ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three and nine-month periods ended September 30, 2018 and 2017. Also discussed is our financial condition as of September 30, 2018 and December 31, 2017. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2018, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of uncertainties, risks and assumptions associated with these statements.
Cautionary Statement Concerning Forward-Looking Statements
Certain of the statements contained in this Report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements about the expected delivery, and removal from service and/or placement into service, of certain aircraft, our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines, Inc. (“ExpressJet”), our objectives, expectations, estimates, intentions and other statements that are not historical facts. All forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on the operations of SkyWest, SkyWest Airlines or ExpressJet; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest’s operating airlines conduct flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; residual aircraft values and related impairment charges; the impact of global instability; labor relations and costs; potential fluctuations in fuel costs, and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; the ability to attract and retain qualified pilots; the other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors.
There may be other factors not identified above of which we are not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by law.
Overview
Through SkyWest Airlines and ExpressJet, we have the largest regional airline operations in the United States. As of September 30, 2018, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 2,800 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of September 30, 2018, SkyWest Airlines and ExpressJet had a total fleet of 625 aircraft, of which 574 were in scheduled service, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRJ200
|
|
CRJ700
|
|
CRJ900
|
|
ERJ145
|
|
E175
|
|
Total
|
|
United
|
|
84
|
|
19
|
|
—
|
|
100
|
|
65
|
|
268
|
|
Delta
|
|
94
|
|
37
|
|
37
|
|
—
|
|
41
|
|
209
|
|
American
|
|
7
|
|
58
|
|
—
|
|
—
|
|
—
|
|
65
|
|
Alaska
|
|
—
|
|
—
|
|
—
|
|
—
|
|
32
|
|
32
|
|
Aircraft in scheduled service
|
|
185
|
|
114
|
|
37
|
|
100
|
|
138
|
|
574
|
|
Subleased to an un-affiliated entity
|
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
Other*
|
|
19
|
|
15
|
|
—
|
|
13
|
|
—
|
|
47
|
|
Total
|
|
208
|
|
129
|
|
37
|
|
113
|
|
138
|
|
625
|
|
*As of September 30, 2018, these aircraft have been removed from service and are in the process of being returned under the applicable leasing arrangement or are aircraft transitioning between code-share agreements with our major airline partners.
As of September 30, 2018, approximately 46.7% of our aircraft in scheduled service operated for United, approximately 36.4% was operated for Delta, approximately 11.3% was operated for American and approximately 5.6% was operated for Alaska.
Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements, typically in the form of fixed-fee arrangements or prorate arrangements, each as defined below, between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners. Our success is principally centered on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics.
Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee contracts,” “contract flying arrangements” or “capacity purchase agreements”) and revenue-sharing arrangements (referred to as “prorate” arrangements). For the nine months ended September 30, 2018, contract flying revenue and prorate revenue represented approximately 84.3% and 15.7%, respectively, of our total flying agreements revenue. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures and other operating measures. On prorate routes, our revenue may fluctuate based on ticket prices and passenger loads and we are responsible for all costs to operate the flight, including fuel.
Third Quarter Summary
Our total operating revenues of $829.3 million for the three months ended September 30, 2018 increased 2.0% compared to total operating revenues of $812.7 million for the three months ended September 30, 2017. We had net income of $83.0 million, or $1.57 per diluted share, for the three months ended September 30, 2018, compared to net income of $53.7 million, or $1.01 per diluted share, for the three months ended September 30, 2017.
Significant items affecting our financial performance during the three months ended September 30, 2018 are outlined below:
Revenue
The number of aircraft we have under contract and the number of actual block hours we incur on completed flights are significant revenue drivers under our fixed-fee arrangements. We are currently in the process of a fleet transition that involves increasing the number of large dual-class regional jets we operate, including the Embraer E175 dual-class regional jet aircraft (“E175s”), while reducing the number of less profitable jets we operate, including a portion of our Embraer ERJ145 regional jet aircraft (“ERJ145s”), Embraer ERJ135 regional jet aircraft (“ERJ135s”) and Canadair CRJ200 regional jet aircraft (“CRJ200s”). Additionally, during the nine months ended September 30, 2018, we completed the process of returning Canadair CRJ900 regional jet aircraft (“CRJ900s”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) operated by ExpressJet under a fixed-fee contract and aircraft lease with Delta. Our objective in the fleet transition is to improve our profitability through the addition of new dual class aircraft, while removing aircraft from service that have been operating under unprofitable or less profitable fixed-fee contracts.
Although the number of our aircraft operating in scheduled service decreased by 5.0% since September 30, 2017, and we had a 4.7% reduction in our block hour production since September 30, 2017, our total revenues increased $16.6 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase in revenue, despite the decrease in fleet size and block hour production, was primarily driven by the increase in revenue from 34 new E175 aircraft added to flying arrangements since September 30, 2017, significantly offset by the removal of 65 CRJ200s, ERJ145s, CRJ700s and CRJ900s with a lower revenue per aircraft during the same time period.
