SkyWest Inc (SKYW) 2002 Q3 法說會逐字稿

Good morning, my name is Linda and I will be your conference facilitator today. At this time I would like to welcome everyone to the SkyWest incorporated 3rd quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

This conference call contains or may contain forward-looking statements based on management's 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 and Exchange Commission. I would now like to turn the call over to Brad Rich, Chief Financial Officer of SkyWest Airlines. Thank you Mr. Rich. You may now begin your conference.

Thank you Linda. Thanks to all of you for taking the time to join us this morning. As always, we very much appreciate your interest in our company and your interest in our performance and results. Obviously, the purpose of this call is to review the financial and operational results for SkyWest's third quarter ended September 30, 2002.

We'll just do a very quick review of the press release and then move on to a discussion of other issues such as major partner relationships, contracts, rate renewals, operational performance, fleet planning and so forth. First of all, as a quick review of the press release, overall our earnings for the quarter are 35 cents and fully diluted earnings per share. Our operating revenues increased 28.9% quarter over quarter. That was on a capacity increase of 51.4% and an RPM increase of 66.4%. Obviously, resulting in a 6.2-point increase in our load factors.

I think I will just make a general comment that we are particularly pleased with our revenue production in the quarter which was positively impacted by excellent reliability and operational performance and as you all know, the operational performance significantly impacts our incentive compensation and all of that was a very positive contributor to the results of the quarter. I will also add, relative to our revenue production, that in the last two quarters consecutively, we realized the highest percentage of total incentive dollars available than ever before in the history of SkyWest contract flying.

The operating expenses increased in absolute dollars 26%. And again, that was on capacity increases of 51.4%. As you can see on the release, we are actually very pleased with our cost numbers [INAUDIBLE] decreased from 18.4 cents to 15.3 cents. I'll just, again make a general comment that we remain very focused, as always, on our cost structure. We understand, very clearly the part of our value -- a major part of our value is in our cost structure and that's particularly critical in the type of market that we are in today.

We believe there are CRJ cost [INAUDIBLE] is very competitive relative to industry benchmarks. Quarter over quarter we see some [INAUDIBLE] decreases in most of our major expense categories. One item that is a bit larger or higher than some would be expecting is our maintenance area. As most of you know, from our previous quarters discussion, we have moved to a direct expense method in maintenance so we are now just incurring maintenance expenses as heavy maintenance events occur which is part of the driver of the increase this quarter. The other component of that is some truing up of an accrual estimate that existed on liabilities that existed before we moved on to the direct expense method.

Another item I think noteworthy is just to point out that the quarter was obviously positively impacted by $1.4 million pretax of the final payment received from the air transportation safety and stabilization act. That 1.4 million impact on fully diluted EPS was approximately 1.5 cents. Again, relative to revenue for the quarter, our revenues were booked in accordance with the provisions of our agreements. As you know, again from previous discussions, we do have assigned 2002 agreement with Delta and we booked revenues on the Delta side in accordance with that agreement. On the United side, again, we booked the revenues according to our interpretation of our United agreement. We still do not have a signed current rate agreement with United.

I'm not going to go into a whole lot of detail on this call about the whys and why nots of the status of that agreement. What I will say is that we believe we have done everything that we can do at SkyWest to get an agreement signed. We have made significant concessions and it's now in United's court. Given that we don't have a signed agreement, we have essentially booked the equivalent of last year's rates. I think maybe a final comment on that is although we don't have a signed agreement, as we are talking this morning, I do not personally know of any disagreements that we have with United.

As we have gone through and negotiated though this process, we don't have any disagreements that I'm aware of, but yet we just don't have a signed agreement. Our weekly cash flows from both Delta and United continue as expected without interruption and at amounts and levels which are minimizing our receivables at period end. I think that's a very positive thing that cash flows are just moving as expected and no issues there. I would draw a little bit more attention to our operational performance. I earlier mentioned that that was a positive impact on the quarter's revenue production. Our raw completion percentage in the quarter was 98.8%. Weather and ATC adjusted, 99.2%. As we talk about from time to time some of the real positive parts about our operation and the real positive things that we contribute to our partners, as we talk about that relative to quality of performance, I think that completion factor is a just very significant issue that demonstrates good quality and obviously has a positive impact on our results.

Moving to our partner relationships, relative to Delta first of all, as I already mentioned, we have been operating under assigned 2002 rate agreement and we are just now beginning our 2003 rate discussions. Relative to United, in spite of the fact that we don't have a current rate agreement, we continue to work through issues, we are working very cooperatively together.

