SkyWest, Inc. 2017 Form 10-K Summary
Business context and reporting period
SkyWest, Inc. reported for the fiscal year ended December 31, 2017. Through SkyWest Airlines and ExpressJet, the company operated approximately 2,980 daily regional departures under code-share and capacity-purchase agreements with United, Delta, American and Alaska. Approximately 87.8% of passenger revenue came from fixed-fee contract flying, with the remainder from prorate arrangements.
The company had 595 aircraft in scheduled service and 623 aircraft in its total fleet at year-end, served approximately 51.5 million passengers during 2017, and employed approximately 16,300 full-time equivalent employees. United and Delta together represented approximately 78.8% of total revenue.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $3.204 billion | $3.121 billion | +2.7% |
| Operating income | $388.2 million | $(172.7) million | Improved $560.9 million |
| Operating margin | 12.1% | (5.5%) | Improved |
| Net income | $428.9 million | $(161.6) million | Improved $590.5 million |
| Diluted EPS | $8.08 | $(3.14) | Improved |
| Cash flow from operations | $684.1 million | $506.7 million | +35.0% |
| Cash and marketable securities | $685.3 million | $564.9 million | +21.3% |
| Long-term debt obligations | $2.712 billion | $2.571 billion | +5.5% |
Net margin was approximately 13.4%, although 2017 net income included a $246.8 million tax benefit from revaluing deferred tax liabilities following the Tax Cuts and Jobs Act. Excluding this benefit, reported profitability would have been materially lower. The filing states that management estimated a 2018 effective tax rate generally between 24% and 25% before discrete tax items.
Total operating expenses were $2.816 billion, down 14.5%. Salaries, wages and benefits were $1.196 billion, aircraft maintenance was $579.5 million, depreciation and amortization was $292.8 million, aircraft rentals were $215.8 million, and fuel expense was $162.7 million. Interest expense increased 34.2% to $104.9 million, primarily due to debt financing for new E175 aircraft.
At year-end, current assets were $995.1 million and current liabilities were $820.8 million. Cash and cash equivalents were $181.8 million, while marketable securities were $503.5 million. The company had $2.377 billion of long-term debt net of current maturities, with an average effective interest rate of approximately 3.9%. It also had $716.8 million of future operating lease payments, including $142.2 million due in 2018.
The company generated $684.1 million of operating cash flow, used $751.3 million in investing activities and generated $102.2 million from financing activities. Capital expenditures, including non-cash amounts, were $689.4 million, primarily for aircraft and related assets.
Material changes versus the prior comparable period
- Revenue increased despite an 8.7% reduction in aircraft in scheduled service, a 5.1% decline in block hours, a 5.8% decline in departures and a 3.8% decline in passengers carried.
- The company added 21 E175 aircraft and removed 78 aircraft, including 47 ERJ145s, 18 CRJ200s, 12 CRJ900s and one CRJ700. The fleet strategy focused on adding newer aircraft under improved fixed-fee contracts and removing less profitable or unprofitable flying.
- Operating results benefited from the absence of the $465.6 million non-cash impairment and inventory-related special charge recorded in 2016 for 50-seat aircraft and related assets. No comparable impairment charge was recorded in 2017.
- SkyWest Airlines segment profit rose to $263.3 million from $23.0 million, while ExpressJet’s segment loss narrowed to $32.5 million from $301.5 million. SkyWest Leasing segment profit increased to $52.5 million from $27.7 million.
- Aircraft rentals declined 17.8% as leased aircraft decreased from 415 to 319. Fuel expense increased 33.0%, reflecting higher fuel prices and greater purchased fuel volume, although most fuel costs under fixed-fee contracts were reimbursed by major airline partners.
- Interest expense increased by $26.7 million as the company financed new E175 aircraft. Long-term debt increased by approximately $141.4 million.
- The quarterly pattern was uneven: fourth-quarter 2017 net income was $289.9 million, primarily reflecting the $246.8 million tax benefit.
Guidance, outlook, commentary, risks and unusual items
- Management expected to add 42 E175/E175 SC aircraft to existing fixed-fee contracts by the end of 2018 or early 2019, including 12 aircraft for Alaska and 30 for Delta. The company had firm purchase commitments for these 42 aircraft totaling approximately $1.098 billion.
- The E175/E175 SC fleet was expected to increase to approximately 149 aircraft by the end of 2018 or early 2019. Management expected the ERJ145/135 fleet to decline to approximately 100 aircraft by the end of 2018.
- ExpressJet and Delta initiated a wind-down of their Delta Connection Agreement, expected to be completed by the end of 2018. ExpressJet expected to return 19 leased aircraft to Delta and remove 30 CRJ700 aircraft from Delta service; eight of those aircraft were expected to transition to American. Transition costs, underutilized facilities and difficulty placing the remaining aircraft could pressure 2018 results.
- Major risks include dependence on United and Delta, pilot shortages and rising labor costs, contract expirations, aircraft financing and lease commitments, fleet residual values, maintenance costs, adverse weather, fuel prices on prorate operations, regulatory requirements and the financial condition or strategic decisions of major airline partners.
- Approximately 42.5% of code-share operating costs were labor-related, and salaries, wages and benefits represented approximately 42.5% of total operating costs. Approximately 22% of employees were represented by unions, with several ExpressJet labor groups amendable in 2018 or later.
- The company had a $75 million line of credit, with $14.8 million of letters of credit outstanding and $60.2 million available at year-end. The facility was scheduled to expire June 1, 2018 and included liquidity and profitability covenants.
- Management believed available working capital and projected operating cash flow would satisfy present requirements, planned capital expenditures, lease payments and debt service for at least the following 12 months, absent unusual circumstances.
- Legal matters were described as routine and not likely to have a material adverse effect. Internal controls over financial reporting received an unqualified assessment from management and the independent auditor.
- The company adopted new share-based compensation guidance in 2017 and recorded a $5.4 million tax benefit from excess tax benefits. Revenue recognition guidance was scheduled for adoption in 2018, primarily changing the presentation of directly reimbursed fuel costs from gross revenue to a reduction of operating expense. New lease accounting guidance was expected to affect the balance sheet beginning in 2019.
Most important facts an investor should verify
- Reconcile reported 2017 net income and EPS for the $246.8 million provisional tax benefit and assess normalized earnings.
- Review the sustainability of improved profitability after excluding the 2016 impairment charge and considering higher labor, maintenance and interest costs.
- Track renewal, transition or termination outcomes for aircraft contracts expiring in 2018 and 2019, especially the ExpressJet-Delta wind-down.
- Assess whether the 42 committed E175/E175 SC aircraft receive timely placements and generate expected fixed-fee economics.
- Evaluate concentration risk from United and Delta, which together accounted for approximately 78.8% of 2017 revenue.
- Monitor pilot availability, union negotiations, labor costs and operational performance metrics that can affect contract incentives or termination rights.
- Review debt maturities, aircraft lease obligations, the 2018 credit-facility expiration and funding needs for committed aircraft purchases.
- Assess the impact of new revenue and lease accounting standards on reported revenue presentation, assets, liabilities and comparability.