SkyWest Inc (SKYW) 2009 Q1 法說會逐字稿

Hello, and welcome to the SkyWest Inc first quarter 2009 earnings results. (Operator Instructions). Please note, this conference is being recorded.

Now I would like to turn the conference over to Bradford Rich, Executive Vice President and CFO. Mr. Rich?

Thank you, Amy. Thanks to all of you for joining us this morning for a discussion of our first quarter 2009 results.

Before we begin, I would just like to make some introductions of those who will be participating on the call this morning. We have Chip Childs, the President and Chief Operating Officer of SkyWest Airlines. Unfortunately, Brad Holt, President of Atlantic SouthEast Airlines, who normally participates with us, is traveling this morning and not able to join the call.

I also have Mike Kraupp, Vice President of Finance and Treasurer, as well as other members of our staff here at SkyWest headquarters this morning.

Before we get into a discussion of the results, I have asked Mike Kraupp to 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 beliefs, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipates, should, likely, and similar expressions identify forward looking statements.

All forward looking statements included in this release 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.

Okay, thank you, Mike.

Okay, this morning, we will use really, as an outline, and text for our discussion, the press release that went out this morning, as well as the press release that went out April 15, 2009, where we pre-released the results for the quarter. Now, for two different reasons, one because we had put the April 15, release out, as well as the fact that we are trying to be sensitive to people's time.

We're going to change really, the format of our discussion a little bit this morning from what we have historically done. Rather than just taking the press releases and kind of reading through them and discussing them that way, I'd really like to turn our attention really to the issues themselves and just discuss the issues.

Again, sticking pretty closely to the context and the text that's in the releases. But doing it just by way of more of a discussion, and then leaving more time for questions and answers, so that we make sure that we are discussing the topics and the issues that you would like to discuss.

First of all, in referencing the release this morning, we reported operating revenues of $672.6 million, which is obviously down significantly from the $868 million, and I'll discuss that specifically in just a moment. We also released net income of $9.4 million, which is $0.16 in fully diluted earnings per share, relative to $29.1 million of net income, $0.47 in diluted earnings per share for the same period last year.

So, first of all, let me just discuss, and I'll do this fairly generally, and if you want to drill into more detail, we're certainly happy to do that within some parameters. Obviously the change in revenue is more driven by reductions in pass through costs than any other single item.

Of the decrease in revenue, $147 million of it is simply due to the reduction in fuel prices, which most of you know in our models is a pass through cost.

The other primary driver of the reduction in revenue is simply production related, and you can see from the release and the statistics that we put out this morning that our block hour production year-over-year is off 8.2%. So when you take the reduction in the pass-through cost, which is the primary driver of the revenue reduction, combine that with just year-over-year block hour decrease of 8.2%, that's really the primary reason that our operating revenues are down.

In focusing on the primary issues that effected our net income during the quarter, it really is as we have discussed. The significant drivers -- there are four or five issues that are really primarily driving the change.

First of all, the weather and maintenance-related issues that we had had at ASA, at Atlantic SouthEast during the quarter, as we released, that has driven about a $7.6 million decrease to our pre-tax income during the quarter. And it really has been some -- the weather-related portion of the issue at ASA has really been a very significant driver. We have had a weather system and weather related difficulties in Atlanta that are really much more severe than we've had, certainly since we have owned ASA since September of 2005.

And as we look back through the history of, even the years prior to us owning them, we just had some very unusual and difficult weather activity in Atlanta. Those of you that follow the Company, that follow transportation and aviation, I think are probably well aware of those kinds of difficulties. When you take the weather-related difficulties, add to that the maintenance issue that surfaced on the last day of March, those things combined to create a material impact on our earnings, and that's the $7.6 million that we have identified.

In addition to that, as I referenced already, we had an 8.2% decrease in our year-over-year block hour production. When you take all of the issues related to the year-over-year decrease in production, and look at the impact of that, and we discussed this a little bit in our prior quarters' call and got into some of the specifics about what happens when production comes down. And the schedules not only come down, but are coming down somewhat inconsistently, that makes it very difficult for us to adjust crew costs, as well as our infrastructure costs and overhead to kind of a consistent level of production.

And when you take the kind of production-related issues, everywhere from just lost revenue to inefficiencies in infrastructure and overhead related to the decrease in production, and put all of those things together in a bucket, those items are about $11.5 million of pre-tax impact in the quarter. A very significant driver of the year-over-year decrease in earnings.

