SkyWest Inc (SKYW) 2008 Q1 法說會逐字稿

Good morning. And welcome to the SkyWest announces additional authorization for stock repurchases and first quarter 2008 results. If you would -- all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note, this conference is being recorded. Now, I would like to turn the conference over to Mr. Bradford Rich, Executive Vice President and Chief Financial Officer of SkyWest, Inc.

Thank you, operator. Thank you to all of you for joining us this morning for the announcement of our first quarter results, as well as to talk about our authorization for additional stock repurchase. Again, we recognize that all of you are busy and we'll try to be respectful of your time this morning and get through this report in a timely fashion.

Before we begin, I'd just like to make some introductions of who we have participating with us this morning. Chip Childs, President of SkyWest Airlines; and Brad Holt the President of ASA are linked in and able to participate with us this morning. I also have various members of our staff here with me in St. George, Utah, participating. Mike Kraupp, our Vice President of Finance and Treasurer; as well as Eric Woodward, our Vice President and Controller. To begin, I'll turn some time to Mike Kraupp who will read our forward-looking statement.

Okay. In addition to 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 belief, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipate, should, likely, and similar expressions identify forward-looking statements. All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to update any forward-looking statement. Actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons.

In addition, on April 25, 2008, SkyWest issued a press release confirming that it had made a proposal to acquire all of the outstanding shares of ExpressJet Holdings, Inc. for $3.50 per share in cash. ExpressJet also announced on the same day it had rejected SkyWest's offer as outlined and indicated it would start a process of exploring options or alternatives including engaging in discussions with SkyWest and other interested parties. At this point SkyWest intends to review its alternatives with respect to its proposal to acquire ExpressJet which could include among other things altering or withdrawing its proposal. As a result of this process, and SkyWest continued evaluation of its alternatives, no additional comments will be made during this call regarding our proposal and we would also respectfully ask callers not to pose questions in the Q&A session regarding our proposal. Thank you. Brad?

Thank you, Mike. As always, I will make the assumption that most of you participating with us this morning have seen our public announcement and press release this morning, which walks through an analysis and some of the key factors affecting our performance for the first quarter. As part of that press release, we also announced that our Board has authorized an additional 5 million shares for repurchase, which we think is a very positive development. We'll use the press release, the text of the press release primarily as the script for our discussion this morning.

As you can see from the release, we reported this morning a 10% increase in our operating revenues. We reported net income of $29.1 million, which is $0.40 -- $0.47 in diluted earnings per share, which is a 16% decrease compared to last year. Some of the primary factors -- well, first of all, let me just say, obviously from an overall perspective, the results are obviously short of our internal expectations. We recognize that it's also short of what most of the market was expecting. It happens to be a quarter where you can take differing perspectives of these results and in some respects, although there is some disappointment that we missed our own internal expectations, there were enough factors that we felt kind of went against us this quarter, there's also a perspective that says you look at these results, certainly amidst the conditions of the industry right now, coupled with some things that didn't go according to plan in the first quarter, and we look at it and say, we're quite fortunate to have produced as strong of results as we did.

But having said that, let me just walk through some of the issues and some of the factors that affect our performance. We assume by now that most of you -- that have been following the Company specifically, pretty well understand how fuel impacts our revenue production and how it flows through our models. All of the fuel that we incur outside of the fuel in our prorate operations obviously flows through the model. It flows both through revenue and through expense and is a direct pass-through and so what that means, the most significant issue that impacts our revenue is total production. And as you can see from our release, although production was up 4.3% in block hours, we obviously expected to have produced more block hours, given the increases in the fleet size. So having said that, one of the factors impacting the performance was that we just did not produce as many block hours as we had internally planned that we would produce.

Now, there are some reasons for that. We obviously had some very difficult weather in our ASA operation in both January and February. It was I think fairly well-publicized, the snow and the ice storms that occurred in those two months which are obviously very unusual for Atlanta. Other factors impacting the production include the fact that we have had some significant changes in scheduled utilization of the equipment. We're seeing that more strongly in the CRJ200 fleet than anywhere else. We think this is somewhat tied to increasing fuel prices and as fuel prices continue to go up, in some cases our major partners have chosen to decrease utilization to some extent and in some cases right to the minimums allowed by contract. That I think as most of you know is a fairly vulnerable spot within our business model in that when we anticipate and prepare for a certain amount of production and then don't produce it, we not only don't collect the revenue, but in most cases don't have time to adjust the cost structure relative for example to crews and so we incur the costs but don't collect the block hour base compensation. So that was obviously a very significant factor in the quarter.

