SkyWest Inc (SKYW) 2009 Q3 法說會逐字稿

Good morning and welcome to the SkyWest third quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Bradford Rich, CFO. Please go ahead.

Thank you. Thank to you all of you for taking the time to join us this morning for a discussion of our third quarter of 2009 results. Let me begin by introducing those that will be participating on the call with us this morning. We have with us Chip Childs, President and COO of SkyWest Airlines. Brad Holt is also participating, the President and Chief Operating Officer of ASA. I also have with me Mike Kraupp, Vice President of Finance and Treasurer, as well as other members of our staff that are here with us at SkyWest headquarters this morning. Before we get into the discussions of the results, I am going to turn the time to Michael Kraupp to read our forward-looking statement.

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. We are very excited and actually enthusiastic to talk about and discuss the results of the quarter this morning. It's been a very busy quarter. A lot of things going on. Not just the ongoing operational issues of the two operating entities, but obviously just a lot of transaction-based activity that has been accomplished in the quarter. As always, I will still try to stick pretty close to the public release that went out this morning as the outline for the discussion this morning, and let's just, -- I'm assuming that most of you have the press release available.

As is noted in the release, we reported total operating revenues this morning of $637.8 million for the quarter ended September 30th, 2009. That's compared to $934.1 million for the same quarter last year. We also reported an increase in net income of 9.2%, or $28.6 million, and $0.50 in diluted earnings per share, which is an 11.1% increase compared to $26.2 million of net income, diluted earnings per share for the same quarter last year. There's obviously some significant items affecting our total revenue production. The most significant of those issues is the $296.4 million decrease in total operating revenue, the majority of that decrease is related to the decrease in pass-through fuel. The fuel pass-throughs were down $300.8 million during the quarter.

In addition to the fuel pass-throughs being significantly down, the only other item of any real significance on the decrease in revenue is related to about a $12.4 million reduction in revenues that previously were generated in customer service handling at various stations. We have transitioned about 23 total stations throughout the system, back to handling to other third parties. When you look at those total reductions, it obviously means that we have had obviously some improvements. We've seen increases relative to a 3.2% increase in total production during the quarter, as well as around an $8 million increase in our prorate flying revenue as compared to the same quarter last year.

A couple of things that I would just point out relative to the decrease in fuel. I think most of you by now that know SkyWest and have been following us and who understand how our models work understand that the majority of the fuel is a pass-through to our major partners. The decrease historically has primarily been attributable to the volatility of fuel prices. So as fuel prices come down materially from quarter to quarter, that will drive a decrease in our top-line revenues. The one slight change to that is that we have also seen kind of a structural change in how the fuel is being purchased, and that is that both Delta and United have taken more of a role in the actual purchasing of the fuel to give some relativity, basically, right now Delta is purchasing 100% of the fuel that goes through the contract flying operation. United has taken the purchasing responsibility at all of the United hubs, which accounts for about 55% of the total fuel being purchased. So the decrease in revenue is now a combination of the volatility of the fuel prices, combined with the major partners actually buying more of the fuel. But I would also point out that that structural change and the fact that more of the fuel is being purchased by the major partners has virtually no impact on our absolute dollars of net income, simply because of the way that our models work.

Looking quickly at the operating expenses and focusing on our nonfuel cost per ASM, the nonfuel CASM has decreased 4.3% to $0.09 per ASM from$0.094 for the same quarter last year. The decrease is primarily due to the transition of customer service handling stations, which has eliminated those costs from running through our CASM calculation, and then, of course, we also have a change in the mix of flying, where we've transitioned to more of the larger jets with the additional 900s coming in at ASA as well as additional 700 deliveries at SkyWest Airlines, and so certainly, there is some amount of the reduction that's simply due to the change in mix, and the move to larger regional jets.

