SkyWest Inc (SKYW) 2003 Q3 法說會逐字稿

Good morning. My name is Marcia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the SkyWest Inc. conference call. (OPERATOR INSTRUCTIONS).

Statements in this 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.; potential consolidation of existing regional carriers; ongoing negotiations between SkyWest and its major partners regarding their coach-sharing arrangements; variation 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 call over to Mr. Brad Rich, Chief Financial Officer. Thank you. Mr. Rich, you may begin your conference.

Thank you, operator. Thank you to all of you for joining us this morning. We know that there are significant issues going on in our industry, and people's time is precious. And we appreciate your interest and the time you're spending with us this morning.

I am assuming that -- well, now, before I get into our remarks, let me also make you aware that Ron Reber, Executive Vice President, Chief Operating Officer, is with me as well this morning. I am assuming that most of you have seen the press release this morning. I'm going to stick pretty closely to the press release, and use it as an outline for the discussion today.

I would make just a general comment that we are actually very pleased with the results for the quarter, both financially and operationally. As you have seen from the release, our operating revenues increased 13.7 percent to 230.5 million in the third quarter. That generated 21.1 million of net income, or 36 cents per diluted share. The results include -- and I want to make sure that people understand this -- a positive pretax amount of 5.9 million, or 6 cents per diluted share, resulting from adjustments made to reflect the company's actual operating results from flights under the company's recently-executed United Express agreement. This is an issue where we have indicated previously that we had been booking what we thought were fairly conservative numbers, because of some uncertainty in the agreement, uncertainty around the bankruptcy, uncertainty about -- although we expected a certain rate, whether that rate would be approved by bankruptcy court, etc., etc. -- and therefore we had been implementing conservative revenue recognition policies.

Now that that agreement is complete and approved, there are some adjustments simply to true-up these agreements to the actual agreed-upon rates. And so that is what that 5.9 million is.

Other items of significance affecting third quarter -- And again, I will follow pretty closely here to the outline in the press release. A couple of comments relative to our total operating revenue production -- obviously, we should have expected revenue increase because of a 39.7 percent increase in capacity, or available seat miles. As most of you would expect, given that that growth was related to additional regional jet acquisitions, I think that most of you understand that, as we bring on regional jets, a larger airplane flying longer stage lengths (ph) -- a normal relationship would be to have some dilution in yield, and we have had that. And that is why, on a 39.7 percent increase in capacity, we have only got a 13.7 percent increase in total operating revenues. So, it is primarily related to mix. At the same time, as we have made you aware in previous calls, we have made some compromise in our contracts with our major carriers, and have some decreases in the contract's flying rates.

I also want to make you aware that, as I indicated, operationally, we're very pleased with our performance in the quarter. Our controllable completion factor was 99.5 percent -- actual completion factor of 99.2 percent of schedule flights. And, at the same time, we have been number one in on-time performance in six of the last seven months. And, that is on the statistics that are reported to the DOT. So, really, from about all respects, our operational performance has been outstanding. And, we has contributed pretty significantly to both -- the operational performance contributing to our financial performance for the quarter.

Relative to our cost per ASM. This is an area that we feel that we have made significant progress. We have brought the cost per ASM down approximately 18.9 percent -- and that is a non-fuel cost per ASM from 12.7 cents per ASM to 10.3. And again, the only reason that we are focusing on a cost per ASM without fuel, as most of you know, most of our fuel expenses are reimbursed by the major partner. There has been some volatility in that number of late. A non-fuel cost per ASM, we believe, is just a more indicative type number to look at. The reduction also has -- although it has certainly some to do with the mix of flying, a higher percentage of the traffic -- of the capacity being generated in regional jets -- a significant portion of the decreases also continues to be relatively to our cost reduction initiatives that we have implemented throughout the company, most of which were implemented in the first and second quarters -- that we continue to realize the benefits from.

I do need to add here that, given that at least most of the initial reductions are in areas that directly impact our employees, relative to wage and salary -- either reductions or freezes; hiring freezes for all non-essential personnel, CapEx reductions -- I mean, all of those things, in one way or another, impact our employees. And without their help and cooperation, we would not have realized this type of success. And so, we're very appreciative of that cooperation that we have received from our employee group.

Let's talk for a minute now about available seat miles and capacity in the fleet. As I already mentioned, our ASM growth was 39.7 percent in the third quarter. The fleet grew to 177 aircraft at the end of September 30, 2003 from 138 aircraft at September 30, 2002. During the quarter, we took delivery of 8 new regional jets and returned 3 regional jets we operated under short-term lease arrangements.

At the end of the quarter, then, the fleet consisted of 76 EMBs, and that breaks out 16 Delta, 53 United; and 7 operating in the Continental code -- as well as 101 regional jets, 56 operating in the Delta code, 45 in the United code.

