SkyWest Inc (SKYW) 2003 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the SkyWest Inc. second-quarter 2003 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation.

Statements in this conference call which are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements encompass SkyWest's beliefs, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipates, should and likely also identify forward-looking statements. All forward-looking statements included in this call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to update any forward-looking statements. Actual results could differ materially from those anticipated for a number of reasons including, among others, developments associated with the bankruptcy proceedings involving United Airlines Inc., ongoing negotiations between SkyWest and its major partners regarding their code sharing arrangements, valuations in market and economic conditions and other unanticipated factors.

Risk factors, cautionary statements and other conditions which could cause actual results to differ from SkyWest's current expectations are contained in SkyWest's filings with the Securities and Exchange Commission including SkyWest's annual report on form 10-K. I will now turn the conference over to Brad Rich, Executive Vice President, CFO and Treasurer. Please go ahead, sir.

Thank you very much, and thank you to all to all of you for joining us this morning. Let me make you aware that I also have with me today Mike Kraupp, our Vice President of Finance and Assistant Treasurer, as well as Chip Childs, our Vice President and Controller. I apologize that we don't have Ron Reber, our Chief Operating Officer, with us this morning. We normally do, but he's on the road taking care of some business this morning. I also just -- make you aware, I've been told that my voice sounds a little different this morning. I've been a bit under the weather. Nothing serious, it really is me. And again, we do appreciate you taking the time to join us this morning. We know that it goes without saying that it's not only an interesting time in our industry, a lot going on, a lot of developments, so we appreciate you taking the time to join us. We'll try to get through the information today very quickly and be sensitive and respectful of all of your time.

We are actually very pleased with the results for the quarter. I will use -- try to use the press release pretty much as the script for our comments this morning. And I'd refer those of you that have seen the release or have a copy to that release. As indicated in the release, in the quarter we generated a 12.4 percent increase in our operating revenues, which were reported as 212.7 million. We generated 14.9 million of net income, which translates to 26 cents in diluted earnings per share. That compares to 21.9 million of net income or 38 cents per diluted share for the same period last year. I just remind you that last year's numbers included certain adjustments. And so those of you that have been following us, I'd refer you to or just remind you that that includes some adjustments for your reference.

I will now just go through and talk about, kind of in order, our operating revenues and our expenses, our fleet plan, the balance sheet, and then we'll talk about some other issues and some developing issues both for our company and as well as some industry issues. Relative to our total operating revenues, obviously the primary reason for the increase in the revenues was a 31.5 percent increase in our capacity, or our ASMs. We saw some reduction in our yield. It goes without saying that the industry still remains under pressure yield wise. But as far as our revenues go, it's still primarily a function of our capacity and then applying the rates in our major contracts to that capacity. And obviously our revenue increase has been somewhat offset by some reduction in our fees or our rates with our major partners, which we've been discussing with you in previous quarters.

And so relative to some of those changes that have been made, both the revenue and the net income are very much what we expected. Not surprised really at all. Our revenues have been booked in accordance with our agreement. First of all, the agreement that we have in place and have had in place now for sometime with Delta Airlines, we have said before that we have been working with Delta in just clarifying some of the administrative aspects, and that has come together very much as we have expected. We have already released during the quarter that we have signed an MOU, a memorandum of understanding with United, and our revenues on the United side have been booked consistent with the terms and conditions and rates in that MOU. So we believe that there's not a lot of -- very little uncertainty in our recorded revenues, again just booked consistent with our agreements.

One item I would point out is that the revenues and our results for the quarter do not include any money received from the government relative to the security reimbursements. We did receive from the government about 6.4 million, which has been publicly disclosed in various places. A good portion of that we know is -- will be reimbursed by us back to our major partners. We're still working through that issue with both carriers on how we divide that up. I would expect that there would be a small amount that will remain a SkyWest portion. But until we know what that amount is, and until we have that clarification and further discussion negotiations with our partners, we have not recorded any of that in revenue.

Relative to our total operating expenses, there really are no surprises at all, really no significant developments in our operating expenses. I think the good news there is that there's just no surprises. Outside of fuel, which fuel prices have gone up in the quarter, our average fuel price was 99.6 cents per gallon in the second quarter compared to 93.2 cents per gallon in the same quarter last year. But outside of fuel, our nonfuel cost per ASM during the quarter is down 1.5 cents or 11.7 percent. Again, that's our nonfuel decrease. That decrease, we know -- a large portion of the decrease or a significant portion is due simply to the weighting or the mix of our ASMs. Obviously as we continue to bring on more RJ flying the cost per ASM in total will come down.