Moving down to our expenses, the expense -- the cost per ASM results here are somewhat interesting to me. Although we had a 2% reduction in our cost per ASM, we did that in spite of lower than anticipated production. We did it in spite of, as we have detailed in the release, some non-engine maintenance expense variances that were unanticipated and in spite of both of those, we still ended up with a decrease in our cost per ASM. So although we had some unanticipated maintenance events and some unanticipated expense variances, on the other hand, we have aggressively been -- and I do emphasize aggressively been pursuing various cost reduction initiatives, which have -- which have resulted in an overall decrease in our total cost per ASM, which we think is good news, and as we have identified, we do believe that some of these expense items are one-time items and, therefore, in the future, we should see continuing improvement in our cost per ASM which we feel very good about. We did detail some of the things in the press release relative to our non-overhaul related maintenance expenses, in reference to some of the seat checks.

I think there has been a fairly widely-publicized issue relative to our CRJ200 fleet that's gotten some media attention in reference to flap actuators. We've also had some aircraft damage created by third parties, which has caused not only some expense increases, but just some difficulty in the operation, all of which we have had to deal with in the quarter.

Our prorate flying is something that in previous quarters we have talked very little about. In this period of rising fuel costs, obviously this has become a more significant issue to our total net income results than it has been previously. In previous quarters, where our total prorate flying has been close to break-even, in these increased fuel price environment, we did lose about 6.2 million pretax in our total prorate flying. In total, we're operating about 34 Brazilias in prorate flying.

Let me talk a little bit more specifically about production in terms of our ASMs. As you can see from the release, ordered 5.6 billion in actual ASMs for the first quarter. I will give you some numbers here for upcoming ASM projections. First of all, I'll give you by quarter as we have historically done. Second quarter, we are projecting 6 billion ASMs, third quarter, 6.2 billion, and the fourth quarter, 5.9 billion. We are quite confident in the estimate for the second quarter of 6 billion. I'm saying that because obviously we're operating in the quarter. The schedules are loaded. I mean, that's the schedule that's been generated by our major partners and is in place.

I would extend some caution relative to third and fourth quarter estimates. Only expressing caution from the standpoint that as we have seen in the first quarter, we have seen some fairly significant reductions in scheduled utilization, particularly by one of our major partners, and we think that although some of that is driven by increased fuel, we think that the -- as we have seen in the second quarter and preparations for summer schedules, where traditionally and historically our block hour utilizations are increased, there's just -- there's some uncertainty relative to the volatility of fuel and the impact on potential schedule changes where I would just extend some caution relative to these third and fourth quarter estimates.

We have detailed in the press release the composition of the fleet by type, by partner and I would won't take the time, given that it's in print for you all to look at and review it on your own time, we won't take the time to go through that in detail on this call. We mentioned earlier that we plan to discuss our progress on the repurchase of -- on our share repurchase program. We indicated that during the first quarter, we acquired 3.1 million shares at a cost of approximately $69 million. We also announced that in our Board meeting yesterday, our Board of Directors authorized an additional 5 million shares to be repurchased. That brings the total amount of shares still remaining under Board authorization at 6.9 million shares. And as always, we would indicate to you that as you have seen us done in the past, where we have been active in the market based on certain market conditions, that will also be our philosophy going forward, to be active in the market from time to time when we deem it appropriate.

And as always, I think I'd just make a general comment that I think like most every Company does, I mean, we take this very seriously. We look at it very specifically and we look at accretion that could be generated through repurchase as an alternative to other opportunities that we see in the market and that we may or may not be pursuing. And that will continue to be our philosophy as we approach share repurchase going forward.

We also made reference in the release to our ongoing dispute with Delta over what we call -- well, it's -- over irregular operations or IROP expenses. We previously announced this in in a press release. We make reference to it here. I think most of you know about this so far. It's just running its kind of regular legal course and there is not a whole lot of update to be given at this point.

Again, as we have tried to always do, we have updated you on the expense related to our stock-based compensation programs, which is $3.4 million pretax, $2.2 million after tax. I think more than anything, we just want to continue to remind you of our -- of a transition plan that we previously announced, where we will be transitioning out of some additional EMBs and replacing those aircraft with additional CRJ700s and CRJ900s, which we have also detailed for you in the press release. I want to talk a little bit about our balance sheet.

In a quarter where obviously we're all a little disappointed about the financial -- the net income and diluted EPS results, one bright spot for us is our balance sheet. We continue to -- well, we think that our balance sheet is -- when we look at our -- just the overall capital structure, our liquidity, we think, without question, this is the best balance sheet certainly in the regional sector. We ended the quarter with $617.6 million in cash and marketable securities. I would just point out that that cash and marketable securities balance is net of the $69 million that we spent in the share repurchase program, and also net of approximately $24 million in auction rate securities that we reclassed from cash and marketable securities into long-term other assets. We have certainly taken a number of phone calls just relative to our positioning in auction rate securities. Given all that's happening in the market.

