SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o 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
Indicate by a 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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was to required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at October 29, 2014 |
Common stock, no par value |
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51,179,324 |
SKYWEST, INC.
QUARTERLY REPORT ON FORM 10-Q
3 | |||
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3 | ||
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Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013 |
3 |
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5 | |
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6 | |
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7 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 | |
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31 | ||
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33 | ||
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33 | |||
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33 | ||
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33 | ||
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33 | ||
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33 | ||
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34 | |
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Exhibit 31.1 |
Certification of Chief Executive Officer |
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Exhibit 31.2 |
Certification of Chief Accounting Officer |
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Exhibit 32.1 |
Certification of Chief Executive Officer |
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Exhibit 32.2 |
Certification of Chief Accounting Officer |
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SKYWEST, INC. AND SUBSIDIARIES
(Dollars in Thousands)
ASSETS
|
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September 30, |
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December 31, |
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(unaudited) |
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|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
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$ |
151,393 |
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$ |
170,636 |
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Marketable securities |
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392,690 |
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487,239 |
| ||
Restricted cash |
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11,582 |
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12,219 |
| ||
Income tax receivable |
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|
|
840 |
| ||
Receivables, net |
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92,662 |
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111,186 |
| ||
Inventories, net |
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150,133 |
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138,094 |
| ||
Prepaid aircraft rents |
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381,046 |
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360,781 |
| ||
Deferred tax assets |
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132,789 |
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156,050 |
| ||
Other current assets |
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24,798 |
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27,392 |
| ||
Total current assets |
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1,337,093 |
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1,464,437 |
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|
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PROPERTY AND EQUIPMENT: |
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|
|
|
| ||
Aircraft and rotable spares |
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4,504,659 |
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4,080,886 |
| ||
Deposits on aircraft |
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40,000 |
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40,000 |
| ||
Buildings and ground equipment |
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283,350 |
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279,965 |
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|
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4,828,009 |
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4,400,851 |
| ||
Less-accumulated depreciation and amortization |
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(1,869,304 |
) |
(1,749,058 |
) | ||
Total property and equipment, net |
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2,958,705 |
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2,651,793 |
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|
|
| ||
OTHER ASSETS |
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|
|
|
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Intangible assets, net |
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13,311 |
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14,998 |
| ||
Other assets |
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88,523 |
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101,991 |
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Total other assets |
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101,834 |
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116,989 |
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Total assets |
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$ |
4,397,632 |
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$ |
4,233,219 |
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See accompanying notes to condensed consolidated financial statements.
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
|
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September 30, |
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December 31, |
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2014 |
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2013 |
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(unaudited) |
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CURRENT LIABILITIES: |
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|
|
|
| ||
Current maturities of long-term debt |
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$ |
202,067 |
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$ |
177,389 |
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Accounts payable |
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252,180 |
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245,518 |
| ||
Accrued salaries, wages and benefits |
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133,744 |
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133,002 |
| ||
Accrued aircraft rents |
|
2,688 |
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7,492 |
| ||
Taxes other than income taxes |
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23,477 |
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19,626 |
| ||
Other current liabilities |
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45,755 |
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37,437 |
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Total current liabilities |
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659,911 |
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620,464 |
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OTHER LONG-TERM LIABILITIES |
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47,730 |
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76,305 |
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LONG-TERM DEBT, net of current maturities |
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1,467,506 |
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1,293,179 |
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DEFERRED INCOME TAXES PAYABLE |
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718,719 |
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727,358 |
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DEFERRED AIRCRAFT CREDITS |
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74,696 |
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80,974 |
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|
|
|
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Preferred stock, 5,000,000 shares authorized; none issued |
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Common stock, no par value, 120,000,000 shares authorized; 78,089,208 and 77,322,304 shares issued, respectively |
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624,810 |
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618,511 |
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Retained earnings |
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1,195,351 |
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1,197,819 |
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Treasury stock, at cost, 26,765,386 and 26,095,636 shares, respectively |
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(391,364 |
) |
(382,950 |
) | ||
Accumulated other comprehensive income |
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273 |
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1,559 |
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Total stockholders equity |
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1,429,070 |
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1,434,939 |
| ||
Total liabilities and stockholders equity |
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$ |
4,397,632 |
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$ |
4,233,219 |
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See accompanying notes to condensed consolidated financial statements.
SKYWEST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars and Shares in Thousands, Except per Share Amounts)
(Unaudited)
|
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Three Months Ended |
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Nine Months Ended |
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2014 |
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2013 |
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2014 |
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2013 |
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OPERATING REVENUES: |
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Passenger |
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$ |
815,867 |
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$ |
836,890 |
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$ |
2,372,054 |
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$ |
2,448,883 |
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Ground handling and other |
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18,766 |
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13,850 |
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51,538 |
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44,474 |
| ||||
Total operating revenues |
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834,633 |
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850,740 |
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2,423,592 |
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2,493,357 |
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OPERATING EXPENSES: |
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|
|
|
|
|
|
|
| ||||
Salaries, wages and benefits |
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315,766 |
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306,887 |
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944,253 |
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904,625 |
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Aircraft maintenance, materials and repairs |
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159,920 |
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176,822 |
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509,905 |
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515,506 |
| ||||
Aircraft rentals |
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72,899 |
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80,928 |
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232,682 |
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245,330 |
