SkyWest Inc (SKYW) 2005 Q1 法說會逐字稿

Good morning. My name is Rebecca and I will be your conference facilitator today. At this time I would like to welcome everyone to the SkyWest Incorporated first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and -answer period. [OPERATOR INSTRUCTIONS]

In addition to historical information, this conference call contains forward-looking statements. SkyWest Incorporated 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 the conference call are made as of the date here of and of and are based on the 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 other developments associated with fluctuations in the economy and the demand for air travel.

Bankruptcy proceedings involving United Airlines Incorporated, ongoing negotiations between the Company and its major partners regarding their contractual relationships, variations in marketing, economic conditions, employee relations and labor costs, the degree and nature of competition, the Company's ability to expand services in new and existing markets 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, including the section of the annual report of Form 10-K for the year ended December 31st, 2004, entitled management's discussion and analysis of financial condition and results of operations, factors that may affect future results.

I would now like to turn today's conference over to Mr. Brad Rich. Please go ahead.

Thank you, operator. Thank you to all of you for joining us this morning. We always appreciate you taking the time to join us and for your interest in SkyWest. I'm assuming that by now most of you have seen the release that we put out this morning where we reported on the results of the first quarter of '05.

The - - the results, you know, are somewhat disappointing from some respects. We're a bit frustrated with the results in some respects. In other respects, given some of the difficulties and the challenges that we face during the quarter, the fact that we still produced in excess of 10% operating margin, you know, we think is a pretty good accomplishment. Having said that, let's spend some time going through the release. I'll spend some time just highlighting and talking a little bit about some of what I determine at least from my perspective or some of the significant items affecting the quarter. I think we can go through this, and I plan to go through it in pretty high level, and I think in most cases, really a discussion of the results can be summarized really into a couple of items. I will stick pretty closely to the press release that we put out as far as the topics that we'll discuss today.

Having said that, let's just begin by just reviewing the results. As we indicated in the press release, we reported operating revenues of 340.3 million for the quarter, which is a 34.1% increase, compared to 253.7 million for the same quarter last year. That translated into $18.8 million of net income for the quarter, or $0.32 diluted share, which is a decrease of 3.1% from the 19.4 million of net income and $0.33 in diluted earnings per share for the same quarter last year. So right out of the chute, I think this is the first time in quite some time that we've reported year-over-year decreases in our results, and as I said, it's disappointing and frustrating from some respects. In others, you know, we're - - we think we've had some good accomplishments during the quarter and, you know, as accomplishment still doing over 10% operating income in margin.

The results really, I think, could be summarized from a couple of very - - from a high-level perspective in a couple of areas. First of all, in January, we were hit pretty hard with weather-related cancellations. The weather through the system in that month was very difficult, and I think from our traffic results and our production that we released in January, it certainly indicated we had had some difficulties and fallen a bit short in our ASM production. The - - the associated challenges and difficulties with weather cancellations has also had some impact on the cost side of the operation. I will talk specifically about the cost per FASM. It's actually a decrease year-over-year exfuel, but it's not on a cost per ASM basis. It is not down as far as we expected it to be, and there are some reasons for that.

Again, to summarize, because with weather related cancels, ASM production was not what it should have been. So simply, the production in the system, the utilization of the equipment was down, so you don't have the units that we expected to produce. So right out of the chute, unit costs, you know, have got pressure, and in addition to that, you know, the difficulties themselves create some challenges on the cost side relative to the costs of handling interrupted passengers, the increased traffic handling and labor costs, and those types of issues that actually put pretty significant pressure on the - - the cost side of the operation. And in a lot of respects, the way that those costs go through our models, they're more straight lined through the rates, and so when you have a real unusual period, you end up with, you know, costs that are not reimbursable in that particular period, although they will be, you know, reimbursed in the regular rates that are more average rates as you go throughout the year.

