SkyWest Inc (SKYW) 2004 Q3 法說會逐字稿

Ladies and gentlemen, please stand by. We're about to begin. Good day everyone and welcome to the SkyWest Airlines third quarter earnings release conference call. Today's call is being recorded. Please allow me to remind you that in addition to historical information this conference call contains forward-looking statements. 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 on 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 statements. 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 including United Airlines Incorporated, potential bankruptcy proceedings involving Delta Airlines Inc., ongoing negotiations between the Company and its major partners regarding their contractual relationships, variations in market and economic conditions, employee relation and labor costs, rapidly escalating fuel costs, the degree and nature of competition, SkyWest's ability to expand services in new and existing markets and maintain profit margins in the face of pricing pressures, aircraft deliveries and the Company's ability to obtain financing 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 including the section of the Company's Annual Report 10K as amended entitled "Factors That May Affect Future Results" and now for opening remarks I'd like to turn the conference over to the Company's Chief Financial Officer, Mr. Brad Rich.

Thank you, Jessica. Thanks to all of you for joining us this morning. We always appreciate your interest in SkyWest and taking the time to join us. Before we begin let me just make you aware that I have Ron Reber, our Chief Operating Officer, here with me. I'm assuming that all of you have gotten a look at the Press Release this morning. We'll use the Press Release generally as an outline for the discussion today. I'll give what I hope will be some brief remarks and then we'll open it up for questions. First of all as you can see from the release we generated a 33.7 percent increase in our top-line revenues, which amounted to 308.3 million for the quarter. We generated 21.3 million in net income or 37 cents per diluted share compared to 36 cents per diluted share in the same quarter last year. I would just make a reference to and a reminder of the fact that last year's third quarter was positively impacted by 5.9 million pre-tax one-time positive revenue adjustment, which amounted to 6 cents per share. You can see how the quarter's results have impacted our year-to-date results through September where we generated 60.7 million of net income through the first nine months or $1.04 per diluted share. That represents a 22.3 percent increase over the 85 cents per diluted share we did through the first nine months of last year. So really from most all perspectives both our quarterly performance and our year-to-date numbers we're very pleased with.

Some of the items impacting the quarter, a little bit of an unusual situation here with our top-line revenue growth. As you can see from the release we've indicated that the increase in top-line revenue is because of the 30.4 percent increase in capacity as well as to increase fuel reimbursements from our major partners. I think most of you know the way our contracts work fuel is a straight pass-through on the majority of our flying. And a little bit kind of different relationship between our top-line growth in revenues and our ASM production, normally our top-line revenue growth has been about two-thirds or so of our capacity growth. This time it's substantially more than that and I think the only thing that I would point out here is that because of the significantly higher fuel prices and all of that being reimbursed back to the revenue line it's really created a little bit different relationship this time in the top-line relative to the ASM growth. Relative to our total operating expenses and interest per ASM for the quarter when neutralized for fuel or in other words just excluding fuel from the equation we do have a 2.9 percent decrease from the same quarter last year so trends certainly are in the right direction. We're still working very aggressively and paying very close attention to our total operating costs. There are a number of things that we're doing and I have to say in cooperation with all of our employees and the things that we're doing, the focus that we have on our costs at the same time keeping very focused on our operational integrity and quality the credit goes to our work force for that. They've worked very cooperatively with us and are partners with us in trying to do both, keep the costs in line and continue to find efficiencies and improvements wherever we can, at the same time keeping the integrity and the quality very high in the operation. And having said that I think we all know that some good efficiencies occur naturally as we take more and more regional jets into the fleet.

Let me talk just for a minute about our ASM production in the quarter. The fleet has grown from 177 aircraft at the end of the third quarter last year to 202 aircraft at the end of September of '04. The fleet consists of 128 CRJs. 121 of those CRJs are CRJ-200s. We have 7 700s in the fleet and then we have 74 EMBs. In the fourth quarter our deliveries have moved around a little bit here and I'll explain why but in the fourth quarter we will take an additional 5 700s so by the time we get to the end of December we'll have a total of 12 700s in the fleet. That's a little bit different than we had told you before. The only reason for that is that we had 3 700s that were scheduled in December for deliveries in December. The airplanes were never intended to be scheduled into service until January so we've moved the actual deliveries into January and we've done that for property tax purposes but by moving them into January it really doesn't change at all our ASM estimates and projections because they were not scheduled until January into service anyway. Then into the first quarter of '05 we will take 14 additional CRJ-700s, an additional 6 in the second quarter of '05 and that will bring us to our total of 32 firm CRJ-700s. Through the remainder of '05 we had previously announced as well as Delta Airlines had announced that we'd been selected to fly an additional 7 aircraft. Those additional 7 aircraft I just need to say at this point we still are very much intending on taking 7 additional Delta airplanes in '05. With a lot of things, as you all know, going on at Delta we're still discussing with them at what point in '05 those airplanes will come in. So when you add those in and I'm not prepared today to tell you when they will come in but we're still looking for a total of 27 deliveries next year in '05. And again to summarize 20 of those aircraft would be CRJ-700s and the additional 7 I don't know when they'll come but they were still expecting at this point for those to be 200s. As far as what all that means in growth rate is I mean we're still expecting about 7.5 billion ASMs in calendar '04. In calendar '05 again not knowing when those last 7 200s will come in I've actually taken those out of our numbers and even doing that being somewhat conservative we think the ASMs will grow to 9.6 billion or roughly a 29 percent increase.

