SkyWest Inc (SKYW) 2009 Q2 法說會逐字稿

Good morning and welcome to the SkyWest, Inc., second quarter 2009 earnings call.

For your information, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). This conference is being recorded and transcribed.

I would like to turn the conference over to Bradford Rich. Sir, please begin.

Thank you Lydia. Thanks to all of you for joining us this morning. We always appreciate your interest in SkyWest, Inc., and appreciate your time.

By way of introductions, we also have participating with us today Chip Childs, the President and COO of SkyWest Airlines. I also have Mike Kraupp, Vice President of Finance and Treasurer of SkyWest, Inc., as well as other members of our staff with us here at SkyWest headquarters. We excused Brad Holt, who we normally like to participate with us, who is actually traveling this morning.

Before we actually get into the call, the details of the results, I would like to turn some time to Mike Kraupp so that he can 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, 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 statements. Actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons.

Thank you Mike. Okay. To -- as always, we will try to use the press release that went out this morning as an outline for our discussion today.

As you can see from the press release, we generated operating revenues in the quarter of $698.8 million compared to $950.8 million for the same period last year.

We generated net income of $26.2 million or $0.46 in diluted earnings per share for the quarter compared to $36.4 million of net income and $0.63 per diluted share for the same period last year.

For first of all, we are obviously a bit disappointed at the decrease period to period. At the same time, we are obviously very pleased with the improvement, a $0.30 EPS improvement, compared to the first quarter of 2009.

When looking at the results year to date, we generated $1.37 billion in topline revenue. $35.6 million in net income and $0.62 in diluted earnings per share for the first six months compared to $1.82 billion in revenue, $65.6 million of net income, and $1.10 in diluted earnings per share for the same six months last year.

In looking at just the quarter over quarter performance and looking at some of the significant items, it goes without saying that just the decrease in fuel prices has had a significant amount to do with just the topline revenue. The topline revenue decreased by $252 million quarter over quarter. That's really primarily due to two factors.

First of all, $232.9 million is simply the decrease in fuel costs that I think most of you know flows through as a pass-through and goes into both our operating revenues and expenses. Just by way of reference, our average fuel prices in this quarter were $1.80 per gallon. That compares to $3.89 per gallon in the second quarter of last year.

The other reason that our topline revenues are down is simply due to the reduction in block hours. Block hour production was off 3%. That 3% translated into approximately $15.2 million just in reduced revenue from the reduced flying.

When we look at the operating expenses and interest per ASM, and obviously the more meaningful discussion here would be centered around non-fuel CASM, our non-fuel CASM increased 1.1% to $0.095 versus $0.095 (sic - see press release) for the same period last year. That increase is primarily due to, again, it's related to the reduction in total production.

The 3% reduction in block hours actually translates into a 2.4% reduction in total ASM production. So although we were able to in many respects reduce our costs, the costs just didn't come down at the same rate as the ASM production did.

That's really, again, there are two primary reasons for that. One is nonreimbursable maintenance costs. We've talked about this in prior calls. That's not an issue particularly centered at either of the operating entities. Both carriers were off -- or incurred higher maintenance costs than we did in the first quarter of last year.

At the same time that we have a lot of issues around reductions in production. One of those issues is trying to manage our crews. And again, as production comes down, it does create underutilization of crews, and that's also one of the reasons for the increase in the CASM.

In some of the other items that we've tried to keep all of you aware of relative to our performance, the stock-based compensation expense we always try to make you aware of and keep you informed. We occurred $1.9 million in stock-based compensation expense. That's $1.2 million after-tax.

Another thing we've been trying to make sure that you are informed on this our activity in the capital markets. One of those issues is the repurchases of Treasury shares. During the quarter, we repurchased about 464,000 shares of stock at about $4.9 million. When you look at our year to date repurchases, we've repurchased 1.8 million shares at a cost of $17.5 million. The simple arithmetic there is about $9.85 per share.

In looking at some of the balance sheet items, obviously one of the things that we feel very strongly about at the company is our cash and our liquidity, the overall structure of our balance sheet, which we really think is one of the best in the industry. We ended the quarter with $731.7 million in cash and marketable securities, which compares to $705.2 million at December, so net of the repurchases of stock that I just mentioned, we've still increased our cash position during the quarter and year-to-date.

Let's see. Long-term debt is about the same that it was at the end of last quarter. We've had normal recurring debt repayments. At the same time we financed the acquisition of three new CRJ700's with straight debt.

During the quarter, we also took the last of 10 -- or in the current order that we've been talking about -- or deliveries of 10 CRJ's into Atlantic Southeast Airlines. We took the last four of those aircraft in the quarter, and we took those under long-term lease arrangements.

