SkyWest Inc (SKYW) 2004 Q2 法說會逐字稿

Good morning and welcome ladies and gentlemen, to the SkyWest, Inc. second quarter 2004 earnings release conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in the listen-only mode.

At the request of the company we will open up the conference for questions and answers after their presentation. In addition to historical information, this conference call may contain forward-looking statements. SkyWest, Inc., 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, the Company’s beliefs, expectations, hopes or intentions regarding future events. Words such as "expects," "intends," "believes," "anticipates," "should" and "likely" and similar expressions, identify forward-looking statements.

All forward-looking statements included in conference call are made as of the date 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 the 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 their 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 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 over to Bradford R. Rich, Executive Vice President and CFO and Treasurer. Please go ahead, sir.

Thank you, operator, and thank you to all of you for joining us this morning. We realize that there is a lot going on in the industry this morning, a lot of announcement activity, that sort of thing. So we do appreciate your interest in SkyWest and your willingness to join us this morning.

Before we begin, let me just introduce who I have with me here at SkyWest, our headquarters. I have Ron Reber, our Executive Vice President and Chief Operating Officer with me, as well as members of our financial staff, Michael Crop, Vice President of Finance and Assistant Treasurer, as well as Chip Childs, Vice President and Controller.

In our discussion this morning I will stick fairly close to the press release that we put out this morning, using it really as a discussion outline. I’ll try to go through that in detail, but yet very quickly, and leave some time for some questions and answers.

First of all, we believe that the results of the quarter are just good solid earnings and performance. We’re pleased with the results, given that it’s indicative of the cooperative efforts of our whole workforce. And as always, we can’t get very far into a discussion of our performance and results without expressing thanks and appreciation to all of the men and women of SkyWest for their cooperation and their contributions.

We reported this morning, a 25.7% increase in our total operating revenues of 267.4m. We generated 20.1m in net income, which translates to 34 cents in diluted EPS. In talking about the revenues, first of all, I think most of you that are following SkyWest and that are following regional airlines and carriers that are operating under contracts, the increase in the revenues is going to be fairly consistent with the increase in our production or our ASM production. So that 25.7% increase in revenue really is the result of 27.2% increase in our ASM productions, offset a little bit by a decrease in the revenue per ASM of 1.3%.

The ASM production, of course, we realize, as I’m sure you do, that ASM production really is a function, first and foremost, of just a growth in the fleet, combined with our utilization and reliability as far as completion factors. So we do have good growth rates in the quarter. The fleet has grown from 167 aircraft in our last year’s second quarter, to 191 aircraft at the end of June.

But at the same time, we’re very focused on the quality of the operation, the completion factor and very focused on the utilization, not only of the fleet, but total utilization through this company as it relates to the airplanes, the equipment, our human resources, utilization of capital, et cetera. So utilization is a key issue and obviously it’s a big factor in our ASM production. Total revenues, of course, are going to go up consistent with that ASM increase.

In talking more specifically about the fleet and what’s contributing to the ASM production, I mentioned the size of the fleet growing to 191 airplanes. I think we’ve done a good job in the written press release at kind of breaking out the composition of the airplanes. I think of most significance is the regional jet fleet is up to 118 airplanes. We have a lot of activity going on in the fleet.

In the quarter just ended, fairly moderate activity, taking four new regional jets; two 50-seaters and two 70-seaters. Our third quarter, the quarter that we’re in, has a lot of activity, as will the fourth quarter, a lot of 700 activity. But in the third quarter alone we’ll take nine new deliveries consisting of seven CRJ-200s and two CRJ-700s.

We’re really just in a mode now, I think, of executing growth plans that we’ve previously announced. And so as we continue to execute those growth plans we’re very confident that it will generate the ASMs and the production and capacity that we have previously talked about and that we also have disclosed in the press release.

The quarter we just ended, second quarter, we generated 1.75b ASMs. That compares with 1.38b ASMs in the same quarter a year ago. With the growth plans that we’ve released and are currently executing and I’ve talked briefly about, we’re still on track for about, in total for the year, still around that 27% increase in total ASMs. We still should come out very close to about 7.5b ASMs for the year.

Not to get too far ahead of ourselves, but I think most of you are also aware that our growth plans for next year, right now involve an additional fifteen 700s, as well as seven 200s. And that activity should produce somewhere around a 30% ASM growth rate next year.

Relative to our total operating expenses and interest per ASM for the quarter, we reported and 8.8% decrease in our non-fuel cost per ASM. Again, we’re only excluding fuel simply because it’s a volatile number. Looking at non-fuel is just more indicative of what the real performance and the change is quarter to quarter. And again, 8.8% reduction.

