SkyWest: This Distinctive Airline Inventory Has Room To Soar (NASDAQ:SKYW)

Introduction

I first wrote up my preliminary funding thesis on SkyWest, Inc. (NASDAQ:SKYW) in June 2024. Again then, I felt that SkyWest was a robust American regional airline that had been experiencing enhancing asset utilization, which was resulting in each prime and backside line progress. As a testomony to its resiliency as a regional airline popping out of the COVID-19 disaster, I believed the corporate deserved its premium a number of relative to friends. With flying agreements selling income progress within the firm’s newest Q2’24 outcomes, I am sustaining my ‘purchase’ score on the corporate. Furthermore, as shares have bought off 11% because the latest highs, I’ve personally initiated a place within the firm, noting that a lot of its plane will likely be totally owned and paid for by 2026.

Firm Overview

SkyWest is a regional airline and occurs to be the most important regional airline operation in america. Beneath the SkyWest Inc holding firm, the corporate owns each SkyWest Airways in addition to SkyWest Leasing. Via SkyWest Airways, the corporate operates about 500 plane that join 240 locations all through North America, permitting passengers to entry a large community of finish factors. Having carried greater than 38 million passengers final 12 months, the corporate has partnerships with main airways like United Airways (UAL), Delta Air Traces (DAL), American Airways (AAL), and Alaska Air Group (ALK).

The way in which the corporate’s enterprise mannequin works is that by way of these main airways, SkyWest operates regional jet plane of their community methods. The massive airline corporations deal with all of the advertising, flight schedules, passenger fares, ticket gross sales, and reservation bookings. Via their agreements, SkyWest operates the flights beneath their banner, typically adhering to sure procedures and working requirements (which may look barely completely different from airline to airline).

That is what makes SkyWest’s enterprise mannequin so distinctive and fewer dangerous. Due to the character of their agreements, SkyWest’s margins are usually higher and extra sturdy, significantly after we contemplate that the airline companions pay fastened charges and organize and pay for gasoline used on capability buy flights. These capability buy agreements (CPAs) represented 94% of the corporate’s fleet final 12 months.

The remaining 6% is beneath prorate agreements, the place SkyWest operates flights utilizing the main airline companions’ ticketing and reservation methods. In distinction to CPAs, beneath prorate agreements, the main airline companions deal with the gathering of passenger fares for the routes operated, which may contain changes when passengers hook up with flights of the main airline companions. SkyWest has higher flexibility in setting flight schedules and passenger fares beneath prorate agreements, and is liable for arranging and paying for the gasoline used on these flights.

Q2’24 Outcomes and Outlook

In SkyWest’s second quarter outcomes for the fiscal 12 months, the corporate reported revenues of $867 million, which represented a 19.5% enhance versus final 12 months’s Q2’23 revenues of $726 million. In comparison with sellside estimates, this represented a greater than 5% beat for about $41 million above what the Road was anticipating.

On internet revenue, SkyWest recorded internet revenue of $75.6 million throughout the quarter for about $1.82 in EPS, a 9 cent beat towards estimates. In comparison with simply 35 cents in earnings per share in the identical quarter final 12 months, it will appear that SkyWest had an excellent quarter on each the highest and backside line.

On the finish of the quarter, the corporate had a fleet of 248 E175s, 49 CRJ900s, 167 CRJ700s, 144 CRJ200s. The introduced the full fleet to 608 plane and the corporate anticipates that can proceed to develop, as they’re on monitor so as to add one new E175 plane with Delta someday in Q3’24 or This autumn’24, together with 28 new E175 plane with United, and one new E175 plane with Alaska Airways someday subsequent 12 months. These capital expenditure plans point out that the corporate is rising properly and is making capability to fund their progress in partnership with the main airways, significantly as journey rebounds. This may even assist to enhance profitability, as older plane which have excessive upkeep capex bills might be changed with less expensive newer fashions.

At quarter finish, about 44% of plane in scheduled service or beneath contract have been operated for United, 28% have been operated for Delta, 19% have been operated for American Airways, and eight.8% have been operated for Alaska Airways. The desk beneath represents SkyWest’s present fleet with every of their companions.

So what drove the outcomes this quarter? A better variety of plane within the fleet with greater block hours have been the primary drivers. As journey demand picks up and SkyWest continues rising its fleet, the variety of plane in scheduled service decreased from 492 in Q2’23 to 475 this quarter. Furthermore, the variety of block hours grew by 12.3% 12 months over 12 months because the scheduled each day utilization of SkyWest’s plane continued to develop.