But in addition to just mix, we still have a significant reduction relative to some of the cost reduction initiatives which we've been talking about for quite some time. We have decreases, significant decreases in our salaries and salaries, wages and benefits or our total employee related costs. We have better utilization of both people and equipment, which is generating some benefit. We've done, relative to the salaries and people expenses, I think we've talked to you before about freezing pay scales, hiring freezes for nonessential employees, etc. We have reductions of our, what had been previously planned capital expenditures. We've been -- and asked for participation in reductions by a lot of our vendors and professional service providers. And all of that is coming together very nicely and has generated some very meaningful and quite significant reductions.

Relative to our -- again, I keep referring back to our people expenses or salaries, wages and benefits. Just to give one point of reference, our total employee count in December of '02 was 5,516 employees. In June of '03 our employee count was 4,827, almost a 700 employee reduction. At the same time we brought on 23 new aircraft. So we are very serious about these reductions. We feel the steps we're taking are appropriate and necessary in our environment. We plan to continue these types of aggressive initiatives, and know that it's essential to provide the required cost structure for -- that's acceptable both to us and to our partners.

Relative to our -- let me just talk for a minute about our fleet and our ASM production. As I already mentioned, our ASMs increased 31.5 percent from the second quarter of '02. Obviously the primary reason for that, as I indicated, was the increase in our fleet. The fleet increased in total from 136 aircraft in June of '02 to 170 aircraft in the end of June of '03. The breakout of those aircraft are as follows: 72 aircraft in the Delta system, 98 aircraft in the United system for a total of 170. The ASMs that we produced in total were just under 1.4 billion ASMs. The breakout of those ASMs were approximately 792 million in the Delta system, 587 -- or 588 in the United system. Obviously a different mix in ASM production versus the total numbers of airplane simply because we had more RJs in the Delta system and, again, just relative to the fleet mix. Relative to ASM production moving forward, in the third quarter we would expect approximately 1.6 billion ASMs in the third, and about -- a little more than that, about 1.65 in the fourth quarter. We bring on 16 additional CRJs. Of those 16, 13 of them will be net new because we have three RJs which will be returned that we've had on short term arrangements and they'll be returned to their lessors -- or to the original lessee.

So in total we expect to do right on 6 billion ASMs for the whole calendar year. Now that ASM production does not include any of the growth that we have talked about. We've previously announced that we have some pretty meaningful growth coming in the United system. Let me -- and to this point, we really have not been in a position to describe to you what that growth means to us in numbers because we've still been finalizing and working through the transaction with Bombardier and have been very unclear as to our delivery positions and when the airplanes would be acquired. We're still working through and finalizing that delivery schedule with Bombardier. We do not have a deal, and again I say Bombardier, we don't have a deal that's struck yet. We believe that we're close. There are still some details and things that have got to be finalized. But let me just -- I do think that we're far enough along that I can give you at least some high level -- at least rough numbers with what we know today of when we -- what I think is a pretty reasonable delivery schedule.

We expect the deliveries of 70 seat airplanes to begin sometime late in the first quarter of '04, continue through mid '05, at which point I would then begin to factor in mid '05. And again, these are just our assumptions at the time that we would begin to exercise some of the options that we have with United which we expect would be a mix of both 50 and 70 seat which would begin sometime mid to late '05. And with those assumptions, I will -- admittedly some risk to putting out numbers not having this finalized. But we would expect there to be somewhere in the neighborhood of about 14 additional aircraft deliveries in '04, primarily 70 seat aircraft. Of the 14 we would expect 12 of those to be 70 seat aircraft with only two remaining 50 seat deliveries which will produce approximately 25 percent ASM growth, which would mean our ASM production would be somewhere between 7.4 and 7.5 billion ASMs.

