SkyWest Inc (SKYW) 2010 Q1 法說會逐字稿

Good morning and welcome to the SkyWest first quarter 2010 earnings conference call. (Operator Instructions). I would like to now turn the conference over to Bradford Rich, Executive Vice President and CFO. Please go ahead, sir.

Thank you, operator. Thank you to all of you for your interest this morning and for taking the time to join us. We got started a couple of minutes late today, as we noticed we still had a lot of people trying to access the call just slightly after the hour.

Before we get started today, I'd like to just introduce those who are with me today and who will be participating in the call. I have with me Chip Childs, the President and Chief Operating Officer of SkyWest Airlines. Brad Holt is also participating with us. Brad is the President and Chief Operating Officer of Atlantic Southeast Airlines. Michael Kraupp, our Vice President and Treasurer, is also with us and participating this morning. In fact, before we go any further I'll turn some time to Mike to read our forward-looking statement.

Okay. In addition to historical information our 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 expects, intends, believes, anticipates, should and likely and similar expressions identify forward-looking statements. All forward-looking statements included in our release and conference call are made as of the date hereof and 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 or projected for a number of reasons.

Okay. Thank you, Mike. Obviously the purpose of our call today is to provide a brief review and discussion of our first quarter of 2010 financial and operating results. As I said earlier we do sincerely appreciate your interest in SkyWest. We appreciate the support and relationships that we have throughout the industry with our partners, our suppliers, and of course most importantly we appreciate all of the men and women of the SkyWest, Inc. companies, and for commitment and dedication to the success of the organization.

Now first of all we will begin by just reviewing the first quarter of 2010 financial results. As you can see from the press release this morning, we have reported operating revenues of $632.2 million for the quarter ending March 31, 2010. That compares to $672.6 million in operating revenue for the same period last year. Our net income for the quarter was $15 million, or $0.26 in diluted earnings per share. That compares to with $9.4 million of net income and $0.16 in diluted earnings per share for the same period last year.

We're obviously very pleased with the quarter over quarter improvements. We do, however, recognize that the comparable, which is the first quarter of 2009, was one of the most difficult quarters in recent history, which included very difficult weather, it included a large marketable securities write off, and nonengine budget overruns. Having said that the first quarter of 2010 has not been without its challenges also. But in spite of them we've seen significant improvement in the current quarter, and for that we're both -- we're pleased and quite proud of.

Our operating revenues -- I think most of you understand by now that fuel prices and the accounting for fuel have created significant volatility in the total operating revenues of the Company. The more meaningful comparison is to look at nonfuel operating revenue, which increased by 7.6% to $577.1 million. That increase seems consistent with the increase in block hours of 6.0% and the increase in available seat miles of 9.9%.

Our nonfuel cost per ASM decreased during the quarter by 5.9% to $0.095. We're obviously please with this result directionally, and it is similar to the 6.9% decrease in the December quarter. Again, so directionally we feel very good about the nonfuel cost for ASM. We recognize that some of the decrease is due to the aircraft mix and flying more 700s and 900s. But we also continue to see productivity increases throughout the entire system. Our nonengine maintenance expenses have decreased, which has been some what of an issue in previous quarters.

From the release you can see that are stock based compensation has decreased, primarily from some changes in our compensation programs and in the mix of performance-based cash awards versus equity compensation to our all employee groups. Our common stock repurchases during the quarter have been somewhat minimal. You have -- most of you have probably also seen this morning that we put out a press release indicating that our Board of Directors has authorized the repurchase of up to an a additional 5 million shares, which brings the total shares authorized for repurchase to a little over 7 million shares. We will continue to evaluate common stock repurchases. We have indicated previously that wetake this issue very seriously. As we look at opportunity, we always consider and evaluate the financial impacts of common stock repurchases against all of the other uses of our cash resources.

Our balance sheet at 3-31, 2010, remains very strong and one of the best in the industry. We believe that balanced sheet strength is critically important in this type of economic environment, and the strength of the balance sheet positions us better than our competitors to pursue opportunity. The cash and securities were $729.7 million at end of the quarter, compared to $732.4 million at the end of December. The small decrease is normal for the first quarter as we experienced the largest period of aircraft rent.

We also invested an a additional $10 million in TRIP Airlines based in Brazil, which is consistent with our agreement with them. The additional investment brings our total ownership in TRIP to 20%.