I guess in this area I would just emphasize the fact that, first of all, we believe that our cost structure is very competitive, given the composition of our fleet, recognizing that our cost per ASM is a combination of the 118 regional jets and still a large composition of turboprop airplanes in there. We still are flying 73 Embry Airs that are all in that mix in our cost per ASM. So given the fleet mix, the stage lengths, those types of things, we feel our cost structure is very competitive.

Now having said that, I would just emphasize the fact that we are very specifically focused on the cost structure. We continue to recognize that the value we create to our major partners is really in very few areas. It's to create a seamless, high quality product and it’s to keep that cost structure in line. And so we are focused very specifically on both of those and continue to work out ways of not only containing, but reducing the overall cost structure.

With the growth that we have coming up, I think one of the issues we have had is in the area of maintenance. And let me talk about maintenance from a couple of perspectives. First of all we have the issue of where we’re going to be performing maintenance as we continue to grow our United fleet. Specifically, we need to get some additional maintenance facilities. And so we’ve had a question of where the facilities were going to go and just some long term planning on what we need to do to prepare for the additional growth and the additional airplanes coming in.

We did announce during the quarter that we had selected Colorado Springs as a place to establish a fairly large maintenance base. As that base is established and grows, we also expect it to be a very significant crew domicile. We did put all of this in a press release previously. But we do expect to have that facility operational by the 1st of August. It's starting out very small, but growing into a very significant facility.

I think this is a significant announcement, because it’s putting, so to speak, stakes in the ground in the West. And we would hope that that would be indicative that a lot of our upcoming growth will stay in the Western part of the United States, which is what we’d prefer to do, given that we want to have operations that are concentrated, so that we can get better utilization, as I talked about before. And we think this is one step in that direction.

Also, as it relates to maintenance, we have been discussing and making sure that you are all aware and have been aware for quite some time of a bit of a mismatch in the recording of revenues that we receive and recognize, relative to maintenance reimbursements and the mismatch in the timing that we incur the expenses. I just want to make you aware that again, in this quarter we have about $5.5m mismatch in that area. And again, I just emphasize the point that that’s an issue that we have that’s really isolated to our United 200 fleet. We are currently working on and pursuing an alternative to this arrangement for the maintenance of the 700s. We’re working on a way that will hopefully turn into very similar to a maintenance power by the hour type arrangement on the 700s. As I said, we’re pursuing that aggressively as we speak and we’ll make an announcement when we have something that’s been concluded in that area.

Let me shift gears and talk for a minute about the balance sheet. We still just feel very strongly that our overall balance sheet, from our liquidity, the overall capital structure, we still believe is one of the best in the industry, if not the best. Our cash and securities at the end of the quarter were 477.2m. Our current ratio is still in excess of four times. We reduced long term debt in the quarter by 11m. The long-term debt at the end of the quarter was 479.9m, again, which is down 11m.

As our long term debt and the impact of our aircraft’s financing and those sorts of things, I’ll answer in the Q&A, I guess really about whatever questions you want to ask us about our aircraft financings. I know that’s a big issue. We’re in very good shape relative to the financing environment. We see good interest. Parties that previously have maybe gone to the sidelines, as far as the types of financing that we would like to do, we see those parties returning. We see more and more interest as we get into the year. We have again, we’ve said this before and I’ll just emphasize it again, that we do have lease financing commitments for all of the deliveries this year. So we just think we’re in very good shape in that area.

We do have a lot of significant amount of off balance sheet commitment in the way of our lease obligations. We have disclosed in the press release that it’s at a 7% discount factor, present values to 1.2b. Obviously not trying to hide the from anybody. You all know it’s there. But even adding all of that into the mix, balance sheet capital coverage, all of those things, we feel pretty good about.

I know that a lot of you have got questions relative to just our relationship with our partners, the condition of our partners and those types of things. Let me make just a couple of general comments right now and then we can pursue this as you feel necessary in the Q&A.

First of all, as it relates to Delta, first question I think that we need to address is the fact that we previously announced that we had come to an agreement with Delta on our rates for 2004 and that as part of that agreement we were discussing terms and conditions and mechanisms for adjusting rates into the future. And we indicated that we were working on a definitive agreement. The definitive agreement is still not completed. So we just released the quarter technically without a signed rate agreement with Delta.