In addition to that, another item that we feel needs to be mentioned is relative to our engine related costs. We have a couple of issues here that I would like to bring to your attention. One is simply due to the timing of overhauls on our CRJ 200 fleet, the timing of those is such that we have just more overhauls than what has been typical of a normal run rate. That is certainly showing in the CASM calculation. At the same time, we have nonreimbursable maintenance costs. These are primarily coming from the ASA operation, where there's a big focus and has been a big focus on improving the operation reliability, which is significantly improved, but there are some additional costs and some investment that has been made there, and about -- throughout the system, about $5.5 million in those types of expenses that is an increase compared to the third quarter of last year.

Let's see. I do want to just make you aware that we have still been active in repurchase of common stock through treasury stock repurchases during the quarter. Certainly with a lot of activity going on, and considering some other transactional based deals, we have slowed down the repurchases compared to what we've done previously, but we still repurchased 93,545 shares during the quarter at a cost of just under $1 million. We still have 2.78 million shares that are authorized by our board of directors in a continuing share repurchase program.

I just want to review quickly some of the significant items on the balance sheet. September 30th, 2009, we ended the quarter with $814.9 million in cash and marketable securities. That compares with $705.2 million at year end, December 31st, 2008. One item I just want to say in relation to the cash, obviously we have announced a transaction with United which I will talk about in just a minute, but obviously these numbers are prior to that financing arrangement that we have entered into with United. That would bring the cash balances down closer to $700 million. And again, I will go into that in a little bit more detail in just a couple of minutes.

During the quarter, we did acquire three new CRJ 700s that were financed with long-term debt. So you will the increases that you see in the balance sheet relative to long-term debt, it's just a combination of the acquisition of the new aircraft and the debt associated with those airplanes, and, of course, offset by just normal recurring payments of long-term debt that were made during the quarter. Relative to the fleet, in the fourth quarter, we will have -- we'll take delivery of an additional eight CRJ-700s that will go into SkyWest Airlines' operation. In the first quarter of 2010, we will take the remaining four 700s that are on order. At the end of the quarter the fleet consisted of 446 total aircraft. We have described the breakout of those aircraft in the press release, and it's there for your information, if you want that breakout.

Relative to ASM production, going forward, we have revised our fourth quarter estimates slightly. We're now projecting just over $5.4 billion ASMs in the fourth quarter, which is about just over 6% increase. That number is down a little bit from what we projected last quarter, simply due to us now seeing the schedules from our major partners, and again, I think most of you understand now that our ASM production, the block hours, the scheduled block hours have been somewhat under pressure the last year or so. We have seen some general increases, which are driving some increases in ASMs, but as we move into the fourth quarter seasonally, it should be expected that utilization and block hour production is down a bit, and we are seeing that in the schedules that we've received from the major partners.

Let's see, another item that we want to make sure that you're aware of is most of you that have been following SkyWest know that we have regularly and consistently disclosed the mismatch between the collection of revenue in our United contract on the CRJ 200 fleet versus the timing of the maintenance. We have pointed out in the press release that during the September quarter, that SkyWest incurred $7.7 million pretax in related engine maintenance cost in excess of the amounts we collected and recorded as revenue. This is significant in that this is the first quarter that we have reported expenses in excess of the revenue collected. The amount that we have in this quarter actually is a run rate that we would expect a number pretty consistent with that through the next four or five quarters. We'll keep you updated, as we always have, on that relationship there. We do expect the expenses to be in excess of the revenue. As I said, for the next year or so, and then as we move further out, then that will change again to where revenues will be back in excess of the expenses. And we'll just continue to keep you updated and give you more information on that as we move forward.

As is detailed in the release, we have discussed the announcement that went out on October 16th, where we described a series of transactions that we entered into with United that provide operational funding to United, which extends our SkyWest Airlines flying on 40 CRJ-200s. It also is a transaction that brings 13 additional aircraft into the United system. Those airplanes will be operated by ASA. The deal anticipates SkyWest - that ASA will begin operating as United Express Carrier starting the first quarter 2010. The aircraft will be operated ASA under a capacity purchase agreement that is generally very consistent with the existing SkyWest Airlines United Express agreement. As part of that transaction, we also extended or provided to United a secure term loan in the amount of $80 million. The term loan bears interest at a rate of 11% with a 10-year amortization period. The deal is secured by ground equipment and airport slot rights held by United. In addition to the term loan, we've also modified our existing United Express agreement to allow for the deferral of certain amounts that were otherwise payable to SkyWest Airlines. The maximum deferral amount is $49 million, and any amounts that are deferred will accrue a deferral fee of 8% annually with those deferral fees paid weekly.