Most of you obviously are probably aware of some of the difficulties surrounding just kind of economic, the current economy driven, all of the attention to what's happening in the investment community. We certainly have had our share of difficulty relative to some of our investments. I think on one hand, when you look at where we were positioned even a year ago in some of our marketable securities, we really have done a very effective job at managing ourselves through the majority of these difficulties.

This particular quarter we do have some, what would have been classified now as others in temporary impairments. It's isolated to two specific investments, and as a result of that, we did take a $7.1 million impairment charge during the quarter.

Kind of related, if you just look at kind of the related issue, and that is just kind of the overall decrease in interest rates and yields generally in the market. We certainly have not been exempt from that, and with the large amount of cash that we still have and are managing. As those rates and yields have come down, our year-over-year interest income generated is $4 million less this year in the first quarter than it was last year in the first quarter.

We also have kind of an open issue that we're still negotiating and working our way through, with Delta Airlines relative to our Delta rates. I think most of you know that we have a contractual provision in both our SkyWest Airlines and our ASA contracts, our Delta connection agreements, that require us to be -- our costs to be average of the Delta connection portfolio.

We have been monitoring and trying to evaluate where we have been relative to that provision for quite some time, in anticipation of the rate reset, and I'll just make a general statement here. This is an item, given that we're still negotiating through it with Delta.

The long and short of it is that we reduced our rates for the first quarter $5 million. We're still negotiating through this. Prior to the acquisition by Delta of Northwest and the bringing in of the Northwest-owned carriers, we felt we were in good shape. And then that issue changed things a little bit, and we ended up with a more significant adjustment than we thought we would have, and as I said, I think what we book here -- I guess I'll just leave it at that.

The issue is still completely unresolved at this moment. We're still working through the issue with Delta. What we have done I think, is a conservative, yet a fair representation of where we would expect this to settle out when it's all said and done.

So with that, let me just make a few comments relative to the balance sheet. Although our net income was not what we would have expected, the balance sheet is still in very good shape. Our cash and securities at the end of the quarter are $697 million, down just slightly from where we ended last quarter at just over $700 million.

That $697 million of cash and securities is net of $12.6 million in treasury shares that we repurchased during the quarter, and I guess I just remind people too that our aircraft ownership payments, whether they're debt or rents, the first quarter is a very heavy period for us in aircraft rents and payments.

Let's see -- just some of the other kind of basic looks at the balance sheet. Current ratio is three times debt and equity ratios 56.5% debt to 43.5% equity. Kind of interesting statistics, at least from my perspective, when you look at where we're trading today in share price, I mean our cash and securities per share are at $12.52 per share. Book value of the Company is $23.05 per share, and of course I say that's somewhat, I think I used the term interesting, but also somewhat frustrating to us given where we're currently trading.

When you look at things, obviously, I always tend to reference our receivables specifically, just as an ordinary course of, I guess letting you know that we're paying and do pay very close attention to liquidity and cash and things like our receivables from our major carriers, particularly. Still no particular concerns at all in our Delta or United receivables. As I mentioned in last quarter's call, we're still watching the situation at Midwest very closely, and if there is any areas of concern, that would probably be it relative to receivables.

I will mention very quickly CapEx. We also have been following this one very closely. It seems like this is one that a lot of you are particularly interested in.

Our non-aircraft CapEx for the first quarter was $19 million. Just slightly above our projected run rate of about $17 million for the quarter. This is a combined SkyWest Inc number, but it is significantly down from prior run rates, which were kind of more in the $40 million to $45 million per quarter run rate. And I think we had indicated this is one area that we're paying very close attention to, and so $19 million is a number that we're fairly comfortable with.

Let me reference a little bit back to our capacity. I mentioned earlier that our year-over-year block hour production is down 8.2%. It is. We do have some upcoming deliveries.

We referenced in the prior call, as well as in the release, the transaction with Delta where we're taking ten additional 900's at ASA. We have taken already nine of those deliveries, and will take the last one this month, so we'll have all ten of those aircraft operating.

And then we'll just continue to execute on a previously announced fleet acquisition issue where we're taking the 18 additional 700's at SkyWest Airlines into the United system. The delivery schedule of those is the same as we had previously announced and talked about.

