SkyWest, Inc. — Form 10-Q Summary
Business Context and Reporting Period
SkyWest filed an unaudited quarterly report for the three and six months ended June 30, 2011. Through SkyWest Airlines, Atlantic Southeast Airlines and ExpressJet, the company operated approximately 4,000 daily departures and a combined fleet of 725 aircraft. Approximately 91% of second-quarter passenger revenue came from contract flying for Delta, United, Continental and other major airline partners; the remainder came primarily from pro-rate operations.
The November 2010 ExpressJet merger materially expanded the company, adding 244 ERJ145 aircraft and increasing aggregate capacity by approximately 49%. Accordingly, comparisons with 2010 are not fully comparable.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $933.7 million, up 43.7% | $1.800 billion, up 40.4% |
| Operating income | $19.0 million | $19.3 million |
| Operating margin | 2.0% | 1.1% |
| Net income (loss) | $1.6 million, versus $18.7 million | $(9.5) million, versus $33.7 million |
| Diluted EPS | $0.03, versus $0.33 | $(0.18), versus $0.59 |
| Net margin | 0.2% | (0.5)% |
| Operating cash flow | Not separately provided | $51.3 million, versus $133.4 million |
Second-quarter available seat miles increased 58.1% to 9.4 billion, revenue passenger miles increased 57.3%, and passengers carried increased 49.4%. The passenger load factor declined slightly to 80.3% from 80.7%. Revenue per available seat mile declined 9.2% to 9.9 cents, while cost per available seat mile declined 4.8% to 10.0 cents. For the six-month period, the load factor declined to 77.9% from 79.0%, and revenue per available seat mile declined 9.9% to 10.0 cents.
Second-quarter operating expenses increased 52.3% to $914.7 million. Major increases included salaries, wages and benefits of 67.0%, aircraft maintenance of 58.4%, fuel of 88.8%, and other expenses of 52.2%. Fuel expense increased to $161.4 million as the average price per gallon rose to $3.64 from $2.58. Contract partners generally reimbursed fuel and certain engine overhaul costs, but unreimbursed fuel costs increased by $7.3 million in the quarter.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $139.1 million at June 30, 2011, compared with $112.3 million at December 31, 2010.
- Marketable securities were $523.7 million, down from $670.7 million. Cash, restricted cash and marketable securities totaled $684.6 million, down 14.9% from year-end.
- Long-term debt, including current maturities, was $1.819 billion, compared with $1.898 billion at December 31, 2010 and $1.973 billion at June 30, 2010. The estimated fair value of long-term debt was $1.861 billion.
- Stockholders’ equity was $1.372 billion, compared with $1.421 billion at year-end. Management reported a capital mix of 45.3% equity and 54.7% long-term debt.
- Management stated that available working capital should meet present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- Variable-rate notes represented 35.2% of total long-term debt at June 30, 2011.
Future commitments totaled approximately $5.133 billion, including $2.688 billion of aircraft and facility operating lease payments, $1.818 billion of principal maturities, $534.3 million of interest commitments and a $92.0 million aircraft purchase commitment due in 2011.
Cash Flow and Capital Allocation
- Operating activities generated $51.3 million of cash, down $82.1 million year over year.
- Investing activities provided $96.8 million, primarily reflecting net sales of marketable securities.
- Financing activities used $121.3 million, including $79.4 million of debt principal payments, $40.3 million of treasury-stock purchases and $4.3 million of dividends.
- Cash and cash equivalents increased $26.8 million during the first six months.
- During the second quarter, the company repurchased 1.33 million shares at an average price of $15.55. As of June 30, 2011, it had spent approximately $317.2 million repurchasing and retiring 16.8 million shares under its authorization.
Material Changes Versus the Prior Comparable Period
- The ExpressJet merger drove most of the increase in aircraft, capacity, revenue and operating expenses, but also increased training, crew relocation, maintenance, rentals and integration costs.
- Revenue growth substantially exceeded profit growth. Second-quarter revenue increased 43.7%, while net income fell 91.5% and diluted EPS declined from $0.33 to $0.03.
- For the first six months, the company shifted from net income of $33.7 million to a net loss of $9.5 million.
- Delta rate adjustments reduced passenger revenue by an estimated $8.6 million in the second quarter and $16.3 million year to date versus prior rates.
- Severe weather during the first quarter resulted in approximately 5,000 additional cancellations and an estimated $5.1 million negative impact on six-month passenger revenue.
- Merger and integration-related costs were $1.4 million in the quarter and $2.4 million year to date.
- AirTran service was scheduled to terminate on September 6, 2011.
Outlook, Risks, Contingencies and Unusual Items
Management expected scheduled engine maintenance events experienced in 2010 to continue through 2011 and into mid-2012. The company expected to finance its committed aircraft purchases through a combination of operating leases and debt financing, but cautioned that credit-market volatility could restrict funding or make financing terms less favorable.
The company’s results are exposed to fuel prices on pro-rate operations, interest rates, weather-related cancellations, maintenance requirements, labor and crew-training costs, seasonal demand and the financial and operational performance of major airline partners. A hypothetical 25% increase in fuel prices would have increased second-quarter and year-to-date fuel expense by approximately $6.9 million and $13.0 million, respectively, on pro-rate operations.
SkyWest and Atlantic Southeast continued litigation against Delta regarding withheld irregular-operations reimbursements. Delta had withheld payments since December 2007; SkyWest had recognized $31.7 million of related revenue cumulatively but had not recognized additional reimbursements since July 2008 because collection was not reasonably assured. Management believed outstanding legal matters were unlikely to have a material adverse effect, but stated that an unfavorable resolution of the Delta dispute would negatively affect results.
The company held approximately $4.0 million of auction-rate securities classified as non-current Level 3 assets because the market may take more than 12 months to recover. It also held $42.1 million of equity-method investments in Trip and Air Mekong and recorded $3.5 million of related losses during the first six months.
Important Facts for Investors to Verify
- Whether ExpressJet integration produces expected operating efficiencies and whether integration costs continue to rise.
- The status, timing and potential recovery or loss associated with the Delta irregular-operations reimbursement litigation.
- The sustainability of profitability given low operating margins, higher fuel prices, maintenance requirements and lower revenue per available seat mile.
- Available financing and terms for the $92.0 million aircraft purchase commitment and other aircraft acquisitions.
- Debt maturities, variable-rate exposure and the company’s ability to fund approximately $5.1 billion of disclosed commitments.
- Whether the decline in operating cash flow and marketable securities is temporary or indicates continuing liquidity pressure.
- The effect of contract-rate resets, partner concentration and the termination of the AirTran agreement.
- Management’s statement that disclosure controls were effective, while integration of ExpressJet policies, processes, systems and operations remained ongoing.