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Depreciation and amortization |
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65,822 |
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61,135 |
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192,389 |
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183,309 |
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Aircraft fuel |
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49,177 |
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49,656 |
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154,420 |
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146,139 |
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Ground handling services |
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31,114 |
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30,541 |
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100,446 |
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98,235 |
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Station rentals and landing fees |
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12,290 |
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29,473 |
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36,729 |
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100,559 |
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Special charges (see Note J) |
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4,713 |
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Other operating expenses |
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68,565 |
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59,124 |
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203,507 |
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177,363 |
| ||||
Total operating expenses |
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775,553 |
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794,566 |
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2,379,044 |
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2,371,066 |
| ||||
OPERATING INCOME |
|
59,080 |
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56,174 |
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44,548 |
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122,291 |
| ||||
OTHER INCOME (EXPENSE): |
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Interest income |
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2,549 |
|
567 |
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3,608 |
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3,164 |
| ||||
Interest expense |
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(16,883 |
) |
(16,999 |
) |
(48,697 |
) |
(52,490 |
) | ||||
Other, net |
|
23,598 |
|
4,625 |
|
20,709 |
|
10,477 |
| ||||
Total other income (expense), net |
|
9,264 |
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(11,807 |
) |
(24,380 |
) |
(38,849 |
) | ||||
INCOME BEFORE INCOME TAXES |
|
68,344 |
|
44,367 |
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20,168 |
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83,442 |
| ||||
PROVISION FOR INCOME TAXES |
|
27,006 |
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17,973 |
|
16,455 |
|
33,094 |
| ||||
NET INCOME |
|
$ |
41,338 |
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$ |
26,394 |
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$ |
3,713 |
|
$ |
50,348 |
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|
|
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|
|
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| ||||
BASIC EARNINGS PER SHARE |
|
$ |
0.81 |
|
$ |
0.51 |
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$ |
0.07 |
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$ |
0.97 |
|
DILUTED EARNINGS PER SHARE |
|
$ |
0.79 |
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$ |
0.50 |
|
$ |
0.07 |
|
$ |
0.96 |
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Weighted average common shares: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
51,322 |
|
51,881 |
|
51,324 |
|
51,841 |
| ||||
Diluted |
|
52,036 |
|
52,610 |
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51,562 |
|
52,551 |
| ||||
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|
|
|
|
|
|
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|
| ||||
Dividends declared per share |
|
$ |
0.04 |
|
$ |
0.04 |
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$ |
0.12 |
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$ |
0.12 |
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|
|
|
|
|
|
|
|
|
| ||||
COMPREHENSIVE INCOME: |
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
41,338 |
|
$ |
26,394 |
|
$ |
3,713 |
|
$ |
50,348 |
|
Proportionate share of other companies foreign currency translation adjustment, net of taxes |
|
(1,130 |
) |
67 |
|
(1,130 |
) |
67 |
| ||||
Net unrealized appreciation (depreciation) on marketable securities, net of taxes |
|
(222 |
) |
363 |
|
(157 |
) |
(137 |
) | ||||
TOTAL COMPREHENSIVE INCOME |
|
$ |
39,986 |
|
$ |
26,824 |
|
$ |
2,426 |
|
$ |
50,278 |
|
See accompanying notes to condensed consolidated financial statements
SKYWEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
|
|
Nine Months Ended |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
186,369 |
|
$ |
251,406 |
|
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchases of marketable securities |
|
(198,690 |
) |
(328,442 |
) | ||
Sales of marketable securities |
|
293,056 |
|
443,950 |
| ||
Proceeds from the sale of equipment |
|
3,468 |
|
270 |
| ||
Proceeds received from sale of Trip Linhas Aereas stock |
|
17,237 |
|
16,658 |
| ||
Acquisition of property and equipment: |
|
|
|
|
| ||
Aircraft and rotable spare parts |
|
(479,451 |
) |
(70,246 |
) | ||
Deposits on aircraft |
|
|
|
(35,629 |
) | ||
Buildings and ground equipment |
|
(16,017 |
) |
(8,847 |
) | ||
Increase in other assets |
|
(12,218 |
) |
(3,710 |
) | ||
|
|
|
|
|
| ||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
(392,615 |
) |
14,004 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Proceeds from issuance of long-term debt |
|
323,665 |
|
|
| ||
Principal payments on long-term debt |
|
(124,660 |
) |
(117,850 |
) | ||
Tax benefit (deficiency) from exercise of common stock options |
|
(1,245 |
) |
(150 |
) | ||
Net proceeds from issuance of common stock |
|
3,831 |
|
4,510 |
| ||
Purchase of treasury stock |
|
(8,414 |
) |
(11,739 |
) | ||
Payment of cash dividends |
|
(6,174 |
) |
(6,207 |
) | ||
|
|
|
|
|
| ||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
187,003 |
|
(131,436 |
) | ||
|
|
|
|
|
| ||
Increase (decrease) in cash and cash equivalents |
|
(19,243 |
) |
133,974 |
| ||
Cash and cash equivalents at beginning of period |
|
170,636 |
|
133,772 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
151,393 |
|
$ |
267,746 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash paid during the year for: |
|
|
|
|
| ||
Interest, net of capitalized amounts |
|
$ |
46,757 |
|
$ |
50,479 |
|
Income taxes |
|
$ |
485 |
|
$ |
2,509 |
|
See accompanying notes to condensed consolidated financial statements.
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A 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. 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. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the three and nine-months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
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.
Effective December 31, 2011, the Companys subsidiary, ExpressJet Airlines, Inc., a Delaware corporation, was merged into the Companys subsidiary, Atlantic Southeast Airlines, Inc., a Utah corporation, with the surviving corporation named ExpressJet Airlines, Inc. (the ExpressJet Combination). In these condensed consolidated financial statements, Atlantic Southeast refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, ExpressJet Delaware refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and ExpressJet refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the consummation of the ExpressJet Combination.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee to vest in an award upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The Company does not believe ASU 2014-12 will have a material impact on the Companys consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Under the new standard, 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. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. Our management is currently evaluating the anticipated impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.
In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20. The standard is effective in the first quarter of 2015, and the impact to the consolidated financial statements is not expected to be material.
Note B Passenger and Ground Handling Revenue
The Company recognizes passenger and ground handling revenues when the service is provided. Under the Companys contract and pro-rate flying agreements with Delta Airlines, Inc. (Delta), United Air Lines, Inc. (United), US Airways Group, Inc. (US Airways), American Airlines, Inc. (American) and Alaska Airlines (Alaska), revenue is considered earned when the flight is completed. Revenue is recognized under the Companys pro-rate flying agreements based upon the portion of the pro-rate passenger fare the Company anticipates that it will receive. 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 Companys major airline partners on flights that the Company operates under its code-share agreements.
In the event that the contractual rates under the Companys flying agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of prior periods approved rates, as adjusted to reflect any contract negotiations and the Companys estimate of rates that will be implemented in accordance with revenue recognition guidelines.
In the event the Company has a reimbursement dispute with a major partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on managements estimate of the resolution of the dispute.
In several of the Companys contractual agreements with its major partners, the Company is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in those agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period covered by those agreements, the Company calculates the incentives achieved during that period and recognizes revenue accordingly.
The following table summarizes the significant provisions of each flying agreement the Company has executed with its major partners:
Delta Connection Agreements
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Performance |
|
Payment Structure |
SkyWest Airlines Delta Connection Agreement |
|
· CRJ 200 - 36 · CRJ 700 - 19 · CRJ 900 32 |
|
· The contract expires on an individual aircraft basis beginning in 2014
· The final aircraft expires in 2022
· The weighted average remaining term of the aircraft under contract is 5.3 years
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Engine Maintenance
· Landing fees, Station Rents, De-ice
· Insurance |
|
· No financial performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
ExpressJet Delta Connection Agreement |
|
· CRJ 200 57 · CRJ 700 - 41 · CRJ 900 28 |
|
· The contract expires on an individual aircraft basis beginning in 2014 |
|
· Fuel
· Engine Maintenance
|
|
· Performance based financial incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
· The final aircraft expires in 2022
· The weighted average remaining term of the aircraft under contract is 4.1 years
· Upon expiration, aircraft may be renewed or extended |
|
· Landing fees, Station Rents, De-ice
· Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines Prorate Agreement |
|
· EMB 120 7 · CRJ 200 10
|
|
· Terminable upon 120 days notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue
|
SkyWest Airlines and ExpressJet are each parties to a Delta Connection Agreement with Delta, pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi-year rate reset provisions that became operative in 2010 and resets each fifth year thereafter. The Delta Connection Agreements also provide that, beginning with the fifth anniversary of the execution of the agreements (September 8, 2010), Delta has the right to require that certain contractual rates under those agreements shall not exceed the second lowest of all carriers within the Delta Connection program. SkyWest Airlines and ExpressJet have agreed with Delta on contractual rates that are effective through December 31, 2015.
