SkyWest Inc (SKYW) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the SkyWest Incorporated second quarter earnings release conference call. [OPERATOR INSTRUCTIONS] Mr. Rich, you may begin your conference.

Okay. Thank you very much. Welcome everyone to our discussion of our second quarter of '05 earnings and operations. I have in the room with me today several members of our staff. I have asked Mike Kraupp, Vice President of Finance and Assistant Treasurer to first of all read our forward-looking statement.

Okay. I will just go ahead and read that. It says, in addition to historical information this 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 release, in this call, are made as of the dates 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 fluctuations in the economy and the demand for air travel. Bankruptcy proceedings involving United Airlines Inc., potential bankruptcy proceedings involving Delta Airlines Inc. the pursuit of the Company's strategic initiatives to expand operations internally and/or through acquisitions, ongoing negotiations between the Company and its major partners regarding their contractual relationships, variations in market and economic conditions, employer relations, and labor costs, rapidly escalating fuel costs, the degree and nature of competition, the Company's ability to expand services in new and existing markets and to 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 on Form 10(K) entitled matters that may affect future results.

Okay. Thank you. Having said all of that I am going to stick pretty closely to our press release which went out this morning. As the agenda or the outline for today's discussion. I would make first of all just a general statement that we really are very pleased with the results of the quarter and a special thanks to all of the people of SkyWest, all of our people who are out there getting the job done every day. One of the main reasons that our performance is what it is is due to their efforts and just the operating performance and the quality of the airline has been very, very good during the quarter. So thanks again to all the people of SkyWest.

As you can see from the release this morning we reported operating revenues of 384 million, a 43.6% increase over the same quarter last year. We reported 24.8 million in net income for the quarter, or $0.42 per diluted share. Very quickly just by way of review of the year-to-date performance, 724.3 million in operating revenue, or 39% increase for the first six months. 43.5 million in net income and $0.75 in diluted earnings per share.

Focusing on some of the primary and significant factors of the first quarter. Our total operating revenue increase I think really can be summarized by pointing really to about four primary factors. Obviously, we have a strong, very solid and strong increase in our ASM production. It's 44.5% over the June quarter of last year. The strong growth rate obviously is due to a couple of factors. Obviously we have taken a lot of additional aircraft, 39 additional aircraft in total from the third -- from the June quarter of last year. So from June to June, 39 additional deliveries, 32 of those, 700s, seven 200s, just in the June quarter alone, we took seven additional 700s. In addition do just the growth aircraft we've had very strong utilization improvements really throughout the system, whether comparing to June of last year or to the March quarter just ended, too, the utilization improvements are 12 -- or 13% over June of last year and 5% utilization improvement over the March quarter. So those two just the growth aircraft as well as good strong utilization improvements have contributed to the total ASM production.

Other factors contributing to the revenue growth are just the quality of the operation. I think those of you that participated or have reviewed our March quarter in that discussion we indicated we had had a really difficult quarter with both weather and ATC type cancelations. That certainly has not been the case in the June quarter. Our operational performance both completion factor, on time performance, has been very, very good. I think most of you know that we do receive quality incentives and that incentive performance in the quarter has been very strong and much stronger than it was in the March quarter.

Additionally, I think most of you know that the way that our contractual arrangements work with our major partners is that fuel is a straight pass through on all of the contract flying. Our fuel cost at SkyWest have increased from $1.61 a gallon in March -- in the March quarter, to $1.87 a gallon. That's a 16 -- 15.9% increase. They also increased from $1.33 per gallon average in the June quarter of last year which is a 40.2% increase. Those fuel variances are of course are recorded both in revenue as well as our operating expenses and that is another component of the increase in the revenue.

Relative to our operating expenses and interest per ASM, I just -- would just make a general comment here that we just are really pleased with our continued improvements in the total cost per ASM. Important I think just to remind you first of all that when you see our total cost per ASM numbers it is a total number which still includes a large number of turboprop aircraft, 66 EMB120s that's in that average. We are pleased that year-over-year our cost per ASM, ex fuel is down 8.7% and even from the March quarter chasm, nonfuel has come down 7.8%. Obviously some of that is due to the utilization improvements and just getting better utilization of the whole system both aircraft, people, facilities and just throughout the whole system. Really other than that there really, there are no significant items at least that I believe relative to the cost structure worthy of mentioning only that we just continue to be very, very focused on continued cost improvement, cost reductions and pleased with the progress that we've been making.

