skyw_Current folio_10Q

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prorate

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to                             

 

Commission file number 0-14719

 

SKYWEST, INC.

 

 

 

 

Incorporated under the laws of Utah

 

87-0292166

 

 

(I.R.S. Employer ID No.)

444 South River Road

St. George, Utah 84790

(435) 634-3000

(Address of principal executive offices and telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

 

 

 

Emerging growth company 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at October 31, 2018

Common stock, no par value

 

51,895,343

 

 

 

 


 

Table of Contents

SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

3

 

 

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2018 and 2017

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II 

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

36

 

Item 1A.

Risk Factors

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

Item 6.

Exhibits

37

 

 

Signature

38

 

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer

 

Exhibit 31.2

Certification of Chief Financial Officer

 

Exhibit 32.1

Certification of Chief Executive Officer

 

Exhibit 32.2

Certification of Chief Financial Officer

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

    

2018

    

2017 (a)

 

 

 

(unaudited)

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

324,561

 

$

181,792

 

Marketable securities

 

 

380,242

 

 

503,503

 

Income tax receivable

 

 

18,118

 

 

5,316

 

Receivables, net

 

 

62,233

 

 

42,731

 

Inventories, net

 

 

124,037

 

 

119,755

 

Prepaid aircraft rents

 

 

89,839

 

 

115,098

 

Other current assets

 

 

53,042

 

 

26,938

 

Total current assets

 

 

1,052,072

 

 

995,133

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

Aircraft and rotable spares

 

 

6,229,941

 

 

5,335,870

 

Deposits on aircraft

 

 

27,579

 

 

49,000

 

Buildings and ground equipment

 

 

297,862

 

 

265,608

 

 

 

 

6,555,382

 

 

5,650,478

 

Less-accumulated depreciation and amortization

 

 

(1,680,115)

 

 

(1,467,475)

 

Total property and equipment, net

 

 

4,875,267

 

 

4,183,003

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Long-term prepaid assets

 

 

189,357

 

 

230,923

 

    Other assets

 

 

68,164

 

 

65,341

 

Total other assets

 

 

257,521

 

 

296,264

 

Total assets

 

$

6,184,860

 

$

5,474,400

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

    

 

    

2018

    

2017 (a)

 

 

 

 

(unaudited)

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

357,327

 

$

309,678

 

 

Accounts payable

 

 

320,432

 

 

288,904

 

 

Accrued salaries, wages and benefits

 

 

150,881

 

 

154,367

 

 

Taxes other than income taxes

 

 

21,618

 

 

19,228

 

 

Other current liabilities

 

 

63,187

 

 

48,648

 

 

Total current liabilities

 

 

913,445

 

 

820,825

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

 

2,751,722

 

 

2,377,346

 

 

 

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES PAYABLE

 

 

493,562

 

 

419,020

 

 

 

 

 

 

 

 

 

 

 

DEFERRED AIRCRAFT CREDITS

 

 

34,580

 

 

44,225

 

 

 

 

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

 

62,678

 

 

58,662

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized; none issued

 

 

 —

 

 

 —

 

 

Common stock, no par value, 120,000,000 shares authorized; 81,239,194 and 80,398,104 shares issued, respectively

 

 

688,168

 

 

672,593

 

 

Retained earnings

 

 

1,714,621

 

 

1,516,957

 

 

Treasury stock, at cost, 29,310,836 and 28,643,535 shares, respectively

 

 

(473,898)

 

 

(435,178)

 

 

Accumulated other comprehensive loss

 

 

(18)

 

 

(50)

 

 

Total stockholders’ equity

 

 

1,928,873

 

 

1,754,322

 

 

Total liabilities and stockholders’ equity

 

$

6,184,860

 

$

5,474,400

 

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars and Shares in Thousands, Except per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended 

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017 (a)

    

2018

    

2017 (a)

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Flying agreements

 

$

816,057

 

$

800,965

 

$

2,377,659

 

$

2,317,218

 

Airport customer service and other

 

 

13,218

 

 

11,708

 

 

40,531

 

 

34,133

 

Total operating revenues

 

 

829,275

 

 

812,673

 

 

2,418,190

 

 

2,351,351

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

301,378

 

 

304,014

 

 

901,775

 

 

896,476

 

Aircraft maintenance, materials and repairs

 

 

142,285

 

 

148,787

 

 

423,665

 

 

433,467

 

Depreciation and amortization

 

 

86,088

 

 

74,095

 

 

246,386

 

 

215,415

 

Aircraft rentals

 

 

36,827

 

 

54,976

 

 

119,015

 

 

168,098

 

Aircraft fuel

 

 

30,258

 

 

22,791

 

 

87,208

 

 

61,295

 

Airport-related expenses

 

 

25,655

 

 

30,209

 

 

80,852

 

