SkyWest Inc (SKYW) 2010 Q2 法說會逐字稿

Welcome to the ExpressJet second quarter 2010 earnings call. My name is Sandra, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

And we'll now turn the call over to Ms. Kristy Nicholas. Ms. Nicholas, you may begin.

Thank you, Sandra. Good morning, everyone. And thank you all for joining the ExpressJet Holdings second quarter conference call. On the call we have Tom Hanley, President and Chief Executive Officer, and Phung Burns, Chief Financial Officer, to discuss the results and take questions. This call does not constitute an offer to sell, or a solicitation of any offer to buy any securities, or a solicitation of any voter approval. The transaction will be submitted to the stockholders of ExpressJet Holdings, Inc for their approval.

In connection with the transaction, ExpressJet will file a statement with the Securities and Exchange Commission. A definitive proxy statement will also be mailed to stockholders of ExpressJet. ExpressJet and SkyWest, Inc also plan to file other documents with the SEC regarding the transaction. Investors and security holders of ExpressJet are urged to read the proxy statement, and other relevant documents that will be filed with the SEC, carefully and in their entirety, when they become available, because they will contain important information about ExpressJet and the transaction.

Investors and stockholders will be able to obtain free copies of the proxy statement, and other documents containing important information about ExpressJet and SkyWest, Inc, once those documents are filed with the SEC, through the website maintained by the SEC at http//www.sec.gov. Copies of the documents filed with the SEC by ExpressJet will be available free of charge on ExpressJet's website at www.expressJet.com under the tab Investors, or by contacting ExpressJet's Investor Relations department at 832-353-1409. Copies of the documents filed with the SEC by SkyWest Inc will be available free of charge on SkyWest Inc's website at www.skywest.com under the tab Invest, or by contacting SkyWest Inc's Investor Relation department at 435-634-3203.

None of the information included on any website maintained by ExpressJet, SkyWest Inc, or any of their affiliates, or any other internet website linked to any such website, is incorporated by reference, in or is otherwise made a part of this communication. ExpressJet, SkyWest Inc and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of ExpressJet in connection with the transaction.

Information about the directors and executive officers of ExpressJet is set forth in its proxy statement for its 2010 annual meeting of stockholders, which was filed with the SEC on April 2, 2010. Information about the directors and executive officers of SkyWest, Inc is set forth in its proxy statement for its 2010 annual meeting of stockholders, which was filed with the SEC on March 12, 2010. These documents can be obtained free of charge from the sources indicated previously.

Other information regarding the participants and the proxy solicitation, and a description of their direct and indirect interests by security holdings or otherwise in the transaction, will be contained in the proxy statement and other relevant materials to be filed with the SEC.

Portions of this call may contain forward-looking statements, not limited to historical facts, but reflecting our current beliefs, expectations, or intentions regarding future events. A number of factors could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning risk factors that could affect our actual results is described in our SEC filings, including our 2009 10-K.

During this call, certain non-GAAP financial disclosures may be made relating to our performance measures. In accordance with SEC rules, we will provide reconciliations to our most directly comparable GAAP financial measures on our website at www.expressjet.com.

Tom and Phung will cover the operating and financial results for the quarter, and then we will take questions. Now I would like to introduce Tom Hanley.

Thank you, Kristy. Good morning, everyone. This is Tom Hanley, and I appreciate you joining us this morning. My goal for today's call are to review our results, and to allow ample time for Q&A, since I'm sure there are many questions given our announcement last week. Here is the outline I intend to follow on today's call. Our performance under the Capacity Purchase Agreements with Continental and United, our progress on Operation Green Light, and finally, our expectations regarding information and timing of the acquisition by SkyWest Inc.

I would like to start off by recognizing the hard work and dedication of our employees. Their commitment allowed the airline to fly approximately 18% more block hours than last year, expand the operation with United to 32 aircraft, and to continue operating one of the most reliable fleets in the regional industry.

Looking at our aircraft allocation, we flew eight fewer aircraft in the Continental Express operation. As you may recall, we executed an amendment to the Continental CPA at the end of 2009, which resulted in the reallocation of eight of our aircraft from the Continental CPA to our United Express operation. Reallocation of these eight aircraft provides ExpressJet with two growth opportunities, new flying with United, and higher utilization of the remaining Continental fleet.

During the quarter, our average utilization was improved to 9.12 hours with Continental, and it was slightly higher than that, 9.78 hours per day, within the United Express operation. This higher utilization caused an increase to our partner flying revenue of 26.9% for the quarter ended June 30. This revenue is net of $1.4 million paid to Continental for utilization improvements, and performance penalties.

