SkyWest Inc (SKYW) 2005 Q3 法說會逐字稿

Good morning, my name John and I will be your conference facilitator today. At this time I would like to welcome everyone to the SkyWest Incorporated Third 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. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. Thank you, Mr. Rich, you may begin your conference.

Okay. Thank you, operator. Thanks to all of you for joining us this morning. Before we proceed into the review of the results, I have asked Mike Kraupp, Vice President of Finance and Assistant Treasurer, to read our forward-looking statement.

Okay. Here we go. In addition to historical information, our release and this conference call will contain forward-looking statements. SkyWest may from time to time make written or oral forward-looking statements, within the meaning of Private Securities Litigation Reform Act of 1995. Such statements encompass SkyWest's beliefs, expectations, hopes or intentions regarding future events. Words such as expects, intends, believe, anticipates, should, likely and similar expressions identify forward-looking statements. All forward looking statements included in this release and call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligations 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. Delta's bankruptcy proceedings, Delta's failure to assume the Delta connection, agreements, [inaudible], bankruptcy proceedings, which we actually now have. The failure to integrate the operations and employees of SkyWest and ASA, and achieve the anticipated synergies as a result of the acquisition.

The failure to successfully operate as anticipated under the terms of the Delta connection agreements, the impact and negotiations with ASA's organized labor forces and the impact of costs of such labor forces on SkyWest's operations and financial conditions. The failure to actively forecast acquisition related costs and the challenges of competing successfully, in a highly competitive and rapidly changing industry. Other factors that may cause actual results to vary from SkyWest expectations, include developments associated with the fluctuations in the economy, and demand for air travel. Bankruptcy proceedings involving United, ongoing negotiations between SkyWest and its major partners, regarding their contractual relationships. Variations in market and economic conditions, employee relations and labor costs. Rapidly escalating fuel costs, the degree and nature of competition, potential fuel shortages in markets where SkyWest airlines or ASA operate. The impact of weather related or other natural disasters on air travel and in airline costs. The ability of SkyWest airlines and ASA to expand services in new and existing markets and to maintain profit margins in the face of pricing pressures. Aircraft deliveries. SkyWest's ability to obtain financing and other anticipated factors. Risk factors, cautionary statements, and other conditions, which could cause actual results to differ from management's current expectations are contained in SkyWest filings with Securities and Exchange Commission, including a section of SkyWest's annual report Form 10-K, entitled factors that may affect future results.

Okay. Thank you. Let me make introductions of the people participating with us this morning, from the SkyWest side. I've with me Ron Reber, President and Chief Operating Officer of SkyWest Airlines; we also have on the line participating Bryan LaBrecque, the President and Chief Operating Officer at Atlantic Southeast Airlines; I also have with me Chip Childs, Vice President Controller; Mike Kraupp, Vice President of Finance and Assistant Treasurer, who has just read the forward-looking statement. I also have other members from our staff here, participating with us.

We're obviously pleased with our results and eager to discuss the results. But today is also a day of some mixed feeling and emotions. We are saddened at the same time with the passing of one of our colleagues at ASA, Mark Fisher, who was a young 47 years old, suddenly and unexpectedly passed away yesterday morning. Mark was as Vice President of Operation Flight Control at ASA. Mark was not only a strong and confident leader, and just a solid professional in his area of expertise. But even more importantly, he was a man of high values and character, and trusted friend. And so our thoughts and prayers go out to Mark's family and his friends this morning.

With that we'll go ahead and begin the review of the results. As always, we are making assumption that you have seen the press release this morning. We will use the press release primarily at the text of the discussion this morning.

Obviously, this quarter has been one of the, one of, if not the most significant quarters in the history of our company. The announcement of and the closing of the ASA acquisition, has obviously been very significant event, not only this quarter, but obviously in our Company's history. All of the things that -- and the results we will be reviewing and talking about this morning, include 23 days of ASA operations, which are included in the current period's results. Although we have had a tremendous amount of activity in the quarter, and when I say a tremendous amount of activity, it has been an activity, around the acquisition, as well as a significant amount of financing activity, as well as just the normal ongoing activity of running two very large airlines. Despite of all of that activity really the results in the quarter are relatively straightforward.