A couple of other items, as you look at our income statement that we released this morning I'd just point out just three quick items in our operating expense categories. First of all our flight operations expenses are up significantly, close to 50 percent and I would just point out again that the majority of that is fuel. If you neutralize fuel it's very much in line with what we had planned and expected given the amount of capacity that we have increased. On our customer service operating expenses we have something a little bit unusual here in that the expenses look like they're up more than they should be and that is due to subcontract handling where we have actually begun doing handling at stations where we're actually not providing any air service and the revenue for that is in our operating revenue line that we've labeled ground handling and other. The majority of that is just ground handling that we're doing as a subcontractor and those expenses are in the customer service line on the income statement. Our maintenance expenses are very much in line with what we had expected with the exception of two unscheduled engine removals, which have hit that line during the quarter. The expense has amounted to about $2.9 million in the quarter, which has bumped, that line up just a little bit. In addition to that in maintenance we have booked $900,000 in expense due to the signing of a MOU with a third-party service provider for the 700-engine maintenance. I'll discuss that more in just a minute. Other than that we think all of our expenses are pretty much in line with what we would have expected and again would just say that we continue very focused on controlling and reducing our operating expenses.

A couple of items that I would just review quickly, it has been previously announced early in September that Delta was moving ahead with a plan to de-hub Dallas/Fort Worth. I just want to mention here and hopefully to dispel any type of concern about what impact or how that's going to affect SkyWest, we really only had 7 airplanes in Dallas/Forth Worth and those 7 airplanes will be redeployed to Salt Lake City and put into service so I just really leave it at that that the airplanes are being redeployed. They're going into service. They remain under contract. We just don't see that as being a real significant event to SkyWest. I just mentioned that we have completed an MOU with a third-party service provider for the 700 engines to provide the heavy maintenance and really that agreement is just a pretty standard type agreement. We've been working -- I will say that we've been working very, very closely and specifically with our outside accountants to make sure that all of the terms and conditions are appropriate and qualify for current expense. This we feel is important. It will eliminate any kind of a mismatch between the revenue and the expense in our contracts for that 700 fleet and we felt that was important moving forward and as I indicated we've put $900,000 of expense for that agreement in the quarter. During the quarter we repurchased 895,656 shares of treasury stock at a price of 12.3 million. That has some positive impact on the quarter EPS but not real significant simply due to the timing of the purchases and how they come into the weighted average calculation. But we just make you aware that we have executed some of those shares that were authorized for repurchase. We still have 1.8 million shares that are authorized to repurchase.

The only other things that I would review quickly are just some of our balance sheet type items. I'll give you some idea of where we ended the quarter. I know you don't have this stuff in press release type information but we did end the quarter with total cash, securities and deposits of 583.6 million, up roughly 23.6 million from where we ended the June quarter. Let's see, our cash and marketable securities per share just cash and marketable securities is 8.67 per share. Our book value per share is 13.18, $13.18, at the end of the quarter so we feel very good about our balance sheet position. Our cash and securities, our liquidity from about any way we look at our balance sheet it's just in very good shape and in the quarter even in spite of the fact that we've expended some dollars for the repurchase of shares etcetera we still had a good solid increase in total liquidity during the quarter so we feel very good about where we've ended the quarter relative to balance sheet as well as just the financial production during the quarter. So with that I'll conclude the remarks and open it up for questions.

Thank you. If you did have a question at this time, it's star one on your touchtone telephone. Again star one for any questions. We'll take our first question from William Greenee, Morgan Stanley.

