SkyWest Inc (SKYW) 2002 Q1 法說會逐字稿

Good morning, and welcome, Ladies and Gentlemen, to the discussion of SkyWest, Inc.'s first quarter earnings results. At this time, I would like to inform you that this conference is being being recorded for a re-broadcast and that all participants are on a listen-only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation. This conference call contains or may contain forward-looking statements based on Managements beliefs and assumptions. Such statements are subject to various risks and uncertainties that could cause results to vary materially. These include but are not limited to economic,competitive, governmental, technological and other factors as identified in SkyWest's press releases or discussed from time to time in SkyWest's reports to shareholders and periodic filings with the Securities Exchange Commission. I will now turn the conference over to Mr. Brad Rich, Chief Financial Officer. Please go ahead, Sir.

Thank you very much. Thank you, too, all of you for taking the time to join us this morning for review of our first quarter. Let me just make you aware of who I have with me this morning. Ron Reber, our Executive Vice President and Chief Operating Officer is with us. Mike Kropp, our Vice President, Finance is with us. and Chip Childs, our Controller. The purpose of the call this morning obviously, is to review the results of the March 2002 quarter and to provide an overall update of the operations. We're assuming most of you have already seen the press release this morning, so we'll discuss the results quite quickly, and then discuss current issues affecting the airlines. Those issues will include our major partner relationships and the status of our rate renewals. The airline's operational performance and the ongoing strike at Bombardier and the impact on our delivery schedule, and our calendar year 2002 growth. First of all, in just reviewing some of the highlights from our press release. Operating revenues increased 32.9% as a result of capacity increases of 63.3%, and a revenue passenger mile increase -- an RPM increase of 96.1%. With the growth in RPM's exceeding the growth in ASM's, it inherently means we had load factor growth, and our load factors are up a full 11 percentage points from 54.7% to 65.7%. So just very good, strong growth and activity. And all the indicators, we know that -- to indicate traffic is coming back and very strong. On the expense side, the operating expense has increased only 25.2%. I say only, keeping that in perspective with the capacity increase. The cost per ASM decreased 23.3 % from 20.2 cents per ASM to 15.5 cents per ASM. Then combining things together, our net income was $16.7 million or 29 cents per diluted share versus $10.2 million, or 18 cents per diluted share in last year's March quarter. Now, we're obviously very pleased with the results for the quarter. In looking at the comparisons year over year, I would just give one reminder that our March quarter of last year did include some very challenging operations relative to ATC and weather-related cancellations, as well as increased expansion costs in that first quarter. We believe that the results for the quarter are indicative that the fundamentals of our business model remain very much in tact. Let me give a little more detail in some of the primary revenue and expense components. First of all, in our operating revenue, although we experience significant growth in load factor and RPM's, you all know by now that the more relevant performance indicators are our contract rates and the quality of our operational performance. Let me give some discussion, first of all about our rates. We indicated in our press release that we have rate agreement with Delta Airlines for calendar year 2002, and with United Airlines for the first quarter of 2002, and that we expect to have an agreement with United very soon on rates that go through the end of calendar year 2003. This year's rate renewal process has been very similar with both Delta and United, both major carriers have required aggressive cost control, increased efficiencies and reductions in cashflows. However and wherever we could achieve that. We believe we have been very diligent and creative in creating value back to both major partners. This has required a lot of cooperation and coordination from our own employees on the part of our partners, and on the part of certain of our SkyWest vendors. In the end, I would just summarize it by saying, there were certain compromises made on both sides, both SkyWest and the side of our partners. We have created value for each partner, but we've still maintained the integrity of our operating agreements. Operational quality, also significantly impacts our revenue as you all know. Our ATC and weather-adjusted completion factor was right on 99% in the quarter. Our performance relative to the incentive matrix, it was a solid -- I just classify it as like a solid B performance for the quarter. And I guess having said that, I'd just remind you that I'm saying a B performance relative to our matrix, which in some cases, the targets are very difficult to achieve, while our performance, relative to our peer group, and relative to the industry was very, very good. On the operating expense side, we really just have two primary issues that I would draw your attention to. First of all, our employee-related expenses decreased 1.6 cents per ASM. We have implemented wage freezes, hiring freezes, reduced incentive payments and the normal things you would expect in this environment, which have contributed to those reductions. The other expense item worth some discussion are maintenance expenses. Our maintenance