Okay. In addition to the weather-related issues, again, which put pressure both on the cost side of the operation and resulted in lower production than we would have assumed. We had a - - a challenge in this quarter just relative to our fleet planning. We brought on 13 700s. Normally we are able to work, you know, in cooperation with Bombardier on the deliveries and deliver the aircraft, you know, very close to their actual in-service dates. This time, with the volume of deliveries in the quarter, we ended up with more unproductive time on the aircraft from the time we took delivery as to when they went into service. We actually ended up with a full nine aircraft months' worth of unproductive flying on 700s on the month, and it really took its toll on just total aircraft utilization in the quarter.

So really from a - - again, from a summary standpoint, it's weather-related issues creating pressure on production and on the cost side. We had nine aircraft months' worth of unproductive time on 700s, and that, as well, it - - it just hit our utilization, so our utilization in the quarter on the aircraft was not what we expected it to be, certainly not what has become kind of SkyWest's standards for utilization. And I think really from most respects those are the two most significant issues that are contributing to, you know, the soft results for the quarter.

Now, very - - let me - - let me just briefly touch a little bit more on the operating revenues. A you can see from the release, the operating revenues for - - increased - - I mean, primarily, as a result of a 33.8% increase in the ASMs. Now, the way that our models work, and those of you that have been following us specifically, know that there's not really a direct, you know, correlation now between revenue growth and ASM growth. It's a bit unusual this time in that 8.6 percentage points of the 3. - - 34.1% total increase was - - or - - yeah, was due to just fuel reimbursements due to higher fuel costs. So of the total increase in revenue, it can kind of be broken out by 25.5% being related to the increase in ASMs, 8.6 percentage points simply due to increased fuel reimbursements. One reason for bringing some attention to that is that of course on the 8.6 percentage points of growth, that obviously is just straight pass-through, no margin on that, and that issue all by itself has caused approximately 1 percentage point of the reduction in our margin. Okay. It's simply related to just fuel.

More specifically, as we've reported in the press release, putting a little bit more numbers and definition to the weather-related impact, we just - - we think that we have approximately 1100 flights in addition to our historical average in this quarter. So, I mean, it's certainly fair assumption to say, well, you know, this is a quarter that we should have expected difficult weather where we have, you know, this historically. and that's true. We had 1100 in addition to what we have come to kind of see as normal in this period. Obviously, we're not completing those flights. We didn't complete, you know, have completed block hours, which is the primary basis for our billing, so obviously we were not able to build the revenue that we normally would have billed due to those cancels. And then as I already alluded to, in addition to just not billing the revenue, it - - those cancels led to, you know, some inefficiencies in the system, our production and utilization went down, as well as incurring, you know, passenger interrupted and those types of expenses.

Moving to a discussion of the cost per ASM. Excuse me. As I already indicated, you know, quarter over quarter, our nonfuel costs per ASM decreased approximately 3.7% to 10.3 cents from 10.7 cents that we did the same quarter last year. Okay. Now, there's certainly a lot of that is simply due to extension of stage lengths, bringing in the larger newer aircraft. We certainly are aware of that. We - - we are remaining very focused on our cost structure, doing everything that we can to - - you know, create efficiencies, and when I - - and I'm also going to - - to talk, as well, about, you know, focus on improving utilization. Now, I know that I'm saying that just after saying that the utilization in the quarter, you know, was compromised.

The good news, and there is some good news here, and that is for the aircraft that we were in revenue service during the quarter, we have experienced utilization increases of 3.7% compared to the fourth quarter and 9.8% utilization increased per revenue line over the same quarter last year. So the good news here is that once we have the fleet now and we get all the airplanes into service, we've got good solid production and good solid utilization, improving utilization on those airplanes. All of that should translate into very strong production, as well as improving, you know, unit cost trends as we move beyond this quarter. So in some respects, it's - - it is good news that our costs per ASM came down. We - - we expect it to continue down and remain very focused on the cost structure, remain very focused on improving utilization and think that we will see some of those - - you know, those issues showing some benefit and improvement as we move forward.

I have already mentioned that we took 13 - - I'm going to move now to - - more to ASM production and - - and the fleet plan. I've already indicated that we took delivery of 13 new CRJ 700s in the quarter. I indicated that really about nine of those aircraft came, you know, more in advance of their scheduled service dates than is normal at SkyWest. That caused some difficulties.