By way of update, we ended the year, 2007, with approximately $120 million worth of auction rate securities. Our current position in auction rate securities is down to 24 million. We have not taken any unreal -- or any realized losses at all on -- as we have gotten rid of the auction rate securities. The 24 million that we still hold, we have taken a small write-down on those securities. It's an unrealized loss that goes through comprehensive income. Those securities are all investment grade. Most all of them are municipalities that are AAA rated with additional security in various types of insurance wraps. So we really are not very concerned and -- with minimal exposure in total at 24 million in that category.

In other respects, we've tried to, as we always have, to be very open about our balance sheet relative to not only our on-balance sheet debt, which ended the quarter at $1.7 billion, but relative to our off-balance sheet obligations, which discounted at 7.39% would total $2 billion at the end of the quarter. And then, we've also made reference here to the timing of maintenance expenses and some mismatch between timing of revenue recognition versus expense recognition, which we have made you aware of in the release, that that mismatch in the quarter is $8.1 million pretax. Mike Kraupp I think did an excellent job of just outlining specifically the issue relative to the ExpressJet offer and indicated that given the conditions there and where we're at in that transaction that we really are not at liberty to discuss that and hope -- and would wish that, and hope that you would respect that. As we get to the Q&A section of the call. And actually, having said that, I think we are at Q&A time. So, Operator, we're happy to take some questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Duane Pfennigwerth at Raymond James.

Just in terms of the utilization in the first quarter, I'm wondering how close to your minimums, specifically on 200s you were, and relative to the outlook you've given for the rest of the year, what would that look like under a minimum scenario?

Good question, Duane. First of all, we are basically at minimums in the first quarter production. Specifically on our Delta system. And so the second quarter, obviously we're just projecting out based on the schedules that we've been given, the third and fourth quarter estimates are based on what I think are some fairly conservative estimates, assuming that we're -- we will remain in a very difficult fuel environment and as such, we have not planned on my meaningful changes or increases from current status relative to our utilization. So that's what we've projected.

Okay. That's good. And do you have any feel for -- given the performance in the first quarter, what this would do to sort of the full year $200 million free cash flow run rate?

Now, you're talking just about cash generation?

Correct.

Okay. Now, Duane, I--?

Ex buyback.

Okay. That's exactly why I was hesitating a little bit, because obviously the assumption that we would or wouldn't make relative to buyback significantly changes that. In a non-buyback-environment -- I don't have a number calculated right off, sitting in front of us that's non-buyback because everything we're looking at obviously has some assumptions for buyback in it. But if we just -- if we project out what's happened so far and look at -- let me say it this way, Duane. If you take our cash generation in the quarter, which when you extract out the change in cash relative to $24 million in auction rate securities and $69 million in buyback, that is cash positive and that would be a good extrapolation moving forward.

Okay. That's great. And then just finally on the -- on your case with Delta, what are the next steps there and when could we hear something?

I don't know how to answer that, Duane. It's just taking its natural course.

Are there any hearings scheduled at this point?

There are, but please keep in mind, we're still fairly early in this process where we filed the complaint, Delta's responded to the complaint. Delta's actually filed a motion -- certain motions, and that's where we're at is the judge considering these motions and then I would expect within 30 days we're going to be in the process where it will move to the next phase and there will be full litigation scheduled and it will move forward. But I honestly don't know how to answer that with any amount of precision.

Okay. Thanks.

You're welcome.

Our next question comes from Lily Ng at Merrill Lynch.

Thank you. Good morning, everyone. My first question is regarding your pro rate business, given there's really no relief in oil. Just wondering what other steps you guys are taking on that part of the business? And have you guys entered into any sort of fuel hedges at all, just to manage the part of the business better?

We are not hedged at all on our pro rate fuel. Our philosophy to this point has been that inherently the way our models work, our total business is in essence 95% hedged and that's why on the prorate side we have not taken any steps to hedge that fuel. Now, in retrospect, was that a good decision? We've certainly recognized there's some room for questioning that decision. But having said that, what are we doing to improve our performance in pro rate? We're doing a number of things.

First of all we're taking our -- first of all, we're looking market by market and saying are there -- how many of these markets should we just discontinue and we look at the DMBs that are operating these routes. We have several of these airplanes that are owned and fully depreciated and actually as fuel prices have gone up, the market for turbo props has actually improved. So first question is how many of these air -- of these airplanes should we just eliminate from the system, whether by just parking them or selling them and just reduce the volume of pro rate flying that we have. That's question number one and we are considering that very seriously.

