SkyWest(SKYW) - 2023 Q4 - Annual Report

Part I Business SkyWest, Inc. is the largest regional airline in the United States, operating scheduled passenger services for major partners under long-term, fixed-fee capacity purchase agreements, with a fleet of 603 aircraft as of December 31, 2023 General Business and Fleet SkyWest provides scheduled passenger service across the U.S., Canada, and Mexico, primarily through fixed-fee code-share agreements with four major airline partners, operating 485 aircraft in service as of year-end 2023 - Substantially all flights are operated under long-term, fixed-fee capacity purchase agreements with United, Delta, American, or Alaska, where partners pay fixed rates and cover direct operating expenses like fuel[16] Fleet in Service or Under Contract (as of Dec 31, 2023) | Partner | E175 | CRJ900 | CRJ700 | CRJ200 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | United | 90 | — | 19 | 89 | 198 | | Delta | 85 | 41 | 9 | — | 135 | | American | 20 | — | 90 | — | 110 | | Alaska | 42 | — | — | — | 42 | | Total | 237 | 41 | 118 | 89 | 485 | Total Fleet Composition (as of Dec 31, 2023) | Category | E175 | CRJ900 | CRJ700 | CRJ200 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Aircraft in scheduled service | 237 | 41 | 118 | 89 | 485 | | SWC | — | — | — | 16 | 16 | | Leased to third parties | — | 5 | 35 | — | 40 | | Other (spares, transitioning, etc.) | — | 3 | 14 | 45 | 62 | | Total Fleet | 237 | 49 | 167 | 150 | 603 | Business Segments: SkyWest Leasing and SkyWest Charter (SWC) SkyWest Leasing manages aircraft financing and third-party leasing, while SkyWest Charter (SWC) began revenue-generating on-demand charter services in May 2023 with 16 CRJ200 aircraft - SkyWest Leasing manages aircraft financing and leases assets to third parties. As of December 31, 2023, it leased 35 CRJ700 aircraft and five CRJ900 aircraft to external entities[22][23] - SkyWest Charter (SWC) is a new subsidiary that launched on-demand charter service in May 2023, operating 16 CRJ200 aircraft in a 30-seat configuration as of December 31, 2023[24] Competition, Industry Conditions, and Pilot Constraints SkyWest competes with other regional airlines, facing significant challenges from pilot attrition that has reduced flight schedules, while maintaining $906.0 million in total available liquidity as of December 31, 2023 - Primary competitors include Air Wisconsin, Endeavor Air, Envoy Air, PSA Airlines, Piedmont Airlines, Horizon Air, GoJet, Mesa, and Republic Airways[25] - High pilot attrition to major airlines has negatively impacted the company's ability to operate flight schedules, causing a year-over-year decline in flights and block hours from 2021 to 2023[30] Operational Performance Trend | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Departures | 691,962 | 739,388 | 749,943 | | Block hours | 1,140,443 | 1,254,392 | 1,319,628 | - As of December 31, 2023, total available liquidity was $906.0 million, comprising $835.2 million in cash, cash equivalents, and marketable securities, and $70.8 million available under a line of credit[32] Code-Share Agreements SkyWest's revenue is dominated by code-share agreements, with 87% of 2023 flying revenue from capacity purchase agreements, and the company has firm commitments to add 21 new E175 aircraft across partnerships through 2026 - In 2023, approximately 87% of flying agreements revenue came from capacity purchase agreements, with the remainder from prorate and SWC flights[39] Code-Share Agreement Summary (as of Dec 31, 2023) | Partner | Agreement Type | Aircraft Count | Average Remaining Term | | :--- | :--- | :--- | :--- | | United | Capacity Purchase & Prorate | 198 | 2.7 years | | Delta | Capacity Purchase & Prorate | 135 | 4.8 years | | American | Capacity Purchase | 110 | 3.1 years | | Alaska | Capacity Purchase | 42 | 7.5 years | - SkyWest has agreements to add 19 new E175s for United (2024-2026), one for Delta (2024), and one for Alaska (2025)[49] Human Capital Resources As of December 31, 2023, SkyWest employed 13,121 people, with 89% represented by in-house labor associations, and has implemented pay increases and pathway programs to combat high pilot turnover - As of December 31, 2023, the company employed 13,121 people, including 4,410 pilots and 4,135 flight attendants. Approximately 89% of employees are represented by in-house labor associations[56] - In response to labor market pressures, the company increased pilot pay rates in September 2022 and raised starting pay for flight attendants by 35% in 2023[58][60] - The company runs a Pilot Pathway Program and an Aviation Maintenance Technician (AMT) Pathway Program in partnership with schools to create a direct career path for aviation professionals[65] - As of December 31, 2023, the workforce was approximately 44% women and 31% people of color[70] Government Regulation and Environmental Matters SkyWest is subject to extensive DOT and FAA regulation, with its 2023 flights producing approximately 5.0 million metric tons