By way of upcoming activity with the fleet, during the third -- the quarter that we are in, this year's third quarter, we will take delivery of four additional 700's at SkyWest Airlines. All of these deliveries that I will mention here are SkyWest Airlines deliveries. Again, four in the third quarter, seven in the fourth quarter, and then the remaining four will come in the first quarter of 2010. That's a slightly different delivery schedule than we have told you before, accelerated a little, a few airplanes into the fourth quarter rather than into 2010.

We have detailed for you the composition of the fleet. I won't take the time to go through that on the call. I think most of you have access to it in print. The only thing that I will mention is I will give you some thoughts here relative to our ASM production in the coming quarters.

Obviously, the scheduling of the fleet, primarily done by our major partners, has been a very sensitive issue. It brings into account things like minimum utilizations on the fleet. Obviously our topline revenues, as we have already discussed, are very sensitive relative to the levels of production. This has been somewhat volatile given last year it was very difficult given high fuel prices. Obviously the scheduling, the utilization, just capacity in general, whether its at mainline carriers or regional carriers, has been a very -- a difficult and a sensitive issue. And obviously, our models are very sensitive to this.

The good news is that our ASM projection for the third quarter is 5.9 billion ASMs, which is actually a 5% improvement over the prior year, and I believe the first quarter of this year that we are projecting increased ASM production quarter over quarter.

The fourth quarter, also estimating at this point an increase year-over-year. We are expecting about 5.6 billion ASMs, which would be approximately 11% increase quarter over quarter.

So at least some slight improvements there in what we are anticipating in production. Now, obviously some of that is due to the upcoming deliveries that I previously outlined.

Another item that we just want to give you some information about is we previously have announced -- back on June 10 we put out a press release that gave some information concerning the wind-down of our Midwest Airlines services agreement. That will result in the removal of the last 12 CRJ200's that we've had flying for Midwest. Those will come out -- actually two of the 12 are already out. The remaining 10 will come out between now and January of 2010.

As part of that agreement, we agreed to exchange a $9.3 million unsecured note from Midwest for a $4 million payment from Midwest, guaranteed by Republic Airways. That brings into question just -- or maybe in some of your minds, just the timing of the -- or the accounting issues involved in that.

First of all, the $9.3 million had never been accrued or recorded as revenue. The $4 million will be recorded as -- into our revenue with the -- as each of the final 10 aircraft are taken out of service. So we are just dividing the $4 million by the 10 airplanes that will be returned, and as each one comes out, we will record $400,000 of income.

Let's see. The issue as well, many of you may have questions just relative to those 12 airplanes. The first thing that I would mention here is that those 12 airplanes are on very short-term leases. Those leases would terminate naturally basically mid next year -- mid 2010. In spite of that, we have aggressively pursued alternatives and opportunities to keep that fleet flying. At this point, we feel very confident that we have a solid plan to keep all of those airplanes flying.

So if we go back and look at the 21 airplanes that we had flying for Midwest, we've previously taken out nine. We placed two of those aircraft in subleases with other carriers. We are flying seven of the airplanes in the SkyWest Airlines fleet. And we think we have, again, solid plans for the additional 12. So we don't expect a lot of down-time on this aircraft. Is our plans for whatever reason aren't meeting our expectation, 12 of the leases expire mid next year anyway. So we have quite a bit of flexibility relative to that whole fleet situation.

The only other things that I would like to mention, when you look at the income statement that we put out this morning, admittedly it's a summary income statement. In addition to the things that I have talked about, I want to just emphasize a couple of things.

One of the things causing the decreasing in year every year diluted EPS, and it's kind of a bigger impact this time than it normally is, which is why I am emphasizing it. That is the comparison to second quarter of 2008 in our other income expense. That one category is having more impact this time than it normally does.

One of the issues there is that the prior-year quarter included a $6.3 million nonrecurring income item in the Continental breakup fee.

And then when you look our interest income, just given what's happening in the economy and interest rates in general, our interest income is down by $2.3 million. When you look at the swing in just those two items alone, that's $8.5 million of pretax income that's certainly having some impact. Nothing really relative to operations at all, but having a fairly material impact on the year-over-year comparisons.

The other thing that I would reference here is that at the same time our interest income has come down, our interest expense has come down. We do have some floating-rate debt that has come down obviously as rates have come down. The issue with that is the interest expense is primarily related to aircraft acquisitions. Those aircraft costs are pass-throughs in our flying contracts and really don't have any impact to our net income.

Our balance sheet, I've mentioned it earlier. To give you just a little bit more information, our working capital at the end of the quarter is $845.6 million. Current ratio was 2.97. Our equity is $1.3 billion. Cash and securities per share $13.06. Book value per share $23.29.