Operating Expenses
Our total operating expenses decreased $9.0 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. This decrease was primarily due to a net reduction in our fleet size and related level of departures and block hours, partially offset by an increase in our average fuel cost per gallon on our prorate flying and an increase in engine maintenance costs as an increased percentage of our fleet is under long-term Power-By-The-Hour engine maintenance agreements. “Power-By-The-Hour” agreements are agreements between us and a third-party vendor, pursuant to which we pay the third-party vendor a set dollar amount per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no additional cost, subject to certain specified exclusions. Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”
Fleet activity
The following table summarizes our fleet scheduled for service as of September 30, 2018 and 2017:
|
|
|
|
|
|
Aircraft in Service
|
|
September 30, 2018
|
|
September 30, 2017
|
|
CRJ200s
|
|
185
|
|
191
|
|
CRJ700s
|
|
114
|
|
131
|
|
CRJ900s
|
|
37
|
|
60
|
|
ERJ145/135s
|
|
100
|
|
118
|
|
E175s
|
|
138
|
|
104
|
|
Total
|
|
574
|
|
604
|
|
Changes in our fleet activity from September 30, 2017 to September 30, 2018 are summarized as follows:
|
|
|
|
|
Aircraft available for scheduled service at September 30, 2017:
|
|
|
604
|
|
Additions:
|
|
|
|
|
New E175 aircraft added with Alaska:
|
11
|
|
|
|
New E175 aircraft added with Delta:
|
23
|
|
|
|
New CRJ900 aircraft added with Delta:
|
1
|
|
|
|
New aircraft added to fleet:
|
|
|
35
|
|
Removals, net:
|
|
|
|
|
ERJ145/ERJ135 aircraft removed from service:
|
(18)
|
|
|
|
CRJ200 aircraft removed from service:
|
(6)
|
|
|
|
CRJ700 aircraft removed from service:
|
(17)
|
|
|
|
CRJ900 aircraft removed from service:
|
(24)
|
|
|
|
Total removals, net:
|
|
|
(65)
|
|
|
|
|
|
|
Aircraft available for scheduled service at September 30, 2018:
|
|
|
574
|
|
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2017, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2017. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, maintenance, aircraft leases, impairment of long-lived assets and stock-based compensation expense. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates.
We adopted Topic 606 as of January 1, 2018, utilizing the full retrospective option.
See Note 1 to the condensed consolidated financial statements contained in Part I, Item 1 of this report for additional information.
Recent Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements for a description of recent accounting pronouncements. Certain prior period amounts were reclassified to conform to the current period presentation.
Results of Operations
Three Months Ended September 30, 2018 and 2017
Operational Statistics.
The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below:
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
% Change
|
|
Block hours
|
|
448,025
|
|
469,901
|
|
(4.7)
|
%
|
Departures
|
|
261,382
|
|
281,921
|
|
(7.3)
|
%
|
Passengers carried
|
|
12,812,370
|
|
13,475,674
|
|
(4.9)
|
%
|
Passenger load factor
|
|
82.2
|
%
|
80.0
|
%
|
2.2
|
pts
|
Average passenger trip length (miles)
|
|
519
|
|
503
|
|
3.2
|
%
|
Operating Revenues
The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Flying agreements
|
|
$
|
816,057
|
|
$
|
800,965
|
|
$
|
15,092
|
|
1.9
|
%
|
Airport customer service and other
|
|
|
13,218
|
|
|
11,708
|
|
|
1,510
|
|
12.9
|
%
|
Total operating revenues
|
|
$
|
829,275
|
|
$
|
812,673
|
|
$
|
16,602
|
|
2.0
|
%
|
Flying agreements revenue primarily consists of revenue earned on flights we operate under our capacity purchase agreements and prorate agreements with our major airline partners. Airport customer service and other revenues primarily consist of revenue earned from providing airport counter, gate and ramp services. Changes in our flying agreements revenue are summarized below (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Capacity purchase agreements revenue: flight operations
|
|
$
|
472,952
|
|
$
|
462,832
|
|
$
|
10,120
|
|
2.2
|
%
|
Capacity purchase agreements revenue: aircraft lease revenue
|
|
|
208,813
|
|
|
213,967
|
|
|
(5,154)
|
|
(2.4)
|
%
|
Prorate agreements revenue
|
|
|
134,292
|
|
|
124,166
|
|
|
10,126
|
|
8.2
|
%
|
Flying agreements revenue
|
|
$
|
816,057
|
|
$
|
800,965
|
|
$
|
15,092
|
|
1.9
|
%
|
The increase in “Capacity purchase agreements revenue: flight operations” of $10.1 million was primarily due to incremental revenue generated from 34 new E175 aircraft and one new CRJ900 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since September 30, 2017, partially offset by the timing of the removal of 65 CRJ200, ERJ145/135, CRJ700 and CRJ900 aircraft from flying arrangements with a lower revenue per aircraft since September 30, 2017. The decrease in “Capacity purchase agreement revenue: aircraft lease revenue” of $5.2 million was primarily due to a reduction in aircraft lease revenue under our fixed-fee agreements that resulted from the net reduction of 30 aircraft from our fleet since September 30, 2017. The increase in prorate agreement revenue of $10.1 million was primarily due to the incremental revenue generated from six CRJ200 aircraft added to our prorate agreements and new prorate agreements at improved economics since September 30, 2017.
The $1.5 million increase in airport customer service and other revenues was primarily related to a combination of an increase in volume of airport service agreements and contract rate increases on agreements that were renewed since September 30, 2017.
Operating Expenses
The following table summarizes our operating expenses and interest expense, collectively, “Total airline expense" for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Salaries, wages and benefits
|
|
$
|
301,378
|
|
$
|
304,014
|
|
$
|
(2,636)
|
|
(0.9)
|
%
|
Aircraft maintenance, materials and repairs
|
|
|
142,285
|
|
|
148,787
|
|
|
(6,502)
|
|
(4.4)
|
%
|
Depreciation and amortization
|
|
|
86,088
|
|
|
74,095
|
|
|
11,993
|
|
16.2
|
%
|
Aircraft rentals
|
|
|
36,827
|
|
|
54,976
|
|
|
(18,149)
|
|
(33.0)
|
%
|
Aircraft fuel
|
|
|
30,258
|
|
|
22,791
|
|
|
7,467
|
|
32.8
|
%
|
Airport-related expenses
|
|
|
25,655
|
|
|
30,209
|
|
|
(4,554)
|
|
(15.1)
|
%
|
Other operating expenses
|
|
|
68,859
|
|
|
65,432
|
|
|
3,427
|
|
5.2
|
%
|
Total operating expenses
|
|
$
|
691,350
|
|
$
|
700,304
|
|
$
|
(8,954)
|
|
(1.3)
|
%
|
Interest expense
|
|
|
31,440
|
|
|
27,101
|
|
|
4,339
|
|
16.0
|
%
|
Total airline expenses
|
|
$
|
722,790
|
|
$
|
727,405
|
|
$
|
(4,615)
|
|
(0.6)
|
%
|
Salaries, wages and benefits.