We'll take three additional aircraft in the second quarter, five additional in the third quarter, five additional in the fourth quarter, and then five that will come early in 2010.

We have also made a decision and have worked closely with United Airlines to place some additional 200's into service. These are airplanes that had come out of the Midwest system, and we have worked with United and are placing seven of those aircraft into prorate operation systems using the United code. This is kind of a unique opportunity that we have, and again as I said, we have worked cooperatively and closely with United to identify, again what we think are kind of some unique opportunities here with some 200 flying, that we are very optimistic will be productive flying.

When you put all of that together and look at what that means to our ASM production, some slight improvements from what we had talked about in the prior earnings call.

Our ASM estimates for the upcoming quarters are as follows. For the second quarter, $5.7 billion. Third quarter, $5.9 billion. Fourth quarter, $5.8 billion.

Okay, and with that, I think I will go ahead and conclude the prepared remarks, and open it up for some questions.

(Operator Instructions). Our first question comes from Mike Linenberg of Banc of America, Merrill Lynch.

Hi, everyone, this is actually Alex Luanzon on behalf of Mike. This is Alex.

Yes.

Hey. I just had a quick question regarding your credit facility. I guess it had expired at the end of the March quarter, the $25 million. Was that renewed or was that -- can we get any update on that, please?

It has been renewed.

Okay, and then the ASM production, it looks like it was up a little bit from your prior expectations. Can you just go through the reasons for the increase there?

Okay, now are you talking about the first quarter's actual results or the ASM estimates that I just gave you?

The ones that you just gave for the remainder of the year

Oh, yes, so I think it's really just a combination -- it's really three issues. Generally we're seeing a slight improvement in the schedules relative to the minimum. So, in the prior estimates we gave, saying that in most cases, particularly in the Delta system, we were really being taken right to the minimums required in the contract. That's pretty much what we had estimated, and we have seen some slight improvements in that.

Add to that, now that we're seeing -- we now have a better look at the schedules for the ten additional ASA 900's that are coming in the system, as well as the additional seven CRJ-200's that we have scheduled into the prorate operation that I just referenced. So when you combine those three issues, that's what is driving the slight improvement in the ASM estimates.

Okay, great, thanks very much.

You're welcome.

Our next question comes from Duane Pfennigwerth of Raymond James.

Hi, thanks, good morning. Can you hear me okay?

Yes, we hear you.

Okay, just regarding your costs, or I guess controllable costs, in the first quarter, I don't know if you broke it out explicitly, but on costs that you can control, what's the magnitude of that. And given that potential margin improvement, how long before you actually take some steps. How long could it take for you to right size, more in line with the level of business that you're seeing today?

Okay, very good question. Obviously, in our -- if you just look at our non-fuel chasm, 4.1% ex-fuel. Excuse me, it's up from what, 9.7 cents to 10.1 cents, that's a 4.1% increase. When you put that in context with the 8.2% year-over-year reduction in block hours produced, and I think the number actually is 8% reduction in ASMs, we've had to do some management of the controllable costs already to keep the non-fuel chasm increase below the reduction and capacity.

Okay, so, but admittedly there are still some controllable costs relative to both infrastructure, overhead and some of the costs with our labor, which everybody kind of assumes that, particularly crew costs, to use as an example, are variable. But yet once you have crew members, and the way that the industry pays crews, we have crews and pay crews really regardless of the exact level of flying.

So, all I can tell you is that we all recognize and are very focused that we have to bring back into balance both our infrastructure costs and our overhead, as well as our overall labor, both in direct labor as well as our overhead labor, to appropriately size it to our projections of ongoing capacity.

Okay, now your question is, I think, what are we doing specifically and when will we see the results? So the things that we can do specifically, we have -- I think you saw it announced, ferlow of ASA pilots that was announced maybe a quarter ago, and that's happened and should help us be more in line with our crews at ASA, specifically. Add to that the ten additional airplanes that are coming to ASA, and that should get us more appropriately sized, and so we should see the impact of that very soon and starting in second quarter.

On the SkyWest Airlines side, certainly that operation has not been immune to the capacity reductions, the schedule reductions, although we're not doing things as aggressively as ferlow and that sort of thing. Under Chip's direction, they have implemented some very specific things relative to voluntary leaves, those sorts of things to try to get that part of the work force more in line.