In my opinion, these are glorious alerts and provides me confidence in SkyWest’s enterprise, even after shares have run up 45% 12 months thus far. Nevertheless it’s not simply income progress that ought to get buyers excited in regards to the identify; expense progress can be moderating, which is resulting in some fairly vital margin enlargement.

For instance, throughout the quarter, the corporate’s working prices grew solely 7.7% 12 months over 12 months. Towards income progress within the excessive teenagers, this allowed margins to increase to 13.8% from 4.4% final 12 months. The most important element was wages and salaries, which grew 10.1%. In my opinion, that is one thing that needs to be anticipated given its correlation with greater volumes and block hours.

Importantly, nevertheless, plane gasoline progress makes up a really small a part of the corporate’s complete working bills. As such, given the majority of expense progress is in salaries and wages, margins at these ranges look sustainable. Furthermore, with the second-largest contributor to complete working bills being plane upkeep and repairs (which grew 12.8%), I really feel assured in underwriting decrease progress right here going ahead because the fleet turns into replenished with new fleet.

As for the outlook, I am bullish on the near-term outlook for the corporate. Why? It is not simply the outcomes from the newest quarter. On the earnings name, the corporate took the chance to revise steering upwards, with expectations that now replicate an enchancment for this 12 months’s block hours to be up 9% to 11% in comparison with final 12 months. This vary is up from prior steering of seven% to 9% 1 / 4 in the past, after I final reviewed the corporate

So on account of this, together with GAAP EPS steering anticipated within the excessive $6 vary, the outlook has improved for the corporate. Why this issues is that that is serving to to enhance the corporate’s steadiness sheet and is enabling the corporate to purchase again inventory at affordable ranges.

From a steadiness sheet perspective, SkyWest is now sitting in a money place of $834 million, a stack of money fats sufficient to afford it the flexibleness to purchase again a 3rd of its market capitalization or pay again a 3rd of its debt. With sturdy free money move era, the corporate has been energetic with its share repurchase program, shopping for again 177,000 at a median worth of $75.23, fairly near the place shares are buying and selling at the moment.

As well as, debt discount has additionally been a spotlight as the corporate paid again $115 million in debt throughout the quarter, and plans to pay again a complete of $400 million in debt throughout the 2024 fiscal 12 months. In my opinion, this highlights SkyWest’s disciplined monetary technique and dedication to enhancing shareholder worth whereas sustaining a stable steadiness sheet. By adequately managing its money reserves, repurchasing shares, and lowering debt, administration is demonstrating that it is taking the precise capital allocation steps to place the corporate nicely for the long run.

Conclusion

The sellside continues to be cautious relative to administration’s steering, with 2024 EPS anticipated at $6.78. From a valuation perspective, based mostly on consensus estimates for 2024 and 2025, SkyWest trades for simply 11.0x 2024 EPS and 9.7x 2025 EPS (supply: S&P Capital IQ).

That is regardless of the truth that the corporate continues to often ‘beat and lift’, typically surpassing sellside estimates, and even their very own steering often. In my opinion, it is clear that there’s a persistent skepticism amongst analysts, regardless of majority ‘purchase’ rankings on the inventory. Regardless of a monitor file of exceeding expectations, the sellside appears to be factoring in potential dangers or uncertainties which may not be totally obvious within the firm’s historic efficiency.

A few of these dangers embody continued business uncertainty across the lack of certified pilots, financial weak point, and the specter of pandemics, terrorism, and battle, as I’ve talked about beforehand. Whereas many of those elements are outdoors of the corporate’s management (and will nonetheless be monitored by buyers with equal scrutiny), the corporate has been making glorious progress on attracting new pilots. On the earnings name, administration talked about that they anticipate to be at over 5,000 pilots by year-end, which is a couple of 25% enhance in comparison with 2023. This alone ought to assist enhance block hours, in an business the place pilots are briefly provide.

So in conclusion, I believe SkyWest’s enterprise mannequin is above common for an airline and its sturdy monetary efficiency throughout the newest quarter have not gave the impression to be correctly mirrored within the present valuation. In my opinion, margins look steady, with upside to enhance, as the corporate will increase its pilot workforce and fleet enlargement, which is able to place it nicely to navigate any challenges successfully. As shares have lately skilled a pullback, the present valuation presents a beautiful entry level for buyers, reinforcing my confidence within the firm’s long-term prospects. Total, SkyWest stays a compelling funding alternative, which is why I am sustaining my ‘purchase’ score.