We would expect that we would produce approximately 1.6 billion ASMs in the fourth quarter of 2003, which results in fourth-quarter ASM growth rates of about 35 percent in total capacity.

One significant item in the quarter -- well, I'm going to go through a list her of what we deem is additional significant issues in the quarter -- on September 15, we announced the completion of a firm order for 30 70-seat regional jets with Bombardier -- all intended to be operating in the United Express operation. The aircraft will begin delivering in January of '04, and continue through May of '05.

The deal, also, I think, as we have already indicated in previous releases, includes a significant number of options -- about 80 options. Those options could be delivered in 70- or 90-sear configurations. The options could start as early as June of '05, and continue through September of '08. The thing that I want to focus on here is just with the 30 firm that we have -- ignoring the options -- we want to make sure that you understand how we are estimating that that will impact our growth rates. Because of the 15 that we will deliver -- the 15 700s that will deliver in calendar '04, the company's ASMs will increase by approximately 23 percent to approximately 7.3 billion ASMs.

The quarterly breakout of those ASMs in '04 are as follows -- we expect 1.7 billion in the first quarter; 1.8 billion in the second quarters; 1.9 in both the third and fourth quarters, which should get us right to the 7.3 billion. We also anticipate delivery of 15 of the 700s in calendar '05. And that will produce -- and at that point, on an annual basis, we expect that to generate about 9. -- right on 9 billion ASMs for 2005 growth rate of approximately 22 percent.

Another significant item -- on September 10, we announced that we had completed negotiations and signed a long-term 11-year definitive contract with United. I have indicated, I think, previously, that we feel very good about the relationship with United. Our two companies are working very cooperatively together. We believe that we have a relationship and a contract in place that are beneficial to both companies, and provide -- well, provide benefits to both companies. On August 29, this definitive agreement was approved by the U.S. Bankruptcy Court. And, as we understand, has also received the necessary approvals from the creditors committee, as well as ALPA.

Let's talk for a minute now about the balance sheet. At the end of September -- well, at September 30, 2003, we had approximately 560.7 million in cash, marketable securities, and deposits, compared to 536.8 million at the end of December, 2002. The increase is primarily the result of the completion of aircraft financing transactions, wherein we entered into permanent long-term third-party U.S.-leveraged lease transactions. And at this point, I do want to add some emphasis to -- since December of last year, we have closed 30 airplanes under the U.S.-leveraged lease transactions, all of which are very -- are recent approvals from the debt and equity sources. I only draw attention to it because I believe these are some of the only leveraged-lease transactions being closed in the market. We still had some success. Admittedly, the market is becoming increasingly difficult. But yet, we have still been able to close 30 leveraged leases since December of last year.

We have also brought a significant number of these transactions on balance sheet in just long-term debt transactions. And, consistent with those transactions, you see a corresponding increase in our long-term debt -- to 348.4 million at the end of September -- at September 30, 2003. Even with this increase in long-term debt on the balance sheet, again, related to the RJ acquisitions, our debt-to-capital ratio is 35.5 percent debt; 66.5 percent equity. That number has moved from 16.4 debt; 83.6 equity at December 31st of '02. We still believe these ratios are very manageable, and SkyWest maintains an industry-leading balance sheet.

I will tell you that my concern in this area is more related to the investment in the aircraft, rather than whether the obligation is on balance sheet or off balance sheet. We are monitoring this situation very closely; paying very close attention to the increased investment. While these aircraft are on balance sheet, it is certainly our intention to have these on balance sheet temporarily. And, we are evaluating, very specifically, several structures that, even if they remain on balance sheet, we will attempt to do 100 percent financings, instead of the roughly 85 percent that we have been doing, currently, to try to recoup that investment, get the cash back on balance sheet and working for us, instead of increasing the investment in the aircraft.

As I mentioned -- I mean, we are paying close attention to our total obligations, whether it is on or off balance sheet. I have given you our long-term debt on balance sheet of 348.4 million at the end of the quarter. If you take our off-balance sheet obligations, present value them at a 7 percent discount factor, the present value of the off-balance sheet obligations is approximately 1.1 billion at the end of the quarter.

One issue that we also want to make sure that you are aware of is that under the company's United Express agreement, specific amounts are included in the rates and charges for mature maintenance on aircraft engines that the company records as revenue. However, consistent with the change to a timing (ph) material maintenance policy, which we have described very completely, I believe, in our SEC reports, the company records maintenance expense as it is incurred. The result of this is that -- the result on the third quarter was that the company collected and recognized and recorded as revenue 14 million -- excuse me -- 4.2 million, pre-tax, under the United Express agreement, with no corresponding offset for maintenance overhauls, since there were none incurred.