And then all I can say is that we are very focused -- and I know that's kind of a warm and fuzzy, abstract-kind of statement, but we are very focused on the cost structure and evaluating everything we can evaluate to make sure that we are taking appropriate and necessary steps to reduce costs appropriately, given the size of the operation today.

Now, admittedly as we're doing some of that, some of that will take until late second quarter, third quarter, to see some of the results. But hopefully a combination of that with some of the increases that we just talked about to the ASM production, at least from where we've been the last two quarters, should help all of that come back in line.

That's helpful, and one follow-up, just regarding the rate adjustment in the first quarter, I guess, what's behind that rate adjustment. Is that essentially you comping yourself off of the entire grouping including both Northwest and Delta carriers, or can you give us any detail behind how you got to the magnitude of the $5 million adjustment? Thanks.

Well, it is basically what you just said. So the provision calls for us to match the weighted average of the portfolio, and that number is taking us pretty close to the weighted average of the whole portfolio, including the Northwest carriers.

Okay. So what's left to negotiate?

Well, as in all of these things, the actual calculations, and how you get an accurate and fair representation of the other carriers' costs, how you allocate costs when you throw in a batch of owned carriers, what's flowing through their cost structure and what's not. Okay, it's getting a handle on all of that before you actually settle and agree on a new rate. It's a process of gaining access to enough information for us to do diligence on it to substantiate the data.

Very helpful. Thanks.

You're welcome.

(Operator Instructions). Our next question comes from Bob McAdoo at Avondale Partners.

Hi, guys. On the prorate flying, what is the effective start date, and are all seven airplanes up and running, or when did you start it or when will it start?

Okay, I'll let Chip talk about that.

All of these aircraft went into service on, I believe it was on June 4, and they're all ready to go. We're obviously utilizing them in some spares right now, but June 4 is the date, and the markets which we have analyzed are ones that we have in some respects been flying under contract with United, so we have some pretty good data and would say that we're relatively optimistic about what that's going to perform.

Could you give us any color, or at least a couple of examples of what a couple of these markets might be?

I think that we can probably get that to you more in detail a little bit later. There is a fair amount that are primarily out of the Chicago region. The specific markets we can get for you at a later time.

Okay, but they're Chicago-based markets, and you say they include some where they've actually cut back some of their own contract flying, and basically going to substitute this for it. Is that conceptually what's going on?

I don't know that they have necessarily cut back their entire portfolio. I think it's helping adjusting -- initially in June it helps adjust some of the summer flying among carriers. Some of the other carriers may have some timing events with maintenance. They have to put some airplanes down.

So, these airplanes are going back into some of the contract markets that we have, and then some of our other contract airplanes are going to back fill some of the other carriers. Some are temporary, some are permanent. To be honest with you, we really don't get into a lot of that with United. We are happy to have the work and continue to deliver a great product for them.

How long do we -- is this something they've asked you to do for 90 days or --. No, this is indefinitely, just like the rest of our prorate line, we continue to evaluate the markets. As long as it works from a cost--. As long as you're happy with it, you're welcome to do it, kind of thing.

As long as both us of are happy with the results, there's no time limit on it.

But I assume since it's prorate flying, in these markets you're going to be their only presence. It's not like you're going to be flying prorate against their contracts, right?

Correct. Yes, that's why these were selected, so there wasn't any conflict in any of those situations.

Okay. And just kind of -- I know you guys have had a dose of prorate flying that you've had over the last several years, but that's all Embraer stuff, right? You've never had CRJ contract flying before. Is that contract?

We can't say never. A long time ago, back --

When the planes were first coming out, yes, but --

We did then with RJ. In fact all of our RJ operations a long time ago started under prorate. We're going back to those days with the RJ. We've got the models in place where we feel pretty confident about how it's going to work, but yes, this is a new fleet type to put under prorate.

Okay, and have you ever, any of these -- let me make sure I understand -- on these new prorate markets that you're going into, have you ever actually -- did you say you had in fact at times had flown some of these before.

Correct. Under contract, correct. That's part of the, one of reasons we're really quite optimistic about this is that, we're not taking these airplanes, number one. We're not doing it as independent flying, which we want to make --

That's a good thing.

