SkyWest Inc (SKYW) 2002 Q2 法說會逐字稿

Good morning and welcome ladies and gentlemen to the discussion of SkyWest Inc's second quarter earnings results. at this time I would like to inform you that this conference is being recorded for re-broadcast and that our participants are in 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 value materially, these include but are not limited to economic, competitive, governmental, technology and other sectors as identified in SkyWest's press release or discussed from time to time in SkyWest's reports to shareholders and periodic with the securities and exchange permission. I will now send the conference over to Brad Rich, Chief Financial Officer. Please go ahead sir.

Thank you operator, thank you to all of you for your time this morning, your interest in SkyWest. The purpose of the call this morning is to review our financial results for the quarter ended June 30th 2002 and to provide an overall update of our operations. As usual I am assuming that most of you have already seen our press release this morning, so I will discuss the results quickly and then move on to a discussion of other current issues effecting the airline. As in the way of time and agenda for the call, the other issues that we will discuss are our relationships with our major partners, status of rate renewals, the airline's operational performance, as well as to give you an update of our capacity and free planning type estimates for the upcoming quarters.

First of all a quick review of our, of some of the highlights of the press release, our operating revenues increased 25.2 percent quarter over quarter. That was primarily the result of a 62.2 percent increase in available seat miles or our capacity. In addition our RPMs were up 80.3 percent and load system wide increase a full seven percentage points, from 62.1 percent to 69.1 percent.

Now of course most of you know that the best measure of performance now, and revenue growth etcetera is our capacity. The RPMs and load factor I bring up only as a very strong indication that the system is working. We have people in aeroplanes and I mean, obviously the more people, the higher the load factors, it just means that the system is working for both SkyWest and our major partners.

As far as our operating expenses are concerned, operating expenses increased 28 percent but keep in mind that was on 62.2 percent increase in capacity. Our overall cost per ASM decreased 21.2 percent from 19.3 cents to 15.2 cents. Of course some of the decrease is due to the fleet mix, we have additional CRJ aircraft that are flying at a lower cost per ASM, our stage has increased from 251 miles to 348, with the additional jet flying, but we have also been very successful at controlling our operating expenses. Our chasm is also down approximately one full cent, due to the change in accounting for maintenance and fuel prices averaged $0.93 versus $1.11 per gallon last year, which positively impacted our cost per ASM by seven tenths of a cent in the quarter.

Just one other general comment that I'd make about our cost per ASM is that we are very pleased, we do not break out specifically our cost per ASM, between aircraft types, between the and the CRJs, but I just make a general comment that we are very pleased with the cost per ASM, particularly in the CRJ, the original jet fleet, specially as we look at that cost per ASM, relative to industry benchmarks. All combined for the quarter then our net income increased to 18.9 million or 33 cents per diluted share versus 17.7 million or 31 cents per diluted share last year. In looking at it very quickly from a six-month year to date perspective net income increased to 35.6 million or 62 cents per diluted share versus 27.9 million or 49 cents per diluted share last year.

Our revenues for the quarter let me give you some perspective and hear about how we booked through the basis for recording revenue. Of course we do have a rate agreement which I believe most of you are aware of with Delta Airlines for 2002 the probably still around 65 percent of our total production during the quarter was in the Delta system. We do have an agreed upon rates with Delta for 2002 as I said. On the United side we booked what I would describer as a very conservative estimate of SkyWest interpretation of the contract rate owed by United although we have yet finalized our rate agreement with United. I'm using the term conservative because the contract is not done we don't have agreement but I believe that what we've recorded is a fair representation of what we have in our contracts but as most of you know we by nature are very conservative and have booked what I believe is conservative estimate of what those revenues would be.

Last time we had this call I indicated that I thought we were very close to having an agreement with united that obviously has not has not come to pass we do not have agreement an agreement as we are here today and given that discussions are still ongoing based upon the fact that I also mentioned I thought we were close last time I would even venture a guess at this point on when we would be complete. But we are in discussions there I would just describe as cooperative and productive at this point.