The total composition of the fleet, though, at the end of the quarter were up to 219 total aircraft. 150 of those being Regional jets. 69 of those being Embraer 120s. The CRJ fleet at the end of the quarter consisted of 25, all operating in the United Express System. We had 125 CRJ-200s, 67 of those aircraft in the United system, 56 in the Delta, and then we had two aircraft, these are two of the four that we acquired, let's see, at the end - - last December. Two of those aircraft were in service, the other two were not in scheduled revenue service. And then we still, of course, have the 69 Brasilias. 50 of those with United. 12 in the Delta system, 7 in the Continental system.

Moving forward, we'll take the remaining - - I think most of you recall that we had an order for 32 CRJ-700s. I indicated at the end of March we'd taken 25 of those. That means we still have 7 of the original order, which we'll deliver by early May, and that will complete that original order of 32. One of the other things that I haven't mentioned, but we think was a real positive significant issue that occurred during the quarter, was being awarded 20 additional 700 - - CRJ-700s that operate in the United system. Those airplanes will begin delivering towards the end of the year. We'll take four of those aircraft in third quarter, three in the fourth quarter, the remaining 13 will come in the first quarter of '06. So again, we - - we - - number one, we think that's a very positive development. We are very pleased to have won that bid and it just - - it keeps some good solid growth coming in the system, not just in '05 but will also translate into very solid growth for us into '06.

The ASM production for the remainder of '05, I will give you at least our - - at least our current thinking on what the ASMs will be by quarter, In the second quarter we expect it to be 2.45 billion. In the third quarter 2.675, fourth quarter about 2.8 billion. Adding all that together, it should get us just over 10.1 billion for the year, which will be a 34.1% increase in '05 production.

Some of the other, I guess, just items to highlight very quickly. You know, we have the Continental system will be, you know, - - we'll be discontinuing. We made that announcement back in January, that together us and Continental had mutually decided to end that Turboprop relationship. I think we've - - we've made a lot of public statements and discussed that in the past, so I'm not going to spend a whole lot of time on that.

The - - the Salt Lake system, I'll just make a brief comment about that, and the relationship there with Delta and some of the things happening, the most significant just being that we've been asked to do the handling on some ASA aircraft. There's approximately 17 aircraft worth of flying that, you know, Delta, DCI and ASA have transferred, I guess, primarily out of the Dallas hub to Salt Lake City. We were asked to do the handling for that, so - - and then that's also had some impact on the quarter. The advance costs and training and all of that to get ready to handle 17 700s out of the Salt Lake hub. I think that those 17 aircraft generate about 46 departures a day out of Salt Lake , so we've been gearing up and are well prepared to handle that flying.

Let's see. I - - I think maybe just relative to the additional 20 700s that we have coming, obviously that has taken a lot of time and effort during the quarter. We're pleased that we are awarded the bid, as well as just working with United and - - and working through the bidding process, and on all of that, obviously we had to, at the same time, negotiate the order for the additional 20 airplanes. We are pleased with the way that that transaction has, you know, has come to kind of completion with manufacturers, with third parties, with various, you know, sources and participants here who have all combined to help do what we think will create a very efficient cost effective product moving forward in that fleet.

I'll move just very quickly to a few comments on the balance sheet. The balance sheet still remains very strong, still think the balance sheet is one of if not the best in the industry. Our liquidity is still very solid at the end of the quarter. We had, you know, and just cash and marketable securities, 544.7 million at the end of the quarter. We did relative to our aircraft financings, we did quite a bit of financing activity during the quarter. We had some aircraft that were on interims as we were just trying to sort out the best way to do the permanent financings. We moved aircraft - - some aircraft out of permanent financings, moved them into a combination of U.S. leveraged leases as well as some just straight debt transactions. Some of that being motivated by, you know, some tax implications that we wanted some aircraft on balance sheet.