Moving to the expense side, we spent about $1 million during the quarter to complete our start-up of the United operation, which is $500,000 dollars less than our forecast, as of the end of Q1. We also saw some productivity improvements across our workforce, particularly in the maintenance arena. We expect to see these improvements to extend to our entire workforce, as we now have the crew base open at O'Hare to support the United flying.

On our Operation Green Light, we made measured progress since our announcement of the plan on June 7. We will continue to pursue additional savings under the plan, while we also work to close the transaction with SkyWest Inc. And at this point, we intend to capture between $4 million and $5 million in additional savings under the plan during the second half of this year.

On to our aircraft allocation, during the quarter we operated 206 aircraft as Continental Express, 32 aircraft as United Express, and six aircraft within our corporate aviation or charter operation. Our expected fleet allocations through year-end will be the same, as we are currently in discussions with United to extend the flying period of the 10 short-term aircraft through part of 2011. And we hope to have an agreement executed in the near future.

Before I turn the call over to Phung to provide some details on our per share and balance sheet performance, I wanted to provide some brief remarks on the announcements we made last week regarding SkyWest Inc's acquisition of ExpressJet. Last week we announced that SkyWest Inc and ExpressJet had signed a definitive merger agreement, whereby SkyWest Inc will acquire all of the outstanding common shares of ExpressJet for $6.75 per share in cash, subject to the conditions of the definitive merger agreement. SkyWest Inc advisors provides us that it's their intent that ExpressJet will be merged into the wholly-owned subsidiary, Atlantic Southeast Airlines, following the closing of the transaction, and receipt of all of the required regulatory approvals.

The transaction also requires approval of the ExpressJet shareholders. We expect to file the proxy statement requesting the shareholders' vote within the next 20 or so days. And it will contain details of a special meeting, and outline the process the Board underwent to sign the definitive merger agreement.

All the other regulatory approval processes are currently on cost, and as stated in last Wednesday's press release, we expect the transaction to close during the fourth quarter of 2010. Until the transaction closes, we will continue to operate as separate legal entities, and we will stay focused on our commitment to providing safe and reliable air transportation, and delivering ExpressJet quality service every day.

While I know there are many questions about the transaction, many I can't answer at this point because we simply don't know the answer, and we don't want to speculate. We have provided -- we will provide updates on the transaction as processes are completed, and facts become known.

With that, I would now like to turn the call over to Phung to discuss our first share performance, and the balance sheet of the second quarter.

Thank you, Tom, and good morning, everyone. Before I go over our earnings results, and the recent balance sheet activity, I too would like to express my gratitude to all my colleagues for their hard work and dedication.

Today we reported a second quarter loss of $5 million or $0.27 per diluted share excluding special items, primarily related to the non-cash adjustments of deferred tax assets and impairment of fixed assets. Including special items, as described in our earnings release, ExpressJet's loss totaled $18.6 million or $0.99 per diluted share for the second quarter.

These results reflect an improvement in block hours and progress on our Operation Green Light. However, despite these improvements, we expect to experience continued financial pressures, due primarily to low consumer-price index revenue rate increase under the Capacity Purchase Agreement with Continental. On July 1, 2010, this rate increase was 0.76%. The remaining $6.1 million balance on Continental utilization incentive will also add pressure to our financials, and the remaining amortization of the United warrants through April 2013.

Turning to the balance sheet, thus far in 2010 we strengthened the balance sheet through collecting $18.2 million in tax receivables, repurchasing and announcing redemptions for $18.6 million par value of our 11.25% Convertible Secured Notes, which are due in 2023, monetizing our remaining auction rate securities, and repaying the $5 million outstanding credit facility provided by Citigroup related to our auction rate securities. We plan to file our second quarter 10-Q by the required date, and it will reflect the accounting for these items on our balance sheet. While we continue to work on closing the transaction with SkyWest, we will remain committed to obtaining additional savings under our Operation Green Light plan, and continuing to improve our balance sheet.

In closing, I thank you for joining us on this call, and will now turn the call back over to Tom.

Thanks, Phung. I would like to ask the operator, if we have some questions, we can begin the Q&A session.

Thank you.

(Operator Instructions).

The first question is from Helane Becker from Dahlman Rose. Please go ahead.

Okay, thank you very much, operator. Thanks for taking my question. Tom, I was wondering if you could just talk to some of the -- some of the initiatives that you had put out there in Operation Green Light back in June. You talked about things like crew productivity and maintenance, productivity and savings and so on. Could you just talk to where you are in the second quarter/where we are in the third quarter, relative to the goals that you set for yourself for the run rate for next year?

Well, certainly we can. As we've said, we have made some progress. I think it's fair to say that a good chunk of the management time over the last few weeks and months have been dedicated, if you will, to evaluating and supporting, if you will, some of the evaluation of the SkyWest transaction. So, we haven't made quite as much progress as we would have liked. But I think we have made some solid progress in a couple of areas.

