SkyWest Inc (SKYW) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to the SkyWest second quarter 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Bradford Rich. Sir, you may begin your conference call.

Thank you, Lee. Thank all of you for joining us this morning. We are always appreciative of you taking the time to participate with us this morning, as we do these releases. To begin, let me just make some introductions of who I have with me this morning, who will be participating. I have Ron Reber here with me, who is the President and the Chief Operating Officer of SkyWest Airlines.

Also with us is Bryan LaBrecque, the President and Chief Operating Officer of ASA. I have members of our staff here with me, Michael Kraupp, Vice President of Finance and Assistant Treasurer, as well as Chip Childs our Controller. To begin, let me turn the call over to Mike Kraupp who will read our forward-looking statements.

Okay. In addition to the historical information this release and conference call may contain forward-looking statements. SkyWest 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 SkyWest's beliefs, expectations, hopes and intentions for future events. Words such as expect, intends, believes, anticipates, should, likely and similar expressions identify forward-looking statements. All forward-looking statements including in this release and conference call are made as of the state hereof and are based on information available to SkyWest as of such date. SkyWest undertakes no obligation to update any forward-looking statements. Actual results will vary and may vary materially from those estimated, projected or expected for a number of reasons.

Okay. Thank you. With that taken care of, let's jump right into a discussion of the results of our second quarter of 2006. We reported operating revenues this morning of $790.4 million for the quarter ended June 30th, 2006. That represents 105.8% increase, compared to the $384 million of operating revenues that we reported in the same period last year. We also reported $39.3 million of net income, and $0.62 in diluted earnings per share. Those numbers represent 58.5% and 47.6% increases respectively, compared to the results for the same period a year ago.

Just as a reminder, all of our results, both our quarterly results and the year-to-date results, reflect the impact of SkyWest's secondary offering of common stock that we completed back in April, wherein we issued an additional 4 million shares of common stock. The impact of that offering on our current period's diluted outstanding shares was a 5.5% increase.

Now, in total, our outstanding shares are more than that, but just the impact of the offering was a 5.5% increase in diluted outstanding shares. As a result, also for both periods, the quarterly and the year-to-date also include the effect of the adoption of FAS 123-R. We've had a discussion about that in the prior quarter, and we'll discuss it again today.

If you take those quarterly results, add those to the first quarter to get our year-to-date results, we had operating revenues of $1.53 billion, for the six months ended June 30th, which is 111.7% increase compared to the 724.3 million that we reported a year ago for the same six month period. Our net income for the six months is $73.9 million, or $1.19 per diluted share, compared to $43.5 million of net income or $0.75 per diluted share for the same six months a year ago.

Some of the significant items that impacted the quarter, obviously, the results include the combined results of both SkyWest airlines as well as Atlantic Southeast Airlines. For anyone that might be new to following the Company, you're aware -- we'll just remind you that we completed the acquisition of ASA back on September 7, 2005. So all of the operating results and the statistics and all of the results include the performance of ASA in our combined consolidated numbers.

The total operating revenues for the quarter were obviously significantly impacted by the acquisition. Our total increase in capacity or ASMs was just under 100% at 99.9% primarily due to the acquisition. Total operating expenses and interest per ASM, we continue to be pleased with our performance.

When you take our cost for ASM excluding fuel, we had a decrease of 3.2% compared to the same quarter a year ago, but we also had a 6.1% decrease just from the March quarter. Again, those numbers are X fuel. Our total ASM production, as I mentioned was up 99.9% for the quarter, primarily just due to the increase of the fleet size, up to 397 aircraft as of June 30, again the significant increase primarily due to the acquisition of ASA.

We've obviously been very busy over the last six to nine months. This quarter, actually was a period that in spite of a lot of activity being very busy with the acquisition and all of those types of things, was a -- compared to the rapid growth that we've had, not only just internally through organic growth, with just a lot of aircraft deliveries but with the acquisition and all of that, this was a very benign quarter. We took delivery of two additional CRJ 200 aircraft we financed those aircraft through third-party long-term operating leases.