As we've reported, we had a 61.3% increase in our operating revenues, and we reported revenues of 497.3 million for the quarter. We reported net income of 30.1 million, which is 51 cents in diluted earnings per share, a nice increase over to 21.3 million and 37 cents per diluted share for the same period of last year.

As I indicated, the completion of the ASA transaction was obviously very significant. The deal was completed on September 7, 2005. We have put out numerous disclosures and releases, relative to the details of the acquisition, the purchase price and all of those details we have restated that again in our press release this morning. I think by now, that’s pretty well understood by the market. So, I will go over that or skip those kind of details and leave back to questions at the end, if some of you still have questions about that.

So, the primary items of significance, in the results. We will review; first of all, in talking about operating revenues. As I indicated earlier, our operating revenues for the quarter were up 61.3%, primarily the result of a 59.2% increase in ASMs and as we look at the increases in volume, the 59.2% ASM increase is an important measure to keep in mind. We also had a 37.6% increase in our block hours.

The 61.3% increase really can be explained I believe very simply in four primary areas. Number one, as I just touched on, the first issue and most significant is just the increase in volumes. Of the 61.3%, 17.7% each points of that were just in the increase in the SkyWest Airlines block hours flown. 25.8 percentage points were due to the 23 days of activity from ASA. And although we will not be breaking out specific results by carrier, just to give some relativity to the impact of ASA on the quarter. The ASA revenues for the 23 days were 79.6 million.

The other significant impact on the increase in revenue is just the impact of fuel. That accounted for 16 percentage points of the increase. If we just look at the dollar variance, just a price variance, quarter-over-quarter that accounted for $49.4 million of increase in the revenue line. So again just by itself, fuel has been a fairly significant driver of that increase.

The third area that I would just touch on, is the incentive performance and I touched on this, not only because of it's relevance to the increase in revenue, but it's indicative of just the quality of operations that we achieved in the third quarter, and we did recognize $3 million in additional incentive money in the third quarter, versus the same quarter last year.

The other thing that I would point out is the fourth reason is just the increase in ground handling contracts. The revenues hitting the ground handling contracts lying really are the ground handling contracts that we have handling other airlines. So most of the stuff that we do just as part of our flying contracts with Delta and United is in our operating -- is in our regular operating revenue line. In the passenger revenue line. The ground handling line is where we account for the contracts we are providing service to other carriers.

And those really are the four primary drivers of the increase in our operating revenues. On the operating expenses side, the first comment I would make is that we are pleased with the 10% decrease in the cost per ASM ex-fuel. Now, admittedly, a good portion of that is simply due to the mix of aircraft as we brought on a significant amount of new aircraft in the larger aircraft type. That by itself is obviously a driver in moving the ASM cost down.

We are also pleased just with our overall performance and our efforts in cost containment and cost reduction efforts which are also a component of moving that cost per ASM down. If you refer to the financials that we released this morning and look at our operating expense categories. When kept in perspective with the volume increases, the 59.2% increase in ASMs as well as the 37.6% increase in block hours. You would expect the increases or the changes in our operating expense line items to be somewhat similar to those increases in volume. Obviously, the big number that stands out there is the change in our flying operations expense lines. In absolute dollars, the increase is $128 million. The interesting thing about that line is that 88.7 million of the 128.0 million increase is all fuel. Outside of that, there really are no big surprises or things that were unexpected or different than we would have expected in our operating cost components. And again, the good news is that other than fuel expense, every single line item on a cost per ASM basis we saw a good solid decreases in period-over-period.

The other expense item that I think is worthy of some discussion is simply our interest expense. Obviously a significant increase period-over-period obviously has to do in part -- just to do to the larger fleet, more aircraft in the fleet. We do have a large portion of the ASA fleet that is debt financed. A lot of that financing is in floating rate-type structures. We have seen some movement up in the floating rates. So it's really just some increases in floating rate and then the biggest piece just the combination of the ASA fleet, which the majority of that fleet is debt financed.

