SkyWest, Inc. 2013 Q3 Form 10-Q Summary
Business context and reporting period
SkyWest operates regional passenger airline services through SkyWest Airlines and ExpressJet, primarily under capacity purchase and code-share agreements with United, Delta, American, US Airways and Alaska. The filing covers the three and nine months ended September 30, 2013; financial statements are unaudited.
- Fleet: 756 aircraft and approximately 4,000 daily departures at September 30, 2013.
- Approximately 60.8% of nine-month capacity was operated for United and 34.0% for Delta.
- About 90% of third-quarter passenger revenue came from contract flying and 10% from pro-rate flying.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Operating revenue | $850.7 million | $865.3 million | $2,493.4 million | $2,723.6 million |
| Operating income | $56.2 million | $55.0 million | $122.3 million | $122.2 million |
| Operating margin | 6.6% | 6.4% | 4.9% | 4.5% |
| Net income | $26.4 million | $20.9 million | $50.3 million | $37.2 million |
| Diluted EPS | $0.50 | $0.40 | $0.96 | $0.72 |
| Net margin | 3.1% | 2.4% | 2.0% | 1.4% |
| Operating cash flow | Not separately provided | Not separately provided | $251.4 million | $244.2 million |
- Third-quarter revenue declined 1.7%, while net income increased 26.1% and diluted EPS increased 25.0%.
- Nine-month revenue declined 8.5%, but net income increased 35.3% and diluted EPS increased 33.3%.
- Passenger revenue excluding fuel and engine-overhaul reimbursements increased 2.4% in Q3 and 2.2% for nine months, driven primarily by higher block-hour production.
- Q3 passenger load factor was 81.7%, down from 82.2%; nine-month load factor was 81.0%, up from 80.6%.
- Q3 available seat miles increased 5.8% and block hours increased 2.8%; nine-month available seat miles increased 5.3% and block hours increased 3.9%.
Cash flow, liquidity, debt and commitments
- Cash and cash equivalents were $267.7 million at September 30, 2013, compared with $133.8 million at December 31, 2012.
- Marketable securities were $440.5 million, down from $556.1 million; total cash, restricted cash and marketable securities increased to $727.8 million from $709.4 million.
- Operating cash flow was $251.4 million for the first nine months, up 3.0% year over year.
- Investing activities provided $14.0 million, primarily reflecting net sales of marketable securities. Capital expenditures and aircraft deposits totaled approximately $114.7 million.
- Financing activities used $131.4 million, including $117.9 million of principal debt payments, $11.7 million of treasury-stock purchases and $6.2 million of dividends.
- Long-term debt, including current maturities, was $1.524 billion at September 30, 2013, compared with $1.642 billion at year-end 2012. Approximately 30.4% of long-term debt was variable rate.
- Management stated that available working capital was expected to satisfy present requirements, anticipated expansion, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- Future operating lease payments totaled approximately $2.0 billion, and firm aircraft commitments totaled approximately $1.171 billion.
Material changes versus the prior comparable period
- Fuel expense decreased 30.5% in Q3 and 60.8% for nine months, mainly because United and other major partners purchased more fuel directly. Related reimbursements are recorded in revenue, so the change reduced both revenue and expense with limited operating-income effect.
- Aircraft maintenance, materials and repairs increased 7.9% in Q3 and 1.0% for nine months. Excluding engine-overhaul reimbursements, maintenance expense increased 21.4% in Q3 and 18.6% for nine months, largely due to scheduled maintenance and parts repairs.
- SkyWest Airlines segment profit increased 31.3% in Q3 and 47.4% for nine months, supported by higher non-pass-through revenue, increased block-hour production and lower CRJ200 engine-overhaul expense.
- ExpressJet reported a $6.1 million Q3 segment loss versus a $1.7 million loss in the prior year and a $35.8 million nine-month loss versus a $12.8 million loss. The deterioration primarily reflected higher scheduled maintenance, health-care and workers’ compensation costs.
- Other income improved due in part to a $5.0 million gain on the sale of Air Mekong shares. The prior-year periods included losses from investments in Air Mekong and TRIP.
- SkyWest entered into an agreement with United to operate 40 new Embraer E175 aircraft, with introduction expected in the second quarter of 2014 and deliveries continuing through mid-2015.
Guidance, outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided in the filing.
- Management expects to receive 40 firm E175 aircraft beginning in March 2014; 60 additional aircraft in the broader Embraer order remain conditional on securing capacity purchase agreements.
- The Airline Safety and Pilot Training Improvement Act was scheduled to become effective January 1, 2014. Management expected additional pilot hiring and training, with possible effects on staffing, scheduling, compliance costs and operations.
- Results are subject to airline seasonality, winter weather, partner contract changes, incentive performance, maintenance timing, labor availability and the financial condition and strategic decisions of major airline partners.
- SkyWest and ExpressJet continue litigation with Delta concerning reimbursement of irregular-operation expenses. Since July 2008, the company has not recognized additional disputed reimbursement revenue because collection is not reasonably assured. The estimated reasonably possible loss range was $0 to $25.8 million.
- Delta Connection agreements include termination, cross-termination, rate-reset and performance provisions. The company expected all 66 CRJ200 aircraft subject to the Delta exchange arrangement to be removed from those agreements by December 31, 2015.
- Management identified revenue recognition, maintenance, aircraft leases, impairment, share-based compensation and fair-value measurements as critical accounting areas involving estimates that could differ materially from actual results.
Most important facts for investors to verify
- Whether ExpressJet’s higher maintenance and employee-related costs improve as scheduled maintenance events normalize.
- Execution, financing and profitability of the 40 firm E175 deliveries and the conditional 60-aircraft order.
- Exposure to United, Delta and other major partners, including contract renewals, rate resets, incentives, penalties and termination rights.
- Progress and potential financial outcome of the Delta IROP reimbursement litigation.
- Ability to fund approximately $1.171 billion of firm aircraft commitments, $2.0 billion of lease payments and scheduled debt maturities while maintaining liquidity.
- Impact of pilot-training and certification requirements beginning in 2014, including staffing costs and operational disruptions.