of CO2e, and is exploring future options like eVTOL aircraft - The company is subject to regulation by the DOT and FAA, covering economic aspects of air service, airworthiness, and operational certifications[74] - In 2023, flights operated by SkyWest produced approximately 5.0 million metric tons of CO2e. Under capacity purchase agreements, major airline partners are responsible for fuel procurement and have significant control over variables impacting fuel consumption[77] - The company has a strategic partnership with Eve UAM, an Embraer company, which includes an option to purchase up to 100 eVTOL aircraft, anticipated to be available after 2026[81] Risk Factors The company faces numerous risks, including operational disruptions from pilot shortages, cybersecurity threats, reliance on key hubs, dependence on four major code-share partners, and significant long-term debt obligations Risks That May Disrupt Operations Operational risks include difficulty retaining qualified pilots, which has already reduced flight schedules, vulnerability to economic downturns, cybersecurity incidents, and disruptions at major hub airports - Elevated pilot attrition, particularly of captains, has led to a reduction in flight schedules in 2023 compared to 2022, resulting in operating inefficiencies[90] - The company faces evolving cybersecurity risks from various threat actors. A 2021 incident resulted in approximately 1,700 flight cancellations and a pre-tax financial impact of about $16 million[97][99][186] - Operations are concentrated at major partner hubs (e.g., Chicago, Denver, Salt Lake City), making the company vulnerable to disruptions from weather, system malfunctions, or other issues at these locations[103] Risks Related to Code-Share Agreements The business model is highly dependent on code-share agreements with four major airline partners, with United and Delta accounting for a significant majority of aircraft in service, and recent contract amendments have shifted compensation towards utilization-based payments - As of December 31, 2023, 333 of 485 aircraft in scheduled service were operated for United or Delta. Termination of either relationship would have a material adverse effect[114] - Recent amendments to capacity purchase agreements have shifted compensation to be more weighted on utilization. In 2023, recognized revenue was $242.5 million less than fixed monthly cash payments received, primarily due to these amendments[117] - The new on-demand charter subsidiary, SWC, which began operations in May 2023, presents significant risks and may divert management attention and resources from the core business[130] Risks Related to Operating Costs and Personnel Labor costs, constituting 46.7% of 2023 operating expenses, are a significant risk, as increases may not be fully offset by rate adjustments in capacity purchase agreements, and the company bears fuel price risk for its prorate and charter operations - Salaries, wages, and benefits constituted 46.7% of total operating costs in 2023. Increased labor costs may not be fully offset under capacity purchase agreements, potentially reducing margins[133] - The company bears the economic risk of fuel price fluctuations on its prorate and charter operations, which involve CRJ200, CRJ700, and CRJ900 aircraft[140] Risks Related to Operating and Leasing Aircraft and Other Investments The company relies on two aircraft manufacturers and one engine manufacturer, holds significant long-term debt of $3.0 billion, and has future purchase commitments of $610.9 million, while strategic investments also carry substantial risks - As of December 31, 2023, the company had approximately $3.0 billion in long-term debt obligations[145] - The company has firm purchase commitments for 21 E175 aircraft and spare engines totaling $610.9 million[149] - The company has guaranteed debt for a Part 135 air carrier ($17.6 million outstanding) and an aviation school ($4.8 million outstanding) to support its pilot pipeline[143] - The investment in Eve Holding, Inc. had a fair value of $15.4 million at year-end 2023, and its value is subject to market price fluctuations[161] Cybersecurity SkyWest manages cybersecurity risk through a NIST-aligned program overseen by the Audit Committee, though a 2021 cyberattack caused 1,700 flight cancellations and a $16 million pre-tax financial impact, half of which was recovered via insurance - The company's cybersecurity risk management program is aligned with the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[183] - The Board delegates cybersecurity risk oversight to the Audit Committee, which receives quarterly reports from management[189][190] - A 2021 cyberattack resulted in a server outage, causing ~1,700 flight cancellations and an estimated $16 million pre-tax negative financial impact. Approximately half of this loss was recovered via cyber insurance in 2023[186] Properties As of December 31, 2023, SkyWest's fleet consisted of owned and leased aircraft, with an average age ranging