SkyWest Inc (SKYW) 2003 Q4 法說會逐字稿

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

The company may from time to time make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements encompass the company's beliefs, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipates, should, likely and similar expressions 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 the company as of such date. The company assume no obligation to update any forward-looking statement. Actual results will vary and may vary materially from those anticipated, estimated, projected or expected for a number of reasons, including, among others: developments associated with the bankruptcy proceedings involved United; ongoing negotiations between the company and its major partners regarding the code sharing arrangements; various,s in economic and market conditions and other unanticipated factors. Risk factors, cautionary statements and other conditions which could cause actual results to differ from the company's expectations are contained in the company's filings with the Securities and Exchange Commission, including the company's annual report on form 10-K.

I will now turn the conference over to Mr. Bradford R. Rich, Executive Vice President, CFO and Treasurer. Please go ahead, sir.

Thank you, operator and thanks very much to all of you for joining us this morning. We always appreciate your interest in SkyWest, and making the effort, taking the time to join us on these types of calls.

First of all, I will proceed with the assumption that have you access to, either by hard copy or electronically, that you have access to press releases that we have made, not only this morning, in the financial results release, but also a release that we made yesterday, relative to some expansion plans, additional aircraft orders, et cetera. I will use both of those releases primarily as the text for -- and as an outline for our discussion this morning.

First of all, starting with this morning's press release relative to the financial results, and some of the significant items during the quarter, let me begin first of all by just reviewing with you the financial results. In fact, before I do that, let me just make you aware, also, that I have in the room with me here at SkyWest headquarters several members of our staff. Mike Kraupp, "Chip" Childs, Ron Reber, our Chief Operating Officer, will be joining us very shortly. So as we get further into the call, and get to questions and answers, these gentlemen are with me to provide support and help answer questions, et cetera.

Relative to the financial results, first of all, we're very pleased with the results, especially given some of the challenges of the environment today. Feel good about the fact that in spite of difficult and challenging times, in our industry, once again, the results I believe are indicative that our financial model is working, it is a proven model, although there is some still amount of risk in the model, we believe that the model inherently, the way that it is set up and established, mitigates to a large extent much of the volatility and the unpredictability that seems to have been -- that goes without saying is inherent in our industry, and that this is a model that is sustainable in both, you know, good times as well as in more difficult times. As you can see, from the release, our operating revenues for the quarter were $237.5 million, a 14.1% increase. That translates into $17.5 million of net income or 30 cents in diluted earnings per share.

I would just make a comment here, that although this is our year end, a time when we, you know, do some of the reconciliations and true-ups and those types of things of things that are happening throughout the year, you know, the results are very reflective of, you know, what I would just say normal operating performance. As you can see from the release, there are no unusual items relative to below the line type of adjustments or anything of that nature, it is a very clean quarter, and again, very reflective of just normal operating performance.

For the year, we did $888 million of revenue, a 14.7% increase year over year. Translated into $66.8 million of net income for the year, and $1.15 in diluted earnings per share. For comparative purposes I would just remind you that the $1.51 in diluted EPS last year included a cumulative effective change in accounting principle of $8.6 million or 15 cents in diluted earnings per share that was in the last year's numbers.

As far as some of the significant items affecting the performance during the quarter, first of all, let's just discuss for a minute the operating revenues. Obviously, our operating revenues are going to track somewhat consistent, at least in some respects, to the capacity that we generate. Our ASMs are up 33.7%. We all know, though, that -- I mean our operating revenues are not going to track exactly with the ASM production increases, because as we bring in more and more RJs, the mix of flying is different, the yields inherently are lower on the RJs, so we have a corresponding decrease in the yield per revenue passenger mile, but net / net, operating revenue is up 14.1%. Some of the things in addition to that, in addition to just the growth, I think most of you that are following our company, that are aware of the model, know that a -- this is our operating performance, our completion factor, our ability to get good utilization out of the airplanes, those types of things are a significant factor on our operating revenue generation, and I would just point out the fact that our operating performance relative to on-time and -- on-time performance and completion factors has been very good in the quarter with a 99.5% controllable completion factor.

Relative to our costs, still pleased with the fact that we have made, we believe, significant progress on our cost per ASM. When you look at the cost per ASM ex-fuel, and again the only reason we're pulling fuel out is just for comparative purposes. The fuel component, you know, has a high degree of volatility in it, so pulling the fuel out just for comparative purposes, our cost per ASM is down from 12.5 cents in the fourth quarter last year to 10.5 cents this year. And now, obviously, some of that reduction is nothing more than the mix of flying. The more RJs we bring in, they are lower cost per ASM aircraft, and so, you know, that's a significant contributor.

In addition to that, we continue to see the results of aggressive diligent progress and work on the cost side of the operation. We have mentioned before that we have done a lot of work in just cost reduction initiatives. I would say that -- and I would kind of put the whole cost reduction issues, really, into two categories, one where we very specifically continue to work on and refine and reduce our cost structure in certain areas. I would classify those areas at this point more as re-engineering, redesigning of processes, more than anything where we still believe that we have some work to do, and continue to be very focused on that.

Some of the other areas I would now put in a category that we would call cost containment. Where we've realized significant progress, and now, we need to contain, really not looking at further reductions in certain areas, but we need to contain the cost levels that we have achieved. I would just say here that we have had very, very good cooperation from our work force on these issues, we could not have done what we have done without their help and cooperation. And so very specifically, and sincerely, we express our thanks and appreciation to our employee ---- have participated with us and really have partnered with us in being able to accomplish what we've accomplished thus far.

