SkyWest, Inc. Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Through SkyWest Airlines and ExpressJet, the company operated approximately 4,000 daily departures and a combined fleet of 725 aircraft. Approximately 92% of second-quarter passenger revenue came from contract flying, primarily for United, Delta, Continental, Alaska, and US Airways.
ExpressJet became a combined operating entity on December 31, 2011, following the merger of Atlantic Southeast and ExpressJet Delaware. Prior-period segment amounts were revised to conform to the current presentation.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Change |
|---|---|---|---|
| Operating revenue | $937.2 million | $933.7 million | 0.4% |
| Operating income | $46.8 million | $19.0 million | 146% |
| Operating margin | 5.0% | 2.0% | Up approximately 3.0 points |
| Income before taxes | $28.6 million | $(1.8) million | Improved |
| Net income | $17.0 million | $1.6 million | 974% |
| Diluted EPS | $0.33 | $0.03 | Up $0.30 |
| Net margin | 1.8% | 0.2% | Improved |
| Metric | Six Months 2012 | Six Months 2011 | Change |
|---|---|---|---|
| Operating revenue | $1.858 billion | $1.800 billion | 3.3% |
| Operating income | $67.3 million | $19.3 million | 249% |
| Income before taxes | $27.4 million | $(20.3) million | Improved |
| Net income (loss) | $16.3 million | $(9.5) million | Turned profitable |
| Diluted EPS | $0.32 | $(0.18) | Improved $0.50 |
| Cash from operating activities | $109.3 million | $51.3 million | 113.1% |
Second-quarter operating statistics improved: passengers carried increased 3.6%, revenue passenger miles increased 1.9%, load factor rose to 82.3% from 80.3%, and revenue per available seat mile increased to 10.0 cents from 9.9 cents. Available seat miles declined 0.5%.
Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $108.7 million at June 30, 2012, down from $129.5 million at December 31, 2011.
- Marketable securities were $501.3 million and restricted cash was $19.4 million, resulting in total cash, restricted cash, and marketable securities of $629.5 million, compared with $646.5 million at year-end 2011.
- Operating cash flow was $109.3 million for the first six months. Investing activities used $42.8 million, while financing activities used $87.3 million.
- Long-term debt, including current maturities, totaled approximately $1.731 billion. The estimated fair value of long-term debt was $1.835 billion.
- Debt represented 53.0% of the capital mix at June 30, compared with 54.6% at December 31, 2011. Approximately 30.8% of long-term debt carried variable rates.
- Future stated commitments totaled approximately $4.571 billion, including $2.365 billion of aircraft and facility operating leases, $474.9 million of interest, and $1.731 billion of debt principal maturities.
- Management stated that available working capital should be sufficient for present requirements, planned capital expenditures, anticipated expansion, lease payments, and scheduled debt service for at least the next 12 months, absent unusual circumstances.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially, primarily because of higher incentive payments and favorable partner settlements, improved labor and scheduling efficiency, lower maintenance and fuel costs in the quarter, and the absence of 2011 merger and integration expenses.
- Second-quarter operating expenses declined 2.7% to $890.4 million. Fuel expense declined 4.9%, aircraft maintenance declined 5.2%, aircraft rentals declined 4.7%, and merger-related costs fell to zero from $1.4 million.
- Six-month operating expenses increased 0.6%, while revenue increased 3.3%. Fuel expense increased 4.5% for the six-month period, partly reflecting a 3.4% increase in gallons purchased and a 1.1% increase in average fuel price.
- SkyWest Airlines generated second-quarter segment profit of $29.3 million, compared with $20.8 million in the prior year. ExpressJet's segment loss narrowed to $2.2 million from $22.2 million.
- Share repurchases declined to $0.9 million in the first six months from $40.3 million in the prior-year period. Dividends declared remained $0.04 per share quarterly.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no formal full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year performance and noted airline seasonality, including stronger summer travel and weaker November-to-February demand.
- Contract flying reduces direct exposure to fuel-price changes because major partners generally bear the fuel risk on contracted flights; SkyWest bears fuel risk on pro-rate operations, which represented approximately 5% of ASMs in the first six months.
- Management expects a relatively steady reduction in scheduled CRJ200 engine maintenance events after September 30, 2012, which could affect the timing of maintenance expense and related reimbursements.
- On July 12, 2012, SkyWest sold its 20% voting interest in TRIP for $42 million, payable in three installments over two years. The company also received an option to acquire a 15.38% interest in the purchaser. The investment had a $24.1 million carrying value at June 30, 2012.
- SkyWest and ExpressJet remain in litigation with Delta over withheld reimbursements for irregular-operation expenses. The company had recognized $31.7 million of related revenue, stopped recognizing additional amounts after July 1, 2008, and estimated a reasonably possible loss range of $0 to $25.8 million. No loss was accrued because a loss was not considered probable and reasonably estimable.
- Revenue and earnings depend heavily on major airline partners, contract rates, incentive payments, operational performance, and the continued effectiveness of code-share and capacity-purchase agreements. The Delta agreements include termination, cross-termination, rate-reset, and performance provisions.
- Management reported that disclosure controls were effective as of June 30, 2012, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported revenue growth with fuel and engine-overhaul reimbursements, which are recorded as operating revenue and can obscure underlying revenue trends.
- Monitor ExpressJet's progress toward sustained profitability and the operational and financial effects of the 2011 combination.
- Assess liquidity relative to approximately $4.6 billion of stated commitments, $1.7 billion of debt, and $2.4 billion of future operating lease payments.
- Track the status and potential financial impact of the Delta litigation and withheld reimbursements.
- Verify the terms, installment receipts, and accounting consequences of the post-quarter TRIP sale.
- Evaluate exposure to major airline partners, contract termination and rate-reset provisions, fuel prices on pro-rate flying, interest rates, aircraft maintenance timing, and access to future aircraft financing.