Relative to our ASM production for the quarter, again, as I mentioned already it's 44.5%. I just want to do a quick review, just of the composition of the fleet. As I mentioned we've taken delivery of seven additional 700s during the quarter. That brings the total fleet at the end of June to 157 regional jets; as well as the 66 EMB120s. For the remainder of the year we will take an additional seven 700s, and then in -- spread between January and February of '06 we will take an additional 13. So the seven remainder -- seven in the remainder of this year and the 13 in January and February are the 20 aircraft that we announced last quarter. The seven that we took during this quarter complete the initial order of 32 that we've had on firm order for quite some time.

As far as what all of this will produce in ASM production for the remainder of the year I will just update you on our third quarter and fourth quarter estimates. Really they remain unchanged from the guidance that we provided last quarter. We are expecting third quarter ASMs to be around 2.7 billion. And around 2.8 billion in the fourth quarter. That should bring us for the full calendar year of '05 to just over 10.2 billion for the year.

I would like to mention just a few quick highlights relative to the balance sheet. Obviously we still feel very good about our total liquidity. Cash and marketable securities of 556.8 million. We had an improvement -- we've improved that position during the year in spite of paying an additional 40 million out in deposits. In new aircraft orders. As relative to the financing of the new airplanes most of the deliveries in this quarter have been financed through seller financing arrangements which we expect to be refinanced into permanent long-term facilities later this or, excuse me, in August.

We just remain really pleased with the overall composition and strength of our balance sheet. I won't spend a lot of time going through it. Not a lot of developments or changes to the balance sheet from what you've seen in prior quarters. I just again emphasize the cash and liquidity is very strong. Cash and marketable securities per share is at 9.63. We've increased the total book value per share during the quarter up to $14.20 in book value per share.

We have had a couple of things that I just mention again relative to the operation and the quality of the operation. We continue to be recognized by various entities. Not only just regional airline of the year type awards. We were just recently awarded the FAAs Aviation Maintenance Technician Gold award for 2005. Again, a lot of thanks to Ron Reber and his operating group for just the overall quality of the operation, our reliability and those types of things. I think this quarter is good strong evidence of the contribution and the impact of just good, solid operating performance and the difference that it makes in our financial results. And with that I am going to conclude the formal remarks and we will now open up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Sam Panella with Raymond James.

Good morning.

Hi, Sam.

In the Wall Street Journal the other day there was an article that mentioned you being in discussions with Delta to buy ASA. If this were to proceed how could you protect yourself given the speculation that Delta may have to file Chapter 11 bankruptcy?

Sam, that's a very good question. And we saw that same article, too. Sam, I think that what I need to do here is really just state the obvious. We have said previously that we have had discussions with a lot of airlines about a lot of different opportunities. If there were anything that had developed to an announceable stage or a discussable stage you would have seen that in press releases. So although I appreciate the question and it's a good question, there's really -- I think it would be inappropriate for me to discuss really anything relative to that situation at this point.

Okay. Looking at the 13 deliveries scheduled for January and February of next year, is that consistent with United's plan to put them into service so that you don't run into the same situation you did this past first quarter where you received aircraft ahead of them going into service?

That's absolutely correct.

That it is consistent with United's plan?.

It is consistent. We don't expect to have the kind of unproductive time on aircraft like we had in the first quarter.

Great. Thank you.

You're welcome.

Next question comes from the line of Ray Neidl with Calyon Securities.

Regarding the 66 turboprops and Continental what do you see the future of the turboprops at your company? Are you going to whittle down the numbers, find another home for them or what's your plans?