A little more information just on the composition of the fleet. As you can see from the release, the combined fleet is at a total of 376 aircraft. Those aircraft break out 301 regional jets and you can see in the release how those break out by code. We also have 63 EMB-120 turboprop aircraft and in the ASA fleet we also have 12 ATR-72 aircraft.

During the third quarter, we generated 3.23 billion ASMs. That compares to just over 2 billion ASMs in the same quarter a year ago. As far as our upcoming ASMs, we would expect to have around 4.6 billion ASMs in the fourth quarter and I'll go ahead and give the breakout as we expect for the fourth quarter, excuse me, for next year by quarter. In the first quarter of next year, 4.7 billion, second quarter 4.9 billion, third quarter 5.1 billion and the fourth quarter 5.24 billion. So all of next year it's just over 20 billion ASMs, which will be a 60 points -- roughly a 61% increase in total ASM production next year.

Other items of significance during the quarter relative to Delta’s Chapter 11 filing in the U.S. Bankruptcy Courts, I think the item here of significance is that on October 6, 2005, the U.S. Bankruptcy Court did assume -- gave approval for Delta to assume our contracts both the SkyWest and the ASA contracts were assumed on October 6. So we are obviously very pleased with that development. I think that it's again a validation, not only of the strength of the partnership and the relationship with Delta, but a good indication of the value in the contracts and of course it is our very strong objective to do whatever we can to create value for Delta and to assist them in any way that we can through this process.

A few comments relative to our balance sheet. Our combined, well our total cash and marketable securities at September 30, 2005 is 418.6 million. Important to note that in that 418 million is 114.8 million of restricted cash, 95 million of which is related to the money in escrow that’s related to the acquisition of ASA, given that the contracts have now been assumed, that there are no appeals, that money is scheduled to be released from escrow on November 2. Also included in our cash and marketable securities total is $90 million that comes from, draws on revolving credit lines. Subsequent to the acquisition we increased our access to revolving credit lines, actually involving two specific credit lines, but we have drawn $90 million on those credit lines.

One thing that I would also point out relative to the balance sheet is that our total long term debt has increased to approximately 1.5 billion, obviously a significant increase. Approximately 1 billion of that increase is of course related to the acquisition of ASA and as I've mentioned earlier, a strong majority of their fleet is debt financed. So when looking at the 1.5 billion of total long term debt, basically 1 billion of that debt relates to the ASA fleet and then about 0.5 billion related to the SkyWest fleet. When looking at the present value of the of balance sheet obligations, that total has gone up to about 2 billion, infact right on 2 billion. The strongest majority of that is SkyWest because we have more operating leases, more off balance sheet obligation. So that breaks out about 1.6 billion SkyWest, 400 million ASA.

We have had, as I mentioned earlier, a significant amount of financing activity during the quarter. This is financing activity both on the SkyWest, fleet as well as the ASA fleet. We have done some financing of previous long term permanent financings. We refinanced 10 CRJ’s during the quarter. We also financed 23 aircraft that were in interim facilities into long term lease transactions or structures. We have also had some activity on the ASA fleet relative to financing that we have put long term lease financing that we put in place for nine ASA aircraft as well, so just a lot of activity in the financing area. A lot of that financing has been done in the lease, in lease structures, which we see as a very positive thing and hopefully reflective of some improvement in the leasing market.

I think with that we will conclude the formal remarks and now open it up for questions.

At this time, I would like to remind everyone if you would like to ask a question, please press "*" then the number "1" on your telephone keypad and please limit yourself to one question and one follow up question so that all participants may have the opportunity to have their questions addressed. And we'll pause for just a moment to compile the q and a roster. And your first question comes from the line of Ray Neidl.

Good morning. Just a very general question about what's happening in the regional sector. With SkyWest, I know you are interested in continuing strong growth as you absorb ASA. Going forward, what do you think would be the most efficient way for you to grow? Would it be to make additional acquisitions? There are a couple of smaller RJ's out there that could be picked up pretty cheaply or do you think its more efficient just to bid for the business from companies that are in bankruptcy and they cancel the current contracts?