We are paying very close attention to issues surrounding the potential bankruptcy and all of that. We are having ongoing dialogues with both United and with our legal counsel. I think we're doing all of the right things that you would expect us to be doing to do the best we can. First of all to help do everything that we can to help United through this. At the same time doing the things that we think we need to do to protect our position. Both carriers as I already mentioned, acknowledge that our quality is amongst the top in the industry. We always said the best way to keep good relationships with your partners is to deliver a good, high quality product. What has obviously gained significant momentum and emphasis in addition to quality is efficiency and low cost.

We are doing everything that we can first of all internally, doing the things we have direct control over, trying to create as much value through efficiencies as we can. Next of all, we're working cooperatively with our major partners to look for and create value through efficiencies together, such as it relates to United's recent announcement of the old traffic handling in certain cities where we can be a little more efficient. Those types of things we are working on cooperatively with both carriers to create efficiencies wherever possible. Let me talk briefly now about our fleet and capacity. We acquired seven additional CRJ's during the quarter so our current fleet consists of 79 EMB's and 68 Canadair regional jets. The ASM production during the quarter again I'm giving you this percentage by ASM or capacity in the quarter which was 36% United, 64% Delta.

In our fourth quarter, we will have 10 Canadair regional jet deliveries or acquisitions. Four of those happened in October and are in the current fleet numbers that I just gave you. We will have three more deliveries in November and three more in December. Our ASM projections for the fourth quarter, I think are basically unchanged from the guidance we have given so far to the market. That is approximately 1.2 billion for the fourth quarter. Then our current capacity or production estimate for calendar year '03 is 6.2 billion ASM's, which represents a 41% increase. I think there is some real positive things to note as you kind of take those numbers into account. It's a lot of growth. The airplanes are coming quickly. Some of you I know paid pretty close attention to the schedules as they are put out in the res systems.

If you have been doing that, you see service, for example, in the United system to and from Denver to cities like Austin, Ontario, St. Louis, Tucson beginning tomorrow Boise, El Paso, Fargo, Omaha, Pasco, Santa Barbara, Springfield. I am mentioning these cities for a couple of reasons. There is obviously good demand and a lot of market opportunities for these airplanes. The majority of the equipment is going into supplemental service. Markets that have either still have or have previously had a main line jet service. Obviously, one of the advantages is on the major side is their increased ability for the majors to manage their capacity with a different mix of equipment. On the Delta side, we have new service, particularly out of the Dallas/Ft. Worth hub of Jackson, Memphis, Louisville and Kansas city. Let me now move to just a brief review on the balance sheet. This is one where I can get a lot of energy developed. Obviously very pleased with the condition of the balance sheet, our capital structuring, our cash and cash equivalents.

In total dollars, are approximately 400 million. When you take the cash and securities, add to that another approximately 97 million of deposits and then you see a very strong liquidity position in real dollars from my way of looking at just under $500 million of cash and equivalents. That represents the cash -- just the cash and securities just under $7 per share. When you add the deposits to it, 8.64 per share and our total tangible book value is $10.70 per share. Interesting to note that approximately 80% of our total tangible book value is in cash and equivalents. Working capital at about $366 million. We do have about approximately 850 million of present value of off balance sheet leases.

The one item to maybe draw your attention to a bit is -- to give you a bit of an update is just the condition of the financing market. We have now for the first time during the quarter done some interim financing on some of our CRJ's. We have been negotiating through some issues with Ardia [PH] some changes to some of the structuring of the transactions which I believe is going to make them more attractive in the market. We do have very recent commitments on equity that will be closed shortly, but as of the end of the quarter, we did have six aircraft on interim financings. We do see some very positive developments relative to the [INAUDIBLE] market as it relates to SkyWest.

I think this is something that could prove to be a real positive thing and a distinct advantage for SkyWest. I do believe -- and again this is my opinion -- I do believe we are one of the few carriers that are financable in traditional kinds of financings at very solid, competitive rates which I think over time could prove to be to our advantage. The six airplanes that are on interim financing because they are on interims, they are on a balance sheet at the end of the quarter, but again I think we have some very good likelihood that those airplanes will be moved off of interim and in regular permanent financing structures by year end.

The last thing that I would mention is that on October 10th, we put out an announcement that we were going to continue a outstanding stock repurchase program. We do have 2.7 million shares of stock in a previous repurchase program that was authorized by our board of directors. As of right now, we have not repurchased any shares. There is a myriad of reasons why we have not repurchased. We have some issues relative to regulations about when we can be in the market or not in the market.