Into 2005, again with the assumptions that I described, we would expect to complete the deliveries of the original thirty 70 seat aircraft, as well as to begin to take a mix of the options, we're assuming approximately 24 deliveries of 70 seaters in '05 and four 50 seaters, and again these are rough numbers, I'm not trying to preannounce that anything has been finalized with United. That is simply not the case. These are just the best we could do in making some assumptions to give each of you some idea of what we would expect the growth to do. Again with that assumption we would assume twenty-four 70 seaters, four 50 seaters in '05 which would take us to somewhere in the area of about 9 billion ASMs in '05 or about 20 percent growth. And this is all growth that is coming into the United system. We have reserved some amount of at least our ability to grow for other partners.

We don't have anything finalized. I'm just emphasizing that that's the growth that comes just inherently, again with some assumptions made out of the agreement with United, and then just emphasizing that we have some amount of ability to grow beyond that we believe that we have reserved for other partners. Now in the current year, what that means since January of 2003 we've acquired 23 additional RJs. Acquisition costs somewhere around 425 million. It's made a fairly significant change to our balance sheet. Let me take you through some balance sheet numbers. First of all, our cash, securities and deposits in total are just under 510 million or 7.42 per share. Our book value is about 670 million or 11.62 per share.

The change to the balance sheet that I spoke of is relative to the on balance sheet debt. Those 23 aircraft have been financed at this point through long-term debt which involves both permanent, long-term debt that's been placed into temporary structures as well as just straight interim financing. At this point we've added onto the balance sheet about 360 million of debt, and then invested about 62 million of our own cash into these acquisitions. That situation is temporary. I'm pleased to let you know that we have permanent debt arranged and committed for all of our deliveries for the remainder of this year, including those that are on interim. We are just, within the next week or so, closing a very large deal with a new equity source, which I'm not allowed to disclose who that party is, but it's a very large and significant deal. And we are, we have just recently awarded and have new commitments for long-term debt again which will take us through the remainder of this year.

So again, in a very difficult market we believe those are very positive developments, although it's brought some debt onto the balance sheet temporarily. Most of that debt will be taken off. And, as I said, some of that debt is on in temporary structures. And the intent is to take that off and to put it into leverage lease structures. And again, I guess the point that I would make is the debt committed for the rest of this year's deliveries -- just have awarded or very close to closing a very large deal with a new equity source. So we still, in this market still have equity that's been willing to do leverage leases. Anyway, that's about all I know to say about that issue.

A couple of other issues. During the quarter we did begin a successful startup with a continental code, with a turboprop operation in Houston. Admittedly started very small with only one aircraft serving Coleen (ph), Houston to Coleen. The operation is planned to increase with two Brasilias a month the rest of this calendar year at which point we'll have nine aircraft committed to that operation. I'll be a little careful about some of the cities that we'll be serving -- in that I need to be careful not to kind of preannounce. I'm pretty confident that we have announced already not only Coleen, which we've already started, but Waco, Tyler and Abolene all being served from Houston.

Obviously the agreement with United that was agreed to during the quarter is a very significant issue, a development that we believe is very positive. We have worked very closely and cooperatively with United. I won't turn into a United spokesperson today only to tell you that we have had a lot of discussion with United, not only about our agreement -- I guess I should call it the MOU at this point which we're very close to turning into a definitive agreement. But we've had a lot of discussion with United about their progress, how they're working through the bankruptcy issues and their progress in that way. And all I'll say is that from our perspective we have more confidence today than we've had in quite some time. Feel very good about the progress that they're making. Having said that, that obviously makes us feel better and better about our agreement with United.

We feel good about it because we believe that in may respects we've improved the agreement. We've extended the term. We have provisions in the agreement which allow for very specifically we understand what the increases will be from year to year and we'll avoid any kind of contention and argument over rates for the next several years. The very positive issue that I would just emphasize relative to that is that we believe that this is -- that the way that the rates increase, which I will tell you is in a method which can't go backwards on us. I only say that because of some issues that have been brought up in the market about some of the risks of this new type of agreement. But we know very specifically what the increases will be, and that gives us very clear targets. We know how to manage internally. We know how to manage with vendors. And so it gives us very clear direction, gives us very specific targets and things to reach with, again both internally with our group as well as externally.