expenses are down significantly, primarily due to a change in accounting from the accrual method to the direct expanse or expenses incurred method. That reduced our cost per ASM one full cent. And I would also add that this is one of the areas where we believe we're creating value back to our major partner, in that we're billing to our contract rates the expenses as incurred, rather than charging through and included in the rate the more mature rate. This obviously has a significant cashflow benefit in the early years of the life of a CRJ. That's one of those things where we have -- we believe we've made some compromises, it's created value, it's required the full cooperation of our engine services vendor, and all of that's had to come together to work. I guess one other item worth mentioning on the expense side, is just that our average price of fuel in the quarter was 85 cents per gallon versus $1.11 per gal in last year's March quarter. Let me now give a fleet update. The current fleet consists of 79 Brasilias and 54 CRJ's. As most of you know, our CRJ growth has been very aggressive. I'm going to just indicate, and I'm a little hesitant to go back to September 11th-type comparisons, but since September 11th, we have brought 27 additional CRJ's into our fleet. I would also add that I think that's more aircraft deliveries than any airline that I'm aware of. And also of significance, I believe, is that all of those aircraft are long-term, permanent financed. We do not have an aircraft on any kind of a short-term interim bridge. Of those 27 acquisitions, three of the airplane were owned and are financed with permanent debt financing. The other 24 were acquired through leverage leases. Let me give you now some indication of where we think our ASM production will be over the next few quarters. Let me just give you the numbers, first of all, and then we will talk a little bit about Bombardia and what we think that means to our growth. In the June quarter, we would expect the AMS's to be just about $1 billion, 30 million. In the third quarter, which will be September, $1.1 billion. In the fourth quarter, $1.2 billion. Combine that with the performance of the first quarter, and that should give us somewhere close to $4.3 billion AMS's for calendar year's 02. In those numbers we have assumed the following are May deliveries from Bombardia that we would experience about a 30-day delivery per aircraft. That's what we have built in to those ASM estimates. Now, having said that, you know, we don't know a whole lot more than, I'm sure any of, you know, about Bombardia's situation. The strike is ongoing as far as we understand. And the -- there are really no developments, at least as far as we understand, in discussions that would put Bombardia any closer to giving us any more concrete, firm indications of when the airplanes will be delivering, the extent of the delays, et cetera, et cetera. Now, having said that, we still have a couple deliveries coming up here through the end of May, which we have been told will be on schedule. I think that of very significant importance is that although we are expecting, you know, at least one month delays through the end of the Summer, we do believe that if this can be resolved in fairly good order, that they'll have the ability to get back on schedule, and that we -- you know, by -- towards the end of the Summer, into the Fall, we're obviously hopeful that things can get back on track, and that the deliveries could come as scheduled. Having said that, we have figured out ways and -- which involve a lot of cooperation with Bombardia to cover all of our revenue lines that have been scheduled through the end of June. So not until July would we have scheduled lines that we were anticipating going into service that would be uncovered because of late deliveries. So I just mention, that because we don't believe that this situation will have really any impact through the -- in our second quarter, through June. And then we're scrambling and figuring out ways that we can cover additional flying beyond that, and then hopefully by the end of the Summer, into the first part of Fall, we would be hopeful things would be back on track and have the deliveries back on schedule. Let me give you some just information about our balance sheet, our Caps position at the end of the quarter is $308 million. I always point out we have just about $116 million on deposit with manufacturers, which brings our real cash position to $420 -- about $424 million. Current ratio is basically four times current assets to liabilities. Our capital structure has a mix, a debt equity mix of 18% debt, 82% equity. Present value of off balance sheet liabilities at the end of the quarter was $713 billion. Tangible net worth, $695 million. Book value per share of just under $10 per share. A lot of you, relative -- let me backtrack a little bit before we begin questions. A lot of people have inquired just about the uncertainty of Bombardia,and the deliveries and that whole issue and have asked for quantification of what happens if the airplanes don't deliver. Rather than get into a whole lot of details and specifics about that, I would just tell you that our internal plans, we plan for about $600,000.00 of net income annually, per CRJ line. So, you know, if you take that, divide it by 12, that's about $50,000.00 monthly net income per CRJ line. So to the extent that airplanes are late, you know, in given months, then that's at least a general guideline that you could use to determine the impact of late deliveries. Having said that, we'll go ahead and conclude our formal remarks. Brian is our operator and he can now open things up for questions.

