Over the past few weeks, a steady stream of U.S. airlines have reported massive quarterly losses: just like three months ago. And while cash burn is slowing gradually, most airlines are still burning quite a bit of cash and will exit the pandemic with weakened balance sheets.
By contrast, SkyWest (SKYW 1.51%) reported a third-quarter profit last week. The regional airline giant does expect to fall back into the red for the next couple of quarters, but it is barely burning any cash and has not suffered any balance sheet damage in 2020. With SkyWest shares down 55% year to date -- more than the broader airline indexes -- SkyWest stock looks like a great way to bet on a future airline industry recovery.
A solid quarter (under the circumstances)
In the second quarter, SkyWest posted a modest net loss of $26 million ($0.51 per share) under generally accepted accounting principles (GAAP), as a 66% plunge in flying activity led to a 53% year-over-year decline in revenue, to $350 million. Lower revenue more than offset the $152 million pre-tax benefit from CARES Act payroll support grant funds.
In the third quarter, SkyWest began increasing its schedules again due to improving demand. Flying activity was down a more modest 41% year over year, and revenue reached $457 million: down 40%. Furthermore, the company continued to benefit from the CARES Act payroll support program, recognizing $190 million of payroll support funds: almost entirely offsetting its payroll expense. As a result, SkyWest swung back to a quarterly GAAP profit of $34 million, or $0.66 per share.
In conjunction with the earnings report, SkyWest also announced some new business that it won recently. First, the carrier signed a contract to operate 20 used CRJ700 regional jets for American Airlines beginning next year. Second, SkyWest's leasing unit is buying 21 used CRJ700s that will be leased to a different regional airline that operates them on behalf of United Airlines.
Modest losses ahead
By the end of last quarter, SkyWest had exhausted all but $3 million of its payroll support funds. A month ago, it seemed likely that the payroll support program would be extended, but a deal never materialized. It's possible that the program will be revived, but investors (and airlines) can't count on it. The expected lack of payroll support aid will put incremental pressure on SkyWest's results over the next few quarters.
Fortunately, the underlying outlook for its business is quite solid. Management expects flying activity to continue increasing, as SkyWest's two-class regional jets are an efficient option for the legacy carriers to rebuild their route networks in the quarters ahead. For Q4, SkyWest anticipates that sequentially higher revenue (mainly from increased flying activity) and lower credit losses and depreciation expense may offset almost half of the decline in payroll support income.
This implies that SkyWest will report a GAAP loss this quarter, but not an especially large one. Furthermore, management estimates that cash burn will average just $250,000 per day: about $23 million for the full quarter. Results will likely be similar in the first quarter and improve thereafter.
SkyWest ended Q3 with $822 million of cash on its balance sheet, so there's no need to worry about the level of cash burn management expects. The company also has up to $665 million of additional secured federal loans that it can draw between now and March if necessary.
SkyWest has a bright future
Most of SkyWest's revenue comes from fixed-fee flying contracts with major airlines. That means the airline will see a much faster revenue and earnings recovery than most airlines, because fare levels don't directly impact its fixed-fee revenue. SkyWest also has a smaller "pro-rate" business for which profitability does depend on fare levels, but it uses older 50-seat jets for which aircraft ownership costs are near zero in that part of its operation. That makes it easy to opportunistically deploy those planes only when it's profitable to do so.
SkyWest is also benefiting from a long-term shift in its fleet toward larger, dual-class regional jets, which are preferred by the major airlines (and their customers). SkyWest shrank its active fleet by 27% between the end of 2015 and the end of 2019, largely due to the sale of its ExpressJet unit, while increasing the mix of dual-class jets from 38% to 61%. The result was that revenue dipped just slightly and profit more than doubled.
The shift toward larger regional jets is continuing, and dual-class aircraft will likely make up 75% to 80% of the active fleet within two years. That -- combined with a return to normal utilization levels -- could enable a full earnings recovery. With SkyWest stock trading for less than five times its 2019 earnings, this outlook makes SkyWest look like an attractive bet on an eventual recovery in air travel.