Issue number two is just improving the management of the cities through doing everything that we can to improve and optimize our revenue management in these markets and one of the ways that we're trying to improve the revenue management is to aggressively go after the cities where we're flying prorate and pursue -- we do have a few cities where we have just the traditional EAS government subsidies. What we're also aggressively pursuing is our city and state-based guarantees or revenue subsidies, that would be required for us to continue service in these cities. And we're aggressively pursuing that and have been successful in obtaining that type of either guarantee or revenue subsidy from several cities, which I think will help actually mitigate some of these losses in the future.

But and then as always, we have to consult with our major partners and although these are prorate markets, in many instances these are still very important markets and generating a lot of down line feed for our major partners and obviously these decisions need to be done in consultation with our partners and how valuable the feed is to them. So all of that we're doing to try to manage and improve our pro rate flying. And I will say that as we're seeing it right now, even in an increased fuel environment, I do not expect the losses to be the same magnitude in the third -- in the second quarter.

Great. And Brad, my second question is regarding your contract with Delta and this is just sort of a bit of a detail. I know that between SkyWest and ASA there's sort of a guaranteed percentage of flying, guaranteed percentage of flying that you guys would do as a percentage of total regional flying at Delta. As Delta go about trying to reduce the flying with their other partners, is there some clause in that contract that would allow them to proportionately take your share down so that they can maintain that minimum number? Which I think was about 80% or so, if I'm right.

Well, we have -- yes, we have actually two different provisions there. One is an 80% provision that specifically relates to -- and that provision now is combined SkyWest and ASA flying in Atlanta and then there is just a percentage of overall fleet that needs to be maintained. So we need to remain just a certain percentage of the overall flying at Delta. And Delta has obviously been very vocal and public about the things that they're doing to improve their own system, one of which specifically relates to their regional flying. But certainly we don't see anything or have heard anything that would say -- that would lead us to believe that there is anything happening, other than as the pulldowns happen. And when I say pulldowns, I mean when scheduled utilization changes happen, that affect the total production in regional flying in the Delta connection program. I mean, we've seen nothing that would indicate that Delta's going to try to do that outside the parameters of those two provisions, if that -- I mean, if that's your question.

Right.

Yes, we -- I mean, we don't see them doing it. We expect them to do it in compliance with those two provisions and I haven't seen them doing it outside of that.

Got it. Got it. Okay. Great. Thank you so much.

You're welcome.

Next question comes from Mike Linenberg from Merrill Lynch.

Good morning. I guess just a couple questions here, Brad. I was curious about just your take. Back a couple weeks ago when Delta had the merger call regarding the Delta/Northwest acquisition, it was interesting because on that call one of the things that management said was that they talked about Compass and Mesaba of having -- of being the best operators and having the best cost structure and, that one goal was to use those guys, as a means to bring down overall costs for all of the regional feed and that even -- there was opportunities to shift from independent to inside and I'm just curious, you having been involved with this industry for some time and knowing costs very well and having gone through lots of different bake offs over the years with your different major partners, I mean, what's your sense on that? What's your take on that? How real is that statement?

Okay. Well, first of all, Michael, I appreciate the question because it is an important one and one that we take very seriously and I previously indicated that we are aggressively -- I mean, I can't overemphasize aggressively enough. I mean, we are aggressively pursuing cost reduction initiatives, which we have to do in order to remain competitive. So I can't -- although I can't -- I really don't have really any comment relative to what Delta's thinking or really even in what they're thinking. I mean, that's for Delta to do and say and deal with as they choose to.

What I can comment on is what we're doing to make sure that we're competitive. So, there's been reference to our Delta contract. Well, our Delta contract also says that we have to be competitive operation within their portfolio. And first of all, we think we are competitive today. As you said, we have been very involved in this market and one of the things that we do I think very well is we do everything that we can to stay atune to the market and what our competition is doing and where we line up relative to our competitors. And we think the fundamental costs, and particularly focusing on what most of us are calling our controllable cost categories, we think we're very competitive.

Now, having said that, we're not putting in our -- putting our heads in the sand and just assuming that all is well. Whether our costs are competitive today or not in this environment of significant challenge, whether it's fuel-driven or just the other challenges of the industry, we can't be complacent and we can't take comfort in the fact that we think we're competitive today. I mean, we have to be sensitive to the changes that are happening in the market and we recognize that the only way we can continue to create value to our partners is to continue to be more efficient, high quality, and that's how we deliver value to our partners. So, sorry for the long-winded explanation but I -- we just have to be very focused on the things that we control and continue to do everything we can to be efficient and productive and keep the quality of the operation up.