Given some of those issues, I'm not going to get into the details of that, we certainly have had a very strong intention of being in the market and acquiring shares. For various reasons to date we have not repurchased any shares, but that is still very much a part of our thinking and when we can be in the market at pricing levels that we deem appropriate, given all the market conditions, we still have the intention of executing a -- and participate in this repurchase program. So, having said that, we will now go ahead and open it up to questions. I would let you know that I have with me here at SkyWest Ron Reber, our Chief Operating Officer, Chip Childs our Vice President Controller and Mike Crop, Vice President of Finance and Assistant Treasurer is joining us by telephone. If you would like to address your questions to one of us specifically, you are welcome to do that as well. So Linda, we will go ahead now and open it up for questions.

At this time I would like to remind everyone, in order to ask a question please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Ray Nidle of Blaylock and Partners.

Yes, I just want to clarify a couple of numbers you were throwing out there. What's the authorized number of shares that you can purchase under the current program?

2.7 million.

Okay and did you say it was 2.7 million under the previous program as well?

No, we -- well, let me be clear on what we are doing. We had a plan -- we had a previous program authorized by the board that allowed approximately, you know, 9 million shares. We have already previously, you know, several years ago repurchased about roughly six million of those, the actual numbers on our statements and things. That leaves roughly 2.7 million remaining from a previous authorization. So that's the 2.7 million we are talking about.

Okay great, I got you on that. Did you give a debt inequity number? I know you gave the present value of the leases, but did you give a total debt number?

Let me be kind of clear about this. The number has changed a bit this time simply because we added these interim financings into our long-term debt for the quarter. It's artificially pushing the number up this time to about 70-30 actually. When those airplanes are taken out and the long-term financings are completed, we will still be back down around the 82-18 type ratio.

Oh okay, okay, good. Did you say that next year ASM's for the year will be 6.2 billion? I just want to clarify that.

That's correct.

Okay great. So you are stepping up the growth rate a little bit it sounds like?

Yes. The actual fleet numbers are the same as what we have -- that's the fleet plan we've had in place for a long time. I think the only tweaking is a slight adjustment to our utilization assumptions. We're just tweaking it up just a little bit.

Okay, great. What percentage will the break down be at the end of next year between United and Delta?

In ASM production, it will get very close to 50-50.

50-50.

It might go back. We have got a lot of United deliveries. I don't know the number exactly, Ray, but it could go 55% in favor of United.

Okay, great. And finally, just one minor detail. You received final payment from the Air Transportation and Safety Stabilization Act, one is why did it come so late, third quarter of this year. I think most of the other airlines received their payments by the first quarter of this year. And secondly, why were you entitled to this payment since you had remained so profitable.

I will answer the last part first. And that is, I think as all of you know, the payment was simply based on ASM production during the quarter. It's just a prorated amount. One of the issues that related to that and the timing was that we needed to provide support. That we actually had incurred losses. Incurred losses meaning the way that this was done in the industry, not just with SkyWest was losses relative to what we would have produced had that event not occurred.

Okay, so this is just money still coming back from reduced earnings in that September 11th period that it's taken this long I guess -- I'm not sure all the reasons why it took this long, but we have been in the process of just verifying numbers, going through, not a formal, but an informal review of the numbers. And, once that review completed, they approved our final payment.

Okay, great. Are you experiencing any problems at all with your RJ suppliers? I know they are having some financial problems -- or industry -- or country problems in the case of one, in the case of Bombardia [PH], some financial problems there.

We are not experiencing any difficulties relative to production. We are obviously concerned about, you know, the financial condition. I mean we consider Bombardia [PH] a very strong partner as we do Embriair [PH]. I mean we're still flying 79 Brazillias [PH]. But Bombardia, as it relates to deliveries and the financial help, that their company -- I mean I'm sure all of you know that there is some factory support and all that that's very meaningful and important to us. So we are concerned about that but we had no production delays or things like that from the factory.

So I mean, we feel as good as we can relative to production but yet concerned just about over all financial help.

Is that why you are going to the financial markets a little bit more now, because of your concern there? Well, we -- I guess general answer to the question is yes. Let me be very clear too about when we say going to the financial markets, we have debt committed at very attractive rates.

I didn't pay a lot of attention or bring up this [INAUDIBLE] in my formal remarks, but we do have debt commitments for virtually all of the deliveries in 2003 at very competitive rates. Our issue has been the roughly 20% equity component that we are in the market aggressively after today.

Okay good. Thank you very much.

Your next question is from William Green of Morgan Stanley.

Hi, good morning. I was wondering if I can just ask a question in terms of 2003? I have that you are expected to take about 27 jets for United? Is that still the case?

It is.

Is that realistic number, is there anything in their scope [INAUDIBLE] or anything that you think might cause that number not to be realized?

No, we believe all of those units are fit within the scope.

Is there any possibility of upping the number with Delta? Are they in talks with you at all about increasing their, I guess it's about eight jets or so?