At this point I guess maybe the one example of some of the things that we've done on the cost side, our average full-time equivalent employee count for calendar '02 was 5,097 employees. That same number, again average full-time equivalents for the 12 months ended December 31, '03, was 4952. So during that period, we brought on 39 additional aircraft, but the average number of full-time equivalent employees actually came down. Again, just one example of some of the types of things that -- where we've made some improvement.

Let's talk for a minute just about our capacity, as measured by available seat miles. As I already mentioned, our capacity in the fourth quarter, again quarter over quarter, was up 33.7%. The size of the fleet increased to 185 aircraft at December 31, 2003. That increased from 149 aircraft at December 31, '02.

During the quarter, we took delivery of eight new regional jets. At the end of the year, the fleet consisted of 109 regional jets, 56 of those in the Delta code, 53 in United's code, just after year-end, early in January, we took two more CRJ 200s for United bringing their total to 55 and the fleet total to 111. In addition, we are still operating 76 EMB-120s. Those break down as follows: 15 in the Delta Code, 52 for United, and 9 in the Continental Code.

Moving ahead to 2004, we anticipate flying approximately $7.5 billion ASMs in the 2004 calendar year, which is approximately 28% growth rate. The quarterly ASMs, I will break this out very quickly by quarter, $1.67 billion for the first quarter, 1.75 second quarter, basically $2 billion in each of the third and fourth quarters. Let's see. And then beyond that, that's the '04. Beyond that, we -- I think all of you know that we have 15 more deliveries in the '05 time period of CRJ 700s, in '05, which will take our '05 ASMs to $9.6 billion. And again, about roughly 28% growth rate again if that year.

Now, I do want to emphasize that the numbers I just gave you are high-level estimates. We're making these estimates based really upon historical averages of ASM production per aircraft, assuming a certain level of historical utilization; assuming you know, a spare to revenue line ratio that is consistent with what we've done before. But again, emphasizing the fact that you know, we're giving ---- here not knowing exactly how these additional -- these growth aircraft will be scheduled by our major partners. These are the best estimates that we have, just relying on historical performance.

I will also give you one other point of perspective relative to the growth from a revenue standpoint. Again I'm giving you this not -- not from the perspective of, you know, of estimates about income or anything like that, just to give you another perspective point, we think the growth in revenue -- or I should say, the revenue generation in '04 will be approximately $1.1 billion in revenue, and approximately $1.3 billion in '05. And again, just as high level reference points. Not meant to, you know, to be guidance specifically about earnings or anything else. Just perspective of growth.

Some of the things that we have announced, let me just review quickly. Back in September, on the 15th, we announced the completion of a firm order for 30, 70-seat Bombardier regional jets for our United Express operation. I just walked through with you the growth and the deliveries of those airplanes, 15 in 2004, 15 in 2005. You know, we have kind of a normal compliment of options and things that you would expect, and the optionality and flexibility of converting some of these airplanes to a 90-seat configuration if we at some point felt that that was appropriate.

On February 10th, yesterday, we announced the completion of another order, I should say kind of a separate order for 10 CRJ 200s, the 50-seat airplane, as well as firming options for two additional 700s. As a result of the new firm order, we anticipate now taking delivery of 17-700s or 70-seat airplanes in '04, and 10 additional 50-seat aircraft in '04, so we now have as a total 111 jets today, we will add 27 in '04, so at the end of '04, our fleet will be a total of 138 CRJs. That will consist of 121 CRJ 200s, the 50-seaters, and 17 CRJ 700s, the 70-seat airplanes.

And I think it also is important, just to emphasize the fact that although the financing market has been difficult, and as we've been, you know, following and watching, listening to what other carriers have been discussing relative to financing, it goes without saying that this market has been difficult. The good news for us is, that I believe, that we have all of the -- all of the deliveries scheduled for '04, with appropriate financing commitments, and most of those in lease commitments. Which I will talk about the impact of that on the balance sheet as kind of the next item of discussion. But very important to note that we believe we have all of these deliveries in '04 covered relative to the financing, and the majority of that in lease financing.

The balance sheet. As of December 31, '03, and I'm going to talk about this, our liquidity, we can either talk about it in just cash from a cash and marketable securities standpoint, because of the changes in the movement in deposits, you know, at any given time relative to deliveries, how much we have down versus how much we've gotten back, I always prefer to talk about it as in totals, in cash securities and deposits. I think the important thing here to note is that during 2003, we invested $95 million of our own cash in aircraft acquisitions. We spent $26 million in covering debt service, and we invested another $70 million in Cap Ex. After having done all of that, our cash and equivalents and upon(sic) all of that increased during the period. And I think that kind of speaks volumes just about not only our financials but the quality of the balance sheet and the quality of our financials.

During the quarter, as I mentioned, we took delivery of eight 50-seat regional jets from Bombardier, brought our total to 39 since January 1st of '03. We've completed financing transactions previously and during the quarter on all of those aircraft. And I think important to note that at the end of the year, we had no aircraft, none of the 39 aircraft were in what we would call temporary or interim financing arrangements. All of the aircraft had permanent long-term financing arrangements.

Of the 39 deliveries during the year, we did -- and I don't want to confuse you with these numbers. In essence, we did 20 U.S. leveraged leases, 15 of those were in deliveries that happened in '03, 5 were '02 deliveries, and the other 24 aircraft, we acquired through participant long-term debt arrangements. All of those long-term debt arrangements have the flexibility and the right to transfer the debt into lease structures when we have the structure and the commitments set up to do that. We do have additional leveraged lease commits from existing lessors that we are very confident can be closed in the near future.

