SkyWest Inc (SKYW) 2004 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen to the SkyWest, Inc. first-quarter 2004 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. SkyWest, Inc., the company, may from time to time make written or oral forward-looking statements within the meaning of 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 conference are made as of the date hereof and are based on information available to the company as of such date. The company assumes 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 fluctuations in the economy and the demand for air travel. Bankruptcy proceedings involving United Airlines, Inc., ongoing negotiations between the company and its major partners regarding the contractual relationships, variations in market and economic conditions, employee relations and labor costs the degree and nature of competition.

SkyWest's ability to expand services in new and existing markets and to maintain profit margins in the face of the pricing pressures and other unanticipated factors, risk factors, cautionary statements and other conditions which could cause actual results to differ from the company's current expectations are contained in the company's filings with the Securities and Exchange Commission. I will now turn the conference —(technical difficulty).

Katherine?

Yes, sir.

We kind of lost you here for a minute. I assume that we're still live and you --

One moment, sir. Sir, you are live.

Okay. We've got -- we've still all of our participants connected?

Yes, sir.

Okay. Thank you. Thank you to all of you for joining us this morning. As the operator mentioned I'm Brad Rich, the Chief Financial Officer at SkyWest. First of all, I thank you for your interest in SkyWest and taking the time to join us this morning. I have in the room here with me at SkyWest Chip Childs, Vice President and Controller, Mike Kraupp, who is normally with us is traveling on business today, as is Ron Reber, our Chief Operating Officer. We are really very pleased with the results of the quarter.

From all measures considered a very successful quarter, and first of all, I just want to express appreciation to our employees, I mean all of our work groups. We're working very cooperatively and cohesively together as a work force and without the help and very cooperative participation of our work groups, we know that we could not have achieved the results that we've achieved and been able to have the success that we're having together as a -- as a company.

So first of all, thank you very much to our employees. Our operating revenues -- well, first of all, I'm going to use -- stick pretty closely to the press release that we put out this morning as an outline for the discussion today. I'm going to go -- what I hope will be fairly quickly through just some highlights of the press release and then move fairly quickly to just a question and answer session. So first of all, assuming that you've all seen and have access to the press release, just a few highlights.

Our operating revenues increased 22.4% to 253.7 million for the quarter. We generated 19.4 million in net income or 33 cents in diluted earnings per share. Most of you, I believe, already know that to a large degree our operating revenues are a function of our capacity put together with our operating performance. Our operating revenues up -- is the increase is the result of a 27. – (technical difficulty) -- 27.6% increase in our ASMs, and of course that was driven simply by execution of our -- of our growth plan and the deliveries of aircraft that we have previously, you know, put in the public.

So if – (technical difficulty) -- continue to execute that plan and that's generated 27.6% increase in -- in our revenues. Relative to our operating expenses for the quarter, another quarter where we've realized a decrease in our cost per ASM. The decrease was 7.8% down to 10.7 cents per ASM excluding fuel. And we're excluding fuel, again, not to, you know, manipulate or, you know, take anybody out in the numbers but simply because number one, the fuel charges are so volatile from period to period, and I think most of you understand that the majority of our fuel expenses are reimbursed by our major partners and are a pass-through.

So excluding the fuel charges, again, another quarter of reducing the cost per ASM. Some of that has happened naturally. Just as the fleet mix has changed and a higher mix of RJ flying. I think most you know that on ASM basis, the jet airplanes are less in cost per ASM but it's also attributable to just continued cost reduction initiatives that's we're realizing the benefits of that we've been talking about for the last several quarters. Our ASM production, again just a few things worthy of note. The 27.6% increase that I mentioned generated 1.67 billion ASMs for the first quarter.

The aircraft fleet increased to 188 aircraft at the end of March from 159 aircraft at the end of March of last year. We took five new aircraft deliveries during the quarter consisting of two CRJ-200s, the 50-seat jets, as well as our first three CRJ-700s, the 70-seat aircraft. Let's see. It broke down -- just the breakdown of the fleet, 114 CRJs, 56 for Delta, and 58 in the United code and then still 74 EMB 120s and that breaks out 51 for United, 14 in the Delta code, and then nine in the Continental fleet.