Thank you. Ladies and gentlemen, the question and answer session will now begin. If you are using a speaker phone, please pick up your hand set before pressing any numbers. Should you wish to ask a question, you may do so by pushing 1, 4 on your push button phone. If you would like to withdraw your question, you may do so by pushing 1, 3. Your questions will be taken in the order they are received. Please stand by for your first question. The first question comes from William Green. Please state your affiliation followed by your question.

Hi, this is William Green with Morgan Stanley. Very nice quarter. I just have a quick question on growth, and that is, as we look at 2003, you folks had talked about a 35% growth rate in capacity for next year. Are you still comfortable with that, do you see any risks to that.

I think the only -- I mean, certainly, we would expect to not have a -- you know, a Bombardia delivery problem by then. We're all hopeful this will be resolved relative to that fact, way before that. The only other issue that would remain is the United scope issue. That as well, we would expect to be resolved before then. I might add, in additional to that, we would expect -- let me back up. In worst case scenario, assuming that there's no resolution to the United scope, it could affect a few of our deliveries right at the end of this year. But we're not talking about deliveries. Those deliveries would not have an impact until December of this calendar year. So we would expect very little impact on calendar year '02. It could have some impact in calendar year '03. We would plan to manage that in a combination of some early Brasilia retirements, as well as just probably a few more -- a few airplanes that would be deferred, just depending on how that's resolved.

In your rate discussions with United or Delta, did you discuss 2004 at all?

We have had no discussions about 2004 at this point.

Okay. And then just secondly,on the cash issue. With $300 million in cash, do you folks envision coming into the market at all and re-purchasing any shares?

Not at this point.

Okay. Thanks.

You're welcome.

Your next question comes from Brian Harris. Please state your affiliation followed by your question.

Hi, it's Brian Harris from Solomon Smith Barney. Brad, I was wondering if you could comment at all regarding the discussions you had with Delta and with United regarding increased insurance and security costs. Are those going to be passed through? Any color on how that issue is being addressed?

Yes. Let me just say very clearly, we have some very significant increases incorporated into our planning this year, just based on, first of all, what we're paying currently, and then what we expected the rate increases to be in -- when we do our renewal later this year. Both of those, we feel, are worst case scenarios and we don't expect the actual cost to come in at that level. But for planning purposes, I mean, we obviously just have to take what we know today, and we weren't willing to, you know, plan on much different than that. So we've gone to both carriers and said, look, this is what's in our planning, we don't think it's going to be this much, and you shouldn't have to absorb that, if we don't incur it. And then we've basically proposed to both carriers that we true up insurance this year, similar to how we treat fuel. In that there's just so much uncertainty in this year. So that's the way we plan to treat it with both carriers.

Okay. Thank you.

Your next question comes from Helaine Becker.Please state your affiliation followed by your question.

Thanks very much, Operator, it's Buckingham Research Group. Hi, Brad. With respect to labor issues, you mentioned, I think, that in terms of going to -- getting everybody on board, if you will, to create value for United and for Delta, could you just discuss, you know, what the response of your pilots were -- was with respect to that. I think you have the largest non-union pilot work force in the industry right now. I know they're always circling. Maybe you could address that situation.

The question is just, we've done some things to decrease our labor costs, and what has the impact on that been to pilots. Is that the question?

Pretty much.