The $2.6 million decrease in salaries, wages and benefits was primarily due to a decrease in direct labor costs resulting from a net reduction in our fleet size and related level of departures and block hours partially offset by increased labor costs and employee benefit costs for certain work groups, including flight crews.
Aircraft maintenance, materials and repairs.
The $6.5 million decrease in aircraft maintenance expense was primarily due to a decrease in direct maintenance costs that corresponds with our net decrease in fleet size and block hour reduction of 6.0% and a decrease in the number of maintenance events during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. This decrease in aircraft maintenance expense was partially offset by an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 34 E175 aircraft added since September 2017.
Depreciation and amortization.
The $12.0 million increase in depreciation and amortization expense was primarily due to the purchase of 34 E175 aircraft and spare engines subsequent to September 30, 2017, which was partially offset by a reduction of less profitable owned aircraft and related depreciation during the same period.
Aircraft rentals.
The $18.1 million decrease in aircraft rentals was primarily due to a reduction of our fleet size that was financed through leases subsequent to September 30, 2017.
Aircraft Fuel.
The $7.5 million increase in fuel cost was primarily due to an increase in our average fuel cost per gallon from $2.06 for the three months ended September 30, 2017 to $2.69 for the three months ended September 30, 2018. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our fixed-fee contracts are either purchased directly by our major airline partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
% Change
|
|
Fuel gallons purchased
|
|
|
11,245
|
|
|
11,085
|
|
1.4
|
%
|
Fuel expense
|
|
$
|
30,258
|
|
$
|
22,791
|
|
32.8
|
%
|
Airport-related expenses.
Airport-related expenses include airport-related customer service costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents (our employee customer service labor costs are reflected in salaries, wages and benefits). The $4.6 million decrease in airport-related expenses was primarily due to a decrease in airport terminal rents during the three months ended September 30, 2018.
Other operating expenses.
Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, and crew hotel costs. The $3.4 million increase in other operating expenses was primarily related to an increase in hotel room rates, an increase in the use of hotels for crew trainings and property tax on additional aircraft added since September 30, 2017, which was partially offset by the decrease in fleet size and other operating costs that resulted from the reduction in departures.
Interest Expense.
The $4.3 million increase in interest expense was primarily related to the additional interest expense associated with the 34 E175 aircraft added to our fleet since September 30, 2017, which were debt financed.
Total airline expenses.
The $4.6 million decrease in total airline expenses was primarily related to a reduction in fleet size and related block hour production of 4.7% during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, partially offset by an increase in our average fuel cost per gallon incurred under our prorate agreements and an increase in engine maintenance costs as an increased percentage of our fleet is under long-term, Power-By-The-Hour engine maintenance agreements.
Summary of interest income, other income (expense) and provision for income taxes:
Interest income.
Interest income increased $0.9 million, or 62.1%, during the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase in interest income was primarily related to an increase in interest rates subsequent to September 30, 2017.
Other income (expense).
During the three months ended September 30, 2018, we had other income of $1.2 million primarily related to a gain on the sale of excess rotable spare parts sold during the three months ended September 30, 2018.
Income taxes.
Our provision for income taxes was 24.5% and 38.0% for the three months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate primarily relates to the Tax Cuts and Jobs Act of 2017 which reduced the federal statutory rate from 35% to 21%.
Net income.
Primarily due to the factors described above, we generated net income of $83.0 million, or $1.57 per diluted share, for the three months ended September 30, 2018, compared to net income of $53.7 million, or $1.01 per diluted share, for the three months ended September 30, 2017.
Nine Months Ended September 30, 2018 and 2017
Operational Statistics.
The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below:
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
% Change
|
|
Block hours
|
|
1,323,566
|
|
1,389,684
|
|
(4.8)
|
%
|
Departures
|
|
765,070
|
|
826,109
|
|
(7.4)
|
%
|
Passengers carried
|
|
36,472,231
|
|
38,861,025
|
|
(6.1)
|
%
|
Passenger load factor
|
|
80.5
|
%
|
80.2
|
%
|
0.3
|
pts
|
Average passenger trip length (miles)
|
|
522
|
|
511
|
|
2.2
|
%
|
Operating Revenues
The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Flying agreements
|
|
$
|
2,377,659
|
|
$
|
2,317,218
|
|
$
|
60,441
|
|
2.6
|
%
|
Airport customer service and other
|
|
|
40,531
|
|
|
34,133
|
|
|
6,398
|
|
18.7
|
%
|
Total operating revenues
|
|
$
|
2,418,190
|
|
$
|
2,351,351
|
|
$
|
66,839
|
|
2.8
|
%
|
Changes in our flying agreements revenue are summarized below (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Capacity purchase agreements revenue: flight operations
|
|
$
|
1,404,801
|
|
$
|
1,367,901
|
|
$
|
36,900
|
|
2.7
|
%
|
Capacity purchase agreements revenue: aircraft lease revenue
|
|
|
599,188
|
|
|
621,099
|
|
|
(21,911)
|
|
(3.5)
|
%
|
Prorate agreements revenue
|
|
|
373,670
|
|
|
328,218
|
|
|
45,452
|
|
13.8
|
%
|
Flying agreements revenue
|
|
$
|
2,377,659
|
|
$
|
2,317,218
|
|
$
|
60,441
|
|
2.6
|
%
|
The increase in “Capacity purchase agreements revenue: flight operations” of $36.9 million was primarily due to incremental revenue generated from 34 new E175 aircraft and one new CRJ900 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since September 30, 2017, partially offset by the timing of the removal of 65 CRJ200, ERJ145/135, CRJ700 and CRJ900 aircraft from flying arrangements with a lower revenue per aircraft since September 30, 2017. The decrease in “Capacity purchase agreement revenue: aircraft lease
revenue” of $21.9 million was primarily due to a reduction in aircraft lease revenue under our fixed-fee agreements that resulted from the net reduction of 30 aircraft from our fleet since September 30, 2017. The increase in prorate agreement revenue of $45.5 million was primarily due to the incremental revenue generated from six CRJ200 aircraft added to our prorate agreements and other economic improvements made to certain prorate agreements since September 30, 2017.
