SkyWest Inc (SKYW) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the ExpressJet fourth quarter, 2007, and full year, 2007, financial results conference call. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded. I would now turn the call over to Ms. Kristy Nicholas. Ms. Nicholas, you may begin.

Thank you, Lorraine. Good morning everyone and thank you for joining the ExpressJet Holdings fourth quarter conference call. On the call we have Jim Ream, Chief Executive Officer and Fred Cromer, Vice President and Chief Financial Officer. Portions of this call may contain forward-looking statements not limited to historical facts but reflecting our current beliefs, expectations, or intentions regarding future events. A number of factors could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning risk factors that could affect our actual results is described in our filings with the SEC, including our 2006 10-K. During this call certain non-GAAP financial disclosures may be made relating to our performance measures. In accordance with SEC rules, we will provide a reconciliation to our most directly comparable GAAP financial measures on our website at www.expressjet.com. Jim will cover the operating and financial results for the quarter, then Jim and Fred will take questions. Now I'd like to introduce Jim Ream.

Thanks, Kristy. Good morning, everybody. The quarter produced a loss of $27.6 million, excluding the special charge that we took in the quarter. It's a $37.1 million loss with the charge, charges related to the writedown of goodwill and our Wing Aviation investment , jreflects the broad pull back in market values of special aviation services. We just thought it would make sense to do a mark-to-market on the evaluation of that company and put it into this quarter. The results for the quarter reflect the enormous challenge of our second full quarter of schooling all of our new (inaudible) and, of course, right in the middle of typically a challenging quarter for the industry generally and then of course you've got the economic issues and record fuel prices on top of it. That said, we feel we've made solid progress in all of our new ventures and continue to see improvements in all of these areas.

With our pro-rate plan for Delta, mid-December we added three aircraft to that line, bringing the total to 11 airplanes that we have working (inaudible) for Delta out of L.A.X. Expansion out of LAX increased departures by about 40% and brought on six new communities. For the branded service, the quarter reflects our continued efforts to improve our ability to sell, increasing our presence in these markets and then evacuating each market pair demands.

We're starting to get a better information to work with and we finally have industry information from the third quarter. It looks like we stimulated the market demand by about 50% in the third quarter and then we gained about half of that overall market share in the markets that we were flying there in the third quarter. It's going to be a few weeks before we have the fourth quarter information. But generally, our selling capability was about the same in the fourth quarter as it was in the third. So the changes that we needed in our reservation system to give the travel agency community that next level of functionality that they enjoy with other carriers, we're hopeful it was going to be in place by the early part of the fourth quarter. The fact of the matter is, most of it occurred the last couple of weeks of December. And some moved into January. We actually brought up refunded exchanges in the tail end of December. Sort of direct and interactive selling we brought online by the-- I think around the first part of February. For Saber in particular and that brought Expedia Corporate Travel on when we got that up and going.

So on balance the fourth quarter to the third quarter is pretty consistent from what a travel agency would have been able to expect in functionality with our ref system. As a result of that, we did see some downward pressure in our travel agency share in November and December, as they were obviously dealing with folks that needed to have an ability to move their itineraries around through heavy travel periods and they just decided to wait until we got that functionality on line. As we did bring it on online, we saw the market share start to regain back to where it was and continue to improve. We're sort of realtime and measuring our performance in that area but we feel confident now that the travel agency community is becoming increasingly more comfortable with what our selling capability is and are starting to use us more and more.

On the demand side, we continued to monitor how each market is doing. We did make a schedule change in kind of mid-November to better match supply and demand. Pull down our overall departure levels about 7% and again we've made an announcement of another schedule change on April 1st in response to demand and just generally where fuel prices are in gauging just how much capacity do we want flying in this point to point operation here going through a very difficult time for the industry. We look at March bookings, we're pleased. We think that not just in the quantity but the quality of the bookings. We've just made a lot of progress from where we were in the fourth quarter and I think in particular how we're kind of measuring ourselves right now until we get to a year-over-year basis is just looking how are we doing, and generating revenue on our aircraft versus sort of where the industry was benchmarked to revenue levels in the summer of '07. So we're -- we monitor every month. Seeing how we're doing versus the industry, and just generally measuring the market level, how it's doing to see if we need to make some-- to make some changes there.