Well, let me be very clear. We, last year, right as -- I mean, as Comair's strike was coming to a conclusion, was the same time at which we were putting in a new pay scale and plan for our pilots. Ok and we believe our rates are very competitive, and we're at a level that our pilots were -- I mean, we put out a plan to the pilots. We took several alternatives to them, actually, and they had a lot of input into what we finally put in place as a plan to take us through the full year. And we have not proposed any changes to devote specifically to pilot or flight attendant rates. The places that we have had good success in reducing our costs, are more in the admin areas, where we have just said, you know, on one hand we have got a very agressive growth rate and we need to carry out that growth growth plan and the maintain the quality of the operation. But we very specifically implemented, for example a hiring freeze. That said, you know, we'll allow growth only when it is directly attributable to the delivery of an RJ. Okay? And outside of that, we have been deferring, as well as implementing, wage freezes in what I'd say are non-scaled ways. So that's -- and then we've also reduced incentive payouts and those types of things, basically, across the board. But those are the areas where we've gotten the bulk of this benefit.

Okay. And then my other follow-up question is, with respect to maintenance, I think you had a new maintenance operation, or a new maintenance hangar opening in Salt Lake. Has that been opened, and do you have any comments on that?

Yes. I'll let Ted [INAUDIBLE] go ahead and address this one.

Thank you.

It's been opened for several months and maintains primarily our Delta operation, and, in addition to that, I suppose it's created a huge base for our growing United jet fleet.

Are you pleased with the performance of it?

Absolutely.

OK, Great. Thanks for your help here.

Your next question comes from Jim Higgins. Please state your affiliation followed by your question.

Oh, yes. Hi, Jim Higgins with Credit Suisse First Boston. A couple of cost questions. With the change in accounting on maintenance How should we look at growth over that line item over the next couple of years.

Growth in that line item is not going to be -- I mean, it will be primarily attributable to our older CRJ fleet. The new airplanes -- and this is one reason we changed this method, is that the new airplanes are relatively inexpensive in the first, you know, three- to five-year period, both because of warranties and you're not up to your first heavy maintenance yet. So the only increase that we'll expect to have materially in this area, is just on those first few older airplanes which is probably, what, 20 -- about 20 of the airplanes, relative to what will be a 70 -- close to a 70-airplane fleet through next year. So I don't expect -- we'll have to work with you individually to give you some trending, I guess. I'm not really prepared to tell you what to expect in, you know, absolute dollars at this point. But it's not going to increase significantly, which is basically, the whole reason that we made the accounting changes, those expenses, now based on cashflow are going to create what we think is, you know, some material benefit to the major partner.

If this change makes that line item more volatile from quarter to quarter?

It certainly won't, for the next several years. You know, out in the later years, when the first heavy maintenance comes due, those numbers will go up, and that's an issue that we have to work with our major partner to make sure they understand what's going to happen, that they're prepared for the increases when they happen. Obviously, if you're lower in the early years, it's going to go higher in the later years at some point. I think everybody understands that that's going to happen.

And in terms of thinking about this year, are we at a reasonable run rate?

Oh, yes. Absolutely. There will not be a material impact of this in this quarter.

Okay.

Excuse me, in the rest of this year.

Great. And then one other question, promotion and sales was low. Is that a function of a shift to an all fee per departure basis? Is that a number that's fallen to a lower level. And we can expect it to stay relatively low?

Yes.

Ok, thank you very much.

Your next question comes from Glenn Engle. Please state your affiliation followed by your question.

I'm Glen Engle ,Goldman Sacks. Good morning. A couple questions, first of all Atlantic Coast, I think on their call, said the rate progress meant that it would be - as the year progressed , it would become more difficult to hit the target. Is that the case for you as well?

More ,I guess if there was no inflation excalation and so I guess they felt it was more challenging to hit the cost targets as the year progressed.

I'm not sure all of the dynamics involved in why ACA would make that comment, I would just say that in general -- I mean, we'll probably have a little of that impact. I don't know for the same reasons, but we'll have a little more cost pressures, we get through the year, as we get more and more into the growth, and how long we can continue to defer certain costs, and those types of things. I would say there could be a little more pressure in the later quarters, but not materially.

Second, can you give the current planes that you would expect to have delivered this year and next. And two, whether you're looking at any other fleet types?

Okay. The answer to the second question is very easy. We are not looking at additional fleet types. Your first question is just, you just want to be updated on deliveries in the rest of this year and next year?