United Express Agreements
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Performance |
|
Payment Structure |
SkyWest Airlines United Express Agreement |
|
· CRJ 200 - 61 · CRJ 700 - 70 · EMB 120 9 · E175 14 |
|
· The contract expires on an individual aircraft basis beginning in 2015
· The final aircraft expires in 2026
· The weighted average remaining term of the aircraft under contract is 3.2 years
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
Atlantic Southeast United Express Agreement |
|
· CRJ 200 - 14 |
|
· Terminates 2015
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Performance |
|
Payment Structure |
ExpressJet Delaware United Express Agreement |
|
· ERJ 135 - 9 · ERJ 145 - 234 |
|
· The contract expires on an individual aircraft basis beginning in 2014
· The final aircraft expires in 2020
· The weighted average remaining term of the aircraft under contract is 3.2 years
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Engine Maintenance
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives or penalties |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines United Express Prorate Agreement |
|
· CRJ200 - 21 · EMB 120 - 20 |
|
· Terminable upon 120 days notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue |
Alaska Capacity Purchase Agreement
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Incentive Structure |
|
Payment Structure |
SkyWest Airlines Capacity Purchase Agreement |
|
· CRJ 700 - 9 |
|
· Terminates 2018
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
US Airways Express Agreement
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Incentive Structure |
|
Payment Structure |
SkyWest Airlines US Airways Express Agreement |
|
· CRJ 200 - 10 · CRJ 900 - 4 |
|
· Terminates 2015
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines US Airways Express Prorate Agreement |
|
· CRJ 200 - 1 |
|
· Terminable upon 120 days notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue |
American Agreement
Agreement |
|
Number of |
|
Term / Termination |
|
Pass through costs |
|
Incentive Structure |
|
Payment Structure |
SkyWest Airlines American Capacity Purchase Agreement |
|
· CRJ 200 - 12 |
|
· Terminates 2016
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines American Prorate Agreement |
|
· CRJ 200 - 4 |
|
· Terminable upon 120 days notice |
|
· None |
|
· None |
|
· Pro-rata sharing of the passenger fare revenue |
|
|
|
|
|
|
|
|
|
|
|
ExpressJet American Capacity Purchase Agreement |
|
· CRJ 200 - 11 |
|
· Terminates 2017
· Upon expiration, aircraft may be renewed or extended |
|
· Fuel
· Landing fees, Station Rents, De-ice
· Insurance |
|
· Performance based incentives |
|
· Rate per block hour, per departure and per aircraft under contract |
Other Revenue Items
The Companys passenger and ground handling revenues could be impacted by a number of factors, including changes to the Companys flying agreements with its major partners, contract modifications resulting from contract re-negotiations, the Companys ability to earn incentive payments contemplated under the Companys flying agreements and settlement of reimbursement disputes with the Companys major partners.
Note C Share-Based Compensation
The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. During the nine months ended September 30, 2014, the Company granted options to purchase 250,175 shares of common stock under the SkyWest, Inc. 2010 Long-Term Incentive Plan (the 2010 Incentive Plan). The following table shows the assumptions used and weighted average fair value for stock option grants during the nine months ended September 30, 2014.
Expected annual dividend rate |
|
1.33 |
% | |
Risk-free interest rate |
|
1.50 |
% | |
Average expected life (years) |
|
5.8 |
| |
Expected volatility of common stock |
|
0.427 |
| |
Forfeiture rate |
|
0.0 |
% | |
Weighted average fair value of option grants |
|
$ |
4.41 |
|
During the nine months ended September 30, 2014, the Company granted 306,704 restricted stock units to the Companys employees under the 2010 Incentive Plan. The restricted stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Companys subsidiaries. Upon vesting, a restricted stock unit will be replaced with a share of common stock. Additionally, during the nine months ended September 30, 2014, the Company granted 44,631 fully-vested shares of common stock to the Companys directors. The weighted average fair value of the shares of restricted stock on the date of grant was $12.10 per share.
The Company records share-based compensation expense only for those options and restricted stock units that are expected to vest. The estimated fair value of the stock options and restricted stock units is amortized over the applicable vesting periods. During the three months ended September 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $0.9 million and $1.1 million, respectively. During the nine months ended September 30, 2014 and 2013, the Company recorded pre-tax share-based compensation expense of $3.7 million and $3.6 million, respectively.
Note D 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 three and nine months ended September 30, 2014, options to acquire 2,942,000 and 3,055,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive. During the three and nine months ended September 30, 2013, options to acquire 3,164,000 and 3,300,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive.
The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
(Unaudited) |
|
(Unaudited) |
| ||||||||
Numerator |
|
|
|
|
|
|
|
|
| ||||
Net Income |
|
$ |
41,338 |
|
$ |
26,394 |
|
$ |
3,713 |
|
$ |
50,348 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator |
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding |
|
51,322 |
|
51,881 |
|
51,324 |
|
51,841 |
| ||||
Effect of outstanding share-based awards |
|
714 |
|
729 |
|
238 |
|
710 |
| ||||
Weighted average number of shares for diluted net income per common share |
|
52,036 |
|
52,610 |
|
51,562 |
|
52,551 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
|
$ |
0.81 |
|
$ |
0.51 |
|
$ |
0.07 |
|
$ |
0.97 |
|
Diluted earnings per share |
|
$ |
0.79 |
|
$ |
0.50 |
|
$ |
0.07 |
|
$ |
0.96 |
|
Note E Segment Reporting
Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to and regularly evaluated by the Companys chief operating decision maker (CODM) when deciding how to allocate resources and in assessing performance.
The Companys two operating segments consist of the operations of its two operating subsidiaries, SkyWest Airlines and ExpressJet. The following represents the Companys segment data for the three months ended September 30, 2014 and 2013 (in thousands).
|
|
Three months ended September 30, 2014 |
| ||||||||||
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
| ||||
Operating revenues |
|
$ |
493,606 |
|
$ |
340,553 |
|
$ |
474 |
|
$ |
834,633 |
|
Operating expense |
|
430,024 |
|
345,606 |
|
(77 |
) |
775,553 |
| ||||
Depreciation and amortization expense |
|
43,853 |
|
21,969 |
|
|
|
65,822 |
| ||||
Interest expense |
|
11,492 |
|
4,692 |
|
699 |
|
16,883 |
| ||||
Segment profit (loss)(1) |
|
52,090 |
|
(9,745 |
) |
(148 |
) |
42,197 |
| ||||
Identifiable intangible assets, other than goodwill(2) |
|
|
|
13,311 |
|
|
|
13,311 |
| ||||
Total assets (2) |
|
2,825,243 |
|
1,572,389 |
|
|
|
4,397,632 |
| ||||
Capital expenditures (including non-cash) |
|
186,678 |
|
6,152 |
|
|
|
192,830 |
| ||||
|
|
Three months ended September 30, 2013 |
| ||||||||||
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
| ||||
Operating revenues |
|
$ |
468,517 |
|
$ |
381,749 |
|
$ |
474 |
|
$ |
850,740 |
|
Operating expense |
|
409,320 |
|
382,583 |
|
2,663 |
|
794,566 |
| ||||
Depreciation and amortization expense |
|
38,845 |
|
22,290 |
|
|
|
61,135 |
| ||||
Interest expense |
|
10,812 |
|
5,274 |
|
913 |
|
16,999 |
| ||||
Segment profit (loss)(1) |
|
48,385 |
|
(6,108 |
) |
(3,102 |
) |
39,175 |
| ||||
Identifiable intangible assets, other than goodwill(3) |
|
|
|
15,560 |
|
|
|
15,560 |
| ||||
Total assets(3) |
|
2,711,009 |
|
1,554,385 |
|
|
|
4,265,394 |
| ||||
Capital expenditures (including non-cash) |
|
21,977 |
|
8,891 |
|
|
|
30,868 |
| ||||
(1) Segment profit (loss) is equal to operating income less interest expense
(2) As of September 30, 2014
(3) As of September 30, 2013
The following represents the Companys segment data for the nine-month periods ended September 30, 2014 and 2013 (in thousands).