We did bring - - so we did bring a little bit more debt on balance sheet, but even with that, you know, the - - the composition of debt versus equity on the balance sheet is still about 60/40, 40% being debt, 60% being equity. The present value of the offbalance sheet debts - - offbalance sheet obligations at the end of the quarter, discounted at 7%, is approximately 1.5 billion. So we're certainly not trying to hide that from anyone and know it's there, and even factoring all of that in to total obligations and how that affects the - - you know, either our total capital structure or, you know, coverage ratios and all of that, we think we're in very good shape.

Our cash CapEx for the quarter ex-aircraft acquisitions was 23.6 million. A good share of that is in aircraft - - in engine overhauls, which I know some carriers don't really consider that CapEx. We always put that number in the CapEx. In addition to that, I mean, we recognize that that CapEx is a little higher than we've been doing per quarter recently. It's high because of some of the engine activity in the quarter, as well as trying to get ramped up and geared up to do some of this handling. Not only in the ASA system, but we've also taken on additional handling on the United side as well.

So you know, in addition to some of the challenges and the difficulties and things that I'm explaining, as we look at growth as it's in place for the future - - or at least out through now '06, we feel very good about what we've got in place there. Feel very good about the additional 20 for United. We feel very good about where some of the trends are moving. As I mentioned, in spite of the fact that our utilization was down in the quarter that we just ended, the utilization per revenue line, I will again emphasize is moving in the right direction. We're seeing good improvement both quarter-over-quarter, as well as improvements even from the fourth quarter of '04. So that's - - feels to us very good, and I think indicates some - - some reasons to be very optimistic and positive about our, you know, future production. We also were, again, for the second consecutive year ranked the number one on-time main line carrier by the department of transportation. That was for '03 and '04. We were also named regional airline of the year for 2004 by Regional Airline World magazine. So I mean, we do have some very good positive things, you know, to feel good about and be optimistic about.

You know, so I think with that, I will go ahead and conclude the formal remarks. And I'm sure that you have some questions. And we'll be happy to address those at this time. I failed to mention in the - - in the introductory remarks, I do have Ron Reber, our chief operating officer, in the room with me here, as well as several members off our staff, so you can go ahead and address questions if you'd like either to me or to Ron, either one.

[OPERATOR INSTRUCTIONS] Our first question comes from Ray Neidl from Calyon Securities Inc.

Good morning.

Good morning, Ray.

A couple of general type of questions. I just want to clarify, a couple of years ago the same thing happened with bad weather in California. Are your contracts structured a bit differently than other regionals where you've got more risks regarding to nonoperating because of weather conditions?

I think - - we yes, we certainly pay very close attention, and we do the best we can to - - to try to understand what others are doing. We see public filings and all of that, and I would say that in some respects our contracts may be a little differently - - different than some, not different at all from others, but - - but the fact of the matter is, what we have primarily is compensation that's based around completed block hours.

Is there any way of modifying that contract, or you're kind of locked in with those?

Well, I - - I would - - I think at this point I've got to - - I mean, we have what we have.

Yeah. That's what I figured. Another thing is you're getting some increased business. I think we've talked about this offline before, from United and so forth. Just the Company's philosophy, would you go after new business on a dual-type of contract? In other words, would you discount to get new business? Let me - - I want to make sure I - - are you asking - - did - - I mean, have we made big concessions and discounted margin and all of that to get additional business? Yes, that's kind of the gist of what I'm talking about. Either have you done it or would you consider doing it?

No. I - - let me make a - - I want to be very careful about this one because I don't - - you know, we do have confidentiality with our partners and I'm not going to talk in great deal about the very specifics of what - - of what our agreement is, but I will say - - well, first of all, it shouldn't come as a surprise to any of you that have been following SkyWest. You've heard me say a number of times that SkyWest, we're not interested in growing just to grow. Okay. We have very specific return objectives, and we aren't going to discount things to a point where it doesn't make sense to us and doesn't meet our return objectives.

Now, having said that, I will also say that - - that because of improvements that we're making in certain areas and because of the confidence we have in our ability to continue to reduce the overall cost structure, some of which is certainly facilitated with growth. Okay, we do believe that we can create additional value to partners by lowering the costs to produce the product. Okay. So - - so - - and yes, so the answer to the question is yes, we believe we've created value to our partners because we're figuring out ways to - - to reduce the costs to produce the product. Have we compromised the economics of the model in doing that? No, we haven't.