The composition of the 397 total aircraft is as follows: 323 of the aircraft are regional jets, 62 EMB 120 aircraft and then 12 ATR 72s. During the quarter with that fleet, we generated just over 5 billion ASMs compared to 2.5 billion ASMs in the same quarter a year ago. Combine that to our 4.7 billion that we generated in the first quarter, our year-to-date ASMs are 9.8 billion. We have coming up 17 firm orders for CRJ 900s. Those aircraft will deliver as follows four in the third quarter, five in the fourth quarter, six in the first quarter of '07, and the remaining two in the second quarter of '07.

With that delivery schedule, our estimated ASMs in the upcoming quarters -- and, again, these estimates are just based on historical run rates of utilization, and those sorts of things. So our best estimates at this point are 5.2 billion ASMs for both the third and the fourth quarters which would bring our total calendar year '06 ASM estimate to at 20.2 billion. Just a quick reminder. Relative to the upcoming CRJ 900 delivery, obviously -- I mean, we are taking CRJ 900s. We obviously will take those aircraft configured to be in accordance with scope clause restrictions. It's just a question that we get a lot relative to, you know, the existing scopes and things that are out there with our major partners.

I mentioned earlier that our results for the quarter certainly included the effect of the adoption of 123-R which we adopted at the first of the year, in January. The impact on the quarter was a $3.1 million pretax expense. The after-tax impact was $2.2 million and equating that to EPS, it's about $0.03.5 in diluted earnings per share impact. I think we indicated in the first quarter that, you know, due to our broad based equity compensation program at the Company, where we really do have a very broad based equity compensation plan, where we do include basically all of our employees in this type of program, you know the expense is a material amount. As we look forward to upcoming quarters, I know that all of you would be interested in -- or might have the question of what our run rate would be given the current impact.

Our best estimate for the third quarter right now would be 2.7 million retax charge. That's about as much guidance as we feel comfortable giving at this point, simply given to the fact that there's still some uncertainty in these numbers, given that, you know, our equity compensation programs are certainly at the discretion of our Board, and upcoming, you know, expenses relative to 123-R will be based on, you know, the decisions that are made, you know, at the discretion of our Board.

I indicated earlier that we had completed the secondary offering back in April. We're obviously pleased with the development and the structure of our balance sheet at this point. We think that our capital position, our balance sheet structure is very adequate at this point to fund upcoming growth. Not only growth we have on the books but growth that we are pursuing and opportunities that we are pursuing. We generated good, strong cash flow during the quarter.

I think it's interesting to note that the majority of the proceeds of the public offering went to retire existing debt and so the increase in cash during the quarter which is up at 420 -- just under 430 million, that increase is primarily driven by cash generated by operations during the quarter, given that the majority of those proceeds went to retire $90 million worth of lines of credit, debt that we had incurred primarily attributable to the acquisition.

We continue to work very aggressively at some restructuring of the balance sheet. We indicated previously that in the acquisition of ASA, we brought on a significant amount of current debt, which primarily was attributable to aircraft financings that were on interim short-term arrangements. We continue to be very active in the finance market, subsequent to quarter end. We have had a lot of financing activity and we continue to work at some restructuring of the balance sheet, particularly relative to the aircraft financings. I think interesting just to note that our cash and securities per share at the end of the quarter were $6.75, which is a good improvement. And we continue to generate good, strong book value per share, which increases $17.26 per share at the end of the quarter.

Looking at just some of the detail of the income statement, I would just remind everyone that the impact of increasing fuel prices, obviously is having, you know, a pretty significant impact, both in just top line revenue, as well as has certainly some margin impact.

I know that a lot of you, as you are building models and looking at our growth, upcoming ASM projections and trying to determine for your modeling purposes, you know, what are the run rates in margin and those types of things, I just remind you that as we look at a margin, which it's operating margin or DBT, earnings before tax margin, it's certainly being impacted by the increase in fuel taxes where most of you know that we are capped at a certain level after which we obtained margin on some of the fuel costs, the remaining fuel costs; although, 100% reimbursed by our major partners in contract flying, we don't get a margin on a portion of that.

So as the fuel prices have continued to increase, it has tended to pull the margin down. But at the same time, we're still generating the absolute dollars of net income that we have expected.