We’ve been in this same kind of territory before. I’m not really happy that we’re here again, but I would just assure you that the revenues that we have booked in the quarter are consistent with the terms and conditions that we have agreed upon. Those rates and conditions and the amounts that we have billed and recorded to Delta, Delta has confirmed those amounts to our auditors. So I don’t expect any issue at all. We’re just booking things according to those terms and conditions that we agreed upon.

I don't’ know that it should be too big of a surprise that with all of the things going on at Delta, that they’re very focused on their own issues and their challenges that they’re working through. They’ve had, as you are all aware, significant turnover in their executive management group. The contracts are now requiring a little more thorough and in-depth review by executive management. So with all the things that they’ve got going, I don’t know that it should be too big of a surprise to us that it’s not taking the highest priority at the moment at Delta Airlines. So we just continue to go along, weekly wires and provisioning and everything is being done just exactly in accordance with the terms and conditions that we have agreed upon.

The relationship with Delta, we feel very good and feel that the relationship is very cooperative. We’re working closely together to figure out just better and additional ways of streamlining and creating more productivity and efficiencies between the companies, which ultimately translate into increased value. And so I feel good about the way that our companies are working together, both in the contracts and financial and administration side, as well as with Ron Weber and his group working with the operations side.

Let me shift gears a little bit and just talk about United for a second. I think the thing that I’ve just addressed right up front, some of you may be aware that with all the things that have happened with the ATSB and the ATSB rejecting their application for their loan guarantee, that United announced that they were aggressively pursuing additional cost reductions and efficiency type measures. And certainly those things are things that they have publicly released that will affect the United Express program.

I just want to assure you that we don't’ believe that this is just a contractual issue, so to speak. In all of our discussions with United, and we’ve talked to them in detail about this, we don't believe it’s their desire just to come back and reopen or re-discuss the contracts.

What they’re pursuing are ways to optimize revenue and take advantage of ways in the United Express program to optimize revenue that haven’t been really focused on and pursued previously, for example, cargo revenue and those types of things. And at the same time, have us work cooperatively with them to create more efficiencies, productivity and reduced costs in areas such as cooperative fuel purchasing. I’ll just throw that out as just one example of the types of things that we’re doing.

So we are cooperating very specifically with United and participating in their purchasing programs when we can, just to take advantage of the things that they have in place, the things that they’ve negotiated that could create value. These are things that really are good for both companies; creates value to them, reduces our overall cost structure, which is good for us. And it’s those types of things that we’re pursuing and working very cooperatively – this really isn’t just a separate United issue, but working cooperatively with all of our partners to accomplish.

And I think that’s very consistent with what I mentioned early on, in that we are very, very specifically focused and will remain very focused on anything that we can do to both preserve quality and generate high quality, and at the same time, keep a very good eye on and reduce and contain the cost structure where possible.

Having said that, I think I will go ahead and conclude the formal remarks. And go ahead, [Shuana], the operator, if you’ll go ahead and open it up for questions I would appreciate it.

(Caller instructions.) Our first question comes from Michael [Linenberg], of Merrill Lynch. Please state your question.

Hey Brad, I have two questions. I guess my first one, you talked about the intense utilization of assets. What sort of utilization are you getting hour wise on a daily basis for your RJs and also your turboprops? And what was that number a year ago?

A good question and you’ve got to understand that with a turboprop fleet and an RJ fleet and with varying and several partners, it’s going to vary by type, by partner and by location. So, I’m sure what you’re trying to get to is just what’s the total movement and we can answer that. I do want you to understand though that this is a pretty complex issue that admittedly can yield significant benefit and value by optimizing utilization. But having said that, let me just look. Mike, are you more interested in either of the types?

If you don't have it by type, combined is fine, too, whatever.

Let me just tell you this, we’ve been averaging, for example, in the total RJ fleet around 8.5 hours per day. We’re currently at 9 and think that even that can be tweaked a little bit, that there’s still a bit of some room in there.

Okay and then maybe as a follow up to that, I think you kind of alluded to it when you talked about the complexity, what sort of exposure do you have to the Delta Dallas-Fort Worth hub? I think at last check you were only operating about two dozen departures there a day.

We’re down to about a dozen aircraft there now, Michael. We don’t have a crew base there. Your question though was what kind of exposure we’ve got relative to Delta doing what with the hub?

Well, maybe that was the implication there that they would possibly downsize it. But just how many aircraft that you have there and in the event that it is downsized, because that has been speculated in the press, are these planes that you would be able to move easily back to Salt Lake or somewhere else throughout the Delta system?

We were substantially larger not too long ago in Dallas and we moved those back to Salt Lake City, so I’m thinking that if Delta made a movement, it would be back to Salt Lake City.

