SKYWEST, INC. — Form 10-Q Summary
Business context and reporting period
SkyWest, Inc. operates regional airline services primarily under capacity purchase and prorate agreements with Delta, United, American and Alaska. This filing covers the three and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic and are not necessarily indicative of full-year 2020 results. The 2019 comparable period included ExpressJet results before its January 2019 sale.
- At June 30, 2020, the fleet included 581 aircraft, with 471 in scheduled service.
- July 2020 daily departures were approximately 1,200–1,400 versus pre-pandemic expectations of approximately 2,500–2,600.
- Capacity purchase agreements represented 86.9% of six-month flying-agreement revenue; prorate agreements represented 13.1%.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total operating revenue | $350.0 million | $744.4 million | $1,080.0 million | $1,468.1 million |
| Operating income (loss) | $(4.4) million | $144.1 million | $61.9 million | $240.5 million |
| Net income (loss) | $(25.7) million | $88.1 million | $4.3 million | $176.2 million |
| Diluted EPS | $(0.51) | $1.71 | $0.08 | $3.40 |
| Operating margin | Approximately (1.3)% | Approximately 19.4% | Approximately 5.7% | Approximately 16.4% |
| Net margin | Approximately (7.3)% | Approximately 11.8% | Approximately 0.4% | Approximately 12.0% |
- Q2 revenue declined 53.0%, while flying-agreement revenue declined 53.6%. Prorate revenue fell 73.2% to $36.2 million.
- Completed departures declined 62.4%, block hours declined 66.0%, passengers carried declined 84.2%, and passenger load factor fell to 34.4% from 83.9%.
- Q2 operating expenses declined 41.0% to $354.4 million, but remained above revenue. The decline included a $151.9 million CARES Act payroll support grant recognized as an expense reduction.
- Depreciation and amortization increased 46.0% to $131.6 million, including approximately $30.8 million of incremental depreciation from shortening the estimated useful lives of owned CRJ200 aircraft.
- Six-month operating cash flow was $492.3 million versus $362.1 million in 2019. The increase was supported by $92.7 million of deferred CARES Act grant income, $69.1 million of deferred capacity-purchase revenue and higher non-cash depreciation.
- Six-month investing cash flow was $(70.6) million, including $161.2 million of aircraft and rotable-spare-part purchases. Financing cash flow was $(56.6) million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $452.2 million at June 30, 2020, compared with $87.2 million at December 31, 2019.
- Marketable securities were $309.8 million, producing total cash and marketable securities of $762.1 million versus $520.2 million at year-end 2019.
- Total available liquidity was $828.3 million, consisting of $762.1 million of cash and marketable securities and $66.2 million available under a $75 million line of credit.
- Total long-term debt, including current maturities, was $3.0 billion, net debt issuance costs of $2.97 billion, compared with $3.02 billion gross at December 31, 2019. All long-term debt had fixed interest rates.
- Operating lease liabilities totaled $326.0 million, comprising $87.4 million current and $238.6 million noncurrent liabilities. Future minimum operating lease payments were $406.6 million.
- Total commitments and obligations were $4.64 billion, including $3.00 billion of debt principal, $661.4 million of firm aircraft and spare-engine commitments, and $406.6 million of operating lease payments.
Material changes versus the prior comparable period
- COVID-19 caused an unprecedented decline in travel demand and partner airline schedules, resulting in substantial revenue and operating-volume reductions.
- SkyWest Airlines generated a Q2 segment loss of $51.5 million versus segment profit of $78.0 million in 2019. SkyWest Leasing profit declined to $16.2 million from $33.4 million.
- For the six months, SkyWest Airlines reported a segment loss of $41.3 million versus profit of $114.0 million in 2019; SkyWest Leasing profit declined to $42.1 million from $65.9 million.
- The Company deferred $69.1 million of fixed monthly capacity-purchase revenue because cash received exceeded revenue supported by completed flights. Recognition depends on future flight levels over the remaining contract terms.
- The Company adopted the expected-credit-loss standard on January 1, 2020, recording an $11.6 million after-tax reduction to opening retained earnings. Credit-loss reserves increased to $19.7 million at June 30, 2020.
- Unlike 2019, there were no special-item expenses in the first six months of 2020; 2019 included $21.9 million of special items and a $46.5 million pretax gain on the sale of ExpressJet.
- The Company repurchased $20.0 million of stock in the first quarter but made no repurchases in Q2. CARES Act assistance prohibits dividends and repurchases through September 30, 2021.
Guidance, outlook, risks and unusual items
- Management expects a continued significant negative impact from COVID-19 for the remainder of 2020 and into 2021, with daily flights potentially remaining below pre-pandemic levels for the foreseeable future.
- Thirty-six Delta CRJ200 aircraft scheduled to expire during the remainder of 2020 are not expected to be extended. Seven American prorate CRJ200 aircraft were terminated in Q2, and further prorate reductions are possible.
- Management expects approximately $22.3 million of additional CRJ200-related depreciation from July through December 2020.
- The Company received approximately $438.0 million under the CARES Act payroll support program: approximately $336.6 million in grants and $101.4 million in a 10-year unsecured loan. At June 30, $306.6 million had been received; the remaining amounts were received in July.
- The CARES Act support includes restrictions on involuntary layoffs or furloughs through September 30, 2020, required service levels, executive compensation and dividends and share repurchases through September 30, 2021. The Company also issued warrants for 357,317 shares at an exercise price of $28.38 per share.
- SkyWest entered into a non-binding letter of intent with Treasury for approximately $497.0 million of additional secured CARES Act loans and was evaluating participation as of the filing.
- Key risks include prolonged travel weakness, financial instability of major airline partners, partner-controlled schedule reductions, aircraft contract expirations, fixed debt and lease obligations, aircraft residual values, labor costs, fuel prices on prorate operations and potential covenant or liquidity pressure.
- Management stated that available working capital, including government assistance, was expected to meet present requirements for at least the next 12 months, although this assessment depends on uncertain pandemic and travel-demand assumptions.
Most important facts for investors to verify
- Whether flight schedules and passenger demand recover sufficiently to absorb deferred capacity-purchase revenue and support aircraft utilization.
- The timing and terms of any additional CARES Act secured borrowing and the effect of related restrictions, warrants and interest costs.
- Liquidity after scheduled debt maturities, lease payments, aircraft commitments and potential partner-driven reductions or contract terminations.
- The extent of additional CRJ200 depreciation, aircraft parking, impairment or disposal costs.
- The credit quality and collectability of receivables from airline partners and other aviation counterparties, including the adequacy of the $19.7 million credit-loss reserve.
- Whether the filing’s statement that liquidity is sufficient for at least 12 months remains valid under prolonged COVID-19 disruption or further partner schedule reductions.