No, I mean, good question. Just to be clear, we do have 66 EMB120s still in the fleet. 53 of them are in the United system. 13 of them in the Delta system. In fact your reference to Continental, we did discontinue during the quarter all of the Continental flying, I think which we discussed quite a bit in the previous call but relative to just the future of EMBs, again we know that this is a bit unusual relative to some of the other leading regional airlines to have this large of turboprop fleet. We don't have any significant plans to discontinue flying in the props.

Most of the airplanes, again, this is for competitive reasons and, again, I just remind you that most of those airplanes are flying in markets where there is no regional jet competition, number one, and flying in very short stage lengths, number two, which makes the economics very difficult for a jet. So as long as there is demand in these short stage length markets and we don't have regional jet competition in the markets which I don't think we will have just because of the nature of the markets, we plan to continue to fly them until leases expire and no plans to rapidly accelerate transition out of props.

You are on guaranteed contracts, too, right.

Well, no, the Delta system is basically all at risk right now and prorate type agreements. And I would add that during the quarter we did have some at risk Brazilian flying both with Continental, United, and Delta, and all of those operations showed positive margins on a fully allocated basis in spite of the increased fuel prices.

That's good. And being a industry leader in the regional sector, I was wondering if I could get your general viewpoint. One of your competitors sees little growth for regionals going forward and as far as acquisitions go they think acquisitions would be very difficult because of the complications with their host or the legacy carrier. And I know you've said in the past publicly, or that SkyWest has said in the past publicly you are looking for an acquisition to broaden your customer base. I was just wondering if you could give me your comments on the industry concerning growth and concerning the possibility of general acquisitions?

Okay. Again, a very good question, Ray. In fact I want to at least knowledge Ron Reber our Chief Operating Officer has also joined us. I will give an attempt at a short answer to this and just if Ron has additional comments he would like to make you are certainly welcome to, Ron.

A few thoughts came to mind as you were asking the question, Ray. First of all I don't know that we share the same thinking that regional jet growth is as limited as at least the question might have implied. We still see some opportunity and we see it in a number of different areas. We are not going to assume that the only way to grow regional jets is within the current contractual arrangements that we have. I mean there are different types of -- there are different models, different types of aircraft as you move up in size. We think there are some opportunities.

Now, I'm certainly not trying to imply that we are going to run out and do something inappropriate or anything like that. But we think there is some growth still in the contractual side of the business. Some development that needs to take place and even in some continued development of the larger aircraft -- I'm saying more mix type, heavily weighted to more 70 seat type equipment, there are opportunities outside of the current contractual arrangements. And then I don't know that we share the same thoughts relative to the acquisition opportunities. I mean we continue to be active in that area and think there is some opportunity. Ron, I don't know if you have anything that you would like to add.

Not knowing the context of the comment that some other regional has obviously made relative as to the limited growth the only thing I would add is that there is still some fleet rationalize -- the legacy carriers will continue to rationalize their fleet, rationalize is a nice word of saying pull aging aircraft out of their fleet. And those aircraft will likely be replaced by regional fee type airplanes. So I would maybe agree that the 50 seat regional players got limited opportunity but the 70 and then you step up to the 90, et cetera, there is a lot of growth opportunity as the major carriers redeploy their assets and some of the deployment may be just parking them which doesn't sound like very good deployment but I think it will create opportunity for us.

Your next question comes from the line of Mike Linenberg with Merrill Lynch.

First off, Brad, I know you can't really address what's been in the press regarding a potential merger with ASA but maybe you can address this. You are a non Union company and you certainly have made it pretty clear over the years that you've looked at other carriers in the past and other regional carriers and that you are always looking at potential opportunities should they come along. Given your non Union status and that much of the competition is Union, if you were to contemplate a merger with any carrier out there, given sort of that disconnect on the labor front how do you proceed? Is that a holding company root? What sort of structure would be available to you in order to facilitate an acquisition on another carrier?