I would also just make reference to the fact that our weekly cash flows from both carriers continue as expected with no interruptions both carriers have committed to adjust weekly payments to a level that will require very little adjustment at period ends. When I say period adjustments obviously in most cases that translates into accounts receivable at SkyWest so obviously it is our objective to have those payments very, very close to a period that estimates so that we don't have bug adjustments and therefore we're receiving the cash flows in a timely manner.

Our operating reliability for the quarter was very, very good. We were in excess of 99 percent completion in as far as how we measure this according to . I would describe our performance relative to the incentive as strong 'A' minus performance in fact we believe that during this quarter we collected the highest percentage of total dollars possible for a quarter than in any other quarter since we've been doing contract flying. So we feel very, very good about our performance operationally during the quarter.

Let me now move to give you a up date of our fleet and our capacity. During the quarter we acquired a additional six CRJ's so our fleet as of today consists of a total of 79 brazils, 60 CRJ's for a 139 total sir craft, those air crafts consists of 63 brazils in the united code and 16 jets in the united code and 16 EMB's and 44 jets in the delta code.

During the quarter we started new service between and Dallas Great Falls to Salt Lake city and in the united system to San Francisco, I think we have exciting and a very good schedule that is bring put in place for up coming deliveries that are happening and will continue to happen in this quarter. When the V about those as some of those cities as some of those cities have not yet being announced by major partners. But it is a good exciting schedule with new service with several new cities excreta.

As far as the balance sheet review is considered cash and cash equivalent at the end of the quarter 363.3 million we still have a 111.3 million on deposit with if you add the two together it is 457 million one thing that I would bring to you attention is that our total cash and cash equitant increased by 56 million in the quarter. Our current ratio is three point nine times the asset to current assets to liabilities, capital mix, death in is very consistent to where it was last quarter at 18 percent death verse 82 percent equity . Our present values of our off balance sheet liabilities at a seven percent discount factor at 113 million.

Tangible net worth at the end of the quarter 592.4 million but value per share at 10.53, $10 53 cents per share and also I think very impressive numbers measure liquidly is that we have $5, 11 cent in cash per share.

Lets see as far as our capacity coming up in up coming quarters last time during our conference call we where obviously dealing with the strike and some issues relative to what the impact would be, we have had some movement in those deliveries that we still feel very good about the projections that we have given previously in fact we actual increased our ASM projects or estimates this quarter and we believe that the numbers we have given previously for third and fourth quarters although we have had some movement n those delivers we still think that third quarter ASM's are going to very close to one point one billion and in the fourth quarter close to one point two billion.

Let me just make a quick reference to first call consensus. It looks like the consensus estimates for the third and fourth quarters are 35 cents respectively. We still feel that those estimates are reasonable estimates. I wouldn't, at least at this point, give any guidance to, you know, to change those numbers significantly. So with that, I'll conclude the formal remarks and open it up for questions.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone please pick up the handset before pressing any number. Should you have a question, please press star one on your push-button telephone. If you wish to withdraw your question, please press star three. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from . Please state your affiliation followed by your question.

with Raymond James. Good morning . Is there a chance in your rates with United that you would have to go back and restate downward, anything?

No, I don't think there's any chance of that. I, as I mentioned, I mean, I think what we've booked is a very conservative estimate of what those rates will be.

And what are the issues, why aren't the rates set?

As we've described in previous phone calls, I mean, our, the nature of our discussions with both of our carrier major partners this time were in a mode where both carriers have been looking for, you know, additional value for us to do everything we can possibly do to reduce expenses etcetera. You know we completed that process with Delta very reasonably. Our discussions at this point with United, I don't want to go into a whole lot of detail or try to come up with excuses why we're not done. That, I don't think would be appropriate. I'll just characterize this, at least from our perspective; we have done everything that we believe is reasonable and practical to do. We've been very sensitive relative to United's financial condition at this point. We've offered a significant amount of concessions in areas that we believe are things that contribute to cash flow, but yet preserve the integrity of a long-term contract, so we've done everything that we think is reasonable at this point and it's basically in United's court right now to continue evaluating and make a decision on, you know, what they want to do with the rates.