With the additional long-term debt financing arrangements, it brought our long-term debt to $462.8 million at December 31, '03. That brings the ratio of debt to equity to 39 debt, 61 equity.

Obviously that is up from where it was at '02, with a 16% debt and 84% equity position -- or ratio, but again, I just want to emphasize, I don't believe that we will see a significant -- in any way, a significant increase to the debt that is currently on the balance sheet. I believe more likely, you will see us take some of the debt and convert that into debt within lease structures, I think, is the more likely scenario.

Even with the current structure of the balance sheet, we believe the ratios, the balance sheet is still one of the leading balance sheets in the industry, and you know, ratios, whether we're looking at coverage ratios, or whatever, still very manageable, and very attractive relative to our industry.

We had book value at the end of the year of $709.1 million, that is $12.23 per share. Cash, marketable securities and deposits all combined was $9.32 a share. And then, you know, all of you know, I think are aware of our outstanding shares, and can do, you know, the calculations and ratios and things on your own for some of the other significant things there. In addition to the on balance sheet debt, certainly no secret, we don't hide this from anyone, at a 7% discount factor, we have approximately $1.1 billion of off balance sheet obligations.

Let me talk about another issue that I want to make sure that people are aware of. And that is, is that under our United Express agreement we have specific amounts that are included in our rates charged for mature maintenance and aircraft engines that we record as revenue when we receive the revenue. However, consistent with a change to a time and material maintenance policy, which we have a very specific complete description of that in our 10-K for the year ended December 31, '02, we record maintenance contract on the CRJ engines as it is incurred. As a result, we have a kind of a mismatch in the timing of the recognition of the revenue, and the incurring and recognizing of the expense.

In the quarter, that number amounted to $4.9 million pretax, again where we recognized the revenue but did not recognize or incur the expense. And I just want to make sure that you're aware of that, the $4.9 million this quarter, I think, is a good number to assume kind of on a running rate. With the amount of deliveries and the growth that we have coming up, I don't believe that there will be a -- you know, that we are going to see like a significant reversal or anything of that issue, not -- certainly not in the near future.

One item that I would also call to your attention is, beginning in calendar '03, we began reporting on-time statistics through the U.S. Department of Transportation Air Travel Consumer Reports, and for calendar year 2003, we were the number one on time domestic airline. Which I emphasize specifically to bring -- as just an example of the focus that we continue to have on the quality of the operation, Ron Reber and his group in the operational side, just continue to be very focused on the quality of the product, and are doing just an amazing job. Again, through Ron's leadership in that area and through the cooperative efforts of all of our employees.

One other item that may be worthy of mentioning here, is just that I know that a lot of you follow very specifically flight schedules, and those types of things. You have seen a fairly significant downsizing of our Dallas/Forth Worth Delta operation. This is consistent with Delta's, kind of a fleet realignment and rationalization plan, not only involving Dallas/Forth Worth, but involving Salt Lake City. And as part of that fleet rationalization plan, we relocated some of the airplanes that previously were based in DFW, we relocated those, beginning -- well both, some in January, some in February. To the point now where our fleet is about 10 aircraft based in Dallas/Forth Worth, and the other 46 we're flying for Delta are now based in the Salt Lake City operation. And quite honestly, that gives us the operation -- or the opportunity for better concentration of activity, less linear operation, and the opportunity for a little more efficiency with concentration at a single hub.

Relative also to the Delta relationship, I know that a lot of you have questions just relative to the relationship, what we're doing with rates for Delta for '04. I would -- we kind of have a couple of things still in discussion with Delta. One being just 2004 rates themselves. And then the other, I kind of say, is although linked, is almost a separate discussion, and that is what we're trying to get in place, and get negotiated, relative to a longer-term, you know, for example like a four-year type agreement, beyond '04. That will be kind of similar to what we've done with United that will just call for, you know, locking kind of into place today what we do in terms and conditions and rates and everything for the next several years. That, we're also well down the road in discussions, and we expect no issues that would prevent us from having that completed here in the first quarter.

With that, I'll go ahead and now conclude our formal remarks and be happy to answer any questions.

Thank you, sir. The question-and-answer session will begin at this time.

If you are using a speaker phone, please pick up the hand set before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw that question, please press star two. Your questions will be taken in the order that they are received. Gentlemen, please stand by for your first question.

Our first question comes from William Green of Morgan Stanley. Please state your question.

Yeah, good morning, Brad. I was wondering if you can remind us of what you think the startup costs for the 70-seat jets will be and how it may get reported. In other words do you get paid on those as a part of the contract?

Yes, a very good question, Bill. And first of all, some of the Cap Ex numbers that I previously gave you involve both startup of new cities, in preparation for the 700s being delivered, as well as, you know, some training, as well as, you know, like already beginning preparation, acquiring, you know, some of the parts and things for the 700s. I would say we probably have around $10 million of Cap Ex type stuff already in the fourth quarter for that type of stuff and our arrangements with the major carriers are that we -- the majority of those type of startup costs, we do get compensated for at delivery.

Okay. And then when you think about sort of longer term, what SkyWest is going to become and you think about the growth rate for the 50-seaters slowing and have you 70-seaters on order, what has Skywest become? Do you need to move the 90 and 100-seat kind of jets or do you feel there is enough growth over, let's say the next three to five years, to keep doing what you're doing?