Which none of us would think was a good idea, and number two, this is not just brand new start up and kind of testing out of new markets. Okay, we're -- the operation isn't just a complete startup of brand new markets? There is some market development in the mix, but it's also got some already proven developed markets.

Okay, are these in the schedule already. So for sale for June.

Yes, they are.

Okay, if we were going to go out and look at the schedule for June and try to back into markets that you're flying in Chicago, and then go back and look at history at some of the those markets, then maybe we could get a sense of what some of those were?

No, because a lot of these we've been flying for a while. We're just switching the model out, and then some of our airplanes are going into some other contract markets. We'll get you the list of new prorate markets that we're going to be flying. You wouldn't be able to go out and dig that out.

You can't back into it that way. All right. Whatever help you can get, that would be great.

Excellent.

Thanks.

Our next question comes from Helane Becker at Jesup and Lamont.

Hello, thank you very much, Operator. Thank you for taking my questions. You're welcome, Helane. I have one that is very mundane. The tax rate of 28.8% versus 34.8%. So going forward for the rest of the year, how should we be thinking about that?

It would be back to more of the normal run rate. This time we had a little bit of the release of some FIN 48 tax reserves that drove it artificially low.

Okay.

It will be back to more of a normal expected run rate.

Okay, and then I know you talked about in your first comments, Brad, I think you said, you commented about the change in cost driven by the pass through items. So if we're to look at your revenue, and say, well the change in revenue of almost, just under $200 million, can you say what percent of that is pass through or is that all pass-through.

Okay, so of the total -- I mean the total reduction, well $164.5 million of it was all just the changes in pass through costs.

Okay.

Okay, and then, so the -- and of that, $147 million is fuel.

Okay.

Which leaves the -- I mean the remainder of it generally is due to the 8.2% reduction in block hours.

Okay. I was just trying to get to the breakdown on that. Okay. Good.

It is kind of sobering. I mean it really drives home, even in our financials, the significance of that run-up in fuel.

Right. Right. No, absolutely, and then, so on the prorate flying, I don't want to beat a dead horse here but I do want to understand what we should think about. So are you responsible on that for fuel then. Will you be responsible for those costs?

Let me give just very quickly a little bit more perspective about our prorate operation. Our prorate operation in the first quarter of last year lost about $6 million in pre-tax.

Okay.

Our total prorate system this time was basically within $1 million of breaking even, so about $1 million pre-tax loss, and of that it's in that total loss was in two markets.

Okay.

Now those two markets are markets that we have chosen to continue flying, at least for now, because it involves flow of airplanes and things back to maintenance and those sorts of things. So if you look at it, it's come from basically $6 million pre-tax loss to basically breakeven, with the exception of something we have consciously done for flow purposes. Our prorate system is improving.

Now we have an opportunity to put some idle 200's into some markets where we do think it's kind of a unique situation. We're pretty optimistic about this.

At the same time, we will continue to evaluate alternate or alternatives for 200's, whether it's leasing, sub-leasing airplanes, selling airplanes, all of those things at the same time, and look at those other alternatives that are created relative to the productivity of the prorate flying.

Okay.

So I mean that's kind of how we're looking at this.

Okay. So, I just wanted to be sure it wasn't -- I personally like the prorate model as you know, better than the other model but I understand obviously the fixed contract model and why it makes some sense. It's just not my personal preference, as if that matters.

I appreciate your optimism about prorate flying.

Yes, I would rather have you in control of your inventory because you're in control of the asset versus having somebody else in control of your inventory and telling you what your margin should be, but I understand why the model works the way it does. Anyway, so with that, thank you very much, you answered all of my questions and I really appreciate the time.

Thanks Helane.

At this time we show no further questions. I would like to turn the conference back over to management for any closing remarks.

Okay, given that there are no more questions, I want to just conclude with an expression of thanks and appreciation for your time and your interest in SkyWest. As always, we would be remiss if we didn't take an opportunity. We know that the call, the purpose of the call is basically to have a discussion with the investment and financial community.

We also recognize that our employees are paying very close attention to these types of things, and these are difficult and challenging times, we all acknowledge. And without the group of people that we have on the frontlines and working at this everyday, which is our employee group, we couldn't be doing what we're doing. And we think they're doing it better than anybody in the industry, and we're very grateful and appreciative to all of our employees. And with that, again, we thank you for your time and interest, and we'll go ahead and conclude. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.