SkyWest, Inc. (NASDAQ:SKYW) - A Resilient Regional Airline Poised for Growth

Published on September 24, 2024 | Ticker: SKYW

SkyWest, Inc. (NASDAQ:SKYW) is the largest regional airline in the United States, operating a fleet of Embraer E175, Canadair CRJ900, and Canadair CRJ700 regional jet aircraft. The company has a long and storied history, having been founded in 1972 and growing to become a dominant player in the regional aviation market.

Financials

In the latest fiscal year, SkyWest reported annual revenue of $2,935,432,000 and net income of $34,342,000. The company's strong operational performance was reflected in its annual operating cash flow of $736,334,000 and free cash flow of $420,008,000. These financial metrics demonstrated SkyWest's ability to generate substantial cash flow, which is crucial for funding fleet expansion, debt repayment, and shareholder returns.

During the second quarter of 2024, SkyWest reported net income of $75.6 million, or $1.82 per diluted share. This represented a significant improvement compared to the $15.4 million, or $0.35 per diluted share, reported in the same period of the previous year. The company's total operating revenues for the quarter were $867.1 million, up 19.5% from $725.6 million in the second quarter of 2023.

The increase in revenue was driven by a combination of factors, including a 12.3% increase in block hour production and a decrease in deferred revenue related to fixed monthly payments for flight operations. SkyWest's capacity purchase agreements, which accounted for approximately 87.1% of its flying agreements revenue in the first half of 2024, continued to be a reliable source of revenue, with the company recognizing $6 million of previously deferred revenue during the second quarter.

SkyWest's prorate and charter revenue also saw a significant increase, rising 30.2% to $107.1 million in the second quarter of 2024, compared to $82.2 million in the same period of the previous year. This growth was driven by higher flight volume and passenger loads on the company's prorate routes, as well as the launch of its SkyWest Charter (SWC) operations in May 2023.

The company's leasing and other revenue also increased by $3.7 million, or 14.7%, year-over-year, reflecting additional leasing opportunities and higher lease rates for aircraft and engines leased to third parties.

On the expense side, SkyWest's total operating expenses increased by 7.7% to $747.5 million in the second quarter of 2024, primarily due to higher salaries, wages, and benefits, as well as increased aircraft maintenance, materials, and repairs costs. The company's depreciation and amortization expense remained relatively flat, while aircraft fuel costs increased by 16.7% due to higher flight volume and a slight increase in the average fuel cost per gallon.

Outlook

Looking ahead, SkyWest is optimistic about its future prospects. The company expects its 2024 block hours to increase by 9% to 11% compared to 2023, driven by improving pilot availability, increasing fleet utilization, and ongoing strong demand from its major airline partners. SkyWest also anticipates its 2024 GAAP EPS to be in the high-$6 range, which would be slightly better than the company's previous guidance and above its pre-COVID levels.

One of the key drivers of SkyWest's growth is its fleet expansion strategy. During the second quarter, the company received 8 of the 20 United-financed E175 aircraft that it had previously announced. These aircraft are in addition to the 19 new E175s that SkyWest will begin receiving at the end of 2024. By the end of 2026, the company expects its E175 fleet to total 278 aircraft, solidifying its position as the largest Embraer operator in the world.

SkyWest is also actively managing its CRJ700 fleet, which it views as a valuable asset and an ideal replacement for single-class CRJ200 aircraft. The company is working with its major partners to place its CRJ700 aircraft under prorate and contract flying agreements, and it anticipates transitioning most of the 19 CRJ700s expiring from its American fleet during 2024 to become CRJ550s in its Delta fleet by the end of the year.

Liquidity

The company's balance sheet and liquidity position remain strong, with $834 million in cash and cash equivalents as of June 30, 2024. SkyWest has been actively repaying debt, reducing its total debt from $3 billion at the end of 2023 to $2.8 billion as of the end of the second quarter. The company expects to repay over $400 million in debt during 2024, which, combined with its share repurchase program, will further strengthen its financial position.

Risks and Challenges

One potential risk factor for SkyWest is the ongoing challenge of pilot availability. While the company has made progress in improving captain attrition and maintaining strong first officer availability through its pathway programs, the regional airline industry as a whole continues to grapple with staffing shortages. SkyWest expects to have over 5,000 pilots by the end of 2024, up from around 4,000 at the end of 2023, but this may still not be sufficient to fully meet the demand for its services.

Another risk factor is the potential for increased maintenance expenses as SkyWest brings more aircraft out of storage and returns them to service. The company anticipates a $40 million increase in maintenance expenses in the second half of 2024 compared to the first half, and it expects maintenance expenses to average $200 million per quarter during 2025 as it works to meet production demands and service its current fleet.

Conclusion

Despite these challenges, SkyWest remains well-positioned for growth. The company's strong partnerships with major airlines, its focus on fleet optimization, and its commitment to operational excellence position it as a leader in the regional aviation industry. As the industry continues to recover from the COVID-19 pandemic and adapt to changing market dynamics, SkyWest's resilience and adaptability will be key to its long-term success.

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