Okay, but bottom line, it’s not a lot of planes.

Not as far as we’re concerned, no.

Thank you. Our next question comes from William Green, of Morgan Stanley. Please state your question.

Good morning. Brad, can I just ask you, why wouldn’t Delta ask you to either reduce rates or margins or however you want to think about it? Why wouldn’t you need to get some sort of cost savings in a renegotiated contract to them?

Well, let’s keep in mind first of all that we have. I mean, we have negotiated a new contract. Remember what we did in our rates last year was a significant reduction, not only just in the rates themselves, but that involves two components. It involves what we’re doing with the cost structure, which we have lowered the cost structure, and then just the actual return that’s built into the rate. And both of those came down fairly significantly last year.

I think the key issue is that both of the times that we have bid for airplanes, with United and with Delta, our cost structure has been lined up against competitors. And I think most of you that follow the industry as closely as you do understand and know Delta’s management to the point where if our cost structure wasn’t in line we wouldn’t have been awarded any growth. So I think the fact that Delta just awarded us seven airplanes of additional growth in ’05, they wouldn’t have done that if they didn’t believe that our costs were in line.

So at the end of the day, I think it’s just our cost competitive, can they get this any cheaper than we’re producing it for. So that’s what we’re focused on, is making sure that we’re as competitive as anywhere else they could get the capacity.

Okay, so then along those lines, does the fact that you don’t have a signed contract put you at risk for future growth with them?

I don’t think so at all. I think first of all Delta realizes just like we do that our ability to contain costs in the future is enhanced by having at least a small amount of growth, in the 5-10 airplanes of growth a year. We’ve had enough discussion with Delta that they understand that. But at the same time, they won’t hesitate to not give us any growth if it’s not at the right price. So whether we have a signed contract or not I really don’t think is the issue.

Let me clarify too, we have a long-term contract with Delta. When we say we don't have a contract, what we don’t have is a signed rate agreement for this year.

Okay. Can I just ask one last question then? United, are they current on all payments to you?

Yes.

Thank you. Our next question comes from Ray Neidl, of Blaylock. Please state your question.

Yes, just to get back to your expansion plans, you discussed pretty much in detail that you thought your contracts were pretty safe with both Delta and United. But I think in the past you had said that you were a little nervous being concentrated with two major customers and were looking to diversify. I was just wondering if you could comment a little bit further on that, what your plans may be in that area, if you’re going to do more independent flying or make an acquisition or look for a new customer?

Sure. I’m not going to talk in really any specifics. And I know some of you may think well, we talk in generalities about this a lot and aren’t doing anything, or at least it doesn’t look like we’re doing anything in the public. Let me just say that we are doing, I think, just what any of you or our shareholders would expect us to be doing. And that is we recognize that we have the financial capability, given our liquidity and our capital structure, we are in one of the best, if not the best position in the industry to pursue external growth opportunities, whether it’s new operations or acquiring someone. And we are looking at several, what I’ll just say are opportunities.

As I’ve said before, we are going to be very careful in our pursuit of opportunities in making sure that they don’t compromise what we’re currently doing, that they don’t jeopardize relationships with our current workforce, et cetera, et cetera. But having said that, we’re looking at acquisitions, we’re looking at new business models, we’re looking at and pursuing additional relationships with additional partners that we’re not currently doing business with. We’re doing all three of those.

Now at the same time, I’ll reemphasize what I have said previously, and that is that we have a good growth rate this year at 27%. With the growth we have already firm for next year, we have around 30% growth. So we’ve got good, solid organic growth opportunities and that’s the way that we would prefer to grow. So although we think in this environment, the difficulties that other carriers are having in some ways does create opportunity. And so we’re looking at and pursuing a lot of possibilities.

But at the same time, we’ve got a lot to do with just what we’ve got in announced, committed growth. So it isn’t that we feel some overwhelming need to go out and do something else, but at the same time, we wouldn’t be doing our jobs if we weren’t very specifically paying attention to and evaluating opportunities that become available. And we’re doing all of that.

Now that doesn’t mean that we’re within a month or weeks or anything like that away from some big acquisition or anything like that. But, I think we’re doing just what you’d expect us to do, looking at a lot of possibilities.

Would you consider going to a mainline aircraft like an A-319 or a Boeing 717 or even an Embry Air-190?

We continue, like I said, to do our jobs in looking at and evaluating the airplanes, looking at what our cost structure would be like in those types of airplanes. But that is not something that I would lead you to – I certainly don’t want to lead you to believe that that is in our – I don’t want to say short term, but it’s not in our near term thinking.