We believe some of the changes in the agreement take away our concerns relative to utilization because -- and again, I'm not going to go into a lot of detail about that because we're still under confidentiality with United not to disclose very specifically the terms and conditions of the agreement, and I'm going to it respect that confidentiality. I will just say in general that we believe there are some very significant improvements to the things that eliminate some of the previous risk. Admittedly, there may be some places where we may be taking on a little more risk. But we believe in total that it's a very good agreement. We like the way that the agreement works. We like the new methodology because, as I said, it takes away our concern over utilization. So in total when you look at the agreement, we believe that it's been improved in many respects. It's long-term in nature and very significant growth.

So we believe that it's not only very meaningful but significant and very positive to our company. Relative to the economics of the deal, I would just make a general statement that we believe that the most significant change that we have made is in our own cost structure, and believe that the changes we've made internally really are more significant than either terms and conditions or economics of the deal itself with United, and all of that is very consistent with any changes that either have been made or we expect will be made in our Delta agreement. So we believe it very important to understand that we recognize we're responsible for our cost structure, we're taking responsibility for it. We're working very aggressively to keep the costs in line. And as long as we do that with the things that we can control, we believe that this agreement will work, we believe that it will produce very respectable economics. And at the same time, still provides mitigation of the downside risks. So we just remain very positive and upbeat about the agreement.

Relative to Delta, I would just say that our relations in general communications, relationship with Delta just continues to strengthen and improve. We're now in discussions with Delta very specifically about the future. We're discussing with them growth opportunities in the future. Certainly nothing that's committed to by either party or that we have to announce today. Just to say that we are in discussions and having very open, productive discussions and the relationship continues to strengthen and there's a good community of working positive relationships.

Another development that I'd just bring to your attention, we don't think is a very, really very significant but certainly worthy of bringing to your attention is that beginning August 1st our Salt Lake Delta Brasilia operation will go back to at risk or prorate flying. Now when I say we don't believe that hugely significant, I mean that from the perspective of size in that that total operation, which is really 14 lines worth of flying, 16 airplanes, 14 revenue lines and seasonally gets down probably to 12 lines, is producing today just under 5 percent of our total capacity. And as you put that together with -- your rapidly expanding ASMs in the future, that ASM will go down somewhere in the mid to around 3 percent of our capacity. It's being done in what we would term or describe as a modified prorate. It's not just purely straight rate by mileage. And I'm not going to go specifically into the details, but it is a prorate agreement that we believe will prevent us from losing money.

We recognize it's going to take some time with some pricing changes and things in the markets, rebuilding some of the local markets, etc. We believe that we can maintain the current levels of connecting traffic and at the same time stimulate some additional local (technical difficulty) turning the yields in the markets back -- or the total RASM in the markets back up. We recognize that will take some time. In the meantime we believe the prorate agreement which is, again, modified prorate, will prevent us from losing money and then over time we believe that we can get it back to at least the margins that we had been realizing under contracts and probably better than that. If not, we would not have agreed to make this change.

But again, in any event it's rather small relative to our total capacity. But certainly an issue we wanted to make you aware of. We don't believe that it's the beginning of more flying going to at risk. We don't see that at all which I know has been a concern to some people. Believe that the remainder of the capacity and all of the additional incremental growth capacity will still be under the fee per departure arrangements. And again believe that that's still a model with very much works for us as long as we do our part to keep the quality high and keep control of our costs.

Relative to our quality, I can't say enough about how well our operations side has done and with the cooperation of all of our employee group. For this kind of completion, admittedly it's a good time of year and weather and all of that has worked in our favor. But our completion factor during the quarter was 99.5 percent in controllable completion. Actual completion 99.2 percent. I think that speaks for itself, goes without saying, and we're just very pleased with the quality of the operation. And again, as long as we keep the quality up and keep our costs in line, believe that we have a very successful business model, growth included in that business model which we'll execute. One thing I have not mentioned yet, getting back to a little bit more balance sheet and cash flow information, just around our CAPEX, our non aircraft CAPEX in the quarter was 13.5 million. We've told you that that's one of the areas that we have really tightened up and cut back. For the six months it's 27.5 million. I believe that for the calendar year it'll be somewhere around 50 million.

Let me just, one more thing relative to the United MOU that I'd just say in closing is that maybe some have some questions relative to the timing, when that will be converted to a definitive agreement. We have several things, several parts of this total deal that need to come together all at once really before we're ready to sign the definitive agreement. Obviously the agreement itself with United we are very close. We have -- we're just really very, very close in the language, in the definitive agreement. But at the same time, we need to reach agreement with the aircraft manufacturer, as well as GE on an aircraft support and maintenance agreement. And all of those things need to come together, and we are very close and expect to have all of that together really in the first week of August, which we're so close to. And our expectation at this time is to take all of this to our Board in our meeting which is in the first week of August.