Relative to our specific operating expense categories, obviously one way that we look at this, just from a very high level in doing various analysis and those sorts of things is to look at the expense increases or decreases relative to capacity. If you look at our expense categories, really the -- the things that I would just point out very quickly in our flight operations line, that's where our fuel expenses roll up. If you normalize fuel or eliminate fuel, the increase in flight expenses are very much in line with what we have expected, no significant issues there. The majority of our customer service -- well, I'll just make a general statement.

I think we have made a point before, just to remind you that in our customer service costs, we do handling not only for the majority of our own flights but for a significant number of other carriers. So that line includes both our own handling and the handling that we do for other carriers and no significant issues to speak of there. The large increase in our interest expense, I think we have pointed out this before, but, again, just a reminder, the majority of that increase is simply due to the ownership structure of the aircraft at ASA, where the majority of those aircraft are owned and debt financed aircraft.

And so really, other that that, just no real issues or items of concern that I would point out about the income statement. In general, we're very pleased with the performance. Operations at both airlines, we think are -- have been very solid. The financial performance is meeting our expectations and basically has been in accordance with particularly -- I will just speak relative to the ASA side, I know a lot of you have called to ask questions --is it performing relative to our expectations -- and certainly financially speaking, it is. And with that, I will conclude formal remarks and we'll now open it for questions.

Your first question comes from the line of Ray Neidl with Calyon.

Hi, Ray.

Just a couple of really quick questions here. Did you give out your estimate for ASMs for 2007?

I gave them to you just for the first two quarters and that's really about all I feel comfortable giving it today. Oh, let's see, we didn't give it for '07. I just gave it for the remaining quarters of this year which were 5.2 billion per quarter. Ray, we are within just a matter of days, we will have ASM estimates, projections on our Web site. So at this point, I just ask you to be patient for a couple of days and then you can grab it right off the Web--

Okay.

--our page.

Okay. Great. Now you are talking about the risk with fuel. Can you give just a rough percentage of your ASMs that do have fuel-related risk?

Fuel-related risk is -- it's around 5% to 6% is all.

5% to 6%. Okay. Great. And do you have any target levels for where you want your cash levels to go?

Well, you would be surprised to just hear me say, up. We would like them to go up.

As high as possible, right.

That's right. Let me just say that we certainly, on one hand, we don't have the desire to hoard cash but some say that we have firm deliveries on 17 aircraft coming up, and so what are we going to do with growth? And therefore, one could say, why do we need to continue to build large amounts of cash with all we have firm booked is 17 airplanes worth of growth? And our response to that is that due to the nature of the industry today, we don't see our major partners awarding out growth very far into the future. We still see a lot of opportunity. We're actively participating in proposal processes.

We still see enough activity that we are very interested in maintaining adequate levels of cash and liquidity to support and to put us in a position to fund those opportunities as we see them. So we do have strong cash flow. The cash balances, I would expect -- again, I always hesitate to make these kind of -- I guess this is -- this would be a perfect example of a forward-looking statement, but I certainly would expect that our run -- our free cash generation will be pretty strong going forward. And we think that is important, because we still see a significant amount of opportunity.

Okay. Is there opportunity in Cincinnati do you think?

Excuse me?

Is there any opportunity in Cincinnati, do you think? What's your opinion on ComAir?

You're asking a very good question that I don't dare give a response to. Obviously we are watching things very closely. Let me just say our first response is, you know -- that we hope things get worked out. I mean, there are -- we respect our, you know, fellow regional operators. They have good operations, and we hope that things work out the best for them. In the event there's opportunities that might come up, I will just say that we're watching and paying attention very closely.

Okay. And finally, do you have any preference when you go out to get new business, do you have any preference of ownership of aircraft, whether it's you or your partner? Would it be easier for you if you are partner on aircraft.

Ray, it's a really good question. And I've got two different responses to it. Number one, certainly it depends what the aircraft type is. You know, we feel better about taking ownership risk and having residual exposure in certain aircraft, and we're, you know, a little more risk adverse in other aircraft.

