Business Context and Reporting Period
SkyWest, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. SkyWest operates the largest regional airline operation in the United States through SkyWest Airlines and provides scheduled service primarily under fixed-fee and prorate code-share agreements with Delta, United, American and Alaska.
As of September 30, 2019, SkyWest Airlines operated approximately 2,300 daily departures and had 530 aircraft, including 483 in scheduled service. ExpressJet was sold on January 22, 2019; its results remain included through the sale date because the transaction did not qualify for discontinued-operations presentation.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Total operating revenue | $760.3 million | $829.3 million | (8.3%) |
| Operating income | $146.4 million | $137.9 million | 6.2% |
| Operating margin | 19.3% | 16.6% | +2.7 pts |
| Net income | $91.3 million | $83.0 million | 10.0% |
| Diluted EPS | $1.79 | $1.57 | 14.0% |
| Net margin | 12.0% | 10.0% | +2.0 pts |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Total operating revenue | $2.228 billion | $2.418 billion | (7.8%) |
| Operating income | $387.0 million | $352.8 million | 9.7% |
| Operating margin | 17.4% | 14.6% | +2.8 pts |
| Net income | $267.6 million | $213.3 million | 25.5% |
| Diluted EPS | $5.19 | $4.03 | 28.8% |
| Net margin | 12.0% | 8.8% | +3.2 pts |
Q3 revenue consisted primarily of $738.8 million of flying-agreement revenue and $21.5 million of airport customer service and other revenue. Fixed-fee arrangements represented approximately 82.1% of nine-month flying-agreement revenue, with prorate arrangements representing 17.9%.
Nine-month operating expenses declined 10.8% to $1.841 billion, primarily because of the ExpressJet sale, lower aircraft rentals following aircraft purchases and fleet reductions, and lower labor and maintenance costs from the divested operation. These benefits were partly offset by higher depreciation, airport-related costs, interest expense and $21.9 million of special items.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $582.5 million for the first nine months of 2019, compared with $573.1 million in 2018.
- Cash used in investing activities was $305.3 million, including $419.5 million for aircraft and rotable spare parts, $61.0 million for buildings and ground equipment, and $53.2 million of net cash proceeds from the ExpressJet sale.
- Cash used in financing activities was $297.6 million, reflecting $291.3 million of debt principal repayments, $93.9 million for treasury and common-stock purchases and employee tax obligations, and $17.4 million of dividends, partly offset by $99.9 million of new debt issuance.
- Cash and cash equivalents were $307.9 million and marketable securities were $263.6 million at September 30, 2019, for total cash and marketable securities of $571.5 million, down from $689.3 million at December 31, 2018.
- Total long-term debt, including current maturities, was $3.009 billion gross and $2.985 billion net of debt issuance costs. Debt represented 55.3% of the capital mix, compared with 58.9% at year-end 2018.
- Operating lease right-of-use assets were $326.7 million, with current and noncurrent operating lease liabilities totaling $341.7 million.
- Management stated that available working capital should be sufficient for present requirements, planned capital expenditures, scheduled lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material Changes Versus the Prior Comparable Period
- The ExpressJet divestiture reduced consolidated revenue and operating expenses but improved reported profitability. The sale generated a $46.5 million pretax gain and $53.2 million of net cash proceeds.
- SkyWest Airlines revenue increased 5.7% in Q3 and 5.9% for the nine-month period, while SkyWest Leasing revenue increased 44.2% and 57.1%, respectively. These gains were driven principally by new E175 and CRJ900 aircraft and additional third-party leasing activity.
- SkyWest Airlines block hours increased 5.8% in Q3 and 6.6% year to date, while consolidated block hours declined approximately 16% because ExpressJet was no longer included for the full comparable period.
- The scheduled-service fleet declined from 574 aircraft to 483 aircraft year over year, primarily because 128 less-profitable ExpressJet aircraft were removed, partly offset by 24 new aircraft and 13 used aircraft returned to service.
- Passenger load factor for SkyWest Airlines increased to 83.9% in Q3 from 83.0% and to 82.3% for the first nine months from 81.6%.
- SkyWest adopted the new lease accounting standard, ASC Topic 842, on January 1, 2019 using the modified retrospective method. The adoption produced a $13.1 million reduction to opening retained earnings and added recognized lease assets and liabilities.
- Share repurchases increased materially. During the first nine months, SkyWest repurchased approximately 1.50 million shares for $84.6 million, compared with approximately 428,000 shares for $25.2 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific earnings or revenue guidance. Management expects to add 11 new E175 aircraft and one new CRJ900 aircraft to existing fixed-fee agreements by the end of 2020 and to receive six used E175 aircraft financed by Delta in 2020.
- SkyWest had firm commitments for 11 E175 aircraft and seven used CRJ700 aircraft. Total commitments and obligations were $4.388 billion, including $3.009 billion of debt principal, $430.3 million of operating lease payments, $365.8 million of aircraft and spare-engine commitments, and $583.0 million of interest commitments.
- SkyWest recorded a $18.5 million non-cash write-off of aircraft manufacturer part credits after terminating an agreement that released future lease-return obligations. It also recorded $3.4 million of ExpressJet-related severance costs. No special items were recorded in Q3.
- Major risks include dependence on Delta, United, American and Alaska; changes in partner schedules or code-share agreements; aircraft residual values and impairment exposure; labor availability and costs, particularly pilots; fuel prices on prorate operations; weather and economic conditions; significant aircraft lease and debt commitments; and the ability to finance and place new aircraft.
- SkyWest bears fuel-price risk on prorate operations. A hypothetical 25% increase in fuel prices would have increased nine-month 2019 fuel expense by approximately $21.9 million. Only 0.1% of total long-term debt was variable-rate debt at September 30, 2019.
- Routine legal proceedings were not expected by management to have a material adverse effect on financial position, liquidity or results of operations.
Important Facts for Investors to Verify
- Assess the comparability of reported growth and margins after the ExpressJet sale, including the $46.5 million gain and other divestiture-related effects.
- Review whether new E175 and CRJ900 aircraft achieve targeted fixed-fee economics and whether scheduled aircraft deliveries and contract placements occur as planned.
- Monitor partner concentration, contract renewal or termination dates, reimbursement disputes and changes in flight schedules controlled by major airline partners.
- Evaluate liquidity against approximately $4.388 billion of disclosed commitments and obligations, including debt maturities, lease payments and aircraft purchases.
- Verify the sustainability of earnings improvements after excluding the ExpressJet gain, tax benefits, special items and other unusual effects.
- Track labor availability and compensation, CRJ200 maintenance costs, aircraft residual values, impairment risks and fuel exposure on prorate routes.