Very good question. We would concur with kind of what is implied in that statement, is that we see the 50-seat, you know, although still important, and we still see some growth in the 50-seat area, but we see the majority of our growth over the next two to three years coming in the 700 environment. And actually, we -- I would tell you, we feel better today about the opportunity for more kind of internal, organic type growth still within the 50 and 70-seat arena, we feel better and more optimistic about this than we have felt in a long time.

At the same time, we are aggressively analyzing and putting together models and things that would accommodate larger aircraft. But, that, we see as something a little further down the road, and something that we really don't feel highly motivated to move on, because we feel better about kind of the internal growth in the 50 and 70-seat category.

Meaning with your current partners?

Yes.

Okay. Thanks for your help.

You're welcome.

Our next question comes from Jim Parker of Raymond James. Please state your question.

Hello, Brad. Good morning.

Good morning, Jim.

Just a little bit of insight, if you can. We knew that United wanted some large number of RJs to replace the departing ACA RJs and maybe not 87, so you guys have gotten 12 so far. Why didn't you get more? And who -- what were the things you didn't agree to? Or why didn't you get more? And also, where do you think, if you're at liberty to tell us, who got the mama ---- of those, or have they been assigned?

The last part of the question, you know, I'm going to have to defer you to United. I mean they're in a much better position to answer that question than I am.

The first part of the question, you know, I would just answer it this way, by saying that first of all, we have had the opportunity, very specifically, the opportunity, to do more than the 12 aircraft that we have announced. But we feel very strongly about the fact that we need to do this under terms and conditions that make sense to us in the long term. I mean we aren't in this for, you know, short-term benefit, and short-term value creation. When we go acquire airplanes, to, you know, satisfy the needs of our major partners, you know, we're making long-term commitments. And the growth and the terms and conditions by which we grow need to be consistent with long-term value creation. And although the aircraft we're bringing in, and when I say that, I'm not talking specifically just about the economics, because the aircraft that we're bringing in, and all of the airplanes that we've had the opportunity to bring in, are airplanes that we would bring in under the same economic terms and conditions as are included in our current United agreement.

When we got a little further out, there are other terms and conditions, and I'm not going to go into them specifically, but there were other -- some other terms and conditions relative to flexibility, and timing issues, that we just didn't feel comfortable, that we felt changed the risk profile a bit. And so at this point in time, we chose to move ahead with 12 airplanes. Those 12 airplanes come in a time that bring our total growth in '04 to 27 airplanes. That is a respectable significant amount of growth, it is an amount of growth that we felt that we could do very comfortably, and keep the quality of the operation that we could actually deliver and do, you know, actually do what we say, and do what we committed to do for United.

Now, having said that, I don't know where they're getting all of the other lift at this point. I mean I have a good idea. I don't know all of the bits and pieces. But what I also know is that -- I mean I don't know that this is, you know, the end of our replacement kind of growth for United. I mean we're in a position here that we've got these things firmed up, we've got the airplanes now firmed up, and being produced by Bombardier, and all of that solidified, so that is growth that we can count on. And now, you know, I guess we will take a patient attitude, see what develops with some of the other carriers, see if they can actually deliver what they've committed to deliver, and we stand by ready and prepared to do more, if we're asked to do more under terms and conditions that meet our risk profile.

Okay. Brad, in the same context, with regard to Delta, it's public knowledge that they submitted requests for proposals for 45 RJs. What's the -- what are the dynamics going on there as far as, you know, why shouldn't the majority of these aircrafts say come to SkyWest? Your costs are lower at least, the labor costs well below those of ComAir and ASA that Delta owns. What's - what are the dynamic, how many of those do you think might come the way of SkyWest?

Again, another good question, Jim. But I got -- I need to be careful with this one, simply because we -- let me put it this way. Would he have two kind of -- we have two kind of somewhat linked but yet two very specific discussions going on with Delta. One, relative to the 45 aircraft they put out for bid. And number two, although associated with, that it is almost a separate discussion, and that is what kind of growth will be coming into the SkyWest/Delta operation over the next several years, in order to be able to continue to produce what we've -- what we've been referring to as growth efficiencies within that side of the business.

Now, it is difficult for me to answer the question that you've asked because Delta has not yet, you know, given any firm conclusions of this to us. But we do expect that over the next several years, we will have some meaningful amount of growth, because it is advantageous both to us and to Delta. Because they know that in order for us to continue to create, you know, growth efficiencies, and to appropriately manage the costs, and contain the costs, there needs to be some amount of growth in the system. Delta is well aware of that. We have had open discussions about that. And so, although I can't answer your question specifically, because Delta hasn't been specific with us yet, we do believe that over the next several years, there will be some meaningful growth in the Delta system.

Okay. Thanks.

You're welcome.

Our next question comes from Tony Cristello of BB&T Capital Markets. Please state your question.

Good morning, gentlemen. I guess the first question I wanted to ask is, with the way have you it set up now for United, and the maintenance, most major maintenance events for them are down the road, 2006, 2007. Are there any maintenance events we can expect this year to hit or is it just pretty much going to be fairly regular routine?

It is going to be fairly regular routine, and by the way, I will add that, you know, keep in perspective that this situation is only on the United CRJ 200s. We do not expect to have this mismatch, and I'm not going to into much detail on this, but we do not expect to have this mismatch on the 700s.

Okay. And also, if you could comment both on your flying with Continental, and how that is progressing, if there is any more opportunity there? And also, what we're seeing on the prorate side of the flying with the Delta business.