 

91,106

 

Other operating expenses

 

 

68,859

 

 

65,432

 

 

206,511

 

 

190,235

 

Total operating expenses

 

 

691,350

 

 

700,304

 

 

2,065,412

 

 

2,056,092

 

OPERATING INCOME

 

 

137,925

 

 

112,369

 

 

352,778

 

 

295,259

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,283

 

 

1,408

 

 

5,692

 

 

3,398

 

Interest expense

 

 

(31,440)

 

 

(27,101)

 

 

(86,485)

 

 

(78,713)

 

Other income (expense), net

 

 

1,157

 

 

 —

 

 

3,470

 

 

 —

 

Total other expense, net

 

 

(28,000)

 

 

(25,693)

 

 

(77,323)

 

 

(75,315)

 

INCOME BEFORE INCOME TAXES

 

 

109,925

 

 

86,676

 

 

275,455

 

 

219,944

 

PROVISION FOR INCOME TAXES

 

 

26,879

 

 

32,960

 

 

62,189

 

 

80,966

 

NET INCOME

 

$

83,046

 

$

53,716

 

$

213,266

 

$

138,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

1.60

 

$

1.04

 

$

4.10

 

$

2.68

 

DILUTED EARNINGS PER SHARE

 

$

1.57

 

$

1.01

 

$

4.03

 

$

2.62

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

52,039

 

 

51,833

 

 

52,002

 

 

51,801

 

Diluted

 

 

52,981

 

 

53,080

 

 

52,976

 

 

53,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

83,046

 

$

53,716

 

$

213,266

 

$

138,978

 

Net unrealized appreciation (depreciation) on marketable securities, net of taxes

 

 

(2)

 

 

11

 

 

32

 

 

67

 

TOTAL COMPREHENSIVE INCOME

 

$

83,044

 

$

53,727

 

$

213,298

 

$

139,045

 

 

(a)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information. 

 

See accompanying notes to condensed consolidated financial statements

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SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

573,127

 

$

532,289

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(1,575,991)

 

 

(1,002,624)

 

Sales of marketable securities

 

 

1,699,284

 

 

843,509

 

Proceeds from the sale of aircraft, property and equipment

 

 

 —

 

 

51,079

 

Acquisition of property and equipment:

 

 

 

 

 

 

 

Aircraft and rotable spare parts

 

 

(848,723)

 

 

(563,524)

 

Deposits on aircraft

 

 

 —

 

 

(46,733)

 

Buildings and ground equipment

 

 

(35,870)

 

 

(8,275)

 

Aircraft deposits applied towards acquired aircraft

 

 

21,421

 

 

36,533

 

Increase in other assets

 

 

(2,479)

 

 

(5,019)

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(742,358)

 

 

(695,054)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

626,163

 

 

384,825

 

Principal payments on long-term debt

 

 

(262,923)

 

 

(245,745)

 

Net proceeds from issuance of common stock

 

 

5,212

 

 

3,447

 

Purchase of treasury stock and employee income tax paid on equity awards

 

 

(38,720)

 

 

(14,330)

 

Increase in debt issuance cost

 

 

(3,182)

 

 

(3,245)

 

Payment of cash dividends

 

 

(14,550)

 

 

(10,868)

 

 

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

312,000

 

 

114,084

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

142,769

 

 

(48,681)

 

Cash and cash equivalents at beginning of period

 

 

181,792

 

 

146,766

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

324,561

 

$

98,085

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

Acquisition of rotable spare parts

 

$

10,346

 

$

 —

 

Debt assumed on aircraft acquired off lease

 

$

59,132

 

$

 —

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized amounts

 

$

85,611

 

$

77,915

 

Income taxes

 

$

2,382

 

$

2,354

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 — Condensed Consolidated Financial Statements

 

Basis of Presentation

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines, Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will likely differ, and may differ materially, from those estimates and assumptions. The Company reclassified certain prior period amounts to conform to the current period presentation.

 

Recent Accounting Pronouncements

 

Standards Effective in Future Years and Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2016‑02, “Leases (Topic 842)” (“Topic 842”). Topic 842 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. Topic 842 will be effective beginning in the first quarter of 2019. Early adoption of Topic 842 is permitted.  In July 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements - Leases (Topic 842).” This update provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented.  The Company anticipates electing this adoption method and expects to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has not completed its assessment, but the adoption of Topic 842 will have a significant impact on its consolidated balance sheets. However, the Company does not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the condensed consolidated statements of operations and comprehensive income or the condensed consolidated statements of cash flows. See Note 6, “Commitments and Contingencies,” about the Company’s undiscounted future lease payments and the timing of those payments.