Hold on, just a second. Okay. We're just separating out here, just making sure that we're accounting for the ones we've already taken. For the calendar year '02, we've been planning on 31 deliveries. Six of those we've already acquired. So that's, you know, for calendar '02, it's 25 additional deliveries, assuming everything, you know, keeps on track. You know, that could move by a couple of airplanes, depending on the Bombardia issue, and could be impacted, I would say, not more than one or two on scope issues with United. In the following year we have --.

That's the scope issue of United.

I think at this point we're going to just tell you we have 11 deliveries in that year with Delta. We have a lot of scheduled deliveries with United that are going to take some working on here and some -- the resolution of the scope.

If the scope issue was resolved, how much could you do next year?

The scheduled deliveries are 25 for United.

Okay.

36 in total.

Thank you.

You're welcome.

Next question comes from Jim Parker. Please state your affiliation followed by your question.

Raymond James. I'd like to know, guys, if you have financing, permanent financing arranged or commitments or permanent financing on all of the RJ's you're going to get this year and next year?

All of the airplanes -- I want to answer that in two pieces, all air -- and re-emphasize, all airplanes are permanent financed that we've taken thus far, no interims have been involved, no short-term bridges, which I think is just a good indication that the equity markets, you know, like Skywest believe in what we're doing, and that we do, in fact, have equity -- access to the markets. We have all of the airplanes scheduled for the remainder of this year, the debt side is already in place and committed. We have a good share of the equity committed and are working on equity commitments for the latter part of this year.

And if you cannot find equity investors for these leverage leases, would you use your own cash to fund the growth.

We believe we have, the good thing about our strong balance sheet and liquidity position is that becomes a very valid alternative. The good news is, we have a lot of alternatives before we would be forced to go to the operating lease market.

Ok and can you quantify the amount of cost savings that you have realized for United? Obviously, they're asking you to help them out with their cost cutting. Can you quantify? And how much that was.

I'm going to answer this one very quickly. I don't believe that any of the -- I mean, we've indicated that there were compromises made that we have reduced cashflow requirements, and that we have done. But I am not going to go into further detail about the agreements, they're confidential and proprietary. If I believed that the impact were material, you know, that any -- that any of this would be material to -- you know, if the costs were reduced to the point it affected our base on which we get reimbursement, which would have a material impact on EPS, I would tell you that.

I'm referring primarily to the cost give-ups you've made since September 11th for them.

I don't believe it's really appropriate to get into very specifically on what we've conceded on both carriers parts. We've made some concessions on both sides, and we believe that those -- the things that we have done are being, you know, considered very positively by both carriers, and were factors in getting our current rate renewals done. But at least on this call, I don't think it's probably appropriate to go into specifically.

Yeah, that's fine. Thanks.

Your next question comes from Jim Altshawl. Please state your affiliation followed by your question.

Good morning. A couple of questions, please. Mesa, in their conference call yesterday, said that they were talking to United. Do you know, are they talking to them about replacing you on any actual or expansion routes?

We do not know that at all. All we can say is, we have, you know, contracts for airplanes to be delivered, and we believe we're creating a very -- not only a very high-quality operation, but one that's very cost competitive. So United's had none of those discussions with us, and we don't -- we're just continuing our normal course of business with United, and would expect to do so in the future. And really, I mean, I -- I not only can't, but wouldn't comment on anything that may or may not be happening between United and Mesa.

Do you have any idea whether the fact that United is talking to Mesa is influencing United's stance in the negotiations with you in what they're expected from you in terms of rates?

I don't believe it's had any impact. I mean, all I can say is that we are doing everything that we can do, you know, reasonably and practically to create benefit and value back to, not just United, but both major partners. I mean, we've compromised things, we've gone back to vendors, kind of re-tooled how we do certain aspects of our business, all in an effort to increase value, reduce costs and reduce cashflow. So we're doing everything we can possibly do, and yet still keep the integrity of the contract in place. And that we believe, is being perceived very well by both carriers, and which is why we've got, you know, rate renewals done, and very close to a longer term agreement with United. So, I mean, we feel -- you know, we feel very good about where these discussions have gone, feel very good about our relationships. I will say too, I mean, their process has taken a long time, which is not unusual. I mean, given the challenges and the issues that the industry is dealing with, nothing that the major partners have asked of us is surprising or unusual, or none of it is stuff that I wouldn't have asked for and pursued myself if I were in their shoes. So we're working cooperatively together, and I think our relationships have not only been clarified, but strengthened as we've gone through this process, and we feel very good about where we're at.