A few other things I think just worthy of mentioning relative to our ASMs. You know, we've talked previously just about, you know, the future of our EMBs and whether we're going to at some point try to accelerate out of EMBs, become an all-jet carrier and we still remain very committed to our Brazilia fleet. They're flying in markets with very short stage lengths. They will be in our fleet into the future for some time. However, it is worth noting, I believe, that 85% of our current ASM production is in the CRJ fleet and only 15% in the EMB fleet.

At the same time, another stat probably worth noting is that although we have taken some EMB flying back under pro-rate or at-risk operations during the quarter 94% of our ASMs were in contracts, only 6% in at-risk or pro-rate flying operations. Just a few other things I think worthy of mentioning that happened during the quarter. I've already mentioned that we took the delivery of our first three CRJ-700s. The first delivery on January 26th, and then two others during the quarter.

On February 10th we made a public announcement of a firm order for 12 additional bombardier regional aircraft, ten of those being CRJ-200s and then two additional 700s which brings our total firm aircraft for the year to 17 CRJ-700s and 12 50-seat CRJ-200s for a total of 29 deliveries for this -- scheduled for 2004. With those deliveries in the system, just to execute that plan, our ASMs will increase by approximately 28% to 7.5 billion for the year. During the quarter that we just ended, I think also worthy of mentioning here that -- that we and Delta Airlines agreed conceptually on a rate agreement and on other terms and conditions for both 2004 and for future periods. We are still negotiating a definitive agreement.

I don't believe that there is anything of any significance that we are not completely in harmony and have agreement between our companies. We're very pleased to, you know, to have -- although we're still negotiating the agreement, the relationship with Delta is very cooperative and productive. We're very pleased that we're now at a point where we are working very much and very cohesively together, both relative to just operational issues that can create more and better reliability and operating efficiencies for our companies, but now focusing very specifically on -- on ways that we can work together to create more cost efficiency and work together on things that will help both of our companies, both SkyWest in making sure that our cost structure is -- is competitive, and the more competitive our cost structure is, the more benefit that creates to Delta.

So we very much are in that mode of -- of, you know, working very well and cooperative together and we're very pleased about that. I think that most of you probably saw a -- an announcement that Delta Airlines made, you know, early this year -- earlier this year announcing that we are selected to grow our CRJ-200 fleet by seven additional aircraft to fly in the Delta system. This was part of the, you know, the bid process that Delta went out with that I think most of you are familiar with, and we were awarded a portion of that flying. Let me move to a discussion of the balance sheet.

First of all, I just make a general comment that our balance sheet really in all material respects has not changed significantly from year-end. Our cash balance is down a little bit to 456.1 million from 480. That really is primarily driven just by the fact that our -- most of our rent payments are semi-annual payments scheduled for January and July.

So in January we had, you know, a significant amount of money that went out in just periodic scheduled rent, you know, rent payment dates in January. That's the primary reason for that decrease. Relative to our long-term debt, we added two additional -- two of the five airplanes that we added during the quarter were added with long-term debt, which is the increase in the long-term debt. The other airplanes were added under lease arrangements. I think also it's worthy of noting that all of the deliveries that we have scheduled for this year we have lease arrangements in place. We have had -- we have had increasing success and interest in the aircraft financing area. We have new leveraged lease commitments that have been made during the quarter. We have other interested parties that we're working with, both to take out airplanes that we have previously brought on balance sheet as well as, you know, placing these new commitments in some of the future deliveries.

So we just feel very good, feel like that we're back at a point where we've got more interest and some things developing. Again, that just make us feel better about the aircraft financing market, having said that, we have commitments for all of the airplanes scheduled for this year so we're in good shape in that area. I think it's important that we continue to point out that under our United Express agreement there's specific amounts included in the rates charged for mature maintenance on the regional jet aircraft engines that we record as revenue.

Consistent with a change to a time and material maintenance policy as we've described in previous filings in our 10(K) for '03, we record maintenance expense on the regional jets as the events occur. Okay, that creates a timing event between the recognition of the revenue and when we incur the expense. And as we have done previously, and as will be our practice into the future, we will make you aware of the dollar amount of that timing mismatch and for the quarter it was 5.51 million pre-tax during the quarter.

Let's see. I will give you now -- if you have -- as we typically have, I will go through the ASMs by quarter that we expect to produce in the remainder -- in the remaining quarters of '04. As we already mentioned, we just did 1.67 billion ASMs in the first quarter. We expect 1.75 billion in the second quarter. 1.95 in the third quarter. And 2.5 in the second quarter. That's going to get you very close to 7.5 billion for the year in total.