OK and one last question. Regarding your financing of aircrafts, and so the leverage lease market seems to be a bit tight for the rest of this year and next year, how are you going to finance the aircraft?

OK. We're in a very good position, I mean; we still have 80 percent of the acquisition cost of these airplanes, which will be in the form of debt. That 80 percent commitment we have on all of our deliveries through about August of next year. So as you indicated, the equity market is the tough piece here. We're still working with various lenders or equity investors. We're working with both Bombardier as well as third parties to generate additional support that can be offered to equity, there are to attract them, but we have several alternatives of how to bring equity investors into these deals which we think are going to be very effective and enable us to get financing at very competitive rates. but I mean the biggest component is we have 80 percent of the financing committed at very competitive rates through basically the end of next year.

OK, thanks.

Thank you. our next question comes from please state your affiliation followed by your question.

Yeah, hi, it's with Morgan Stanley. Just one question on your discussions, I know at one point you where in discussions with US Airways on the possibility of flying for them, have those talks presumed or have they progressed at all, I was wondering if you could comment on that.

I'm going to, well let me, the reason, one of the reasons that those talks stalled before us, we just felt that some of the conditions, I mean the jets for jobs whole arrangement we felt was going to compromise our pilots to a level that we where not comfortable with and so, that's basically the reason why those discussions, you know, kind of fell of. that combined with US Airs condition at the moment, we would be doing this not just for growth but for diversification of risk, and so there's a number of reasons why we have just pushed that aside a bit. now obviously we're aware of US Airs scope cause, the fact that they have, it looks right now significant room for growth in RJ's so all of that we're very much aware of, but there needs to be some changes in some of those conditions before we would enter back into any meaningful discussions with US Air.

OK, understood. and just one quick follow up here, in terms of the cash that you've got on hand clearly if you can't get the remaining 20 percent of somebody's aircraft finance I assume you'd use some of the cash that you've got; but I was also wondering what the other uses of cash might be for example given the pull back in stock price, would you consider putting in place a share repurchase program?

Yes we would, we have a share repurchase program, it's already been approved by our board, it goes back to an authorization that was done actually some time ago that we have not fully completed; if you remember several years ago we bought back several million shares in a repurchase, we still have shares available in that and we're watching the market very closely. but I would also say at this point, given where the industry is at, we feel even more important that equity is at a premium at this point, that's one thing that sets us apart I think from some of the other regional carriers, we have good partners, have good contracts, but we also have one of the best balance sheets and the best equity, that gives us an opportunity to look at and evaluate growth opportunities even outside of our SkyWest core business and so that's another reason that we're maintaining some strong equity at this point.

Fair enough, thank you.

Your welcome.

Thank you, our next question comes from , please state your affiliation followed by your question.

Hi it's with , good quarter, just a couple of questions, first in the last quarter you guy's switched to expensing from maintenance rather than approval, I was wondering if could, one, sort of give us an idea, that certainly helped your last quarter, I'm assuming it helped you this quarter; are there any expense checks or I guess service checks that are going to come up on some of these regional that may be higher than what we have been seeing, or is this something that's still a year or two away before we're seeing those type of service decks on the aircraft?

Certainly a very good question. Certainly on the new RJ's that are coming in we're still you know we're be basically two in between two and three years out before they're first real heavy maintenance events occur. OK, so I don't see anything in the for example the remainder of this year.

OK.

I don't see anything like strictly timing events that are that like have been deferred, and are jump up, and kind of nip us at least not in the remainder of this year, and then keeping in mind that as these airplanes it's not till two to three years out that the first heavy event becomes due.