Brad, I'm wondering if you can talk just in very general terms if Delta were to file Chapter 11 what kinds of changes would you expect in the contract? Is it inevitable that the margin would take a hit?

Well, I don't think it's inevitable. I will say right now that Delta has already come to us and has asked us what we can do to help and I think the way that we're trying to accomplish this and create some additional value is in the cost side, not the margin side, and we're working cooperatively with them. We've had a lot of discussion here about things that we can do cooperatively to make the system more efficient and more productive and try to create additional value through efficiencies and reductions in costs, not necessarily just straight margin reductions.

But since 9/11 haven't you already done quite a bit in that regard? So is there a whole lot left to do?

In -- which are you talking about, cost reductions and that or the --?

Yes.

Well we've done a lot of both. We've done some margin reduction as well as some efficiencies but one thing that we have not focused on very much, probably not as much as we should, is really coordinating and cooperatively working with our counterparts in this case because your question was centered to Delta in working with our counterparts at Delta to take advantage of things like supply chain management and any way that we can work cooperatively together to create more efficiency. We've done a lot on our end and Delta is doing a lot on their end and now we're doing things cooperatively where we think there's still some value to be created.

Okay, just the last question, are they current on their payments to you? That is, Delta?

Yes.

Okay, thank you.

Tony Cristello, BB&T Capital Markets.

Thank you. I was wondering with the finalized rates with Delta for the balance of this year. Are they in line with what you had planned for the fourth quarter? And then also comparing them to last year can you comment on any differences?

Yes, I mean comparing to last year -- and I'm glad you brought that up because obviously the signing of that rate agreement was a pretty significant event during the quarter to just finalize rates for '04 -- the difference in that rate agreement for calendar '04 is not necessarily in the economics of the agreement but just in the methodology and the structure of the agreement so it's a better agreement I mean just administratively and structurally but economics didn't change significantly. The things that are really missing from the '04 agreement are the longer-term provisions that would affect multiple years and we're in discussions with Delta right now about the multiple-year rate agreement.

Okay and so what you had been using or assuming then was pretty close so we wouldn't see any difference or true up for previous quarters?

No and, by the way, we expect it to be -- what we've just signed is what we had planned on for the full year and that's what we expect it to be.

Okay and if I could switch a little bit to United, now you've had several quarters working under the new agreement can you comment on how close you've been in terms of meeting internal goals and what you thought you would have under that contract and as far as going forward do you think it will be even more difficult for you to meet those under costs on a cost basis? And then also should we expect to see United maybe on the margin side at least come down some?

Okay, there's actually quite a bit included in that one question. First of all, I'm going to stay very general to this and your question is -- I think your question is are we producing what we thought we would produce out of the contract -- I mean very simply, and my answer to that is yes. I mean it's doing pretty much exactly what we though it would do with one exception and that is that as it relates to incentive goal performance the standards were set pretty high. Our operational performance is very good performance and we think amongst the best of the United Express carriers but yet it's not producing quite the incentive dollars that we thought it would produce. But with that one exception it's doing just what we thought and just like we had the discussion about Delta and the things that we're doing with Delta, we're cooperating with United I think very specifically and trying to create value through increased utilization, not only of the fleet but of our people and our equipment and our facilities. We're teaming up with United and taking advantage of their fuel contracts and just their purchasing power where we can and those types of things, which are helping on the cost side. And those are things, by the way, that we're having discussions now with Delta that we expect to achieve some value as well.

Okay, thank you.

You're welcome.

Michael Linenberg, Merrill Lynch.

Hi, this is actually Lilly (ph) on behalf of Michael. Hi, Brad. I have a question in your prorate business. How are you performing on that and are there any plans to expand it so it picks up I believe more than 8 percent of your revenue which is where it is right now?

It's not performing very well in this quarter simply because of the increase in fuel but having said that it's not -- I mean it's still near breakeven. We don't expect to expand it really materially at all so we plan to just keep what we've got in prorate and hope that -- I mean we are focused very specifically on it trying to increase revenues and yields and things but we all know how elasticity affects this industry so we're trying to do what we can to recover fuel in that operation but we'll just keep doing what we're doing with it.

Sure and my second question relates to possible reserve that you would take should Delta do declare Chapter 11? If I recall correctly when United went to Chapter 11 I think they owed you about $10 million up front. What is that number with Delta and I know you mentioned that last quarter that you're going to try and mitigate that sort of thing as that's sort of a mismatch. Have you done anything further on that? Any details would be helpful.