I think it's also worthy of mentioning we have been very busy at SkyWest during the quarter in -- and in one of those areas has been our customer service area. They have been working very diligently and in some respects have pulled off a miracle by way of how many stations we have opened, some due to our participation in the United transition, what we call transition in some of the transition away from ACA. We have opened from January 7th to April 1st, we opened 19 new cities. Six of those were in the Delta system, 13 of those in the United system.

This has gone pretty much without a hitch, and again, just many thanks to our customer service department for pulling this off and they've done it in a manner that's, you know, maintained the quality and the integrity of the operation. In addition to that, I think it's worthy of mentioning -- and I mention this simply by not -- not to like announce or get anybody really diverted that we're, you know, creating up new lines of business and new ways of, you know, generating revenues or any of that, but we are now handling flights for ten other airlines, handling close -- just over 130 flights a day for those ten carriers. I only mention it just as evidence of two things.

The quality of our services as well as the fact that we're -- that our costs for these services seem to be, again, very competitive, very much in line and that's why we've been awarded these contracts. I think with that I'll go ahead and conclude the remarks and open it up now for questions.

Thank you, sir. The question and answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push button telephone. If you wish to withdraw your question, please press star 2. Your question will be taken in the order that is received. Please stand by for your first question, sir. Our first question comes from Tony Cristello from BBT. Please state your question, sir.

Hi. Good morning. Thanks, Brad. A quick question. I wanted to talk a little bit more about what you're doing for United and how have things now changed with the announcement that they are finally leaving ACA and are you sort of diverting some of your fleet Ops from the west to the Chicago area or to the Dallas area and are these new stations? Maybe you could give us a little bit more color where these are opening up?

Okay. Very good question. I guess first of all I'd just say, yes, we are participating in -- in some respects, in the transition, both in flying as well as in our handling of cities. In some cases we've opened cities that we don't expect really to ever provide service to. We're trying to keep that to a minimum, but in some respects -- really in an effort more to help United, we have -- have -- have done some of that servicing.

But -- but -- let me -- let me say in general, what we're trying to do is we're trying to keep concentration at hubs. So as far as the regular flying activity -- I mean, you know, our concentration for United is -- is, you know, San Francisco, Los Angeles, Denver, Chicago. We're adding capacity to Chicago. We have been for some time and I suspect that we will continue to add more and more capacity to Chicago.

But our strong preference and where we think we're headed with United is to keep the bulk of our -- our net new growth centered in -- in Chicago west. So that to us means Chicago and Denver would be the bulk of our, you know, of where the net new growth goes and by the way, you know, that is -- is our strong preference because it keeps concentration at hubs instead of spreading us out and making our flight system a lot more linear and by keeping it centralized at hubs we can create more efficiencies so that's the reason for that.

Okay. Great. And -- and I could ask just one more question with respect to Delta. Are you allowed to comment any on the -- on the tentative agreement yet that you have and if you can, can you give us a little bit more color on if the rate that we're -- that you're going to see is going to be similar to what you've been experiencing in the past or is it better and is there the conflict with respect to the contract extension how many years would that be?

Very good questions. Given that we're still, you know, negotiating the definitive agreement, I think I need to really limit my comments relative to the agreement to what I've already said. And I'll just reiterate, I mean, what we've put in the press release is that we do expect the agreement to include multiple year rate reset provisions which is a very good thing I think for both companies which gets us focused very much on working together to create efficiencies and -- and operational integrity and quality and all of that, and we do expect a contract extension.

So but I think that's -- relative to the rates and fees I'll make one comment. You know, there always seems to be kind of a question if we haven't gone out and made public announcement of a definitive agreement that includes -- or a rate, specific rate amendment, you know, then how have we booked, you know, revenues for the quarter? What I can say here is that we do have agreement on rates with Delta. We have prepared our billings consistent with that agreement, set those -- those billings to -- to Delta and have their concurrence with the -- I mean, they've responded with their concurrence that, you know, that in all material respects they agree with those billings. So I don't believe we have any issues at all with just the rates and what we've recorded with revenues.

We feel very comfortable about that, believe that on that aspect of the agreement we're very much in step with Delta's thinking and have agreement there. Relative to what it means, I'd just say that the rates are pretty consistent with -- with what we've been doing. I think we've told you before that that we did make some concessions. We are working our way back to a -- to what I'd just say is kind of a more normal industry competitive-type, you know, rate agreement with Delta. But I think that's probably about all I should say at this point.