|
|
Nine months ended September 30, 2014 |
| ||||||||||
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
| ||||
Operating revenues |
|
$ |
1,416,149 |
|
$ |
1,006,021 |
|
$ |
1,422 |
|
$ |
2,423,592 |
|
Operating expense |
|
1,289,218 |
|
1,089,923 |
|
(97 |
) |
2,379,044 |
| ||||
Depreciation and amortization expense |
|
125,811 |
|
66,578 |
|
|
|
192,389 |
| ||||
Interest expense |
|
32,180 |
|
14,309 |
|
2,208 |
|
48,697 |
| ||||
Segment profit (loss)(1) |
|
94,751 |
|
(98,211 |
) |
(689 |
) |
(4,149 |
) | ||||
Identifiable intangible assets, excluding goodwill(2) |
|
|
|
13,311 |
|
|
|
13,311 |
| ||||
Total assets(2) |
|
2,825,243 |
|
1,572,389 |
|
|
|
4,397,632 |
| ||||
Capital expenditures (including non-cash) |
|
487,711 |
|
18,653 |
|
|
|
506,364 |
| ||||
|
|
Nine months ended September 30, 2013 |
| ||||||||||
|
|
SkyWest |
|
ExpressJet |
|
Other |
|
Consolidated |
| ||||
Operating revenues |
|
$ |
1,380,930 |
|
$ |
1,109,085 |
|
$ |
3,342 |
|
$ |
2,493,357 |
|
Operating expense |
|
1,236,003 |
|
1,128,757 |
|
6,306 |
|
2,371,066 |
| ||||
Depreciation and amortization expense |
|
116,309 |
|
67,000 |
|
|
|
183,309 |
| ||||
Interest expense |
|
33,535 |
|
16,099 |
|
2,856 |
|
52,490 |
| ||||
Segment profit (loss)(1) |
|
111,392 |
|
(35,771 |
) |
(5,820 |
) |
69,801 |
| ||||
Identifiable intangible assets, other than goodwill(3) |
|
|
|
15,560 |
|
|
|
15,560 |
| ||||
Total assets(3) |
|
2,711,009 |
|
1,554,385 |
|
|
|
4,265,394 |
| ||||
Capital expenditures (including non-cash) |
|
66,339 |
|
28,242 |
|
|
|
94,581 |
| ||||
(1) Segment profit (loss) is equal to operating income less interest expense
(2) As of September 30, 2014
(3) As of September 30, 2013
Note F Commitments and Contingencies
As of September 30, 2014, the Company leased 544 aircraft, as well as airport facilities, office space and various other property and equipment under non-cancelable operating leases which are generally on a long-term net rent basis where 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 may be renewed or replaced by other leases. The following table summarizes future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2014 (in thousands):
September through December 2014 |
|
$ |
96,439 |
|
2015 |
|
341,184 |
| |
2016 |
|
267,626 |
| |
2017 |
|
197,709 |
| |
2018 |
|
153,301 |
| |
Thereafter |
|
571,781 |
| |
|
|
$ |
1,628,040 |
|
During the nine months ended September 30, 2014, the Company took delivery of fourteen Embraer E175 dual-class jet aircraft (E175s) and initially financed the aircraft through the issuance of $323.7 million of long-term debt. The debt associated with the E175 aircraft has a fifteen year term with a variable interest rate and is secured by the E175 aircraft.
Note G Fair Value Measurements
The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company determined 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. The Companys marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities and are classified as Level 2 investments. |
|
|
|
|
|
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, 2014 and December 31, 2013, 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, 2014 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Marketable Securities |
|
|
|
|
|
|
|
|
| ||||
Bonds and bond funds |
|
$ |
392,565 |
|
$ |
|
|
$ |
392,565 |
|
$ |
|
|
Asset backed securities |
|
125 |
|
|
|
125 |
|
|
| ||||
|
|
392,690 |
|
|
|
392,690 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash, Cash Equivalents and Restricted Cash |
|
162,975 |
|
162,975 |
|
|
|
|
| ||||
Other Assets |
|
2,272 |
(a) |
|
|
|
|
2,272 |
| ||||
Total Assets Measured at Fair Value |
|
$ |
557,937 |
|
$ |
162,975 |
|
$ |
392,690 |
|
$ |
2,272 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Fair Value Measurements as of December 31, 2013 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Marketable Securities |
|
|
|
|
|
|
|
|
| ||||
Bonds and bond funds |
|
$ |
487,049 |
|
$ |
|
|
$ |
487,049 |
|
$ |
|
|
Asset backed securities |
|
190 |
|
|
|
190 |
|
|
| ||||
|
|
487,239 |
|
|
|
487,239 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash, Cash Equivalents and Restricted Cash |
|
182,855 |
|
182,855 |
|
|
|
|
| ||||
Other Assets |
|
2,245 |
(a) |
|
|
|
|
2,245 |
| ||||
Total Assets Measured at Fair Value |
|
$ |
672,339 |
|
$ |
182,855 |
|
$ |
487,239 |
|
$ |
2,245 |
|
(a) Comprised of auction rate securities which are reflected in Other assets in the Companys unaudited condensed consolidated balance sheets
Based on market conditions, the Company uses a discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing condensed consolidated financial statements, these securities were categorized as Level 3 securities. The Companys Marketable Securities classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.
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, 2014. The Companys policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
The following table presents the Companys assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2014 (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
Auction Rate |
| |
Balance at January 1, 2014 |
|
$ |
2,245 |
|
Total realized and unrealized gains or (losses) |
|
|
| |
Included in earnings |
|
|
| |
Included in other comprehensive income |
|
27 |
| |
Transferred out |
|
|
| |
Settlements |
|
|
| |
Balance at September 30, 2014 |
|
$ |
2,272 |
|
The fair value of the Companys long-term debt classified as Level 2 was estimated using discounted cash flow analyses, based on the Companys current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Companys long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $1,706.3 million as of September 30, 2014, as compared to the carrying amount of $1,669.6 million as of September 30, 2014. The fair value of the Companys long-term debt is estimated based on current rates offered to the Company for similar debt and approximated $1,509.2 million as of December 31, 2014, as compared to the carrying amount of $1,470.6 million as of December 31, 2013.
Note H Income Taxes
The income tax provision for the nine months ended September 30, 2014 included a valuation allowance of $5.5 million for previously generated state net operating loss benefits specific to ExpressJet that are scheduled to expire before the benefits are anticipated to be utilized. The Company did not record a valuation allowance for the three months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2014 is higher than the expected federal and state statutory rate due to the valuation allowance recorded during the nine months ended September 30, 2014 and a disproportionate increase in expense with limited tax deductibility relative to the Companys pre-tax income for the nine months ended September 30, 2014.
Note I Legal Matters
The Company is subject to certain legal actions which it considers routine to its business activities. As of September 30, 2014, 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 Companys financial position, liquidity or results of operations. During the three months ended September 30, 2014, SkyWest Airlines and ExpressJet executed a confidential settlement agreement with Delta resolving all disputed issues of a complaint filed in the Georgia State Court of Fulton County. The complaint related to the allocation of liability for certain irregular operation expenses paid by SkyWest Airlines and ExpressJet to their passengers and vendors under certain situations (IROPs). The financial impact of the settlement approximated the amount accrued by the Company prior to the settlement agreement. The parties also reached an agreement on the allocation of IROP liabilities for the remaining term of the Delta Connection Agreements, which the Companys management does not believe will have a negative impact to the Companys financial results.
Note J Special charges
In connection with the acquisition of ExpressJet Delaware, the Company acquired an aircraft paint facility in Saltillo, Mexico, and recorded a foreign value added tax (VAT) asset attributable to the paint facility. The realizability of the VAT asset is dependent upon the Companys future utilization of the facility. During the nine months ended September 30, 2014, the Company wrote-off the VAT asset value of $2.5 million as the Company was no longer using the paint facility. Additionally, during the nine months ended September 30, 2014, the Company wrote down the value of the paint facility by $2.2 million. The Company did not record any special charges during the three months ended September 30, 2014. On October 1, 2014, the Company sold the paint facility to a third party for an amount that approximated the net book value of the paint facility.