from 5.8 to 20.9 years, and the company owns its corporate headquarters and some maintenance facilities while leasing most airport facilities Fleet Details (as of Dec 31, 2023) | Aircraft Type | Owned | Leased | Passenger Capacity | Average Age (years) | | :--- | :--- | :--- | :--- | :--- | | E175s | 207 | 30 | 70-76 | 5.8 | | CRJ900s | 17 | 24 | 70-76 | 13.0 | | CRJ700s | 116 | 2 | 65-70 | 18.3 | | CRJ200s | 89 | — | 50 | 20.9 | - The company owns its corporate headquarters in St. George, Utah, and maintenance facilities in locations like Salt Lake City, Milwaukee, and Oklahoma City. It leases most airport terminal and maintenance facilities[195][196] Legal Proceedings The company is subject to routine legal actions incidental to its business activities, which management believes are not likely to have a material adverse effect on its financial position, liquidity, or results of operations as of December 31, 2023 - As of December 31, 2023, management believes that the ultimate outcome of routine legal actions is not likely to have a material adverse effect on the company's financial position, liquidity, or results of operations[197] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SkyWest's common stock trades on the Nasdaq under SKYW, and while no dividends were declared in 2022 or 2023, the company repurchased 995,631 shares for approximately $45.0 million in Q4 2023, with $90.9 million remaining under the repurchase program - The company's common stock is traded on The Nasdaq Global Select Market under the symbol "SKYW"[200] - No dividends were declared in 2022 and 2023. Payment of dividends was restricted through September 30, 2022, under Payroll Support Program Agreements[201] Share Repurchases (Q4 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Value (in thousands) | | :--- | :--- | :--- | :--- | | Oct 2023 | 372,691 | $40.25 | $14,996 | | Nov 2023 | 332,433 | $45.12 | $15,000 | | Dec 2023 | 290,507 | $51.63 | $15,000 | | Total Q4 | 995,631 | $45.20 | $44,996 | - For the full year ended December 31, 2023, the company repurchased 10.6 million shares for $289.1 million. As of year-end, $90.9 million remained available under the May 2023 repurchase program[203][169] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, SkyWest's operating revenues decreased 2.3% to $2.9 billion, and net income fell to $34.3 million, driven by a 9.1% reduction in block hours and $242.5 million in revenue deferrals from amended partner contracts, while liquidity remains strong with $835.2 million in cash Overview and Financial Highlights SkyWest's 2023 financial performance was marked by a 2.3% decrease in operating revenues to $2.9 billion and a drop in net income to $34.3 million, reflecting a 9.1% decrease in block hours due to pilot shortages Financial Highlights (2023 vs 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $2.9B | $3.0B | (2.3)% | | Net Income | $34.3M | $73.0M | (53.0)% | | Diluted EPS | $0.77 | $1.44 | (46.5)% | - The number of aircraft in scheduled service decreased by 6.2% from 517 to 485, and block hours decreased by 9.1% from 1.25 million to 1.14 million, primarily due to pilot availability constraints[217] - The company plans to add one new E175 with Delta in 2024, 19 new E175s with United from 2024-2026, and one new E175 with Alaska in 2025[213] Results of Operations (2023 vs 2022) For 2023, operating revenues decreased by $69.5 million (2.3%) to $2.94 billion, primarily due to a $97.5 million drop in capacity purchase revenue and $242.5 million in revenue deferrals, leading to a net income of $34.3 million Operating Revenue Breakdown (in thousands) | Revenue Source | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Flying agreements | $2,834,397 | $2,899,837 | $(65,440) | (2.3)% | | Lease, airport services and other | $101,035 | $105,088 | $(4,053) | (3.9)% | | Total operating revenues | $2,935,432 | $3,004,925 | $(69,493) | (2.3)% | - In 2023, the company deferred recognizing $164.0 million of flight operations revenue and $78.5 million of aircraft lease revenue related to fixed monthly payments received under amended capacity purchase agreements[226][227] Operating Expense Breakdown (in thousands) | Expense Category | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Salaries, wages and benefits | $1,322,615 | $1,211,551 | $111,064 | 9.2% | | Aircraft maintenance | $673,453 | $644,157 | $29,296 | 4.5% | | Aircraft rentals | $25,507 | $75,353 | $(49,846) | (66.1)% | | Other operating expenses | $268,120 | $318,145 | $(50,025) | (15.7)% | | Total operating expenses | $2,831,363 | $2,823,763 | $7,600 | 0.3% | - The decrease in aircraft rentals was primarily due to an early lease buyout of 35 CRJ aircraft in Q1 2023[238][239] Business Segments Analysis (2023 vs 2022) In 2023, the SkyWest Airlines and SWC segment reported a loss of $191.8 million, while the SkyWest Leasing segment's profit grew 65.6% to $165.0 million, primarily due to the non-recurrence of a large 2022 impairment charge Segment Profit (Loss) (in