Okay. Great. Thank you.

Uh-huh.

Thank you. Our next question comes from ee from Morgan Stanley. Please state your question, sir

Yes. Good morning Brad. Can you give us capex for 2004?

Yes. Let's see for all of -- you asked for -- for all of 2004's?

Yes.

Capex is what you're after?

Yep.

And what -- what I'll give you here is just what we kind of call non-aircraft capex and it's going to be right around 70 -- 70 to 75 million.

And you're assuming because the rest of the aircraft are coming on lease that there's no further expenditure on aircraft?

Yes.

Okay.

And by the way that number for us, you know, also includes, you know, full maintenance, overhaul, I mean overhauls and that type of expense we include in the capex.

Okay. And then, Brad, do you think -- you did I guess a 13/7 margin if I recall for the first quarter.

Yes.

Does that seem to be slightly higher than we had been talking about? Should we expect that you can attain a 13% plus kind of margin in '04?

Well, I think that it's -- it's -- yes. I think it's -- it's very reasonable. But I think -- but I also -- one of the reasons that we give you the -- this timing issue of 5.5. If you take that out, you know, it's 11.8. If you bring interest above the line, you know, it drops to 9.7. So, I mean, those are the kind of numbers that we would expect to see.

Okay. Thanks for your help.

You're welcome.

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

Brad, good morning. Regarding this handling or other airlines, would you elaborate on that a bit? And one, is it at stations where you're handling either Delta and/or United and if you do incremental business say for Northwest, and I just picked Northwest out of the air, does Delta or United pay you less? Are you using the same people to do that? Can you explain this and perhaps what the potential is there for doing more of it.

First of all, yes, the more of this we do the more efficient it becomes for anyone that we're -- we're providing the services for to particular station. And yes, it is that stations that we're already there and doing our handling. So it's just a way of creating, you know, more volume and through the volume, you leverage existing resources and creates more efficient -- more efficiencies for everyone. And again, I do think there's some potential for this.

It continues to expand and it continues to expand. Again, because of the cost efficiencies and the rates that we're able to do it for and the quality, but I don't want to -- to lead anybody to believe that this is a, you know, real significant material, you know, new line of business. It is a -- it is a good thing that helps us create efficiencies and -- and those types of things but -- but I -- it would not be accurate to have you leave the discussion thinking it's a big, huge opportunity.

All right. Brad, a second question. I believe that you have an agreement with your pilots where there's a pay freeze for a certain period of time and where that if they fly 70 and potentially some day 90-seaters at the same rate as 50-seaters. What's the expiration date or when does that freeze and that agreement end?

It ends -- I believe – I've got to be a little careful here. I believe -- and I wish Ron were here to answer this question. I believe it goes through the end of this year. And when we say a hiring freeze let me make sure that you do understand that the pilots are still moving through an existing pay scale that -- that -- that so the scale itself, doesn't move but the pilots still do move through the scale. Just a slight clarification, I guess that I would --

Yeah. I understand.

And I believe that it goes through the end of this year, but -- and -- and as we do every year, I mean, we are in discussions right now with pilots just relative to, you know, what happens when the scale comes off -- I mean the freeze ends on the scale and what we do for the future. But just relative to the scale but you're comment about their agreement to fly, you know, larger airplanes on same scale is accurate.

Okay. Thank you.

Uh-huh.

Thank you.

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

Thanks very much operator. Hi, Brad.

Hi Helane.

Just real quickly I want to just understand two things. Freight was up a lot on a year-on-year basis, something like 50%. Is that just a function of additional -- of the additional flying you're doing or could you just kind of walk us through that? And then the other question is with respect to interest expense, this $4.5 million level is that the run rate on a go-forward basis?

Okay, first of all, the first part of your question, Helane, you cut out just a little bit on our end. Were you asking about the freight line?

Yes. Cargo and other revenues.

Yes, and let me just make another clarification here. We will be -- we're going to change the title of this line item going forward because there is very little to none in the freight category and what really is in that line now is the other which is this other contract revenue that I've just talked about.

Got it. Okay.

The -- excuse me. The —(technical difficulty) -- customer service.

Right. The handling revenue?

Yes the hand.

Yeah, yeah, yeah.