Okay. Another item -- Delta Air Lines has previously announced a fleet rationalization plan for Salt Lake City, Utah and Dallas/Fort Worth. As part of the fleet rationalization, effective January 7th of '04, SkyWest will relocate 9 50-seat regional jets from DFW to Salt Lake City to accommodate this fleet rationalization. As a result, we will operate the 11 50-seat jets in DFW and 45 regional jets in Salt Lake City in the Delta code. I think it is probably just worthy of mentioning that we are also in -- well into the process of completing rate negotiations with Delta for the 2004 contract flying rates. We expect these discussions and the agreements to be finalized in the fourth quarter of this year. Well, I should just say by the end of this year.

Effective August first, we took responsibility -- when I say "took responsibility," we moved our Delta Brasilian operation back to a pro-rate operation, meaning we assumed responsibility for pricing, inventory control, and scheduling on those 16 Brasilians that were previously operated under Delta Connection contract flying arrangements. Now, we just wanted to make sure that you are aware. It does not represent a significant amount of capacity. There are various reasons why both Delta, as well as SkyWest, were not only willing, but felt this was an appropriate thing to do. We actually look forward to the opportunity to regain some of the pricing and inventory control in these local markets that we have a lot of history in; that we developed over years and years worth of operating. And, these are markets that, historically, we have been very successful in, in pro-rate agreements. So it is shifting a little -- a small percent of the capacity back to pro-rate -- not anything that we are necessarily concerned about, and very honestly, look forward to assuming a little more responsibility in those markets.

Let's see -- during the quarter, we took delivery of 8 new 50-seat regional jets from Bombardier, and we have acquired a total of 31 regional jets since January 1st of 2003. My only point in coming back to this is just to make you aware that we're taking a lot of deliveries; airplanes continue to come rapidly; we will take 10 more by year-end; and then start in to the 700 deliveries.

Although we are bringing more of the acquisitions -- we are acquiring them in transactions that are long-term debt-oriented, I do want to make you aware that we have had a lot of success, still, in attracting permanent long-term debt. We have a significant portion of these future deliveries already committed on the long-term permanent debt side. Yes, we have put some of SkyWest's cash into these acquisitions. We still believe that is temporary. We are working very diligently to pursue long-term lease arrangements, as we have done -- the majority of our financings have been in that type of structure in the pass, and we still believe that we will have some success in the future.

Another issue to make you aware of -- on July 1st 2003, we commenced Continental Connection operations under a new code-sharing agreement with Continental Airlines, operating Brasilia aircraft out of the Houston hub. By the end of the quarter, the operation grew to 6 aircraft, with service to several Texas communities. It will continue to increase, and it will be at 9 aircraft by year-end.

I will just give a quick comment on that -- that although we are still early into that relationship, financially, it seems to be meeting our expectations at this point. And, importantly, is just the beginning of a relationship, again, with Continental. And, it is a relationship that we are happy to begin -- diversify some of the risks. But, we have enjoyed doing business with Continental in the past, and it is a good, cooperative, productive relationship.

Okay, with a with that, I will conclude the formal remarks. If Marcia, our operator, can come back on, we will entertain some questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). William Green (ph), Morgan Stanley.

Brad, I just want some clarification, if I could, on your margins. If I take out the 5.9 million in adjustments that you made as a result of the finalization of the contracts, and we take out the maintenance, you would be roughly around 11 percent operating margins. Does that sound about right to you?

Yes.

And so would that imply that, going forward, if you do incur -- well, obviously, you will incur maintenance -- that your margins actually could be, say, 200 basis points below that 11 percent? If you -- because you have already recognized the revenue for it.

That is true. I think the issue here is -- as long as we have consistent growth, we are going to have units coming on, at least through 2004, 2005. We are going to have enough growth in units that are coming on with little to no -- with very little maintenance that is going to offset some of the heavy maintenance that is going to be incurred. And so I think, moving forward, as long as we have consistent growth, it mitigates the impact of that, to a large degree.

Okay, so for modeling purposes, do you think 11 to 13 is more realistic, then? Because in the past, you had been talking about 10 to 11 percent --?

I think, still -- I would not encourage you to go much above 10 percent. I mean, that is where -- once you make these adjustments that we would be -- and keep in mind, that performance was done with some of the best operating performance that we have ever had. So, I would not encourage you to go much above 10 percent.

Okay. And then, if I can just ask one follow-up on your at-risk flying -- how are the margins in that business? Are they comparable with what the contract business has?

Not yet.

Okay.

But, keep in mind, we have only been managing these since the first of August on the Delta side; first of July in the Continental. The good thing about this is that load factors are very good, which gives us the ability to work with and better manage the yield. And, at the same time, with us managing them, we expect to make the local traffic a little more effectively. So, I mean, we are pretty encouraged about the potential in these at-risk markets. And, keep in mind, it is still only about 7 percent of our total capacity.