And I will say too, I mean, there's been so much said about the quality of the operation, particularly at ASA. I mean, the quality of both airlines today is really very good. I mean, ASA's progress has been very significant. I mean, their controllable completion factor in the first quarter was 99.3%, basically right on top of SkyWest Airlines, and what we've seen so far in the second quarter, I mean in the month of April, as people will see in the publicly reported DOT reports and things, ASA is -- I mean, both airlines are right there at the top of the regional industry. So we're doing -- making very good progress on the quality of the operation, the fundamental operations are very sound, and we're going to add to and supplement that with continued work on cost improvement and efficiency and all of that designed to kind of make Delta's statements irrelevant, I mean, because we're just going to produce high quality, low cost operation.

Okay. Great. Thanks. That was my question.

Okay.

Your next question comes from Jamie Baker at JPMorgan.

Yes, good morning, everybody. I'll respect your request regarding the ExpressJet offer, but let me try to ask a consolidation question in a hypothetical. As SkyWest looks at possible acquisition targets, which you do from time to time, is the assumption that you could buy higher cost operators and possibly turn them around in order to satisfy both your return requirements as well as those of your partners? Or is it more likely that you simply eat some of the higher expense in order to satisfy a partner's desire for the lowest possible cost regional feed?

I wouldn't say -- you probably wouldn't expect me to say that it's either/or. It's actually -- it's somewhere in between what you just described. I mean, we certainly aren't really interested in acquiring non-competitive operations and in essence eating some of the high cost and therefore taking a lower return. What we do see a a lot of value in is -- we don't see really any value in growth just to grow. That is of no interest to me or to Jerry or to our Board. What is of high value and interest to us is, first of all, creating a return that's appropriate with investment. And we are very much return on investment focused. I mean, that's -- when we look at different valuation models and objectives, we're very simply looking at value in an earnings stream that will come from a contract and looking at it relative to the investment. I mean, that's just fundamentally how we approach these and along the way, obviously we try to find ones where top line value and compensation paid seems to match with hard assets available in an entity. I mean, those are all kind of important factors to us in this area.

But the thing that we do find valuable as it relates to just growth is that we want to grow when we can use the growth to create efficiency and to create some point of leverage that comes through size, that we can then translate and turn into value. So size just creates a larger platform from which we expect to gain efficiencies for the entire platform. Okay. That's the value that we see in this type of activity.

Okay. Brad. Thank you, that's a very detailed answer to the purposely hypothetical question. Thank you for that.

You're welcome, Jamie.

Next question from Bob McAdoo at Avondale Partners.

I'd just like to go back through a little bit more on the pro rate, obviously something we haven't paid a whole lot of attention to because it's been kind of quiet and out of the way. In today's world it's obviously different. When you talk about -- could you just kind of go back and give us some, kind of a refresher course on what all you've got in pro rate. I mean you've got the 59 E120s. Are all of those in pro rate. You talk about getting rid of 23 of them and going off into contract. Are those contract E120s that are going to go from a small airplane all the way to a 70 seater? I guess other things, little bit of insight into how much of your fuel bill this quarter was pro rate fuel versus other fuel and ASMs pro rate versus others so we can kind of get a way to kind of calibrate, what a fuel does run away, or when a fuel gets better, how much does that impact your bottom line, just moving the fuel around, if you could give us some help on that?

Let me -- from kind of a high level, let me just break it down a little bit for you. We have basically 34 aircraft in prorate operations today. The transition -- and that's -- this is all pre-- how do I say this a little more accurately? The transition that we've referred to in our press release where we're taking out some Brazilias and replacing those with jets, I mean, there is one section, about six airplanes worth of that that's already been done, and those airplanes -- some of those six airplanes are in these prorate numbers I just gave you. But the idea is not to just take those airplanes down and just move all of that into prorate and therefore would you expect a big increase in our prorate flying in the future? No. Okay. Most of that transition plan is with airplanes that are naturally terminating and there is no current plan to increase the size of the pro rate flying as we execute through that transition. First of all, I just want to make that point clear.

What we are looking at more specifically as I tried to indicate earlier is is that some of these airplanes flying prorate are owned and fully depreciated aircraft that we could sell and just terminate that flying. And so -- I mean, that's what's being looked at and considered as part of our plan to improve the performance in our total pro rate. As far as total production in the pro rate environment, it's still about 5% of our total ASM production. And that number, I think it's probably crept up from 4% previously to 5% as we've added a few more airplanes to that. And I might also add here that one of the reasons we have done that is to try to be sensitive to the needs of our partners and trying to be good partners and in some of these cases this has been done at the request of a partner. We've said hey, this is something that we're willing to do to try and help and create some value and that's how this has crept up over time to about 34 airplanes of flying. Okay? You asked about prorate fuel. Hold on just a second, Bob. I've had people, as I've been giving the first part of the answer running this for me.

