SkyWest Inc (SKYW) 2010 Q4 法說會逐字稿

Hello. Good morning, and welcome to the SkyWest Fourth Quarter 2010 Earnings Call. 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. An operator will give instructions on how to ask your questions at that time. (Operator Instructions) Please note that today's conference is being recorded. At this time, I would like to turn the conference call over to Mr. Brad Rich, Executive Vice President and CFO. Mr. Rich, please begin.

Thank you very much, Operator. Thank you to all of you for joining us this morning. We always appreciate your time and your interest in SkyWest, Inc. Participating with me this morning will be Chip Childs, the President and Chief Operating Officer of SkyWest Airlines, as well as Brad Holt, the President and Chief Operating Officer of Atlantic Southeast. I also have here at headquarters with me, Mike Kraupp, Vice President of Finance and Treasurer, as well as other members of our staff who are present with me this morning. We will go ahead and begin the call by asking Mike Kraupp to read our forward-looking statement.

Okay. In addition to the 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, anticipate, 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, project, or expected for a number of reasons.

Okay. Thank you, Mike. We will now go ahead and have a discussion about the fourth quarter results. First of all, let me just make a statement about the timing of our release this morning. I think the release is a little later than we would normally be releasing. With the ExpressJet acquisition, we wanted to make sure that we were taking adequate time to make sure that we had everything as complete and final as we could be before we did the release. We're confident that we have that well in hand and a lot of thanks to all who have been involved in all of what it takes to get those -- all of the reporting done when we do an acquisition or a transaction of this size and nature.

First of all, or next of all, I want to make sure that all of our people, all of the people of SkyWest, Inc. Companies know of our sincere gratitude for all of they have done, all that they continue to do every day to make this operation work. We now are a very large and in some ways very complex organization that is putting out thousands of flights every day, and it is due to the commitment and the hard work of these men and women of SkyWest, Inc. family of companies that make all of this possible, and we're sincerely grateful to all of our employees for the work that they're doing.

I always assume that most of you have seen the press release. We will use the press release as the outline for our discussion today. As you can see from the release, our reported operating revenues for the quarter were $796.3 million for the quarter ended December 31, 2010. That compares with $604.4 million for the same period last year. We reported net income for the quarter of $37.2 million or $0.67 in diluted earnings per share. That compares with $19.5 million of net income or $0.34 of diluted earnings per share for the same period last year. Very importantly, though, I want to point out that those earnings include $10.2 million in net earnings or $0.18 in diluted earnings per share of what we would describe as unusual items when compared to the historical results for the same period last year.

I will spend some time talking about these items. In general, the items are such things as purchase accounting gain from the ExpressJet acquisition. I previously have indicated in prior calls that we had been working on a true-up of some open issues in our Delta contract, particularly with the rates. We have accounting -- or acquisition fees and severance payments and that sort of thing resulting before the ExpressJet acquisition. We have the engine mismatch -- maintenance mismatch that we'll also spend some time talking about, and then we have some adjustment in our IROP litigation reserve that will also -- that's also impacted the earnings. So those are the types of things that we'll be discussing this morning that have impacted our results.

When you look at the results on a year-to-date basis, our operating revenues are $2.77 billion, which compares with $2.61 billion for last year. We reported $96.4 million or $1.70 per diluted share for the 12 months ended December 31, 20 10, which compares with $83.7 million or $1.47 in diluted earnings per share for the same period last year.

In looking at the results, important to keep in mind that the results do include the acquisition and the operations of ExpressJet from the closing date, which was November 12, 2010, through the end of the year, December 31, 2010, which is 50 days worth of ExpressJet operations, which is part of those results. I think most of you know by now that on November 12, 2010, we did complete the acquisition of ExpressJet. The total cash purchase price was $136.5 million, which does include the value of the shares previously owned by Atlantic Southeast Airlines. I think most of you are aware that the structure of that acquisition was done through Atlantic Southeast Airlines where ExpressJet became a wholly-owned subsidiary of Atlantic Southeast.