7


 

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Recently Adopted Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014‑09, “Revenue from Contracts with Customers, (Topic 606)” (“Topic 606”).  Under Topic 606, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service.  In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations.  The Company adopted this standard as of January 1, 2018, utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented. Under the new standard, the Company concluded that, in addition to the aircraft lease, the individual flights are distinct services and the flight services promised in a capacity purchase agreement represent a series of services that should be accounted for as a single performance obligation, recognized over time as the flights are completed. The adoption of Topic 606 did not have a material impact on recorded amounts when applied to the opening balance sheet as of January 1, 2018. The adoption of Topic 606 only affected the Company’s consolidated balance sheets and statements of comprehensive income classification, with no impact on the Company’s operating income (loss), net income (loss), earnings (loss) per share or cash flows, however the principal versus agent considerations under Topic 606 resulted in the Company recording directly reimbursed fuel expense under its fixed-fee contracts as a reduction to the applicable operating expense (net) rather than revenue (gross).  This classification change resulted in a reduction to total revenue and a reduction to operating expenses by the same amount, resulting in no change to operating income. Additionally, under the nonrefundable up-front fees and contract costs considerations of Topic 606, reimbursements from the Company’s major airline partners for up-front contract costs will be deferred and amortized over the contract term.  The related up-front costs to obtain the contract will also be capitalized and amortized over the contract term.  As the amount of the up-front reimbursement is determined from the Company’s actual costs to fulfill the contract, this change is not expected to impact the Company’s operating income (loss) as the amount of deferred revenue and the amount of capitalized costs will be recognized over the same period.  This change also resulted in a deferred revenue liability and a capitalized contract cost on the balance sheet of the same amount. 

 

Prior to the Company’s adoption of Topic 606, the Company segregated its revenue into two categories: “Passenger revenue” and “Ground handling and other revenue.”  “Passenger revenue” included revenue from fixed-fee contracts, prorate flying agreements and airport customer service agreements for flights operated by the Company.  “Ground handling and other revenue” included revenue from airport customer service agreements for flights operated by third parties and other revenue.  Under the disaggregated revenue disclosure considerations in Topic 606, the Company segregated its revenue into the following categories: “Flying agreements revenue” and “Airport customer service and other revenues.”  “Flying agreements revenue” includes revenue from fixed-fee contracts, prorate flying agreements and other revenue, primarily lease revenue for the use of the aircraft.  “Airport customer service and other revenues” includes revenue from airport customer services agreements.  This change reclassifies amounts previously reported as “Passenger revenue” and “Ground handling and other revenue”. Additionally, in connection with the Company’s adoption of Topic 606, the Company renamed the operating expense “Ground handling services” to “Airport-related expenses.”  Certain airport-related expenses, such as landing fees and airport facility rents, were previously reported as “Other operating expenses” and have been reclassified as “Airport-related expenses.”

 

In 2016, the FASB issued Accounting Standards Update 2016‑15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” and Accounting Standard Update 2016‑18, “Statement of Cash Flows (Topic 230): Restricted Cash” related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity’s statement of cash flows, respectively.  These standards are effective for interim and annual reporting periods beginning after December 15, 2017.  The Company adopted this standard in the first quarter of 2018 and modified the presentation to include changes in restricted cash in the Company’s Consolidated Statement of Cash Flows, which had an immaterial impact.

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Impact of Recently Adopted Standards

The Company recast certain prior period amounts to conform with the adoption of Topic 606, as shown in the tables below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

September 30, 2017

Income Statement:

    

Previously Reported

 

Adjustments

 

Current

Presentation

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 Flying agreements (1)

 

$

812,295

 

$

(11,330)

 

$

800,965

 Airport customer service and other (2)

 

 

19,641

 

 

(7,933)

 

 

11,708

 Total operating revenues

 

$

831,936

 

$

(19,263)

 

$

812,673

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 Salaries, wages and benefits

 

$

303,997

 

$

17

 

$

304,014

 Aircraft fuel

 

 

42,071

 

 

(19,280)

 

 

22,791

 Airport-related expenses (3)

 

 

16,693

 

 

13,516

 

 

30,209

 Other operating expenses

 

 

78,948

 

 

(13,516)

 

 

65,432

 Total operating expenses

 

 

719,567

 

 

(19,263)

 

 

700,304

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

$

112,369

 

$

 

$

112,369

1.

In previously reported periods, this line item was presented as passenger revenue.

2.

In previously reported periods, this line item was presented as ground handling and other.

3.

In previously reported periods, this line item was presented as ground handling services.

