SkyWest, Inc. Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. SkyWest operates regional airline services primarily under capacity purchase and prorate agreements with United, Delta, American and Alaska, along with aircraft leasing, airport services and SkyWest Charter activities.
- Fleet: 616 aircraft, including 492 in scheduled service or under code-share contract.
- Approximately 1,930 daily departures as of June 30, 2023.
- Capacity purchase agreements represented approximately 88.3% of flying-agreement revenue; prorate agreements represented 11.7%.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|
| Total operating revenue | $725.6 million | $799.1 million | $1.417 billion | $1.534 billion |
| Operating income | $31.9 million | $88.6 million | $27.2 million | $140.7 million |
| Operating margin | 4.4% | 11.1% | 1.9% | 9.2% |
| Net income (loss) | $15.4 million | $54.0 million | $(6.7) million | $71.7 million |
| Diluted EPS | $0.35 | $1.07 | $(0.14) | $1.42 |
| Net margin | 2.1% | 6.7% | (0.5)% | 4.7% |
- Q2 revenue declined 9.2%, primarily from lower block-hour production, fewer prorate flights and increased deferred revenue recognition under amended capacity purchase agreements.
- Q2 operating expenses declined only 2.4%. Salaries, wages and benefits increased 11.7% to $322.4 million, reflecting higher employee compensation and pilot pay scales.
- Six-month operating expenses were broadly flat at $1.390 billion, while revenue declined 7.6%.
- Interest expense increased 10.8% in Q2 and 14.1% for the six-month period, primarily because of higher rates on debt issued since June 30, 2022.
- Interest income increased to $10.5 million in Q2 and $20.5 million for the six months due to higher investment balances and rates.
Cash flow, liquidity and capital structure
| Metric | June 30, 2023 | December 31, 2022 |
|---|
| Cash and cash equivalents | $114.4 million | $103.0 million |
| Marketable securities | $747.9 million | $944.2 million |
| Total cash and marketable securities | $862.3 million | $1.047 billion |
| Total debt, before unamortized issuance costs | $3.213 billion | $3.409 billion |
| Stockholders’ equity | $2.157 billion | $2.348 billion |
- Six-month operating cash flow was $333.0 million, up from $215.3 million in 2022, driven principally by timing of payments and cash received in excess of recognized revenue.
- Investing activities provided $70.0 million, including $199.3 million of net proceeds from marketable securities, compared with $556.6 million used in 2022.
- Financing activities used $391.6 million, including $221.1 million of debt principal payments and $196.0 million for treasury-stock purchases.
- The company repurchased 8.4 million shares for $194.1 million during the six months. A further $185.9 million remained available under the May 2023 authorization.
- Debt had an average effective interest rate of approximately 4.1% and consisted primarily of aircraft and spare-engine financing, including $200.6 million payable to the U.S. Treasury.
- A $100.0 million credit facility had no borrowings but $29.9 million of letters of credit outstanding, leaving $70.1 million available. Management stated that liquidity was sufficient for present requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Block hours declined 15.6% in Q2 and 13.5% year to date, while departures declined 12.9% and 11.0%, respectively. Management attributed the reductions primarily to pilot and other labor constraints.
- Passenger counts declined 11.1% in Q2 and 7.3% year to date. Q2 load factor decreased 0.5 percentage points to 85.5%, while the six-month load factor increased 0.9 points to 83.0%.
- Aircraft in scheduled service or under contract declined to 492 from 521 at June 30, 2022; the fleet included 13 additional E175 aircraft compared with the prior year, offset by reductions in CRJ aircraft.
- Q2 salaries, wages and benefits increased $33.9 million, partially offset by lower maintenance, fuel, aircraft rental and other operating costs.
- Aircraft fuel expense declined 42.6% in Q2, reflecting lower prorate flying and a decrease in average fuel cost from $4.67 to $3.30 per gallon.
- Deferred revenue increased materially. Total deferred revenue was $262.1 million at June 30, 2023, versus $144.7 million at December 31, 2022, primarily because of lower production and amended contractual payment structures.
- The SkyWest Airlines and SWC segment reported a Q2 loss of $42.7 million versus $25.3 million of profit in 2022; SkyWest Leasing segment profit increased to $40.9 million from $32.9 million.
Guidance, outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing.
- Management expects fleet changes to continue, including three E175 deliveries under the Delta agreement in 2023–2024 and one E175 delivery under the Alaska agreement in 2025. Delivery and in-service timing may change because of labor availability and other factors.
- Management expects existing liquidity to support planned capital expenditures, lease payments and debt service for at least the next 12 months, but intends to finance four committed E175 aircraft with approximately 80%–85% debt and the remainder with cash.
- Key risks include pilot recruitment and retention, labor costs, inflation, partner-controlled schedules, changes or renegotiations of code-share agreements, partner financial condition, fuel prices, aircraft financing, residual aircraft values, debt and lease commitments, and broader economic or travel-demand conditions.
- A hypothetical 25% increase in prorate fuel prices would have increased six-month fuel expense by approximately $9.8 million. A hypothetical 25% increase in salaries, wages and benefits would have increased six-month operating expenses by approximately $164.4 million.
- The company acquired 32 CRJ aircraft in an early lease buyout for $125.5 million and held 14 CRJ700 aircraft for sale with a recorded value of $56.7 million.
- Other income included a $7.9 million unrealized gain on Eve Investments for the six-month period.
- The company guaranteed $19.8 million of debt for a third-party Part 135 air carrier. Routine legal proceedings were not expected to have a material adverse effect.
Investor verification points
- Verify whether pilot staffing and captain availability improve enough to restore block hours, departures and aircraft utilization.
- Review deferred-revenue balances and the expected timing of recognition under amended capacity purchase agreements.
- Assess whether higher labor costs and inflation can be offset by contractual rate increases and operating improvements.
- Monitor cash and marketable securities after share repurchases, debt maturities and committed aircraft purchases.
- Review concentration and renewal or removal dates across the United, Delta, American and Alaska agreements.
- Evaluate residual-value and impairment risk for aircraft held for sale and aircraft transitioning between contracts.
- Confirm available borrowing capacity, covenant compliance and the financing plan for the four committed E175 aircraft.