Note K Investment in Trip Linhas Aereas S.A.
On July 12, 2012, the Company sold its 20% interest in Trip Linhas Aereas S.A., a Brazilian regional airline (TRIP), for a price of $42 million. The purchase price was scheduled to be paid in three installments payments with the final payment due in July 2014. As part of the transaction, the Company also received an option to acquire 15.38% of the ownership in Trip Investimentos Ltda. (Trip Investimentos), the purchaser of the Companys TRIP shares. The Company recorded the fair value of the option as additional consideration received in the transaction. The option has an initial exercise price per share equal to the price paid by Trip Investimentos to acquire the TRIP shares from the Company. The exercise price escalates annually at a specified rate and the
Company can exercise the option, at its discretion, between the second and fourth anniversaries of the Companys receipt of the final required installment payment from Trip Investimentos. The option has been written down to a nominal amount based on the Companys assessment of its current fair value. Under the terms of the agreement, Trip Investimentos could not transfer the TRIP shares until the final installment payment has been made, which prevented the Company from recognizing the gain on the transaction until the final payment was received and the Trip Investimentos restriction to transfer the shares was removed.
During the three months ended September 30, 2014, the Company received the final installment payment attributable to the sale of its TRIP shares, which removed Trip Investimentos restriction to transfer the TRIP shares. Accordingly, during the three months ended September 30, 2014 the Company recorded a gain of $24.9 million in other income as a result of the completed transaction. Additionally, under the terms of the purchase agreement, the Company received $2.1 million of interest payments from Trip Investimentos, which the Company recorded as interest income during the three months ended September 30, 2014.
ITEM 2: MANAGEMENTS 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, 2014 and 2013. Also discussed is our financial position as of September 30, 2014 and December 31, 2013. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine-month periods ended September 30, 2014, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the following section of this Report entitled Cautionary Statement Concerning Forward-Looking Statements for discussion of the 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, the revenue environment, our contract relationships and our expected financial performance. These statements include, but are not limited to, statements about our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines and ExpressJet, our objectives, expectations and intentions, and other statements that are not historical facts. You should also keep in mind that 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 likely vary, and may vary materially, from those anticipated, estimated, projected or intended.
There may be other factors not identified above of which we are not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by law.
Overview
Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of September 30, 2014, SkyWest Airlines and ExpressJet offered scheduled passenger service with approximately 3,700 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of September 30, 2014, we operated a combined fleet of 751 aircraft consisting of the following:
|
|
CRJ200 |
|
ERJ145 |
|
ERJ135 |
|
CRJ700 |
|
CRJ900 |
|
E175 |
|
EMB120 |
|
Total |
|
United |
|
96 |
|
234 |
|
9 |
|
70 |
|
|
|
14 |
|
29 |
|
452 |
|
Delta |
|
110 |
|
|
|
|
|
60 |
|
60 |
|
|
|
7 |
|
237 |
|
American |
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
US Airways |
|
11 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
15 |
|
Alaska |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Subleased to an un-affiliated entity |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Unassigned (a) |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
9 |
|
Total |
|
248 |
|
234 |
|
9 |
|
139 |
|
64 |
|
14 |
|
43 |
|
751 |
|
(a) As of September 30, 2014, these aircraft were in transition between flying contracts with major partners.
For the nine months ended September 30, 2014, approximately 61.2% of our aggregate capacity was operated for United, approximately 31.9% was operated for Delta, approximately 3.1% was operated for American, approximately 2.1% was operated for Alaska and approximately 1.7% was operated for US Airways.
Under a fixed-fee flying arrangement, the major airline generally pays the regional airline a fixed fee for each departure, with additional incentives based on completion of flights, on-time performance and baggage handling performance. In addition, under the fixed-fee arrangement, the major airline bears the financial risk of changes in the price of fuel and other agreed-upon costs that are directly reimbursed by the major partner or paid directly by the major partner. Regional airlines benefit from a fixed-fee arrangement because they are sheltered from many of the elements that could cause volatility in airline financial performance, including variations in ticket prices, passenger loads and fuel prices. However, regional airlines in fixed-fee arrangements do not benefit from positive trends in ticket prices, ancillary revenue, passenger loads or fuel prices.
Under our fixed-fee arrangements, three compensation components have a significant impact on comparability of revenue and operating expense for the periods presented in this Report. One compensation component is the reimbursement of fuel expense, which is a directly-reimbursed expense under all of our fixed-fee arrangements. If we purchase fuel directly from vendors, our major partners reimburse us for fuel expense incurred under each respective fixed-fee contract, and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed-fee arrangements during a particular period will impact the comparability of our fuel expense and our passenger revenue during the period equally, with no impact on our operating income.
The second compensation component is the reimbursement of landing fees and station rents, which is a directly-reimbursed expense under all of our fixed-fee arrangements. Our major partners reimburse us for landing fees and station rent expense incurred under each of our existing fixed-fee contracts, and we record such reimbursements as passenger revenue. Over the past few years, some of our major airline partners have paid an increased volume of landing fees and station rents directly to airport authorities on flights we operated under our fixed-fee contracts, which impacts the comparability of revenue and operating expense for the periods presented in this Report.
The third compensation component is the compensation we receive for engine maintenance under our fixed-fee arrangements. Under our United, American, US Airways and Alaska fixed-fee contracts, a portion of our compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to compensate us for engine maintenance costs (Fixed-Rate Engine Contracts). Under the compensation structure for our Delta Connection and ExpressJet United CPA flying contracts, our major partner reimburses us for engine maintenance expense when the expense is incurred (Directly-Reimbursed Engine Contracts). We use the direct- expense method of accounting for our Bombardier CRJ200 Regional Jet (CRJ200) engine overhaul costs and, accordingly, we recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis. Under the direct-expense method, the maintenance liability is recorded when the maintenance services are performed (CRJ200 Engine Overhaul Expense).
Because we use the direct-expense method of accounting for our CRJ200 engine expense, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine maintenance events and related expense we incur each reporting period under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our operating income for the presented reporting periods.
Because we recognize revenue at the same amount and in the same period when we incur engine maintenance expense on engines operating under our Directly- Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods.
We have an agreement with a third-party vendor to provide long-term engine maintenance covering scheduled and unscheduled repairs for engines on our Bombardier CRJ700 Regional Jets (CRJ700s) operating under our Fixed-Rate Engine Contracts (the Power by the Hour Agreement). Under the terms of the Power by the Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power by the Hour Agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. Because we record engine maintenance expense based on the fixed hourly rate pursuant to the Power by the Hour Agreement on our CRJ700s operating under our Fixed-Rate Engine Contracts, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods. The table below summarizes how we are compensated by our major partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.