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

September 30, 2017

Income Statement:

    

Previously Reported

 

Adjustments

 

Current

Presentation

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 Flying agreements (1)

 

$

2,349,047

 

$

(31,829)

 

$

2,317,218

 Airport customer service and other (2)

 

 

58,063

 

 

(23,930)

 

 

34,133

 Total operating revenues

 

$

2,407,110

 

$

(55,759)

 

$

2,351,351

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 Salaries, wages and benefits

 

$

899,966

 

$

(3,490)

 

$

896,476

 Aircraft fuel

 

 

113,564

 

 

(52,269)

 

 

61,295

 Airport-related expenses (3)

 

 

52,130

 

 

38,976

 

 

91,106

 Other operating expenses

 

 

229,211

 

 

(38,976)

 

 

190,235

 Total operating expenses

 

 

2,111,851

 

 

(55,759)

 

 

2,056,092

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

$

295,259

 

$

 

$

295,259

1.

In previously reported periods, this line item was presented as passenger revenue.

2.

In previously reported periods, this line item was presented as ground handling and other.

3.

In previously reported periods, this line item was presented as ground handling services.

 

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Balance Sheet:

 

Previously Reported

December 31, 2017

 

Adjustments

 

Current Presentation

December 31, 2017

ASSETS:

 

 

 

 

 

 

 

Other long-term assets

 

$

49,220

 

$

16,121

 

$

65,341

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Other long-term liabilities

 

$

42,541

 

$

16,121

 

$

58,662

 

The $16.1 million adjustment to other long-term assets and other long-term liabilities reflects the amount of capitalized up-front contract costs and the amount of deferred revenue for up-front reimbursements as of December 31, 2017. The $16.1 million capitalized contract costs and deferred revenue is expected to be amortized over the applicable remaining contract term. For the nine months ended September 30, 2018 and 2017, the Company recognized $1.4 million and $1.1 million, respectively, of revenue associated with the amortization of the up-front contract reimbursements.

 

As of September 30, 2018, the Company had $62.2 million in accounts receivable of which $56.4 million related to flying agreements. As of December 31, 2017, the Company had $42.7 million in accounts receivable of which $33.9 million related to flying agreements.

 

Note 2 — Flying Agreements Revenue and Airport Customer Service and Other Revenues

 

The Company recognizes flying agreements revenue and airport customer service and other revenues when the service is provided under its code-share agreements. Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee contracts” or “capacity purchase agreements”) with Delta Air Lines, Inc. (“Delta”), United Airlines, Inc. (“United”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”), the major airline partner generally pays the Company a fixed-fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as airport landing fees and airport rents. Under the fixed-fee arrangements, revenue is earned when each flight is completed and is reflected in flying agreements revenue. The transaction price for the fixed-fee agreements is determined from the fixed-fee consideration, incentive consideration and directly reimbursed expenses earned as flights are completed over the agreement term.  For the nine months ended September 30, 2018, fixed-fee arrangements represented approximately 84.3% of the Company’s flying agreements revenue.

Under the Company’s revenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner.  Revenue is recognized under the Company’s prorate flying agreements when each flight is completed based upon the portion of the prorate passenger fare the Company anticipates that it will receive for each completed flight. The transaction price for the prorate agreements is determined from the proration formula derived from each passenger ticket amount on each completed flight over the agreement term.  For the nine months ended September 30, 2018, prorate flying arrangements represented approximately 15.7% of the Company’s flying agreements revenue.

Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. The transaction price for airport customer service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled by the Company over the agreement term.

Other ancillary revenues commonly associated with airlines, such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits, are retained by the Company’s major airline partners on flights that the Company operates under its code‑share agreements.

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The following table represents the Company’s flying agreements revenue by type for the three and nine-month periods ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Capacity purchase agreements revenue: flight operations

 

$

472,952

 

$

462,832

 

$

1,404,801

 

$

1,367,901

 

Capacity purchase agreements revenue: aircraft lease revenue

 

 

208,813

 

 

213,967

 

 

599,188

 

 

621,099

 

Prorate agreements revenue

 

 

134,292

 

 

124,166

 

 

373,670

 

 

328,218

 

   Flying agreements revenue

 

$

816,057

 

$

800,965

 

$

2,377,659

 

$

2,317,218

 

 

A portion of the Company’s compensation under its fixed-fee agreements is designed to reimburse the Company for certain aircraft ownership costs. The aircraft compensation structure varies by agreement, but is intended to cover either the Company’s aircraft principal and interest debt service costs, its aircraft depreciation and interest expense or its aircraft lease expense costs while the aircraft is under contract. The consideration associated with the use of the aircraft under the Company’s fixed-fee agreements is deemed to be lease revenue, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The lease revenue associated with the Company’s fixed-fee agreements is accounted for as an operating lease and is reflected as flying agreements revenue on the Company’s consolidated statements of comprehensive income. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income since the use of the aircraft is not a separate activity of the total service provided.