So that's pretty much what that is, and what's driving it and that's why it's up as it is. Okay. Relative to interest expense. Obviously because we've brought these airplanes on balance sheet, we've got some reduction in -- in a typical run rate that would normally be in our flight-ups line where lease expenses would be and it's falling below the line in interest expense and that was why in a previous question I made the clarification on our margin that yes, the operating margin as reported is 13.7 but we have a large item and a bigger than has been item below the line in interest expense.

That will be the going run rate as long as we have those airplanes on balance sheet. But as I mentioned, it is not our intention to keep them on long-term. We are working very specifically with -- with certain parties to take airplanes to -- to restructure existing debt into leases, but at that point, all it does is shifts from interest back above line into flight ops expense in the rentals. So, you know, for the time being, I think that's a good run rate. But that number could come down as we take the airplanes off balance sheet and get them back above the line in leases.

Okay. And then my last question is the tax rate was 40%. Was that higher than you were thinking it would be?

It actually -- yes. It is a point higher and really just due to more -- as we've expanded the route system and now have more operation -- more of our operation in higher state tax rate operations that's -- that's really the only driver to that increase.

Okay. Great. Thanks very much.

You're welcome.

Thank you. Our next question comes from Michael Linenberg. Please state your question.

Yes. Hi, Brad, good morning. I have a couple of questions. I guess just on looking at the fuel. What did you pay per quarter? What was your stated fuel cost and the number of gallons consumed?

Number of gallons consumed, I'm kind of looking at staff here to help me with that number. I know the average rate during the quarter per gallon was right on a $1.25 per gallon. But again, keep in mind that on all but 6% of the flying, you know, that that fuel number is pass through.

Okay. And then --

It was 2.7 cents of the total cost per ASM.

Okay.

I think our total -- total amount spent for fuel in the quarter was 45.5 million.

Okay. so I can just back up – (multiple speakers).

But I don't have the gallons.

I can just back it out.

Well, you can do the arithmetic.

Okay. My second question is -- that's right, you gave what the ASMs were. I guess 6% pro rate and 94% under contract. What's the revenue breakout?

The revenue breakout is a little different than that. It's -- it's a little higher on the pro rate side. It's probably going to be -- well, I'll give you the exact number.

Thank you. Our next question comes from Glenn Engel with Goldman Sachs.

Operator, hold on just a second with the next question. Let me finish out the answer to Mike's question on the percentage. I think it's closer to about 10%, Mike, in the pro rate revenue. Okay. Next question.

Next question comes from Glenn Engel. Please state your question, sir.

Sorry, Mike. For interrupting you. It's – a question on the Delta contracts. Are you accruing or being paid right now under the likely new rate or is that still -- are you still being paid and accruing on the old rate in the first quarter or a combination?

No it's the new rates were effective January 1st.

And Delta was paying according to those new rates?

Yes.

Okay. That's all. Thanks.

You're welcome.

Our next question comes from Ray Neidl from Blaylock. Please state your question.

Yes. Brad, maybe I copied the numbers wrong but the ASM by quarter I'm coming up with more than 7.5 million for the year. Was it 1.75, Q2, 1.95, Q3, 2.5, Q4?

No. Excuse me. 2.05.

2.05. Okay. Great. And also with the -- you've been throwing out a lot of really useful numbers here, but I just want to try and clarify. Based on ASMs and/or revenue, what's the approximate breakdown of your business between Delta, United, and Continental?

That's another good question. We've got about -- let me -- I'll just give you the breakout as it is for the first quarter.

Okay.

Which I think is -- I mean, it's as up-to-date, really, as we've got.

Uh-huh.

In the Continental system it's only 2% of the total ASMs.

Okay.

The Delta system is right on 50% of the total ASMs which leaves 48% in Delta -- excuse me in United.

Okay. Great.

And Ray, I appreciate your clarification on the ASMs because I think I might have said 2.5 instead of 2.05.

I thought my calculator was broken there.

I'm glad you clarified. I may have said it wrong. I don't know for sure, but it is 7.5, is the estimate for the full year.

Great. And more general question is, you might have covered this a little bit, but more specifically, what are your plans -- you've got plenty of growth for now with the United contract which I guess is going to grow faster than it's going to start squeezing down Delta but for, you know, going forward you wanted to diversify your risk. And I'm just wondering do you have any plans right now for an acquisition or to go point-to-point or to buy peripheral type of businesses.

