SkyWest, Inc. 2014 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airline subsidiaries SkyWest Airlines and ExpressJet. For the quarter ended September 30, 2014, the company operated approximately 3,700 daily departures and a combined fleet of 751 aircraft. Approximately 88.1% of passenger revenue came from contract flying and 11.9% from pro-rate flying. The filing is unaudited and covers the three and nine months ended September 30, 2014, with comparisons to the same periods in 2013.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Change |
|---|
| Total operating revenue | $834.6 million | $850.7 million | (1.9%) |
| Operating income | $59.1 million | $56.2 million | +5.2% |
| Operating margin | 7.1% | 6.6% | +0.5 percentage points |
| Net income | $41.3 million | $26.4 million | +56.6% |
| Diluted EPS | $0.79 | $0.50 | +58.0% |
| Net margin | 5.0% | 3.1% | +1.8 percentage points |
| Metric | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 | Change |
|---|
| Total operating revenue | $2.424 billion | $2.493 billion | (2.8%) |
| Operating income | $44.5 million | $122.3 million | (63.6%) |
| Operating margin | 1.8% | 4.9% | (3.1 percentage points) |
| Net income | $3.7 million | $50.3 million | (92.6%) |
| Diluted EPS | $0.07 | $0.96 | (92.7%) |
| Net margin | 0.2% | 2.0% | (1.8 percentage points) |
- Third-quarter results benefited from a $24.9 million gain related to the final payment on the sale of the company’s TRIP investment and $2.1 million of related interest income. The comparable 2013 quarter included a $5.0 million gain associated with Air Mekong.
- Third-quarter SkyWest Airlines segment profit increased to $52.1 million from $48.4 million, while ExpressJet’s segment loss widened to $9.7 million from $6.1 million.
- Nine-month segment results deteriorated materially: SkyWest Airlines profit declined to $94.8 million from $111.4 million, and ExpressJet’s loss increased to $98.2 million from $35.8 million.
- Passenger revenue excluding fuel, landing-fee, station-rent and engine-overhaul reimbursements increased 1.0% in the third quarter but decreased 0.5% for the nine-month period.
- Third-quarter load factor improved to 83.1% from 81.7%, while available seat miles declined 2.1%, block hours declined 3.8%, and departures declined 6.0%.
Cash Flow, Debt, Liquidity and Commitments
- Cash provided by operating activities was $186.4 million for the first nine months of 2014, compared with $251.4 million in 2013. The MD&A table states $186.4 million; the cash flow statement states $186.369 million.
- Investing activities used $392.6 million, principally reflecting the acquisition of 14 E175 aircraft, one used CRJ700 and related rotable assets.
- Financing activities provided $187.0 million, including $323.7 million of aircraft-related long-term debt issuance, partly offset by $124.7 million of debt repayments.
- Cash and cash equivalents were $151.4 million at September 30, 2014, compared with $170.6 million at December 31, 2013. Marketable securities were $392.7 million, down from $487.2 million. Total cash, restricted cash and marketable securities declined 17.1% to $555.7 million.
- Long-term debt, including current maturities, was approximately $1.670 billion, compared with $1.471 billion at December 31, 2013. The company reported an estimated fair value of $1.706 billion.
- Variable-rate notes represented 41.2% of long-term debt, up from 29.5% at December 31, 2013. The reported average effective interest rate on aircraft debt was approximately 4.2%.
- Future operating lease payments totaled $1.628 billion, including $341.2 million due in 2015. Total listed commitments and obligations were $4.455 billion, including debt principal, interest, leases and firm aircraft commitments.
- Management stated that available working capital should satisfy present financial requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material Changes, Outlook and Risks
- SkyWest Airlines began service with additional E175 aircraft; 12 of the 14 aircraft acquired during the nine-month period were in service at September 30, 2014. The remaining firm E175 deliveries were expected through August 2015.
- ExpressJet removed 16 ERJ145 aircraft from its United contract during the first nine months. Additional ERJ145 and ERJ135 expirations were scheduled through early 2015, with management not expecting a material negative financial effect from those removals.
- Management identified the Airline Safety and Pilot Training Improvement Act and related regulations as a continuing source of pilot scheduling inefficiencies, higher wages, training costs and crew lodging expenses.
- ExpressJet’s nine-month performance was adversely affected by fleet reductions, a 7.3% decline in block hours, severe weather in the first half of 2014, lower performance incentives and contract invoice true-ups.
- The company wrote off a $2.5 million VAT asset and recorded a $2.2 million write-down related to an unused aircraft paint facility in Mexico. The facility was sold on October 1, 2014 for approximately its net book value.
- Fuel-price exposure is concentrated in pro-rate operations; a hypothetical 25% fuel-price increase would have increased nine-month fuel expense by approximately $21.8 million. Major airline partners generally bear fuel-price risk under contract flying arrangements.
- Management stated that no material changes occurred in previously disclosed risk factors. Routine legal matters were not expected to have a material adverse effect. A confidential Delta settlement concerning irregular-operation expenses had a financial impact approximating amounts already accrued.
- The company had no specific full-year earnings guidance in the provided filing text. Airline seasonality, weather, contract renewals, partner concentration, performance incentives, labor availability, fuel prices, interest rates and aircraft financing remain important uncertainties.
Investor Verification Points
- Determine the portion of third-quarter and nine-month net income attributable to the nonrecurring TRIP gain and related interest income.
- Assess whether ExpressJet’s continuing losses and fleet reductions improve or worsen after the scheduled United aircraft contract expirations.
- Verify funding sources and refinancing requirements for the $4.455 billion of listed commitments and the remaining E175 deliveries.
- Monitor variable-rate debt exposure, aircraft lease obligations and the decline in cash and marketable securities.
- Reconcile the cash-flow statement’s $186.369 million operating cash flow with the $186.389 million amount presented in MD&A.
- Evaluate whether pilot-training and scheduling inefficiencies under the Improvement Act continue to pressure labor and operating costs.