Now you seem to still have a large proportion of prop aircraft. I thought you would be maybe phasing them out a little bit faster. Was there a change in plans there or what’s the future of your props?

It's certainly not a change in plans of any sort. We have, I thought, been pretty clear that we’ve got a large fleet of turboprops that we’re going to have for a while. And Ray, this is pretty much driven, I mean, on one hand we’d like to be able to say hey, we’re moving to a rapid acceleration out of those airplanes and going to become an all jet carrier.

On the other hand, the majority of those airplanes are flying in very short stage lengths, where there are not any real good alternatives. I mean, when you’re flying props in 130, 140, 145-mile stages, where there’s not good ground transportation, no good underground rail and your alternative is fly the turboprop or the highway, these airplanes are still performing very well in those types of markets.

Okay great. And they’re mostly at-risk markets, is that true?

No, actually the majority of them are under contract. Well first of all, let me give you some perspective; 86% of our production in the quarter was in regional jets.

Okay great. And just to clarify two points; did you say that ASMs this year were going to be up to about 7.5?

Yes.

Okay great. And the other thing is freight and other, it looks like that number has taken a pretty big jump this year. Was there a reclassification or restatement of some items or are you really growing in that sector?

Ray, could you restate your question, I’m sorry?

In the freight and other category, for 2004, it looks like the number is growing pretty aggressively. I’m just wondering if you’re taking some other items and putting them in there that weren’t in there before or if the freight sector is really growing that strong?

We actually relabeled that line. It should say ground handling. I hope that’s what you’re looking at. That’s really just handling contracts.

For those of you on the call, let me just clarify. I said 86% of our activity was CRJs, it’s 84%. Okay, next question.

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

Good morning, guys. Brad, how much of your revenue is currently in non-contractual flying and what is the profitability of that business?

92% of our total revenue is in contract arrangements, 8% at risk. The 8% at risk, I think, and let me just be very clear about this, it’s the Continental operation, which is 9 EMBs and then it’s the Delta Brasilias and Salt Lake, which is 15 EMBs and then we have just a couple of airplanes that we refer to as secondary markets in the United system, and that’s all we have that we’re flying what we call at-risk.

So it’s 8% of the total revenue. And those airplanes or those operations, they certainly vary by location and things, but in general I’ll just tell you, that as we’ve either begun the Continental operation at risk or taken airplanes back to at risk operations in Delta. They’re performing really very consistent with what our projections have been. The airplanes aren’t losing money, so there’s some return in them. And the longer we work with the revenue and have control of the revenue, the better they seem to perform. And that’s something that we have been pursuing in all of those operations, is us having more influence and in some cases complete control over the revenue management. And the more we do that, the better we seem to be able to optimize total revenue.

So you’re saying this 8% of revenue that’s at-risk, that it is profitable business, is that correct?

Yes.

And how much of a hit did you take on fuel prices in that part of the business?

Well, not very much. I mean, if you say year over year, it’s a couple of hundred thousand in real dollars difference even year over year in that operation.

Okay. One other question; let’s say that Delta were to declare Chapter 11, even though they pay you currently, how much, say on a weekly basis, do they owe you that might be at-risk? Because when United went into Chapter 11 there was what, 10m that they didn’t pay you right away.

Yes, a little higher actually.

How much is that same figure for Delta?

It's about a little lower than that, around 9m. And by the way, I think Bill or someone earlier asked the question, I think his question was specifically, is United current on payments. Our partners are both current on payments. Nobody’s missing wires. They’re just paying as they should according to the agreements. But as you’d expect us to do, we’re trying to learn from our experience before. We’re trying and paying close attention to whatever we can do to mitigate that potential exposure. So we’re well aware of it and we’re doing what we can to mitigate it.

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

Thank you very much, operator. Hi Brad. Just real briefly, in the second quarter since your growth was relatively small and then accelerates in the second half of the year, is there any timing differences for training costs or has that all smoothed out now?

We understand that. I think the question you’re getting to is are we going to have a big increase all of the sudden in our training expenses associated with that growth and the answer is no. We’re planning for it well ahead. They had a good jumpstart on the training. And I don’t think you’re going to see anything unusual at all or no big spikes in our training expenses.

Okay. And then my second follow up question is with respect to your financing, I think I heard you say that you financed all your aircraft deliveries for ’04. Can you just look out to ’05 and tell us where you stand there, A? And B, have you noticed that the market for financing has improved or are you still having to do the equity in the aircraft delivery?

