SkyWest, Inc. 2014 Form 10-K Summary
Business context and reporting period
SkyWest filed its Form 10-K for the fiscal year ended December 31, 2014. Through SkyWest Airlines and ExpressJet, the company operated approximately 3,600 daily regional departures and a 749-aircraft fleet serving the United States, Canada, Mexico and the Caribbean. Approximately 88% of passenger revenue came from fixed-fee contract flying, primarily for United and Delta, with the remainder from pro-rate arrangements.
Capacity was concentrated with United and Delta: approximately 61.4% of aggregate capacity operated for United and 31.6% for Delta. The company reported two segments: SkyWest Airlines and ExpressJet.
Financial and operating metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $3.237 billion | $3.298 billion |
| Operating income | $24.8 million | $153.1 million |
| Net income (loss) | $(24.2) million | $59.0 million |
| Diluted EPS | $(0.47) | $1.12 |
| Operating margin | 0.8% | 4.6% |
| Net margin | (0.7)% | 1.8% |
| Operating cash flow | $285.5 million | $289.9 million |
| Capital expenditures, including non-cash items | $696.9 million | $142.0 million |
| Cash, restricted cash and marketable securities | $559.1 million | $670.1 million |
| Long-term debt, including current maturities | $1.746 billion | $1.471 billion |
| Operating lease commitments | $1.536 billion | Not stated in the filing excerpt |
Available seat miles declined 2.5%, block hours declined 4.4%, departures declined 6.6% and passengers carried declined 2.7%. The passenger load factor improved to 82.4% from 81.2%. Revenue per available seat mile increased to 8.5 cents from 8.4 cents, while cost per available seat mile increased to 8.6 cents from 8.2 cents.
Total operating expenses increased 2.2% to $3.213 billion. Salaries, wages and benefits rose 3.9% to $1.258 billion, representing approximately 39.2% of operating costs. Interest expense declined 3.9% to $66.0 million.
At December 31, 2014, total assets were $4.410 billion and stockholders’ equity was $1.400 billion. The company had $211.8 million of current debt maturities and a $25 million credit line with no outstanding balance; the credit line was scheduled to expire March 31, 2015.
Material changes versus the prior comparable period
- Revenue decreased 1.8%, while operating income fell 83.8% and the company moved from net income to a net loss.
- ExpressJet revenue decreased 8.1% to $1.347 billion and its segment loss widened to $117.9 million from $49.0 million. SkyWest Airlines revenue increased 3.3% to $1.889 billion, but segment profit declined 44.4% to $77.6 million.
- Severe weather in the first quarter caused approximately 15,800 more cancellations than in the prior-year quarter, a 144% increase, contributing to lower production and revenue.
- Operating cash flow was broadly stable, but investing cash use increased to $585.2 million, primarily because of aircraft purchases. Financing cash flow was positive $261.3 million, including $460.6 million of new long-term debt used largely to finance 20 E175 aircraft.
- Cash, restricted cash and marketable securities declined 16.6% to $559.1 million, while total long-term debt increased approximately $275.2 million.
- SkyWest Airlines began operating E175 aircraft for United in May 2014 and had received 20 of 40 aircraft by year-end. The company expected the remaining 20 deliveries in 2015.
Guidance, outlook, management commentary, risks and unusual items
- Management stated that available working capital and projected operating cash flow were expected to satisfy present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- The company expected to receive 27 remaining firm E175 deliveries through the first quarter of 2016, add seven E175 aircraft for Alaska beginning in mid-2015, and place 15 used ERJ145 aircraft into American service during the first half of 2015.
- All EMB120 turboprops were expected to be removed from service by the end of the second quarter of 2015. This decision resulted in $57.0 million of special items, primarily impairment and lease-related charges.
- An amended United agreement accelerated the termination of certain ERJ145 aircraft and shortened the ExpressJet United ERJ agreement from 2020 to 2017. Related special items totaled $12.9 million.
- Total special items were $74.8 million, including the EMB120 and ERJ145 charges and a $4.8 million write-down related to the sale of a paint facility in Saltillo, Mexico. The filing does not present a separate adjusted earnings measure.
- Other income included a $24.9 million gain from the final sale proceeds of the company’s ownership interest in TRIP. The 2014 tax provision also included a $6.0 million valuation allowance for certain ExpressJet state net operating losses and approximately $2.0 million of foreign tax related to the TRIP sale.
- Management cited continuing effects from stricter pilot qualification and training requirements, including higher pilot, training and crew lodging costs. Approximately 45.1% of employees were unionized, and ExpressJet labor agreements remained amendable after employees rejected a proposed joint agreement.
- Major risks include dependence on Delta and United, which together represented approximately 88.7% of total revenue and 93.0% of available seat miles; contract renewal and termination risk; pilot shortages; labor negotiations; aging-fleet maintenance costs; weather and operational disruptions; competition; regulatory requirements; fuel exposure on pro-rate flying; and substantial debt and lease obligations.
- The company had approximately $1.7 billion of long-term debt, $1.5 billion of future operating lease payments and $572.5 million of firm aircraft commitments. Approximately 41.3% of long-term debt carried variable interest rates.
- Management reported no material adverse effect expected from routine legal proceedings, and the independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether United and Delta renew, extend or modify aircraft contracts expiring or beginning to expire in 2015 and later, particularly the ExpressJet United ERJ agreement ending in 2017.
- Actual execution of the E175 delivery and financing plan, including the seven-aircraft Alaska arrangement and the remaining United deliveries.
- Cash generation after aircraft capital expenditures, debt service, lease payments and fleet transition costs.
- Progress and cost of removing EMB120 aircraft and returning or redeploying ERJ135 and ERJ145 aircraft.
- Resolution of ExpressJet labor negotiations and the potential impact on costs, productivity, staffing and operations.
- Whether the $74.8 million of 2014 special items represents substantially nonrecurring charges or signals further impairment and restructuring risk.
- Liquidity available relative to the $211.8 million of 2015 debt maturities, $343.0 million of 2015 operating lease payments and $562.5 million of 2015 firm aircraft commitments.