SkyWest, Inc. (SkyWest Airlines and ExpressJet Airlines) (St. George, Utah) reported a net loss of $22.9 million, or $0.44 per diluted share, for the first quarter ended March 31, 2014, compared to net income of $3.2 million, or $0.06 per diluted share, for the same period last year.
Due primarily to the severe weather and its related effects during the quarter ended March 31, 2014, SkyWest experienced a significantly larger pretax loss than it previously anticipated. Consistent with the experience reported by other airlines operating in the eastern United States, SkyWest experienced a significant number of flight cancellations related to a series of severe winter storms during the quarter ended March 31, 2014. Specifically, SkyWest, through its operating airlines, SkyWest Airlines, Inc. (SkyWest Airlines) and ExpressJet Airlines, Inc. (ExpressJet Airlines) cancelled a total of approximately 27,000 flights during the quarter ended March 31, 2014, of which approximately 21,000 were related to the severe weather. As a result of these flight cancellations, SkyWest not only experienced a negative effect on total operating revenues due to block hours not flown, but also experienced increased total operating costs due to its obligations to pay flight crews for cancelled flights, as well as incurring additional maintenance and other expenses from the negative effects of the severe weather.
Following are selected statistics and financial and operating information from the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013:
Net income declined from $3.2 million for Q1 2013 to a net loss of $(22.9) million for Q1 2014
Fully-diluted EPS declined from $0.06 for Q1 2013 to $(0.44) for Q1 2014
Block hour production declined (4.4)%, from 571,991 block hours during Q1 2013 compared to 546,813 block hours during Q1 2014
Estimated aggregate negative financial impact of severe weather in Q1 2014 of $30.3 million pretax from plan
Additional maintenance costs of approximately $6.2 million in Q1 2014 due to weather and general aging of the fleet
Repurchased $3.1 million, or 242,250 shares of outstanding common stock
Took delivery of first E175 regional jet aircraft in firm order of 40 aircraft
Increased total aircraft fleet to 758 aircraft as of March 31, 2014, compared to 752 aircraft as of March 31, 2013
Outlook for 2014
With the challenges experienced in the first quarter some outlook is provided here for the remainder of 2014. It will continue to be a year of transition for SkyWest as we are working to resolve financial and operational issues with our operating airlines and work with our major partners for mutually beneficial resolutions to these challenges. We will see continued reductions of our 50 seat aircraft and flying as indicated in the attached table to this release as well as take delivery of an estimated 23 Embraer E175 regional jet aircraft. The reduction of 50 seat aircraft coincides with capacity purchase agreement expirations on the 50 seat aircraft, the majority of which are aircraft financed by our major partners and will be returned to the major partner with no further obligation by SkyWest. The certification process for the Embraer E175 regional jet aircraft continues as previously scheduled and we anticipate flying our first aircraft in scheduled operations later in May 2014. This certification process will result in additional transition costs related to the launch of a new aircraft type on the SkyWest platform, including training costs.
Commenting on the results, Jerry C. Atkin, SkyWest’s Chairman and CEO, said, “Due primarily to factors outside of our control from the series of severe winter storms, we experienced a significant negative impact to our financial and operating results for the quarter ended March 31, 2014.” He continued, “We have experienced some relief from the severe weather in the month of April and look to achieve more normalized operating and financial results in the remaining quarters for 2014. On a positive note, we continue to make good progress on our certification work for the Embraer E175 regional jet and have taken delivery of the first two of the 40 E175 aircraft order.”
Financial and Operating Results
Operating revenues totaled $772.4 million for the quarter ended March 31, 2014, compared to $803.5 million for the same period of 2013, a decrease of $31.1 million. The decrease was due primarily to three factors, 1) a reduced amount of revenue of approximately $21.1 million from fuel expenses, certain engine overhaul amounts, landing fees and station costs which are recorded as operating revenues and are considered “pass-through amounts” under contracts with SkyWest’s major partners, 2) a reduction of approximately $20.5 million as a result of significant flight cancelations, including missed markup and margins, from weather impact and 3) increases of approximately $10.5 million from normal contract escalations in SkyWest’s contract flying and improvements in prorate flying.