The $6.4 million increase in airport customer service and other revenues was primarily related to a combination of an increase in volume of airport service agreements and contract rate increases on agreements that were renewed since September 30, 2017.
Operating Expenses
The following table summarizes our operating expenses and interest expense, collectively, “Total airline expense" for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
Salaries, wages and benefits
|
|
$
|
901,775
|
|
$
|
896,476
|
|
$
|
5,299
|
|
0.6
|
%
|
|
Aircraft maintenance, materials and repairs
|
|
|
423,665
|
|
|
433,467
|
|
|
(9,802)
|
|
(2.3)
|
%
|
|
Depreciation and amortization
|
|
|
246,386
|
|
|
215,415
|
|
|
30,971
|
|
14.4
|
%
|
|
Aircraft rentals
|
|
|
119,015
|
|
|
168,098
|
|
|
(49,083)
|
|
(29.2)
|
%
|
|
Aircraft fuel
|
|
|
87,208
|
|
|
61,295
|
|
|
25,913
|
|
42.3
|
%
|
|
Airport-related expenses
|
|
|
80,852
|
|
|
91,106
|
|
|
(10,254)
|
|
(11.3)
|
%
|
|
Other operating expenses
|
|
|
206,511
|
|
|
190,235
|
|
|
16,276
|
|
8.6
|
%
|
|
Total operating expenses
|
|
$
|
2,065,412
|
|
$
|
2,056,092
|
|
$
|
9,320
|
|
0.5
|
%
|
|
Interest expense
|
|
|
86,485
|
|
|
78,713
|
|
|
7,772
|
|
9.9
|
%
|
|
Total airline expenses
|
|
$
|
2,151,897
|
|
$
|
2,134,805
|
|
$
|
17,092
|
|
0.8
|
%
|
|
Salaries, wages and benefits.
The $5.3 million increase in salaries, wages and benefits was primarily due to higher flight crew compensation costs resulting from labor agreements executed during the second half of 2017, which was partially offset by a decrease in direct labor costs resulting from a net reduction in our fleet size and related level of departures and block hours.
Aircraft maintenance, materials and repairs.
The $9.8 million decrease in aircraft maintenance expense was primarily due to a decrease in direct maintenance costs that corresponds with our net decrease in fleet size and block hour reduction of 4.8% during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, which was partially offset by an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 34 E175 aircraft added since September 2017.
Depreciation and amortization.
The $31.0 million increase in depreciation and amortization expense was primarily due to the purchase of 34 E175 aircraft and spare engines subsequent to September 30, 2017, which was partially offset by a reduction of less profitable owned aircraft and related depreciation during the same period.
Aircraft rentals.
The $49.1 million decrease in aircraft rentals was primarily due to a reduction of our fleet size that was financed through leases subsequent to September 30, 2017.
Aircraft Fuel.
The $25.9 million increase in fuel cost was primarily due to an increase in the number of prorate flights we operated and the corresponding additional gallons of fuel we purchased along with an increase in our average fuel cost per gallon from $2.00 for the nine months ended September 30, 2017 to $2.58 for the nine months ended September 30, 2018. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our fixed-fee contracts are either purchased directly by our major airline partner, or if
purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
% Change
|
|
Fuel gallons purchased
|
|
|
33,858
|
|
|
30,628
|
|
10.5
|
%
|
Fuel expense
|
|
$
|
87,208
|
|
$
|
61,295
|
|
42.3
|
%
|
Airport-related expenses.
The $10.3 million decrease in airport-related expenses was primarily due to a decrease in airport terminal rents and an increase in terminal rents being directly paid for by our major airline partners under fixed-fee agreements during the nine months ended September 30, 2018.
Other operating expenses.
The $16.3 million increase in other operating expenses was primarily related to an increase in hotel room rates, an increase in the use of hotels for crew trainings and property tax on additional aircraft added since September 30, 2017, which was partially offset by the decrease in fleet size and other operating costs that resulted from the reduction in departures.
Interest Expense.
The $7.8 million increase in interest expense was primarily related to the additional interest expense associated with the 34 E175 aircraft added to our fleet since September 30, 2017 which were debt financed.
Total airline expense.
The $17.1 million increase in total airline expenses was primarily related to an increase in our average fuel cost per gallon incurred under our prorate agreements, an increase in flight crew compensation costs and an increase in engine maintenance costs as an increased percentage of our fleet is under long-term Power-By-The-Hour engine maintenance agreements, partially offset by a reduction in fleet size and related block hour production of 4.8% during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
Summary of interest income, other income (expense) and provision for income taxes:
Interest income.
Interest income increased $2.3 million, or 67.5%, during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase in interest income was primarily related to an increase in interest rates subsequent to September 30, 2017.
Other Income, net.
During the nine months ended September 30, 2018, we had other income of $3.4 million primarily related to a mark-to-market gain on trading securities and excess rotable spare parts sold during the nine months ended September 30, 2018.
Income taxes.