OK. OK, and in going back to what to what you said about how you're sort of going along and being conservative with your expensing of United. If you're very conservative, and there's some upside to what you actually had booked would you go back, and then restate, or would that be a one time gain that you might take on a going for basis?

I don't have, well first of all I don't believe that any adjustment is going to be real material. If it is I mean if they became very material then we may choose to deal with it differently but as I see it now it's in material if any, and it's something that we'll just fold, and you know just bring back into in , and move on. If it were material enough to you know distort number at all we'd certainly pull that out separate it, and bring it to your attention.

OK, and one last question on cap ex. Where were you in the quarter, and what do you have any estimates for were you might be for this year?

As far as just non cap, or non aircraft cap ex?

Ah yes.

Yeah hold on just a second. OK for this quarter we spent about 14.6 million.

OK.

In non aircraft so I'm just talking about outside just outright airplane acquisitions.

OK.

14.6 our estimate for the full year is right on 60 million.

Right thank you.

Your welcome.

Thank you. Our next question comes from . Please state your affiliation followed by your question.

Sure it's Deutsche Bank. I have just two questions. One is when you did a crew already for United revenues I'm assuming that performance incentives were not included in that. Is that correct?

No I mean. No we put I mean our total revenue obviously consists of basically a block hour rate, and then incentives.

OK.

OK so what we put for revenue included both, and I will add I mean you know as I said earlier our incentive portion we did better, we did better relative to the total incentive dollars available than we ever have in a single quarter.

OK, and then my second question was when we think about kind of your fleet plan going forward is there be a time you know if United doesn't have all their employees on board that you may not be necessarily comfortable you know taking CRJ's in, and you may want to you know keep your Brasilia's instead, and how are we you know kind of how can we think about this?

Well let me give you a couple of very quick things here. First of all we have a very specific fleet plan you know that calls for reductions of Brazilians either through natural lease terminations or terminating or eliminating owned aircraft from the fleet. Then bringing on to either replace that service or b, just net incremental growth airplane I mean so we have a firm plan in place it's been working for us.

Now a couple of things, first of all in United conference calls a few weeks what ten days ago or so you know as Mr outlined some key points in their recovery plan in the first of four points that he mentioned he emphasized the importance of in the United system so you know we certainly believe that United still wants and needs more and more I mean we expect to still be an important part of that growth plan and delivering more and more now of course we have to do that with a rate agreement that works for us I mean we can't continue to bring on airplanes and you know we can't do it without returns that are acceptable and require to meet return on investment and good enough to stimulate investment in airplanes. OK but first of all they still want the airplanes they're an important part of their plan.

We're all geared up an establishing more facilities in fact the one thing I didn't mentioned in prepared remarks that probably would have been appropriate is that we are in the process of firing up a maintenance operation in which will handle both airplanes in both systems Delta and United systems will have a pilot domicile there as well as maintenance people so we're making all the preparations for that. But so we're just at this point continuing the plan as we have outlined previously. Now one thing that could change that plan a bit as we've always we've been very straight forward all the way along in that if the if the nature of the environment changes such that we're competing against more and more jets or if our major partners either one of them says we want replaced quicker with OK then obviously that's something that we're interested to do and would try to come up with every alternative for accelerating terminations and replacing with but that's a call that has to be made very cooperatively with our major partner.

Got it OK well thank you.

You're welcome.

Our next question comes from please state your affiliation side by your question.

Thanks very much operator I'm with hi Brad. Just a question on the G&A and the promotion in sales I guess I would have thought promotion in sales would have been a little would have down a little more in the quarter with United and Delta doing more for you.

OK in fact I thought your question was going to be why is it down so much which is because Delta and United some of the expenses that used go through that line item have been in essence removed from our expense model we're just being handled now strictly by the majors.

OK so I mean in terms of like four and a half million that's like the run rate we should be considering?

Yeah I think that is that is the rate yes.