Right. But the margins are positive?

Yes.

Okay. Thanks for your help.

Jim Parker, Raymond James.

This Delta rate negotiations has been going on for at least a year, and maybe two. Why are you confident that it is about to happen, you are about to get it done?

Well, we do have a rate agreement in place for 2003. We have started, I think, a lot earlier, number one. I think, we have been in these discussions -- very specifically on 2004 rates. Actually, in some respects now, for a couple of months. And, I think one of the biggest issues that we have had to deal with in these discussions is simply just making sure that everybody understood very clearly the underlying cost structure. And, I believe, right now that there is enough -- that both us and BCI (ph) have generated enough information relative to the underlying costs; that we are all getting comfortable with what the cost structure is. Now we just need to take that cost and come to an agreement on acceptable returns. And that is good progress from where we have previously been. So, I really don't expect -- I don't expect that these discussions would not be cleared up here very early in this quarter.

Okay. The second question has to do with the regional airline business having evolved to the point where there is consolidation on the front burner. It looks like Mesa (ph) has fired the first shot here. What is SkyWest's role in all of this? What is the attitude of SkyWest about being a player in consolidation or not consolidating? What do you think about all that?

Well, first of all, obviously this is a -- I mean, your questions -- somewhat of a broad question -- very specifically related to the transaction that is getting the most attention. Obviously, this is a very sensitive situation, one that the whole industry is watching very closely. The comment, I think, that we're prepared to make today is twofold. Number one, as I have said previously, and as I -- and I will stand by previous statements, to the effect that we believe that we are better-positioned than any regional airline to take advantage of these types of opportunities when we feel they are appropriate, because of our capital structure and our liquidity.

Number two, we are watching these developments very, very closely. We are monitoring them daily. If we were not, we would not be doing our jobs. And so, all we are prepared to say is that we are watching the developments, watching the evolution. And at what point, if any, we decide it appropriate to get more involved, we can, because we have the balance sheet to do it, the capital structure. And so, we are prepared if we see a situation that makes sense to us. So, we are monitoring very closely, watching the developments, and that is about all we're prepared to say today.

All right. Thanks.

You're welcome.

Tony Cristello , BB&T.

Thank you. A couple of questions -- one, cost initiatives that you had in the first quarter and second quarter -- now you're starting to see those in place. Are they, I guess in a sense, permanent? Or is there a period where, as business may improve some, you could see giving back some to your employees?

That is a difficult question. First of all, as I have said before, most of these initiatives are things that are very difficult on the majority of our workforce. And things that -- well, as I said, there are things that directly impact them, and they are difficult items. As we continue to grow, we could look at that and say, on an absolute dollar basis, yes -- I think some of this we have to watch very closely and make adjustments as necessary. On a unit-cost basis, in taking kind of the new base of infrastructure and applying that over future units -- whatever kind of adjustments are made, going forward, need to be done in a way that still fits within the unit-cost structure that we're trying -- that is our objective and our new target, and one that fits within these contract arrangements.

So, I mean, it is a difficult question; one that we have to monitor very carefully; we have to be very sensitive to our employees, because we've got -- I mean, we still have a lot of growth coming up here. And without our employees very much on-board with what we are doing, it is going to be very difficult to executed this growth plan. So, we are going to try to do both -- be very sensitive to the employees needs; at the same time, we still have to be very, very conscientious about what this is going to produce on a unit-cost basis.

Okay. And just one other question -- your deliveries are, as you said, (indiscernible) the 70-seaters in place '04, and then for 2005. If one were to execute some options, how is the market right now in terms of availability and being able to deliver more? Is there enough space to continue to take orders now? Or are you starting to see that tightening up some?

We have 30 70-seaters. As I have said, 15 in '04; 15 in '05. The 15 on '05 actually end in May of '05. We then have in place, relative to the options, delivery positions reserve, that basically, are two a month, starting in June of '05. So, we have delivery positions reserved in the event that these are needed by one of our partners.

Thank you.

You're welcome.

Lewis Starks (ph), Chesapeake Partners.

Mr. Starks, your line is open.

Question answered, thank you.

Helene Becker, Benchmark Capital.

Brad, can you break down for us the percentage of your revenue now that comes from each of your three operations? Or four, I guess -- the percent that is Delta on pro rate, and the present on (indiscernible) departure, and then the percent of revenues from Continental, and from United?

And then my follow-up question is -- with respect to Continental, you had a co-chair agreement with them once before -- maybe what? 10 or 15 years ago? Are you comfortable with -- granted a new management team -- but, comfortable with what you're doing for them in Houston? You know, that it could be a long-term agreement?