Now, we have issued a separate press release. We've also filed an 8-K which goes into quite a bit of detail on the transaction. I would just say, make a general comment that although it is not our general policy to provide liquidity and loans to major airlines, we do feel this is a unique transaction, where we have an opportunity to utilize the SkyWest strengths with the strengths of a major partner that will create total value for both of us. The transaction we feel has met several SkyWest, Inc. objectives. Number one being that it materially mitigates the tail risk of a large portion of CRJ-200s. When I say the tail risk, I'm just talking about the continuing aircraft financial obligations beyond the contract flying terms. And so we basically have extended 40 aircraft worth of CRJ-200 flying to the end of their terms, and those contract extensions average about 8.5 years.

In addition to that, the transaction basically locks in our rates long term, so that we know exactly what the future holds for those -- or within very tight tolerances, what the rates will belong term on those aircraft. Another objective that we feel is met is that ever since we did the ASA transaction, we have had an objective of trying to align ASA with an additional code, an additional partner. It certainly does that. And we certainly feel that the total transaction strengthens our relationship with United Airlines.

Let's see, something else that I think is of significance, just yesterday, on November 4th, we released that SkyWest Airlines has entered into a codeshare agreement with AirTran Airways. Under the terms of the codeshare agreement SkyWest Airlines will operate five CRJ-200s under a pro rata arrangement. Two aircraft are scheduled to begin service in December of this year and the three additional aircraft are scheduled to begin service in early 2010. The code sharing agreement has a three-year term. However, either party can terminate the agreement upon 120 days' written notice. I think some other parts of the deal that are important to note are that we do feel that we have somewhat of a unique opportunity here to put the airplanes into a partnership with a very credible partner, credible code in established markets, and we're able to do it in a way that's requiring very little investment with very short-term obligations on the aircraft that are being utilized in that operation. So we have high hopes and are optimistic about the potential for the operation, and for the opportunity to work in partnership with AirTran.

And with that, I'd like to just make a couple of comments specifically on the financial statement, which it's a summary financial statement that was included in the release and just make one observation. I have tried to describe some of the material changes in the financial statements relative to revenues and expenses. One item that we haven't discussed which I think is fairly significant this quarter is in the other income expense category of the financials. As you look at the interest income during the quarter, there's a $2.8 million decrease in interest income. There's also a $2.7 million decrease in interest expense. It's very easy to look at the financials and say, well, interest income is down 2.8, interest expense is down 2.8. Those two things kind of wash. The fact of the matter is that they don't wash. Interest expense is a pass-through to the major partners, so the benefit of the decreased interest expense goes to the benefit of the major partners, whereas the 2.8 million interest income obviously is a direct hit to pretax income. The other item of significance in the other income expense section is the investment in -- is the other net, which is 1.6 million. That is primarily our share of the investment in trip net income. With that, I will go ahead and open the call up to questions.

Before I do that, I think it's important to note that here at SkyWest we are kind of celebrating what we refer to as appreciation week throughout the company. It's an opportunity for us all to celebrate one another's successes, to pay particular and special appreciation to all of the employees of SkyWest, and we all recognize that our employees -- and I know this can come off as kind of a trite, insincere comment, but in an airline, in a service industry in which we operate, really our only point of product differentiation is the quality of service that our people deliver, and it's the day to day interaction of the people of SkyWest with our customers that really makes the difference. And we know that, we appreciate it, and I just want to make sure that we pay particular and special appreciation to all of the employees of SkyWest today.

With that I will go ahead and turn it to questions.

