SkyWest, Inc. 2020 First-Quarter Form 10-Q Summary
Business context and reporting period
SkyWest reported results for the three months ended March 31, 2020. The company operates regional airline services primarily under capacity purchase and prorate agreements with Delta, United, American and Alaska. As of March 31, 2020, SkyWest Airlines had 559 aircraft, including 484 in scheduled service and approximately 2,300 daily departures before subsequent COVID-19-related reductions. ExpressJet was sold in January 2019, and the 2019 comparable period includes its results.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $729.9 million | $723.7 million | 0.9% |
| Operating income | $66.3 million | $96.4 million | (31.2%) |
| Operating margin | 9.1% | 13.3% | Down 4.2 points |
| Net income | $30.0 million | $88.2 million | (66.0%) |
| Diluted EPS | $0.59 | $1.69 | (65.1%) |
| Net margin | 4.1% | 12.2% | Down 8.1 points |
| Cash flow from operations | $269.5 million | $154.9 million | 74.0% |
Revenue consisted of $709.5 million from flying agreements and $20.4 million from lease, airport services and other activities. Capacity purchase agreements represented approximately 85.9% of flying-agreement revenue and prorate agreements 14.1%.
At March 31, 2020, cash and cash equivalents were $289.5 million, marketable securities were $288.4 million and total available liquidity was $644.1 million, including $66.2 million available under SkyWest Airlines’ credit facility. Total assets were $6.66 billion and stockholders’ equity was $2.16 billion.
Total long-term debt, including current maturities and before debt issuance costs, was $2.93 billion. Net debt after debt issuance costs was $2.90 billion. The company had $61.8 million of letters of credit and surety bonds outstanding and no borrowings under its $75 million line of credit. All long-term debt carried fixed interest rates, and the company was in compliance with its credit-facility covenants.
Capital expenditures, including non-cash items, were $111.1 million, compared with $414.6 million in the prior-year period. Financing cash outflows included $89.8 million of principal repayments, $26.2 million for treasury-stock purchases and employee equity withholding taxes, and $6.0 million of dividends.
Material changes versus the prior comparable period
- Operating revenue increased modestly, but operating expenses rose 5.8% to $663.6 million, reducing operating income by $30.1 million.
- Aircraft maintenance expense increased $42.0 million, or 35.5%, primarily due to higher maintenance parts, CRJ200 and CRJ700 direct maintenance, and engine maintenance costs.
- Depreciation and amortization increased $21.7 million, or 24.1%, including approximately $15.0 million of incremental depreciation from shortening the useful lives of 36 owned CRJ200 aircraft expected to leave service.
- Prorate revenue declined 5.4% to $100.4 million despite a 6.6% increase in aircraft operating under prorate agreements, reflecting COVID-19-related reductions in passenger demand.
- Capacity purchase aircraft lease revenue increased 17.0% to $242.7 million, primarily due to additional E175 aircraft and improved economics under certain agreements.
- Special items declined from $21.9 million in Q1 2019 to zero. The prior-year amount primarily reflected an $18.5 million non-cash write-off of aircraft-part credits and $3.4 million of ExpressJet-related severance costs.
- Other income declined sharply because Q1 2019 included a $46.5 million pre-tax gain on the sale of ExpressJet; Q1 2020 other income was $0.4 million.
- Cash and marketable securities increased by $57.7 million from December 31, 2019, although cash increased while marketable securities declined. The increase in operating cash flow was aided by a $122.8 million increase in accounts payable, primarily related to the timing of engine-maintenance payments.
- Passenger volume declined 7.8% to 8.86 million and the passenger load factor fell to 67.5% from 78.6%, while departures increased 8.2% and block hours increased 2.2%.
Guidance, outlook, risks and unusual items
- Management expected a more significant COVID-19 impact in the second quarter and the remainder of 2020. April daily departures were approximately 800 to 900, versus approximately 2,500 anticipated before the pandemic; comparable reductions could continue through 2021.
- Fifty-five CRJ200 aircraft under the Delta Connection Agreement were not expected to be extended after scheduled 2020 expirations. The company expected to return 19 leased aircraft and park 36 owned aircraft, with $29.1 million of additional depreciation anticipated from April through December 2020.
- The American prorate agreement covering seven CRJ200 aircraft was expected to terminate in 2020, with potential additional prorate reductions.
- SkyWest had firm commitments for 26 new E175 aircraft and two used CRJ700 aircraft. Delivery timing was subject to renegotiation or deferral because of reduced demand. Total firm aircraft and spare-engine commitments were $714.8 million.
- Future minimum operating lease payments were $434.5 million, and total disclosed commitments and obligations, including leases, aircraft commitments, interest and debt principal, were $4.62 billion.
- On April 23, 2020, SkyWest Airlines entered into a CARES Act Payroll Support Program agreement expected to provide approximately $438.0 million, comprising approximately $336.6 million of grants and $101.4 million of promissory-note obligations. Fifty percent was received in April 2020.
- The CARES Act support restricts dividends and share repurchases through September 30, 2021, limits certain workforce actions through September 30, 2020, requires specified service levels and imposes executive-compensation limitations. SkyWest also agreed to issue Treasury warrants for up to 357,317 shares at an exercise price of $28.38 per share.
- The company applied for and expected to be eligible for approximately $497.0 million of additional secured CARES Act financing but was evaluating whether to participate.
- SkyWest repurchased 385,606 shares for $20.0 million during the quarter. Repurchases and dividends were subsequently suspended under the Payroll Support Program.
- The company adopted expected-credit-loss accounting on January 1, 2020, recording an $11.6 million after-tax reduction to beginning retained earnings. Additional credit-loss reserves of $3.8 million were recorded during the quarter, bringing the allowance to $19.1 million.
- Management stated that available working capital, including government assistance, was expected to satisfy present requirements, capital expenditures, lease payments and debt service for at least the next 12 months; however, the filing emphasizes substantial uncertainty from COVID-19, partner financial condition, schedules, aircraft values and fixed obligations.
Important facts for investors to verify
- Actual second-quarter and full-year flight schedules, passenger demand, prorate revenue and load factors relative to the company’s stated COVID-19 assumptions.
- Final timing and accounting treatment of the $438.0 million Payroll Support Program proceeds, promissory note and Treasury warrants.
- Whether the company participates in the approximately $497.0 million CARES Act secured-loan program or raises other financing.
- Changes to delivery schedules, contract extensions and utilization for the 55 Delta CRJ200 aircraft, the seven American prorate aircraft and other CRJ200 fleets.
- Liquidity after scheduled debt maturities, aircraft commitments, lease payments and potential additional aircraft impairments or accelerated depreciation.
- Whether major airline partners maintain contractual schedules, payments and reimbursement arrangements, and whether any partner credit deterioration increases SkyWest’s receivable-loss reserves.