SkyWest, Inc. (NASDAQ: SKYW), the parent company of SkyWest Airlines and SkyWest Leasing, operates a fleet of nearly 500 aircraft that connect millions of travelers to over 200 destinations across North America. Emerging from the pandemic as the strongest American regional airline, SkyWest has demonstrated improved asset utilization, leading to revenue growth and margin expansion.
Investment Thesis
Despite operating in a mature industry, SkyWest has multiple growth opportunities. The company expects to receive 100 additional 65-76 seat aircraft from its mainline partners. SkyWest has also effectively monetized its fully depreciated CRJ-200 fleet through initiatives such as SkyWest Charter and its partnership with Contour.
SkyWest’s strong balance sheet, improving pilot staffing, and potential for margin and free cash flow growth make it a compelling investment opportunity. The company’s recent financial performance supports this outlook.
Recent Results
SkyWest reported Q1 2024 revenue of $804 million, up 16.2% year-over-year, driven by increased flying contract rates and higher production. Operating margins improved to 12.4%, surpassing analyst expectations. Block hours for the quarter increased by 4.9% year-over-year.
Strong Financial Position
SkyWest’s balance sheet is robust, with a net leverage ratio of 3.6x, down from 4.9x six months ago. The company owns 41% of its 475 aircraft outright and expects to fully pay off debt associated with its E175 fleet by 2026. This improved financial position will likely enhance free cash flow and enable shareholder returns through stock buybacks.
Outlook and Valuation
SkyWest is expected to experience a multi-year improvement in margins and free cash flow as pilot staffing improves and debt obligations decrease. The company authorized a share repurchase plan in May 2023 and is likely to renew and increase this authorization.
Consensus EPS estimates for SkyWest are $6.56 in 2024 and $7.56 in 2025, implying a forward P/E ratio of 10.6x. Historically, SkyWest has traded at low double-digit P/E multiples during growth cycles. Given the company’s positive outlook and historical performance, SkyWest’s current valuation is reasonable.
Conclusion
SkyWest has navigated recent industry challenges effectively, positioning itself as a best-in-class operator with strong growth prospects. While there are inherent risks, such as pilot shortages, economic weakness, and geopolitical uncertainties, SkyWest’s solid financial position and growth opportunities make it a compelling investment. As such, I rate SkyWest shares a ‘buy’ and recommend adding on any short-term dips.SkyWest: A Strong Regional Airline with Compelling Investment Potential
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