Flying |
|
Compensation of Engine Expense |
|
Expense Recognition |
SkyWest Delta Connection |
|
Directly-Reimbursed Engine Contracts |
|
Direct Expense Method |
ExpressJet Delta Connection |
|
Directly-Reimbursed Engine Contracts |
|
Direct Expense Method |
SkyWest United Express (CRJ200) |
|
Fixed-Rate Engine Contracts |
|
Direct Expense Method |
SkyWest United Express (CRJ700) |
|
Fixed-Rate Engine Contracts |
|
Power by the Hour Agreement |
SkyWest United Express (E175) |
|
Fixed-Rate Engine Contracts |
|
Power by the Hour Agreement |
SkyWest United Express (EMB120) |
|
Fixed-Rate Engine Contracts |
|
Deferral Method |
ExpressJet United Express (CRJ200) |
|
Fixed-Rate Engine Contracts |
|
Direct Expense Method |
ExpressJet United CPA (ERJ145) |
|
Directly-Reimbursed Engine Contracts |
|
Power by the Hour Agreement |
Alaska Agreement |
|
Fixed-Rate Engine Contracts |
|
Power by the Hour Agreement |
American Eagle Agreement (CRJ200) |
|
Fixed-Rate Engine Contracts |
|
Direct Expense Method |
US Airways Express (CRJ200 / CRJ900) |
|
Fixed-Rate Engine Contracts |
|
Direct Expense Method |
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 contract flying and our controlled or pro-rate flying. For the nine months ended September 30, 2014, contract flying revenue and pro-rate revenue represented approximately 88.1% and 11.9%, respectively, of our total passenger revenues. 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, flight departures and other operating measures.
Third Quarter Summary
We had total operating revenues of $834.6 million for the three months ended September 30, 2014, a 1.9% decrease, compared to total operating revenues of $850.7 million for the three months ended September 30, 2013. We generated net income of $41.3 million, or $0.79 per diluted share, for the three months ended September 30, 2014, compared to net income of $26.4 million or $0.50 per diluted share, for the three months ended September 30, 2013.
The significant items affecting our financial performance during the three months ended September 30, 2014 are summarized below:
Revenue
Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Excluding the impact of the expenses incurred for fuel, landing fees, station rents and engine maintenance expense and associated reimbursements from our major partners, our passenger revenues increased from $755.4 million for the three months ended September 30, 2013 to $763.0 million for the three months ended September 30, 2014, or by $7.6 million or 1.0%. This increase was primarily due to certain contact renewals and modifications and operation of the additional E175 aircraft during the three months ended September 30, 2014 compared to the corresponding period in 2013. Although we had a reduction in block hour production during the three months ended September 30, 2014 compared to the corresponding period in 2013, the decrease in block hour production was significantly concentrated in the ExpressJet ERJ145 flying contract with United, which has a lower revenue per block hour than our other flying contracts as both fuel and aircraft lease payments are paid directly by United under the ExpressJet ERJ145 contract and we do not record revenue for expenses paid directly to vendors by our major partners.
Operating and Other Expense Related Items
Salaries, wages and employee benefits increased $8.9 million, or 2.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in salaries, wages and employee benefits expenses was primarily due to increased pilot costs associated with the implementation of the Airline Safety and Pilot Training Improvement Act of 2009 (the Improvement Act), which had a negative effect on pilot scheduling and work hours. We anticipate that the negative impact of compliance with the Improvement Act will continue in future periods. The increase in salaries, wages and employee benefits was also due to additional hiring and training associated with the deliveries of our E175 aircraft.
Other operating expenses, which primarily consist of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $9.4 million, or 16.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in other expenses during the three months ended September 30, 2014 was primarily due to an increase in crew lodging expenses resulting from our compliance with the Improvement Act. During the three months ended September 30, 2014, we received the final installment payment from Trip Investimentos related to our sale of TRIP shares. Because Trip Investimentos was restricted from transferring the shares until we received the final payment, we did not record the gain on the
transaction until the final payment was received. During the three months ended September 30, 2014 we recorded a gain of $24.9 million in other income as a result of the completed transaction. Additionally, under the terms of the purchase agreement, we received $2.1 million of interest payments from Trip Investimentos, which was recorded as interest income during the three months ended September 30, 2014.
Other Items
On May 16, 2013, SkyWest Airlines and United entered into a United Express Agreement to operate 40 new E175 aircraft. Under the agreement, we acquired the first fourteen of these aircraft during the nine months ended September 30, 2014, with deliveries scheduled to continue to mid-2015. The United Express Agreement has a 12-year term for each of the aircraft subject to the agreement, and other terms which are generally consistent with the SkyWest Airlines United Express Agreement. During the three months ended September 30, 2014, SkyWest Airlines began passenger service with six additional E175s to be operated under the United Express Agreement. Twelve of the fourteen aircraft acquired have been placed into service as of September 30, 2014.
Under the ExpressJet Delaware United Express Agreement, 16 ERJ145s were removed from contract due to scheduled contract expirations during the nine months ended September 30, 2014 and the aircraft are being returned to United. Additionally, there are ten ERJ145s and eight ERJ145s with scheduled contract expirations for the month of December 2014 and January 2015, respectively. Nine ERJ135s are scheduled for removal in early 2015. We do not currently anticipate that we will reach an agreement with United to extend the flying contract term with these aircraft and ExpressJet will return these aircraft to United. We do not anticipate the termination of these aircraft will have a material negative effect on our financial results.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2013, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2013. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require managements 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 intangibles, stock-based compensation expense and fair value. 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 could differ materially, from such estimates.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee to vest in an award upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award, but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not believe the implementation of ASU 2014-12 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Under the new standard, 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. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. Our management is currently evaluating the impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.
In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20. The standard is effective in the first quarter of 2015. We do not believe the implementation of the standard will have a material impact to the consolidated financial statements.
Results of Operations
Our Business Segments
For the three months ended September 30, 2014 and 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet.
|
|
For the three months ended September 30, |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% |
| |||
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
| |||
Operating Revenues: |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines Operating Revenues |
|
$ |
493,606 |
|
$ |
468,517 |
|
$ |
25,089 |
|
5.4 |
% |
ExpressJet Operating Revenues |
|
340,553 |
|
381,749 |
|
(41,196 |
) |
(10.8 |
)% | |||
Other Operating Revenues |
|
474 |
|
474 |
|
|
|
0.0 |
% | |||
Total Operating Revenues |
|
$ |
834,633 |
|
$ |
850,740 |
|
$ |
(16,107 |
) |
(1.9 |
)% |
Airline Expenses: |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines Expense |
|
$ |
441,516 |
|
$ |
420,132 |
|
$ |
21,384 |
|
5.1 |
% |
ExpressJet Expense |
|
350,298 |
|
387,857 |
|
(37,559 |
) |
(9.7 |
)% | |||
Other Airline Expense |
|
622 |
|
3,576 |
|
(2,954 |
) |
(82.6 |
)% | |||
Total Airline Expense(1) |
|
$ |
792,436 |
|
$ |
811,565 |
|
$ |
(19,129 |
) |
(2.4 |
)% |
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines segment profit |
|
$ |
52,090 |
|
$ |
48,385 |
|
$ |
3,705 |
|
7.7 |
% |
ExpressJet segment loss |
|
(9,745 |
) |
(6,108 |
) |
(3,637 |
) |
59.5 |
% | |||
Other profit (loss) |
|
(148 |
) |
(3,102 |
) |
2,954 |
|
(95.2 |
)% | |||
Total Segment profit |
|
$ |
42,197 |
|
$ |
39,175 |
|
$ |
3,022 |
|
7.7 |
% |
Interest Income |
|
2,549 |
|
567 |
|
1,982 |
|
349.6 |
% | |||
Other |
|
23,598 |
|
4,625 |
|
18,973 |
|
410.2 |
% | |||
Consolidated Income before taxes |
|
$ |
68,344 |
|
$ |
44,367 |
|
$ |
23,977 |
|
54.0 |
% |
(1) Total Airline Expense includes operating expense and interest expense
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $3.7 million, or 7.7%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in the SkyWest Airlines segment profit was due primarily to the following factors:
· Excluding the directly reimbursed expenses associated with our contract flying, which is reflected in operating revenues, SkyWest Airlines operating revenue increased by $31.9 million or 7.9 % during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase was primarily due to increased government subsidies applicable to certain routes we operated, improvements in the provisions of certain of our flying contracts and due to the operation of twelve new E175s placed into service by September 30, 2014.
