SkyWest Inc. 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
SkyWest, Inc. operates regional airlines through SkyWest Airlines and ExpressJet, providing scheduled service primarily for United, Delta, American and Alaska under fixed-fee capacity purchase agreements and prorate arrangements. The filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Approximately 95.6% of available seat miles were flown under fixed-fee arrangements during the first six months of 2016.
At June 30, 2016, the company had 694 aircraft, including 655 in scheduled service, and approximately 3,200 daily departures. Capacity was operated approximately 53.8% for United, 35.9% for Delta, 5.5% for American and 4.8% for Alaska.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2016 | Year-over-Year Change | Six Months Ended June 30, 2016 | Year-over-Year Change |
|---|---|---|---|---|
| Total operating revenue | $801.3 million | +1.6% | $1,563.4 million | +0.9% |
| Operating income | $84.1 million | +20.3% | $145.9 million | +40.3% |
| Net income | $40.2 million | +27.9% | $67.3 million | +63.8% |
| Diluted EPS | $0.77 | +$0.16 | $1.29 | +$0.50 |
| Operating margin | 10.5% | Up from 8.9% | 9.3% | Up from 6.7% |
| Net margin | 5.0% | Up from 4.0% | 4.3% | Up from 2.7% |
| Operating cash flow | Not separately provided | Not applicable | $228.0 million | +35.1% |
Six-month operating expenses declined 1.9% to $1.417 billion, while interest expense declined 1.5% to $36.0 million. The effective tax rate was 39.3%, compared with 40.3% in the prior-year six-month period.
At June 30, 2016, cash and cash equivalents were $228.0 million, marketable securities were $276.6 million, and restricted cash was $8.2 million, for total cash, restricted cash and marketable securities of $512.8 million. Total current assets were $1.028 billion versus current liabilities of $740.8 million.
Total long-term debt, including current maturities and before debt issuance costs, was $2.062 billion, compared with $1.949 billion at December 31, 2015. Debt net of issuance costs was $2.040 billion. Equity represented 47.2% of the capital mix and long-term debt represented 52.8%. The company had no borrowings under its $75 million revolving credit facility, with $68.2 million available after letters of credit.
Net cash used in investing activities was $313.2 million, including $321.96 million of capital expenditures. Net cash provided by financing activities was $110.1 million, including $249.0 million of new long-term debt and $136.3 million of principal repayments. Cash increased $24.9 million during the first six months.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially despite lower activity. Second-quarter revenue passenger miles declined 6.1%, available seat miles declined 5.0%, block hours declined 7.2% and passengers carried declined 5.1%. Six-month block hours declined 6.5%.
- The company added 18 E175 aircraft to flying arrangements since June 30, 2015 and had 56 E175 aircraft in scheduled service at June 30, 2016. The fleet transition reduced less-profitable 50-seat aircraft, including ERJ145s, ERJ135s and CRJ200s.
- ExpressJet remained loss-making, with a second-quarter segment loss of $10.2 million versus a $3.0 million loss in the prior-year quarter. Its six-month segment loss was $18.2 million, broadly comparable with the prior-year loss of $18.0 million.
- SkyWest Airlines second-quarter segment profit increased 37.1% to $69.2 million; six-month segment profit increased 46.2% to $114.8 million. SkyWest Leasing profit increased 58.6% in the quarter and 91.4% for the six months, primarily due to E175 additions.
- Second-quarter operating expenses decreased only $1.3 million despite lower fleet activity. Six-month maintenance expense declined 10.6%, ground handling expense declined 14.4%, and fuel expense declined 1.5%.
- Directly reimbursed expenses affect revenue and expense comparability. Excluding directly reimbursed fuel, landing fees, station rents and engine maintenance, six-month passenger revenue increased 2.3% and total airline expense declined 0.6%.
Guidance, Outlook, Risks and Unusual Items
Management stated that available working capital was expected to satisfy present financial requirements, anticipated expansion, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances. No formal earnings guidance was provided.
The company had firm commitments for 48 additional E175 aircraft scheduled for delivery from July 2016 through the end of 2017. Firm aircraft and spare-engine commitments totaled approximately $1.422 billion, while operating lease payments totaled approximately $1.057 billion and principal debt maturities totaled approximately $2.062 billion.
- An $11.5 million favorable resolution of a flying-agreement matter with a major airline partner was recognized in second-quarter revenue and materially benefited year-over-year results.
- The company recorded $10.1 million of early lease termination costs related to three CRJ700 aircraft, including maintenance, rental and related costs.
- Major risks include dependence on United, Delta, American and Alaska; partner-controlled schedules; contract renewals and rate resets; pilot availability and labor costs; aircraft residual values and impairment; significant lease and debt obligations; fuel prices on prorate operations; weather and economic conditions; and the financial stability of airline partners.
- Fuel-price exposure is concentrated in prorate operations, which represented approximately 4.4% of first-half available seat miles. A hypothetical 25% increase in fuel prices would have increased first-half fuel expense by approximately $8.4 million.
- Variable-rate debt represented 9.3% of total long-term debt. A hypothetical one-percentage-point rate increase would have increased interest expense by approximately $1.1 million and interest income by approximately $2.4 million for the first six months.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether E175 deliveries and related financing improve consolidated returns without increasing leverage and fixed obligations disproportionately.
- Whether ExpressJet can return to profitability as older aircraft are removed and contracts are renewed or replaced.
- The recurring earnings contribution excluding the $11.5 million favorable contract matter and the $10.1 million early lease termination costs.
- Future contract expirations, rate resets and aircraft placement risk across the major airline partners.
- Liquidity relative to approximately $4.9 billion of disclosed commitments and obligations, including aircraft purchases, leases, interest and debt maturities.
- Aircraft residual values, potential impairment charges and the effect of labor, maintenance and fuel costs on margins.