We acquired -- well we brought into the operation, 244 regional jet aircraft operated by ExpressJet, ExpressJet Airlines, which is the primary operating entity of ExpressJet. I've already mentioned that in conjunction with that acquisition, there was a purchase accounting gain of $15.6 million, which is reflected in the other income expense category in the SkyWest, Inc. consolidated and condensed statement of income.

Additionally, the purchase accounting gain, an important item to note here is a non-taxable item, as the tax basis and the net assets acquired did not change the result of the transaction. More specifics relative to some of these items impacting income during the quarter. We not only had the purchase accounting gain of $15.6 million, again, which was not tax affected, but that was partially offset by about $8.8 million pre-tax of acquisition-related costs, which, of course, are -- include things like professional fees as well as some of the employee termination and severance costs.

I would make a general statement about ExpressJet. First of all, the operations of ExpressJet are very, very good. The quality and reliability of the operation is outstanding, and again, for that we congratulate and express our appreciation to the men and women of ExpressJet. They have acted very professionally as the transition has been taking place, and I also would just note generally that although we don't report specifically on segments, the XJet operation was both positive cash flow and did generate operating income from November 12 to December 31, 2010.

Also during the quarter, as I previously mentioned, and have in previous calls, we did reach an agreement with Delta Airlines on several open issues primarily related to the ongoing rate issues under our connection agreements. As a result of the settlement of the open issues, we received and recorded $17.2 million pre-tax of additional revenue, which is reflected in our operating revenues for the quarter.

We have talked a great deal in the past about our issues with our CRJ-200 engine maintenance expense under our United Agreement. During the quarter, those expenses increased $11.4 million pre-tax compared to the quarter-ended December 31. And again, I think most of you know this is all due to the timing of the scheduled engine maintenance events. This is an item that we have been discussing for -- actually for years. This mismatch in expense versus what we collect in the contracts, as most of you know in previous periods, generally that has been positive. Now it's turned negative. It will remain negative. I mean, similar numbers as to what we reported throughout -- in this quarter, throughout 2011. And then again, simply due to timing of these events, midway through 2012, the number will go back positive again.

Okay. A, little more detail relative to our operating revenue, our operating revenues increased 31.7% or $191.9 million during the quarter. Of course, most of that is related to a 39% increase in block hours related to the integration of the ExpressJet operations that generated $108.7 million in additional revenue. So, of course, most of the increase in the total operating revenues resulted from the ExpressJet acquisition. In addition to that, there is an 8.3% increase in just SkyWest and Atlantic Southeast block hours which resulted in an increase of $11.3 million in additional revenue.

In addition to that, our pro-rate revenues as well as our pass-through costs both increased, which accounts for the remainder of the increase. I think worth noting as well is in conjunction with the settlement of our issues with Delta, we did agree upon rates for the next five years. So that's something we feel very good about. It's a positive development. As most of you know by now, sometimes these rate discussions become very difficult, and the good news here is that this is now solved for the next five years with Delta.

Okay, a little more information relative to our operating expenses. Again, much of the same explanation for the increase. Much of -- the majority of the increase in our expenses is due to ExpressJet again, just integrating those operations in, and that -- in addition to the things that we're identifying as kind of unusual items for the quarter, that, of course, is the thing outside of what I've mentioned that really is the primary driver of the increase in the expenses for the quarter.

Other items that I think are note worthy, a little discussion about our repurchase program. We did purchase -- repurchase 1.1 million shares of our common stock at a cost of $17.5 million under our stock repurchase program. Just a little bit about our thinking on stock repurchase. We previously indicated that it is strongly our objective to at least repurchase enough shares to offset any dilution created from our equity based compensation programs. We also feel pretty strongly, especially now that our stock does represent a good value and we have been active in repurchasing our own shares and we plan at this point to continue a fairly active repurchase program.