No, during the quarter we did close two leverage-leased airplanes. We have some leverage-lease airplanes that we’re currently negotiating and expect to close here by the end of the month. So we do have leverage-leased activity going on. Which I’m not completely positive, but we’ve got to be one of very few, if any that I know of that are getting leverage-lease financing done.

As we get leverage-leases done here – and I’m not going to go into too much detail and specifics about this, to preserve some confidentiality, but as we continue to close long term lease arrangements in the current year, that, I’ll just say generally, frees up committed lease arrangements into ’05. So as we’re having success now, it inherently accrues to additional commitments in ’05.

So we feel very good about where we stand, not only because we see good interest and things in the financing market strengthening, and I think that that holds in just a general industry statement. But as it relates specifically to SkyWest credit, we see the market strengthening and more interest in our ability to do, as we prefer to do, leverage-lease financing. And the more of that we do now, the better shape that puts us for ’05 activity.

Thank you. Our next question comes from Jim [Ashull], of Aviation Advisory Service. Please state your question.

Good morning, gentlemen. A couple of questions please. First of all, how do the amounts you’re booking under the Delta contract compare to the amount you’re actually receiving in cash?

They’re very consistent. I’m not quite sure, maybe I’m not understanding the question. But first of all, what we record as revenue, we bill according to the terms and conditions in our agreement, in our verbal agreement. I think I made it clear we don’t have anything in writing. But we’re billing in accordance to that verbal agreement and they’re paying in accordance with that verbal agreement. So, there’s no mismatch between what we’re booking and what we’re collecting.

Okay, that’s good to know. Second thing, with regard to the Continental operations, are you in discussions about adding anymore aircraft to that system and are you looking at flying turboprops for anybody else?

The answer to the second part is no. I think it’s fair to say we’re not out actively pursuing additional turboprop opportunities. Now if there’s additional growth opportunity, which Continental has talked to us a number of times. We’ve had kind of an ongoing dialogue ever since we started flying for Continental about additional growth opportunities, whether it be in Houston or in places outside of Houston. We’ve had kind of an ongoing dialogue there, nothing that’s likely to be announced or anything. But outside of that and some growth possibly within Continental in the prop system, we’re not actively pursuing anything.

Thank you. Our next question comes from Bob Toomey, of RBC Dain Rauscher. Please state your question.

Hi, good morning. Brad, you talked a little while ago in your prepared remarks about delivering value to your business partners and obviously I have a sense of what that means and what they’re looking for, but I wondered if you could speak a little bit about delivering that value versus maintaining your margins over the longer term. There were 13.2% operating margin in the quarter and I just wondered how you feel about value versus maintaining your margins long-term?

It's a very good question. You can get into a big philosophical discussion about this. What we’re trying to do is produce a competitive product. At the end of the day, what our partners are looking at is in total, what they’re paying for capacity. And that involves the covering of the costs and the margins. And I would say in most cases right now, what they just look at is here’s the total payments that they’re making to us for the capacity. And so what we have to do is make sure that in total we’re delivering a high quality and very competitive product.

So we’re doing a number of things. I mean, you can isolate this question into components. And we do that very specifically. You can look at it in general and say what are the totals, just the totals and is that total competitive? And then you can look at our peers and say what is the rest of the industry doing, what are acceptable margins for the regional sector to be making? You can then take that to say well what happens to our cost structure if we don’t have earnings, what happens to our ownership costs and all of those types of things?

And I would submit to you that we have to be making, I’ll just say, an adequate return to continue to finance and deliver airplanes and competitive prices and at competitive rates. And so when you look at that in a total business model that says the traffic that we’re delivering in general is high yielding, premium type traffic and we’re doing it at a price that’s less expensive than the majors could do it for themselves.

And by the way we don’t take this whole issue lightly. We know we have to continue to improve and continue to find ways to be more efficient and as I’ve said, I think at least a half a dozen times on this call, we are very focused on anything and everything we can do to increase productivity and utilization and reduce the costs. We’re doing everything we can.

But I think ultimately our ability to deliver cost does necessitate us – in order to attract capital at competitive rates we have to have some margin. Whether that margin has to be 13 or 5 or 10, we’re just trying to make sure it’s competitive with the industry. I don’t know what else to say.

That’s good. As a corollary to that, Brad, I just wonder if you could comment on, when you sit down face to face with Delta and United and you talk about these issues, do they have an understanding of your need for maintaining an adequate ROI, so to speak?