Our long-term debt increased during the quarter to $1.87 billionfrom $1.82 billion. The small increase was could you to the acquisition of an additional four CRJ700s, which were debt financed.

We've included kind of the break down of our fleet in the press release. You can see from the numbers there that the fleet totals 456 aircraft at the end of the quarter. We believe that is the 6th largest aircraft fleet in the world. One of the -- I won't go line by line with the break out, as those numbers are all in the press release.

One issue that may be of interest is that we have seen an increase in our pro-rate flying. We ended the quarter with a total of 23 CRJ200s in pro-rate, in addition to 39 EMB-120s flying pro-rate. That is a total of 62 aircraft in pro-rate operation. Of the 456 aircraft, 62 of those were flying pro-rate operations during the quarter. The pro-rate operations did experience a loss of $6.1 million during the quarter. We need to keep in mind that seasonally this is the most difficult quarter for pro-rate operations.

We have indicated that we're -- we see some opportunity here. We have some attractive ownership arrangements, meaning both the attractive rents and short-term lease terms on a good portion of this fleet, which puts us in a good position to enter some unique market opportunities that we think exist. We're watching these markets very closely. And as I've indicated previously, the terms and conditions on the fleet give us actually some unusual flexibility to make some fairly quick decisions with this flying if need be.

Let's see, we've consistently informed the financial analyst community of the accounting treatment for the CRJ200 engine expenses with those aircraft operating in the United system. This is a significant issue in the financial performance of the first quarter. During the quarter we incurred $8.4 million in expense that we experienced above and beyond the revenue that we collected and recorded. That is a $12 million swing from the impact in the first quarter of 2009. And I would just remind you it is due to the timing of the engine overhauls on that fleet. Having said that, we do expect similar numbers during the next year, and then we'll keep you informed of the expected impact as we move forward.

An a additional item -- we did not include this in the press release. Certainly the impact of weather and ATC cancellations has gotten a lot of attention during the first quarter of 2010. The SkyWest,Inc. companies were not exempt from our share of challenges and difficulties related to weather and ATC. To put a little bit of perspective to this, our weather and ATC cancellations in the first -- and by the way, I'd remind you too that in the first quarter of 2009 we experienced an unusually high amount of weather and ATC cancellations. But even with those difficulties in the first quarter of last year, our missed block hours related to weather and ATC was almost double what it was the first quarter of 2009. The financial impact of that during the quarter was approximately $2 million.

I want to review just briefly the condensed income statement that we included in the press release this morning. I've already indicated that our total operating revenues are a bit misleadingwhen considering the volatility introduced due to not only the prices but the accounting for our fuel reimbursements. The de -- the significant portion of the decrease in our operating revenues is simply due to the accounting for fuel. Actually our production increases in revenue were about $10 million during the quarter, our pro-rate was up $35 million, while the impact from fuel caused the decrease of $88.2 million in our operating revenues.

As you look down to our operating expenses, the same explanation really holds true for aircraft fuel. Our contract fuel was down $81.4 million. Again simply due to our major partners buying more of the fuel and not running through our financials. Our pro-rate fuel expenses were up $14.3million during the quarter.

Salaries, wages and benefits we think is a significant issue. Very slight change in total salaries, wages and benefits in spite of an increase of 6.0% of block hours and an increase of 9.9% increase in ASMs. We think that is significant and is a key indicator of increased productivity and efficiency throughout the system.

Our aircraft maintenance materials and repairs, I've touched on already the most significant impact in the year-over-year change. Of the total $14.6 million change there, $12 million of the swing is related to the United CRJ200 engine overhauls.

When you continue down through the condensed income statement the -- I just want to put some emphasis to the provision for income taxes. We had an unusually low effective rate in last year's first quarter of 28.8%. The effective rate in the first quarter this year was 38.8%. We would expect a more normalized effective tax rate moving forward of about 38%.

To just give by way of summary and just a very quick review of the financial performance. Again we're please with the increasefrom $9.4 million to $15 million. The income is up $5.6 million in spite of the $12 million swing in the United Engines, the $6.1 million loss in the pro-rate operations and the $2 million impact from weather and ATC. So I guess my point there is we're actually very pleased and proud of the financial performance in spite of those kind of unusual issues during the quarter.

As far as balance sheet, a little bit more on the balance sheet just by way of some stats. I mean our cash and marketable securities per share at the end of the quarter were $13.05. Book value per share was $24.44 per share.