Not at this point, no. I mean we're certainly having active discussion and a lot of dialogue, but nothing that I would tell you at this point to lead you to believe that there is more at this point.

Okay. And then in terms of the revenue assumptions you are making in the United contract, do you foresee there will be any kind of a an adjustment to those rates whether positive or negative when you finally come to an agreement?

No, in fact I'm very confident the other way. I mean, you know, given that we've essentially booked last year's rates and that's what we have been doing for actually now a couple of years, you know, and as I mentioned, we don't, in effect, have any disagreements about the rates. We are not sure why -- it's a bit of a frustrating issue for us. We honestly don't know why we are in the position we are in without a signed agreement because we don't have any disagreements. We have negotiated through the issues. We believe we have answered every question they had.

We have addressed the issues. We have made a lot of concessions to get this deal done. Why it remains unsigned, I'm not sure but once it is, I think that what we booked is in accordance to what we'll have an agreement when it's eventually signed.

So in other words, you don't expect the number to be revised?

I don't.

Okay, thank you.

You're welcome.

Your next question is from Michael Linenberg of Merrill Lynch.

Yeah, hey, good morning Brad and team. Two questions here. First, Brad, you gave us the ASM break up between United and Delta. What does it look like on the revenue front? I mean is it a similar breakout?

No, it's a little heavier on the United side, just under 50% on the revenue breakout to United.

Okay. Then as you expand out of Dallas for Delta, you know, your airplanes are now ending up on the East coast. I was just curious what you were seeing on the cost side. Because I guess now you probably have to domicile crews in Dallas. Any logistical issues there or cost issues there that we should look out for in 2003 or at least later this year and into 2003 as a result of just expanding your network?

Very good question. I don't expect any surprises is the short answer. What we have done out of Dallas/Ft. Worth, although the system -- when you just look at it graphically it's obvious that the system is becoming more linear -- I mean more time away from major hubs, which has been a big concern for us. At the same time we are focused on creating operational efficiencies, reducing cost wherever we can. The system has the potential to become less efficient because it's more linear and less, just [INAUDIBLE] hub and spoke flying. But, the way we have done Dallas at least to this point, yes, it's getting spread out, but we are still flowing crews over Salt Lake, we are still bringing the airplanes back flowing the aircraft back to Salt Lake for heavy maintenance, et cetera, et cetera.

So, yes, it's an issue we are paying very close attention to. It's creating some challenges, but I don't think any significant cost volatility because of that at least not at this point. I don't think we will see it in '03.

Okay, and just a -- one quick one on fuel. What did you book for the quarter? At what price?

Oh, average fuel price for the quarter was just under $1.

Okay, thank you very much.

Your next question is from Brian Harris of Solomon Smith Barney.

Hi Brad, just a couple of questions. I would like to follow-up a little bit on Will's question and make sure I understand the situation right now with United. You obviously had discussions with them. You've offered some concessions. You don't have disagreements right now, yet you are just booking the same revenues that you had under last year's interpretation of the contract. That implies that these concessions are not material and that wouldn't change [INAUDIBLE] in case, you know, they come back and say yeah, let's just go with all the concessions you already illustrated?

No. It's quite the contrary actually. The concession are very significant, very meaningful and real dollar concessions. When I talk about concessions, I mean, we [INAUDIBLE] a 30 terminated Brazillias [PH], for example, that eliminated just over $50 million of Brazillia Turboprop expense to United. Now one could come back and say well, yeah but they have lost some revenue. That's true. However a lot of the traffic is also displaced onto existing frequencies. So, you get into an issue about well how much was that concession?

The other thing is that we have taken and really refined what's in the cost modeling, what are the costs that are actually being billed. Okay, and we have taken a very, what I think, a very aggressive position, meaning willing to make some concessions. There are a lot of costs that have previously been in the model that we have eliminated from the model and just not billed which is to the point that I have said all along that we are trying to preserve the integrity of agreements, yet at the same time help. We deferred maintenance costs where we used to charge, you know, mature maintenance. We are not doing that anymore. To keep the integrity of the agreement, we change our method of accounting to make that more consistent with what our major partners are after. It's those kinds of things that we have done that are creating some real live hard value, but at the same time, we think preserve the integrity of the model. I know on one hand you look at it and we have got a very good margin and all of that, yet we are booking last year's rates and saying we made concessions. Well, both statements are true.

Okay, I'm [INAUDIBLE] a little bit of trouble with that. This implies that you have kind of already unilaterally applied those concessions and that those concessions are already factored into this quarter's numbers, is that correct?

That's why I'm saying we have no disagreements. I mean, we've made concessions. So on my knowledge, I don't know if they have any other disagreements, I don't know about them at this point.

