheduling and pricing for most flights and may reduce utilization, renegotiate rates, terminate contracts or operate regional aircraft themselves.
- The company bears fuel-price risk on pro-rate operations, which represented approximately 4% of available seat miles. A hypothetical 25% increase in pro-rate fuel prices would have increased 2015 fuel expense by approximately $19.1 million.
- Weather, hub disruptions, regulatory changes, aircraft maintenance requirements, manufacturer support, cybersecurity incidents, accidents and changes in passenger demand could materially affect results.
- Operating leases were not recorded as balance-sheet liabilities under the accounting rules applicable in 2015. The company reported 470 leased aircraft and approximately $1.0 billion of present-value lease obligations.
- The company corrected a nonmaterial 2014 balance-sheet classification error that had overstated current prepaid aircraft rents and understated noncurrent prepaid aircraft rents by $201.5 million; there was no effect on income, equity or cash flows.
Most Important Facts for Investors to Verify
- Whether 2016 and later contract expirations, particularly with United, Delta and American, were renewed, replaced or allowed to lapse.
- Actual E175 deliveries, financing terms, utilization and profitability compared with the company’s fleet plan.
- ExpressJet’s progress toward eliminating losses and the sustainability of SkyWest Airlines’ improved margins after excluding 2014 special items and the 2015 debt-extinguishment gain.
- Liquidity after aircraft purchases, debt maturities, lease payments, dividends and share repurchases; also verify availability under the expiring credit facility.
- Pilot availability, employee retention, labor negotiations and any effect on flight completion or contracted capacity.
- Exposure to Delta and United concentration, partner rate resets, utilization reductions and early-termination provisions.
- The eventual balance-sheet impact of new revenue, debt-cost, deferred-tax and lease accounting standards identified in the filing.