The Company’s fixed-fee and prorate agreements include weekly provisional cash payments from the respective major airline partner based on a projected level of flying each month. The Company and each major airline partner subsequently reconcile these payments to the actual completed flight activity on a monthly or quarterly basis.  In the event a flying agreement includes a mid-term rate reset to adjust rates prospectively and the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company applies the variable constraint guidance under Topic 606, where the Company records revenue to the extent it believes that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi‑annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly, subject to the variable constraint guidance under Topic 606.

 

The following table summarizes the significant provisions of each code-share agreement the Company has with each major airline partner:

 

 

 

 

 

 

 

Delta Connection Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

CRJ 900

E175

 

65

25

37

41

 

Individual aircraft have scheduled removal dates from 2018 to 2027

ExpressJet

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 700

 

 

12

 

 

 

Individual aircraft have scheduled removal dates throughout 2018

SkyWest Airlines

Delta Connection Prorate Agreement (revenue-sharing arrangement)

 

CRJ 200

 

29

 

Terminable with 30-day notice

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United Express Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

United Express Agreements

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

E175

 

61

19

65

 

Individual aircraft have scheduled removal dates from 2018 to 2029

ExpressJet

United ERJ Agreement

(fixed-fee arrangement)

 

ERJ 145

 

100

 

Individual aircraft have scheduled removal dates from 2018 to 2022

SkyWest Airlines

United Express Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

23

 

Terminable with 120-day notice

 

American Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

American Agreement

(fixed-fee arrangement)

 

CRJ 700

 

42

 

Individual aircraft have scheduled removal dates from 2019 to 2023

SkyWest Airlines

American Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

7

 

Terminable with 120-day notice

ExpressJet

American Agreement

(fixed-fee arrangement)

 

CRJ 700

 

16

 

Individual aircraft have scheduled removal dates from 2018 to 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alaska Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination
Dates

SkyWest Airlines

Alaska Agreement

(fixed-fee arrangement)

 

E175

 

32

 

Individual aircraft have scheduled removal dates from 2027 to 2030

 

 

In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska and Delta to place additional Embraer E175 dual-class regional jet aircraft (which are typically configured with 76 or 70 seats) (“E175”) into service for those major airline partners.  As of September 30, 2018, the Company anticipated placing an additional three E175 aircraft with Alaska and eight E175 aircraft with Delta. The delivery dates for the new E175 aircraft are expected to take place by the end of 2018 or early 2019 with the exception of three E175 aircraft with Alaska that have been deferred until 2021. Final delivery dates may be adjusted based on various factors.

SkyWest Airlines also entered into an agreement with Delta in the second quarter of 2018 to operate 20 new Canadair CRJ900 regional jet aircraft. The aircraft will be acquired by Delta with delivery dates beginning in 2018 that are expected to continue through the end of 2020. These aircraft will replace 20 Canadair CRJ700 regional jet aircraft (“CRJ700”) scheduled to expire under SkyWest’s flying contracts with Delta.

SkyWest Airlines also reached an agreement with American in the second quarter of 2018 to place 20 used CRJ700 aircraft into service under a four-year contract. The 20 CRJ700 aircraft are being sourced from within the Company’s fleet. SkyWest Airlines began transitioning the CRJ700 aircraft into service during the second and third quarters of 2018 and all 20 aircraft are expected to be in service by early 2019.

Additionally, in the second quarter of 2018, SkyWest Airlines and United agreed to extend the flying contract for 19 CRJ700 aircraft. These aircraft previously had expirations scheduled for mid-2019, which were extended to mid-2022.

During the third quarter of 2018, ExpressJet began transitioning 20 Canadair CRJ200 regional jet aircraft (“CRJ200s”) into service under a previously announced three-year agreement with United. The aircraft are being sourced

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from within the Company’s existing fleet through other contract expirations. The first aircraft was placed into service in October 2018 and all 20 CRJ200 aircraft are scheduled to be placed into service with United by early 2019.

 

When an aircraft is scheduled to be removed from a fixed-fee arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the aircraft with another major airline partner, return the aircraft to the lessor if the aircraft is leased and the lease is expiring, place owned aircraft for sale, or pursue other uses for the aircraft. Other uses for the aircraft may include placing the aircraft in a prorate arrangement, leasing the aircraft to a third party or parting out the aircraft to use the engines and parts as spare inventory or to lease the engine to a third party.

 

The Company’s operating revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with its major airline partners, contract modifications resulting from contract renegotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major airline partners.

 

Note 3 — Share-Based Compensation and Stock Repurchases

 

During the nine months ended September 30, 2018, the Company granted 15,165 fully-vested shares of common stock to the Company’s directors at a grant date fair value of $53.40. Additionally, during the nine months ended September 30, 2018, the Company granted 114,856 restricted stock units and 89,982 performance shares to certain employees of the Company and its subsidiaries under the SkyWest, Inc. 2010 Long-Term Incentive Plan.  Both the restricted stock units and performance shares have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries. The number of performance shares awardable from the 2018 grants can range from 0% to 200% of the original amount granted depending on the Company’s performance over the three-year vesting period against the pre-established targets. Upon vesting, each restricted stock unit and performance share will be replaced with one share of common stock. The fair value of the restricted stock units and performance shares on the date of grant was $53.40 per share. During the nine months ended September 30, 2018, the Company did not grant any options to purchase shares of common stock.