While they're doing that, let me make sure I got one other thing. The difference between the 34 prorate aircraft and the 59 total aircraft are those contract E120s.

Yes, those are still operating under contract.

Geographically, how would you describe to a layman where you've got pro rate stuff going on?

Where the pro rate flying is?

Yes.

Okay. Well, we have -- we have some Las Vegas-based prorate, there's some Portland in the Pacific Northwest, some Portland-based, Portland and Seattle. There's some flying in San Fran. Our Salt Lake markets, we have, what, 14 of the airplanes that are just based out of Salt Lake City, out and back from Salt Lake. So that's the kind of--.

But it's all out West. It isn't--?

It is, I think all West Coast based.

Okay. Did you get your fuel number yet?

Yes. It's -- our total -- let me just make sure. Hold on just a second. Okay. Bob, to put it in perspective, I mean, our total fuel bill for pro rate flying in the quarter was only $9 million.

Okay. All right. But that gives us a way to kind of know that it's not a big number or to be able to use that and scale it up or down as we see fuel moving around?

Yes.

Okay. So $9 million total and what kind of an average price should we assume for that? Is it like your overall average or--?

Yes, it's our overall average which for the quarter was just a tad over $3, $3.08.

Okay. That's very helpful. I appreciate it. Thanks a lot.

You're welcome, Bob.

Our next question comes from [Bradley Bennett] at Goldman Sachs.

Hey, good morning. I was wondering if you could update us on what the share buyback has been to date? I think the numbers we have were as of the end of the quarter.

Okay. So you -- I'm not sure I understood the question. So in the first quarter, we spent $69 million repurchased 3.1 million shares. Subsequent to quarter-end, we have basically acquired a little over 400,000 more shares and that was done basically at prices averaging about mid-18s.

Great. That's helpful.

Okay.

And then I wanted to ask you a couple more questions about the pro rate flying. Are the new aircraft that are on order that are going to go to United, are those -- and Bob might have asked this question already or touched on it, but I missed it. Are those going to replace flying that's contract flying or pro rate flying?

No, those jets will come in and replace current contract flying, but the majority of those Brazilias that they're replacing that are in contract, they've got natural lease expirations, so they just go away.

And can you help by -- you did say that you had a mix, in your pro rate flying, you had a mix of aircraft that were owned and fully depreciated versus leased, can you give us what that breakdown is so we can get a sense for how much flexibility you have to reduce that flying?

Only about eight of the aircraft are owned. The rest are leased.

Eight of the 34?

Yes.

Okay. Thank you. And can we talk a little bit about the maintenance charges that you talked about, the non-overhaul charges. Are those -- those charges expensed in the period, are they -- are you compensated for those maintenance expenditures based in your block hour payments? How are you recouping those expenses? Is it just you're paid periodically on a per block hour basis and then whenever you incur the maintenance, you spend the cash.

Okay. So these are primarily costs in what we call our controllable cost categories, where we're reimbursed based on a bid rate per hour. So that bid rate is how we get compensated and our historical run rates and things and everything we use to develop that rate, that's what we expect the expenses to be. The $10.2 million that we identified in the release relative to these expenses are expenses above that projected block hour rate. So we're compensated back at the block hour -- the bid rate, and we just very simply exceeded that rate by $10.2 million and therefore did not receive compensation.

Is that because it was lumpy and you did you more block hour -- you did more seat checks this period than you typically do and therefore over the course of the contract you're compensated for this maintenance or was this just a one-time periodic over expenditure?

Admittedly, there's some of both. But we also think that there are some -- there is a very strong one-time component to this. I mean the flap actuator problem where we did incur a significant amount of expense, I mean, that's an issue that we have, whether it's -- we think it's one-time and we think that there's -- that we've finally, in cooperation with manufacturers and vendors have come up with a solution to this issue, but it's a problem that's exacerbated in cold temperatures and really hit us hard, very hard in the winter months and into the first quarter.

Can you help us with what percent or how much of that 10.2 was attributable to the flap actuator?

I think on this call, we're going to leave it at the $10.2 million bucket that's comprised of additional seat checks, flaps, we also had some aircraft damage. Certainly, when I say aircraft damage, this is kind of unusual damage that was above and beyond kind of normal run rates of damage.

Are those third parties being held responsible for that expense?