But having said that, to the extend that there's aircraft required to, you know -- that we would need to acquire one issue is, is that with the strength of our credit, you know, we still have very good access to the capital markets at very competitive rates. And so it's hard to get through these analyses without looking at the ownership cost to the aircraft, simply driven, not by the acquisition purchase price, but by the financing costs. And in this current environment, with the strength of our credit, generally, we'll be very successful at lowering the all-in costs if we are the ones acquiring and financing the aircraft. I mean, maybe just a couple of different ways to look at that.

Okay. Great. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Buck Horn with Raymond James.

Just related to the Continental bid, it appears when the RFPs went out for the second time, you guys were active in that process, but R Jet Republic came away with the business. They mentioned yesterday that they were probably not the low bidder for that business. Give me some ideas on why you didn't come away with that and do you think you were more cost competitive on that bid?

Very good question, Buck. You know, let me just, first of all say, you know, this is obviously a sensitive issue in some respects and certainly first of all, congratulations to Republic for winning that business. We have a lot of respect for them. They run a good operation and all of that. We certainly felt that in this realm, we were very competitive very much in a position to be successful at winning this particular bid. I don't know exactly where we were relative to just -- you just take back the components that you mentioned relative to the cost. What I do feel very confident in, is that we were very cost competitive. Whether we were the actual low bidder or not, I don't know.

Let me just say though, that in this particular situation, as we have talked about growth previously and I think we talked about a little bit about our philosophy about growth, we looked at not just the economics but certainly risk parameters and all of those things, the impact of a deal on our work force, are all factors for us. And so this particular transaction, as we looked at the risk profile, we looked at the risk as they related to our work force and particularly, I'm just talking about doing the right things for our people. We made a decision on this one that this was one that did not fit consistently with our risk profile. I didn't think that it fit well with certain employee issues and the risks to our employees, and we chose not to pursue this particular opportunity.

Okay. Thanks. And one other one, we also heard last week, there may have been some operational type issues with United during the period, maybe weather-related or due to any resource allocation system they are using. Did you have any trouble with United, either in Chicago or anywhere else in the quarter?

Buck, this is another good question and I know that there's been some talk about this, and, you know, one of the other regional carriers, I think may have indicated they had some issues with this. This is an issue that we have dealt with, you know, primarily on the West Coast, as United has made some operational changes, and tried to change the flow of aircraft, you know, in and out and through their hubs. I would just say that we have more impact of this in the first quarter, since we work with it and -- continue to work with it and try to sort out different operational challenges. We certainly didn't have near the impact in the second quarter as we had on the first and we feel actually pretty confident.

Now having said that, I mean we certainly have our share of challenges related to some of the changes that have been made, and we continue to work cooperatively with United through those issues. Financially speaking, we didn't have near the impact in the second quarter as we had in the first.

All right. Thank you.

You're welcome.

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

Yeah, hi. Good morning, guys.

Yeah, hi.

Just a quick one. Did you not participate in a second bid for the Continental business?

No. We participated very aggressively and specifically we were negotiating and discussing the deal right until -- I don't know how to say it, other than right until the 11th hour.

Okay.

At the end of the day, I -- my statement was meant to say is that at the end of the day, as -- as the -- as the -- as it was coming right to a head, there were just certain parts of the deal that we did not like the risk involved--

--Yes

--and we didn't pursue it at that point.

Okay. My second question, you, you know, talked, about you know, that ASA financially, it was meeting expectations. What -- what are we seeing operationally? I know, you know on the D.O.T. consumer report, on-time has definitely lagged but that may be more of a function of the region in which it operates in. If you can just --

Michael, very good question. And as you are well aware, there are two responses to this. First of all, is a pure financial response --

Mm-hmm.

--and the way we have structured our contract, you know, our incentives and financially speaking, it's tied to, you know, controllable numbers, which are not reported to the D.O.T. Mm-hmm. And so obviously, what you see in the D.O.T. reports are all the raw data and there, in fact, Bryan LaBrecque is with us. I'll let Bryan respond to that.

Good morning. As Brad has indicated, from the financial perspective, the weather-related issues associated with operation here and primarily in Atlanta, which as most of you know is about 80% of our operations if not more on a daily basis, it does have its challenges in there. Operationally, we are not where we need to be with the D.O.T. and that is going to -- it's probably going to remain a challenge to us because of the weather, but aside from that, I think it's fair to say that the other issues have crept in that are somewhat within our control that have lowered our numbers over the past month and a half. And we're addressing those even as we speak today.