Very good question, Ray. And I, you know, I would -- I think that you would just assume that in kind of the ordinary course of us doing our jobs and as we're looking at industry developments and conditions, I mean, we're looking at all of what you just described. I mean, we're looking at opportunities to do things with different airplanes, we're looking at opportunities for acquisition.

And again all motivated by -- by I guess a couple of things, diversification of risk, as you mentioned, and opportunities to, you know, leverage existing resources and thereby create, you know, some additional, you know, efficiencies just by leveraging the existing resource. So I mean so, yes, we're looking and have been for some time looking very specifically at -- at either acquisition opportunities, growth opportunities with other codes, growth opportunities possibly with other types of aircraft. I mean, we're looking at all of those things now, but I want to just -- again, I mean, in fact some people have been critical of us for being too conservative in this area.

I mean, we have liquidity. I think we have one of the best just balance sheets, capital structures, liquidity all of that, I mean it puts us in one of the best positions in the industry to do these types of transactions but we are going to be very careful when we do them. And very careful doesn't mean that we're not willing to do anything but some of the opportunities that we see we think, yeah, they might be very accretive and very productive in the short term but lead to longer-term challenges that might compromise, you know, the stability and the long-term profitability. But we're going to be very careful and do it with things that we think make long-term sense.

Now, just your general opinion, I don't know if you want to give it or not. As you pointed out, you do have plenty of cash, you do have borrowing power. The markets right now, possibly with the exception of your stock, most of the other regionals are trading at what I consider pretty low PD multiples and that you know, in some cases maybe for good reason and in other cases I think they're just cheap. Would now be a good time to maybe consider buying another regional while the -- while they're on sale at bargain basement prices, you might say?

Again, all I would say is that we're following what you said very closely. We're well aware of what you just said, and we're -- we're just continuing to evaluate. I don't now how else I can answer it but we're very well aware of what you just said.

Okay. Great. Good quarter, Brad. Thanks a lot.

Thank you.

Thank you. Our next question comes from Michael Linenberg. Please state your question.

Brad, just on following up when you had given me the revenue breakdown. I think you said it was about 10% on the pro rate side.

Uh-huh.

And I believe I want to say last quarter it was more like 8% and I believe that the capacity on the pro rate side hasn't changed all that much and so what I'm leading up to is, I mean is your pro rate business now more profitable? Are you seeing better results since I think it was just a quarter – a couple of quarters ago where you just started ramping back up into the pro rate area.

A couple of things are happening. I wouldn't say necessarily that any of our pro rate flying is, you know -- you know, really productive. It -- it is holding its own, it's breaking even, it's improving. It's doing, I would say, better actually than I expected it to do at this point. Now when I say that, for example the Delta pro rate operations that we brought back more recently.

I mean, we've taken back revenue management and control of those flights and the revenues and the yields actually have come back much quicker than any of our people in revenue management thought that they would, you know, only having management control of them for this short period of time. So we're -- we're optimistic about that and it's -- and like I said improving quicker than we thought that it would. The Continental operation, to be very honest with you, has not performed at least more -- most recently to our expectations.

Okay.

Now, having said that, we have also made some changes in how the management -- the pricing and the management of those seats is being done. Where SkyWest now has more control of the revenue management. And since we took that over that's improving as well. So, you know, and then the other little bit that we have is just a couple of airplanes and, you know, a couple of Brazilias in the United system that we fly at risk too, but, you know, it just -- it's not super productive at this point.

But it's holding its own. I mean we're not losing money in the flying. And it's improving so --

Okay. That's helpful and then just as a another follow-up. When I -- Is there -- when I look at the Delta arrangement that you have and I'm not sure how much you can say in this, but I mean you have publicly come out and said that you will get seven airplanes and I realize that, you know, it's -- it's both of these sides -- it's both sides here at work where, you know, obviously Delta, you know, will dole out airplanes to all of its partners and then on the other hand it's whether you have the capacity to absorb those planes and I'm just curious from your view the seven number doesn't seem like a lot of airplanes.

You know, is that a function of your ability to absorb more additional aircraft or is that more of a function of maybe the economic terms associated with flying those airplanes with Delta? I mean anything that you can -- you can shed some light on with respect to, you know, growth with Delta and the number of allocations that you guys got would be helpful.

Okay. I mean, there's not a whole lot that I can -- that I can add to this question, Mike. I mean it's a good question. But I mean let me just give you a couple of real quick thoughts that come to mind. First of all, we know there are a lot of economically driven factors that Delta considers in making, you know, this allocation.