Okay. That's clear. That's what I wanted to clarify. Now, last thing, would you want to comment on the Company -- I know you've been talking about it for the couple of years, but the possibility of the Company making some acquisitions of other regional airlines.

Oh, okay. I'll - - I'm going to be about as generic as I can be on this one, Ray, and I apologize for it. But I'll just echo what we have tried to say in other type forums and that is that in this environment, we recognize it's an environment of opportunity. We're looking at a lot of things. We've had discussions with a lot of carriers about a lot of different opportunities. So we have a lot of those types of discussions, but it would - - it would not be appropriate to lead you to believe that anything has developed to, you know, - - you know, to a point that anything would be made public or anything like that. So, we just continue to look, we're being very careful, and that's all we can say about that at this point.

Do you think - - generally speaking, do you think that the valuations that most of the other regionals are trading at, which are far below SkyWest, do you think that makes them attractive for a possible acquisition?

Ray, I think I'm going to - - I probably need to keep away from that. I'll just say in this type of environment, you know, it has - - it has created what we think are some - - it's a good - - it's a good environment to be looking at transactions because of valuations.

Okay. Great.

I mean, I'll just say that and probably leave it at that.

Okay. Great. Thanks a lot.

You're welcome.

Your next question comes from Sam Panella of Raymond James. Good morning, guys.

Hi, Sam.

A couple of questions. The CRJ 700s that you now have and the seven coming in by early May, are those anticipated to go into service, or will you have some of this unproductive aircraft situation again?

I think we are back matching up very closely to deliveries with service dates. I don't expect this same situation to occur in the upcoming quarters.

Okay. And can you quantify the weather impact, either from a revenue and a cross side, perhaps?

We certainly have - - it's - - I'm going to do it in a - - in a fairly big round number and knowing that - - I mean, I think most of you would know inherently that when you get into these types of situations - - there are a myriad of factors that come into play here and a myriad of things that would - - to be looked at and analyzed. We've looked at and analyzed very thoroughly the impact, and it - - and it comes both in the form as I mentioned earlier, decreased revenue, as well as increased costs to deal with the situation itself and - - and some of those costs are not, you know, reimbursable costs in this current period. So all in total with all of those things combined, we think the impact is approximately $4 million of operating income. You know, pretax.

Okay. And did you get any incentive payments in the quarter?

We certainly got some. But, you know, that's the other - - that's another factor is that, you know, once you start with these types of - - of issues you kind of creates a ripple effect through the rest of the system, and it is fair to say that we did not perform as well as we had expected to on our incentives.

How about in looking at February and March when you didn't have as much of the weather impact, how did you do in terms of incentives during those months?

We did - - we did all right. You know, the - - the impact of that in - - in -- I wouldn't say that the - - well, let me just put it this way. The - - the February - - the February and March incentives, I don't believe had any impact at all on, you know, the variance in the results. I mean, they were very normal.

Okay. Okay. Thank you.

You're welcome.

Your next question come from mike linenberg of Merrill Lynch.

Hey, good morning, guys. I'd like - - just a couple - - I guess the nine aircraft months where you had planes out of , what - - how should we look at that as it relates to the impact to - - you know the sort of the hit that you took. Is it, I don't know a couple hundred thousand dollars a month per airplane? I mean, anything that can give us - - to that.

Well, I will - - just in ownership costs alone it's just under $1 million just on that category of ownership, but the issue is that, you know, as soon as you deliver airplanes you ramp up for it, you know, we're hiring crews, based on hiring and training and all that, based on deliveries, and there's a - - you know, there's a little bit of a mismatch this time. And so recovery of all of the costs, not just the ownership costs and the insurance and all that that goes with the airplanes at acquisition, you know, there's a pretty sizable, you know, ramp up of direct, you know, costs directly associated with the bringing on of an airplane, you know, in addition to just the ownership-type costs. And that's where we just - - we ended up with a bit of a mismatch this time, a little more than we normally have, and yet at the end of the day when you add it all together. Nine full aircraft months, it was - - it ended up being a material issue in the quarter.