And the other question is respect to operations up in Salt Lake I guess in the past year or so you have opened new maintenance facility and you have a new training facility can you just update us on how things are going up there?

yes I have go our Chief Operating Officer with us and I will let him respond to that one.

Thank you.

Well actually the facility has being opened now for several months and I would say it is every bit of what we expected our training classes and even our hiring programs one thing that has happened over the last several months is the availability of crew members and trun over has changed. So our classes are large as we at one time had anticipated but the fatality is certainly nice to have.

OK great thanks very much for your help.

Thanks .

Ladies and gentlemen as a reminder should you have a question please press star one at this time.

Our question comes from please state your followed by your question.

Yeah hi could you elaborate on what your fleet plan loks like you know through the remainder of the year and maybe even give us a glimpse into 2003 and also your interoperation of where as to where thinks are in respect to scope and united especially if this TA this pendent of agreement that was approved by there pilots if for some reason this doesn't as other employee groups you know fail to get on the band wagon here at UA?

OK very good question I mean let me attack the flight plan first of all, as far as this remaining deliveries this year I mean we have got to have basically remaindered of this year we are scheduled to take 15 more deliveries.

OK

And then next year we are roughly next year we are 35 deliveries.

OK.

OK, and then I think most of you know that the bulk of our activity are deliveries become here to four most of the deliveries have been delta I mean which got us mentioned earlier to 44 deltas CR days at this point 16 united. Well you know that is going to go you know in the next couple of years more stringer united deliveries which I guess the next part of your question is important and is that going to be possible giving the scope.

Yeah.

And all I can do I tell you is just convey what we have heard from united. First of all I will go back to comments where he indicated the importance of the CRJ's in there system as we understand both management as well as the MEC representation at united and there financial advisers all agree that the CRJ's are a important part of the united's recovery and there turn around and again I am just not giving you that is not my option I am just trying to convey what we have heard united or united representatives say and I am kind of in dangerous ground here cause I am not a united spokes man and a can not as being one. This is a general feeling we get from them is that pretty much the general under stood that the CRJ's are very important at United, they need to get more of them they are behind.

Some of the other major carriers as far as their regional jet programs are concerned and we also understand that, we have just been told very confidently they believe that this will be resolved in a productive manner. We obviously have some contingency plans, that we are considering, at least all the deliveries for the remainder of this year, with the exception of just one or two would be even allowed under the existing arrangement, and if couldn't take those, then we would probably plan on eliminating some which would then allow them in as replacements, but as far as looking out into next year all I can do is to convey to you that we have been told very confidently by United to continue our plans for delivery of those airplanes.

OK Brad, on a 15 for the rest of the year, and a 35 in 03 can you provide us the split between the two companies, have you been providing that?

The rest of the year it is four more Deltas.

OK

and 11 United's, which would bring us to mmm 55, I am just kinda calculating this in my head right now, it would mean in '03s deliveries there has got to be roughly 27 that are United's, out of 35.

OK that is very helpful.

That may be off one or two, but I think it is close to 27 for United.

OK and just lastly on the labor front, I know you guys have done a very good job of keeping your labor costs under control and I think you know typically every year, or a couple of years with the various labor groups, you know you go through, I am not sure if I call it, it is not a contract negotiation, but you do look at their wages, and kinda where they are versus the industry, and you talk you know, profit sharing and you know 401 K and things like that. Where are you on that front with your various labor groups.

I will have address this one.

Hi .

How are you?

We just completed a contract with our flight attendants. It only runs through July of next and there are some open agreements out there. The flight attendants preferred waiting to see where they came in and now we have seen the Agreement come in so our fly attendants that we just completed going for a year we've got some time left with our maintenance package our pilots will be with again discussing for July of next year but I think as you stated our relationship with our labor groups is I'd say is as good as it's ever been with turnover slowdown it creates a couple of new problems for us. I mean it helps us on the training front but it does create a new challenge with people that are not going to be given the opportunity to move on to major carriers and they're looking at us a little differently so I guess my point is we're staying very focused on our people and being a quality employer with competitive pay package. And as you said any plan is a big part of that package.