Good, without being too specific, though, because both United and Delta have other relationships, you know, without being specific as to number, or specific carriers, do you have any sense as to whether there's a big difference between -- with each of the partners, the rates you were getting and the rates they are paying their other independent co-chairing regional affiliates.

The way I'll answer that, Jim, is we spend a lot of time bench marking and doing the best we can, gathering what information is available to help, you know, compare and bench mark our operating expenses against our peer group. And, having done that, we believe that we are very competitive with the industry and with our peer group. And so you take the fact -- we think our costs are in line and very competitive, then it becomes an issue of quality. And that is an area where we feel extremely good. You know, we believe we've got the best quality in the industry.

Good. I don't want to take too much of your time. You mentioned with regard to the United deliveries next year, that's subject to some resolution and scope clause issues and things on their end. If you're not able to resolve them and take all those deliveries, are you going to have any penalties with Bombardia?

Bombardia ,is - has been very willing to work with us on this issue. I don't know the answer to that question specifically, until we know the extent of possible deferrals. As we see it right now, no.

Good. Thank you, very much.

You're welcome.

Your next question comes from Robert Toome. Please state your affiliation followed by your question.

Good morning, RBC Dean Raucher. Brad, can you talk a little bit about the operating margin in the first quarter was quite good. And, you know, we had been, or at least I had been modeling for modest reduction over time. Do you think margins are going to hold up better because of your cost reductions? Can you say anything about that?

That's certainly a big factor in -- you gonna have to keep in mind, though, a good portion of cost reduction -- that will be passed through -- back through to our majors. Those are things we're doing inherently to create value back. So to the extent we can be, you know, have success in that -- the majority of that benefit will go back to the majors. Now, our operating margin, you know, we've had a -- last year, as I already mentioned, particularly in our first quarter, we had a difficult quarter and our margins were down. They're back up now because of very good operational performance. We didn't have ATC and weather delays and those kinds of things so our operating margin this quarter, I think, is somewhat reflective of what you'll see, but it will gradually come down as -- when I say come down, I mean in that, the level that we just produced, I would think it would be, you know, somewhat similar moving forward. I don't expect a big variance either way. I will say that performance was achieved with very good incentive performance. But I don't expect a material change in margins, you know, in either direction.

Incentive performance on the contracts, Brad?

What's that?

Incentive performance on the contracts, is that what you're referring to?

Yeah, I just wanted to be very clear these margins were achieved with very good performance relative to those incentive matrix.

Ok, I guess as a follow on to that, I know what you're going to say to this, because you've addressed it several times, but I'll ask it anyways and that is having to do with your negotiations with Delta and United. Are you confident that they understand the economics of what you need to do to maintain an adequate return on investment for your company?

Yeah, we believe they do. Now, but having said that, I mean, we understand that this is a very, very sensitive issue. And the thing that we are -- we're trying to help them keep in mind, is that we don't want -- we're sensitive in the fact that, if this were just a matter of just sheerly, just margin performance, you know, we would take a much different view about this. Our issue is, though, that a lot of -- a lot of investment, both in just the equity and the debt markets coming into this company, which is essential to fund our growth, is dependent on preserving the integrity of those contracts. And if there are things, weighs and means, that we can create value, for example in reduced cash flow requirement, is the specific area that I'm addressing here, if we can reduce cash flow requirements, but still preserve the integrity of the contract so that we can attract investment, which is necessary to fund the growth, that's what we're trying to accomplish, and that's been our objective, that's why we've been willing to compromise some things on the cash flow side, that have still tried to be very firm in the contracted rates themselves. But we believe that we've been successful at doing both. We've kept the margins pretty strong, at the same time, created value back in other ways. We're not talking about just meaningless fluff here. I mean, we're talking about some substantial benefit that's been created to both major partners, in reductions of cash flows required. That's what we think is the real win here, is that we've been able to do both. But those -- the economics, and the majors understanding the economics, and how vital it is that the integrity of the contract is preserved so we can fund the growth, I mean, that's a very significant, vital part of what we're doing.