Okay, well maybe this question can be solved if you can give guidance as far as the amount of incentive comp you got that was, you know, greater than normal this quarter. Could that account for this kind of missing mass?

Brian, I don't really want to get into this much detail about this issue. The quick answer to the question is when I say we booked essentially last year's rates, what that means is that if we would have had a normal rate renewal, we have cost increases that have gone either gone up that aren't being covered or we have made concessions in the models which allow us to give, you know, what would be representative of a flat rate renewal.

So what we think our rates will end up being is close to what last year's rates were. Those rates then being applied to, in essence, a lower cost basis which involves another concession. But in total, you applied last year's rates to this year's activity and that's about what I think we are going to end up with.

Okay, you mentioned if you break out your operations by revenue that United is now close to 50%. Where would you expect that to be by the end of next year broken out by revenue?

Let's see. We have this calculation somewhere. I don't have it on the top of my head, Brian. If capacity gets close to 50-50, it's going to swing our revenue production close to 60%.

Okay, thank you.

You're welcome.

Your next question is from Helene Becker of Buckingham Research.

Brad, just some basic questions. What was capital spending in the third quarter and what will it be for the fourth quarter and what is your projection for next year?

Helen, state your question again, please.

[INAUDIBLE] Cap Ex for the third quarter, fourth quarter and '03.

Okay.

You know, just for cash flow modeling.

Okay. Good question. But I don't have right off the top of my head, other than the '03 Cap Ex -- and I'm going to give to you as cash Cap Ex -- I mean our total Cap Ex, we eliminate aircraft financing, you know things that are going to be financed. Although, you know, it could be considered capital spending. But that number is going to be around 85 million in '03.

Great. And then if you can just fill in those other numbers in a minute that would be great. The other question I had is with respect to the ASM's for next year, a 41 increase, do you have that or can you at some point provide to us the quarter by quarter numbers?

Absolutely. In fact, I'm very comfortable just, you know, sending out an E-mail to all of you that are on our regular list. If some of you aren't on the list and want the break out, you'll call us and we will send it to you as well. But we will send out a quarterly break down to all of you that are on the phone.

Okay, thank you. And my last question, Brad, is would you answer doing the United portion on an at risk basis rather than on a prorate? Would you consider taking the flying back if you couldn't get a signed agreement with them?

The easy answer to the question is yes. But keep in mind that goes contrary to why this works for the major partners. I mean it eliminates all the efficiency and, you know, the value added nature of, you know, inventory and yield management to do that. I mean that certainly has entered my mind. If one of the major partners doesn't like our -- thinks we are not low cost enough, doesn't like the rates, we say we will take it back.

Right.

We don't like that answer not because we don't think we could make money at prorate, I mean we have done that for a long time and made money at it. It's just goes contrary to the override and what should be-the overriding issue which is create efficiency and synergy wherever we can and this is an area where there is very powerful value creation in putting the two systems together and allowing better yield and seat management.

Okay, and then my last question is, just with respect to your labor, you know, you have had great labor relations over the years, you are a nonunion operation. Any updates there? Your, you know, pilots and everybody solidly behind you while you negotiate this back and forth issue with United, you know, to death.

Interesting choice of words there Helene.

It kind of gets tiresome, you know.

I understand. I am going to have Ron Reber address this as it relates to labor. The quick answer to the question is, I mean we have had and still have very cooperative, productive relationships with our labor. I will let Ron address it in a little more detail though.

Helen, I would agree with Brad. Our relationship with our labor groups I think is very cooperative. I think we are not without our challenges here. I think the key here is the productivity piece. We focused too much on labor rates and we kind of failed to see the real issue is productivity.

I think at SkyWest we have a very productive workforce. Our rates are competitive and as long as we can keep the two - you know, the rates and the production intact, we are in good shape. I'm trying to think of -- our work groups we have had some union activity, but we have had union activity within somewhere in our workgroups for the last 15 years. So that's nothing new. And I think moving forward, the environment is good for SkyWest. In a nonunion environment and possibly as some of the union issues surface at other carriers, I don't think that unions have the shine within the industry that they may have once had.

Okay. Thank you.

Your next question is from Jim Barker of Raymond James.

Hi Brad, it's Jim Parker. Just regarding incremental RJ contracts going forward above what you have now, it appears that that would be the direction in which the majors are going. There are also some of some other regional airline who certainly are pursuing this business and on the basis that their costs are below SkyWest, ACA and wonder if you would comment just on how your costs stack up if you include all end financing costs and everything in.

