SkyWest, Inc. 2011 Form 10-K Summary
Business context and reporting period
SkyWest filed its Form 10-K for the fiscal year ended December 31, 2011. The company operates regional passenger and air-freight services through SkyWest Airlines and ExpressJet, with approximately 4,000 daily departures and a 732-aircraft fleet serving the United States, Canada, Mexico and the Caribbean. Approximately 91% of passenger revenue came from contract flying under code-share and capacity-purchase agreements.
Effective December 31, 2011, Atlantic Southeast Airlines and ExpressJet Delaware completed their combination, with the surviving entity named ExpressJet. The 2011 results include a full year of the acquired ExpressJet Delaware operations, whereas 2010 included only 50 days; therefore, year-over-year comparisons are not fully comparable.
Financial and operating metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $3.655 billion | $2.765 billion | +32.2% |
| Operating income | $41.1 million | $201.8 million | -79.6% |
| Operating margin | 1.1% | 7.3% | Down 6.2 points |
| Net income (loss) | $(27.3) million | $96.4 million | Declined $123.7 million |
| Diluted EPS | $(0.52) | $1.70 | Down $2.22 |
| Net cash from operations | $162.1 million | $347.1 million | -53.3% |
| Total cash, restricted cash and marketable securities | $646.5 million | $804.9 million | -19.7% |
| Long-term debt, including current maturities | $1.815 billion | $1.898 billion | Down $82.6 million |
| Stockholders’ equity | $1.334 billion | $1.421 billion | -6.1% |
Operating expenses increased 41.0% to $3.614 billion. Major cost increases included salaries, wages and benefits of $1.155 billion, aircraft maintenance of $712.9 million and fuel of $592.9 million. Fuel expense increased 74.3%, while maintenance expense increased 46.3%.
Passenger revenue increased 31.6% to $3.585 billion. Excluding partner reimbursements for fuel and engine overhauls, passenger revenue increased 23.7% to $2.919 billion. Fuel reimbursements were $492.7 million and engine-overhaul reimbursements were $173.1 million.
Revenue passenger miles and available seat miles each increased 43.9%; block hours increased 45.4%; departures increased 38.8%; and passengers carried increased 38.2% to 55.8 million. The passenger load factor remained 79.3%. Revenue per available seat mile declined to 10.0 cents from 10.8 cents, while cost per available seat mile improved to 10.1 cents from 10.4 cents.
SkyWest Airlines generated segment profit of $58.0 million, compared with $91.1 million in 2010. ExpressJet reported a segment loss of $98.8 million, compared with segment profit of $23.1 million in 2010.
Material changes versus the prior comparable period
- The ExpressJet combination materially expanded the fleet, workforce and operating footprint, but also reduced comparability and contributed to higher operating costs.
- Revenue growth was outweighed by expense growth, producing a sharp decline in operating margin and a consolidated net loss.
- Fuel costs rose primarily because of higher prices and increased flying. Average fuel cost increased to $3.48 per gallon from $2.74.
- Aircraft maintenance costs rose substantially because of increased operations, an aging CRJ200 and ERJ145 fleet, scheduled engine events and higher repair activity. Management expected elevated scheduled engine maintenance through mid-2012.
- Delta rate adjustments reduced 2011 passenger revenue by approximately $21.7 million versus prior contractual rates. The company also received no comparable 2011 cost-savings payment of the $6.9 million recognized in the fourth quarter of 2010 and received lower performance incentive payments by approximately $18.9 million.
- Other expense increased by approximately $14.0 million, principally because of the company’s share of losses from its Trip and Air Mekong investments.
- The company recorded a $5.7 million purchase-accounting adjustment related to the ExpressJet acquisition, compared with a $15.6 million purchase-accounting gain in 2010.
- For the fourth quarter of 2011, revenue was $899.9 million, operating loss was $5.0 million, net loss was $18.0 million and diluted loss per share was $0.35.
Cash flow, liquidity and capital structure
- Operating cash flow was $162.1 million, investing cash flow was $(11.6) million and financing cash flow was $(133.4) million.
- Capital expenditures, including non-cash items, were approximately $199.8 million. Aircraft and rotable-spare-parts purchases totaled $158.9 million.
- Cash and cash equivalents were $129.5 million, restricted cash was $19.4 million and marketable securities were $497.6 million at year-end.
- The company had a $25 million line of credit with no outstanding balance; the facility was scheduled to expire March 31, 2012. Letters of credit and surety bonds totaled $66.1 million.
- Total contractual commitments were approximately $4.889 billion, including $2.562 billion of operating lease payments, $511.8 million of interest commitments and $1.815 billion of debt principal maturities.
- Aircraft and facility leases are largely off balance sheet; 556 aircraft were under lease, with estimated present value of lease obligations of approximately $2.0 billion.
- Management stated that available working capital and expected operating cash flow should cover present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expected continued integration of ExpressJet operations over the next several years and anticipated reduced scheduled engine-maintenance events after mid-2012. The projected combined fleet declines from 681 aircraft in 2012 to 538 aircraft in 2015, assuming scheduled lease returns and debt-financed aircraft retirements.
- SkyWest is highly dependent on Delta, United and Continental; these three relationships represented approximately 97.6% of total revenue in 2011 and approximately 98.8% of available seat miles.
- Code-share agreements contain performance requirements, rate-reset provisions, early-termination rights and restrictions on growth at certain hubs.
- Approximately 46% of employees were union represented. Integration of ExpressJet work groups, seniority issues and collective bargaining negotiations could delay synergies or disrupt operations.
- Labor costs represented approximately 32% of total operating costs. Future wage increases, unionization efforts or work stoppages could materially affect earnings.
- The aging regional-jet fleet creates ongoing maintenance and fleet-replacement requirements, while aircraft replacement may require additional leverage and capital.
- Fuel exposure is reduced on contract flying because major partners generally reimburse fuel costs, but the company bears fuel risk on pro-rate operations. A hypothetical 25% increase in fuel prices would have increased 2011 fuel expense by approximately $25.0 million for pro-rate operations.
- SkyWest and ExpressJet are litigating with Delta over irregular-operation expense reimbursements. The company had recognized $31.7 million of related revenue, had not recognized additional disputed revenue since July 1, 2008, and disclosed a reasonably possible loss range of $0 to $25.8 million.
- The company held $28.5 million in Trip and $2.9 million in Air Mekong investments and recognized $13.3 million of its share of their 2011 losses.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2011.
Important facts for investors to verify
- Reconcile the apparent revenue growth with the full-year inclusion of ExpressJet Delaware and assess pro forma profitability.
- Monitor whether ExpressJet returns to profitability after the 2011 segment loss and whether integration costs and labor negotiations remain elevated.
- Verify the sustainability of operating cash flow relative to annual debt maturities, lease commitments and fleet-replacement needs.
- Evaluate exposure to Delta, United and Continental contract renewals, rate resets, utilization reductions and termination provisions.
- Track maintenance expense trends for CRJ200 and ERJ145 aircraft and the timing of expected reductions in scheduled engine events.
- Follow the Delta litigation, including potential recovery of withheld amounts and the possible counterclaim.
- Assess liquidity after considering off-balance-sheet operating leases, restricted cash, marketable securities and the expiration of the $25 million credit facility.
- Review the company’s ability to maintain quarterly dividends and share repurchases while reporting a net loss and reduced operating cash flow.