I want to just mention as well, the operating performance at both SkyWest Airlines and Atlantic Southeast Airlines remains very strong. The operating performance at Atlantic Southeast Airlines was strong enough that we collected essentially every dollar possible in performance incentives during the quarter, and that is a significant improvement of where we've been previously. The operational performance just remains consistent and strong and among the best in the industry at SkyWest Airlines, and we congratulate both entities for their excellent work there. The dedication and commitment that it takes to pull off that kind of performance has not gone unnoticed. It's appreciated and has had a significant impact on the first quarter performance.

I think with those remarks, operator, we'll conclude the prepared remarks and now open it for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Helane Becker with Jesup and Lamont.

Thank you very much, operator. Hi, gentlemen. Thank you for taking my question. Brad, did you talk at all about what ASA is doing in China with the co-chair agreement, and if not, could you?

I will touch on it very briefly. As no public announcements have been made my, only statement I think would at this point would be that we have made -- consistent with the statements we've made previously, that we've been looking and evaluating and considering additional international opportunities to continue to invest in areas that are seeing rapid economic growth and development of air transportation. We see Vietnam as being an area of potential investment that would pair at least with our initial assessment to be one of some promising opportunity. So as we have said before we're doing significant research analysis and putting some work into it, but beyond that no formal announcements are ready to be made.

Okay. Because on -- just FYI, on April 30th in one of the Asian related trade manage that's I read, it did comment that you had received an operational services agreement with Air Mekong in Vietnam, which is why I asked that question. But that's fine. If it's not been signed but you guys yet, I have no problem respecting that.

We are well aware of that, and I'll stand by my previous statement.

Okay. That's totally fine. And the only other question I had I think was related to -- just in one of the stats. The average trip length? Is that decline continuing? Is it meaning less?Should I not put too much weight in that?

I don't think you should put much weight in it. I mean, it has not changed materially. Directionally I'm not too worried about it. The more significant indicator here with the way that our models work is the block hour production.

Okay. I'm I'll go back in the queue. Thank you very much for answering my question.

You're welcome, Helane.

Our next question is from Bob McAdoo with Avondale Partners.

Hi, guys.

Hi, Bob.

A couple of things. You have in your P&L, I got two or three lines I just want to ask about. You have things, ground handling and other, seem -- not looking versus last year, but just looking at the last two or three quarters, seemed to have jumped a pretty good size amount versus like fourth quarter and third quarter. I'm curious as to what is in there that is jumping, and how should we be thinking about that over the next two or three quarters.

Yes, I mean, we've got here -- yes, I mean we have picked up a few stations along the way that we've RFPed, which is increasing the ground handling. There should be -- they are similar increases in the ground handling and other, but really nothing of that significant to point out in that area.

Well I guess what I'm saying is the last two or three quarters the ground handling line has been $23 million a quarter, and now this quarter it jumped to $29 million? So it is $6 million on a base of $23 million? And I'm just saying is that -- but the revenue line up at the top doesn't seem to be jumping that much, so I'm trying to understand what is going on.

As we're firing up more pro-rate markets, we're doing some of our handling in those markets.

Okay. So, that's kind of a piece of the -- so something like the $29 million is more -- it now becomes a more normal number for us to look at going forward.

Yes.

It's basically -- it just reflects the change in the business. It is not like a one time deal. It's like this is the new world.

Yes.

And the same on the other expense line?

Yes.

And then maintenance versus the last couple of quarters -- actually, especially versus the second and third quarter of last year is down quite a bit. Was there just fewer events that happened to be scheduled in the quarter?

Okay, now Bob which line are you looking at again?

Maintenance. It looks like it went -- like the middle of last year was like 1-6 to $116 million to $119 million. Now it's down to $106 million?

Okay,so, Bob, we've got two issues. Two fairly significant issues going on in maintenance. First of all when you look at the condensed financial and look at aircraft maintenance materials and repairs it is up significantly.

Verses last year.

Versus last year.

Right.

So, that is due to the timing of engine overhauls, particularly on that CRJ200 fleet.

Right. Which we talked about that. I'm just trying (inaudible - multiple speakers) back down now.

Yes. Then going the other way is that in our nonengine related maintenance expenses, in previous quarters we had seen fairly significant increases both year-over-year and relative to our budgeted expenses, and those expenses have come down significantly at both carriers.