Okay. Very good question. First of all, we know there is extreme pressure to create the lowest costs that we can produce. At the same time, we are not interested in reducing the cost to the point that we have compromise our quality. Having said that, we have asked our major partners. We have done more of this analysis with one than we have the other. But we know that there is this idea out there that some other regional carriers, you know, could be producing the product cheaper or less expensive, whatever, than we are. All we have asked is that we engage in a very specific, thorough cost analysis that gets all of these issues at a real apples to apples comparison and we are confident that when we have the opportunity to do that, it will be -- you know, our cost structure will be validated that it is among, if not one of the lowest in the industry.

So we are very confident of that. We know that we are getting -- you know when you say -- you mentioned our cost structure with all end financing costs, etc., etc., I mean we have got some of the most competitive if not the most competitive best price financing transactions that are being done in the regional business. Our credit is perceived as one of the best, I think the best credit in the regional industry right now. So, we know we have advantages in some areas which combined everything in, we think we are going to be very competitive. So, I will just leave it at that.

Well Brad, referring to your cash position which is obviously just great and gives you advantage in financing aircraft in this very difficult market for others to finance aircraft. But you have got 500 million, including deposits. What will you do with all of that was cash?

Okay, well I'm sure it goes without saying that it's market conditions like this that cash balance is very important. It gives us a lot of alternatives that some other carriers may not have as it relates to financing. Given that we have 80% of the acquisition price already committed in very competitive debt commitments, we have -- I mean we have a real live alternative when it comes to financing the airplanes to just provide the 20% equity. Take the 20% debt that's committed and take the airplanes.

So, I mean that's one very real advantage that we have because of that liquidity. The thing that -- the other alternatives an things that it makes it available is that in this kind of market, all types of opportunities and potentials are being created where we want to have a good liquidity position. That with cash available to do some things, given the right opportunity. So we are trying to find the balance between, you know, possibly investing some money in our own deliveries. We have got to be very careful though because that it does increase the required investment and finding the balance between, for example, using some of the liquidity to repurchase shares plus keeping a good supply of cash available for, you know, opportunity capital.

Okay, thank you.

You're welcome.

Your next question is from Tony Cristello of BB&T Capital Markets.

Hi, gentlemen. A question on the maintenance. I know last quarter you discussed it a bit in respect to how the new accounting was going to be and how you were going to treat this. You know, this quarter's maintenance expense was obviously higher than what I think you were looking for. I know you mentioned there was an accrual on that. One, what was that accrual amount and secondly, are you expecting any more fierce maintenance checks in the next couple of quarters that you can point to that may impact what that run rate may be?

Okay, we are expecting some additional heavy maintenance to occur in coming quarters. I don't have, you know, with me at the moment enough information to give you real solid guidance on a running rate. In the way that we are dealing with this in our contracts now is that I mean according to the expenses incurred method, when the events happen, we expense them and get reimbursed for them.

So we are not too concerned that volatility -- what we know that does is creates -- will create more volatility in that maintenance expense line. But given that the majors understand that as the volatility occurs, you know, the volatility -- I guess what I'm saying it will be both on the revenue side and the expense side. So, it's less of -- the volatility itself is, you know, is less of a driver to us. Okay, are you understand what I'm saying?

I am following. I guess with respect to that, are the majors and part of you switching to the way this new system is as far as direct expense with maintenance, wasn't that supposed to be or helping in you giving a concession back to your major partners. And in doing this, are they fully wanting to take on the increased volatility? I mean if things are higher than they liked, are they going to pay you for that or is that something that, in that margin you may have to just eat yourself how should we look at that?

No this is an issue that's been very specifically reviewed with partners is that with a growing new fleet, there is no question that in the early years the maintenance expenses actually incurred will be significantly less than had we been accruing a normal mature rate. Therefore, the majors are -- they are more than happy. It's their desire to take the short-term -- the shorter term current benefit of the reduced costs, knowing that there will be spikes when the heavy events become due and they have taken responsibility for that.

Okay. And I guess one other item. How much of the maintenance was an accrual that you had this quarter from the old accounting methods?

There is some very complicated issues involved in that question that I would just assume prefer not to get in to that much detail.

Okay.

Okay?

Okay, that's fine. Thank you.

Thank you.

Your next question is from Jim Higgin of CSFB.

Yes hi, thanks. A couple of kind of bigger picture questions. United appears to be throwing around the notion of restarting some sort of low cost airline. I'm wondering, if that were to happen, I mean bearing notwithstanding the fact that the first go round it wasn't terribly successful, how do you think that might change their demand for your product?

Very good question that I don't know the answer to. First of all, you know it sounds like you know as much, possibly more than we know about this possibility of a United low cost operation. All we know is that we feel confident that the units that we have firm ordered are still in demand. We have heard also a United announcement saying that, you know, that RJ's are an important part of their, you know, restructuring and turn around. We know that -- all I really can speak to is the ones we have on order right now, we don't think there is going to be any change to that interruption. They are still in demand and wanted by United and that's about all I can say about it.