During the quarter ended December 31, 2010, we entered into an agreement with Horizon to acquire eight CRJ-700 aircraft. We intend to finance those aircraft by either assuming the existing lease financing on the aircraft or to sublease the aircraft from Horizon. We are well into that program, and in the process of taking aircraft. Those aircraft will be operated by both SkyWest Airlines and Atlantic Southeast Airline under the Delta Connection agreements. Deliveries of those specific eight aircraft began on February 4 and are scheduled to be completed on -- during June of 2011.

During the quarter, we also entered into an agreement with Bombardier to acquire four new 700 next-gen aircraft. Those aircraft are scheduled for delivery in the third and fourth quarters of 2011. Those aircraft will also be operated in the Delta Connection agreement by SkyWest Airlines, and those aircraft will replace six CRJ-200s which will come out of service as their financings terminate.

Also, subsequent to year end, SkyWest Airlines signed a letter of intent with Alaska to operate five CRJ-700 RJs for Alaska under a capacity purchase agreement. Those airplanes will be acquired from Horizon, and again we're working out the financing details and arrangements on those airplanes, but we don't expect any issues at all on the financing of the aircraft.

During the quarter ended September 30, so this is back a quarter, we did make a $7 million investment in Mekong Aviation joint stock company. That is a carrier operating in Vietnam. They operate as Air Mekong. We have 30% ownership in that operation. We have joined forces with local people there in Vietnam. We did have a significant input both in the development of the operating certificate and additionally we've provided organizational leadership as well as pilots who were previously employed by Atlantic Southeast. Might be worthy also of noting that we will begin consolidating that 30% ownership of Air Mekong in the first quarter 2011 results.

We ended the quarter, or ended the year with $804.9 million in cash and marketable securities. That compared to $732.4 million a year ago. I would maybe just add a little bit more detail with the cash. Obviously, we feel pretty strongly about the condition of our balance sheet. We think it's one of the best balance sheets in the industry. When you look at things such as our debt-to-equity ratios, we think they're at very solid levels. We pay very close attention to things like our coverage ratios and those sorts of things, but particularly in this industry, in this economic climate, we do feel pretty strongly about our liquidity.

We're happy to report $804.9 million at the end of the year, especially considering that, that is after the acquisition of ExpressJet and net of about $17.5 million that we allocated for share repurchases in the quarter. Relative to our long-term debt on balance sheet, we have -- that number is $1.74 billion at the end of the year, which compares to $1.82 billion a year ago. The decrease in the long-term debt really is just due to the payment of normal recurring debt obligations. We've always been pretty clear about reporting the present value of our off-balance sheet lease obligations which at a 6.2% discount rate, the present value of those lease obligations at December 31, 2010 is right on $2 billion.

At December 31, 2010, our fleet has grown to 704 airplanes, consisting of 656 regional jets. I won't take the time to go through all the allocation of those aircraft. Suffice to the say that it is now a very, as I mentioned earlier, very large and significant presence in the transportation sector.

I will give some guidance as to our ASMs for the coming quarters. We are projecting $8.7 billion ASMs for the first quarter, $9.3 billion for the second quarter, $9.6 billion for the third quarter, and $9.2 billion for the fourth quarter. Obviously those are estimates at this point. There are a lot of things that affect our production. We're always mindful and working very specifically to make sure that our assets are being properly utilized so we're trying to make sure that we have improvements in utilization wherever we can, and that we're just operating the fleet as efficiently and productively as we can. But obviously those numbers are estimates at this point, and we will keep you updated as we move forward. Also, those numbers obviously include -- those are inclusive of the ExpressJet operation. When you total the 2011 estimates, that's $36.8 billion. That compares to $25.5 billion last year.

I think it's also, maybe would be important to just summarize a little bit, as I went through some of the activity or aircraft growth that's coming up as I went through some of the things that we're doing. Let me just give some summary to that, because we do have a meaningful amount of CRJ-700s that we'll be delivering throughout the year. In the fourth quarter, we will take delivery of an additional four 700s. In the second quarter there will be nine 700 deliveries. Third quarter, we'll take an additional two. And fourth quarter, an additional two. So that's a total of 17 additional aircraft. Most of those airplanes will be coming out of the Horizon fleet, and then we'll take the four additional net new that we've mentioned in the Bombardier order.

