Investor Update - SkyWest Airlines

PARTNER OF CHOICE
EMPLOYER OF CHOICE
INVESTMENT OF CHOICE
Investor Update
May 2016
1
Forward Looking Statements
In addition to historical information, this presentation contains forward-looking statements. SkyWest, Inc. (“SkyWest”) may,
from time to time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements encompass SkyWest's beliefs, expectations, hopes or intentions regarding future
events. Words such as “forecasts”, "expects," "intends," "believes," "anticipates," "should,” “of choice,” "likely" and similar
expressions identify forward-looking statements. All forward-looking statements included in this presentation are made as of
the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to
update any forward-looking statement. Readers should note that many factors could affect the future operating and financial
results of SkyWest, SkyWest Airlines or ExpressJet Airlines, and could cause actual results to vary materially from those
expressed in forward-looking statements set forth in this presentation. These factors include, but are not limited to, the
prospects of entering into agreements with other carriers to fly new aircraft, uncertainties regarding operation of new aircraft,
the ability to obtain certain regulatory approvals to operate new aircraft under SkyWest Airlines’ and ExpressJet Airlines’
operating certificates and the ability to obtaining financing for the aircraft.
Actual operational and financial results of SkyWest, SkyWest Airlines and ExpressJet Airlines will also vary, and may vary
materially, from those anticipated, estimated, projected or expected for a number of other reasons, including, in addition to
those identified above: The compensation received under the code-share agreements may be less than the corresponding
costs incurred; aircraft debt and lease commitments extend beyond the respective fixed-fee contractual term on certain
aircraft; the supply of pilots to the airline industry may be limited; increased labor costs and labor disputes may adversely
affect the financial results and operations; developments associated with fluctuations in the economy and the demand for air
travel; ongoing negotiations between SkyWest, SkyWest Airlines and ExpressJet Airlines and their major partners regarding
their contractual obligations; the financial stability of those major partners and any potential impact of their financial condition
on the operations of SkyWest, SkyWest Airlines, or ExpressJet Airlines; fluctuations in flight schedules, which are determined
by the major partners for whom SkyWest’s operating airlines conduct flight operations; variations in market and economic
conditions; labor relationships; the ability to attract and retain qualified pilots; the impact of global instability; fluctuating fuel
costs; the degree and nature of competition; the impact of weather-related or other natural disasters on air travel and airline
costs; aircraft deliveries; and other unanticipated factors. Risk factors, cautionary statements and other conditions which
could cause SkyWest’s actual results to differ from management’s current expectations are contained in SkyWest’s filings
with the Securities and Exchange Commission; including the section of SkyWest’s Annual Report on Form 10-K for the year
ended December 31, 2015, entitled “Risk Factors.”
2
Organizational Structure
3
Executing on our Fleet Transition
Generating value during our fleet transition:
1.
2.
3.
4.
5.
Adding aircraft to new, profitable contracts
Removing aircraft from unprofitable contracts
Improving economics in existing contracts when available
Delivering strong operating performance
Reducing our fleet risk
4
Improvement in Flying Contracts and Fleet Mix
Q1 2015
Q1 2016
52%
25%
Aircraft in service: 693
Aircraft in service: 656
Legend:
Each colored box represents one aircraft
Each white box represents one removed aircraft
Significant annualized earnings
Significant annualized losses
5
Fleet Changes Since March 31, 2015
March 31, 2015
Additions
Removals
March 31, 2016
E175s
29
19
-
48
CRJ700s/900s
203
-
(1)
202
232
19
(1)
250
ERJ145s/135s
215
10
(43)
182
CRJ200s
234
-
(10)
224
EMB120 turboprops
12
-
(12)
-
461
10
(65)
406
693
29
(66)
656
“Dual Class aircraft”
“Single Class aircraft”
Total Operating Fleet
Up 8%
Down 12%
6
Scheduled E-175 Deliveries
Total in-service as of
March 31, 2016
Q2 2016
2H 2016
1H 2017
Total anticipated
in-service by
June 30, 2017
United
41
6
7
11
65
Alaska
7
2
6
5
20
Delta
-
-
13
6
19
48
8
26
22
104
56
7
SkyWest Flying Contract Risk Model
Risks
Yes
No
•
•
•
•
•
Passenger fare volatility
Seat inventory
Fuel costs
Network strategy
Majority of fleet financing risk covered
by contracts with major partners
•
•
•
•
•
Labor costs and shortages
Aircraft maintenance
Operating performance
Competition
Financing tail risk on less than
half of fleet
Business model generated
net income in 24 of 26 years
8
Financial Data
9
Profitability from Fleet Transition and Operational Improvements
Profitability from Fleet (in millions)
FY 2015
Q1 2015
Q1 2016
Revenue
$
3,095.6
$
760.4
$
762.1
Pre-tax income, ex special items (1)
$
169.6
$
16.3
$
44.5
Pre-tax margins
5.5%
2.1%
5.8%
(1) FY 2015 Excludes gain from early debt payoff of $32.6 million, and $7.9 million negative resolution of a flying contract matter.