Do you have any talks underway with other airlines than your current partners about supplying products?

Yes.

Does your nonunion status create hurdles in some cases in terms of potential partners?

No, we think it does just the opposite.

You don't think that the pilots of a given airline don't consider -- somehow consider that you are more of a threat than if you were unionized?

No, I don't think so at all. What it does is gives us I think flexibility, but keep in mind our first and foremost issue is that we -- and maybe should I have Ron speak to this point, but the fact that we are nonunion doesn't mean that we are going to do anything to compromise our pilots' positions. So, I mean I'm not sure that -- I mean we have a lot of discussion with our pilots and before we do things that will directly affect the pilots, we are very concerned about any decision that we might make that has that kind of implication to a pilot. So, -- but I don't think that from the perspective of does it become a hurdle to us pursuing opportunities, I don't see it that way. Ron, let me have Ron express some thoughts.

Interesting that you would say hurdle. I think it does force us to have a little more open and honest communication with our workforce. I don't know if that's a hurdle, but it does consume a little time that we do go out and talk to our individual workgroups. Specifically, that we talk to our pilots about the USAir Jets for Job proposal. Our pilots worked -- at least they were supportive of the way that the airways was proposing that to us and we didn't pursue it. But I think as Brad stated, our workforces I think their opportunity to look at different possibilities, whether it be with a co-chair partner or another operation, start up operation if you will. We have more flexibility than a union operator's got today.

Yeah, I would - the hurdle comment was more a hurdle coming from the potential major partner side than from your side.

Well that's a good question too you know. Alpha attempts to act like they are in control of what the major carriers do relative to the regional flying, but I think thus far they haven't attempted to prevent SkyWest from having flying opportunities.

Great, thank you very much.

You're welcome.

Your next question is from Chip [INAUDIBLE] of Greenville Capital.

Yes, good morning. My question is to just go back on the United thing one more time. I'm sorry to sort of kick a dead dog here, but if you had the proposed agreement in place, would it be fair to say that the income levels that you reported in the third quarter would have been higher than they were? My understanding in that correctly, is that basically you have given the concessions but you have not been able to take the cost increases.

Generally speaking, I think your statement could be correct. But I also want -- I mean what we have booked is our best estimate of what we think the revenues will actually be. I mean they are what they are today, but I mean, when the agreement is finally completed it reflects, probably I think fair to say somewhat of a conservative estimate of what we think they are really going to be. So, I mean I don't know what else I can really say to bring clarification to this issue. It's a difficult, sensitive issue, but we think we have been very -- I mean we have been very careful, but I think what we have booked is a very appropriate reflection of what our current agreement is going to be.

The next follow-up question would be on the other sources for your RJ's. Other than Bombardia [PH], have you looked at other sources?

Yes

Okay. And can give us a sense of what the cash flow in the fourth quarter might look like?

Cash flow in the fourth quarter? Just increase in 4th quarter cash?

Mm hm.

It's going to go up. I estimate, at this point, probably by another roughly $20 million.

Thank you.

You're welcome.

Your next question is from Jim [INAUDIBLE] of Aviation Advisory Securities.

It's Aviation Advisory Service. Good morning gentlemen. A couple of questions. First of all, you must be getting tired of this topic, but with regard to the United agreement, since you don't have a signed agreement, on what basis are they calculating the weekly cash payments that they are remitting to you?

Best estimate of what the -- I mean you are bringing up a very interesting point in that, you know, we have jointly cooperatively determined on an appropriate amount. Well that amount has to be on some assumed rate. Okay, well we've -- I mean the weekly wires really are coming consistent with what we think the agreement is and what we have booked. So it's a cooperative effort where -- and again that's about all I'm going to say about it. But I mean I hope that gives you some indication that we are not just, you know, out in left field here on what we think it gives some validity to the basis upon which we booked our revenue is this whole process we go through to determine cash flows.

But the amount that we are receiving today is an amount designed to cover the rate assumption, adjusted for growth in units. And at the current time, another assumption is that it's designed to minimize our receivables and at the current time, thats being achieved. So I mean we feel, you know, very good about how that whole process is working.

Okay. Next question, have you seen the revised application or are you familiar with that United's filed with the ATSB?

No.

So do you have any idea whether that calls for any concessions from you or their other regional partners beyond what you have already discussed?

No, we have not been involved at all in that process.

Okay. Next thing, since you indicated you made some meaningful concessions to United, do you think that will influence Delta's approach to the 2003 negotiations with them?