A quick update on our IROP litigation might be appropriate. During the quarter ended December 31, we did, for a period of time, work specifically and cooperatively with Delta to try to come to an out of court settlement. That was not successful. In that process, we did offer to settle that -- the dispute for approximately $5.9 million less than the cumulative total of the revenue that we had previously recognized on this matter. Because those settlement discussions were not successful, because we had made the offer to settle, we did go ahead and record a reserve of $5.9 million during the quarter. That has nothing to do with how we view the legal merits of our case, and we will continue to vigorously pursue our claims in the court.

By way of summary then, when looking at some of these items and the impact on the fourth quarter specifically, I mentioned the purchase accounting gain, which is an after-tax $15.6 million positive. The Delta rate adjustments were $10.5 million after tax. Accounting -- or, excuse me, acquisition fees and severance costs, that sort of thing, $5.4 million after tax. The maint -- the increase in the engine CRJ-200 engine costs, $6.9 million after tax. And the IROP reserve, as I mentioned, $5.9 million pretax, $3.6 million after tax. When you add those items up, that gets you to the $10.2 million that I mentioned previously, was the net positive impact of all of these kind of unusual items that occurred during the quarter.

I think it's also worth noting a little bit about the progress of our pro-rate flying during the quarter. In our fourth quarter a year ago, we lost $6.4 million in our pro-rate flying. This fourth quarter just ended, we made $1.5 million. That's a $7.9 million pre-tax swing in our pro-rate flying. We do have right now about 61 aircraft allocated to our pro-rate operations. We're actually very pleased with the development of that program, especially given that our fuel costs on the pro-rate flying averaged just over $3 a gallon in the quarter. Of those 61 aircraft in pro-rate operations, 39 of those aircraft are EMB-120s, and 22 of them are CRJ-200s.

So all in all, the results for the quarter we're very pleased about. We do have a lot of work still to do at all of the entities, always focused on safety, always focused on our relationships with our employees who take care of our customers. We have a lot of work still to do with the integration of ExpressJet into the Atlantic Southeast operation, and as good as we feel about the results in the fourth quarter, I do need to give a word of caution for the first quarter of 2011. First of all, seasonally, our budgets, our internal budgets, are lower in the first quarter than the fourth quarter. There's some seasonal impact both due to now some seasonality in the pro-rate flying as well as some issues with utilization that have generally been a little lower in the first quarter, and we have taken that into account into our profit planning.

So obviously, as I just mentioned, we are planning our pro-rate flying to not be quite as productive in the first quarter. We're concerned about -- a little bit about first quarter utilization, which could be, although we are seeing some general signs of improvement, and as I mentioned we're always focused on this and working with our major partners to improve utilization wherever we can, we are being somewhat cautious. The winter storms have been a significant impact, a significant factor on the first quarter. I'm not in a position to quantify that. First of all, the quarter is not over. But we did have significant impact from those winter storms, and that will impact our first quarter a lot more significantly than did it our fourth quarter. We will also have continuing -- some restructuring costs on the ExpressJet integration that will still be present in the first quarter results, and the maintenance cost issue on the CRJ-200s in the United System will also have an impact on the first quarter.

So with that, please just take that as a word of caution. We generally still feel very good about what's going on at the SkyWest, Inc. Companies. We're very focused on our operations, on the reliability, the overall quality of the operations. We are very focused on a thorough and complete integration of ExpressJet into Atlantic Southeast. We're extremely pleased with the fact we have got some good old organic growth coming into the system with the addition of the CRJ-700s. Maybe just worthy of noting that we were awarded those airplanes without formal RFPs, either at Alaska or Delta for those airplanes. So we think our costs are very competitive, and the quality of the operations are very acceptable. So with that, I will now conclude our formal remarks and be happy to take some questions.

(Operator Instructions)Our first question comes from Jim Parker from Raymond James. Please go ahead with your question.

Brad, Mike, and all, good morning.

Good morning, Jim.