Okay. The prorate flying on the Delta side of the business, I will just talk about generally, saying that I believe it is doing -- actually precisely what we thought it was going to be doing at this point.

The Continental side in the prorate system, I will tell you that the yield side has been a bit disappointing to us. At the same time, we have just been -- made a change where SkyWest personnel are now in the position of controlling all of the revenues and the inventory management, which we believe is going to help, you know, bring that -- those yields back up on the short segments.

So it started out, we thought, doing pretty close to our expectations. It hasn't done quite as well in the last couple of months. But again, with us now taking over inventory control and pricing, we believe that it will get back meeting our expectations. We are very optimistic about it.

The good is that we believe Continental is very pleased with the quality of the operation, and all of that, the load factors have been -- I mean have been very strong. So now that we have a good strong load factor base, you know, that's the first ingredient you've got to have, now that you have that, you can go in and really start working with and optimizing the yields. So, you know, we're not -- we're not that disappointed in it. Although it hasn't met our expectations the last couple of months, we believe it has all of the -- all of the ingredients there to be, you know, to get back to meeting our expectations.

Now, having said that, again, it is nine airplanes, your first question was, first part of the question was, do we see opportunity for growth? You know, I think the issue here is that, as we said all along, that our primary issue was was to get the relationship established with Continental, demonstrate to them that we are a good producer both on the cost side and that we are a very high quality producer, that their customers were going to be pleased with the level of our service, and all of that, and that that could lead to, you know, growth. And all I will say is that all of those things that we identified as objectives, doing this relationship in the first place, are materializing. I think we're demonstrating all of the things. We've got a good relationship with Continental. I will just very generally say that ,yes, we do believe that there is more growth opportunity. That there will be growth opportunity down the road with Continental, certainly nothing developed, I don't want to oversell that or overemphasize it, but we believe it is doing just what we thought it was going to do. So that is lead to, you know, some kind of an enhanced developed relationship with Continental down the road.

Is it -- and I guess, is it a situation where six months go by, and it is still not maybe where you would like it to be, are there other things you can do? Can you go back to them and restructure something or is -- would there be any opportunity to sort of re-evaluate?

You know, I don't want to make too big of an issue out of this, because I mean right today, it is so -- I mean it is so small, it is only 1% of ASMs. So you know, whether it is -- this is kind of one of those things, whether it is really hitting our financial objectives or not, you know, as long as it is breaking even, it is really kind of immaterial to our overall financial results. And again, the importance -- rather than us, you know, probably making a big issue out of some kind of necessary adjustment to restructuring of that agreement, it is going to be more a matter of, is this going to lead to more significant growth down the -- you know, down the road. Is our bigger issue, and as long as we still think that that opportunity is there, as long as this small turboprop operation is at least breaking even, you know, that's probably about our expectation at this point.

Okay. And one last question. It seems like you're doing very well on financing, getting everything done, and matched up. Cash flow is good. A lot of cash build. Can you just comment a little bit on your thoughts of, you know, what you would look for in an acquisition that would meet your, sort of, requirements or qualifications, both from a blend with your own nonunion personnel, as well as expectations for growth of another partner?

Yeah, I don't want to spend a whole lot of time on this issue. I will touch on it generally. I'm always a little hesitant to do this because as soon as we make the statement that we're -- you know, that continued analysis and looking at acquisition, you know, opportunities, is just a part of what we do, you know, then you know, the next thing I hear is, you know, people being critical about the fact that we're not doing anything. That we're being so passive, we always talk about acquisition possibilities but never do anything. People, you know, insinuate that we just don't have the corporate personality to do an acquisition.

Well, let me kind of frame this generally for you. We are looking at a lot of different possibilities and a lot of different opportunities. We all know that in this market, this is a market where those that have the financial strength, that have the positioning, there are opportunities available. And that's the way we view and see this market, and as you mentioned, with our capital structure and liquidity, we think we're the best positioned regional airline in the country to take advantage of these opportunities. So yes, we are looking at a lot of different possibilities and scenarios. However, we are going to be very patient. We are going to be very careful. We are going to make sure that whatever we do meets long-term corporate objectives.

And at the same time, that we're looking at those types of opportunities, we, as I mentioned earlier, we feel very good about our organic growth opportunities right now. And although it is almost feeling like some people are disappointed at our growth, which I find a little hard to believe when we've got 28% for the next two years, just with what we have firm, that being the minimum, I think there will be growth on top of that, we strongly prefer just internal organic growth when it is available. And we think that there is going to be, as I said, we're just very optimistic, and feel very good about that potential moving forward. And so, yeah, although we're well positioned, we have the equity, and the liquidity, we're going to be very careful about acquisition activity, because we see the internal organic growth opportunity is pretty good right now.

Okay. Thank you, gentlemen.

You're welcome.

Our next question comes from James Higgins of Credit Suisse First Boston. Please state your question.

Yes, hi, Brad. Could you comment, the 700s start to come in, margins, what we should be looking for in terms of unit revenue, unit cost changes, et cetera? Can you just give us -- at least high level color on that?

I don't think that I will get into that much detail. All I can tell you, and we will say just generally, is that you know, as most of you are putting your models together, I mean I don't -- as the 700s come in, the fundamentals and the dynamics and the economics of the model are not going to change significantly by the introduction of 700s.

Okay.

It will remain very consistent with what we're doing. I mean unit costs will come down.

Uh-huh.

But so will unit revenues. And the fundamental relationships and dynamics of the model I think will stay -- I mean as the outcome, will stay pretty consistent.