Good. All right. Cool. That makes sense. And one final thing then at the risk of monopolizing the call, could you tell us more about what TRIP is doing now. How big it is? We don't see a line of that shows any kind of -- or I don't think I see a line here that shows anything about the equity contribution plus or minus what is going on there, but yet you own 20% of the company. What -- how big is it, what is it doing and how is it doing?

First of all, the line item on the financials where this is -- the actually direct financial impact to us is in the other income expense. On the condensed financial there is a line called other. That 255 is basically the financial impact during the quarter of TRIP. Primarily due to currency translation. As far as their financial performance, it is exactly what we thought it would be at this quarter. I mean, within very tight tolerances of the projections. The fleet is growing right cording to plan. It is up to roughly 30 aircraft. They've added some larger aircraft to the fleet and are planning to add a few more airplanes in each of the next few years. So all of that is on track. We've been able to assist them in getting the fleet financed. And things just seem right on track and very consistent with what we thought it was going to do.

And what kind of fleet -- the 30 airplanes, what kind of airplanes are they?

They have a large fleet of ATRs, and then they've just added large ERJ jets to the fleet.

E170 types or something.

175s.

And they are flying for their own nickel? They're not contract flying? They're flying for their open own nickel, or whatever the appropriate phrase is in Brazil?

That is substantially correct. They don't have relationships like we do with majors, but they have some marketing agreements. But generally it is what we refer to as just independent pro-rate flying.

Okay. Very good. Thanks a lot.

(Operator Instructions). Our next question is from Glenn Engel of Merrill Lynch.

Good morning.

Hi, Glenn.

A couple of questions. One, I was a little bit confused on a comment on the United Engine maintenance expense. You said you expected similar numbers going forward. I'm not sure what similar to what meant.

I think the main point to take is that the directionally we expect throughout this year and into next year that our maintenance expense will be in excess of the amounts that we collect in revenue for that part of our contract. So this time the excess was a little over $8 million. And there was a quarterly number. It's going to be about that number for the next several quarters.

And you mentioned you're nonengine airframe expense decreased. Would you expect that to also be similar going forward? (Inaudible - multiple speakers) lower level?

That is certainly what our plan is.

And final question on labor. The national mediation board I guess is considering changing the rules on union votes. Where are we on that, and what effect does it have on you?

I'm going to turn the Mike over to Chip Childs and let him address that one.

We've been very involved in the debate, and the debate, I think as you've followed it relative to what the national scenario is with this, we're prepared to deal with that regardless of which way that ruling goes. And to be honest with you I think what we focus on is taking care of our people. The structure for organization may change. That is something that we certainly deal with, but at the end of the day our long-standing approach for the last 38 years in dealing with our people and making sure they are recognized for the effort that they put forward, and make sure that we team with they them in a very good relationship to make sure the needs of the Company and they are met in a team-like manner. Our strategy for dealing with that is a timeless approach that we've had that has been very successful, and we're going to continue doing that going forward.

Finally are there many growth opportunities?

Yes, let me -- well, the quick answer is yes. I think it should not be surprising that in the current -- just a number of things -- the current economic climate has created some difficulties for some of our competitors. We think that creates opportunity. There will be in the -- near- to mid-term future, we're paying very close attention to the contracts between regionals and majors, and we expect that there will be some RFP opportunities coming up. And then, as we have said previously, we're looking at opportunity everywhere from international-type opportunity to acquisition-type opportunity. And we consider all of that all the time, and in this market we think there is more opportunity than normally.

And the comment, does that imply your opportunity domestically is more of a share shift than a growth?

Well, probably. Who -- the -- we certainly see more signs of consolidation at the major level. What that means at the regional level I don't know. Whether it's consolidation, I mean it could take that form. It could take just some shifting around of who's providing the addition -- current feed.

Thank you very much.

You're welcome.

Thank you. Our next question is from Bob McAdoo of Avondale partners.

Yes, one other thing. The $6 million pro-rate loss. Is that virtually all of them or almost profitable because of seasonality, or are there particular areas, regions, markets, some relatively small number of markets that the majority of the problem? That if you decided to you could surgically remove those and the rest of it would look just fine?

I'll answer it very generally. I think there that the losses are concentrated into a particular area. A significant issue here is that we now have pricing and inventory control responsibilities for that segment of the flying, so combine that with the fact that we're moving into a seasonably better period, and we're still optimistic about the potential.

Okay. Thanks.