Ray, I think, obviously, you are asking a very good question here. I am going to have answer it fairly briefly. Just in referring to some of the comments we have made in previous calls and that is, in most circumstances we feel like we can grow very efficiently and effectively just by good internal organic type growth. And one of the strategic advantages of the new combined company and the expanded platform is our ability to drive cost down and be very competitive in bidding for additional work. So that’s our top priority and our first preference. We do, however, remain very well positioned financially. And so, your question, the part of your question round your acquisition type growth. Obviously, we’ve got our handful at the moment but it certainly does, certainly financially. We still remain very well positioned to look at and consider other things. But I mean our top preference is just continue to evaluate market conditions, be very focused on our cost structure, be as affective as we can and realizing the potential of this expanded platform and use that to be very effective in this bidding for internal organic growth.

Okay. And relating to that, I think you might have mentioned this in that past. I just want to reconfirm. If the industry does restructuring; I am talking about the legacy carriers and feel like Delta does close their Salt Lake City hub or entrances the east coast or whatever. SkyWest I think you said previously was prepared to start up independent flying again, is that still pretty current?

Well. Let me restructure that a little bit, or restate a bit. As you would expect us to do, we spend a lot of time thinking just strategically about opportunities knowing that under certain conditions that type of flying might be productive. We certainly understand or may be mailed stated to week and as an order of preference and in our risk assessment would consider that a higher risk. But that doesn’t mean that we are thoroughly analyzing and considering these types of opportunities. So, we think we've identified some opportunities that could make sense. But they are not at the top of our priority list.

Okay. Great, thank you.

And your next question comes from the line of Mike Linenberg.

Yeah. Good morning guys. I guess just a couple of questions. It looks like recently a bunch of your older CRJ100s ended up leaving the fleet, I think it was 10 of your Airplanes and maybe all those your airplanes, where – did that happen or where did those airplanes go?

Michael, if you remember some of the disclosures relative to the ASA acquisition, we indicated that Delta had agreed to take 40 aircrafts onto their books. That’s all those 10 airplanes. We have done a lot of questions about this one. I’m glad you're bringing it up actually, because this has been a little confusing to some people who have seen this. That very simply is just part of getting those 40 aircrafts on the Delta's book. So, we don’t have a net reduction in our fleet at all. It's just the restructuring of the fleet to accomplish that objective.

Okay. I guess, I think when we saw that originally we just assumed it was 40 of ASA CRJs but it turns out that it's some of your airplanes as well.

Well. If they get that accomplished, in such cases their aircrafts swapping.

Perfect.

Okay. So that’s all what is happening there.

Okay. My second question, you talked about the October 6th, date, how Delta has gone ahead and now they assumed the ASA SkyWest contracts and I think you made a point about, that with respect to appeals that it seems like that you said the doors are closed on that. And then when I just I read your press release, it talks about the courts approval if not appealed which satisfied the conditions of the acquisition of the ASA. And when I read that, should I particular be that there is still the possibility that it could be appeal but it is based on kind of helping to proceeding what you know that the 125 million is going to deals and done deal?

I think it’s the latter Michael. I think in cases like this I think we always hesitate to say that there is absolutely no possibility of an appeal. So we rewarded that way just I guess is some protection in the language as I understand and as we have been counseled by our legal professional that we understand that window for appeals has closed. And that therefore the instructions, the extra instructions have been satisfied and completed and therefore the money will be released.

Okay. And just my last one Brad you saw, you look at some of the government filing of ASA as private company. I think the last reported quarter the June quartet they did just over about 10% operating margin and of course, some of that cost is picked by Delta and started to get a good sense of how that’s being allocated. But now as you own the company and of course Delta has to pay you a margin on top of that. And of course there is obviously some opportunity maybe to reduce some costs, reduce overhead. I mean, how should we think about the margins on the ASA side of the business going forward, I mean we have that 10% number out there but again we don't have much clarity on accounting that we would like it's a private company. I mean how should we think about that and maybe how they will impact your overall margin going forward?

Mike, again a very good question, I am not quite sure which filing you are referring to get that 10% number. What I would say here is that we think the contracts will perform pretty close to what we’ve done historically and so for instead of giving specifics about what I think they are going to do going forward, I really will just leave you back to historicals and say that I wouldn’t expect things to be much different than we’ve been doing historically in total margin.

