SkyWest, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. SkyWest operates regional airlines through SkyWest Airlines and ExpressJet and has a leasing segment. At September 30, 2016, the company operated approximately 3,200 daily departures and had 642 aircraft in scheduled service within a total fleet of 688 aircraft.
Financial performance and liquidity
| Metric | Three months ended September 30, 2016 | Year-over-year change | Nine months ended September 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $799.8 million | +0.7% | $2.363 billion | +0.9% |
| Operating income | $85.8 million | +9.6% | $231.8 million | +27.1% |
| Net income | $41.3 million | +13.9% | $108.7 million | +40.5% |
| Diluted EPS | $0.79 | +$0.08 | $2.08 | +$0.59 |
| Operating margin | 10.7% | Up from 9.9% | 9.8% | Up from 7.8% |
| Net margin | 5.2% | Up from 4.6% | 4.6% | Up from 3.3% |
Cash flow: Nine-month operating cash flow was $399.3 million, compared with $313.5 million in the prior-year period. Investing cash use was $850.7 million, including $619.8 million for aircraft and rotable spare parts and significant purchases of marketable securities. Financing cash flow was $298.1 million, including $497.5 million of new long-term debt and $198.4 million of principal repayments. Cash and cash equivalents declined to $49.8 million from $203.0 million at December 31, 2015, while marketable securities increased to $506.2 million from $286.7 million. Total cash, restricted cash and marketable securities were $564.2 million.
Debt and liquidity: Total long-term debt, including current maturities and before debt issuance costs, was $2.248 billion at September 30, 2016, versus $1.949 billion at year-end 2015. Debt net of issuance costs was $2.225 billion. The company had a $75 million revolving credit facility, with $68.5 million available after $6.5 million of letters of credit; it was in compliance with applicable covenants and had no borrowings outstanding. Management stated that available working capital should meet present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material changes versus the prior comparable period
- The company continued shifting its fleet toward larger dual-class E175 aircraft and away from less profitable 50-seat aircraft. Aircraft in scheduled service declined from 656 to 642, while E175 aircraft increased from 43 to 67.
- Twenty-two E175 aircraft were delivered during the first nine months and financed with $497.5 million of long-term debt. An additional 16 E175 aircraft were anticipated for United, seven for Alaska and 14 for Delta through the end of 2017. The company had a firm commitment for 37 remaining E175 aircraft under its purchase agreement.
- Despite a 6.4% decline in nine-month block hours and a 4.5% decline in available seat miles, revenue increased, primarily from E175 additions, improved contractual rates, performance incentives and an $11.5 million favorable resolution of a flying-agreement matter.
- Nine-month operating expenses decreased 1.3%, led by lower maintenance, ground handling and fuel costs, while salaries and depreciation increased. ExpressJet revenue declined 11.4% and its segment loss was $20.4 million, compared with a $24.7 million loss in the prior period.
- SkyWest Airlines segment profit increased 26.6% to $174.3 million, and SkyWest Leasing profit increased 71.3% to $22.0 million. ExpressJet remained loss-making despite a smaller loss in the third quarter.
- The company recorded $19.4 million of early lease-return costs for nine CRJ700 aircraft during the first nine months, including $9.2 million in the third quarter. An $8.7 million accrued liability remained at September 30, 2016.
- Contract flying represented approximately 86.4% of passenger revenue and prorate flying approximately 13.6%. Approximately 95.5% of available seat miles were flown under fixed-fee arrangements, limiting direct exposure to fuel prices on most flying.
Outlook, risks and unusual items
Management expects to continue the E175 fleet transition and generally intends to finance committed aircraft acquisitions with approximately 85% debt and the balance with cash. Management also expects aircraft and operating leases that expire in the ordinary course to be renewed or replaced. No quantitative earnings guidance was provided.
- Future results depend substantially on contractual relationships, schedules and rates established by United, Delta, American and Alaska. Contract expirations begin in 2016 for several aircraft, with certain final expirations extending from 2020 through 2027.
- ExpressJet’s United ERJ agreement was scheduled to expire in 2017, subject to two one-year extensions. The company may need to redeploy, return, sell or otherwise use aircraft removed from contracts.
- Operating lease payments totaled approximately $1.020 billion, and firm aircraft and spare-engine commitments totaled approximately $1.080 billion. Total disclosed commitments and obligations, including debt principal and interest, were approximately $4.756 billion.
- The company identified potential impairment risk for its 50-seat fleet. Changes in aircraft residual values, contract demand or operating cash flows could lead to asset write-downs or additional lease-related charges.
- Key risks include dependence on major airline partners, airline industry competition and seasonality, labor costs and pilot availability, weather, fuel prices on prorate operations, aircraft residual values, debt and lease commitments, and interest-rate movements.
- A hypothetical 25% increase in fuel prices would have increased nine-month 2016 fuel expense by approximately $13.4 million for prorate operations. Variable-rate debt represented 7.9% of total long-term debt.
- Routine legal proceedings were not expected to have a material adverse effect. Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of earnings growth after excluding the $11.5 million favorable contract matter and assessing the $19.4 million of early lease-return costs.
- Track ExpressJet’s continuing losses, fleet reductions and contract expirations, particularly the 2017 United ERJ agreement.
- Evaluate whether the E175 transition improves long-term profitability while considering the associated $1.080 billion of firm aircraft and spare-engine commitments and increased debt.
- Reconcile reported liquidity by considering cash, marketable securities, restricted cash, credit-facility availability, debt maturities and lease obligations together.
- Assess exposure to major airline partners, including contract renewal terms, rate resets, schedules, incentives and reimbursement disputes.
- Monitor the 50-seat fleet for impairment, additional early lease-return charges and changes in residual-value assumptions.