We certainly expect them to, but at this point we have just -- we've ran that through our expenses. So I think we've taken a -- I mean, we've taken a conservative view. We've just expensed the damage as it's been repaired. We certainly do expect to -- through the insurance process and -- I guess I'll just leave it at that. Yes, we will do the best we can to hold others responsible. We've taken a pretty conservative approach to that in the quarter.

I got it. Okay. Thank you.

You're welcome.

One last one, which is when I think about the impact of fuel on your income statement, does it make sense to clarify what your revenues and costs would have been if you excluded fuel all together, so that we could get a better sense of what your margins are? I'm just wondering whether the actual margin calculation is distorted by the fuel in the revenue and in the costs?

Bradley, we're going to file our 10-Q probably this Friday and there will be a complete breakout of that in the 10-Q.

I see. Am I correct in thinking that the margin -- the actual margin calculation appears lower than it would otherwise if you were to back out the fuel from the revenue and from the operating costs?

Yes, absolutely, because as everything has grossed up and top line moves up as fuel moves up and as flowed through the model, then it decreases the margin.

That's what I thought. I was just hoping to try and clarify what the actual margin was.

And the numbers and quantification of that will be broken out in our Q.

Okay. Terrific. That's all from me. Thank you very much, guys.

Our next question comes from [Frank Bisk] at [Heartland Advisors].

Hi, good morning, gentlemen. What's our CapEx, what do we think our CapEx budget is for this year and then just to follow-up, what should I think of as maintenance CapEx if we weren't buying any planes or doing anything like that?

Excuse me, I missed the second part of the question.

Just maintenance CapEx, what would that look like if -- just in general?

Okay. So the number that we put out, we put out a number that we describe as non-aircraft CapEx, which includes maintenance but doesn't include, deposits or the actual aircraft that we might buy and that sort of thing. So in total, SkyWest Inc. CapEx for the year we're planning to be about $140 million.

That does not include buying additional aircraft, though?

That does not have aircraft in it.

Correct. Okay.

It does have, though, about $140 million -- excuse me, $100 million of the 140 is maintenance related CapEx.

Understood. Okay. And then in terms of I guess -- so we have around 280 leased planes give or take and I guess these leases run off I guess between now and 18 or 19 years according to the K. Could you talk about that? If leases start to run off, how would that work with the Delta or United, one of our partners, they run off. Would we still fly that lane. Would we have to then just find a new play, either buy it or lease it? Could you just talk about that?

What you're talking about is something we refer to as just tail risk, it's kind of the tail on aircraft obligations versus the contracts that they're currently operating in. So we have a very specific detailed analysis that we look at regularly that says, here's the length of the contract, here's the length of the obligations on the airplanes, whether it's debt on the airplanes or lease obligations. And we plan all of that out and we look at it frequently and so as we look at that, at our GAAP analysis, which is the difference between the two, yes, then it says at some point, when we start to have more aircraft obligations than we have them in contracts, I don't think we're any different than a lot of airlines in that we -- regionals that have these contracts, is that we have a number of options. We have to look for opportunities where we can place them into other flying or we're going to have to be very aggressive in helping remarket the airplanes. That's really one of the two.

Okay. All right. Thank you.

You're welcome.

Our next question comes from [Keith Weisman] at Cowen Securities.

I was wondering if the transition of the fleet that is under way, from the turbo props, if that will have any impact going forward on your maintenance expense, do you expect it to be lower, given there will be newer aircraft?

That's a good question. I don't expect that issue to be a very material issue, but the general concept is certainly -- I think you're on to a concept that is accurate, that is, that as we replace these older Brazilias that are at the end of their either debt terms or lease terms, they have heavier maintenance requirements and therefore more expense per block hour than the newer aircraft will that will be replacing them. But oftentimes there's a trade-off there in aircraft cost per block hour versus maintenance cost per block hour. So isolated specifically to maintenance, it would be lower maintenance. But with a new aircraft, it should be both -- it will be a little higher aircraft cost per block hour, lower maintenance, but very importantly, probably higher reliability.

Right. Okay. Hopefully my next question doesn't violate your request to steer clear of the ExpressJet situation.

I'll let you know if it does.

I'm sure you will. I just want to know if -- assuming things move forward, would that have any impact on your buyback program or are they completely separate in terms of how you think about the two?