thousands) | Segment | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | SkyWest Airlines and SWC | $(191,825) | $(45,563) | $(146,262) | 321.0% | | SkyWest Leasing | $164,964 | $99,642 | $65,322 | 65.6% | | Total Segment Profit (Loss) | $(26,861) | $54,079 | $(80,940) | (149.7)% | - The SkyWest Airlines and SWC segment loss widened due to deferring $164.0 million of flight operations revenue and a $111.9 million increase in salary expenses[252][261] - The SkyWest Leasing segment profit increased primarily because a $51.4 million impairment charge recorded in 2022 did not repeat in 2023[257] Liquidity and Capital Resources As of December 31, 2023, SkyWest had $835.2 million in cash and marketable securities, down from $1.0 billion due to $289.1 million in share repurchases, while long-term debt decreased from $3.4 billion to $3.0 billion Liquidity and Debt Position (in billions) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash, cash equivalents & marketable securities | $0.84 | $1.0 | | Long-term debt (incl. current maturities) | $3.0 | $3.4 | Summary of Cash Flows (in millions) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $736.3 | $480.4 | | Net cash used in investing activities | $(23.2) | $(904.9) | | Net cash provided by (used in) financing activities | $(667.8) | $269.1 | - The company used $289.1 million to repurchase 10.6 million shares of common stock during 2023[259] Significant Commitments and Obligations As of December 31, 2023, SkyWest has total commitments and obligations of $4.24 billion, including $3.03 billion in long-term debt principal, $610.9 million in aircraft and engine purchase commitments, and $472.0 million in interest commitments Commitments and Obligations Summary (as of Dec 31, 2023, in thousands) | Obligation Type | Total | 2024 | 2025 | 2026 | | :--- | :--- | :--- | :--- | :--- | | Operating lease payments | $129,063 | $19,924 | $17,503 | $13,752 | | Firm aircraft & engine commitments | $610,945 | $143,810 | $230,725 | $236,410 | | Interest commitments | $471,986 | $117,976 | $97,702 | $77,951 | | Principal maturities on long-term debt | $3,030,310 | $447,534 | $532,314 | $510,625 | | Total | $4,242,304 | $729,244 | $878,244 | $838,738 | - The company has guaranteed $22.4 million in promissory notes for third parties ($17.6 million for a Part 135 carrier and $4.8 million for an aviation school) to support its pilot pipeline[278][406][407] Critical Accounting Policies and Estimates SkyWest's critical accounting policies involve significant management judgment, particularly in revenue recognition, where $78.5 million in lease revenue and $151.4 million in non-lease flight operations revenue were deferred in 2023, and in assessing long-lived assets for impairment - Revenue Recognition: A portion of fixed monthly payments from capacity purchase agreements is deferred. In 2023, the company deferred $78.5 million of lease revenue and $151.4 million of non-lease flight operations revenue[281][282] - Long-Lived Assets: The company estimates useful lives (up to 22 years for aircraft) and residual values (up to 20% for aircraft) and assesses for impairment based on future cash flow projections. In 2023, a $2.3 million impairment loss was recorded for 14 CRJ700 aircraft held for sale[286][287][337] - Income Tax: The company makes estimates and judgments to determine tax expense, including evaluating the utilization of tax credits and deferred tax assets. The effective tax rate was 14.8% in 2023, down from 21.2% in 2022[289][244] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from aircraft fuel prices, interest rates, and labor inflation, with fuel price risk borne by SkyWest for its prorate and SWC operations, where a hypothetical 25% increase would have added $21.5 million to 2023 expenses - The company bears the economic risk of fuel price fluctuations on its prorate and SWC operations. A hypothetical 25% increase in the price per gallon would have increased 2023 fuel expense by an estimated $21.5 million[292] - As of December 31, 2023, all of the company's long-term debt had fixed interest rates, mitigating exposure to interest rate fluctuations on existing debt[293] - Salaries, wages, and benefits represented 46.7% of total operating expenses for 2023, highlighting significant exposure to labor cost inflation[295] Financial Statements and Supplementary Data This section includes the unqualified opinion from Ernst & Young LLP on the consolidated financial statements and internal controls, presenting the core financial statements and detailed notes covering accounting policies, segment reporting, debt, and other material financial information Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on SkyWest, Inc.'s consolidated financial statements and internal controls as of December 31, 2023, identifying the valuation of fixed overhead deferred revenue as a critical audit matter due to estimation uncertainty - Ernst & Young LLP expressed an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[299][300] - A