Our next question is from Mike Roarke of McAdams Wright and Ragen.

Good morning. Do you have -- on block hours do you have an outlook for where you think they will be over the next year or so?

I don't have the block hour projections right with me. I will give you the ASM projections for the coming quarters. We're expecting in the second quarter $5.9 billion. Third quarter, $6.1 billion. Forth quarter, $5.7 billion. That would accumulate -- add to it the first quart actual -- that would be $23.3 billion for the entire year, which would represent a 5.1% increase.

Okay. And then on block hours again did you start doing new business with United in the first quarter they are was not present in the first quarter a year ago?

We did begin, I'll term it a new relationship, which is the Atlantic Southeast Airlines flying for United, which started up during the quarter. During the second -- it started in the first quarter. By -- during the second quarter it should grow to 14 aircraft in that system.

So in terms of the 6% increase in block hours, how much of that was attributable to that new piece of business as opposed to kind of organic increase in flying for exists relationships?

It's very, very small.

Okay. So I guess as far as current trends go, is the general direction right now to gradually add back capacity as far as your partners are concerned?

Well capacity, block hours, ASMs. There are two issues and two ways to look at that. One is just to increase utilization within the current amount of aircraft that we have. Right?And so that's been one of our issues in the last year and a half or two years, isthat utilization on the existing aircraft has come down fairly significantly. I mean during the past quarter -- I mean our block -- average block hour utilization on the Atlantic Southeast Fleet was only 8.3 hours. The SkyWest Airlines utilization is much better at that at 9.7 hours. That issue is a fairly significant thing. If we can just get the utilization back up on the existing system, that would provide a meaningful amount of increased -- what I'll just call increased production whether it's block hours or ASM production. Okay, then in addition to that, then we're always looking for opportunities to either increase the number of units and the size of the units. Okay?And we're just continuing to pursue opportunities in each of those area. Everywhere from utilization of the existing fleet to opportunities to place more and larger regional jets.

Okay. Great. Thank you and one last one as I was just playing with the number and thinking about it from an earnings perspective. On this maintenance issue is kind of a bottom line way of thinking about that, it will be a drag of $0.09 to $0.10 a share per quarter for the rest of the year and then also into 2011?

That is correct.

Okay.

And again, as bad as that sounds we have -- this is why for years we have consistently reported every quarter what the mismatch was here. And it just -- although we've been making people aware of this, made it I think very clear to the financial community that this is how the accounting works. We don't necessarily like this particular accounting, but the account regs say we have to match the accounting treatment with the way the contract works. And this is what it ends up with on this particular portion of our contract. So, again we've done the best we could to disclose this thoroughly, but it admittedly doesn't feel good when you get into periods where it reverses on you. And that's where at, and that's where we'll for the next -- the rest of the year into part of next year. Then it will flatten out for several quarters, and then it will turn back positive.

Understood. Thank you.

You're welcome.

Our next question is from [John O'Malley] of Wedge Capital Management.

Good morning, guys.

Good morning.

Just one follow-up on the maintenance expense question and with the United contract. Is it safe to assume that economically this activity is meant to be a break-even activity? As expressed in the contract?

Well, yes and no. I mean, certainly we expect as in all of the components of our cost structure, that if we're meeting the terms of the agreement, there is certainly an intended markup on top of the actual cost incurred. So over time there will be -- there should be an offset, but yet in the embedded number -- this cost base, there is certainly intended to be markup on this base of cost. So the base cost, yes. It should work out to a break even. But yet the cost base is -- does qualify for markup.

Understood. So basically, if you are exceeding or doing better on the expense side of it, you have the ability to make some margin on it over time.

I would not say there is any -- there is not enough potential for any windfall, because we're doing the very best we can to manage this cost component. We think we've done some very significant and industry-leading things in how we structure contracts with partners and vendors to materially manage this cost down , and the majority of that benefit is passed on to our major partners. So we just expect to get the margin, the markup as contracted out of this base of costs, whatever the base ends up being, which we're aggressively trying to manage

Okay. Thank you very much.

You're welcome.

This concludes our question-and-answer session for today. I'd like town the call over to the speakers for any closing remarks they may have.

I don't really have much more to say. Again, I appreciate your participation. We know it takes a time commitment to participate with us. And with that we'll get ahead and conclude and close the call. Thank you very much.

The conference has now ended. Thank you for attending today's presentation. You may now disconnect.