I know it would be helpful and I apologize. I really am not going to really speculate at all about -- I mean simply because to a large extent-- Well, first of all I don't know what's going to happen there and a large factor there is just the timing of when they file. Not knowing any of that I'd really prefer not to speculate with any kind of a number. I honestly don't know.

Okay. Well, thank you very much.

You're welcome.

Jim Parker (ph), Raymond James (ph).

I think in 2003 that you negotiated with your pilots or worked out an agreement where that there was a wage freeze in rates through '04 I believe. What happens in '05?

Okay I'm going to have Ron Reber address this one.

Well, as you'd suspect we've been talking with pilots for some time regarding '05 and beyond kind of base rates. We have not completed those discussions so I guess I don't have a definitive answer for you except that I think that when we conclude we will have long-term competitive base rates.

Okay and Ron maybe a second question for you and Brad about the Embraer 170 which seems to be the platform for possibly regional airline growth in the future and that we have enough 50 seaters. What is the likelihood that SkyWest would operate the 170 for some legacy carrier or carriers?

Jim, I'll take the first stab at this and Ron may want to comment as well but your general comment about 50 seat aircraft versus 70 I mean obviously we agree with you. There is a strong -- it seems like a much stronger appetite for 70-seat equipment. Of course, we already have the Bombardier, the CRJ-700, in our fleet and something that we have to be very careful about is anything that will go backwards on us relative to operational efficiency and what I'm referring to is kind of the inherent inefficiency that could be, not necessarily will but could be, created with bringing on a second type in the same size aircraft. So first of all we think both aircraft are excellent aircraft. As far as their operational performance, their operational integrity we don't see a lot of difference at all. If there seems to be a preference for one of the aircraft and I think you're right, I mean there seems to be some general thoughts that the 170 from a passenger standpoint might be preferable, but at the end of the day in this environment the majors are making their decisions based on economics and one of the reasons that the 170 seems to be preferred is that it's a bigger, heavier aircraft and it does cost a little bit more to operate. So there admittedly is some trade-off. Now having said all that I'll admit we are looking very specifically at the airplane. We're updating all of our models, have all of the analysis fine-tuned so we're looking at it very closely but at the same time we're telling you we're going to be very careful to do anything that's going to go backwards relative to efficiencies and costs because at the end of the day that's what we see the majors focused on. Ron, I don't know if you have anything else you want to add.

I think the only thing I'd add is there would have to be a compelling reason for us to add an additional fleet type in the same seat (inaudible-background noise) and so there are compelling reasons out there so (inaudible-background noise) be one.

Ray Neidl, Calyon Securities.

Yes, to go back to Delta you said that you had talked to the carrier and they've asked you for help and I take it right now the guaranteed margins are still up in the air but I was just wondering did they look to do some other things with you maybe like selling you one of their own regionals to raise cash?

I'm not going to elaborate very much on the second part of your question. I'll say rather than have they done anything I'll put it back from SkyWest's prospective. We continue to look at opportunities in the industry for growth both internal and external so we do have a number of projects, analysis things that we're doing in that area and then that's I think about all that I should say at this point about that. Relative to the kind of the question about the contract with Delta I think it's not quite a fair characterization to say that it's just kind of up in the air. I mean Delta has come to us and asked us to do certain things. We're trying to accommodate their request. Their request isn't something that is going to be in any way catastrophic to us. We're digging pretty deep here at SkyWest to accommodate what they're asking to -- We're being cooperative with them and there are things that I think are kind of value for value kind of trade off kind of things that we're working with and so on. I mean we're working very closely with them but I don't expect this to be a material negative impact on SkyWest. At the end of the day we're working cooperatively with them. We're going to find some -- work together to find some joint benefits and value creation and at the end of the day we think there will be some value for value exchanged.

Okay and you had mentioned as is obvious there's going to be a lot of restructuring, a lot of changes going on going forward for the next year or two, a lot of defecting SkyWest and regionals. I'm just wondering if you could give us a general comment on some opportunities you might see with these changes? For instance, if you US Airways were to liquidate or Independence Air were to fail or United already announced that they're going to be cutting back a lot of domestic capacity and that they're replacing -- be replacing some of that capacity with RJ service. What kind of opportunities for continuing heavy future growth over the next couple of years do you see as a result of these developments?

Well, I think I'll answer it very short and succinctly just by saying that in these challenging times we all know what creates opportunity. We're evaluating the opportunity and we think there is opportunity and we're we think the best prepared and positioned in the industry to grab it when it presents itself so I'm going to be very general and pretty much leave it at that. We think there is opportunity and we're prepared to take advantage of it.