And so, that should give you some idea of how close we believe we are, not only on the definitive agreement with United, but on all of these other aspects that need to come together at the same time. So with that, we'll now turn it over to questions. So, Charlene, if you could help us with the questions, please.

(CALLER INSTRUCTIONS) Tim Parker from Raymond James.

Good morning to all. This thing about growing the fleet and decreasing the headcount by 12.5 percent is rather impressive about giving your cost down. Exactly how did you do this? Can you provide some detail on how you're maintaining the level of service with say 12.5 percent fewer people on a greater number of aircraft?

I provided a little bit of detail. Let me put a few things in perspective. I think that in the quarter the 1.5 cent decrease in our cost per ASM, as near as we can calculate, again this isn't a perfect science, but we think in general numbers about half of that decrease is due simply to fleet mix. The other half is due to the reductions -- very specifically due to the cost reduction initiatives. The personnel issue we have said for quite some time now that we are very focused on utilization and that utilization was not only of our aircraft but of all of our resources which are very importantly and probably most importantly our people and our facilities. We've said that we are going to limit hiring to essential only positions and that all other positions, including replacement, were all under review and that we've been looking at all of our functions and processes and eliminating, cutting, refining wherever we can. And that's what we've done and we're still doing, and that's the kind of results that it's generating.

Now again, in addition to that we have reduced the cap spending. We have asked for and realized reductions from vendors. And again, can't be really more specific, some have participated and helped us, some haven't. We've asked for and received reductions in professional service fees, some have helped and participated, some haven't. And let me also -- so, I don't know how to be any more specific than that other than to say we're still working on it. The things we're talking about I don't believe are temporary. I believe that they're permanent in nature, and we're still evaluating and studying functions and processes to where we can realize additional savings. So I don't know what else to say other than that.

I think that'll take care of it. Thanks.

Rick (indiscernible) from Blaylock Partners.

One thing I didn't understand, Brad, is with the previous quarter did you say the new United contract that's going to be signed this quarter reflects that new contract as far as the guaranteed margins go and so forth?

Yes, let me say margins really aren't guaranteed. There's still a portion that's a base and a portion that's on incentives. But yes, we have booked revenues this quarter based upon the terms and conditions of that MOU.

Thank you.

William Green from Morgan Stanley.

Just a quick question again on the margins, 11.4 or so in the second quarter, a little bit higher than the first quarter, how should we think about your margins going forward?

I think that one thing that obviously has impacted the quarter was 99.5 percent (indiscernible) completion. That completion factor certainly has made this an exceptional quarter. I don't know that that's the level of performance that we can maintain. The margin expectation, I think we have said all along that we were going to, and think that in this market, our margin expectation really is no longer the 14 type percent margin. We know that it's going to be compressed. I think this quarter's margin was very good because of the completion and the performance. On an ongoing basis we've said that if we're best quality in industry and can maintain near these types of qualities that we should have similar slightly in excess of 10 percent. And so to figure something 10 to 11 percent with near this kind of completion and performance I think is a realistic expectation going forward.

Thank you.

James Higgins from CSFB.

Any thoughts on what developments at Atlantic Coast could mean for you? Are there any indications, I guess it's very early, but just any thoughts you might share on what Atlantic Coast sort of removing itself from the playing field could mean for you?

That obviously is a very good question. Let me, first of all just say, we're a bit surprised with that development. We're also a bit surprised at the level of detail which has been put into a market relative to some of the specific terms and conditions of the agreements because I believe that we've all been bound by confidentiality which I'm going to respect. Some of the things that have been put in the market -- I guess first of all make a general statement, some of the terms and conditions that have been talked about in the market, either in print or verbally, some of those things we have in our agreement, some we don't. So, why this development has occurred, we're not quite sure and have been a bit bit surprised, too. We believe that it really can't do anything but create some additional opportunity for us. Probably only limited by our internal capability to grow.