Okay. Yeah, I've got him from the Form 41, but that’s helpful. Thank you.

Okay.

Your next question comes from the line of Jim Parker.

Good morning guys.

Hello.

Just a here is the Delta may have its regional airline affiliate get as many as a 100 smaller regional airline type aircraft meaning may be 70, 75 seats may be even 90 seats. And it would appear also that those aircrafts might be operated by the three Delta connectors, SkyWest, RJET and Mesa. Now, RJET and Mesa I think we all talk with them, in general they would suggest that perhaps their costs are better than SkyWest. On the other hand SkyWest has a better balance sheet and perhaps lower ownership costs. Also SkyWest might have a chance for with its ASA acquisitions. So, here is my question in that context, what's the likelihood and how competitive is SkyWest as well as the other two in getting a substantial proportion of the regional aircraft that Delta might get in the future?

Yeah, good question Jim, I think my first, the first topic comes to mind is that there is inference share of the strength of our balance sheet and financial positioning that is may be a strategic advantage. My first thought is that I don’t think there is any question but what that is a strong strategic advantage that we have. Next, we'll, relatively to our respective cost structure. I would just say look we’ve demonstrated, this is certainly is not the first time we have heard this. We’ve heard it before the acquisition of ASA and we successfully have bid and have been awarded bids for additional flying. The acquisition, I think, will do nothing but put us in a better position to be more cost effective and more competitive. So, if we’re successful in attracting and obtaining growth before we’re now only in a better position. So, I don’t think anything has changed there. I think that we're as well positioned as anyone to get additional growth. And I think what you said is right on point and that is we have to be very, very focused on everything and anything we can do in our cost structure to be more competitive and create value to our partners. And if you ask what our strategic objectives, it is the number one the quality of our operation and two is we have got to be competitive in our cost. And we’re not going to lose sight of that. So, I think that’s all I have to say about it.

Okay. And one other question was now that you have ASA you are in the South Eastern part of the U.S. where we get some hurricanes occasionally, has there any impact in October as a result of Wilma or anything else, weather related that’s impacting your ASA results?

Another very good question, first of all in looking at the timing of the completion of the deal, we were and I don’t want to appear tabular incentive about this but given that the deal closed on the 7th became effective on the 8th, you know the first of the Gold hurricanes, we’ve kind of avoided the direct impact of that due to the timing of the completion. The most recent hurricane we have been watching that and there is not material impact on the operation from that hurricane. Now having said that maybe it's a good time to just say, I mean I think more important to us is just been the impact on people. I mean we've had I think the number is just under 30 of our people directly impacted, I mean in a very significant material way, their lives directly impacted by these hurricanes and that has been a concern to us and we are very appreciative of our employees' generosity and their efforts. Our employees of Jet have donated both ASA and SkyWest airlines employees have donated I think the last total was $98,000 to help and assist our employees in those that have been affected. But as far as direct impact on the airlines, nothing material to speak of Jim.

Okay. Thank you.

At this time, I again would like to remind everyone. If you would like to ask a question, please press "*" then the number "1" on your telephone keypad, and please limit your question to one question and one follow-up question, so that all participants may have the opportunity to have their questions addressed. And your next question comes from the line of Helane Becker.

Thank you very much operator, hi Brad.

Hi, Helane.

Just a couple of things, as we think about the ASA acquisition going forward, and flight level of maintenance and so on. Can you give us some sense of where the ASA aircraft are in the whole maintenance scheme, so that we can filter that through our models; number one; and my other question is also related there. Can you just talk about your experience to date, are you surprised, or -- maybe that’s the wrong word, but is the acquisition for the first couple of weeks -- meeting up to your expectations into what Delta represented, would be in terms of traffic and revenue and so on. Thank you.