I'd like to know just if you would review any aircraft that are coming off contract over the next several years.

Okay. Over the next several years will be a little bit of a challenge in this forum. But as far as the coming year goes, really the only meaningful retirements are the six 200s that I mentioned that are coming out of the Delta system. And those airplanes are part of the -- I mean, those six will come out and four 700s will go in. So that's really the only meaningful terminations that will happen during the year, and that's probably as far as I should go at this point.

And '12 and '13, or anything significant coming in those years?

Nothing significant, Jim.

Okay. All right. I think that catches me up. Thank you.

Our next question comes from Helane Becker from Dahlman Rose. Please go ahead with your question.

Thanks very much, Operator. Hi, gentlemen. So, can I just ask, how much time in advance do your partners have to give if you they're going to make adjustments in either ASMs or schedules or block hours flown? I don't know however you want to answer that in whichever term.

Chip Childs, I think your line is open. Could you take that one, please?

Yes. Hi, Helane, it's Chip. Can you guys hear me?

Yes.

Yes.

Okay, it kind of depends. What we try to do, Helane, we try to do some level of forecasting which is relatively soft. We (inaudible) that's pretty solid, we know exactly what's going to happen to it. We have about anywhere between three and four months -- by the time we start to work with that schedule to get it finalized with crews and everything, it's about -- we see about three or four months out.

Okay. So, I guess the point is, what's going on in the world markets today, doesn't really affect your operations until sometime in the second part of the second quarter, at the earliest.

Yes, right now we're generally working on schedules about May and June time frame, and certainly with what the oil situation is, everybody is keeping a very close eye on that, but we would certainly anticipate that the busy season, we continue to ramp up for that. We haven't really heard anything that's going to slow us down from continuing to pursue some -- I don't want to say pretty aggressive schedules, but normal summer schedules compared to what we've seen in the past.

Got you. Thanks, Chip.Brad, where will Air Mekong consolidated numbers show up? Will that just be one line item or will it be throughout the income statement?

No. It will show up in one line item similar to how TRIP is showing up in our financials right now, and that's -- I mean, that TRIP just runs right through our other section in the other income expense section of the income statement.

Okay, great. And then on TRIP -- can -- you didn't really comment on that. I was surprised that you didn't have anything new to say.

Okay. Well, I will say something, if you would like. (laughter)

Well, maybe you can just catch us up on how it's doing.

Generally, we're -- I mean, we're very pleased with what's going on at TRIP. The operation is very sound. It's growing at a faster rate than we had anticipated, and in spite of very rapid growth, the earnings, the cash flows, the EBITDA, all those kind of targets that we had established are very much on track. So, you know, and they have significant growth planned for this coming year. So ,we're really very pleased with what's going on. The management team down there has got a very good handle on what's going on. We have some board representation, which is enabling us to have some meaningful input. So, yes, we're really pleased with the developments in TRIP.

Okay, great, thank you. And I just have two more I think relatively easy questions. When should we think about that Alaska Air agreement taking over the flying from Horizon coming in, and is all that included in your ASM guidance? And the other question is, is there anything new on the labor issues that you should catch us up on?

Okay, two -- I'll answer the first part, because that's the easy part. The labor issue is the hard part, so is I'll punt that to Brad Holt.

Okay.

So the easy one first. The Alaska flying, under that capacity purchase agreement will begin in May, and that operation, those five aircraft are -- those are -- the ASMs, the production is in the ASM estimates that I provided.

Great, thanks.

Okay now, relative to the labor issues, we do have some meaningful labor issues that we're dealing with. Brad Holt, would you please address that.

Certainly. Anyway, issues I'm not sure is the right word. I can give you a real quick rundown as to where we stand from Atlantic Southeast and ExpressJet labor agreements. The unions we have here, and we've been working since November 12 with all these folks, and actually I wouldn't categorize anything as a real issue. We have some work to do to get the unions together on both sides, but for example, pilots are both out, the mechanics are both IBT.

