SkyWest, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; comparative period is the three months ended March 31, 2017. The filing was submitted May 7, 2018. SkyWest operated 614 aircraft, including 580 in scheduled service, through SkyWest Airlines and ExpressJet under agreements with United, Delta, American and Alaska.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total operating revenue | $783.4 million | $747.2 million | 4.8% |
| Operating income | $88.2 million | $76.3 million | 15.6% |
| Operating margin | 11.3% | 10.2% | Up 1.0 point |
| Net income | $54.4 million | $34.8 million | 56.3% |
| Diluted EPS | $1.03 | $0.65 | 58.5% |
| Net margin | 6.9% | 4.7% | Up 2.3 points |
| Cash flow from operations | $165.9 million | $143.9 million | 15.3% |
- Flying agreements revenue increased 4.6% to $768.0 million; airport customer service and other revenue increased 22.1% to $15.4 million.
- Fixed-fee arrangements represented approximately 85.7% of flying agreements revenue, while prorate arrangements represented 14.3%.
- Operating expenses rose 3.6% to $695.2 million. Salaries, maintenance, depreciation and fuel costs increased, partly offset by lower aircraft rentals and airport-related expenses.
- Fuel expense increased 46.1% to $26.9 million, with average fuel cost rising to $2.40 per gallon from $2.01. SkyWest bears fuel-price risk primarily on prorate operations.
- As of March 31, 2018, cash and cash equivalents were $251.4 million and marketable securities were $394.1 million, for total cash and liquid securities of $645.5 million.
- Total debt, including current maturities and before debt issuance costs, was $2.80 billion, compared with $2.71 billion at December 31, 2017. Equity represented 42.3% of total capital and debt represented 57.7%.
- Current assets were $952.6 million versus current liabilities of $837.8 million. Management stated that available working capital should meet expected requirements, capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
Material changes versus the prior comparable period
- The fleet in scheduled service declined 8.2% to 580 aircraft, block hours declined 3.6% to 436,367, departures declined 6.0% to 248,127, and passengers carried declined 5.8% to 11.3 million. The passenger load factor decreased to 77.4% from 78.6%.
- Despite lower fleet and block-hour levels, revenue increased primarily because 19 E175 aircraft were added, offsetting the removal of 71 lower-revenue CRJ200, ERJ135/145, CRJ700 and CRJ900 aircraft.
- SkyWest Airlines revenue increased 19.7% to $556.3 million and segment profit increased 26.7% to $52.9 million. ExpressJet revenue decreased 29.5% to $161.1 million and its segment loss widened to $6.6 million from $1.9 million. SkyWest Leasing profit increased 30.7% to $15.6 million.
- Cash flow from investing activities improved to a $100.1 million use from a $248.9 million use in Q1 2017, primarily due to marketable-security activity and lower aircraft-related spending. Financing cash flow declined to $3.8 million from $53.6 million.
- The company adopted ASC Topic 606 using the full retrospective method. The adoption changed revenue and expense classifications and created deferred revenue and capitalized contract costs, but management stated it did not materially affect operating income, net income, EPS or cash flows.
- The effective tax rate declined to 19.1% from 33.6%, reflecting the Tax Cuts and Jobs Act and a $4.3 million discrete benefit from excess tax deductions related to employee equity transactions.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quarterly or full-year earnings guidance. Management expects to continue the fleet transition toward larger dual-class regional jets and away from less profitable 50-seat aircraft.
- SkyWest anticipated placing 10 additional E175 aircraft with Alaska and 27 E175/E175 SC aircraft with Delta, generally by the end of 2018 or early 2019, with three Alaska aircraft deferred to 2021. Final delivery dates may change.
- The company had firm commitments for 37 E175/E175 SC aircraft. Total disclosed commitments and obligations were $4.92 billion, including $2.80 billion of debt principal, $979.3 million of aircraft and spare-engine commitments, $600.6 million of operating lease payments and $538.0 million of interest commitments.
- Key risks include dependence on major airline partners and their financial condition, changes in schedules or code-share contracts, contract rate resets and incentive payments, pilot availability and labor costs, fuel prices, weather, residual aircraft values, aircraft financing and substantial lease and debt obligations.
- A hypothetical 25% increase in prorate fuel prices would have increased quarterly fuel expense by approximately $6.7 million. A one-percentage-point increase in variable-rate debt costs would have increased quarterly interest expense by approximately $0.2 million.
- Topic 842 lease accounting is scheduled to become effective in the first quarter of 2019 and is expected to significantly affect the balance sheet, although management did not expect a significant impact on lease-expense recognition or cash flows.
- Routine legal proceedings were not expected to have a material adverse effect. The company had $87.9 million of letters of credit and surety bonds outstanding.
Investor verification points
- Verify the sustainability of revenue and margin gains as the fleet shifts toward E175 aircraft and ExpressJet continues to contract.
- Review the timing, financing and economics of the 37 committed E175/E175 SC aircraft and related debt service.
- Assess exposure to United, Delta, American and Alaska, including contract expirations, removals and renegotiation or reimbursement risks.
- Reconcile the ASC 606 recast presentation and monitor deferred revenue and capitalized contract-cost balances.
- Track fuel prices and prorate flying exposure, pilot and crew compensation, Power-by-the-Hour maintenance costs and aircraft residual values.
- Evaluate liquidity against $4.92 billion of disclosed commitments, including $250.7 million of debt principal maturities during the remainder of 2018 and $340.5 million in 2019.
- Confirm the provisional Tax Act accounting, including the unresolved treatment of $13.9 million of alternative minimum tax credits.