Uh-huh.

You know, I mean you can get into things like the -- the -- just the equity value creation by putting an RJ into service and is it better for Delta to put that in owned carriers or contract carriers? There's the issue about, you know, a contract carrier's ability to -- to maintain our cost structure if, you know, you know, I mean I think you know that if we get into a period of no growth it's much harder to contain costs than it is if we have growth coming and Delta knows that as well.

So I think it's a combination of them trying to, you know, them doing -- and I -- and I can't comment on how they came to their conclusions other than I know that these are some of the factors.

Okay.

But whatever they put into the equation they're coming up with the what mix makes sense to them. So we got seven airplanes and I, and here's what I think is driving it. Number one, we know and Delta knows that our ability to contain costs is better if we have some growth coming in. And by the way, because they understand that very clearly, I would -- I -- I can't tell you this for certainty, but I would just expect that over the next few years we'll get, you know, a modest amount of growth in the Delta system. I mean because that -- that just kind of is an inherent factor here in our ability to maintain costs. Now, I can tell you how we won't get any growth and that is if we let our costs get too high.

Okay.

Okay. So these kind of things kind of go together but yet I can also tell you that if our costs weren't competitive we wouldn't even have got seven airplanes' worth of growth. So that's about really the only thought that comes to mind. It's a good question, though.

Okay. Thank you. I appreciate it.

You're welcome.

Thank you. As a reminder, if you do a question please press star 1 on your push button telephone at this time. Our next question comes from Jim Parker. Please state your question.

Brad, just a follow-up and perhaps an accounting clarification. If you make an acquisition of another regional airline that has a capacity by agreement don't you have to write down the goodwill or the value of that over the remaining life of that contract?

Well, I -- I guess there's a -- there's a yes and no answer and then there's a it depends answer. I think we all know that the new rules in accounting in this area. You know, you know, allow for or require the amortization of the goodwill when there's some type of impairment of value. So I mean, so I guess that's the depends answer. I mean I -- I guess in general, though, I mean we would expect there to be some amortization.

So if you entered into an agreement where a regional airline say had five years left on the contract. Would you not write off the value above the assets that you acquire in that five-year period?

It -- Jim, this is not a -- this gets into a fairly detailed, a little more complicated question than you're trying than you're asking the question – (indiscernible). Because I think as you know, it's going to depend largely on where you assign the value of the goodwill. I mean the portion that's assigned to intangible type things, yes. But we all know that we're -- that in any of these transactions you try and as we would to make a case that value -- that there's a lot of value in the tangible assets.

Okay. I'm just wondering if acquisitions are really a viable growth path of existing regional airlines that say have contracts with major airlines.

I think that -- that -- that -- well, you know that -- you know from the fact that I've told you that we have looked at a lot of these opportunities and we've not done one so far, I think, is a clear indication and emphasis to what we have said before and that is as long as we have good organic, you know internal growth opportunities, that's how we'd prefer to do it. But one of the issues that makes it difficult for us from an economic valuation standpoint is -- is the -- the, you know, the assignment of value to the contract.

And -- and that, you know, that in some cases gets to the point where it makes the economics of a transaction very difficult. So I mean in some respects you're right. Now, I wouldn't say it's -- that that's just a clear-cut, no, they don't make sense. I think it's going to take exactly the right deal and the right circumstances to make it work, but I think maybe where you're going with this is that -- I mean it is our preference to grow internally where we can.

All right. Just in that context, though, how far away are you from perhaps making a decision or how close are you to the 170, 190, the MB 170, 190 program?

I don't think I'm really at liberty to say that. All I can say is that we continue to do a lot of analysis of the airplanes and of business models where they would make sense but -- but, you know, I mean number one issue is we've got scope issues to deal with and I mean that's I think that -- I mean given that, that's really why I'm not at liberty to say too much, Jim.

Okay. Thanks.

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

Okay. Thank you. We're coming right up on an hour that we've been on the call. I know that there are other calls scheduled for this morning that are taking people's time and I want to be sensitive to that.

I appreciate, again, your participation with us, your thoughtfulness in the questions. Again, just would re-emphasize the fact that we're -- we're pleased with the results for the quarter and again just to express our thanks and appreciation to our work groups for helping us achieve the successes that we're achieving and with that I will conclude. Thank you very much.

Thank you, 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 ID number of 350827. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.