We've got a little bit of a mismatch on flight attendants and dispatchers, but I would say we expected going into this that we had some very good people that we were going to be working with, and I've not been surprised to see how well it is working. They're all working well with us. We're not having any big issues, and from a completion standpoint on joint collective bargaining, I believe we're right on track. I think everybody wants to make this work, and I'm very happy with our progress so far.

Okay. There's no like specific timetable that would you like to get this done by?

Yes, there is. I can tell you from -- we're looking at three different things. One is post-merger integration, started on November 12, and we had a good solid plan in place. We expect to be through post-merger integration in 14 to 18 months. So that puts us into the later first quarter of 2012. The single operating certificate process, combining the two airlines, air carrier certificates, our goal was 12 months. We're a little bit ahead on that, and I believe that we will have single operating certificate by the end of 2011.

From a joint collective bargaining agreement standpoint, we're moving into joint collective bargaining with pilots in the next 30 days. We've already got transition in process agreements in place, and we're in discussions with the IBT, AFA, AFTA, and TWU also and those negotiations will also start. And I believe they'll be in the -- completion in the same timeframe as post-merger integration.

Okay, great, thank you so much for your help.

You bet.

Our next question comes from Michael Linenberg from Deutsche Bank.

Hello, evereyone. This is [Rachel Howard]. Mike's associate filling in for him. Just a few questions. With regard to the ExpressJet merger, it sounds like you're pleased with initial results from ExpressJet operations. But I was hoping you could elaborate on your prior projections. You previously indicated that you expect to add $0.45 to $0.50 to annual EPS once a single operating certificate was acquired. I wanted to know if that's still consistent with your view. And I believe it was stated that single operating certificate would be achieved in 2011, so if we can see any sort of positive impact this year, even though you probably won't start seeing that $0.45 to $0.50 impact until 2012.

Okay, so very good question. First of all, generally, we are very much on track as has been mentioned already. We have taken this integration very seriously, from the first moment we considered the XJet acquisition this time. We began very specifically working on a formal post-merger integration plan, and as Brad Holt indicated, at the day of closing, we began executing that plan. We're very much on track. I think we've already realized somewhere in the neighborhood -- approximately $20 million in costs that we have taken out of the operation. We expect to get continued savings, not quite at that rate, during the year 2011.

So we'll continue to work on things and get an amount not quite as big that is but close, and then the big -- the bigger pop will come when we achieve SOC as Brad Holt has said, and our target for that is still the end of 2011. So the first full year of all of that impact would be in 2012. But we'll still have some meaningful accretion from the ExpressJet operations in '11, although we don't get the real big impact until SOC.

Okay.

And generally, would just say -- If anything, I would say we're actually a little ahead of our plan at this point.

Okay, very good, thank you. And also, you talked about in the past about adding additional code sharing partners over the longer term. And I was just wondering if could you give us an update on that front and comment on your relationship with current partner United and how that might have shifted after the merger with Continental was finalized.

Okay. Well, so just -- I will try to be somewhat concise here, which is hard to do when talking about strategic development and trying to articulate our strategy, because, first of all, we do feel very strongly about our focus right now on our strategy moving forward. We -- one of the benefits of growing this operation and strengthening the platform across the country is that we think we are the best positioned regional airline to grow. I mean, we've got the economies that come from size. We're well positioned strategically and geographically around the country. So we will aggressively pursue additional code share agreements. And we believe that we have a strategy in place that we're working on which will position us even more competitively than we already are relative to our costs and productivity.

We're taking that very seriously, and really, it's because we are absolutely committed to regional flying. I mean this is what we do. We think we do it better than anyone else, and we're very committed to growing the operation by adding additional partners. Now, having said that, of course, one of our strategic objectives in the ExpressJet operation initially was to diversify our code share relationships through Continental. And, of course, midway through that process, United and Continental announced their intentions to merge, and so I guess -- in some respects, one of the strategic issues there changed pretty materially. But the overall strategy of diversification geographically and adding size so that we could create value through integration and through just economies of scale is still a very important part of the strategy.