The Company accounts for forfeitures of stock options, restricted stock units and performance share grants in 2018 when forfeitures occur.  The estimated fair value of the stock options, restricted stock units and performance shares is amortized over the applicable vesting periods.  During the nine months ended September 30, 2018 and 2017, the Company recorded pre-tax share-based compensation expense of $10.4 million and $8.2 million, respectively.

The Company repurchased 427,869 shares of its common stock for $25.2 million, and paid $13.6 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the nine months ended September 30, 2018.  The Company repurchased 281,000 shares of its common stock for $10.0 million and paid $4.3 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the nine months ended September 30, 2017. 

 

Note 4 — Net Income Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. During the nine months ended September 30, 2018, 207,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of September 30, 2018. During the nine months ended September 30, 2017, 284,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of September 30, 2017.

 

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The calculation of the weighted average number of shares of common stock outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

    

2018

    

2017

 

 

2018

    

2017

    

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

83,046

 

$

53,716

 

 

$

213,266

 

$

138,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

52,039

 

 

51,833

 

 

 

52,002

 

 

51,801

 

 

Effect of outstanding share-based awards

 

 

942

 

 

1,247

 

 

 

974

 

 

1,286

 

 

Weighted average number of shares for diluted net income per common share

 

 

52,981

 

 

53,080

 

 

 

52,976

 

 

53,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.60

 

$

1.04

 

 

$

4.10

 

$

2.68

 

 

Diluted earnings per share

 

$

1.57

 

$

1.01

 

 

$

4.03

 

$

2.62

 

 

 

 

Note 5 - Segment Reporting

 

The Company’s three reporting segments consist of the operations of SkyWest Airlines, ExpressJet and SkyWest Leasing activities. Corporate overhead expenses incurred by the Company are allocated to the operating expenses of SkyWest Airlines, ExpressJet and SkyWest Leasing.

 

The Company’s chief operating decision maker analyzes the profitability of operating the E175 aircraft (including operating costs and associated revenue) separately from the profitability of the Company’s ownership, financing costs and associated revenue of the Company’s E175 aircraft (including depreciation expense, interest expense and associated revenue). The SkyWest Leasing segment includes aircraft lease revenue attributed to the Company’s E175 aircraft ownership related revenues under the applicable fixed-fee contracts and the depreciation and interest expense of the Company’s E175 aircraft. The SkyWest Leasing segment’s total assets and capital expenditures include the acquired E175 aircraft. The SkyWest Leasing segment additionally includes the ownership and activity of four CRJ200 aircraft leased to a third party.

 

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The following represents the Company’s segment data for the three-month periods ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2018

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

   

Airlines

 

ExpressJet

  

Leasing

  

Consolidated

 

Operating revenues (1)

 

$

607,052

 

$

140,155

 

$

82,068

 

$

829,275

 

Operating expense

 

 

512,278

 

 

139,736

 

 

39,336

 

 

691,350

 

Depreciation and amortization expense

 

 

39,651

 

 

8,683

 

 

37,754

 

 

86,088

 

Interest expense

 

 

4,044

 

 

649

 

 

26,747

 

 

31,440

 

Segment profit (loss) (2)

 

 

90,730

 

 

(230)

 

 

15,985

 

 

106,485

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

1,224

 

 

 —

 

 

1,224

 

Total assets (as of September 30, 2018)

 

 

2,251,563

 

 

565,266

 

 

3,368,031

 

 

6,184,860

 

Capital expenditures (including non-cash)

 

 

44,689

 

 

3,069

 

 

273,808

 

 

321,566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2017

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

   

Airlines

    

ExpressJet

    

Leasing

    

Consolidated

 

Operating revenues (1) (3)

 

$

558,994

 

$

191,368

 

$

62,311

 

$

812,673

 

Operating expense (3)

 

 

472,000

 

 

200,344

 

 

27,960

 

 

700,304

 

Depreciation and amortization expense

 

 

34,049

 

 

12,573

 

 

27,473

 

 

74,095

 

Interest expense

 

 

5,276

 

 

1,017

 

 

20,808

 

 

27,101

 

Segment profit (loss) (2)

 

 

81,718

 

 

(9,993)

 

 

13,543

 

 

85,268

 

Identifiable intangible assets, other than goodwill

 

 

 

 

6,121

 

 

 

 

6,121

 

Total assets (as of September 30, 2017) (3)

 

 

2,072,597

 

 

721,939

 

 

2,579,459

 

 

5,373,995

 

Capital expenditures (including non-cash)

 

 

27,118

 

 

2,259

 

 

24,122

 

 

53,499

 


(1)

Prorate revenue, Airport customer service and other revenues is primarily reflected in the SkyWest Airlines segment.