Our provision for income taxes was 22.6% and 36.8% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate relates to the Tax Cuts and Jobs Act of 2017 which reduced the federal statutory rate from 35% to 21%, a year-over-year increase in the discrete tax benefit from excess tax deductions generated from employee equity transactions, and a 2018 discrete tax benefit from a release of capital loss carryforward valuation allowance. Multiple variables may impact the future tax benefit from excess tax deductions generated from employee equity transactions including changes in our stock price, timing of employee stock option exercises and timing of restricted share vesting, among other factors.
Net income.
Primarily due to the factors described above, we generated net income of $213.3 million, or $4.03 per diluted share, for the nine months ended September 30, 2018, compared to net income of $139.0 million, or $2.62 per diluted share, for the nine months ended September 30, 2017.
Our Business Segments
Three Months Ended September 30, 2018 and 2017
For the three months ended September 30, 2018 and 2017, we had three reportable segments which are the basis of our internal financial reporting: SkyWest Airlines, ExpressJet and SkyWest Leasing. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief
operating decision maker. Our operating segments consist of SkyWest Airlines, ExpressJet and SkyWest Leasing. Corporate overhead expense is allocated to the operating expenses of SkyWest Airlines and ExpressJet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines operating revenue
|
|
$
|
607,052
|
|
$
|
558,994
|
|
$
|
48,058
|
|
8.6
|
%
|
ExpressJet operating revenues
|
|
|
140,155
|
|
|
191,368
|
|
|
(51,213)
|
|
(26.8)
|
%
|
SkyWest Leasing operating revenues
|
|
|
82,068
|
|
|
62,311
|
|
|
19,757
|
|
31.7
|
%
|
Total Operating Revenues
|
|
$
|
829,275
|
|
$
|
812,673
|
|
$
|
16,602
|
|
2.0
|
%
|
Airline Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines airline expense
|
|
$
|
516,322
|
|
$
|
477,276
|
|
$
|
39,046
|
|
8.2
|
%
|
ExpressJet airline expense
|
|
|
140,385
|
|
|
201,361
|
|
|
(60,976)
|
|
(30.3)
|
%
|
SkyWest Leasing airline expense
|
|
|
66,083
|
|
|
48,768
|
|
|
17,315
|
|
35.5
|
%
|
Total Airline Expense (1)
|
|
$
|
722,790
|
|
$
|
727,405
|
|
$
|
(4,615)
|
|
(0.6)
|
%
|
Segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines segment profit
|
|
$
|
90,730
|
|
$
|
81,718
|
|
$
|
9,012
|
|
11.0
|
%
|
ExpressJet segment loss
|
|
|
(230)
|
|
|
(9,993)
|
|
|
9,763
|
|
(97.7)
|
%
|
SkyWest Leasing profit
|
|
|
15,985
|
|
|
13,543
|
|
|
2,442
|
|
18.0
|
%
|
Total Segment Profit
|
|
$
|
106,485
|
|
$
|
85,268
|
|
$
|
21,217
|
|
24.9
|
%
|
Interest Income and other income
|
|
|
2,283
|
|
|
1,408
|
|
|
875
|
|
62.1
|
%
|
Other Income (Expense), net
|
|
|
1,157
|
|
|
—
|
|
|
1,157
|
|
*
|
|
Consolidated Income Before Taxes
|
|
$
|
109,925
|
|
$
|
86,676
|
|
$
|
23,249
|
|
26.8
|
%
|
|
(1)
|
|
Total Airline Expense includes operating expense and interest expense
|
* is not measurable
SkyWest Airlines Segment Profit.
SkyWest Airlines block hour production increased to 355,264, or 8.8%, for the three months ended September 30, 2018, from 326,608 for the three months ended September 30, 2017, primarily due to the additional block hour production from 34 new E175 aircraft added subsequent to September 30, 2017. Significant items contributing to the SkyWest Airlines segment profit are set forth below.
The $48.1 million, or 8.6%, increase in SkyWest Airlines Operating Revenues for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily due to revenue associated with 34 additional E175 aircraft subsequent to September 30, 2017.
The $39.0 million, or 8.2%, increase in SkyWest Airlines Airline Expense for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily due to the following factors:
|
·
|
|
SkyWest Airlines’ salaries, wages and benefits expense increased by $23.2 million, or 11.8%, primarily due to the additional block hour production.
|
|
·
|
|
SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $3.9 million, or 3.8%, primarily attributable to direct maintenance costs related to the increased volume of block hours along with an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 34 E175 aircraft added since September 2017, partially offset by a decrease in the number of maintenance events during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.
|
|
·
|
|
SkyWest Airlines’ fuel expense increased $7.5 million, or 32.8%, primarily due to an increase in the average fuel cost per gallon in 2018 compared to 2017. The average fuel cost per gallon was $2.69 and $2.06 for the three months ended September 30, 2018 and 2017, respectively.
|
|
·
|
|
SkyWest Airlines’ other operating expense increased $6.0 million, or 22.9%, primarily due to an increase in the use of hotels for crews, property taxes on additional aircraft added since September 30, 2017 and an increase in direct operating costs associated with the increase in block hour production year-over-year.
|
ExpressJet Segment Loss.
ExpressJet’s block hour production decreased to 92,761, or 35.3%, for the three months ended September 30, 2018, from 143,293 for the three months ended September 30, 2017, primarily due to the reduction in fleet size. Significant items contributing to the ExpressJet segment loss are set forth below.
The $51.2 million, or 26.8%, decrease in ExpressJet Operating Revenues for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily due to a reduction in block hour production due to a reduced fleet size since September 30, 2017.