· SkyWest Airlines salaries, wages and employee benefits increased $9.7 million or 6.8% during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, primarily due to direct labor costs associated with the E175 operations and increased expenses associated with the implementation of the Improvement Act, which had a negative effect on pilot scheduling and work hours. Additionally, pilot training costs increased due to preparation for upcoming E175 deliveries during the three months ended September 30, 2014 compared to the comparable period of 2013.
· Excluding the directly reimbursed expenses associated with our contract flying and salaries wages and employee benefits, SkyWest Airlines remaining airline expense increased by $18.5 million, or 8.8%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase in direct operating costs associated with the additional E175 operations and additional crew hotel expenses due to crew scheduling resulting from the Improvement Act.
ExpressJet Segment Loss. ExpressJet segment loss increased $3.6 million, or 59.5%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in ExpressJet segment loss was due primarily to the following factors:
· Excluding the directly reimbursed expenses associated with our contract flying, which is reflected in operating revenues, ExpressJet Airlines operating revenue decreased by $18.9 million, or 6.8%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in operating revenue was primarily due to a reduction in the ExpressJet fleet size and related decrease in block hour production of approximately 27,000 block hours, or 7.7%, from the three months ended September 30, 2013 to the three months ended September 30, 2014. Block hour production is a significant driver of revenue in our flying contracts with our major partners.
· Excluding the directly reimbursed expenses associated with our contract flying, ExpressJets other airline expenses decreased $15.3 million, or 5.4%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease was primarily related to the reduction in ExpressJet fleet size, related block hour production and direct operating expenses. The ExpressJet airline expenses for the three months ended September 30, 2014 were negatively influenced by inefficiencies associated with the implementation of the Improvement Act, which negatively impacted crew wages and crew lodging expenses.
Three Months Ended September 30, 2014 and 2013
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.
|
|
For the three months ended September 30, |
| ||||
|
|
2014 |
|
2013 |
|
% Change |
|
Revenue passenger miles (000) |
|
8,342,394 |
|
8,384,129 |
|
(0.5 |
)% |
Available seat miles (ASMs) (000) |
|
10,037,729 |
|
10,256,027 |
|
(2.1 |
)% |
Block hours |
|
590,534 |
|
613,821 |
|
(3.8 |
)% |
Departures |
|
355,273 |
|
378,063 |
|
(6.0 |
)% |
Passengers carried |
|
15,630,168 |
|
15,929,930 |
|
(1.9 |
)% |
Passenger load factor |
|
83.1 |
% |
81.7 |
% |
1.4 |
Pts |
Revenue per available seat mile |
|
8.3 |
¢ |
8.3 |
¢ |
0.0 |
% |
Cost per available seat mile |
|
7.9 |
¢ |
7.9 |
¢ |
0.0 |
% |
Cost per available seat mile excluding fuel |
|
7.4 |
¢ |
7.4 |
¢ |
0.0 |
% |
Fuel cost per available seat mile |
|
0.5 |
¢ |
0.5 |
¢ |
0.0 |
% |
Average passenger trip length (miles) |
|
534 |
|
526 |
|
1.5 |
% |
Revenues. Total operating revenues decreased $16.1 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. The most significant reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Our fuel expense, landing fees, station rents and directly-reimbursed engine expense decreased by $28.6 million, during the three months ended September 30, 2014, from the three months ended September 30, 2013, due primarily to our major partners paying an increased volume of landing fees and station rents directly to airport authorities on flights we operated under our code-share agreements. The following table summarizes the amount of fuel, landing fees, station rents and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).
|
|
For the three months ended September 30, |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Passenger revenues |
|
$ |
815,867 |
|
$ |
836,890 |
|
$ |
(21,023 |
) |
(2.5 |
)% |
Less: Fuel reimbursement from major partners |
|
16,666 |
|
22,527 |
|
(5,861 |
) |
(26.0 |
)% | |||
Less: Landing fee and station rent reimbursements from major partners |
|
4,699 |
|
25,021 |
|
(20,322 |
) |
(81.2 |
)% | |||
Less: Engine overhaul reimbursement from major partners |
|
31,470 |
|
33,922 |
|
(2,452 |
) |
(7.2 |
)% | |||
Passenger revenue excluding fuel, landing fee, station rent and engine overhaul reimbursements |
|
$ |
763,032 |
|
$ |
755,420 |
|
$ |
7,612 |
|
1.0 |
% |
Passenger revenues. Passenger revenues decreased $21.0 million, or 2.5%, during three months ended September 30, 2014, compared to the three months ended September 30, 2013. Our passenger revenues, excluding fuel, landing fee, station rent and engine overhaul reimbursements from major partners, increased $7.6 million, or 1.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Passenger revenues excluding fuel, landing fee, station rent and engine overhaul reimbursements increased primarily due to an increase in E175 operations and certain contract renewals and modifications at SkyWest Airlines, partially offset by a reduction in the ERJ145 fleet and related revenue at ExpressJet.
Ground handling and other. Total ground handling and other revenues increased $4.9 million, or 35.5%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Revenue attributed to ground handling services for our aircraft is reflected in our consolidated statements of comprehensive income under the heading Operating RevenuesPassenger and revenue attributed to ground handling services we provide for third-party aircraft and government subsidies we receive related to our pro-rate operations is reflected in our consolidated statements of comprehensive income under the heading Operating RevenuesGround handling and other. The increase in ground handling and other revenues we generated during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily related to an increase in government subsidies we received for providing service to certain locations under our pro-rate operations.
Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. (dollar amounts in thousands).
|
|
For the three months ended September 30, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
| |||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
|
Cents Per |
|
Cents Per |
| |||
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
|
ASM |
|
ASM |
| |||
Aircraft fuel |
|
$ |
49,177 |
|
$ |
49,656 |
|
$ |
(479 |
) |
(1.0 |
)% |
0.5 |
|
0.5 |
|
Salaries, wages and benefits |
|
315,766 |
|
306,887 |
|
8,879 |
|
2.9 |
% |
3.1 |
|
3.0 |
| |||
Aircraft maintenance, materials and repairs |
|
159,920 |
|
176,822 |
|
(16,902 |
) |
(9.6 |
)% |
1.6 |
|
1.7 |
| |||
Aircraft rentals |
|
72,899 |
|
80,928 |
|
(8,029 |
) |
(9.9 |
)% |
0.7 |
|
0.8 |
| |||
Depreciation and amortization |
|
65,822 |
|
61,135 |
|
4,687 |
|
7.7 |
% |
0.7 |
|
0.6 |
| |||
Ground handling services |
|
31,114 |
|
30,541 |
|
573 |
|
1.9 |
% |
0.3 |
|
0.3 |
| |||
Station rentals and landing fees |
|
12,290 |
|
29,473 |
|
(17,183 |
) |
(58.3 |
)% |
0.1 |
|
0.3 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Special charges |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other operating expenses |
|
68,565 |
|
59,124 |
|
9,441 |
|
16.0 |
% |
0.7 |
|
0.5 |
| |||
Total operating expenses |
|
775,553 |
|
794,566 |
|
(19,013 |
) |
(2.4 |
)% |
7.7 |
|
7.7 |
| |||
Interest |
|
16,883 |
|
16,999 |
|
(116 |
) |
(0.7 |
)% |
0.2 |
|
0.2 |
| |||
Total airline expenses |
|
$ |
792,436 |
|
$ |
811,565 |
|
$ |
(19,129 |
) |
(2.4 |
)% |
7.9 |
|
7.9 |
|
Fuel. Aircraft fuel expense decreased $.5 million, or 1.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in fuel cost was primarily due to a reduction in fuel expense associated with our contract flying due to the major airline partners purchasing more fuel directly from vendors, primarily offset by an increase in fuel used in our increased pro-rate flying operations during the three months ended September 30, 2014, compared to the prior period of 2013. The average fuel cost per gallon was $3.42 and $3.48 for the three month periods ended September 30, 2014 and 2013, respectively.