So it could be, you know, based on just what you said, at least a million and maybe it's a couple million hits on a pretax basis for the quarter?

Absolutely. Okay. My second question, Brad, on utilization, you talked about it, and I know you threw out a couple of percentages, and maybe I didn't hear. But if you could go over maybe on an hourly basis, sort of the daily aircraft utilization you saw for the quarter, and maybe what you were seeing in 2004, and just based on some of the comments that you said the way that things seem to be ramping up and in place for even better utilization and improving chasm. What sort of, maybe, daily aircraft utilization we should see as we look out into 2005? Okay. Let me first of all just re-emphasize the numbers - - restate the numbers that I gave you earlier in my remarks. And those numbers were - - let me make sure I'm right on. 3.3% in utilization improvement over just the fourth quarter, so the December quarter of '04 and 9.8% utilization increase from the first quarter of last year. Okay. So now, now, the issue that I want to be a little careful with here is, I don't - - I don't know that we've ever given to the market very specifically what our daily utilization is by type.

Okay. Okay.

And I want to be a little careful about that

Okay.

Because, you know, it does vary between certainly between - - well, yeah, it fluctuates a bit with schedule changes and all that, but it also varies by type. Certainly our daily utilization in RJs is much better than it is in the Turboprop fleet. But I mean, - - we're in the - - I mean I think I feel comfortable telling you on the RJ fleet, you know, we're in the mid 9.5 - - I mean we're around 9.5 hours of daily utilization approximately.

Okay. That's helpful.

Okay.

That helps, and then I guess my last question. Really on looking at your prorate book of business, you're certainly going to see that scale back as Continental goes away, but that's a small piece. Maybe if you could talk about how that's working in Salt Lake, and then, you know, as we look forward, as you work through the various agreements with your partners, and I'm sure that there's been some request to maybe consider more risk sharing in - - in various markets, you know, how should we look at that, and how do we - - how should - - or how do you see that developing or progressing over the years?

I'll make a - - a brief comment about it, and then if Ron wants to follow up on it, he can.

Okay.

You know, as Ron has direct response - - well, direct responsibility for the revenue management side of the operation and the people that are doing revenue management and markup planning and all those functions. I will say first of all, just a general comment. I mean, certainly the prorate flying - - first of all, the comment on it - - a brief comment on it relative to the results of the first quarter. I mean, it certainly had some impact. I mean - - But the prorate flying, you know, was not a big, you know, negative driver of the results in the quarter. I mean, we're holding our own, we're - - I'd classify it basically even in this environment of high fuel and all of that. I mean, that prorate flying basically is breaking even right now.

And so if you look quarter over quarter, or this quarter compared to last year, and the difference in fuel costs, you know, we're just under $1 million of increased fuel expenses in the - - around - - let me restate that. About three quarters of a million dollars in increased fuel costs in the prorate flying, for example. But even with that, that flying is still holding its own. It's doing okay. It's about break even. So break even, it's not meeting our objectives, but in the environment of higher fuel prices, we've had to make some real improvements in the revenue management and the optimization of revenue in those markets to keep it at break even in this environment.

So in - - in building on what we see happening and the improvements we're making in revenue management, and just some differences, not being critical at all of how main-line carriers will manage revenue in these markets versus how we manage them, it's just - - it's just our area of expertise. I mean, we've been doing this a long time, and we've been pretty successful at, improving the revenue in these prorate markets. That, I believe sets us up. Not that we're going to run out and do a whole bunch more prorate flying, but it certainly is something where we look at it and say - - that leads us to further analysis about opportunities in the prorate environment.

Now, having said that, I don't - - I'm looking at Ron to see if he wants to add anything to that.

Hey, Michael.

Hey, Ron.

I would agree with Brad. I don't think that we would be opposed to further development of prorate flying and may or may not get that opportunity as we transition out of Brasilia and into RJs, and we know there's a lot of Turboprops out there that are sitting idle, so we may get that opportunity and may choose to take that opportunity. And what we've seen with our prorate flying thus far, is we may be a little better small community specialists when it comes to revenue management than our senior partner.