Total airline expenses (consisting of total operating and interest expenses) increased approximately $10.0 million, or 1.2%, during the quarter ended March 31, 2014, compared to the same period in 2013. However, after deducting “pass-through” costs like fuel, certain engine overhaul expenses, aircraft ownership, landing fees and station costs from total operating cost and interest expenses, the remaining total airline expenses increased $31.0 million. Management estimates that approximately $20.1 million of the increase was due primarily to increased flight crew and maintenance labor costs related to severe weather impact and approximately $6.2 million from aircraft maintenance expenses, again related to the weather impact and general aging of SkyWest’s fleet. Lastly, SkyWest Airlines incurred approximately $1.5 million, consisting primarily of pilot training costs, related to certification costs of the new E175 aircraft.
Under certain of its agreements with its major partners, SkyWest recognizes revenue at fixed hourly rates for mature engine maintenance on regional jet engines and recognizes engine maintenance expense on its CRJ200 Regional Jet (CRJ200) engines on an as-incurred basis as maintenance expense. During the quarter ended March 31, 2014, CRJ200 engine expense under these agreements decreased $3.3 million to $6.7 million, compared to $10.0 million for the quarter ended March 31, 2013, primarily as a result of decreased engine overhaul expense due to the timing of scheduled engine maintenance events. SkyWest was reimbursed approximately $12.4 million and $11.4 million for engine overhaul expense, under its agreements with its major partners, during the quarters ended March 31, 2014 and 2013, respectively.
At March 31, 2014, SkyWest had $542.7 million in cash and marketable securities, compared to $670.1 million as of December 31, 2013. Cash and marketable securities decreased $127.4 million during the quarter ended March 31, 2014 compared to the balance as of December 31, 2013, due primarily to SkyWest’s normal recurring debt and lease payments made on a semi-annual basis, amounts spent for capital expenditures for operations and operating losses experienced at ExpressJet Airlines, primarily related to the severe weather impact. SkyWest’s long-term debt was $1.28 billion as of March 31, 2014, compared to $1.29 billion as of March 31, 2013. SkyWest has significant long-term lease obligations that are recorded as operating leases and are not reflected as liabilities on SkyWest’s consolidated balance sheets. At a 5.8% discount rate, the present value of these lease obligations was approximately $1.4 billion as of March 31, 2014.
On May 21, 2013, SkyWest announced it had entered into a Capacity Purchase Agreement (“CPA”) with United Airlines, Inc. (United Airlines) to operate 40 new Embraer E175 dual-class regional jet aircraft. The CPA is for 12 years and the new aircraft are scheduled to be operated by SkyWest Airlines. Deliveries for these aircraft began in March 2014 and are expected to continue through July 2015. The aircraft are expected to start to be introduced into service for United in mid-May 2014.
Additionally, on May 21, 2013 SkyWest announced it reached an agreement with Embraer S.A. (Embraer) for the purchase of 100 new E175 dual-class regional jet aircraft, 40 of which are considered firm orders and are scheduled to be placed into service under the United CPA discussed above. The remaining 60 aircraft remain conditional upon SkyWest entering into capacity purchase agreements with other major airlines. SkyWest also has an option for an additional 100 E175 dual-class regional jet aircraft.
On June 17, 2013, SkyWest and Embraer jointly announced an aircraft purchase agreement covering 100 E175-E2 dual-class regional jet aircraft and an option to purchase an additional 100 of the same aircraft. Deliveries for these E2 aircraft are tentatively planned to start in 2020.
During 2012, SkyWest announced the award of 34 additional dual-class aircraft and the removal of 66 CRJ200 aircraft under its Delta Connection agreements with Delta Air Lines, Inc. (Delta Air Lines). As of May 2013, all 34 of these additional dual-class aircraft had been delivered. As of March 31, 2014 SkyWest had removed 38 (22 placed in contract with another major partner and 16 removed from SkyWest’s fleet) of the 66 CRJ200 aircraft from service and currently anticipates removing another 22 CRJ200 aircraft during 2014. SkyWest believes the remaining six CRJ200 aircraft will be removed from its fleet in early 2015. Additionally, 41 of the 66 CRJ200 aircraft were financed by Delta and have been returned or will be returned to Delta with no further obligation by SkyWest.
Read the analysis of why SkyWest suffers the most during periods of bad weather from Bloomberg Businessweek: CLICK HERE
Copyright Photo: Michael B. Ing/AirlinersGallery.com. SkyWest believes the remaining six Bombardier CRJ200 aircraft will be removed from the Delta Connection contract fleet in early 2015. Bombardier CRJ200 (CL-600-2B19) N427SW (msn 7497) of SkyWest Airlines approaches the runway at Long Beach in the old 2000 livery.