And you believe they understand that?

We believe that they're understanding it more and more, yes.

Okay. Can I just ask one other question, also, on the scope clause impact, which, as you said earlier could potentially have an effect later this year or next year? I mean, can you -- how do you feel, ultimately, Brad, about the way this plays out over time? Are you confident that ultimately the scope clause will not be a limiting factor for your growth, or is there anything you can say on that longer term, I guess?

Yeah, I'm going to ask for Ron's help on this one too. I'll give a very quick response, and that is, it feels more and more to us like all of the interested and affected parties are understanding the value of an RJ, and that both at the major level, and our level, you know, it doesn't help, for example, one of the majors positions to restrict or artificially limit RJ growth. I mean, that isn't good for any of us because of the -- well, as you said, because of the economics involved. The more traffic we can get in and feed to a hub, the downline activity, the more downline revenue and the more downline capacity is required. So it -- at least it feels to me, and Ron can add here too, but it feels like to me, the longer this has gone on, the more all of the impacted parties are understanding the value of an RJ. Ron, anything to add?

The natural evolution of our industry would -- and you're seeing it now, the focus is even shifting now to the 70-seater or the 90 or 100-seater. So you have to think - the 50-seater will almost be a resolved issue just by default, as they shift their focus to other opportunities. As our fleet types get bigger. So the issue will be the next 12 months, however, with United, trying to resolve their scope issue. And other carriers have gone quite a ways to resolve theirs.

Okay. And then just one other question with regard to the employment cost, the employment freeze or wage freeze, Brad, do you -- can you say -- do you see that extending for an extended period of time, and does that raise any risks in terms of, you know, employee relations?

No, I mean, I don't think we have much risk of that at all. I think everybody understands the condition of the industry, and understands that we're one of the fortunate few that has not been in the situation where we've gotten layoffs and furloughs and reductions of work force. So we're pretty much sticking by our policy that says, essential growth only. And as long as we do that, we think we can keep the costs where they need to be and still maintain productive relations at the same time.

One last question, if I might. Just your general sense on the outlook for industry activity and fares and that sort of thing. What you can see, Brad.

I will just give a general comment. I may not be the best one to give an opinion on this, in that, you know, 100% of our fare environment is controlled by the majors at this point. But, at least as we see things happening, is the first step that needs to happen here is, consumer confidence needs to return. People need to get in airplanes, and we see that happening. I mean, the load factor of growth that you've seen in our airline is indicative that passenger confidence is and has returned, and people are in the air, okay? That is the first and most important step to this. Now that we have the traffic, and people are returning to the air, then the majors are in a better position to specifically to manage the revenue and try to optimize yield. But we all know the yield issue is the big factor in the industry's revenue at this point. So as long as the people are there, now the next step can happen, which is optimize for yield.

Spring sales have put a lot of discount passengers in airplanes, and as the travel industry picks up - the business picks up, you'll see yields put a bit of pressure on those.

Thank you very much.

You're welcome.

Ladies and Gentlemen, just a reminder, should you wish to ask a question, you may do so by pushing 1, 4 on your push button phone. Your next question comes from Susan Donofrio. Please state your affiliation followed by your question.

Yeah, hi Brad. Susan Donofrio, Deustche Banc. A couple questions. One is have you discussed with United possibly doing a reverse code share to get around the pilot's scope clause?

Ok, second, with respect to the aircraft coming in for '03, possibly in violation of the pilot's scope clause, is there anything in your contract that would allow you to put them to United if they decide not to fly them?

No, there isn't, but I -- we've -- we're going to run through a lot of alternatives before it would get to that point.

Ok, and then last, US Airways was able to raise their pilot scope clause. Have you been having discussions with them over the near term?

I think I'll let Ron -- I think the first, we indicated last time there had been ongoing discussions there, and there had been. Things slowed down significantly while they were working on the issue with the scope. I'll let Ron now talk about if there has been much activity or much discussion since we've heard about the increase in the scope.