We will now begin the question-and-answer session. (Operator Instructions). At this time, we will pause momentarily to assemble our roster. The first question comes from Duane Pfennigwerth of Raymond James. Please go ahead.

Good morning.

Hi, Duane.

Just in terms of the new business that you have at United, and then some of the announcements that have come out recently about another partner, essentially contracts being terminated there, what due think your incremental opportunity is at that carrier?

Okay, so you've asked kind of at least a two-part question, I think. The first part of it is, I think just directed at the new flying that we've picked up. And let me just say, and maybe I can answer this quickly and succinctly, both of the questions, in one response, and that is, when we're negotiating transactions, when we're responding to RFPs, any of that kind of activity, we're doing the best that we can to create flying opportunities for all of the entities within SkyWest, Inc., and when we respond to RFPs or when we're negotiating deals, we don't know exactly where the opportunity is coming from. If another airline's contracts are expiring, we just do the part that we can control, and that's respond appropriately to RFPs and try to negotiate deals as they're presented to us, and so that's all that we're doing, and that's all we've done here. And what other majors are doing in their contracts, that's not our business until it's presented to us by a major as a flying opportunity, and then we'll act on it.

Okay, so are there RFPs that you're responding to that go beyond what you've already agreed to?

Well, I mean, I think most of the market is aware that United, for example has been in the market with an RFP. At least to my knowledge, I don't know that any announcements, or whatever, have been made relative to that total RFP. I mean, that's one that's in the market. And then, I mean, it shouldn't be a surprise that just in us doing our jobs, we enter into discussions quite often just with a lot of different carriers trying to determine what the opportunities are, and today is no exception.

Thanks. I think Jim may have a question.

Okay.

Brad, got a question regarding this maintenance. We all knew on the United 200s, we knew that was coming, cross over the line and to have start that revenue would be be throw costs. But you're saying actually there's a transaction back that revenue will exceed the cost, but you didn't say when. When will that happen?

Very good question. I want to make actually two comments relative to this. You're right. So what I want to do is focus on -- the timing of these events obviously has a lot to do with things like the block hours, the daily utilization, the actual flight time that's put on the aircraft and the engines. So I don't want to get too far ahead of ourselves and make a lot of projections that are out beyond kind of fear seeable future. So what I know, or what I think we know with pretty good precision, is that on current levels of utilization, that for the next six quarters or so, we know that there will be a negative relationship here where costs will exceed revenues.

Okay, so somewhere between, six quarters or eight quarters out, some where in that time period, the first wave of overhauls will pass through, and then the relationship will flip back to revenue in excess of expense. The other comment I want to make in this is that we have worked very aggressively at renegotiating contracts entering into additional contracts, restructuring contracts to reduce these overhaul costs as they come due. And we have been successful at that and the expenses really will be mitigated, this negative mismatch, because of the work that we have done with various vendors.

Okay. Brad, just one more. Your RJs that you're going to put with AirTran, they had an experience with Air Wisconsin a few years ago with 10 of them. They didn't work. What makes you think now that this is going to work in this low-fare environment?

Well, a couple of things. First of all, the expenses we believe of this operation will be much different than the cost structure that was utilized previously. The previous structure, as we understand it, was a contract flying relationship. We are taking the risk, and we're willing to take the risk because we have analyzed very specifically the revenue patterns, the airplanes are going into previously established markets, and the cost structure is lower. So that's why we think that we have a high probability of success here, and then as I mentioned earlier, in the event we're wrong, we do not have long-term agreements on these airplanes, and we can make modifications as we need to.

Okay, thank you.

You're welcome.

(Operator Instructions). The next question comes from Helane Becker of Jesup & Lamont. Please go ahead.

thank you very much, operator. Hi, Brad and Mike and everybody else.

Hi, Helane.

This is my question. With respect to the United loan, should we be thinking of that as a deduction to interest income, or a deduction to the capacity purchase agreement, or how is the accounting for that working? I'm a little vague on that.