No, because we have made similar type concessions with Delta and the concessions we are talking about although happening in slightly different ways, we have made concessions to both carriers. We just got the Delta deal done earlier. And, you know, a lot of these concessions we made have been on the table for over six months with United. So, it's not a whole lot new. But, I can't for obvious reasons, go into any more detail than I've done on this issue.

I firmly believe that we have made real hard dollar concessions, we are focused and I have mentioned it to United more in this call simply because, you know, that's the agreement that's unsigned at the moment. We have made very similar, maybe in slightly different ways or whatever, but very similar concessions are built into our Delta rates as well, so.

Okay. Next thing relating back to your answer or previous question, you say you have looked at other sources for RJ's besides Bombardier? [PH]

Well I mean -- all I'm say -- we keep our -- we are trying to keep our options open at every level, both aircraft wise and provider wise. You know partner -- I mean all of that we are doing the best we can to do the things that we think are prudent to keep our options open and to keep alternatives alive. I mean and why wouldn't we? I mean if we are losing, we don't want to lose business to a provider because of the type of equipment. So, I mean we have a good -- I mean we have good relationships with manufacturers, maintain those relationships, keep updated on the economics of aircraft types and that's kind of a perpetual ongoing issue that we never stop.

I see. One more thing for this also relates back to a previous question. You have a lot of cash. The lease equity market is not easy. You also are very profitable so you can use the tax benefits. Why aren't you buying some of these deliveries and putting them on the balance sheet and getting those tax benefits?

Very simply, reduced cost to the major. The depreciation on interest when we bring on balance sheet is more expensive than a leverage lease payment.

Okay. And are you seeing a meaningful increase in the cost of lease equity compared to with pre 9-11?

No.

Thank you very much.

You're welcome. Operator?

Yes sir.

We have been on the phone just about an hour, slightly over. I think we ought to respect the people's time. If there is one more question, we will go ahead and take it and other than that, let's just take one more and then we need to conclude the call.

Okay. Your last question comes from Glenn Ingel of Goldman Sachs.

Congratulations on a nicely boring quarter. I wish we had more of those. Two questions. One is can you just give us what you expect the fleet to look like at the end of 2003 and '04 and you mentioned about the spreads, can you talk about what you think your spreads are and lease rates relative to your weaker competitors today versus maybe pre 9-11?

I'm searching here a little bit about how much I want to talk about the last part of the question. All I will say is that we believe that our credit is the best credit in the industry. Our capital structure, our liquidity, you know, our results, all says that we -- that our credit is right at the top. And all I will say is that we believe that our financings, the real cost of these financings, is reflective of that credit differential.

And the lease rate you expect to pay for the planes you take on in the fourth quarter, you don't think will be that different than they were pre 9-11?

I do not. I mean we are getting -- this is an interesting topic and I hesitate to draw this call on any longer than it's already gone on, but I mean outside of commitments that are being given where there might involve some, you know, kind of quick pro quo kind of things going on where we will agree to do this if you will take an airplane that, you know, might have a problem with some operator. I mean I think we have three equity commitments, one just last week that I think are three of the few equity commitments that have been given post 9-11. For example, the one that we just got last week, and I'm not going to go into any more detail than to say that that deal is -- I mean it's very equivalent to the deals that we were doing on pre 9-11 commitments.

Okay, our debt has been committed and this is -- on the debt side is 80% of the deal. That debt with the exception of a handful of airplanes that have been committed recently, those are on commitments that were done pre 9-11. Okay, so when you are talking about a deal that was priced pre 9-11 that's 80% of the deal, you know, the pricing is not moving much.

In the fleet year end 2003 and '04?

The end of '03, we will have -- oh, end of '03 50 United, 56 Delta jets. As the end of '03 and then in '04, we are still working through -- I can't tell you '04 at this point. We are still working through what we are doing with some conditional orders, with some options. So that one is not as clear to us at the moment. But what we do know is what it's going to look like at the end of '03. We do know we have five additional firm commitments from United in '04 but that's all we've got at this moment.

And the Brazillia should stay at 79 for a while?

No, the Brazillia's will gradually go down. We will lose a few of the EMB's just to natural lease expirations through '03. Yeah, so I mean they're going to -- it's going to-- that fleet is going to go down by, you know, 15 -- well around 10 maybe. They are just natural lease expirations in the next year.

And the same thing happens in the following year?

Yes. As far as Brazillia go aways retirements.

Thank you very much.

You're welcome. Okay, with that, at this given timing, I think it's appropriate to conclude the call. Again I appreciate your interest, your comments, your questions, etc. And we will look forward to this discussion next quarter. Thank you.

This concludes today's SkyWest Airlines conference call. You may now disconnect.