See reconciliation of Non-GAAP Financial Measures in Additional Information section.
Q1 2016 results reflect progress in fleet economics and operating performance
–
Added 29 profitable aircraft and removed 66 unprofitable aircraft
–
99.8% adjusted completion rate achieved at SkyWest and ExpressJet
–
Solid operating performance generated additional revenue and improved operating efficiencies
Opportunities to improve fleet mix not fully played out yet
–
56 additional E175s scheduled from April 2016 to June 2017
–
Scheduled contract expirations with unprofitable single class aircraft in 2016 and 2017
–
Potential noise likely in execution of fleet optimization going forward in the form of non-cash or cash
charges
10
Q1-16 Improvement from Q1-15
$50
$6
$40
$3
$30
$(3)
$5
$(14)
$7
$14
$7
$45
$45
$20
$10
$16
$-
$48
$(44)
-$10
-$20
-$30
Q1-15 Actual
(pre-tax)
Reduced
Increased
Contract Single Contract Dual
Class Aircraft Class Aircraft
Additional
Pro-Rate
Flying
Improved
Contract
Performance
Incentives
Pass
Through
Costs
Pass
Through
Costs
Higher Labor
Costs
Lower Aircraft
MX Costs
Lower
Fuel Costs
Lower Ground
Handling &
Other
Revenue Variances
Operating Expense Variances
$2
$27
$29
Q1-16 Actual
(pre-tax)
11
Pre-tax Income
Operating Margin %
60
$59.8
15.0%
$52.5
50
$44.5
$43.4
40
$41.0
10.0%
$33.5
9.9%
30
8.9%
7.1%
20
0
-3.6%
8.1%
5.0%
6.2%
2.2%
10
7.9%
$16.3
4.5%
Operating Margin
Margin %
%
Operating
Pre-Tax Income ($ in millions)
A New Trajectory
0.0%
-$2.0
-$43.2
Q1-14
Q2-14
Q3-14
$0.14
EPS*
Q4-14
Q1-15
Q2-15
Q3-15
$1.98
EPS*
* Adjusted for special items, see Reconciliation of Non GAAP Financial Measures
Q4-15
Q1-16
$0.52
EPS
12
Balance Sheet Highlights
SkyWest summary balance sheet (in millions)
3/31/16
Cash, marketable securities, restricted cash
$
Other current assets
442
542
Current assets
984
Aircraft, PP&E and other
3,829
Total assets
$
4,813
Current ratio: 1.3
Current portion of debt
$
Other current liabilities
274
455
Current liabilities
729
Long-term debt
1,665
Deferred income tax payable and other
56%
44%
883
Total long-term liabilities
2,548
Shareholder equity
1,536
Total liabilities and shareholder equity
Debt Mix:
Equity Mix:
$
4,813
13
2016 / 2017 Execution Strategy
•
Place 56 additional E175 aircraft into service by mid-2017
•
Improve economics in unprofitable aircraft through extensions or removals
•
Deliver outstanding operational performance
•
Enhance pilot recruiting and retention efforts
•
Reduce fleet risk
•
Deploy cash towards accretive opportunities
14
Additional Information
15
SkyWest, Inc. Operating Fleet
March 31, 2016
66+ Seat Dual Class Jets
50 Seat Jets
Combined
SkyWest Airlines
CRJ700
CRJ900
E175
Total
CRJ200
ERJ135/145
Total
Total
United – contract flying
69
-
41
110
57
-
57
167
United – pro-rate flying
-
-
-
-
26
-
26
26
Delta – contract flying
20
36
-
56
49
-
49
105
Delta – pro-rate flying
-
-
-
-
20
-
20
20
American – contract flying
-
-
-
-
12
-
12
12
American – pro-rate flying
-
-
-
-
5
-
5
5
Alaska – contract flying
9
-
7
16
-
-
-
16
98
36
48
182
169
-
169
351
CRJ700
CRJ900
E175
Total
CRJ200
ERJ135/145
Total
Total
United – contract flying
-
-
-
-
-
166
166
166
Delta – contract flying
40
28
-
68
41
-
41
109
American – contract flying
-
-
-
-
12
16
28
28
American – pro-rate flying
-
-
-
-
2
-
2
2
40
28
-
68
55
182
237
305
138
64
48
250
224
182
406
656
ExpressJet
Combined
16
SkyWest, Inc. Route Map
SkyWest operated
1.2 million flights
and carried 56 million
passengers in 2015
As of March 31, 2016
Approximately
1 out of every
12 passengers
in the U.S.
traveled on
flights operated
by one of
SkyWest’s
operating
carriers in 2015.