Oh, Mike, again this is a very good question. I think the first comment that I would make is that we obviously -- we think we understand pretty well the issues involved in this area. They are very sensitive issues. And all I would say is that our philosophy, our objective at SkyWest is to be fair with all of our employees and to treat them with respect, whether in a non Union environment or a Union environment. And given that that is the overriding principal and objective I think that we can be successful with this in any environment. So although we've recognized that there are very sensitive and important issues relative to this question, that's just the way we are approaching it, is sensitively and carefully, but at the same time recognizing that we do have some corporate objectives to satisfy. We will continue to be active in at least analyzing and pursuing these types of opportunities. And we will treat all of our employees with respect and fairly in whatever environment comes out of this.

Okay. That's helpful. My second question, I think when Ron was talking about rationalization of the industry, he was talking about different types of airplanes and maybe stepping up from 70 to 90 seaters. At this juncture, it seems like it's U.S. Airways and maybe America West who's pilots have given management the okay to bring in the larger shelves, five years ago there may have only been one airline flying 70 seaters. Is it your sense that maybe three to five years from now we could see 3 or 400 90 seaters flying around the U.S.? I'm including the potential 100 that could be delivered at JetBlue? What's your thoughts on the larger shelves and maybe even above and beyond that?

Mike, let me say, too, that economics are going to drive this day. And whoever can fly these aircraft with the best economics is who will win the flying whether that be the larger legacy carriers that can pull their pilot rates down to JetBlue like rates or America West, operated by Mesa type rates. That will be the driver. Now to your second part, will there be these kind of airplanes? Absolutely. You can't have a gap between the 70 seater and then jump to 150 or 130 seater. There will be this airplane flying. Now, the numbers of them will be kind of interesting. Again, it almost falls back to what will happen with crew rates, at major carriers over the next three to five years. Will they actually come backwards or will they want to just move forward and turn that flying over to their regional partners? That's yet to be seen but those airplanes will operate.

Your next question comes from the line of Helane Becker with Benchmark.

Thank you very much, operator. Hi, guys.

Hello.

I just have a couple of I think, after those questions, easier ones. Your maintenance costs are up 41% in the quarter and yet your fleet seems to me to be relatively young. So could you just discuss what might be driving that?

Yes, nothing to be concerned about here at all, Helane. All we have is it's really just all around timing of overhauls and the timing is always overhauls, this is a pass through type item on those overhauls so they're in expense and in revenue. So it's simply just an overhaul timing issue.

Okay. So we are looking at the costs being around that level on a go forward basis?

Yes.

And then the other items that kind of surprised me was commercial and sales down about 17% year on year and kind of flat year to date. I know that you don't do a lot of at risk flying but is there a decline in advertising, is that how I should see and interpret that?

No. I mean I think it's a combination of a lot of things, the most significant of which I think is just related to the way that we were booking our Continental reservation and those types of customer -- the whole reservation process for the Continental flying was rolling through that line. And so with the discontinuation of that flying, that's why the number is down. But it's no real significant changes other than that.

I'm sorry, I don't remember why they decided to discontinue that. Was it just markets that weren't working out for them?

Well, no, I mean Continental -- Continental has a desire to continue flying. In fact, they have a contractual arrangement with another carrier. I just describe it this way. I mean first of all the Brazilia in those types of -- in those markets was having some weight limitation issues. Continental came to us and very clearly said they like doing business with SkyWest. They felt that our costs were good, but felt they needed to make a change in the equipment. And so when that opportunity was presented to us we just -- we did not think that the economics really justified going out and getting a different aircraft type to keep that small of an operation alive.

So it very much was a -- and we would describe this as a very cooperative thing between ourselves and Continental and it really was. They made their objectives known to us. We made a decision not to pursue it. They got a relationship with someone else. We are fully participating, cooperating in the transition. All of our flying did stop July 1.

Okay. July 1, right.

Yes.

Okay. Okay. Great. Thank you very much. I appreciate your help.

You're welcome, Helane.

[OPERATOR INSTRUCTIONS] There are no follow-up questions, sir.

Okay. Well, I appreciate your time. We've tried to go through this review as expeditiously as we could. We recognize all of your time is valuable. Again, we express appreciation for your interest in SkyWest. And with that we will go ahead and conclude. Thank you very much.

Thank you for participating in today's conference call. You may disconnect at this time.