Would you consider doing any independent flying or do you want to keep the model intact and just do it as a relationship flying?

We think there's going to be enough opportunity just to grow organically that that's what we would prefer to do rather than take on the additional risks that come with outside but I will tell you that we're prepared and positioned to do it the other way if growth opportunities don't materialize internally.

Okay, good. Thank you.

You're welcome.

Helene Becker (ph), Benchmark (ph).

Just wanted to clarify one thing, the 2005 Delta rates are not in effect yet; your rates with them just go to your end. Is that correct?

That's correct.

Okay and then my second question is I think you're doing some flying for Continental?

We are.

Could you just update us on how that is going?

Yes, I mean it's a very small operation. It's 9 EMBs centered out of Houston and the flying is you know it's okay. I mean it's not producing anything stellar. It's all prorate with kind of an additional incentive for certain things on top of the prorate. The flying -- you know up until the spurt in fuel it was making good return, down to about breakeven now with the fuel where it's at but again our intent -- I think we've been pretty specific with people. I mean our intentions of doing that operation in the first place was really to establish a relationship with Continental and from that standpoint we think it has been very successful.

Okay, great. Thank you very much for your help.

You're welcome.

(Operator Instructions) Glenn Engel, Goldman Sachs.

A couple of questions please, one is United is now asking more concessions from its labor groups. Has United gone back to you for any requests, further requests?

Yes, they have but it's to work with -- they have come to us and been very clear about a very specific plan that includes operational process type improvements as well as some revenue enhancement issues and then they've been very specific saying here's the issue and here's either the expense reduction or the revenue enhancement that we think goes with it and very specifically asked for our help and our cooperation in either creating cost reductions or revenue enhancements but they have not come back and in any way suggested that they want to just change the contract. It's to create value in these other ways and so that's what we're doing with United and we're working very cooperatively with them.

Even though Delta isn't in bankruptcy aren't the economics of their agreement not much different than United even though the rate structure may be different?

They are different agreements and operate very much the same.

I guess I'm saying is if you brought margins down for Delta wouldn't that put pressure on the United ones as well?

I guess as long as we don't get anything -- you know I mean when we renegotiate our agreement with United we made certain concessions there as well and a lot of things we did like I said in the discussion about Delta is some value for value kinds of things. We made some concessions in some areas and got some growth in exchange for example and so although the contracts aren't exact we have our deal with United and it's a good deal and we've made some concessions and they've given us some growth. In the Delta discussions we expect a very similar thing to happen so I don't think we're getting anything either of the agreements significantly distorted or they're different. I'm not quite sure what you're after but I guess the answer to your question is no, I don't expect it to put pressure on the United agreement.

United I think will have up to 253 regional jets by the middle of next year and I think why they like that number of aircraft they'd like to have a somewhat higher mix of 70 seaters and a lower mix of 50 seaters. Can you find a way to place 50 seaters in other airlines so that you can free up United to get more 70 seaters?

We are working on that as we speak.

And are there any new airlines that you are talking to right now that might occur over the next year?

I think I'd better just stick with what I said earlier. We're working very specifically on accomplishing just what you've said United would like and that's more 700s in the fleet and obviously to do that we've got to place some 50 seaters in some other operation and we are working very specifically on that.

And finally just financing aircraft how are rates today versus where they used to be?

We haven't seen really a whole lot of change, at least at our airline, and I think as we have at least indicated in our Press Release we didn't talk about it in our remarks today but we do have -- we were successful in placing leveraged leases in the quarter. Again which I think we're one of the very few airlines that are still doing leveraged lease financing and have all of the airplanes on firm order. We have leased financing committed at very similar rates to what we've been doing so we're actually very pleased with how that's developing.

Thank you very much, Brad.

You're welcome. Jessica?

(Operator Instructions). Robert Ashcroft, UBS.

I just wanted to follow up on what Glen said. Are you saying that United has specifically asked you to try to swap out 50s for 70s?

No, I mean they've just, I think just --

They've made their preferences clear?

They've made their preferences clear and also indicated that at any point we can remove a 200 from the system they're happy to have it replaced with a 700.

Got you. All right, thank you very much.

You're welcome.

Gentlemen, at this time there are no other questions standing by. Mr. Rich, I'd like to turn the conference back to you for any additional or closing remarks.

Okay, well we'll go ahead and close. Again just I'll express appreciation for your time. We know your time is valuable. We appreciate your interest in SkyWest. Thank you very much.

Ladies and gentlemen, this will conclude today's teleconference. We do thank you for your participation and you may disconnect at this time.