Okay. Very good. Thank you, guys.

Thanks, Mike.

Your next question comes from Helane Becker of Benchmark.

Thank you very much, operator. Hi, everybody.

Hello.

This is one - - I have a couple of questions. Your tax rate was 39% in the quarter. I kind of thought it might be closer to 40%.

Uh-huh.

Was that - - I mean, is that as a result of just the delay in the revenues or just - - I mean, should I be thinking that 39% is the number going forward?

I would use 39 going forward and there's nothing really real earth shattering, or a whole love at consequence driving that other - - I mean, it's just, you know, every quarter, or we do a periodic review of the - - of the provision, and that - - and it just - - relative to that periodic review that we do in conjunction with our own management here and our outside help, I mean that's where we're at for the quarter. And I think it's indicative of what it's going to be for the rest of the year.

And then the other question I had on interest expense, that was about - - I don't know, about 500,000 or 600,000 more than I kind of thought it would be, so and I'm taking it because it's a - - I'm thinking now that must be because of the permanent financing on some of the other differences?

That is what it is, Helane. I mean, it's -- we took some aircraft that we previously had in some leased structures and - - and did permanent debt structures on several of the aircraft. I think - - it - - yeah. We actually put five aircraft into permanent debt structures during the quarter. So that - - that is what's driving the increase in interest income - - or in interest expense.

Okay. And then my last question was you - - you kind of mentioned a thought quickly, increased union activity in the quarter, or did you just say union activity in the quarter? And is there something going on there? Is there an increased effort to unionize - - I mean, I know they're always on the property, but has something picked up that we should be aware about?

Hold on, Helane. If I said - - I didn't think I used the word in any - - the word union in any context.

Okay. So I must have misheard.

If I did, I apologize, because there's nothing outside of just normal stuff going on at all.

Okay. I thought when you were talking about cash CapEx you talked about it being higher because of engine overhauls, handling for ASA, and then I thought you said something about union activity.

If I did I misspoke.

Okay. All right. Just getting that clarified. Thank you.

Okay.

[OPERATOR INSTRUCTIONS] Your next question comes from Glenn Engel of Goldman Sachs.

Good morning. Two questions, please. One, can you talk about the pipeline, how many - - you know, are there lots of opportunities, any proposals you have out there right now? I know you can't say who, but I just - - you know, more of a sense of the activity.

Okay. You know, we - - we have been in a period right here where we have had - - I mean, so much activity going on in this area, the simple fact of the matter is that with what we have on the books right now in firm orders, it - - it will be difficult for us to do much more. So you know, we're still involved and still - - we continue to pursue relationships and things like that, but we -- you know, we really are at a point where at least, for the next year or so, we're - - we're doing about all we can do.

I guess that's what's changed a little bit is that you tend to give things much closer in right now than it used to be? It used you would get orders much - -

That has changed significantly. I mean, we used to kind of put things in place you know, two and three years in advance, and it does feel like the environment's changed quite a bit.

So you'll probably not know whether the next round of stuff until early next year?

I think that - - that - - I think as was we see it right now, that's probably true. Yeah. I think that's probably the case.

Second, can you talk about what your unit costs goal was? You said it was down 4%, but what - - will you be hoping to get your unit costs down in 2005 exfuel?

I'm - - I think I'm going to choose not to comment very specifically on that just because of the uncertainty involved. I mean, I think what is fair to conclude from my remarks is that - - that - - that in a more normal production period with the - - all of the - - with the costs of a certain size, but not the production size, that we would have expected our nonfuel costs per ASM to have been below $.10.3. Now, I'm - - I am going to - - I'm hesitating to say - ,- to put a whole lot of detail around that just to say that I think it will be lower than - - than $.10.3 cents going forward.

Thank you.

You're welcome. [OPERATOR INSTRUCTIONS] At this time you have no further questions.

Okay. With no further questions, we'll let everybody get back to work and again, I just conclude by thanking you for your time. We always appreciate your participation and your interest in SkyWest and with that, we'll go ahead and conclude. Thank you very much

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