Primarily, with the summer months coming here in Atlanta, the scheduling of our gates and the scheduling of our facilities here has been stressed to its -- probably to its maximum limit or even beyond that approach. So we are doing some things with our partner Delta to try to alleviate some of that stress on our system and we believe within a month or so, we will have those things taken care of.

And in the interim, we have in here with staffing and moving some of our aircraft to other gates to alleviate some of those pressures but, yes, there's no question that the operation is a function of where we are. That is Atlanta, but we do say some responsibility for the congestion and some of the dip in the numbers. And the team here is focused on turning that around quickly.

Okay, Bryan, just since I have you. One last one, which would be the status on the labor situation at ASA. And I know that these contracts have been open for sometime -- at least past the amendable date. But I guess in all fairness, the ASA, its destiny was not known, until, you know, four, five months ago. Anything you can give with us an update on that would be great.

Yes, sir. The -- for -- by way of history for those of you on the line who are not aware. Our contract has become amendable that in December will be four years ago. It's on the primary list of things to get taken care of and we have dedicated ourselves primarily within the past six months to resolve this. Unfortunately for us, we have not been able to really come together with our friends at Alpha, and I work with them frequently with the national mediator. In June the gap as it stood was wide enough that the mediator essentially recessed the normal negotiations within an indefinite time period associated with it.

Since that point, we have continued to have conversations with our group locally and informally to discuss where we can go and what we can do but at this particular moment, there's no formal activity moving forward. That being said, I think everyone needs to understand that in the process, this is being controlled by the mediator and therefore, the timing of any action of any time is certainly not imminent in that process. I think that's the best I can say.

We are working very hard towards conclusion. It's important for us and it's always important for us that, you know, we value our people and we are committed to them to provide a conversation package that is competitive, and that meets the industry standards and certainly makes the opportunities for growth of our company and I think it's probably fair to say that both sides haven't yet agreed on what that level of competitive nature is.

Okay. Great. Thank you very much.

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

Thank you very much, operator. Hi, gentlemen.

Hi, Helane.

Just to follow up on, that the ASA, I think the pilots voted to strike at some point.

They did formally authorize a strike.

Right. So are there any concerns or issues with respect to either wildcat actions or what about the idea of merging the two labor groups? Have they been putting any pressure on you in that regard and can you operate under the two certificates without, you know, the SkyWest pilots wanting to unionize? Or alternatively, can the ASA pilots choose not to unionize or be part of the union?

Okay. You're asking some very, very good -- not only good questions, but they are complex issues, obviously, that you are addressing here. First of all, let me just make a simple statement, and that is that we -- that certainly one of the reasons -- I mean, just one of many reasons that we have chosen to operate the companies separately are because of the issues that you are just questioning.

We are very much aware of single carrier issues and having implications of single carrier status and so we are very careful in that area. So with respect to the other parts of the question, about, you know, any kind -- I think you termed it kind of wildcat type operations. I think I will bring Bryan back in to address that part of it.

Yes, under the mediation process, there is -- there is no threat of a -- I think you termed it wildcat strike. The process is very formal, and requires the National Mediation Board to come to a conclusion that there is no meeting of the minds, either imminent or capable, in which case at that point in time, whenever that point would be, the program then requires a 30-day, I guess you could refer to it as cooling off-period or however you want to refer to it, it is a self-help period before any type of job action of imposition by the Company can occur. So there's really no threat of that type of operations here going on. We have to follow the process and continue along through the formal mediation process in there.

Okay.

I don't know how else to -- if that answers your question.

No, no, Bryan it does. You had said in response to Mike's question something about there were certain issues that were controllable with your --

Operations.

--with your operations and I'm sad to say I don't fly ASA that often. So are they related to, you know, pilot issues or are they just other types of issues that have nothing to do with labor?

No, ma'am, they are not related to any pilot issues. They are structural issues in terms of our facilities and staffing levels. So it is pretty much internal between our with Delta and ASA. It is not related to the pilot issues.

Okay. Great. And then Brad, when are you -- or did you and I missed it -- filing the Q?

We'll file the Q about next Wednesday.