The $61.0 million, or 30.3%, decrease in ExpressJet Airline Expense for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, was primarily due to the following factors:
|
·
|
|
ExpressJet’s salaries, wages and benefits expense decreased $25.9 million, or 24.3%, primarily due to a reduction in direct labor costs associated with 35.3% fewer block hours produced year-over-year.
|
|
·
|
|
ExpressJet’s aircraft maintenance, materials and repairs expense decreased $11.4 million, or 25.0%, primarily due to the decrease in fleet size subsequent to September 30, 2017.
|
|
·
|
|
ExpressJet’s aircraft rental expenses decreased $8.1 million, or 83.8%, primarily due to a reduction of ExpressJet’s fleet size that was financed through leases subsequent to September 30, 2017.
|
|
·
|
|
ExpressJet’s airport-related expenses decreased $4.3 million, or 80.6%, primarily due to a reduction in station rents since September 30, 2017.
|
|
·
|
|
ExpressJet’s other operating expense decreased $6.9 million, or 33.9%, primarily due to a decrease in direct operating costs associated with a 35.3% reduction in block hour production year-over-year.
|
SkyWest Leasing Segment Profit.
SkyWest Leasing profit increased $2.4 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017, primarily due to 34 E175 aircraft added to our fleet subsequent to September 30, 2017.
Nine Months Ended September 30, 2018 and 2017
For the nine months ended September 30, 2018 and 2017, we had three reportable segments which are the basis of our internal financial reporting: SkyWest Airlines, ExpressJet and SkyWest Leasing. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief
operating decision maker. Our operating segments consist of SkyWest Airlines, ExpressJet and SkyWest Leasing. Corporate overhead expense is allocated to the operating expenses of SkyWest Airlines and ExpressJet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines operating revenue
|
|
$
|
1,750,827
|
|
$
|
1,543,618
|
|
$
|
207,209
|
|
13.4
|
%
|
ExpressJet operating revenues
|
|
|
444,943
|
|
|
631,634
|
|
|
(186,691)
|
|
(29.6)
|
%
|
SkyWest Leasing operating revenues
|
|
|
222,420
|
|
|
176,099
|
|
|
46,321
|
|
26.3
|
%
|
Total Operating Revenues
|
|
$
|
2,418,190
|
|
$
|
2,351,351
|
|
$
|
66,839
|
|
2.8
|
%
|
Airline Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines airline expense
|
|
$
|
1,518,020
|
|
$
|
1,348,742
|
|
$
|
169,278
|
|
12.6
|
%
|
ExpressJet airline expense
|
|
|
457,348
|
|
|
647,709
|
|
|
(190,361)
|
|
(29.4)
|
%
|
SkyWest Leasing airline expense
|
|
|
176,529
|
|
|
138,354
|
|
|
38,175
|
|
27.6
|
%
|
Total Airline Expense (1)
|
|
$
|
2,151,897
|
|
$
|
2,134,805
|
|
$
|
17,092
|
|
0.8
|
%
|
Segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines segment profit
|
|
$
|
232,807
|
|
$
|
194,876
|
|
$
|
37,931
|
|
19.5
|
%
|
ExpressJet segment loss
|
|
|
(12,405)
|
|
|
(16,075)
|
|
|
3,670
|
|
(22.8)
|
%
|
SkyWest Leasing profit
|
|
|
45,891
|
|
|
37,745
|
|
|
8,146
|
|
21.6
|
%
|
Total Segment Profit
|
|
$
|
266,293
|
|
$
|
216,546
|
|
$
|
49,747
|
|
23.0
|
%
|
Interest Income and other income
|
|
|
5,692
|
|
|
3,398
|
|
|
2,294
|
|
67.5
|
%
|
Other Income (Expense), net
|
|
|
1,157
|
|
|
—
|
|
|
1,157
|
|
*
|
|
Consolidated Income Before Taxes
|
|
$
|
273,142
|
|
$
|
219,944
|
|
$
|
53,198
|
|
24.2
|
%
|
|
(1)
|
|
Total Airline Expense includes operating expense and interest expense
|
* is not measurable
SkyWest Airlines Segment Profit.
SkyWest Airlines block hour production increased to 1,028,492, or 13.2%, for the nine months ended September 30, 2018, from 908,364 for the nine months ended September 30, 2017, primarily due to the additional block hour production from 34 new E175 aircraft added subsequent to September 30, 2017. Significant items contributing to the SkyWest Airlines segment profit are set forth below.
The $207.2 million, or 13.4%, increase in SkyWest Airlines Operating Revenues for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was primarily due to revenue associated with 34 additional E175 aircraft subsequent to September 30, 2017.
The $169.3 million, or 12.6%, increase in SkyWest Airlines Airline Expense for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was primarily due to the following factors:
|
·
|
|
SkyWest Airlines’ salaries, wages and benefits expense increased by $84.3 million, or 15.1%, primarily due to the additional block hour production along with higher flight crew compensation costs resulting from labor agreements executed during the second half of 2017.
|
|
·
|
|
SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $31.3 million, or 11.3%, primarily attributable to an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 34 E175 aircraft added since September 2017, and direct maintenance costs related to the increased volume of block hours.
|
|
·
|
|
SkyWest Airlines’ fuel expense increased $26.8 million, or 44.4%, primarily due to an increase in the average fuel cost per gallon in 2018 compared to 2017 along with an increase in the volume of gallons purchased. The average fuel cost per gallon was $2.58 and $2.00 for the nine months ended September 30, 2018 and 2017, respectively.
|
|
·
|
|
SkyWest Airlines’ other operating expense increased $34.8 million, or 27.6%, primarily due to an increase in the use of hotels for crews, property taxes on additional aircraft added since September 30, 2017 and an increase in direct operating costs associated with a 13.2% increase in block hour production year-over-year.
|
ExpressJet Segment Loss.
ExpressJet’s block hour production decreased to 295,074, or 38.7%, for the nine months ended September 30, 2018, from 481,320 for the nine months ended September 30, 2017, primarily due to the reduction in fleet size. Significant items contributing to the ExpressJet segment loss are set forth below.
The $186.7 million, or 29.6%, decrease in ExpressJet Operating Revenues for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was primarily due to a reduction in block hour production due to a reduced fleet size since September 30, 2017.