Great. That really answers the question. Thanks.

Okay.

Thank you. Our next question comes from Helen Becker of Benchmark. Please state your question.

Thank you very much, operator. Hi, gentlemen.

Hello, Helen.

These are my couple of questions. First of all, are there any significant debt repayments this year?

Second, there was a gain in the fourth quarter that was below the line of about $400,000, I think. Did you say what that was?

We didn't say what it was. It is just sales of a little bit of ground equipment and things like that.

Okay. And then --

Not significant.

Okay.

And then my last question is in terms of pilot training and other cabin crew training, what is in the queue as the 700s come on and how are we mismatched in terms of salaries, versus, I guess cost out versus expected revenue?

Very good question. But one that we don't see a significant impact and not much -- not a real significant mismatch of timing. Because you know, although -- I mean we've had -- we've got a lot of training right now in the queue, and we've been making preparations for this for quite some time, and yes, we may advance a little bit of the costs, maybe a month or two in advance, but when those airplanes deliver, in our arrangements with our majors, I mean the majority of those costs are reimbursed at delivery time.

Okay.

So I mean, I don't -- I don't expect any material distortion or timing mismatches that will show up in the financials.

Okay. And then were there any significant debt repayments scheduled for this year?

Oh, no, I mean just -- I mean I think that you're going to see a -- I think it is probable to see a significant decrease in our long-term debt, but not because of repayments, just because of restructuring, and moving that debt off balance sheet, into -- or yeah, moving it into off balance sheet type structures.

Okay.

Not because of, you know, cash requirements to pay off the debt.

Okay. Great. Thank you.

You're welcome.

Our next question comes from Robert Ashcroft of UBS. Please state your question.

I guess is SkyWest open to taking aircraft from Atlantic Coast, assuming something could be negotiated between the two companies?

That's a good question. You know, we -- let me just say this. We have had, you know, some discussion with ACA already. But again, this is to a large extent, you know, I don't know that this is a particularly sensitive statement to make, but our interest in those airplanes really will be based on United's interest in the airplanes.

Gotcha. Okay. And on the timing of the Delta aircraft, originally, my understanding is that they were going to make a decision perhaps by December 15th of last year. Clearly, that date has gone by. Do you have any understanding of what the likely decision date might be on those aircraft?

You know, I wish -- I wish that we did. We really -- I got to be honest with you, I'm not real clear myself at this moment, as to the timing. I think -- I think that -- I think that we will know something here, you know,, when I say very soon, I mean I think that by, you know, during this quarter. I think that we will more than likely towards the end of this month, first part of March, we will have -- it feels like Delta is kind of pulling all together into one discussion, a number of issues with us. And that is 2004 rates, the long-term rate agreement, the -- any growth out of the 45 aircraft bid, and the longer-term growth. And all of those are kind of being discussed in the same, you know, the same kind of pot of issues. And I really think we're going to have some resolution and some clarity of that, you know, either by the end of the month or first part of March.

Okay.

The last thing, I understand that there is a nascent in-house union that may have decided to -- pilot union that may have decided to go to the National Mediation Board to run an election. Is that correct? Is that understanding correct?

This is a --

The UPA?

We have -- let me just tell that you we have kind of these kind of -- I don't know how to term them. Kind of efforts going on, kind of it feels like these things come up every so often, every few months. We have been aware that our -- a kind of an effort was going on to have our own in-house guys formally recognized by the NMB. I honestly have to tell that you, I mean there are a lot of steps and things that have to happen in this, we know that they have gotten more aggressive of late. At this point, we don't think it is gone beyond just kind of an in-house formalization.

There is nothing official at the moment then? Like the National Mediation Board hasn't come to you and said hey, we have an official whatever?

We have not received any notification from the NMB that they have, you know, you know, all the things that it takes to call a vote, for example.

Okay. All right. That's really what I was asking. Thank you very much.

You're welcome.

Our next question comes from Robert Toomey of RBC Dain Rauscher. Please state your question.

Good morning, Brad.

Good morning.

Can you talk a little bit -- you mentioned earlier that you're very confident and you feel very good about your organic growth. Can you explain a little bit what you mean by that? Or expand on that a little bit?

Yes, I mean you know, obviously when we look at growth, we can just do it kind of internally and just grow with our existing infrastructure, better utilization of the existing infrastructure, the other -- and that is the kind of growth that we would prefer.

Another way to continue the growth would be to go out and do kind of an outside acquisition. We don't like that approach nearly as well because we then try to pull together different cultures, we have a completely nonunion environment today, and combining that with about whatever -- I mean whatever kind of acquisition target we would look at, you know they're going to have organized labor. And at the same time, you know, even though we think this is an attractive acquisition environment, you know, you're bound to pay, you know, some amount of goodwill for, you know, in an acquisition. And so rather than doing all of that, when we have the opportunity for internal organic-type growth where we can better utilize our existing infrastructure, and all of that, that would be our preference.

And so, you know, if we still feel very good about our internal growth opportunities going forward, then that would kind of say, let's take advantage of those opportunities, which create both better efficiencies, better economics, of doing it internally. We'd prefer that, and maybe take a less aggressive approach to acquisitions. You know, now, when we get to a point where that, you know, where the internal growth kind of goes away, then that thinking would probably get a lot more to the aggressive side of looking at some M&A activities.