And of course in this market with aircraft availability and financing difficulties, that's creating some limitations and constraint all by itself. But I think that it will certainly create some growth opportunity. But again, we're going to be very careful about what we can do. We're also going to be very careful about how much of our total growth capacity we will commit to United. We're still keeping open and will keep open some growth ability for other partners. So we're not going to make too big of an issue out of this. We don't believe that it could do anything but enhance our growth opportunity, but at the same time certainly don't want to represent that we see it as a huge opportunity because of both some limitations as well as just we've got to keep our total mix and our diversification in mind. And we'll do that going forward.

Thank you very much.

Robert Toomey from RBC Dain Rauscher.

Good morning, Brad. You mentioned in your comments on cost reduction that you feel that there are further opportunities for cost reduction, and I wondered if you could comment on -- gosh you've done such a great job so far, where else are you going to get those cost reduction opportunities? And then secondly, you mentioned that you feel a lot more positive about the United situation in particular than you have in a long time and I wondered if you could comment on that as well why you feel that way?

Okay. First of all, relative to the cost, I think it is logical and reasonable to recognize that the initial cost savings and the amount -- the benefits that we've realized so far have been in areas and in items that have been the easiest to identify. And those are certainly the things that we've gone after first and where benefits are realized. And I can't say enough about just the participation of our people and the cooperation we've had in this from our workforce because without their help and without their cooperation we could not have done what we've been able to do. And we wouldn't have been a position to do the deal with United. And unfortunately, a lot of the initial benefits, or I should say the initial reductions have come in things that have directly affected our workforce and our employees. Having said that, there's been kind of additional areas that very specifically impact and revolve around processes.

Those are more difficult items to identify, more difficult items to implement and address. But yet we know they're there. How much more benefit can be realized, I honestly don't know. All I can tell you is that we know that our job is not done. I don't believe that there's a whole lot more that is specific employee related. I think we've done about all we can do in that area, and what I'm referring to now is more just around processes, automation, technology, just how we conduct business. And we've got to recognize that there are always areas for improvement. We may engage outside help in identifying and evaluating areas for further improvement. Now the second part of the question --

(indiscernible) to have to do with -- you mentioned that you feel more positive about the situation at United than you've felt in a long time, and I wondered if you could comment on why you feel that way?

Certainly. Now at the same time I say that, we're certainly not living in caves, and I don't believe we've got our head in the sand. We certainly understand that there are many challenges ahead for United, for our industry and for us for that matter. But we have had the opportunity to sit down with United's most senior management. They have been gracious enough to take time, spend time with us helping us identify and understand the progress they've made, been very straightforward with us about the challenges and how they expect to overcome the challenges. We appreciate the amount of time they've spent specifically with us in that area, and as we've sat down and discussed these issues and items with them, we've gained more confidence. It's as simple as that. We look at the progress they've made. They have very clear direction. We believe, again through our discussions with them that they are very specifically just implementing their plan, and that as they do that we believe there are chances for recovery and coming out of this successfully now are pretty high.

Again, I hate to say too much more about it because again, I'll start to appear to become a United spokesperson, and I'm not. And again want to emphasize that I'm not. We just have a general feeling through our discussions with them that things are improving, feel good about the direction they're going and the steps they're taking and about their plan. In addition to that, though, I want to emphasize the way we've felt about this all along is that we're not growing our system any more than we believe is justified by market demand. And a lot of this growth, albeit going in the United system, we believe is going into and will be going into service, into city pairs, into hubs that justify the service. And if that weren't the case, we wouldn't be adding the growth. And so, if we're wrong, and United doesn't successfully emerge, we believe that there's just overriding demand, fundamental demand for our product and that -- where we plan on deploying it.

Thanks, Brad.

Michael (indiscernible) from Merrill Lynch.

This is actually (indiscernible). Brad, I have a quick question regarding -- still going back to your rates. I know you booked this quarter's revenue at the rates aligned in the MOU. Are you going to go back and restate revenue for previous quarter, like for the first quarter '03, or is some sort of position in the MOU sort of won't allow that or that is not necessary?

We don't believe that that's necessary. Actually the revenue that we have booked, as we told you last time, last quarter, we booked revenue as accurately as we could based upon where we thought the terms and conditions and rates would end up. And we were actually quite far along in our discussions with United, and as it turns out we were very accurate in the first quarter. And what we ended up with in the actual MOU and what will be in the definitive agreements is very close to what we booked in the first quarter. And actual revenues in the second quarter really reflect a six month -- a true up of our six month number which there is a very small positive -- I would say if we were to just take quarter by quarter there would be a small positive true up meaning we were a tad bit conservative in the first quarter, but our six month revenue is six months of revenue in the United agreement. And we've been very specifically through this with our outside accountants. No assessments and restatements and things of that nature required. It's what we've reported as a six month number consistent with the MOU.