You never want to say never, but we could not internally resolve the issue of their crew members coming into our airplanes at something different than a new hire. And reading what they have appeared to have stated, that their captains will receive captain pay regardless of the seat. I don't know the seniority and how they'll move into their airplanes, I'd say the likelihood of Skywest flying a US Airways aircraft under those conditions is very slim.

Okay. Terrific, well, thank you.

Your next question comes from Alex Brand. Please state your affiliation followed by your question.

Thank you. BB&T Capital Markets. I have a couple of clarification questions, I guess. I'm curious on the United, the agreement that you were able to get for the first quarter, but I guess that didn't translate into a full year agreement. I wondered if you could give some color as to maybe why that was. Is there a difference that you're still working on there?

I wouldn't say it's necessarily a difference. Rather, I would say it's a little more definition. The point being, that when it's on intention here, and we're so close to doing a deal for -- basically, covering two years, there's just a little more definition that needs to take place on both sides about what, I mean, just to make sure that it's a deal that works for both carriers and the value that SkyWest is attempting to create to give a little more definition to what and how that's going to happen, and to make sure that we have all the I's dotted T's crossed. We all understand it very well before we embark on a deal that's going to cover two full years.

And that's the primary reason that it wasn't -- we have not absolutely concluded the deal at this point.

Okay. Presumably it's worth a little extra time not to have to go through this again next year, right?

Absolutely. That's a prime objective.

Ok, the second point of clarification for me, I think you -- you mentioned that Bombardia has helped you sort of get covered, I think is what you said, with your scheduled lines through June. Could you sort of clarify exactly what that means?

Yeah, it's very easy. We had had a late delivery because of a little problem with the airplanes, it was on a new delivery that was supposed to happen, it didn't happen, it was late enough that Bombardia was good enough to provide basically a white-tail airplane to us as a spare, and they've agreed to let that airplane stay with us a little longer than was originally anticipated , which is coming into play now and helping cover revenue line.

Ok, great. Thank you.

It's really as simple as that.

The only thing I would add is that quite by accident we were planning to have additional spare in the month of June, so by our own planning, now we have a spare that's going to be able to cover line flying.

yup. We are being a {INAUDIBLE] force in position going into this site.

There's a lot of things in the operation that have to happen to cover these additional lines. Reducing a spare compliment, and those types -- plus the airplane that we've gotten from Bombardia that will stay here a little longer than intended. Those are the things you do to scramble and cover lines in this situation.

Great, thanks a lot, guys.

You're welcome.

Your final question comes from Michael Linenberg. Please state your affiliation followed by your question.

Hi, Merrill Lynch. I'm just - ah -two quick ones here. Brian, can you -I noticed your interest income was down a bit, it was down about 40%. I know you had. I think you had much higher cash balances. Is that all attributable just to lower rates, or is there some timing there?

It's rates, Mike.

Okay.

That's just, you know, a lower rate environment.

Ok, and then just -- my second, if you could just break out where you are in an ASM basis between your two partners?

Sure. Let me give it to you. First of all, what it is, currently, 65% Delta.

And that's ASM's, right?

That's ASM's. That's happened -- we've seen a pretty big shift here over the last couple quarters, simply because of the rapid expansion of the Delta CRJS. That this year is intended to flip a bit, where the majority of the deliveries become United and it should even out a little closer to 50/50 by the end of the year.

Have you provided in the past what that split out is by revenue?

We have not.

Okay. Do you care to do so?

No, not at this point.

Fair enough. Thanks. It was a good quarter.

Thanks, Mike.

Ladies and Gentlemen, at this time I am showing no further questions. I will now turn the conference back to Mr. Rich to conclude.

Okay. We'll just go ahead and conclude. We've been on the phone just about an hour. I appreciate your time. Not only your time, but your interest in SkyWest. Thank you very much.

Ladies and Gentlemen. That concludes your conference call for today. If you wish to access a rebroadcast of this call you may do so by dialing 1-800-428-6051. And for international dialers 973-709-089. With the user pass code of 240006. Thank you all for participating, and have a nice day.