Okay, so, well, the accounting actually is pretty simple. We're basically just -- and I want to be careful in the way that I describe this, because I think it's worthy to point out, we have no aspirations of diversifying away from our core business, which is the best regional airline flying in the world, to financial services, okay. And this is not a transaction that we would have done just on the merits of it as a stand-alone financing. Okay, we did it because it gave us a significant amount of risk mitigation on those CRJ-200s. To put this in real terms, we've got aircraft extensions that amount to just short of 5,000 aircraft months worth of flying.

Right.

Okay. So it's -- I mean, it's very material. And at the same time we know with very high precision now what our rates are going to be through that whole extension period. Okay, now, the accounting, as you said, increase or decrease or whatever on interest income, we're basically, we've got a bit of a interest rate arbitrage where we're taking cash that we were earning 1, 1.5% on, and we're going to make 11 and 8% on. And the accounting really is no different than just accounting for any extension of a long-term note.

Okay.

So it is a significant increase, and will be a significant increase to interest income going forward.

Right, okay. I just want to -- that's kind of where I put it in model, but then I was thinking maybe that was wrong. Okay. That's good to know.

Okay.

Now, the other question I have is with respect to your crews. Are you set with your crews? Do you have to train any additional crews in advance of this new CPA for ASA, or is that all up to speed?

Well, the short answer to that is no, but let me have Chip Childs address that.

I mean, I'm not quite exactly sure which piece of new need, but relative to -- this is ASA. Holt is on the phone as well. The conversations we've had, there would not need to be any training events relative to crews.

So you have enough people to handle the aircraft. The aircraft for the ASA are just being moved from one group to another, or are they new aircraft?

Okay, so let me make sure people understand what we're doing here. Last year, we announced a transaction with -- between ASA and Delta, where ASA took delivery of 10 of the 900s, in exchange for 20 of the CRJ 200s going out. So this actually -- this replaces 13 -- actually 14 air aircraft when you include a spare, of those 20 airplanes that are just being displaced. So the crews, the infrastructure, all of that for those aircraft are already in place.

Got It. Okay, thank you. I really appreciate that. Okay, that was my questions. Thank you.

Thank you, Helane.

The next question comes from Bob McAdoo of Avondale Partners.

Hi, Brad.

Hi, Bob.

just very briefly, back to Duane's question about some of the up night transactions that have been -- not yours, but with Mesa and whatever, do you have as many E-120s available your world that are not being used that could you take over the flying that they're losing, the propeller flying that they're losing? Are there any routes that they fly which could you not fly with your E-120s?

Bob, let me just -- I'm very uncomfortable about a discussion about one of our carriers and replacing their flying that we really aren't involved in. What I can say is that, I mean, certainly -- I mean, we have a lot of EMB-120s, but those EMB-120s are not the right aircraft to back-fill the type of flying that I think you're referring to. So it really isn't a discussion about EMB-120s. And we feel pretty comfortable right now with what we're doing with EMB-120s, by the way, but I really -- I guess I should say -- I not only shouldn't, but I really am not going to discuss kind of what's happening with another regional carrier.

Okay. You have, what, 3 ATRs that are not active?

That's correct. Those -- yes, and really no impact financially at this point of those aircraft at all. They're still here on site, but they're out of service. The financial transactions are basically done. All the accounting is done. They're just here on site, ready to go back to their owners.

So it's not as if they're available or could be used for flying?

No.

All right, thank you.

You're welcome.

(Operator Instructions).This concludes our question-and-answer session. I would like to turn the conference back over to Bradford Rich, Executive Vice President and CFO, for any closing remarks.

Okay. My only closing remarks would be, again, just to thank those of you that are on the call, expressing sensitivity to your time and thank you for taking the time to express interest in SkyWest. And again, a genuine and heart-felt thanks to all of the employees of SkyWest, Inc., and the subsidiaries. We really do believe you're providing and generating the best product in the industry. And we thank you for that. And with that we'll go ahead and close the call. Thank you.

The SkyWest Airlines, incorporated, third quarter 2009 earnings conference has ended. Thank you for attending today's presentation. You may now disconnect.