critical audit matter was identified concerning the valuation of fixed overhead deferred revenue, specifically the significant estimation uncertainty related to forecasting future block hours over the contract term[303][307] Consolidated Balance Sheets As of December 31, 2023, SkyWest reported total assets of $7.03 billion, a decrease from $7.41 billion in 2022, with total liabilities at $4.91 billion and total stockholders' equity at $2.11 billion Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,131,896 | $1,371,281 | | Total Property and Equipment, net | $5,482,967 | $5,548,480 | | Total Assets | $7,026,293 | $7,414,553 | | Total Current Liabilities | $1,254,292 | $1,172,543 | | Long-Term Debt, net | $2,562,183 | $2,941,772 | | Total Liabilities | $4,912,791 | $5,066,922 | | Total Stockholders' Equity | $2,113,502 | $2,347,631 | Consolidated Statements of Comprehensive Income For the year ended December 31, 2023, SkyWest generated total operating revenues of $2.94 billion, with operating income of $104.1 million, and net income of $34.3 million, or $0.77 per diluted share Consolidated Income Statement Summary (in thousands, except per share data) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total operating revenues | $2,935,432 | $3,004,925 | $2,713,491 | | Total operating expenses | $2,831,363 | $2,823,763 | $2,437,624 | | Operating Income | $104,069 | $181,162 | $275,867 | | Income Before Income Taxes | $40,309 | $92,583 | $150,610 | | Net Income | $34,342 | $72,953 | $111,910 | | Diluted Earnings Per Share | $0.77 | $1.44 | $2.20 | Consolidated Statements of Cash Flows For 2023, net cash provided by operating activities significantly increased to $736.3 million, while net cash used in investing activities sharply decreased to $23.2 million, and net cash used in financing activities reversed to $667.8 million, driven by stock repurchases Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $736,334 | $480,376 | | Net cash used in investing activities | $(23,228) | $(904,894) | | Net cash provided by (used in) financing activities | $(667,813) | $269,081 | | Increase (decrease) in cash and cash equivalents | $45,293 | $(155,437) | | Cash and cash equivalents at end of period | $148,277 | $102,984 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial data, including revenue recognition, segment reporting, $3.0 billion in long-term debt, income tax reconciliation, commitments, leases, fair value measurements, and stock compensation - Note 1 details revenue recognition policies, highlighting that in 2023, the company deferred recognizing $78.5 million in fixed lease revenue and had a net deferral of $138.8 million in non-lease flight operations revenue due to contract amendments and flight activity levels[346][349] - Note 2 provides segment data, showing the SkyWest Airlines and SWC segment had a loss of $191.8 million in 2023, while the SkyWest Leasing segment had a profit of $165.0 million[383] - Note 3 outlines long-term debt of $3.03 billion as of year-end 2023, with an average effective interest rate of 4.1%. Maturities are scheduled through 2035[386][388] - Note 11 details stock compensation, including the issuance of 127,348 RSUs and 391,810 PSUs (at target) in 2023. It also notes that no stock options were granted[431][435][429] - Note 14 discusses investments, including a $9.9 million investment in Contour Airlines and an investment in Eve UAM with a fair value of $15.4 million at year-end 2023[447][454] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting, and Ernst & Young LLP issued an unqualified opinion on the effectiveness of internal controls - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[457] - Management's annual report on internal control over financial reporting concluded that controls were effective as of December 31, 2023, based on the COSO framework[461] - The independent registered public accounting firm, Ernst & Young LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[462][465] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information required for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership of management, related transactions, and principal accountant fees and services, is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Shareholders - Items 10, 11, 12, 13, and 14 are incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Shareholders, to be filed within 120 days of the fiscal year-end[477] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the 10-K report, including consolidated financial statements, Schedule II—Valuation and qualifying accounts, and a detailed list of exhibits such as articles of incorporation, material contracts, and CEO/CFO certifications - The filing includes the consolidated financial statements and Schedule II—Valuation and qualifying accounts[481][483] - A comprehensive list of exhibits is provided, including key agreements like the Delta Connection Agreement, United Express Agreement, and various aircraft purchase agreements[484][486]