And I'm just saying that what we're kind of in an interesting -- an interesting point, at an interesting point, where there is a lot of activity, it feels like, in the M&A area, yet we have a lot of good strong and feel very good about our internal growth. So yeah, we're looking at -- I guess all of this is just telling you, we're going to be very careful and very patient relative to mergers and that type of activity, as long as we feel good about our internal growth opportunity.

Okay.

And just as a follow-up to that, I think you indicated earlier, or implied earlier that your growth could be somewhat higher, longer term than the kind of ASM production that you're forecasting? Did I hear that correctly?

Well, I'm just saying that what we have on firm order and what we have announced today, it again, in round numbers, I mean it is generating 28% growth in '04 and '05. And I'm just saying that in and of itself, you know, that's pretty respectable growth. I mean, you know, in '04, I mean that's 27 airplanes, I mean we're doing just under -- or you know, around 2 1/2 airplanes a month. So I mean that is not -- you know, that's not bad.

And I'm just saying that that's all -- that's what we have firm, and I'm just saying who knows what is going to happen with some of these other areas right now. I mean, you know, United's ability to get all of the growth and all of the replacement of the ACA fleet that they're after. I mean maybe some additional holes show up in that plan, or somebody can't get the airplanes that they thought they were going to get. I mean who knows? I'm just saying we've got good respectable growth, and there are a number of possibilities. Whether there's, you know, -- I think that there will be more growth on the Delta side, you know, I mean I'm telling you -- I'm being honest but to say we don't have anything firm at this point, but I really believe it is likely that there will be something. And we haven't announced anything yet.

You know, will there be more opportunity on the United side? Well, right now, they haven't -- as far as we know haven't awarded any growth out in '05, other than what carriers have, you know, have are already announced. You know, will there be more? I mean I would think there probably will. I don't know that. I'm just saying I think there is some opportunity there that is not in our numbers.

Okay. And one last question, if I might.

And that has to do with the way the contracts that you're talking about negotiating, are structured relative to yield and ASM cost. I guess it would be kind of a complicated question. But do you see at some point your yields were down, year over year 18%, some of that was the new contracts. Do you see a point where the change in yield kind of flattens out here? I'm just trying to get a picture of how that might be reflected in the contracts that you're talking about with United and Delta, if you can say anything about that.

No, I can say something about it. I mean I want to be very clear.

The decrease in yield is really from two factors. Yes, we have renegotiated the agreements. And in some respects, the -- you know, the unit -- the unit revenues were compressed a bit. But another component and a very significant component is just mix-related. Okay, now, now that we have such a strong component of our ASM production coming from the CRJ fleet, we may see a little bit of further reductions in unit revenues simply as we weigh in 70-seat versus 50-seat airplanes. That could happen just naturally.

I don't think we will see any further dilution relative to, you know, relative to just changing or reductions in the terms and conditions and the economics of the contracts. Whatever dilution we see going forward will be mix-related. I mean that's what I believe today. We have for the next several years, our contract in place with United, and the unit revenues should not come down. And I believe we will have something very similar with Delta. So --

So does that mean that the yield -- the year over year yield reductions should start to diminish, Brad?

Yeah, let me say it another way. I think the yields that you're seeing now are very -- are going to remain pretty consistent. We may have a little bit of dilution, because of the weighting in of the 70-seat ASMs. Not because of further contract compression.

Great. Thank you very much.

You're welcome.

Ladies and gentlemen, should you have any further questions at this point, please press star one on your push button telephones.

Our next question comes from Jim Aushul of Aviation Advisory Service. Please state your question.

Good morning, gentlemen.

Do your discussions with Delta include the possibility of introducing 70-seat aircraft and with the larger airplanes, are you looking at both the product alternatives?

I think everyone is probably aware of the fact that Delta is right up against their limit today of 70-seat flying within their current scope. And I have certainly am not -- I mean our discussions right now with Delta are around 50-seat equipment. I don't expect them to really have discussions with them on 70-seat equipment, unless they, you know get to the point in discussions with tight-ups that that becomes an option. So right now, our discussions are with 50-seat equipment.

And with regard to your exploratory -- your exploration of the possibilities of 90 or 100-seat equipment, are you considering both product types?

Yes.

Okay. Is Bombardier providing any financing or fax top (ph) financing for any of the deliveries have you this year?

I will just say that we have some -- some support from Bombardier, if it is needed. But we are having -- we are having quite a bit of success on our own in the financing markets, and this I better -- I don't really want to go into much more detail than that.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Gaylord Swim of Pillar Capital. Please state your question.

Brad, a question on your reasoning to go with leases versus debt financing.

Isn't the cash flow issues very similar, other than maybe the window dressing, that your balance sheet appears to be better because the leases are off balance sheet? Is there really that much material difference, or what is the benefit that accrues to the airline by going to leases, versus long-term financing?

The strongest issue is that when -- is that our -- that the place that the cash flows become a bit distorted is in the -- right in the front end of the acquisition, because we end up putting, you know, somewhere between 10-15% of the acquisition costs down up front day one on the debt. When we just take -- you know, bring the aircraft on and it is straight debt acquisition. That is the point in time when the cash flows become distorted.

Okay? So that is probably the strongest issue to us. Is just that immediate chunk of cash out the door, day one. And that, we're trying to avoid. It isn't about, to me, whether the debt is on balance sheet or off balance sheet. I mean we know that all of you, I mean the sophisticated analysts, I mean we're not -- it is really -- it doesn't make a difference whether it is on or off. To us, it is that immediate cash flow hit on day one. Now, --

Is there any other related benefit to ownership versus leasing, whether it is the depreciation or the buy-out at the end of a lease? One you're building the equity versus others, you're not. Or is that confidential?