Okay, yes, let me answer the second half of the question first. We did have a very good, productive relationship with Continental out of the Los Angeles hub, actually, back in 1995. And that was just a very good relationship. You know, the relationship did not end because of any particular difficulties. I mean, there was a contractual issue with one of our other partners -- was the main issue there.

I think we have said all along, I mean this Brasilia operation is a small operation -- it never really intended -- a big expectation on our part for it to grow. And that part of the operation of growing anything real significant, as far as just total size -- it is a good, efficient, quality operation. It gives us a chance to have some fleet flexibility in what we do with some of our Brasilias. At the same time, we are utilizing some of Continental's Brasilia that have not been utilized. But, most importantly, it is to re-establish the relationship with Continental in hopes that, over a long-term, it can generate, in other ways, into a more meaningful relationship. And certainly, that is our intention. Whether that materializes, remains to be seen. But, certainly that is our intention, is to develop the relationship in anticipation of long-term, more specific, more significant growth.

Right. Okay.

Okay, relative to the first part of your question. The breakout of our revenues -- let me make an attempt at this, and then you can kind of tell me where I did not completely answer it, if I don't. First of all, the Continental portion is less than 1 percent of total revenues today. The Delta portion is about 41 percent, which breaks down 34 percent in contract flying; 7 percent coming from the Brasilia -- what is now at-risk operation. The United revenues are now 57 percent, and that is broke out -- that is all contract, and broke out 33 percent in the RJs; 24 percent in the turboprops.

Great. That covers it. Thank you very much.

You're welcome.

Jim Aushul (ph), Aviation Advisory.

I want to clarify a couple of things. First of all, with regard to this revenue from the new maintenance arrangements in the United contract -- I am confused, because you said -- the renewal arrangement is shifting to time and materials?

Yes.

So, if that is the case -- if it is supposed to relate to money actually spent, how come you received of booked some revenue, but did not have to spend any money?

Because our United revenue -- very specifically, our United contract includes -- in that reimbursement rate is mature -- mature maintenance costs are built into the reimbursement rate. Okay? So, that means that we are collecting a mature rate, but still the actual maintenance incurred is now based on time and materials. So, there's just a mismatch in the timing of the collection of the revenue and the time that we incur the maintenance. I mean, that is really all there is to this.

Okay. When do you think -- over what time frame are you going to actually incur the expenses included in this 4.2 million for which you have already been reimbursed?

You are kind of asking when? When we will see some reversal of this -- what is kind of -- what is a good guide in this quarter? And when is that going to reverse?

Well, I guess -- if I'm understanding what you just said -- you were reimbursed for expenses based on the assumption that some of your airplanes were mature -- I mean, you have a relatively-young fleet -- so you have not actually had to lay out the money. But, those planes are going to be ready for their C-check (ph) one of these days, and you are actually going to have to spend that money. Is that what you were saying, basically?

Well, yes, it is. What I am -- I do not know that we are going to see a time in the next, you know, -- I am estimating here a little bit -- I want to make sure that is clear. But, I cannot foresee a time over the next 2 to 3 years, at least, that we we'll see a big pronounced reversal, necessarily. Because, as we are bringing on more and more units in brand-new airplanes, on a unit basis, you are not going to see a big disparity. Because, as long as we have got consistent growth, the time that this will become more pronounced is when the growth stops, and then we start incurring heavy maintenance. But, I do not see that happening for the next several years.

Okay. What is the C-check cycle? After how many years does an RJ need a C-check?

Ron, can you help us with this one? The cycle time of a C-check? Let me try a different way of answering this. What we are kind of including in this category -- I mean, the Cs and D checks, the actual airframe inspections are part of this. The most significant part of this is the actual overhaul. Okay? And we are up now two roughly 19,200 cycles on the overhaul interval. Okay? Which, for us, is over a 7-years cycle for the first overhaul cycle.

Are you talking about overhaul of the airframe or the engine?

Of the engine. And what I'm saying is -- you were asking a question about the airframe inspections, where the most significant portion of this is the overhaul.

I see.

The overhaul on the engine. And I'm telling you, that one I know very clearly -- is that we have just gotten some cycle extensions on these intervals that take us to a 19,200 cycle interval.

I see. You took your first RJs -- was it '95, '96?

Yes, '94, actually.

'94.

But, the first few years, you did not have a very large fleet. So, I guess, you're not going to have a lot of engine overhauls hitting in the near future. Is that right, based on everything you have said?

Not on the United fleet, where this is an issue. Because, our United RJ fleet, see, is relatively new.

I see.

And see, on the Delta side, we do not have this mismatch. We are reimbursed by Delta when the maintenance is incurred.