Well, I think they do. But again, at the end of the day, I’m not sure they care. At the end of the day, what they’re focused on is where can they source the capacity the cheapest. And so when they go out for bid, and we’ve seen both Delta and United basically just put flying up for bid. And so we’re competing for that just like our other regional competitors are competing for and bidding for. And so in total, our cost structure plus our return has got to be competitive. And at the end of the day, like I said, they’re not in any mood to award out flying and growth to non-competitive carriers. So, our focus has just got to be – the total that they pay us has got to be competitive.

Okay. And then one last question I have has to do with the uncertainty with obviously, what’s going on with Delta, United’s still in bankruptcy, a lot of things can happen that we can’t predict in those scenarios. But you mentioned earlier you have several growth opportunities that you’re pursuing. We’ve talked about this before in the past. When you look at your assets and your roots and the whole, all the assets of your company, how strongly do you feel about where you would be in kind of a worst case scenario, say with Delta? We’ve already seen it with United, but with Delta as well? The worst case meaning they’d have to dramatically restructure their operations in the sense that it could affect your business with them.

Okay. Obviously this is a very relevant and pertinent issue and question. Let me kind of address it from two perspectives. First of all, we continue to feel very strongly about the need for the capacity in the hubs where we’re generating capacity. And whether we see change-over and those types of things with our partners, that certainly could happen. But at the end of the day, we don’t see those types of changes. And let’s just say there’s consolidation or failures or throw out whatever worst case scenarios we can see at the mainline level, we still don’t see that materially altering or decreasing the demand for the services that we’re providing, for the capacity that we’re generating.

There’s still going to be a need to get passengers in some mainline code, in the shorter and lower density markets, into a hub. And that’s why we’ve continued to say that part of our strategy is to be the number one most dominant carrier in the big hubs where we’re associated with that respective partner. And as long as we do that, we feel that as long as we’re generating the capacity at a competitive price that there’s going to be need for that capacity. And to us, it’s less sensitive to which code it’s in. We just feel that there’s going to be an overriding need for the capacity, okay? So that’s just the first thing.

And with all this going on, I mean we certainly are concerned about the industry and the strength and viability of our partners, but as we continue to grow and have agreed to continue to grow, we’ve done it because we feel very strongly about the overriding demand for the product in the hubs.

Okay, now the second thing, the reason that that demand is there and the reasons I think that our capacity will provide value to someone, is that you’ve got to understand that as we have grown, we’ve got a very valuable revenue stream that’s being generated in these airplanes. I mean, we by and large, at least with the data that we have, we think that our revenue stream is still a high yielding, the term we use is premium revenue stream. And when you compare that revenue stream to our trip costs, compared to what the majors can get this for, that makes it a valuable product, we think. We have to be careful with this and I know this is a sensitive issue, but we’re delivering pretty inexpensive trip costs. And that inherently creates value relative to the premium revenue stream.

So from those two perspectives, I mean we understand the difficulties and the challenges of our partners, and regardless of what our opinion is on any given day about how likely it’s going to be that they succeed and are successful long term, we still believe there’s fundamental demand for our product.

That’s a great answer, Brad. I appreciate your spending time to explain that. But even in a situation where you’ve got uncertainties that we can’t now predict, for either carrier, Delta or United, you still feel very good about the value of that product to someone out there, some major carrier?

Yes. I mean, I don’t know what else to say about it. We think that there’s going to be continued demand in these lower density and shorter haul markets. The demand in those markets is more appropriately served in the smaller size airplanes that we fly. And if you try to take a bigger airplane and put it in those markets, even though your unit costs come down, you start to fill the airplanes with very low yielding traffic, which then generates extremely high breakeven load factors and right there your economics don’t hold anymore. The whole theory here is to right size the airplanes and the cost structures to these lower density, shorter markets, let the low yielding traffic go somewhere else, if it needs to go, because of the size of the equipment, and maintain the higher yielding non-discounted traffic.

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

Hey guys. Historically, the leases that SkyWest entered into were tax driven leverage leases. The leases that you’re entering into at the moment, are those the same, are they also tax driven or are they in some way different from in the past? Specifically, could they be characterized as synthetic or similar?

The long-term, permanent leasing that we’ve done is still tax advantage leasing and tax driven. We have done some, I guess just a simple way of explaining it I’ll use the term you used, synthetic leasing on interims, while we’re negotiating long-term arrangements. We have done some of that. But our permanent leasing has been done in tax driven leases.

And the equities, without disclosing who they are, are they some of the same people that you were seeing previously, as in the past, or I guess you’ll be seeing a smaller selection of equities?

