SkyWest, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, with unaudited fourth-quarter results included. SkyWest operates SkyWest Airlines and ExpressJet, providing approximately 4,000 daily regional departures under code-share and capacity-purchase agreements with United, Delta, American, US Airways and Alaska. The consolidated fleet comprised 757 aircraft at year-end.
Financial and Operating Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenues | $3.298 billion | $3.534 billion | Down 6.7% |
| Operating income | $153.1 million | $166.0 million | Down 7.8% |
| Operating margin | Approximately 4.6% | Approximately 4.7% | Down modestly |
| Net income | $59.0 million | $51.2 million | Up 15.2% |
| Diluted EPS | $1.12 | $0.99 | Up 13.1% |
| Net margin | Approximately 1.8% | Approximately 1.4% | Improved |
| Operating cash flow | $289.9 million | $288.8 million | Up 0.4% |
| Cash and cash equivalents | $170.6 million | $133.8 million | Up 27.6% |
| Marketable securities | $487.2 million | $556.1 million | Down 12.4% |
| Long-term debt, including current maturities | $1.471 billion | $1.642 billion | Down $171.5 million |
| Operating lease commitments | $1.889 billion | Not stated in comparable table | Significant off-balance-sheet obligation |
- Fourth-quarter 2013 revenue was $804.4 million, operating income was $30.8 million and net income was $8.6 million, or $0.17 diluted EPS.
- Passenger load factor increased to 81.2% from 80.7%; revenue passenger miles rose 5.8%, available seat miles rose 5.2%, and block hours increased 3.6%.
- Revenue per available seat mile declined to 8.4 cents from 9.5 cents, while cost per available seat mile declined to 8.2 cents from 9.2 cents.
- Approximately 90% of passenger revenue came from contract flying, and approximately 91.6% of total revenue was attributable to Delta and United.
- SkyWest Airlines generated segment profit of $139.5 million, compared with $106.1 million in 2012. ExpressJet reported a segment loss of $49.0 million, compared with a $18.5 million loss in 2012.
- Total commitments and obligations were approximately $4.9 billion, including $1.47 billion of debt principal, $1.89 billion of operating lease payments, $1.17 billion of firm aircraft commitments and $363.3 million of interest commitments.
Material Changes Versus the Prior Period
- Reported revenue declined primarily because major partners increasingly purchased fuel, landing fees and station rents directly from vendors, reducing both reimbursed revenue and related expenses. Passenger revenue excluding these reimbursements increased $102.9 million, or 3.6%.
- Fuel expense fell $232.9 million, or 54.6%, as partners purchased more fuel directly. The decline had limited effect on operating income because the related costs were generally reimbursed.
- Aircraft maintenance, excluding reimbursed engine overhauls, increased $78.5 million, or 17.6%, due to more scheduled maintenance events and aircraft parts repairs. Salaries, wages and benefits increased $39.6 million, or 3.4%.
- Interest expense decreased $8.7 million, or 11.3%, primarily because of lower interest rates and reduced debt.
- Other income improved by $21.0 million, including a $5.0 million gain on the sale of Air Mekong shares and approximately $5.1 million of income related to termination of the Air Mekong sublease and maintenance deposits.
- Cash from operating activities included a $49 million payment from United for previously deferred amounts under the United Express Agreement.
- Debt declined while stockholders’ equity increased to $1.435 billion from $1.387 billion. The reported capital mix was 52.6% equity and 47.4% long-term debt at year-end.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available working capital and projected operating cash flow should be sufficient for current requirements, planned capital expenditures, expansion, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- SkyWest expected to begin receiving 40 new Embraer E175 aircraft for United in the second quarter of 2014, with deliveries continuing through mid-2015. A separate Embraer agreement covered 100 E175 aircraft, of which 40 were firm and 60 were conditional on additional capacity-purchase agreements.
- Management expected crew costs to increase in 2014 because of new pilot qualification, duty-time and fatigue-related requirements. The filing also identifies a shrinking supply of qualified pilots as a material operating risk.
- ExpressJet workforce integration remained incomplete. Employee groups rejected a proposed joint pilot collective bargaining agreement in December 2013, reducing anticipated merger savings and leaving labor agreements amendable.
- SkyWest is highly dependent on Delta and United: 703 of 757 aircraft operated under arrangements with those partners, and 94.5% of available seat miles were attributable to them. Contract termination, lower utilization, rate pressure or partner financial distress could materially affect results.
- The company faces substantial fleet-related fixed obligations, including approximately $1.5 billion of long-term debt and approximately $1.9 billion of future operating lease payments. Fleet replacement and E175 deliveries may require additional financing.
- SkyWest and ExpressJet continued litigation with Delta over reimbursement of irregular-operation expenses. The company had recognized $31.7 million of related revenue before July 2008, wrote off $5.9 million of receivables in 2013, and estimated a reasonably possible loss range of $0 to $25.8 million.
- The filing cites additional risks from aging aircraft, higher maintenance costs, labor negotiations, weather, fuel prices on pro-rate flying, regulatory compliance, competition and potential disruptions at major hubs.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management reported no material weakness.
Investor Verification Items
- Verify the sustainability of SkyWest Airlines’ profitability relative to ExpressJet’s continuing segment losses.
- Assess renewal, pricing and utilization terms for the Delta and United agreements, including aircraft expirations beginning in 2014 and 2015.
- Review financing, lease obligations and capital requirements associated with the E175 orders and broader fleet replacement plan.
- Monitor pilot availability, labor negotiations and the timing and cost of ExpressJet workforce integration.
- Follow the Delta IROP litigation and any potential effect on cash, receivables and reported earnings.
- Separate underlying operating trends from reimbursed fuel, maintenance, landing-fee and station-rent amounts when evaluating revenue and margins.