I see. Okay. Another question. Maybe I wasn't paying proper attention -- the debt-to-total-capital figure you threw out -- or you gave -- 35.5. Does that or does that not include the 1.1 billion present value of (inaudible) --?

It does not. That is the on-balance sheet number.

Okay. And one more question, if I may. The company has so much cash. And since you are a significant and regular taxpayer, why don't you want to own more airplanes? Wouldn't you like to have some of those depreciation deductions for yourself?

I will simply say that, even with all of these aircraft we've got on balance sheet, we are able to fully utilize tax benefits. So, I would still prefer to have these off balance sheet at 100 percent financings, again, simply because of the additional investment. But, as you have mention, having these on balance sheet, for two reasons -- the fact we've got a very favorable rate environment today, and our credit is still being priced very attractively. And, as long as these are on balance sheet today, we've done them as floating rate deals, because we still expect to put equity in and restructure them at some point -- combined with the fact that we are fully utilizing the tax benefits, you know, that is having a -- that, as well, is a component of our reductions of costs in the quarter.

So, I will just say we don't feel too badly about the fact we've got some tax benefits that we can fully utilize. And, very honestly, I think that I am okay having some of these on balance sheet long-term. But still, our preference -- to keep the investment where it needs to be -- I prefer still to do predominately leveraged-lease structures, if we can attract the equity.

Thank you very much.

You're welcome.

Robert Ashcroft, UBS.

I just have one question about your 70-seaters. The (indiscernible) has been showing the 170 around the country --

Yes.

-- recently. I don't know whether that came by Utah or not.

It has.

Some people think that gives a better passenger experience than the Bombardier aircraft. Do you have any concerns about people moving towards that aircraft, as opposed to the Bombardier product, over time?

I will let Ron think about this for a minute, and let him give an answer as well. I will just tell you that -- I mean, certainly, one of the issues here is commonality of fleet types, and the fact that -- we believe that, for us, there is some efficiency by sticking with (multiple speakers)

Absolutely. I don't dispute that for a second.

Okay. And relative to your point, I don't think -- I mean, there is no question that the EMB-170, from a passengers standpoint, is a very nice airplane. Do we think that it is a big enough issue to make us -- is the cabin amenities and the quality of the experience in the cabin noticeably different -- significantly different between the two? Enough to cause us some concern, I think, is probably your question?

Yes. In the sense that -- could you see United in the future saying "hey, you know, maybe we'll go from some of these 170? Plump for 170 growth rather than CRJ 700 growth in the future?

Let me have Ron give a comment on this one.

First of all, we've been very involved with this aircraft with (indiscernible) in the early development stages. So we're very familiar with the airplane. I would have to think -- and you're talking mostly -- I'm guessing, what is the passenger or the customer's perspective here. And I think you -- the major carriers have done a lot of homework, relative to cabin and different classes within the regional cabins. And we even have cabins now -- we have two first-class (ph) cabins being developed in the regional --

I think there's going to be a movement away from that. So, we are going to go to a single-class cabin. It might be more of a 31, 32 pitch kind of a cabin. But I don't think that there's enough difference between them -- the (indiscernible) product and Canadair. And if you look at the new 70-seater in Canadair, it is a better airplane than (indiscernible); it is better from the cabin aesthetics; the seats are better; the overhead bins are better; its luggage capabilities, or payload, is better per passenger. So, I don't -- to answer your question, I don't think United or Delta are going to come to us and want us to move to the (indiscernible) product because it is a better airplane.

No, I was just more worried that they may, in the future, direct their growth to regional airlines that have the 170 as opposed to the CRJ 700.

We don't think -- we still think they're going to pay very close attention to economics; very close attention to the quality of the individual operators.

Okay. Thank you very much.

You're welcome.

Bob Toomey, RBC Dain Rauscher.

Brad, I got on the call a little bit late, so I apologize if this is repetitive. Did you comment on cash flow in the quarter?

We reviewed pretty specifically just some balance sheet numbers. We did not go over specific cash flow data.

Can you comment on that? Were you cash flow positive? Are you cash flow positive through 9 months?

Absolutely. We are cash flow positive, irrespective of the fact that we invested about just under $50 million in these aircraft acquisitions of our own cash. And still cash flow positive.

Okay. And I just wondered if could -- you were mentioning earlier that you were talking about the importance of maintaining on a low-unit costs. And, you did a great job in the quarter on that. And again, I apologize for getting on late, but could you comment on -- exactly why you are seeing such good performance in unit costs? And, do you expect that to continue to improve, going forward?