Smaller, yes, some of both. Some who have participated previously with us as well as we have interest from some new parties as well.

Okay. Lastly, Delta is in the middle of a strategic review. Do you have any reason to believe that that could result in a change in emphasis on the role of regional jets within the Delta system?

This is a very good question and we have at least some thoughts about it. But this is a question that really I would prefer not to get into. That one could go a lot of different directions. And very honestly, I don’t know what’s in Delta’s head at this moment on that issue.

Thank you. Our next question comes from Tony Cristello, of BB&T. Please state your question.

Thank you. I guess one question I have is, do you have a time scheduled for your next meeting with Delta, or to at least discuss a new agreement?

We actually do. It’s later this week.

Okay. You talked, Brad, about getting more efficient and greater productivity with respect to United. Is it fair to say that for the stations that you operate and the things you do for them, the upside is, you participate in any efficiencies that you can bring, but on the flip side, if you can’t get your costs lower or you don’t find the productivity, the margin hit is all on you?

I think, by the way, that’s generally how our agreement is structured right now. Let me answer it two ways. We have an agreement right now that gives us a calculated and very modest year over year increases. So if we can’t contain, control, reduce, whatever the appropriate term would be, our costs – I mean, we know what the increases are going to be and if we can’t control the costs within those levels, it will come out of our margins. So, the way that we’ve set up the contractual arrangements, it’s already kind of in a mode that does what you just said.

Okay now in addition to that, we realize that the types of things that we're talking about, the utilization and things, we understand that our system is going to be more efficient if we have a system that we can concentrate in locations, that we can take full utilization of people and equipment and those types of things in concentrated locations rather than being spread out where we’d have less ability to utilize people and things and equipment and stations and those types of things. So as you think through that, you also quickly come to the realization that what we need to do can’t be done without very close cooperative efforts between us and our partners, as it relates to scheduling and all of those types of things.

So I guess all we’re saying is that we’re doing everything we can, in cooperation with our partners, to figure out how to tweak and optimize utilization, which accrues to the benefit of both of our companies.

Now in addition to that, we are working closely with them to figure out any and all ways of reducing the cost structure. Okay now, if we’re figuring out ways to reduce the cost structure that’s in excess of what we anticipated when we drafted the contracts, we understand very clearly that that benefit of our refinements has got to accrue to both parties. And that’s what we would expect to happen.

And by the way, the more we reduce our cost structure, whether we get any immediate benefit out of it or not, what it does is improves our position to bid. It improves our ability and the likelihood of us getting growth. And that’s what accrues to our benefit. It just makes us more competitive.

Okay. And I guess one other question related to that is, what’s going on with United and aggressively wanting to cut back some things and then also as they’re becoming more competitive or saying they’re going to be more competitive with some RJs in the sense of Chicago and the Dulles markets, I guess to look at what Independence Air is doing, does that make it more difficult for you or have they been shifting around your schedule some to meet those needs or demands and thus getting away from your being able to have a higher concentration at some of your hub levels?

They’ve actually moved a lot of our capacity to Chicago. We’re at 60 departures today, growing to 80 next month. And so that actually works in our favor, other than Chicago is a bit crowded. And ACA will not be flying any trips for United as of, I believe, the 1st of August. So I mean, the transition is nearly complete. And once that transition is completed we could probably focus, as Brad said earlier, on taking our deliveries and developing the West, the Denver hub as well as some of the West Coast lines. So I think our economies are getting better with United.

Okay. And then one last question, can you just give the mix of revenue by partner for this quarter and sort of where you project that, with most of the growth coming from United by the end of the year?

Sure. The Delta percentage is about 40%. And these numbers are second quarter percentages, so Delta in the second quarter was 40%, United is going to be right on 55%, and then 5% in other, which is a combination of the Continental props and then just some of the ground handling and other types of revenue. So what is that; 40%, 55% and 5%; 40% Delta, 55% United, 5% Continental and other.

And then how do you see that the rest of the year?

Not changing significantly. If anything, United might go up a little bit, just because of this year’s deliveries are United. But it isn’t going to really dramatically change. The United percentage probably will go from 55 to 60 in total, something like that.

(Caller instructions.) Since there are no further questions, I will now turn the conference back to Mr. Rich.

Okay, given that there are no more questions, we’ve had you on the phone over an hour, that’s long enough. So again, thank you for your time this morning and your interest in SkyWest. Thank you very much. We’ll now conclude.

Ladies and gentlemen, if you wish to access the replay of this call you may do so by dialing 1-800-428-6051 or 973-709-2089, with an ID number of 365583. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.