Thank you very much.

Tony Costello (ph) from BB&T Capital Markets.

Just if you could give a little more clarity on what's going to happen to the balance of the year for the balance sheet, what's going to be coming off, how the interim financing is going to work out that would be great.

Okay. I believe that the -- really the debt on the balance sheet at this point, at the end of the quarter, is really about highly leveraged as you will see our balance sheet. If anything, a lot of the -- well, in fact, most of the interim financings will be completed. It will be taken back off balance sheet and put into leveraged lease transactions. The level of debt that we brought on the balance sheet and the extent of our own capital that's been invested is about at our limits right now. I mean I certainly don't want to see it go much higher. So what we have in place are transactions to remove the majority of what's come on in long-term debt to remove that from the balance sheet, get these airplanes in permanent leveraged lease structures.

That then means that really we now need to begin working on next year's deliveries which we're already starting on both on debt and equity, we're very specifically working that issue. But as I said, I think we're about at my limit on balance sheet leverage. And so, I don't see it getting any higher percentage in the debt mix, I see it doing nothing but coming down in the future. So I don't know how to be more clear than that. We're about at our limit right now.

You said -- I think you said you added 360 million in debt. Is that correct?

Yes.

And so how --

I think that, and again, I'm trying to be a little careful here because having commitments is one thing, closings are another thing. And there's always the potential that something can jump up and prevent a closing. And you're never done until they're done and filed. But with the commitments that we have in placed, I believe we're going to be successful in removing basically all of that additional long-term debt from the balance sheet. Now one exception to that may be just -- we may decide to keep some of it on balance sheet for tax management purposes. But with that exception, I think we have commitments in place to remove virtually all of that additional debt.

Okay, thank you.

Helene Becker from Benchmark.

Just very quickly on the stage length, you're up 11 percent year on year. Can you just address how that will change as you take delivery of the new aircraft and expand the operation and what we can expect there? Thank you very much.

You're welcome, Helene. I think if anything we should expect a gradual -- gradual but small, probably single digit increase in the stage length, but it will continue to expand a little bit as the mix becomes predominate or more predominately RJ mix. I've got to be a little hesitant about this because we still don't know exactly the city pairs. We know in general what the market opportunities are, and know that in general they're in longer stage length groups. So we expect the average to continue to move out. And again, with rapidly expanding ASMs and longer stage lengths, this is one of the reasons we feel so confident in our ability to manage our cost structure. I will say that without stretching the stage length a bit, without this much growth, cost containment, cost management becomes more difficult. But I would expect a gradual continued increase in the stage.

Okay. Thank you.

Jim (indiscernible) from ABS Advisory Services (ph).

A couple of related questions related to the Continental co-chair. Can you tell me is this also going to be a prorate, are the nine Brasilias coming from your existing fleet, or you're going to have to procure some other airplanes, and are you looking at Brasilia co-chair operations either for Continental at other hubs or anybody else anywhere else?

Very good questions. We do believe there is the potential for growth in that operation in the Continental system beyond what we've described and in other hubs. We are still having those discussions with Continental. I think most of you know that Continental does have some Brasilias that are out of service that they are still committed to. Right now our agreement calls for a 50-50 mix of airplanes, meaning 50 percent of the operation will be -- the capacity will be provided by their aircraft and 50 percent by our aircraft, which again is one of the benefits of having this arrangement and the ability to have other turboprop opportunities is it does provide some hedge to our existing turboprop fleet.

But we we think, for example, if we feel it appropriate to utilize either reduced revenue lines in our existing flying with Delta United or reduce the spare complement (ph), we have opportunities and somewhere else to deploy those airplanes. So again, that is all part of the benefits of doing the Continental agreement. And again, it is also what I would term a modified prorate. It is not just straight rate prorate.

It's got some, what we'd would call a connect incentive in there, which again I would just to say is something that prevents us from losing money in the operation. But we do believe it has the potential to produce a very respectable margin. There is growth opportunity in it, both in the existing hub that we are using, as well as other Continental hubs. We are not having discussions at the moment with any other carriers or partners relative to Brasilia flying.