(2)

Segment profit (loss) is equal to operating income less interest expense.

(3)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information.  

 

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The following represents the Company’s segment data for the nine-month periods ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

    

Airlines

    

ExpressJet

    

Leasing

    

Consolidated

 

Operating revenues (1)

 

$

1,750,827

 

$

444,943

 

$

222,420

 

$

2,418,190

 

Operating expense

 

 

1,505,298

 

 

455,084

 

 

105,030

 

 

2,065,412

 

Depreciation and amortization expense

 

 

115,979

 

 

30,044

 

 

100,363

 

 

246,386

 

Interest expense

 

 

12,722

 

 

2,264

 

 

71,499

 

 

86,485

 

Segment profit (loss) (2)

 

 

232,807

 

 

(12,405)

 

 

45,891

 

 

266,293

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

1,224

 

 

 —

 

 

1,224

 

Total assets (as of September 30, 2018)

 

 

2,251,563

 

 

565,266

 

 

3,368,031

 

 

6,184,860

 

Capital expenditures (including non-cash)

 

 

121,010

 

 

5,996

 

 

827,065

 

 

954,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

SkyWest

 

 

 

SkyWest

 

 

 

 

    

Airlines

    

ExpressJet

    

Leasing

    

Consolidated

 

Operating revenues (1) (3)

 

$

1,543,618

 

$

631,634

 

$

176,099

 

$

2,351,351

 

Operating expense (3)

 

 

1,331,931

 

 

644,490

 

 

79,671

 

 

2,056,092

 

Depreciation and amortization expense

 

 

98,396

 

 

38,808

 

 

78,211

 

 

215,415

 

Interest expense

 

 

16,811

 

 

3,219

 

 

58,683

 

 

78,713

 

Segment profit (loss) (2)

 

 

194,876

 

 

(16,075)

 

 

37,745

 

 

216,546

 

Identifiable intangible assets, other than goodwill

 

 

 —

 

 

6,121

 

 

 —

 

 

6,121

 

Total assets (as of September 30, 2017) (3)

 

 

2,072,597

 

 

721,939

 

 

2,579,459

 

 

5,373,995

 

Capital expenditures (including non-cash)

 

 

85,895

 

 

12,414

 

 

474,091

 

 

572,400

 


(1)

Prorate revenue, Airport customer service and other revenues is primarily reflected in the SkyWest Airlines segment.

(2)

Segment profit (loss) is equal to operating income less interest expense.

(3)

Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information.

 

Note 6 — Commitments and Contingencies

 

As of September 30, 2018, the Company leased aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases which are generally on a long-term, triple net lease basis pursuant to which the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property.  The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased. The following table summarizes future minimum rental payments primarily related to aircraft required under operating leases that had initial or remaining non-cancelable lease terms as of September 30, 2018 (in thousands):

 

 

 

 

 

 

October 2018 through December 2018

    

$

25,327

 

2019

 

 

83,268

 

2020

 

 

98,790

 

2021

 

 

90,378

 

2022

 

 

72,438

 

Thereafter

 

 

125,570

 

 

 

$

495,771

 

 

As of September 30, 2018, the Company 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 have been deferred until 2021.

 

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The following table summarizes the Company’s 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, the Company had variable rate notes representing only 1.0% of its total long-term debt.

Note 7 — Fair Value Measurements

 

The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company determined the fair value of these assets based on the following three levels of inputs:

 

 

 

 

 

 

Level 1

 

 

Quoted prices in active markets for identical assets or liabilities.

Level 2

 

 

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities.

Level 3

 

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

As of September 30, 2018 and December 31, 2017, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of September 30, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Cash, Cash Equivalents

 

$

324,561

 

$

324,561

 

$

 —

 

$

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

159,942

 

$

 —

 

$

159,942

 

$

 —

Commercial paper

 

 

220,300

 

 

 —

 

 

220,300

 

 

 —

 

 

 

380,242

 

 

 —

 

 

380,242

 

 

 —

Total Assets Measured at Fair Value

 

$

704,803

 

$

324,561

 

$

380,242

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2017

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Cash, Cash Equivalents

 

$

181,792

 

$

181,792

 

$

 

$

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and bond funds

 

$

344,251

 

$

 

$

344,251

 

$

    Commercial paper

 

 

159,252

 

 

 —

 

 

159,252

 

 

 —

 

 

 

503,503

 

 

 —

 

 

503,503

 

 

Total Assets Measured at Fair Value

 

$

685,295

 

$

181,792

 

$

503,503

 

$

 —

 

The Company’s “marketable securities” classified as Level 2 securities primarily utilize broker quotes in a non-active market for valuation of these securities.