Yeah OK well very good and very good quarter guys.

Thanks .

Thank you. Our next question comes from . Please state your affiliation followed by your question.

Yes, hi! with Credit Suisse First Boston. A couple of questions again on the United discussions. Are you looking for an agreement for just this year with United at this point, or would you, or for next year as well.

No, I certainly will include 2003.

OK. And secondly, is it reasonable to believe that the talks are basically within the framework of United's government guaranteed loan application?

Well yes, we certainly believe so.

OK.

That, and I, that has been, you know, one factor here in our discussions. Obviously, I mean, they don't, they want to do things their, they, well yes, I mean the short answer to your question is yes.

OK.

It has been discussed, I mean, as a factor in these discussions.

OK, great. Thank you very much.

You're welcome.

Thank you. Our last question comes from . Please state your affiliation followed by your question.

Hi! . Good morning .

Morning.

Can I just pick up on that last point you made regarding the agreement with United within the context of the government loan to United, I mean, is that saying that if they fail to get that, and there's been some discussion of that, would that jeopardize the agreement?

Well, OK. Let me, I think, let me address that very quickly in two aspects. Number one is, there's the issue that in relative to their receipt of loan guarantees from the government, the government is going to be interested to see that...

All interested parties here have made concessions, so we're going to look for concessions from vendors, labor, contractors like SkyWest and want to see that all parties are contributing and that's where I said, we, I mean, we have made millions of dollars worth of concessions that we think are either our, or should be on that tally sheet, which would not jeopardize our long-term agreement at all. Now, depending on what happens with all of that and, you know, then comes an issue of if they get these long guarantees or don't get the guarantees, what happens with United and therefore, our agreement? And, I'll just say that one reason that we're taking a little longer in these discussions is that we are very committed in SkyWest to preserving the integrity of this long-term agreement we have.

OK, and I mean, if things get, you know, if things get to a point where, you know, United, for example, had to file bankruptcy, I mean, we want, you know, and up-to-date solid agreement in place at the time that happens. I think that is in our interest, our shareholder's interest, our investors interest that we protect the integrity of that contract and that's what we're trying to do.

OK, great. Thanks. I apologize for asking it, you may have mentioned this earlier. Did you translate ASM growth for us for '02 and '03.

No, we haven't done that yet . All we mentioned, and I think all that we're prepared to talk about now is we just referenced that a consensus for the quarters coming up at 35 cents a quarter and felt like, at this point, that those are reasonable estimates. Oh, excuse me, are you talking EPS or ASM.

Oh, I'm sorry, ASM.

Oh, excuse me.

That's OK.

Where we, we talked about ASMs for the quarters, for third and fourth.

OK.

But we have not updated that for 2003. In fact it's bring us out well with what we've just talked about or total assets for the year would be about 4.3 billion. OK, and we're looking for somewhere between 35 and 40 percent growth next year on that 4.3 billion.

OK. That's real helpful.

OK.

And then one other question did you have depreciation for the quarter, and for the full year as well for this year Brad?

Well as appreciation, and amortization for the quarter was 15 million basically 15 million even, and that's a pretty good you know running rate.

OK. Thanks very much.

OK.

Thank you. If there are no further questions I will turn the conference back to Mr. Rich to conclude.

OK. We've been on the phone for about 45 minutes, so again I appreciate your interest in our company. We feel very good about our performance particular operations. Our operational groups under leadership I mean have produced outstanding reliability, so we just feel very good about you know our operations, our performance. We think that we're well positioned for the future. Again we appreciate your time, and with that we'll go ahead, and end the call thank you.

Ladies and gentlemen if you wish to access the replay for this call you may do so by dialing 1800-428-6051 or 973-709-2089 with an ID number of 250543. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.