The $190.4 million, or 29.4%, decrease in ExpressJet Airline Expense for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was primarily due to the following factors:
|
·
|
|
ExpressJet’s salaries, wages and benefits expense decreased $79.3 million, or 23.5%, primarily due to a reduction in direct labor costs associated with 38.7% fewer block hours produced year-over-year.
|
|
·
|
|
ExpressJet’s aircraft maintenance, materials and repairs expense decreased $44.0 million, or 28.1%, primarily due to the decrease in fleet size subsequent to September 30, 2017.
|
|
·
|
|
ExpressJet’s aircraft rental expenses decreased $23.4 million, or 79.5%, primarily due to a reduction of ExpressJet’s fleet size that was financed through leases subsequent to September 30, 2017.
|
|
·
|
|
ExpressJet’s airport-related expenses decreased $14.6 million, or 83.6%, primarily due to a reduction in station rents since September 30, 2017.
|
|
·
|
|
ExpressJet’s other operating expense decreased $18.5 million, or 28.8%, primarily due to a decrease in direct operating costs associated with a 38.7% reduction in block hour production year-over-year.
|
SkyWest Leasing Segment Profit.
SkyWest Leasing profit increased $8.1 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to 34 E175 aircraft added to our fleet subsequent to September 30, 2017.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash Position and Liquidity.
The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the nine months ended September 30, 2018 and 2017, and our total cash and marketable securities positions as of September 30, 2018 and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
573,127
|
|
$
|
532,289
|
|
$
|
40,838
|
|
7.7
|
%
|
Net cash used in investing activities
|
|
|
(742,358)
|
|
|
(695,054)
|
|
|
(47,304)
|
|
6.8
|
%
|
Net cash provided by financing activities
|
|
|
312,000
|
|
|
114,084
|
|
|
197,916
|
|
173.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Cash and cash equivalents
|
|
$
|
324,561
|
|
$
|
181,792
|
|
$
|
142,769
|
|
78.5
|
%
|
Marketable securities
|
|
|
380,242
|
|
|
503,503
|
|
|
(123,261
|
)
|
(24.5)
|
%
|
Total cash and marketable securities
|
|
$
|
704,803
|
|
$
|
685,295
|
|
$
|
19,508
|
|
2.8
|
%
|
Cash Flows provided by Operating Activities
The $40.8 million increase in net cash provided by operating activities was primarily due to an increase in income before income taxes of $55.5 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This increase in net cash provided by operating activities was partially offset by changes in working capital.
Cash Flows used in Investing Activities
The $47.3 million increase in cash used in investing activities was primarily due to the acquisition of 31 E175 aircraft and the related spare aircraft assets during the nine months ended September 30, 2018, compared to 18 E175 aircraft and the related spare aircraft assets purchased during the nine months ended September 30, 2017, which in total represented an increase of $285.2 million. This increase in cash used in investing activities was significantly offset by net liquidation of marketable securities, which provided an additional $282.4 million during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Additionally, during the nine months ended September 30, 2017, we received proceeds from the sale of 15 CRJ200 aircraft, eleven EMB120 aircraft and one CRJ700 aircraft for $51.1 million.
Cash Flows provided by Financing Activities
The $197.9 million increase in cash provided by financing activities was primarily related to proceeds from the issuance of long-term debt of $626.2 million associated with 31 E175 aircraft acquired during the nine months ended September 30, 2018, compared to proceeds from the issuance of debt of $384.8 million associated with 18 E175 aircraft acquired during the nine months ended September 30, 2017. During the nine months ended September 30, 2018, we used an additional $17.2 million as principal payments on long-term debt primarily due to the additional E175 aircraft acquired subsequent to September 30, 2017, partially offset by the payoff of debt on 15 CRJ200 aircraft and one CRJ700 aircraft that we sold during the nine months ended September 30, 2017. Additionally, during the nine months ended September 30, 2018, we used an additional $24.4 million to purchase treasury shares and make income tax payments towards vested employee equity awards.
Liquidity and Capital Resources
We believe that in the absence of unusual circumstances, the working capital currently available to us will be sufficient to meet our present financial requirements, including anticipated expansion, planned capital expenditures, and scheduled lease payments and debt service obligations for at least the next 12 months.
At September 30, 2018, our total capital mix was 41.2% equity and 58.8% long-term debt, compared to 42.5% equity and 57.5% long-term debt at December 31, 2017.
Significant Commitments and Obligations
General
The following table summarizes our commitments and obligations as noted for each of the next five years and thereafter (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Oct - Dec 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Operating lease payments for aircraft and facility obligations
|
|
$
|
495,771
|
|
$
|
25,327
|
|
$
|
83,268
|
|
$
|
98,790
|
|
$
|
90,378
|
|
$
|
72,438
|
|
$
|
125,570
|
|
Firm aircraft and spare engine commitments
|
|
|
352,925
|
|
|
211,485
|
|
|
27,500
|
|
|
27,500
|
|
|
86,440
|
|
|
—
|
|
|
—
|
|
Interest commitments (1)
|
|
|
600,413
|
|
|
60,498
|
|
|
111,075
|
|
|
96,051
|
|
|
82,139
|
|
|
69,227
|
|
|
181,423
|
|
Principal maturities on long-term debt
|
|
|
3,134,768
|
|
|
90,653
|
|
|
360,599
|
|
|
342,080
|
|
|
336,897
|
|
|
342,439
|
|
|
1,662,100
|
|
Total commitments and obligations
|
|
$
|
4,583,877
|
|
$
|
387,963
|
|
$
|
582,442
|
|
$
|
564,421
|
|
$
|
595,854
|
|
$
|
484,104
|
|
$
|
1,969,093
|
|
|
(1)
|
|
At September 30, 2018, we had variable rate notes representing only 1.0% of our total long-term debt.
|
Purchase Commitments and Options
As of September 30, 2018, we had a firm purchase commitment for eleven E175 aircraft from Embraer, S.A. with scheduled delivery dates through the end of 2018 or early 2019 with the exception of three E175 aircraft that are anticipated to be delivered in 2021.
