SkyWest, Inc. 2016 Form 10-K Summary
Business context and reporting period
SkyWest, Inc. operates SkyWest Airlines and ExpressJet, providing regional passenger service primarily under fixed-fee code-share agreements with United, Delta, American and Alaska. The filing covers the fiscal year ended December 31, 2016; fourth-quarter results are included but this is an annual Form 10-K, not a standalone quarterly filing.
- Approximately 3,160 daily departures and 652 aircraft in scheduled service at year-end.
- Approximately 86.9% of passenger revenue came from fixed-fee contract flying; approximately 13% came from prorate arrangements.
- United and Delta represented approximately 85.4% of total revenue combined.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $3.121 billion | $3.096 billion | +0.8% |
| Operating income (loss) | $(172.7) million | $234.5 million | Decline |
| Net income (loss) | $(161.6) million | $117.8 million | Decline |
| Diluted EPS | $(3.14) | $2.27 | Decline |
| Total operating expenses | $3.294 billion | $2.861 billion | +15.1% |
| Operating margin | (5.5%) | 7.6% | Down 13.1 points |
| Passenger load factor | 82.1% | 82.6% | Down 0.5 points |
| Revenue per available seat mile | 9.2 cents | 8.6 cents | +7.0% |
| Cost per available seat mile | 9.9 cents | 8.2 cents | +20.7% |
Cash flow from operations was $506.7 million, compared with $417.3 million in 2015. Investing cash flow was $(1.177) billion, primarily reflecting purchases of 41 E175 aircraft and marketable securities. Financing cash flow was $614.1 million, including $926.1 million of new long-term debt related to the E175 acquisitions.
- Cash and cash equivalents: $146.8 million.
- Marketable securities: $409.9 million; total cash, restricted cash and marketable securities: $564.9 million.
- Long-term debt obligations: approximately $2.6 billion, including $308.9 million of 2017 principal maturities.
- Operating lease commitments: $954.8 million, with an estimated present value of approximately $795.1 million.
- Revolving credit facility: $75 million, with $68.5 million available after letters of credit.
- Stockholders’ equity: $1.351 billion, down from $1.506 billion.
- Cash dividends declared increased to $0.19 per share from $0.16 per share in 2015.
Material changes versus the prior comparable period
- Revenue was broadly stable, but operating expenses rose sharply, producing an operating loss and net loss.
- Results included a $465.6 million non-cash special charge, principally related to impairment and inventory write-downs for 50-seat aircraft and related assets. The charge included $424.5 million of CRJ200-related items and $41.2 million of ERJ145-related items, net of Bombardier-related consideration.
- SkyWest Airlines segment profit fell to $23.0 million from $182.0 million, including $184.3 million of special items. Excluding those items, management stated that segment profitability improved by $34.6 million.
- ExpressJet reported a $301.5 million segment loss versus a $34.2 million loss, including $281.4 million of special items. Excluding those items, management stated that ExpressJet profitability improved by $20.9 million.
- SkyWest Leasing segment profit increased to $27.7 million from $10.9 million, driven primarily by additional E175 ownership revenue.
- Block hours declined 6.6%, departures declined 6.0%, passengers carried declined 4.8%, and available seat miles declined 5.0%.
- The fleet shifted toward newer E175 aircraft: 41 E175s were added, while 49 aircraft were removed from service. E175s in service increased from 45 to 86.
- Fuel expense increased 3.5% to $122.3 million, but the average fuel price declined to $1.70 per gallon from $2.09.
Guidance, outlook, risks and unusual items
- Management expected to place 18 additional E175 aircraft into service during 2017, including seven with United, five with Alaska and six with Delta. The E175 fleet was expected to reach approximately 104 aircraft by year-end 2017.
- Management expected to remove approximately 46 CRJ200 aircraft and approximately 59 ERJ145/135 aircraft during 2017. ExpressJet was expected to transition toward primarily dual-class CRJ aircraft.
- The company anticipated fleet-transition inefficiencies, employee relocation costs, facility underutilization and other cash or non-cash expenses during 2017.
- United’s ERJ agreement had an average remaining term of approximately 0.9 years and was scheduled to expire for relevant aircraft during 2017, subject to extension rights. Several American and other aircraft contracts also had scheduled expirations beginning in 2017.
- In December 2016, SkyWest terminated residual value guarantee agreements covering 76 CRJ200 aircraft in exchange for cash and other consideration valued at $125 million, accelerating the retirement of the CRJ200 fleet.
- Key risks include dependence on United and Delta, contract termination or rate pressure, reduced regional aircraft utilization, pilot shortages, labor costs and disputes, fleet residual values, aircraft lease and debt obligations, weather and hub disruptions, fuel costs on prorate flying, regulatory requirements and competition.
- Approximately 36.8% of operating costs were salary, wage and benefit costs; approximately 33.4% of employees were union-represented, while SkyWest Airlines employees were not unionized as of year-end.
- Management stated that available working capital and projected operating cash flow should meet present requirements, planned capital expenditures, lease payments and debt service for at least the next 12 months, absent unusual circumstances.
- The company had routine legal matters and reported that management did not expect them to have a material adverse effect. Internal controls received effective assessments and the independent auditor issued unqualified opinions.
Most important facts for investors to verify
- Whether the planned CRJ200 and ERJ145/135 retirements improve profitability without creating material transition, lease-return or impairment costs.
- The renewal, extension or replacement of contracts expiring in 2017, particularly ExpressJet’s United ERJ agreement and American CRJ200 arrangements.
- United and Delta concentration, including the approximately 85.4% combined revenue exposure and the 561 aircraft associated with those partners.
- Cash generation after E175 capital expenditures, debt service, lease payments and the remaining $548.4 million of firm aircraft and spare-engine commitments.
- The sustainability of operating cash flow excluding the benefit of the $465.6 million non-cash impairment adjustment.
- Debt maturities, variable-rate exposure and the effect of bringing approximately $954.8 million of operating lease commitments onto the balance sheet under the then-pending lease accounting standard.
- Potential changes in revenue presentation from adoption of the new revenue recognition standard, particularly for directly reimbursed fuel and other expenses.