Like all carriers, the issue's becoming fuel and we're going to continue to monitor that and as we come into the summer months, verify that we're generating more cash operating the aircraft than not and right now our best guess is where we feel we're going to be. So we've still got enough flexibility in our planning to be able to take a look at all of the marginal performing aircraft on the point to point and look for other opportunities and we will continue to do that as we get into -- as we get into the summer and really see how things are going. But right now as we approach our first anniversary, we feel like we've made a lot of progress in a very difficult time and more importantly beyond that sentiment of how we're doing, is just generally looking at the cash flow and we feel we're going to be in position to demonstrate we're generating more cash operating the aircraft than not.

Our charter group is continuing to expand the number of agreements they have in place. We expect with the expected value in how those agreements look coming together, that we may end up having to have about 15 aircraft working in the back end of this year. That obviously allows us to continue to redeploy aircraft out of the point to point system and we may ultimately end up with about 30 aircraft working in that system when we get to the fourth quarter.

For our CPA flying, we did not achieve our target margins. The expenses to fly the schedule were higher than the rates that were established. The impact of the fourth quarter was about $15 million so on top of everything else we have going on in schooling our new businesses, the fourth quarter results were impacted by the fact we did not hit target margins with the flying that we're doing for Continental. We're now starting to work earnestly in setting the '08 rates. That process has been ongoing. They had a lot of projects on their side that kind of slowed that up from us going back and forth with them for a while. They're now back engaged and we're sending information. We expect to have that resolved here pretty soon and be able to kind of move forward in getting those rates in place. Finally, we closed the quarter with $214 million in cash. And in the quarter we spent $10.5 million repurchasing some stock and pre-paying on the note we have-- the convertible note. That kind of hits the high points. Lorraine, why do not we open it up to some

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Michael Linenberg from Merrill Lynch Please go ahead.

Yeah, hi. Good morning. A couple of questions here. First, if we do the math you have 50 airplanes and your branded and your Delta pro-rate, and you indicated that you re-deployed a few more this quarter to prorate. When you were flying 220 departures in the branded, what were the number of airplanes, and then at 200 and then going down to 172, I just want to get the exact numbers.

I think the K will obviously have a lot more information for you to do a better job of modeling things out, Mike, but on balance we had -- before we did the November schedule change, we had 42 lines of flights in the point to point operation and eight aircraft working for Delta. So we went down to 39 lines of flight, aircraft dedicated, when we made that change. As we do the April change, you're probably looking at effectively around 36 aircraft working in the point to point operation. And we're-- probably from a utilization standpoint looking at kind of a lower 30s. We'll start redeploying aircraft into either charter or into pro-rate options as we continue to have conversations with several other carriers.

Okay. And then at 36 though, is that just to do the math, is that 14 at Delta or is the number actually less than that?

Well right now we're at-- still at 11.

Okay.

We're looking at opportunities to maybe expand a couple of markets out of there that may eat up another aircraft and we're in conversations with a couple of other carriers about whether or not we can provide some opportunities in and out of their networks.

Okay. And then my next question is when you look at the lines of flying and you're at 42 and I think when you're in April you're 36 aircraft, what are the number of lines of flying that you think you'll be operating in April?

Right now, probably around 31 to 32.

Okay. 31 to 32. Just, I don't know if you can provide us this information and maybe you do break it out in the 10-K, but when we look at the segments, what percentage of those segments are profitable and maybe it's just easier to say on a cash basis as opposed to the more conservative fully-allocated business.

I think we're hopeful -- the only kind of forward point, I would say, Mike, obviously the fourth quarter and it's only being at this for our second full quarter operation, everything is going to be under pressure. There is that bottom 25% you're going to work on and say it's not just a selling issue or a presence issue, this is a demand issue so we have to do some things there. I think what we're seeing now is that the markets are starting to bunch pretty close together. We've got points of strength out west, some more challenges the further east you go and we're kind of working through that.