Thank you very much.

Robert Toomey.

Sorry to keep you on the line, Brad. With respect to Helene's question about stage length, and relative to ASM and the whole -- you started talking about 70-seaters in your mix. What impact might that have on your ASM costs? Would it not be that much different from adding 50-seaters?

Yes, we believe that the 70-seat airplane is going to produce a lower cost ASM. And so as we add 70 seaters to the mix, it naturally would bring our cost per ASM down. Is that your question, Bob?

Yes, I guess so. I guess if you could kind of qualify that, is it significant versus the 50 seaters?

We believe it's somewhere between 10 and 15 percent on an ASM basis cheaper.

Okay. And I'm wondering just for my edification, you're really building -- continuing to build your business. The United -- the expansion of the United business is certainly a major positive. What would other -- are there other regional jet flying models, either owned by other airlines or separate, that are on your scale right now? Of SkyWest?

Yes, I'll just from a very high level perspective let you know that we're looking at evaluating a lot of other opportunities. First of all I think previously we have said that we'd like to even further diversify and bring at least an additional co-chair partner into our mix. And we're having some discussions, we think there is some opportunity. I don't want to oversell this one at all. But we do believe that there is at least a reasonable opportunity to possibly obtain some flying in a fourth code in the regional jet environment. At the same time, we have also indicated to you -- to the market in other discussions and calls that we've had that we've been evaluating other models for even larger aircraft either within co-chaired (ph) operation and stand-alone operations where we believe that there's a demand and a model that work in that environment. But that's an opportunity that we believe we can take advantage of whenever we deem it appropriate. Or whatever -- I guess I'll just leave it at that.

So, yes, we're looking at a lot of other opportunities, both within what I'd say -- our current business model as well as additional business models that involve larger airplanes. But the larger airplane model, that's an opportunity that we believe is there with or without the existing flying that we're doing and one that we could take advantage of, again, whenever we feel it appropriate.

Do you think you could scale up to that without a lot of disruption, Brad?

That again is all part of the evaluation, and one of the reasons that we're not moving very aggressively because we have -- we've got our hands full right now with our existing model and executing our already booked growth. But the good news is that it represents additional opportunity.

And one last question if I could, Brad, and that has to do -- you mentioned the MOU with United and the new agreement generates a very respectable return, and we talked about margins a little bit. But when you look at return on capital and you look at those models, can you just comment on how you feel about that return on capital and I think your historic return on equity I believe has been in the mid teens and do you think you can continue to do that?

Because we're -- we believe we have such a strong face and a strong infrastructure, we believe that we can add the growth at diminishing or reducing capital requirements, which means -- and I've said this before -- that we believe we can stand some reduction of our margin and keep our return on invested capital very consistent. Now admittedly, we have -- and I want to be a little careful with this because I don't feel bad at all about our balance sheet structure today. I think our balance sheet is the best balance sheet in the industry. Admittedly, we probably have a little excess capital -- and that might sound a little stupid because I don't know how you have excess capital in this market, in this environment.

But we're still cash-flow positive with the exception -- and again, the only reason we have some reduction of liquidity in this quarter is simply because of the 62 million we've invested in aircraft acquisition. Without that we're still cash-flow positive, expect to be cash-flow positive going forward, and we're keeping powder dry for opportunity money. But again, we believe that we can take some reduction of margin and still keep return on invested capital pretty -- not exactly -- but pretty consistent going forward.

Consistent with several years ago?

I mean, I'm talking high level of round numbers here. But I think pretty comparable.

Thank you very much, Brad.

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Ladies and gentlemen, we've been on in excess of an hour. It's probably time that we terminate the call. Again, I very much appreciate your interest in SkyWest. I appreciate your participation and many of you very much in partnership. We feel very strongly about our business model and our direction, feel good about our agreements, understand we're in a difficult and challenging environment but believe that we're prepared and positioned with capital and liquidity and our people and equipment to deal effectively with that moving forward. So with that, again I thank you for your time. And operator, we'll go ahead and conclude the call.

Ladies and gentlemen, if you wish to access a replay of this call you may do so by dialing 800-428-6051 or 973-709-2089 with an ID number of 301093. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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