Oh, okay. Right on -- right on your date. And is there anything in the tax rate we need to be -- I think the tax rate went up a little bit?

The tax rate is up primarily just due to 123-R issues.

Okay.

I think as we learn and have learned more and more and more, one of the things you learn is that there are certain aspects of this that become temporary differences and that's why you have kind of an odd number here in the pretax, you know, after tax impact of 123-R and that's primarily what's driven up our effective rate.

Okay.

But also with that, these are temporary differences that will reverse. As we change certain aspects of our equity compensation program, they truly will reverse. So it's kind of a temporary increase in the effective rate, but not temporary enough that you should expect anything different for the next year or so.

Got you. Okay. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Susan Donofrio with Cathay Financial.

Hi, guys.

Hi, Susan.

One more follow-up on the ASA issue, and then I will move on to my other questions. But I did see that the Delta connection, the pilot leaders kind of all met together, and I'm just wondering. Is this becoming a Delta connection issue. Are you feeling like you are negotiating with ASA or is this becoming a Delta/Delta connection issue.

Bryan, while you are thinking about a response to that, let me just make a quick statement here.

Mm-hmm.

The -- what impact that is having on these discussions, you know, I really don't know and I'm not -- and even if I did, I'm not sure it would be appropriate to get into that much detail. Obviously we are in a pretty sensitive spot here with these negotiations. But let me just say this, you know, given the situation we are in and given as long as it's been with the ASA pilots having an amendable contract, I mean we have been very, very pleased with the cooperation that we have had from that work force.

I mean, our operating results since acquisition relative to just, you know some of the general quality kind of indicators -- the completion factor, for example, has steadily improved since the acquisition, but that has not happened without the complete work force, including, you know, this work force that's been -- that has had an amendable contract for this long.

So just my first general observation is that we are very appreciative of the cooperation and the help that we have gotten from the work force and they have improved the operation, and that's helping all of us. Now, Bryan, if there's more follow-up relative to the question, you are certainly free to give some additional comments.

Right. I think you have said it very well. First of all, our knowledge of the activity that took place in Cincinnati is limited, as you all know as well, is what we reported. And secondly, we -- you know, even if we had a better idea of it, we're focusing on our people and negotiating with our team and our representation here for our folks. So it is really a non-issue with us in this process. Brad said it correctly, the team is continuing to work together. Through all of this difficult time, and we don't envision any problem beyond that as well. So to make any kind of comments about what went on in the Delta connection group discussions, I really don't have much more to say.

Okay. And then moving away from labor, if you were awarded -- let's just say today, new flying business, how quickly can you get incremental, you know, new aircraft?

Well, that's a pretty broad question.

Mm-hmm.

Susan, I'm sure you know that it is.

Mm-hmm.

It would obviously depend what it is we are trying to source. If we were trying to source, you know, used equipment, used CRJs, for example, we know and understand that market really well --

Mm-hmm.

--given what we have been doing and working so hard on the last few months. So we certainly understand the availability. There are aircraft available that could be obtained very quickly in the used market in the CRJ side. If you are talking about new aircraft, again, it depends on the type. I think most of you probably that are following the industry closely know that there's, you know, interest generated -- being generated for -- you know, for large turbo props, for example.

Those are gaining some momentum globally and, you though, those are not as available. You know, additional just regional jet aircraft, you know, or in between used RJs and the large turbo props, they are kind of in between. So it just would depend on which aircraft type we are trying to source.

Great. And then just last, can you just remind us right now what your split is between United and Delta flying?

Yes. Delta, just consolidated total numbers, the Delta flying is now about 57% of the total, and United about 43%.

Great. Thanks so much.

Mm-hmm.

At this time, there are no further questions.

Okay. I think I heard you say there are no further questions in the queue. We appreciate your time and interest. We -- again, I always hesitate to close without just -- just paying some -- or expressing thanks and appreciation to our work force, who are making all of these things happen every day, day in and day out.

We always appreciate the interest of the market and appreciate your time today, and so with that, we'll go ahead and conclude the call. Thank you very much. Operate pray thank you for joining today's conference call. You may disconnect at this time. Thank you for joining today's conference call.

You may disconnect at this time.