No, that is a good -- that is a very good question you're asking. But at the same time that we're building equity in the aircraft, we're also exposing ourselves to the residual risk at the end.

And by the way, we're happy taking, you know, you know, our share of residual risk, and that's why we have been okay taking, you know, -- acquiring as many of the airplanes that we have, but at the end of the day, we would just as soon spread out that residual risk issue to, you know, to a lot of different participants, and that's another reason that we would prefer to do some of this financing in the lease area.

That's helpful. Thank you.

You're welcome.

Our next question comes from Robert Toomey of RBC Dain Rauscher. Please state your question, sir.

Thanks, Brad. I just want to follow-up, it relates again to the long-term growth issues. And just for my benefit, can you talk a little bit about, you know, RJ flying in general, how far do you think this expansion can keep going? I'm just trying to get a feel for, given the changes in the industry, what the major carriers are doing, how far do you think the transition to regional jet flying can keep going here? If you can quantify that at all.

No, this is a good question. I mean, and you know, recognize, my opinion is just one person's opinion, in the industry. And you could ask 10 people this question and get slightly different take -- maybe a dramatically different take. But the answer to this question is all based, at least in my opinion, on cost structures. And it has to do with -- I mean it is associated or linked to I think the -- what's becoming now, a kind of a movement of preference to 70-seat, a little larger equipment, is because again, it is still all cost-driven. And we have to keep in mind that as long as our costs that we can produce these costs cheaper than the major carrier, it is going to -- it is going to continue to create opportunity.

Now this is -- I mean I'm on a very sensitive slippery slope here. But you know, the movement to larger airplanes is driven by the majors concluding that they can't -- they can't make money in what, to them, are the smaller airplanes. Again, driven by, you know, cost per ASM in the, you know, the 11 and 12 and in some cases 13 cents per ASM, when yields are -- when yields are lower than that.

And so if we can take our cost structure, and put it in, you know, a larger airplane, a larger airplane to us, smaller airplane to them, but create, you know, 7, 7.5 cent cost per ASMs, and depending on the size of the airplanes, our cost could get down to 6.5 cents. You know, it is still all driven by those fundamental economics of the costs, relative to what the yields are going to be in these markets. And it is just -- although some people would say we're getting to a saturation point with the regional jets, I personally don't see it, because again, simply because of costs. And it also -- also says that our ability at Skywest, our ability to continue to attract opportunity and to continue to provide value, is based on our ability to control our costs. But as long as we can do that, I think we are in a position to continue to create more value, and that value will come in more jets.

And do you think, Brad, that -- do you see your unit costs continuing to decline? Going forward?

I think that -- I think that they can go a bit further. And then we will be in a containment mode and just kind of need to contain the costs. But the overriding issue, we always have to be -- I mean we've got to always be focused on, and looking for ways to, you know, to do a number of things. Improve our utilization of everything, of our people, of our equipment. We always have to look for ways to improve our efficiency. And we always have to be competitive with those that are competing for our business.

And you know, you know, some people have been discouraged saying well, you know, because we're only doing 12 airplanes of United growth, we have lost our, you know, lost business to other competitor, well we haven't lost that business, because of our costs. Okay? We've let -- we've made a conscious decision to let flying go other places because we didn't feel that it fit our risk profile. So we believe our costs are very competitive today. And we have to keep them very competitive with those that are bidding against us.

Great. Thanks again, Brad.

You're welcome.

Thank you. Our last question comes from Gaylord Swim of Pillar Capital. Please state your question.

Yes, a follow-up question kind of following up on the questions that we were just hearing. Is the market for regional aircraft, or the presence of the regional aircraft actually creating a new market into cities that, up until this time, essentially had no meaningful scheduled travel, and thus, the saturation hasn't hit because there is really a new marketplace? Not just increased volume, but maybe cities now are considering having manned airports that allow scheduled airlines to come in, that before that, wouldn't consider it because they couldn't handle a 737, there wasn't enough volume.

I think that -- I think that the demand is coming in three areas. Number one, there is exactly the scenario that you just created - or expressed. And that is, you know, one of the factors that is creating increased demand and continuing demand for regional jets. But you kind of step back, and for us, we continue to put regional jets first in new markets, that just plain and simply haven't had service before, and it is efficient productive service in a smaller package. We continue to replace some of our smaller equipment, either replace it or supplement service, as markets that have had service are developing, and growing, and market demand has been stimulated. And they now support the larger airplanes. But an increasing amount is simply coming in either replacement or supplemental of the main line carriers, smaller equipment. Where again, as I've said, you know, they are concluding that it is very difficult for them to make money in the 130 and lower seat type aircraft and that continues to create opportunity for us.

Thank you.

Uh-huh.

Thank you. At this time I will now turn the conference back to Mr. Rich.

Okay. We've gone on long enough now I think. I appreciate your thoughtful questions. And again, I just conclude by saying that we feel very strongly about, you know, our positioning at Skywest. The quality of the operation is very strong, our financial positioning is very strong, we just believe very strongly in how we're positioned both in our markets and our financials, and our positioned to take advantage of opportunities in this market.

So with that, we will conclude. Again, express our thanks and appreciation for you taking the time to join us this morning. Thank you very much. And we will now conclude.

Thank you, sir. Ladies and gentlemen if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an I.D. number of 333176. This conclude's our conference call for today. Thank you all for participating and have a great day. All participants may now disconnect.