Yes, we do expect it to continue, going forward. We need it to continue, going forward. And the thing that -- I guess, as long as you are asking the question , I will just emphasize this a little stronger -- and that is that -- I mean, you look at our total cost per ASM in the quarter of 12.7 cents, inclusive of fuel, which was about 2.5 -- 2.4 or .5 cents of that in the quarter. You take that and then consider that that is a blended rate -- our turboprop rate. That is a blended rate, (indiscernible) in the Turbos, blended together with the RJs, should indicate that we are flying these regional jets at a very, very competitive cost per ASM.

Now, the types of things that we have done are -- refinements in our overhead; the essential-only CapEx -- those type of things, focusing very specifically on utilization, utilization of airplanes, of people, of equipment. I mean, all of those things are fundamental refinements and improvements that we are making in the operational. And, by the way, I don't know that we are done, as it relates to process-type re-engineering improvements. I mean, there are still other things that can be looked at and done to make further improvements. So, yes, we have made significant progress.

You know, when you start deferring CapEx, that is a difficult question. I mean, you cannot just keep deferring, deferring, deferring forever. What we can do, though, is be very careful, and much more prudent in how we utilized resources. And that is what we're trying to do -- is make, kind of, a cultural change, not just something that we have done once and now it all -- it cannot just happen once and snapback. I don't think we're looking at that kind of situation at all. So I think most of the improvements that you are seeing in the results are things that we need to continue to happen on a unit basis.

And did you comment on any long-term operating margin objectives?

Bob, why don't you -- we've been through that a little bit already. Why don't you give us a call and we will tell that to you on a phone call -- a separate phone call, so we don't have to go over it again.

Great. And one follow-up, if I could, Brad, and that is -- you talked about the importance of having your people buying into this cultural change that you are going through. Do you feel that you are getting the support of the rank-and-file of workers in the company? Are they behind this? Or are you seeing any problems with that?

Ron, take this one.

I will speak to it relative to the sustainability of, kind of, our current efficiencies and productivities in the workforce. I think we have gotten very good -- and have implemented some very thought-out productivity-based initiatives. And most of what we have done in cost reductions -- we have tried to stay away from abusing people. And, by the way, those are the easiest to do and maybe the most over-reactive. So, I hope we have not done much of that.

The workforce, though, today, is very sensitive on all fronts. And mostly driven by our industry and the unknowns of the industry, itself. So I think our workforce is very much onboard -- it is what SkyWest is trying to accomplish. We have got to move very carefully, going forward, to sustain the efficiencies we've got today.

Great. Thank you.

You're welcome.

Michael Linnenberg (ph), Merrill Lynch.

This is actually Lillian. I work with Mike. Brad, I only have one question and it relates to the pro-rate business with Delta. I realize it is only 7 percent of your ASMs. I'm wondering if you can provide us with just some color on the yield performance on this business?

Ron is saying it is not as good as we would like (laughter).

(laughter). Okay. Getting better, hopefully.

Yes. And that is what I was trying to say -- (multiple speakers) I will let Ron speak to this a little bit. Coming from an environment where it has been managed by the major -- and in that environment, where there may have been a little different focus and emphasis on the local traffic. I mean, the majors are going to be pricing very specifically for the through passenger. Whereas, we need both a good mix of through traffic and local traffic to prop up the yields. So we have only had one month, really, of results here to really look at and analyze -- actually, well two months -- August and September -- to really -- it is not given us enough time to re-establish our pricing objectives in the local traffic, so our yields are still not where we would like them. The good news is, is that the load factors are there. And so, the underlying base that we have to have is demand for the product. Once we have the demand, then we can start working with the fare mix to begin propping up the yield. And that is the point where we are at, and we have only had two months to work with this, so far. (multiple speakers)

The only thing I would add to that is -- as Brad said earlier, we were excited to get these risk markets back . (indiscernible) When the major carriers took those from us, we knew that they did not know as much as we did about managing a 30-seat aircraft inventory. So, taking these back, yields deteriorated very quickly under the major carriers management. And so, taking those back , there is some huge upside here to property managing these inventories and putting a fare structure in place to accommodate that local passenger Brad's talking about. And none of this is inconsistent with what Delta or United would want. They don't have quite the focus that we do on these markets.

They just want to make sure that we preserve the (indiscernible) in connecting traffic. So we preserve the connecting traffic and still make fares that will -- put in fares to accommodate local traffic. It is still meeting their objective and ours. So, that is why we look forward to this opportunity.

The only other thing that I would add here is that we might be developing a model within a model, that has probably more long-term economics sense to it than we could be recognizing right at this moment. So having the element of risk traffic in a contract environment is not -- is turning out to be a good thing.

All right. Thank you very much, gentlemen.

You're welcome.

Lewis Starks, Chesapeake Partners.

I have a question, just as more of a clarification on the acquisition strategy. Are you -- and obviously you're watching industry developments, and you can make your response either offensively or defensively, given the strength of the balance sheet. Are you more interested, particular given some of the union issues in the industry, with buying assets as opposed to entire firms?