Okay. Helane, let me address the second part of the question first, relative to has the acquisition kind of met our expectations and all of that. First of all let me answer it by way of people. There is -- I don’t think there is anyway that answer that, other than to say, relative to just the people at ASA and the quality of the people and their eagerness to work with us and to and just their cooperation, I guess in one sense, but just their desire to do everything they can to help make this work and to do everything to run a high quality airline. That has exceeded our expectations. I mean we've just been pleasantly surprised, delighted, whatever, adjective you want to put to it, just on the quality of the people. And given that, that makes us really happy about the potential going forward, because we are started with just a solid base of very high quality people. The operation itself relative to just now operational and statistical type results, has been very much what we expected. I mean, we are encouraged by what we've seen so far, we are working together in ways to you know, to improve and by the way part of the strategic value of the deal is that the we can work together to make both airlines better. And we are well underway in those types of analysis and best practice type analysis to make that happen. Relative to your first part of the question, relative to maintenance. Helane, I am not quite sure I understand the question. From a standpoint that -- relative to maintenance. I mean we are on similar programs with same aircraft types generally, and so you know, we modeled out the impact and where we are out with the maintenance, there is nothing here too surprising. I don’t think really anything much different than what we have been doing at SkyWest airlines in maintenance. So if there is a aspect to the question that you can help me better understand.

No, I think that was it. I was just trying to get a sense of what on a cost basis, we would will be looking for, in the fourth quarter, and in '06. But I think you just answered that.

Okay. All right.

Thank you.

You are welcome.

Your next question comes from the line Glenn Engel.

Good morning.

Hi, Glenn.

Question on protection. Now with Delta and United contracts, what sort of protections do you have in terms of them looking to make the contract, calling you, you have return planes; that they don’t want them anymore.

Well, given all of our -- I guess well I'd say all of our contracts are three operating agreements. Our ASA and our SkyWest Delta connection agreement, and now United Express agreements, have all been assumed in the bankruptcy [course]. So, we don’t expect any sort of modification, or changes to the contracts. I guess at this point, the only thing that I can see, that would create a problem or anything to be concerned about in that area, is simply if our performance isn’t, what it means to be.

So, they don’t have the right to tell you that they don’t as many aircraft as they said before?

No.

And the recourses, put options like before or just financial?

No, say that again Glenn.

I think in the past recourse you’ve had, is that if they don’t want the plane, you can put it back to them. Is that still what the recourse is?

No, we don’t -- at least in our new DCAs. I mean we don’t have, put [in call] provisions. I mean, very simply, here is the fleet, and as long as we previously disclosed, as long as we keep our costs competitive and the quality of the operation meeting minimum performance requirements. I mean that is our fleet and there are no terminations or rights to call in the agreements.

Let's take an example where somebody like Independence goes bankrupt, dramatically lower their rates and has lower cost, would that be something that would make you vulnerable at all?

Well, let me answer it, first of all, strictly contractually. No. Okay, now if you're asking does that present some element of concern to us and the time we come up for rate renewals and things like that, is it going to add some pressure and are we going to have to start planning now to be responsive to those types of issues? Certainly. And again, it just further, I guess validates or it gives emphasis to what I have previously said is that we are aware that these things are going on, contractually, we are protected. But at all times, we are going to be very sensitive to whatever we can do to create value to our partners and the best thing we can do is keep the quality of the product high and the cost low and we are doing everything we can to do that.

Thank you very much.

You're welcome.

Your next question comes from the line of Jim Boucher (phonetic).

Good morning gentlemen. You may have addressed this in the conference call you had to announce the ASA acquisition, which unfortunately I never participated in, but why did you choose to purchase ASA instead of Comair?

I don’t know if we don't have enough time on this call to go into all of the reasons. I'll give you just a couple, first of all, we think there is strong strategic value into the diversification that the ASA specific transaction brought to us and that is dominance of market share in an extremely important hub, both an important hub in the U.S. transportation system and the world transportation system, but very specifically to Delta. Okay. And so that was a very important part of what we were after was to go after an entity where we could gain immediately a strong hold and control market share in a strategically important hub. Infact I probably don't need to go past that. Okay?

Okay. And if I had to step away for a moment, you may have addressed this but in the news release under the breakdown of the aircraft you list more of the jets as SkyWest as opposed to one of the [co-chair] partners, why is that?