But I think everything is starting to behave in a pretty similar way and so when we get to the second quarter we're hopeful when you put all of the at-risk line together that we are generating more cash flying the aircraft than we are if we were to-- if we were to ground them. So you start -- with fuel being as high as it is, and hitting our first anniversary, we think that's a pretty good point to be. But from general experience, the markets are spooling as we would expect them to spool. Obviously part of the -- it's masked somewhat by fuel just continues to move northward. So we're just-- somewhat dealing with what the rest of the industry is looking at when you look at '08.

Okay. Good. One last quick one, Jim, and this is more of a philosophical question. Let's just assume that oil sits around 100 bucks, 105 bucks into perpetuity maybe it's kind of the new model. That being said, it would seem like the 50-seat aircraft, the economics of the 50-seat jet-- it does not make -- it does not make a lot of sense in a lot of markets and not just what you're doing, but what other people are doing. And when I look out over the next couple of years it seems like a lot of regional contracts are up against their amendable dates. And I'm just curious how you think about your fleet today and maybe the possibility that you could actually be taking more 50 seaters from Continental in coming years and maybe how that changes just with oil prices where they are. Are you forced to completely rethink your approach if oil prices stay where they are?

Well, that's a big question, Mike.

I know. It's philosophical, that's why.

I would say that my experience of sort of looking at it is that every airplane is going to be under pressure at $100 a barrel oil. Really it's a function that what I've tended to see over time is that you end up having to regauge the markets depending on trying to get the revenue mix on the aircraft to offset an external vice like what we're dealing with right now. So the 50 seater fits in a whole spectrum of fleet options when you're looking at how to maximize the performance on any given market pair. So, is the 50 seater working on every market it's in now?. No it's absolutely not. But there's going to be small narrow bodies that are going to face that same phenomenon. So, when you redeploy how you want that network to look given where oil is, this is still a pretty useful asset. It's an aircraft that-- it has a high per seat economics but it gets within striking distance of strong narrow bodies which gives you an awful lot of flexibility.

From a broad CPA world, obviously the majors are going to want to make sure that this aircraft is adding value to their network and they're going to want to make sure their partners are doing everything they can and that this is the right airplane for them. So, I think everybody faces that strategic issue across any aircraft that you're going to fly. On the stuff we're doing on our own, you've got a chance to really match supply and demand. If you can get the right mix of passengers on there, even at $100 a barrel oil, you're going to do as well as you would do with any other aircraft. The bigger the aircraft, the more you're going to have to have folks on the aircraft that aren't paying a lot of money for those seats. And, they tend to be a little bit susceptible to pricing sensitivities than folks that actually have got to get somewhere. I'm not sure what aircraft I want at $100 a barrel oil, but I don't think the 50 seater is naturally more limited than any other aircraft.

Okay, good, thank you.

Our next question comes from Duane Pfenningwerth from Raymond James. Please go ahead.

Hi. Thanks for taking the question. Just wondering, maybe I missed it in the press release, but what was revenue for the branded segment in the quarter?

Well you'll need to take a look at the K where you've got all of the lines sort of broken out there, rather than just start barking numbers out in space. That would be the easiest thing for to you look at.

Okay. I guess you broke that out last quarter. And just generally you can talk about average fare this quarter for branded.

It was up in the upper 90s for the quarter, so slightly higher than where we were in the third quarter. The point to point did better than that. And we've moved more aircraft over in the pro-rate flying, west-coast, north-south stuff, a little bit larger, longer stage length, so it had a little bit more pressure on it from a RASM standpoint in the quarter. So the RASM performance on the point to point is a lot better than when we ended up on the pro-rate side, but obviously you have less school issues on the pro-rate as we moved airplanes into L.A.X.

Okay, great. And could you give us an update on where-- how much of that convert left-- is left to be taken out.

134 -- $134 million.

So if fuel remains at these levels, given the cash burn that you're seeing here, how do you avoid going into chapter 11?

