Business Context and Reporting Period
SkyWest, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. SkyWest operates the largest U.S. regional airline operation through SkyWest Airlines and provides scheduled service primarily under fixed-fee capacity purchase and prorate agreements with Delta, United, American and Alaska. As of June 30, 2019, the fleet totaled 525 aircraft, including 482 in scheduled service and approximately 2,260 daily departures.
SkyWest completed the sale of ExpressJet on January 22, 2019. ExpressJet results remain included in the reported periods because the transaction did not qualify for discontinued-operations presentation, reducing comparability with 2018.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total operating revenue | $744.4 million | $805.5 million | (7.6%) |
| Operating income | $144.1 million | $126.7 million | 13.8% |
| Operating margin | 19.4% | 15.7% | +3.7 pts |
| Net income | $88.1 million | $75.9 million | 16.1% |
| Diluted EPS | $1.71 | $1.43 | 19.6% |
| Net margin | 11.8% | 9.4% | +2.4 pts |
| Operating cash flow | Six months: $362.1 million vs. $350.8 million | 3.2% |
| Six-month metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total operating revenue | $1.468 billion | $1.589 billion | (7.6%) |
| Operating income | $240.5 million | $214.9 million | 12.0% |
| Net income | $176.2 million | $130.2 million | 35.3% |
| Diluted EPS | $3.40 | $2.46 | 38.2% |
| Operating margin | 16.4% | 13.5% | +2.9 pts |
| Net margin | 12.0% | 8.2% | +3.8 pts |
- Q2 fixed-fee flight-operations revenue declined 17.1%, primarily because of the ExpressJet sale, partly offset by new E175 and CRJ900 aircraft and improved contract economics.
- Q2 aircraft lease revenue increased 2.7%, and prorate revenue increased 4.2%. Airport customer service and other revenue increased 60.4% to $19.0 million.
- Q2 operating expenses fell 11.6% to $600.3 million. Salaries, maintenance and aircraft rentals declined with the ExpressJet divestiture, while depreciation, airport expenses and interest expense increased.
- Six-month other income included a $46.5 million pretax gain on the ExpressJet sale, materially contributing to the increase in pretax income and net income.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $362.1 million. Investing cash outflow was $249.0 million, including aircraft and property expenditures, partly offset by $53.2 million of net cash received from the ExpressJet sale.
- Six-month financing cash outflow was $187.8 million, reflecting $211.2 million of debt principal payments, $68.9 million for treasury and common-stock purchases and employee tax withholding, and $11.3 million of dividends, partly offset by $99.9 million of new debt issuance.
- Cash and cash equivalents totaled $253.7 million and marketable securities totaled $295.9 million at June 30, 2019, for combined liquidity of $549.6 million, down from $689.3 million at December 31, 2018.
- Total long-term debt, including current maturities, was $3.089 billion before unamortized debt issuance costs; the estimated fair value was $3.06 billion. The average effective interest rate was approximately 4.2%, and variable-rate notes represented only 0.1% of total long-term debt.
- Operating lease liabilities totaled $347.3 million, comprising $81.8 million current and $265.5 million noncurrent. Right-of-use assets were $336.7 million following adoption of the new lease standard.
- Management stated that available working capital should be sufficient for present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material Changes, Outlook and Risks
- The scheduled-service fleet declined from 583 aircraft at June 30, 2018 to 482 at June 30, 2019, primarily because of the ExpressJet sale and removal of less profitable aircraft. SkyWest added 25 E175s and 11 CRJ900s and removed 100 ERJ145/135s and 38 CRJ700s.
- SkyWest expects to add seven E175 aircraft and nine CRJ900 aircraft to existing fixed-fee agreements by the end of 2021. The company had firm purchase commitments for seven E175 aircraft with deliveries scheduled through 2021.
- The company adopted ASC Topic 842, Leases, on January 1, 2019 using the modified retrospective method, resulting in a $13.1 million reduction to opening retained earnings related to previously unrecognized impairment of leased CRJ200 aircraft.
- Six-month special items totaled $21.9 million, including an $18.5 million non-cash write-off of aircraft manufacturer part credits and $3.4 million of severance-related costs associated with the ExpressJet sale.
- Management did not provide a specific full-year earnings or revenue forecast in the filing. It indicated that results are seasonal and that current liquidity is expected to support operations and planned commitments for at least the next 12 months.
- Key risks include dependence on major airline partners and their financial condition, partner-controlled schedules, contract renegotiations, pilot recruitment and retention, labor costs, aircraft residual values and impairment, substantial debt and lease commitments, aircraft delivery timing, fuel prices on prorate operations, weather and economic conditions.
- A 25% increase in fuel prices for prorate operations would have increased six-month 2019 fuel expense by an estimated $14.1 million. Routine legal matters were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Separate the effect of the ExpressJet sale from underlying SkyWest Airlines and SkyWest Leasing performance when assessing year-over-year trends.
- Verify the sustainability of improved margins after excluding the $46.5 million ExpressJet sale gain and considering the $21.9 million of special items.
- Monitor debt maturities, aircraft purchase commitments, lease obligations and the decline in combined cash and marketable securities.
- Assess whether new E175 and CRJ900 aircraft generate sufficient returns to offset higher depreciation, maintenance, labor and interest costs.
- Review exposure to Delta, United, American and Alaska, including contract renewal, aircraft removal dates, incentive payments and reimbursement disputes.
- Track pilot availability, labor-cost inflation, prorate passenger demand and fuel-price exposure, particularly because fixed-fee partners generally bear fuel risk only on contracted flights.