 

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The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the nine months ended September 30, 2018.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

As of September 30, 2018 and December 31, 2017, the Company classified $380.2 million and $503.5 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year.  As of September 30, 2018 and December 31, 2017, the cost of the Company’s total cash and cash equivalents and available for sale securities was $704.8 million and $685.5 million, respectively.  As of September 30, 2018 and December 31, 2017, the fair value of the Company’s total cash and cash equivalents and available for sale securities was $704.8 million and $685.3 million, respectively.

 

The fair value of the Company’s long-term debt classified as Level 2 debt was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $3.15 billion as of September 30, 2018 and $2.70 billion as of December 31, 2017, as compared to the carrying amount of $3.13 billion as of September 30, 2018 and $2.71 billion as of December 31, 2017.

 

Note 8 — Long-Term Debt

 

Long-term debt consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

Current portion of long-term debt

$

361,131

 

$

313,243

Current portion of unamortized debt issue cost, net

 

(3,804)

 

 

(3,565)

Current portion of long-term debt, net of debt issue costs

$

357,327

 

$

309,678

 

 

 

 

 

 

Long-term debt, net of current maturities

$

2,773,637

 

$

2,399,107

Long-term portion of unamortized debt issue cost, net

 

(21,915)

 

 

(21,761)

Long-term debt, net of current maturities and debt issue costs

$

2,751,722

 

$

2,377,346

 

 

 

 

 

 

Total long-term debt (including current portion)

$

3,134,768

 

$

2,712,350

Total unamortized debt issue cost, net

 

(25,719)

 

 

(25,326)

Total long-term debt, net of debt issue costs

$

3,109,049

 

$

2,687,024

 

During the nine months ended September 30, 2018, the Company took delivery of 31 E175 aircraft and purchased nine previously-leased aircraft, which the Company financed through $626.2 million of long-term debt.  The debt associated with the 31 E175 aircraft has a 12-year term, is due in quarterly installments with a fixed annual interest rate ranging from 4.6% to 5.0% and is secured by the E175 aircraft. The Company acquired nine aircraft off a lease during the nine months ended September 30, 2018. The debt associated with the nine previously-leased aircraft has a term ranging from three to four years, is due in semi-annual installments with a fixed annual interest rate of 6.45% and is secured by the previously-leased aircraft.

 

As of September 30, 2018 and December 31, 2017, the Company had $84.8 million and $87.4 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.

Note 9 — Income Taxes

 

The Company’s effective tax rate for the three months ended September 30, 2018 was 24.5%. The Company’s effective tax rate for the three months ended September 30, 2018 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible expenses.

 

The Company’s effective tax rate for the nine months ended September 30, 2018 was 22.6%. The Company’s effective tax rate for the nine months ended September 30, 2018 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible expenses, partially offset by a $4.6 million

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discrete tax benefit from excess tax deductions generated from employee equity transactions that occurred during the nine months ended September 30, 2018 pursuant to Accounting Standards Update No. 2016‑09, “Compensation—Stock Compensation (Topic 718) and a $0.9 million discrete tax benefit from a capital loss carryforward valuation allowance resulting from a gain on sale of capital assets during the nine months ended September 30, 2018.

 

In connection with the Tax Cuts and Jobs Act of 2017 (“Tax Act”) enacted in December 2017, the Company recorded a provisional amount of income tax benefit of $246.8 million related to the re-measurement of deferred tax balances for the year ended December 31, 2017.  In accordance with relevant SEC guidance, the effects of the Tax Act may be adjusted within a one-year measurement period from the enactment date for the items that were previously reported as provisional, or where a provisional estimate could not be made.  The income tax provision for the nine months ended September 30, 2018 did not reflect any adjustments to the provisional amounts as of December 31, 2017.  The Company is still analyzing the impacts of the Tax Act on $13.9 million of alternative minimum tax credits that may be refundable as of September 30, 2018.  The Company will continue to assess forthcoming guidance and accounting interpretations on the effects of the Tax Act and expects to complete its analysis within the measurement period in accordance with SEC guidance.

 

Note 10 — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of September 30, 2018, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations.

 

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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.

 

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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:

 

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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

 

 

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Table of Contents

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

%

 

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Table of Contents

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)

%  

 

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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.

 

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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

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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

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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

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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.

 

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·

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

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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.

 

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·

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

%

 

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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.

 

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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

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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.

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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.

 

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ITEM 6. EXHIBITS

 

 

 

 

31.1

 

Certification of Chief Executive Officer

31.2

 

Certification of Chief Financial Officer

32.1

 

Certification of Chief Executive Officer

32.2

 

Certification of Chief Financial Officer

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

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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

 

 

38