Those are four aircraft that we acquired a number of months ago that are just unassigned. Yeah, we acquired them last December. Those are aircraft that we have used for a number of corporate purposes but they are unassigned -- they're just assigned airplanes at this point. And we have taken those airplanes, and we are considering alternatives at the present time of what to do with those aircraft. Infact an earlier question surrounded, do you think there are opportunities? What we do with aircraft either in prorate type arrangements where we are using major codes, but in prorate environments or taking the airplanes and developing some very selective specialty type markets. And that’s what those airplanes were acquired for, was to use them to help develop other business opportunities.

Thank you very much.

You're welcome.

And you have a follow up question from the line of Ray Neidl.

Brad, just a very general question, doesn't necessarily have to apply to SkyWest, but with all the turbulence that's going on now with the legacy carriers are you aware if there's a 'most favored nation' status in any of the contracts? In another words, in bankruptcy, say if like Northwest got pinnacled to go down to a 5% operating margin or a 7, are you aware of any existing contracts that would say, okay, if somebody does that we will automatically open up our contract and we negotiate the rate?

Ray, I'm certainly not an expert on anyone else's contracts. We don't have those kind of provisions in our own contracts.

Okay. And the other thing, this is very general also, but I'll give you an example, say if SkyWest did buy Pinnacle, Northwest owns Pinnacle's airplanes and Northwest said to SkyWest you've got the airplanes or somebody else, it doesn't have to be SkyWest, transferring those planes over and recertifying them as well the employees, do you have any estimate how long that will take? Some people say it could take up to a year, but if it’s the current employees and equipment, I believe it could be happening a lot quicker. What's your view on that?

I'll give a real brief response and that may be I'll let Ron give a reaction to that. And the reason to Ron is, first of all, I don’t see, I don’t know how many airlines has done this type of thing better than we have. I mean we have demonstrated our ability to react very quickly and to bring on large amounts of growth, not only efficiently but very quickly. So, my first reaction is that, I think as we've done much quicker than the timing that you've suggested but I think I would like here Ron's thought as well.

I am not sure what I can answer that. What part of the question do you think you didn’t answer?

Ron, my question was, wouldn't we buying Pinnacle but it would be taking that Northwest contract and since Northwest owns only the aircraft. Northwest will be giving the aircraft to you or whoever was involved with deal and then may be when I heard the Pinnacle employees to fight would have to be purely recertified, that would take up to a year, clearly do you think it could be done much quicker?

We have a history of doing it much quicker. So, it could be done quite quickly, it's been on the size is going what the operational we're talked about.

Okay. Great, thanks for sharing your thoughts on that.

You are welcome.

And you have follow up question from the line of Mike Linenberg.

Again, just one quick one, I know we touched on rate renewals I think in some of the questions Brad. And I know your old contracts that you stand to come up every single year and I know that the new contracts you know one of the issues to that you wanted to address was to push that out longer. I mean these rate renewals that you can refer into I mean what can you give us a sense of, is it every three years, five years?

Well. They are five year rates.

Okay.

And Michael I think that’s a good thing. I cannot – I mean contractually and in negotiating deals and all of that I mean obviously it's an important part of what we of do. And we said it was an important part of the contracts. But having said that we tried, okay we do that upfront, we get it in the contract, but that’s not really a focal point of the contracts to us.

Right.

We know we have a rate renewal coming up but at the same time -- I mean we will in five years. But I mean our objective is to do everything we can in the meantime to create value at the lower costs wherever we can lower them to create value. And then I mean you guys all know now that I mean to the extent we can reduce cost even if there are past through costs are, they are modeled out costs. I mean to a large extent, that value goes back to the major partners. And so our focus is still just on doing everything we can whether it's the past through item or not a past through item to reduce cost and to create value back to the partners. And regardless of when our renewal is or whether five years or three years, it's just our focus is we’ve got to be committed and focused to still refinement and efficiencies and bringing out ways to do things different better than we’ve done them in the past.

Okay. Thank you.

Welcome.

Sir, at this time there are no further questions.

Okay. If there are no further questions, I know the time is important to everyone. And I think we’ve taken enough time this morning. I sincerely appreciate all of your interest in SkyWest. We're obviously again pleased with the results, pleased with the quality of our operations and with the results for the quarter. And with that we'll go ahead and conclude this conference call. Thank you very much.

This concludes today's SkyWest's conference call. You may now disconnect.