SkyWest, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 4, 2011. Financial statements are unaudited. SkyWest operated SkyWest Airlines, Atlantic Southeast and ExpressJet, with approximately 4,000 daily departures and a 727-aircraft fleet at quarter-end.
Business Context
The November 2010 ExpressJet merger materially increased SkyWest’s scale, adding approximately 244 ERJ145 aircraft and increasing capacity by approximately 49%. Atlantic Southeast and ExpressJet were working toward operating under a single FAA operating certificate, anticipated in the fourth quarter of 2011. Approximately 91% of third-quarter passenger revenue came from contract flying and 9% from pro-rate flying.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenue | $955.4 million | $686.9 million | $2.755 billion | $1.969 billion |
| Operating income | $26.8 million | $58.3 million | $46.1 million | $150.0 million |
| Income before taxes | $(2.1) million | $39.2 million | $(22.4) million | $94.4 million |
| Net income | $0.1 million | $25.5 million | $(9.4) million | $59.1 million |
| Diluted EPS | $0.00 | $0.45 | $(0.18) | $1.04 |
| Operating margin | 2.8% | 8.5% | 1.7% | 7.6% |
Revenue growth primarily reflected the ExpressJet merger. Third-quarter capacity increased 53.0%, revenue passenger miles increased 54.3%, passengers carried increased 46.2%, and the load factor rose to 81.4% from 80.8%. Revenue per available seat mile declined 9.2% to 9.9 cents, while cost per available seat mile declined 4.9% to 9.8 cents. Fuel cost per available seat mile increased 21.4% to 1.7 cents.
Major third-quarter expenses included salaries, wages and benefits of $288.4 million, maintenance of $189.8 million and fuel of $160.3 million. Fuel expense increased 83.6%, reflecting both higher fuel consumption and an average price increase to $3.49 per gallon from $2.55. Merger and integration costs were $2.2 million in the quarter and $4.6 million for the nine-month period.
At September 30, 2011, cash and cash equivalents were $84.6 million, marketable securities were $620.1 million, and restricted cash was $19.5 million. Total cash, marketable securities and restricted cash were $724.2 million, down from $804.9 million at December 31, 2010. Long-term debt, including current maturities, was $1.826 billion, compared with $1.898 billion at December 31, 2010; estimated fair value was $1.864 billion. Stockholders’ equity was $1.359 billion.
Cash Flow and Liquidity
- Operating cash flow was $161.4 million for the first nine months, down from $268.3 million.
- Investing cash flow used $65.8 million, compared with $230.0 million used in the prior-year period.
- Financing cash flow used $123.3 million, including $110.5 million of debt principal payments, $56.2 million of treasury-stock purchases and $6.4 million of dividends.
- Capital expenditures included $91.5 million for aircraft and rotable spares, $13.5 million for aircraft deposits and $10.6 million for buildings and ground equipment.
- Management stated that available working capital was expected to cover present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material Changes and Unusual Items
- The ExpressJet merger drove substantial increases in revenue, capacity, employees and operating costs, limiting comparability with 2010.
- Delta rate adjustments reduced third-quarter passenger revenue by approximately $5.3 million and nine-month revenue by approximately $21.6 million versus prior rates. Lower incentive payments reduced third-quarter revenue by approximately $7.0 million and nine-month revenue by approximately $13.7 million versus the comparable period.
- A $5.7 million adjustment to the ExpressJet purchase accounting gain increased deferred tax liabilities and was recorded in other expense.
- Equity-method losses from Trip and Air Mekong were $8.5 million pretax for the first nine months; the investments had a September 30 carrying value of $38.5 million.
- AirTran code-share service ended September 6, 2011.
- The company held $4.0 million of auction-rate securities classified as noncurrent Level 3 assets because the market could take more than 12 months to recover.
Outlook, Risks and Contingencies
- Management expected elevated scheduled CRJ200 engine maintenance events to continue through 2011 and into mid-2012, followed by a significant reduction.
- Future minimum operating lease and facility payments totaled approximately $2.632 billion; total debt principal maturities were $1.826 billion and total commitments and obligations were $5.033 billion.
- Two remaining aircraft under a 2011 purchase commitment were expected to require approximately $50 million through year-end. Management expected to use operating leases and debt financing but warned that credit-market disruptions could restrict funding or worsen terms.
- Fuel-price, interest-rate, airline-partner, weather, seasonal, labor, integration and operational risks could materially affect results. Approximately 34.2% of long-term debt carried variable rates.
- SkyWest and Atlantic Southeast continued litigation with Delta over withheld irregular-operation reimbursements. The company had recognized $31.7 million of related revenue but had not recognized additional reimbursements since July 2008 because collection was not reasonably assured. Delta proposed a counterclaim alleging damages exceeding $4.5 million; no loss was accrued because a loss was not probable and reasonably estimable.
- Management reported that disclosure controls were effective at a reasonable-assurance level. Internal-control integration remained ongoing following the ExpressJet merger.
Investor Verification Items
- Verify the sustainability of post-merger margins, particularly given the decline in operating margin and nine-month net loss.
- Assess exposure to fuel prices, unreimbursed pro-rate flying and the timing of engine maintenance events.
- Review contract concentration and renewal, termination, rate-reset and incentive provisions with Delta, United and Continental.
- Evaluate the company’s ability to fund $5.033 billion of disclosed commitments while maintaining liquidity.
- Track the FAA operating-certificate integration, merger costs and expected operational synergies.
- Monitor the Delta litigation, withheld reimbursements and potential counterclaim exposure.
- Review the valuation and liquidity of auction-rate securities and the carrying value of Trip and Air Mekong investments.