Salaries wages and employee benefits. Salaries, wages and employee benefits expense increased $8.9 million, or 2.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in salaries, wages and employee benefits was primarily due the implementation of the Improvement Act (and associated regulations) which had a negative effect on pilot scheduling and work hours and resulted in an increase in crew costs. The increase was also due, in part, to additional E175 operations and training costs associated with the commencement of our E175 flight operations.
Aircraft maintenance, materials and repairs. Aircraft maintenance, materials and repair expense decreased $16.9 million, or 9.6%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The following table summarizes the amount of engine overhauls and engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).
|
|
For the three months ended September 30, |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Aircraft maintenance, materials and repairs |
|
$ |
159,920 |
|
$ |
176,822 |
|
$ |
(16,902 |
) |
(9.6 |
)% |
Less: Engine overhaul reimbursed from major partners |
|
31,470 |
|
33,922 |
|
(2,452 |
) |
(7.2 |
)% | |||
Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
6,830 |
|
9,069 |
|
(2,239 |
) |
(24.7 |
)% | |||
Other aircraft maintenance, materials and repairs |
|
$ |
121,620 |
|
$ |
133,831 |
|
$ |
(12,211 |
) |
(9.1 |
)% |
Other aircraft maintenance, materials and repair expense decreased $12.2 million, or 9.1%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in aircraft maintenance expense excluding engine overhaul costs, for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily due to a decrease in the number of scheduled maintenance events and aircraft parts replacement.
We recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis as maintenance expense. Under our Fixed-Rate Engine Contracts, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the Fixed-Rate Engine Contracts can have a significant impact on our financial results. During the three months ended September 30, 2014, our CRJ200 engine expense under our Fixed-Rate Engine Contracts decreased $2.2 million compared to the three months ended September 30, 2013. The decrease in CRJ200 engine overhauls reimbursed under our Fixed-Rate Engine Contracts was principally due to fewer scheduled engine maintenance events.
Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our major partners at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amounts and during the same periods we recognized the corresponding expenses in our consolidated statements of comprehensive income.
Aircraft rentals. Aircraft rentals decreased $8.0 million, or 9.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease was primarily due to a decline in aircraft lease renewals subsequent to October 1, 2013.
Depreciation and amortization. Depreciation and amortization expense increased $4.7 million, or 7.7%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in depreciation and amortization expense was primarily due to our purchase of new and used aircraft and spare engines since October 1, 2013.
Ground handling services. Ground handling service expense increased $0.6 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in ground handling service expense was primarily due to SkyWest Airlines outsourcing customer service and ramp functions at several pro-rate stations.
Station rentals and landing fees. Station rentals and landing fees expense decreased $17.2 million, or 58.3%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The decrease in station rentals and landing fees expense was primarily due to our major partners paying an increased amount of station rents and landing fees directly to the applicable airports related to our contract flying arrangements.
Other operating expenses. Other operating expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $9.4 million, or 16.0%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The increase in other expenses during the three months ended September 30, 2014 was primarily due to additional crew lodging expenses attributable to the requirements of the Improvement Act. Other operating expenses increased due to additional pro-rate flying.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) decreased $19.1 million, or 2.4%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. We record the amount of those reimbursements as revenue. Under our Directly-Reimbursed Engine Contracts, we are reimbursed for our engine overhaul expense, which we record as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).
|
|
For the three months ended September 30, |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Total airline expense |
|
$ |
792,436 |
|
$ |
811,565 |
|
$ |
(19,129 |
) |
(2.4 |
)% |
Less: Fuel expense |
|
49,177 |
|
49,656 |
|
(479 |
) |
(1.0 |
)% | |||
Less: Engine overhaul reimbursement from major partners |
|
31,470 |
|
33,922 |
|
(2,452 |
) |
(7.2 |
)% | |||
Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
6,830 |
|
9,069 |
|
(2,239 |
) |
(24.7 |
)% | |||
Total airline expense excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |
|
$ |
704,959 |
|
$ |
718,918 |
|
$ |
(13,959 |
) |
(1.9 |
)% |
Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses decreased $14.0 million, or 1.9%, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The percentage decrease in total airline expenses, excluding fuel and engine overhauls, was different than the percentage increase in passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, due primarily to the factors described above.
Other income (expense), net. Other income, net, increased $21.1 million during the three months ended September 30, 2014, compared to the three months ended September 30, 2013. We recorded a gain of $24.9 million recorded during the three months ended September 30, 2014 resulting from the sale of TRIP stock and recorded interest income of $2.1 million received in conjunction with the TRIP transaction. During the three months ended September 30, 2013, we recorded a gain of $5.0 million associated with the sale of our investment in Mekong Aviation Joint Stock Company, an airline that operated in Vietnam (Air Mekong).
Net income. Primarily due to factors described above, we generated a net income of $41.3 million, or $0.79 per diluted share, for the three months ended September 30, 2014, compared to net income of $26.4 million, or $0.50 per diluted share, for the three months ended September 30, 2013.
Nine Months Ended September 30, 2014 and 2013
Our Business Segments
For the nine months ended September 30, 2014 and 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet.
|
|
For the nine months ended September 30, |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% |
| |||
|
|
Amount |
|
Amount |
|
Amount |
|
Percent |
| |||
Operating Revenues: |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines Operating Revenue |
|
$ |
1,416,149 |
|
$ |
1,380,930 |
|
$ |
35,219 |
|
2.6 |
% |
ExpressJet Operating Revenues |
|
1,006,021 |
|
1,109,085 |
|
(103,064 |
) |
(9.3 |
)% | |||
Other Operating Revenues |
|
1,422 |
|
3,342 |
|
(1,920 |
) |
(57.5 |
)% | |||
Total Operating Revenues |
|
$ |
2,423,592 |
|
$ |
2,493,357 |
|
$ |
(69,765 |
) |
(2.8 |
)% |
Airline Expenses: |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines Expense |
|
$ |
1,321,398 |
|
$ |
1,269,538 |
|
$ |
51,860 |
|
4.1 |
% |
ExpressJet Expense |
|
1,104,232 |
|
1,144,857 |
|
(40,625 |
) |
(3.5 |
)% | |||
Other Airline Expense |
|
2,111 |
|
9,161 |
|
(7,050 |
) |
(77.0 |
)% | |||
Total Airline Expense(1) |
|
$ |
2,427,741 |
|
$ |
2,423,556 |
|
$ |
4,185 |
|
0.2 |
% |
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
SkyWest Airlines segment profit |
|
$ |
94,751 |
|
$ |
111,392 |
|
$ |
(16,641 |
) |
(14.9 |
)% |
ExpressJet segment loss |
|
(98,211 |
) |
(35,772 |
) |
(62,439 |
) |
174.5 |
% | |||
Other pr |