We have not historically funded a substantial portion of our aircraft acquisitions with working capital. Rather, we have generally funded our aircraft acquisitions through a combination of operating leases and long-term debt financing. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition. At present, we intend to fund our acquisition of any additional aircraft through cash on hand and debt financing. Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed acquisitions, as well as additional aircraft. We intend to finance the firm order for eleven E175 aircraft with approximately 85% debt and the remaining balance with cash.
Aircraft Lease and Facility Obligations
We also have significant long-term lease obligations primarily relating to our aircraft fleet. At September 30, 2018, we had 265 aircraft under lease with remaining terms ranging from one year or less to nine years. Future minimum lease payments due under all long-term operating leases were approximately $495.8 million at September 30, 2018. Assuming a 5.0% discount rate, which is the average rate used to approximate the implicit rates within the applicable aircraft leases, the present value of these lease obligations would have been equal to approximately $403.1 million at September 30, 2018.
Long-term Debt Obligations
As of September 30, 2018, we had $3.1 billion of long-term debt obligations, including current maturities, related to the acquisition of CRJ200, CRJ700, CRJ900 and E175 aircraft and spare engine financings. The average effective interest rate on the debt related to such aircraft and spare engine financings was approximately 4.2% at September 30, 2018.
Guarantees
We have guaranteed the obligations of SkyWest Airlines under the SkyWest Airlines Delta Connection Agreement and the SkyWest Airlines United Express Agreement for the E175 aircraft. We have also guaranteed the
obligations of ExpressJet under the ExpressJet Delta Connection Agreement and the ExpressJet United ERJ Agreement. In addition, we have guaranteed certain other obligations under aircraft financing and leasing agreements.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for an entire year, since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased travel on our prorate routes, historically occurring during the summer months, and unfavorably affected by decreased travel during the months November through February and by inclement weather, which may occasionally or frequently, depending on the severity of the inclement weather in any given winter, result in cancelled flights during the winter months.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aircraft Fuel
In the past, we have not experienced difficulties with fuel availability and we currently expect to be able to obtain fuel at prevailing prices in quantities sufficient to meet our future needs. Pursuant to our fixed-fee arrangements, United, Delta, Alaska and American have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. We bear the economic risk of fuel price fluctuations on our prorate operations. For the nine months ended September 30, 2018, prorate flying arrangements represented approximately 15.7% of our total flying agreements revenue. For illustrative purposes only, we have estimated the impact of the market risk of fuel price fluctuations on our prorate operations using a hypothetical increase of 25% in the price per gallon we purchase. Based on this hypothetical assumption, we would have incurred an additional $21.8 million in fuel expense for the nine months ended September 30, 2018.
Interest Rates
Our earnings may be affected by changes in interest rates due to our variable rate long-term debt. The interest rates applicable to variable rate debt may rise and increase our interest expense. At September 30, 2018, we had variable rate notes representing 1.0% of our total long-term debt compared to 2.5% of our long-term debt at December 31, 2017 and changes in interest rates are not expected to have a material adverse effect on our earnings. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for variable rate long-term debt. Based on this hypothetical assumption, we would have incurred an additional $0.4 million in interest expense for the nine months ended September 30, 2018.
We currently intend to finance the acquisition of aircraft through manufacturer financing, third-party leases or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire these aircraft. To the extent we place these aircraft in service under our code-share agreements with Delta, United, American, Alaska or other carriers, our code-share agreements currently provide that reimbursement rates will be adjusted higher or lower to reflect changes in our aircraft financing interest rates.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to ensure that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of September 30, 2018, those controls and procedures were effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the nine months ended September 30, 2018, we implemented changes to our processes in response to the adoption of Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” that became effective January 1, 2018. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal controls over financial reporting
.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2018, there were no pending legal proceedings that, if decided against us, were likely to have a material adverse effect on our financial position, liquidity or results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our other filings with the SEC, which factors could materially affect our business, financial condition and results of operations. The risks described in our reports filed with the SEC are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our Board of Directors has adopted a stock repurchase program which authorizes us to repurchase shares of our common stock in the public market or in private transactions, from time to time, at prevailing prices. Our stock repurchase program currently authorizes the repurchase of up to $100.0 million of our common stock. The following table summarizes the repurchases under our stock repurchase program during the three months ended September 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per Share
|
|
Total Number of Shares
Purchased as Part of a
Publicly Announced
Program (1)
|
|
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Program (in Thousands)
|
July 1, 2018 — July 31, 2018
|
|
10,000
|
|
|
$
59.87
|
|
10,000
|
|
|
$
69,390
|
August 1, 2018 — August 31, 2018
|
|
111,996
|
|
|
$
60.07
|
|
111,996
|
|
|
$
62,661
|
September 1, 2018 — September 30, 2018
|
|
128,293
|
|
|
$
61.04
|
|
128,293
|
|
|
$
54,828
|
Total
|
|
250,289
|
|
|
$
60.56
|
|
250,289
|
|
|
$
54,828
|
|
(1)
|
|
On February 9, 2017, we announced that our Board of Directors authorized the repurchase of up to $100.0 million of our common stock over the next three years. Purchases are made at management’s discretion based on market conditions and financial resources.
As of September 30, 2018, we had repurchased 911,648 shares of our common stock for $45.2 million under this authorization.
|
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2018.
|
|
|
|
SKYWEST, INC.
|
|
|
|
|
By
|
/s/ Robert J. Simmons
|
|
|
Robert J. Simmons
|
|
|
Chief Financial Officer
|
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