Well, no, I mean, I think that is a fair question. I made some kind of higher level comments, kind of aimed at that issue, just to say that -- I mean, we do I think what everybody either does or should do, and we just look at the -- we run sensitivity models relative to accretion that could be generated from stock buyback and obviously sensitivity models relative to the pricing of the shares at the time we're doing the buyback and we look at the accretion that that can create relative to what the opportunities that we would pursue would create. And so we try to just look at and pursue the things that we think are meaningful productive opportunities and we'll pursue the ones that have the highest accretion, whether it's acquisition opportunities or stock repurchase. I mean, I don't know how to answer it other than that. It's just standard philosophy that we'll pursue the ones that have the highest accretion.

I guess the question is would you have the financial flexibility to pursue it if ExpressJet moved forward?

We -- let me answer it this way. Even with a transaction that we've been looking at, we have been repurchasing shares. Now, obviously, how aggressive we will be in the repurchase market will change one way or the other. But I do still expect us to be in the market. I apologize, I can't -- we'll just continue to make progress and a lot of the issue and obviously a sensitive factor in the repurchase accretion model is the price of the stock. So I mean, I don't -- I apologize. I'm not trying to be elusive. I'm just trying to say there are so many factors here. Currently, we do intend to continue to be active in the repurchase market.

Fair answer. One last small one. Looks like last couple quarters the tax rate's been a little bit lower. Is there anything there of significance or?

Very good question. I think what we would lead you to assume moving forward is something more in the 37.5% rate. We have had some changes, just with some state tax laws, that have moved some state tax rates down and that's why we'll probably lead you from a 38.5 or something that we've been at historically more down to 37.5. But I think 37.5 range is a good number to assume going forward.

Okay. That's it for me. Thanks.

You're welcome.

Our last question comes from Jim Parker at Raymond James.

Good morning, Brad and others. Just regarding this pro rate flying, how many of those aircraft do you own?

Eight.

Eight. Okay. Now, you're talking about raising fares and perhaps getting your partners to share more so you could get rid of eight. What's the trigger point here that says you park those airplanes, you stop, you reduce pro rate flying. What are you going to do about this loss of fuel stays where it is?

Well, I mean, if -- if fuel stays where it is, we have really no choice other than to aggressively look at how much of this flying we continue to do. We do a very specific segment analysis. I mean, we're looking at every pro rate market. We know I think with a high degree of precision what these markets are contributing, both to the bottom line and/or what they're contributing. So we're going to do what I mentioned before. We're going to do the best we can at just revenue management and trying to recover some of the fuel increases through fares. We're going to aggressively go after city and state either get revenue guarantees or subsidies from local governments and similar to what the government CAS program does. And as I mentioned, we have been successful in getting several of those. And then, to the extent the markets still aren't working, we're going to have a discussion with our partners and try to assess how valuable the feed really is to our partners. I'm not trying to be cavalier about that one and I certainly don't want to lead anyone to believe that our partners will be willing to help increase our total revenue optimization programs.

What I am suggesting, though, is that this is an area that we have to be sensitive to, because the feed in these markets is still very important to our major partners and to be a good partner, we want to make sure we're not just jumping to conclusions and closing markets and pulling down aircraft that has an impact on our partners, certainly without cooperative effort and consultation with them and in that process, I mean, somehow we have to determine how they want to value that feed. And it's really just kind of that -- that kind of a stepped approach to determining how much of this we continue to try to work with and mitigate the loss and how much of it we just continue -- discontinue or whatever. So.

if you wanted to get out of pro rate flying, what would it cost you relative to current market values on these 26 Brazilias that you apparently lease, what would you cost you to just get out of that business?

Jim, I don't know the answer to that. I mean, I do think that -- I mean, as it relates to the eight that we own, the market is -- it's -- I don't think we'll have a significant issue on the eight that we own and then of course the others that are in leases, we're coming to -- we're getting pretty close to natural terminations of leases on actually, I mean, the majority of our fleet. We just have to look at it relative, first of all, to bottom line net income production or -- and then look at it relative to contribution to more of a -- kind of a contribution margin type approach before we start making decisions to put airplanes down and keep the leases. But I don't really have the numbers in front of me to answer it any more detailed.

Okay. Thanks.

You're welcome. Okay. It looks like we've answered most of the questions. I appreciate your indulgence in staying on the line with us for as long as you have. Again, I recognize that everyone's time is valuable. So thank you for your participating with us. I would be remiss if I didn't take whatever opportunities we have to just in spite of some difficulties at -- in some of these areas that we've discussed this morning, our front line employees continue to create very sound operationally sound product, which we think now, with the progress that ASA is making, the continued positive, high quality operation of SkyWest Airlines, we've got two platforms here that due to the great efforts and work of our front line people are two of the highest quality operations in this business and we owe that thanks and gratitude to our front line people. And with that, we'll go ahead and conclude the call and disconnect. Thank you.

Thank you all for attending. You may now disconnect.