17
The People of SkyWest, Inc.
SkyWest employees deliver a culture of quality, reliability and efficiency
Nearly 20,000 dedicated aviation professionals throughout the US
Our People
Nearly 20,000
Pilots
Flight Attendants
Maintenance
Customer Service
Ops Support & Other
Dispatch
7,070
4,875
3,415
2,282
1,350
241
18
Partnership Models
Fixed-fee flying contracts:
•
•
•
•
•
Revenue at fixed rates, primarily based on completed flights
Partner directly reimburses us for certain costs such as fuel
Primary “at-risk” costs are labor, aircraft maintenance and overhead
Most agreements include operating performance bonuses/penalties
Fixed rates are typically set for the full contract term at inception
 Advantages of fixed-fee flying contracts:
–
–
–
–
Significant airline operating costs, such as fuel and aircraft ownership, are essentially mitigated
Contract length typically provides for long-term infrastructure planning
Major partner has lead/risk on passenger fare management; allows us to focus on a strong operation
Provides value to major partners by providing critical feed into their hubs
 Disadvantages of fixed-fee flying contracts:
–
–
–
–
“At-risk” operating costs may exceed fixed rates over contract term
Operating requirements may vary over time without concurrent rate adjustments
Partner may change schedules and utilization seasonally, resulting in inefficient periods
Potential aircraft financing exposure if financing terms extend beyond contract terms
19
Partnership Models
Pro-rate agreements:
•
•
•
SkyWest receives a pro-rated portion of connecting passenger fares
We receive 100% of the passenger fares on local routes (non-connecting passengers)
We are responsible for all operating costs associated with pro-rate flights, including fuel costs
 Advantages of pro-rate agreements:
–
–
–
Increased control over scheduling
Control over pricing of local routes
Independent negotiation of government subsidies
 Disadvantages of pro-rate agreements:
–
–
–
Number of preferable routes limited
Subject to passenger fare volatility
Increased risk for fuel cost
SkyWest by Model
(Aircraft Count)
Contract
92%
Pro-Rate
8%
20
DOT Customer Complaint Ranking YTD 2016
January – March 2016
Rank
Airline
Complaints
System-wide
Enplanements
Complaints per 100,000
Enplanements
1
ExpressJet Airlines
19
5,451,931
0.35
2
SkyWest Airlines
32
7,206,263
0.44
3
Alaska Airlines
27
5,642,400
0.48
4
Southwest Airlines
168
34,652,593
0.48
5
Delta Air Lines
222
32,665,653
0.68
6
JetBlue Airways
69
9,111,016
0.76
7
Hawaiian Airlines
23
2,599,370
0.88
8
Virgin America
29
1,757,121
1.65
9
United Airlines
644
22,114,788
2.91
10
American Airlines
1,152
34,547,108
3.33
11
Frontier Airlines
132
3,262,759
4.05
12
Spirit Airlines
542
4,915,932
11.03
21
Reconciliation of Non-GAAP Financial Measures
Year ended December 31, 2015
Pre-tax Income
GAAP income
$
Adjusted for:
Q4 2015 Adjustments (1)
Non-GAAP income
194,322
Income Tax
$
(24,731)
$
169,591
(76,505)
$
9,517
$
(66,988)
Net Income Per
Diluted Share
Net Income
117,817
$
(15,214)
$
102,603
2.27
(0.29)
$
1.98
Year ended December 31, 2014
Pre-tax Income
GAAP income (loss)
$
Adjusted for:
Gain on Sale of Equity Investment (3)
Special items for fleet reduction (2)
Total Adjustments
Non-GAAP income
$
(16,343)
Income Tax
$
(7,811)
$
(24,154)
(24,922)
74,777
9,470
(28,415)
(15,452)
46,362
49,855
(18,945)
30,910
33,512
$
(26,756)
Net Income Per
Diluted Share
Net Income
$
6,756
$
(0.47)
0.61
$
0.14
(1) Adjusts for a gain from early debt payoff of approximately $32.6 million, partially offset by a resolution of contract matter with a major partner of
approximately $7.9 million.
(2) Adjusts for costs resulting from the removal of a specific aircraft from our operations.
(3) Adjusts for the gain from the sale of our equity investment in TRIP Linhas Aereas.
Although SkyWest’s financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), SkyWest management believes that certain non-GAAP
financial measures may provide investors with useful information regarding the underlying business trends and performance of SkyWest’s ongoing operations and may be useful for period-overperiod comparisons of such operations. The table above reconciles income before income taxes, excluding special items, to GAAP financial statements for the periods indicated (dollars in millions).
Readers should consider this non-GAAP measure in addition to, not a substitute for, financial reporting measures prepared in accordance with GAAP. This non-GAAP financial measure excludes
22
some, but not all, items that may affect SkyWest’s net income. Additionally, this calculation may not be comparable with similarly titled measures of other companies.