Just a couple of closing comments. Obviously one of our issues is the cost structure of both operating entities. We feel that in many respects, our operating costs are very competitive. At the same time, we have the responsibility and the task of making sure we are doing everything we can to right-size the infrastructure and to right-size our total operating expense relative to not just general competitive factors only, but also to match that, relative to the total production.

And we have mentioned this before. I will mention it again that we are aggressively working on many initiatives here to continue to bring the operating costs down. And when I say that, I really do mean we have specific initiatives that we are working on to continue our efforts there in just making sure the cost side of the equation is extremely competitive and appropriate given the levels of production.

Having said that, I will close now and open it up for questions.

(Operator Instructions). Mike Linenberg, Banc of America-Merrill Lynch.

Good morning. Two questions here. One, what is -- I know you've been phasing out on the turboprop side, but what would be your interest in the Q400? And does -- depending on what plays out in Denver, do you see maybe an opportunity to do something with the Q400 there? Maybe take a closer look lengths? Just your thoughts on that airplane and any opportunities there.

I can answer this one I think pretty quick. I think we haven't been bashful in the past about saying that we continue to analyze and stay very close to the Q400 relative to our own internal analysis, both performance analysis operationally as well as what that could mean to us financially.

We do have interest in the airplane, and we've been paying very close attention both to what's going on with the length situation. Obviously has become very interesting in the last week or so. And we've also paid -- stayed very close to several major carriers that we think have additional interest in large turboprop flying as well. So we are interested, and we think several mainline carriers also have additional interest.

And just my second question, and I could be wrong on this, but I know on I believe -- I know you have a bunch of contracts with Delta, but I do think that one comes up, I want to say early 2012. I don't know if it's the SkyWest or SkyWest/ASA. And I recall that one of the restrictions or one of sort of the gating issues with your contract with them was that it was important for you to keep your costs, you had to be competitive with other Delta Connection carriers. You had to be like -- you couldn't be worse than the top three, and then maybe it went to the top two.

The question, I guess, is that when I think about Delta today, there's a lot more Connection carriers. Some of them are private companies. And I'm just curious, do you still have to confront or deal with that? Is that still part of the contract -- your competitiveness versus the others? You being kind of near the top. And does that universe of carriers now include some of these private companies, whether it's Compass or Masaba? I don't even how we can get what the real numbers are. Can you give us some insight onto that and maybe how that schedule plays out in the coming years?

Yes. It's a very good question. As you recall, we had a fair amount of discussion about this whole -- what we refer to as a rate reset process, driven by our contractual provisions that require us to be cost competitive in the Delta agreement -- in both our SkyWest and ASA agreements.

First of all, to clarify, our contracts with Delta are long-term contracts that go to 2020. So the contracts themselves don't expire. They're long-term. The first trigger point was after the third year, which was last September. We are still in negotiations with Delta on how to reset the rate to meet the average of the portfolio.

And all of the things -- well, generally speaking, most of the things that you just mentioned are all part of that negotiation. And we are still trying to discuss and negotiate through with Delta -- is proper alignment of cost buckets as well as which carriers are appropriate comparisons. So all of that is still being worked out, still in negotiation and discussion with Delta.

And as you recall, last time we indicated how we were booking our rates. I think we had taken -- put some amount of conservatism into how we recorded revenue, and if anything I think we've had some improvements in those numbers since we talked about this in the first quarter. So it's actually improved a little bit from where we were, but it's not settled as of this moment.

Okay. Thank you.

Jim Altschul, Aviation Advisory Service.

You mentioned that you took some more planes in the recent quarter. Can you give us some insight into the current availability of financing with regards to both debt and leasing, and particularly with the debt? Are you -- are the lenders being more conservative on loan to value? Or being more demanding on the spread they want? Obviously you are one of the best credits there is in the business, but what are you seeing with regard to the availability of debt and lease finance?

Okay. So obviously we are pleased in the quarter that of the seven aircraft that we took delivery of, three of those were straight debt. Four were under long-term leases. The good news here is that most of these are under agreements that were negotiated some time ago, before we got into the real difficulties of the liquidity market right now. So all of these are under previous commitments, which is the first thing you need to understand, and the majority -- all but the last four of the deliveries that I referenced are still under that same commitment. So they are still at very competitive rates, very competitive credit spreads.

Our real issue really won't be until we negotiate for the last four, which come in 2010, first quarter of 2010, but we still expect to have export credit agency involvement in those financings and still expect to have financing at very competitive rates.

Are you talking to lenders and lessors now for those deliveries?

Because most of these are committed and most of -- our plan at this point is to bring most of the -- is to do straight debt financing on this upcoming group that have previously been committed, we have not been -- and we have not actively been marketing the aircraft.