One is the maintenance area. We've seen some significant improvements, in a little bit of the approach that we use on some of the on-condition items, as they would refer to in the cabin area, where, historically, we would basically change everything out, we are now looking at seeing if we can refurbish some of that, and so maintain the appearance that we are driving to maintain on the airplanes. We're also doing some better softening within the maintenance area, which is extremely leveraged. And we've also seen some improvement in some of our contracts that we have, on some of what we call our power-by-the-hour, our components support and those kind of things. So, we are making improvements there.

We are seeing improvements in productivity, as the block hours have improved. We are not seeing the number of bodies that historically would have maybe been added to the system. So, we're working a little bit smarter. And I know everyone is working very hard. So, we are making some progress there. On the crew side, we're seeing productivity improvements both in the May and the June year-over-year. I haven't quite seen where July is. But we will get through that in the next couple of days here.

And we're constantly trying to figure out, how do we improve the utilization. As we said, our build out, if you will, of the United operation is now complete. We have our base established up there. So, that will help us on our productivity on the crew side. It will also -- now that we've got everybody in place for this particular round, our training is also slowing down slightly. And we'll be more into just training for attrition. So, I think we are making progress.

That's hugely helpful. Thank you very much.

Sure.

One other question with respect to the SkyWest transaction, are there any provisions in the contract that would allow for a higher price for ExpressJet shareholders, if the cash position on your balance sheet was greater than you expected? Or if your earnings between now and closing were higher than expected?

Well, I think we clearly have filed -- we've filed our agreement, and I think I would refer you back to the agreement. It does have some discussion points on that. And I think that will probably, hopefully answer the question.

Okay. Thank you very much. I appreciate the help.

Thank you.

The next question is from Ross Margolies from Stelliam Investment. Please go ahead.

Good morning. I have two questions. First, can you review the accounting and the actual Q2 impact of United Warrants? How much -- what the actual quarterly charge was? And secondly, can you review current timetable for the $40 million expected savings by year for -- from Operation Green Light? In other words, how much you expect of the $40 million to get to, by the end of this year, next year, and 2012.

I will take the second question first, and then I'll turn it over to Phung for the accounting of the warrants. That's well beyond my expertise. Operation Green Light, as we've said, we think that by -- in the second half of this year, we'll have a run rate savings of about $4 million to $5 million. We think that -- we have every indication that the $40 million that we put into Operation Green Light as a stand-alone entity is obtainable. And that that run rate would be achieved some time by 2012.

Some of these things will be changing a little bit. SkyWest, I think, has got a series of -- their Operation Green Light, if you will, as they plan, and I'll ask you to get back to those guys for some color on that. But I think we are solidly in a position where we can continue to move forward on some of our items that we can control. It gets a little bit tougher, because some of the things that we were planning to do, had a two or three-year sort of agreement style. And some of those discussions, obviously, are slowed down by the pending transaction. So, I'll turn it over --

Sure, can I just interrupt to follow-up on that, then. What I'm trying to do is -- I understand that it's not going to happen the way it was originally planned because of the merger. But in terms of what -- can you review what the original timetable would have been? And I understand that that might also change, for instance, if the merger didn't go through for regulatory or other reasons. For the original timetable--

Sure. Our original time frame -- because -- was run rate savings of about $40 million, effective, if you will, in the 2012 time frame. And some of those would phase in earlier. Some of those would phase in, probably on New Year's eve of 2011. So that was (multiple speakers) of our expectation --.

$4 million to $5 million would be this year. And then, how much next year, and how much in 2012 under the original expectations?

Well, I think the only part we have vision of right now, is what we've put into the -- what we've already discussed, the $4 million to $5 million this year. Obviously, we are continuing to work the issue. And I think in later calls, we will provide you an update.

Okay. Thank you.

On the accounting for the United Warrant, the total is about $12 million. And it is reflected on our balance sheet. So, when we file our 10-Q later on this week, or first part of next week, by the required due date, you will have the details of that. But for the second quarter of 2010, the amortization of that warrant was about a $1 million dollars.

And it is -- straight line over the life of the contract allocated to it? Or is there a mark-to-market component, because of the warrant and the derivative?

It is straight line. Basically it was determined at the point the warrants were granted.

Thank you.

Thanks, Ross.

(Operator Instructions).

Standing by for questions. At this time we have no further questions.

Okay. Well, I appreciate everybody taking the time. And I know there will be more releases as we go forward, as we get better definition of progress that we're making, by way of the transaction, and as events here at ExpressJet continue to develop. So, thank you for the time. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.