Well I think, as we look at things, we feel that this year, obviously we're looking at a bad quarter, quarter four is going to be bad, first quarter is going to be bad, second and third quarter we do not think is going to be as bad. So when we look at how much capital we need to spend in '08, the improvement we're seeing in all of the lines of business, the fact that we have got about 80% of our fleet under CPA flying, I think from a liquidity standpoint we feel pretty comfortable with '08. So in this year where the economy is and where fuel is, it's not a bad spot to be.

Thank you.

Our next question comes from Bob McAdoo with Avondale Partners. Please go ahead.

Most of my question have been answered. Just when do you expect to file the 10-K.

By the end of this week. Certainly by the 17th is our current plan. So in the next couple of days we'll kind of finalize everything and then you'll see more detail, obviously, in that document.

Okay. Thanks. That's all I have.

Our next question comes from [Sandra Arnault from Air Transport World.] Please go ahead.

Good morning, Jim. I was wondering, are you getting pressure from shareholders to reduce further this branded flying operation. I had seen a couple of articles about that. And how low can this -- these numbers go. You're going to go down to 36 aircraft. What kind of fleet do you need to make this a viable operation?

Well I think what was -- it was enormously difficult to take 42 aircraft and deploy them as quickly as we had to do it. I mean it's not -- it hasn't been done in this industry before. So it's very, very hard to do. So any chance you have to look at some other opportunities where you do not have as much spooling as you tend to have with as many new markets as we're working in, just takes a little bit of pressure off of us.

We are seeing points of strength. We're also seeing markets out there and saying I'm not sure this is going to be successful in this current fuel environment. So the negatives of it is, we had to spool very quickly. A lot of aircraft, a lot of new markets, nobody knew us, brand new ref system needed a lot of work on it. The good is all of those things are kind of fixable, and you have a little bit of a blank sheet of paper to move assets around as you have an opportunity to see whether it's working for another carrier or in kind of finding another market where this aircraft could work a little bit better and change in frequencies.

You've got more flexibility to move around with this portfolio of businesses that we're working through right now, and so I think we'll -- we will -- I think we'll ultimately be able to manage this to a point where it becomes not the issue that it is immediately. But it's a big challenge to work through in '07 and the first quarter of '08 is going to have the same kind of challenges the rest of the industry is. But when you start looking at where the bookings are going into the second quarter and how we've been able to improve our presence in those communities, there is a lot to be happy about when you see what we've done in just our first year of going at this.

Okay. Thank you.

Our next question comes from [Sam MacKenzie from Credit Suisse]. Please go ahead.

Hi. Good morning, guys.

Good morning.

I'm wondering if you can answer just a couple of questions. I'm wondering what you're seeing with respect to competitor pricing, if you could just talk a little bit about the competitive dynamic.

Right now it hasn't -- it hasn't been so noticeable that we think its one of the bigger issue that's we're working through right now. I think we've found a niche that we can fill with the right aircraft to do it. And I think on balance, most of the other networks that are out there are kind of concentrating on their own strength and are not really paying as much attention to us as you thought maybe might have been the case when we first launched into this. I think some of it is-- we try to be a good competitor. We've gone in with fare levels that make sense and not trying to drive load factor to a point that you really didn't end up driving any value from a RASM standpoint. And again I think the value we bring to the market pairs that's we're flying is a fair amount that is difficult to replicate if you're going to drag folks over a connecting hub. So I think on balance we've kind of found a little bit of a home here and we're not dealing with a lot of competitive pressures.

Interesting. And then I guess given the supply demand dynamic which you referenced in your markets, wondering if you can provide some perspective on the PDOs, the passengers daily each way where you feel you have a sweet spot given all the network changes that you guys have-- are implementing here.

Well I think as we get into the second quarter, in our ability to continue to manage the inventory that is available on working the average fare up, we're getting into a quarter that we think we'll start moving up into that 35 range. That's kind of where we think we need to be at this point in our life cycle on this project and on balance I think that's kind of what we're seeing.

Okay. Good. Thank you.

Mr. Ream, I'm showing no further questions at this time.

Okay. Well thank you. We appreciate everybody following us and we look forward to '08 continuing to improve upon where we are currently and bringing some real value to all of our shareholders. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating and you may now disconnect.