That is a very good question. What I can tell you is that one issue that we see as sensitive as any issue in this whole discussion -- this whole question -- is the impact of a transaction like this on our current workforce. I mean, we have very good relationships -- I think, most all of you know that we are completely non-union today at SkyWest. We have good, cooperative relationships with our employees. And, we are going to be very, very careful about any transaction that jeopardizes our current employee relationships. And, we see that issue as a risk of a potential transaction. Now, that is one factor. It is one of many factors. But, one that we're going to be very, very sensitive to.

Is it fair to say that it is an important factor that obviously will go into the equation, but, in and of itself, it is not enough to, in this case or any other case, deter you if you feel it is the correct strategic move?

Well, it is hard to determine whether it's the correct strategic move if it has the impact of upsetting the existing workforce. Let me be more specific here -- what we are trying to assess here is the financials, the impact operationally of an acquisition, versus looking at our growth opportunities and the growth strategy without an acquisition. And if we can accommodate -- if we can still recognize and realize our growth objectives and just do it within and through natural growth, that is preferable to us. Because we can do it and built upon all of the positive aspects of the base; build it with the cooperation of our existing employees; take advantage of those good relationships that we have -- I should not say take advantage of -- just utilize -- the good relationships. And that -- you know, if everything else was equal and we could realize our growth objectives, that would be preferential.

Sure. (multiple speakers)

We have to then say "okay, can we do that?" What is the impact to us if we just try to take a back seat and let others in the industry be more aggressive, and grow quicker than us. And what does that do to us and to our standing in the industry? You know, all of those things are part of this question.

Okay. But you don't, emphatically, ever rule out any acquisition if there were a union component. But, it is something that you would weigh carefully, given your current workforce relations? Is that --?

Well said.

Thank you very much.

You're welcome.

Michael Grossmarker, Goldman Sachs.

Actually it is Glen Engel from Goldman Sachs. Questions on the future orders -- yesterday or the other day I saw that ComAir pilots have rejected some labor concessions. So, clearly, you're the low-cost producer of Delta's players. And United still has got 70-seaters; it is probably going to need to order. Can we expect additional orders in the next several quarters? And, if you were able to get lucky and hit on a bunch of them, how much upside is there in capacity numbers for '04 and '05?

Glenn, I honestly do not know how to answer that question. I mean, everything that you have just said, I would concur with; I just don't know have to put a number to it. I mean, we certainly think that this is going to create some opportunity. I do not know how to put a sizing to it. All I can say is -- and again, as you mentioned, we believe that we are -- that our costs are very, very competitive. And, because of that cost structure -- I mean, the whole focus of -- and emphasis of this cost structure is to put us in a position to take advantage of these types of opportunities. So, the opportunities are there; we believe our costs are right; the quality of the operation is there; the personnel are in place to take advantage -- all of that is all in place, and there will be opportunities. I just don't know how to put a number to it. And I apologize, but, I cannot.

Are there likely to be decisions on whether Delta and United go your way or some other way within the next couple of quarters?

I would expect, yes.

Thank you.

You're welcome.

Dan Morton (ph), Daniel Morton (ph) & Company.

The 5.9 million that you picked up in this quarter -- am I correct in the procedures that you use in your contemplation with United, that that is reflected both in your revenue and expenses?

Yes.

And, a follow-on to that -- could you give us any indication, at what part of the 5.9 would have been a normal cost of revenue change, I should say, in this quarter?

Are do you just -- let me make sure I understand your question, Dan. Are you just asking how much of the 5.9 was revenue and how much was expense?

I would like to know that, but more specifically, I was also wondering what proportion of the 5.9 was generated in the quarter just ended, as opposed to prior quarters? Were you doing any catch-up? Or was it all in this quarter?

No, I think the 5.9 is all previous quarters.

All previous quarters? (multiple speakers)

We have -- given the timing of when we concluded the agreement -- I mean, for all intents and purposes, for this quarter we have booked the new rates. And then once the agreement was approved by the Bankruptcy Court, at that point we then felt good about going back and applying those new rates (technical difficulty) to the quarters.

And, can you give us indication of what part of that was revenue and expense?

I prefer not to.

Okay. And the 4.2 million maintenance charge -- I assume, then, that this would be a continuing source of revenue? In other words, this would actually be reflected in your yield?

Yes.

So, we will see it on a continuing yield, but we, of course, have not picked it up in unit cost?

That is correct.

Thank you.

You're welcome.

There are no further questions at this time.

Okay. Again, thank you to all. We have taken, I believe, enough of your time this morning. We will go ahead and conclude. Again, we just thank you for your interest in SkyWest. And, thank you very much, and we will go ahead and conclude.

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