SkyWest, Inc. — Form 10-Q Summary
Business Context and Reporting Period
SkyWest operates regional airlines through SkyWest Airlines and ExpressJet, primarily under fixed-fee capacity purchase agreements with United, Delta, American and Alaska. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Approximately 95.8% of available seat miles were flown under fixed-fee arrangements and 4.2% under pro-rate arrangements.
At March 31, 2016, the company had 701 aircraft, including 656 in scheduled service, and approximately 3,200 daily departures. Contract flying represented approximately 88% of passenger revenue.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $762.1 million | $760.4 million | 0.2% |
| Operating expenses | $700.3 million | $726.3 million | (3.6%) |
| Operating income | $61.8 million | $34.1 million | 79.4% |
| Operating margin | 8.1% | 4.5% | +3.6 pts |
| Net income | $27.1 million | $9.6 million | 181.8% |
| Diluted EPS | $0.52 | $0.18 | 188.9% |
| Net margin | 3.6% | 1.3% | +2.3 pts |
| Cash flow from operations | $34.5 million | $35.2 million | (1.9%) |
Revenue was broadly stable despite lower production. Revenue passenger miles declined 3.5%, available seat miles declined 2.1%, block hours declined 5.8%, departures declined 6.0%, and passengers carried declined 4.0%. Passenger load factor decreased to 79.0% from 80.2%, while revenue per available seat mile increased to 9.0 cents from 8.7 cents. Cost per available seat mile improved to 8.4 cents from 8.6 cents.
- Salaries, wages and benefits increased 0.9% to $305.6 million, primarily due to pilot compensation, employee benefits and E175 training costs.
- Aircraft maintenance expense declined 12.3% to $138.9 million.
- Aircraft rentals declined 4.7% to $67.1 million.
- Fuel expense declined 7.2% to $25.3 million; average fuel cost per gallon fell to $1.49 from $2.23.
- Interest expense declined 4.0% to $17.7 million.
Liquidity, Debt and Capital Commitments
At March 31, 2016, the company held $246.8 million of cash and cash equivalents, $187.3 million of marketable securities and $8.2 million of restricted cash. Total cash, marketable securities and restricted cash were $442.3 million, down from $497.9 million at December 31, 2015. Management stated that available working capital was expected to meet present financial requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Total debt was $1.96 billion, or $1.94 billion net of debt issuance costs. Long-term debt represented approximately 52.0% of the company’s capital mix, compared with 52.4% at year-end 2015. The average effective interest rate on aircraft and spare-engine financing was approximately 3.7%; variable-rate notes represented 11.2% of total debt.
Operating cash flow was $34.5 million. Investing activities used $1.1 million, reflecting purchases of three E175 aircraft and net sales of marketable securities. Financing activities provided $10.3 million, including $68.2 million of new aircraft debt and $57.2 million of principal repayments.
Material obligations included $1.11 billion of future operating lease payments, $1.63 billion of firm aircraft and spare-engine commitments, $1.96 billion of debt principal maturities and $343.8 million of estimated interest commitments. The company had taken delivery of 48 of 104 contracted E175 aircraft and expected delivery of the remaining 56 aircraft from April 2016 through June 2017.
Material Changes Versus the Prior Comparable Period
- The company continued transitioning from smaller, less-profitable regional aircraft to larger dual-class E175 aircraft. Scheduled aircraft declined from 693 to 656, while E175s increased from 29 to 48.
- Twenty-nine aircraft were added to profitable flying arrangements, while 66 aircraft were removed from unprofitable or less-profitable arrangements.
- SkyWest Airlines segment profit increased 62.5% to $45.6 million, supported by E175 operations and improved contract incentives.
- ExpressJet’s segment loss narrowed to $7.9 million from $15.1 million, primarily because of lower production and associated operating costs.
- SkyWest Leasing segment profit increased to $6.5 million from $2.6 million, primarily due to additional E175 aircraft.
- Operating cash flow was essentially unchanged, but capital spending and debt financing were substantially lower than in Q1 2015 because the company acquired three E175 aircraft versus nine in the prior-year quarter.
Outlook, Risks and Unusual Items
No formal earnings guidance was provided in the filing. Management expected to continue the E175 fleet transition and anticipated delivery of 56 additional E175 aircraft by June 2017. Delta Connection agreements entered a contractual rate-reset period on January 1, 2016, and 2016 rates had been agreed.
- Pilot availability is a significant risk. More stringent qualification standards, fewer military-experienced applicants and potential hiring by major airlines could increase attrition, constrain schedules and cause contract penalties or aircraft underutilization.
- Some aircraft have lease or debt obligations extending beyond their fixed-fee contract terms. Twenty CRJ700s had contract expirations during 2016, while related financing or lease obligations extend from 2018 to 2024.
- Revenue and profitability depend heavily on code-share contracts, contract renewals, incentive payments, reimbursement disputes and the continued financial and operational performance of major airline partners.
- The company bears fuel-price risk on pro-rate operations. A hypothetical 25% increase in fuel prices would have increased Q1 2016 fuel expense by approximately $4.0 million.
- Approximately $1.1 billion of operating lease payments and $1.6 billion of firm aircraft and spare-engine commitments create substantial future liquidity requirements.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
- The company was evaluating the future effects of new revenue recognition, deferred-tax, lease and stock-compensation accounting standards.
Important Facts for Investors to Verify
- Execution and profitability of the E175 fleet transition, including delivery timing, financing availability and placement with United, Delta and Alaska.
- Renewal or replacement of code-share contracts expiring in 2016 and 2017, particularly contracts tied to CRJ700 and ERJ135/145 aircraft.
- Pilot hiring, training and attrition trends and any resulting schedule reductions or performance penalties.
- ExpressJet’s progress toward eliminating its remaining segment losses.
- Cash generation relative to scheduled debt maturities, lease payments and the $1.63 billion aircraft and spare-engine commitment.
- Exposure to fuel prices on pro-rate flying, interest-rate changes and fluctuations in marketable-security values.