To the extent we think we have or could find any active participants in the equity market where we could match equity with debt into a leverage lease, that is still our primary focus. But in the absence of that, we still have firm commitments for very competitively priced straight debt.

Terrific. Thank you very much.

Helane Becker, Jesup & Lamont.

Thank you. Hi gentlemen. Just a housekeeping question. Brad, on the maintenance related expenses as we are looking forward, they seem to be up a lot. Is that a number we should be thinking about going forward, in that ballpark?

Okay. So let me give a little bit of relativity to this. Some of the -- what we are really talking about here is -- the part of the maintenance increase that we are concerned about is the nonreimbursable engine expense. And that can come really in two ways. Number one is simply the timing of the United CRJ200's. And that is the issue that we have disclosed in every press release for several years, where we have disclosed every quarter the timing difference between the collection of revenue and the timing at the expense.

So to give some relativity here, the increase in this category was about $16 million in the quarter -- roughly. Of that $16 million, about $5.5 million of it was simply due to the timing of the United 200's. Okay. So in essence, we've got a little bit of the previous mismatch where we collected more revenue to the expense. Now we are having that flip a little bit where we are having more of those events hitting. So that's $5.5 million of the $16 million issue in the quarter.

The rest, that's the part that's really -- I will use the term concerning, and that we are really trying to manage. There are some things in that area relative to things like time and cycle extensions on certain components, and those sorts of things that we were working aggressively on. SkyWest has just secured some extensions in some cycle related timing, and things like that. We have aggressively pursued and renegotiated some of the purchase agreements on some of the components, which will manage that down. And then, just active management of some of the age-related issues affecting the fleet. We've just got to do the best that we can to manage those issues.

So I think, number one, some of it is just due to aging of the fleet. But there's also another element that we are actively proactively managing here to try to bring that number down in the future. So certainly our hope is that the $10.5 million of this time's increase that's not due to just the timing of the 200, the United 200's, we would certainly hope that we can bring that number down a bit. But we do have -- it's not going to go away altogether, certainly not in the next couple of quarters.

Thank you very much. And then I think you talked in your press release about the lawsuit against Delta. And can you just say the timing of when that may be resolved?

I wish I knew. The process is still just continuing. I mean, we are kind of moving into the deposition phase of discovery. And so it's just continuing. I honestly can't tell you. I don't know when to lead you to expect a conclusion.

Okay. Thank you for answering my questions.

Mike Linenberg, Banc of America.

Just a couple of follow-ups. One, your investment in Trip, is that accounted for under the equity method? And where does that show up? What was that?

Yes. It is accounted for under the equity method. Really the most meaningful impact of it right now as far as rolling into our financials, it's all relative to foreign currency translations at the moment. This quarter we had about a $400,000 pretax income on Trip. So yes. It's in the other asset section of our balance sheet.

And it shows up in the other income line -- or expense line?

Yes, exactly. In other -- that's right. So yes, on the income statement, precisely it's just sitting in other -- yes, other net in the other income expense section.

And I know you give the details in your Q, but I'm just bringing it up because last quarter, and maybe this was again FX going the other way. Wasn't it a $2 million hit?

No, $200,000.

Oh, it was $200,000. Okay. Then I misread it.

And then, just a question on capacity. I know you highlighted the fact that you are going to be up 11% in the fourth quarter, but the question -- I thought last quarter you had guided -- instead of 5600, you had actually guided to like 5800, which should be up 14%, which -- maybe my number is wrong there, but the fact that it is lower than maybe what I had, but the fact that you are accelerating airplanes into the fourth quarter. So I didn't -- I'm trying to get a sense -- just the read from this. Are you actually -- is your utilization better? Or is the utilization actually coming in worse than maybe what you would have thought it would have been in the fourth quarter a few months ago? How should I interpret that?

Slightly reduced from the previous guidance. The acceleration of the two into the fourth quarter are deliveries in the fourth quarter, service still starting in January.

All right. That helps.

So it mitigates maybe what you were thinking to some extent. But we are -- again, and I -- hopefully we're -- we are generally fairly conservative, and we are -- I think we are trying to be -- take the conservative approach on this too in those estimates.

Fair enough. Thank you.

Gentlemen, I have no other questions at this time. I can give the instructions again if you like.

With no other questions in the queue, we will go ahead and conclude the call. Again, just a closing comment to express appreciation to you for your interest and your time today. I never like to have these calls without recognizing the efforts of our employees and expressing our sincere appreciation and gratitude to them for the work they are doing every day to keep this a high-quality, competitive-cost organization. And we sincerely appreciate all of their efforts.

And with that, I will go ahead and conclude the call. Thank you very much.

Thank you for attending today's conference. You may now disconnect your lines.