So all of what we're doing, we just think prepares us and positions us to grow in the future. And that's what -- that's what we're focused on doing, and whether it comes through just good old organic growth, whether we're successful in winning flying with other carriers as contracts renew. At some point, we will again be looking at growth through acquisition if we find just the right opportunities. I mean, we just think we're positioned to grow through any of those ways into the future.

Okay, great, thanks so much for the color.

You're welcome.

Our next question comes from Glenn Engel from Bank of America Merrill Lynch.

Good morning, a couple questions. One, the $17.2 million Delta settlement, that's revenue you earned in prior quarters? How would you apportion that revenue out if I was going to apportion that revenue out roughly in prior periods?

So I think we have mentioned previously that -- I mean, a couple of points. First of all, because we had not resolved these issues with Delta, we were going to be very conservative in what -- in what we booked as renew. And not only that, we would not, even though we felt pretty strongly that there would be some true-up, we were not going to book the true-ups until we were -- these negotiations were complete and money had traded hands. So the latter is as to why we did not book anything previously, and the majority of that is due to prior periods, where we were just more conservative because we had the uncertainty.

And that goes back how far?

Oh, it actually covers 18 months to two-year time period.

And the new rate agreement when you have Delta, is that CPI-based?

The new agreement is for five years and does have annual -- I will just call them -- they're not purely CPI, but they are indexed escalators, yes.

And finally, can you -- you gave the pro-rate profit of $1.1 million versus the $6.8 million loss, I think. Can you give a revenue also? Even if it's a rough number.

The revenue for flying? I know period to period we're grabbing that information. I know period over period with the addition of airplanes into the system, our pro-rate revenue increased $34 million period over period. The total revenue in the period from our pro-rate flying was $79 million, it looks like. And the income, I think if I didn't say $1.5 million, I should have.

Okay. I might have misheard that then, okay. And next year does the pro-rate number of aircraft stay where it is right now?

I don't see it moving meaningfully. One of the things -- but I do want to reemphasize that one of the advantages I think we have with what we're doing in our pro-rate flying is that we're not doing this pro-rate flying out of kind of desperation or because we don't have anything else to do with these airplanes. Again, we think we have some unique opportunities here. I know everybody says that, but the thing we have difference is we have flexibility on the majority of these airplanes. These are airplanes, the majority of which we have very short-term, in some cases month-to-month obligations on, and at some point, as we're working with this, for whatever reason we choose to, we can very quickly either add to or downsize that operation. So, I don't expect it will change meaningfully, but the really important point is that we have flexibility in that fleet that we think is a pretty unique positive issue that SkyWest has.

Thank you very much.

You're welcome.

Our next question comes from Bob McAdoo from Avondale Partners.

Hi, guys. A couple of two or three real simple questions. The $5.9 million bad debt what line does that show up on? Is that in other net?

That's in the G&A section on the income statement.

Okay. And the impact of weather in this current quarter, are the AFM forecasts that you've given us, the $8.7 million, does that reflect some kind of a reduction to reflect the weather, or is that kind of through weather-scheduled number?

Hey, Bob, let me restate my previous answer. We've done some restructuring of our publicly reported statement, the face of the income statement, and the -- that write-off is in the other section. It's called other net. Yes, I assumed that's what you meant. Yes.

And again, the impact of weather in this quarter, is it reflected in the $8.7 million ASM number for the first quarter or is the $8.7 million in a pre-weather impact?

It's pre-weather impact. Thank you for clarifying that.

Okay. And then, you have a line item called other net, which is a positive in the other income expense line of $22.19 million.

Yes.

$22 million, what's involved in that?

That is primarily the accounting for the TRIP investment.

So that means your share of TRIP profits is up that much in the quarter?

Yes.

That's great, great. And then one final quick little simple thing. Now that you've bought the shares, what should we be using for shares outstanding primary and -- basic and diluted for the first quarter?

For the first quarter, let's see. Probably -- for fully diluted, about 55.2.

55.2, okay, very good. Probably that used up my limit. Thanks. Nice quarter, great.

Our next question comes from Jim Parker from Raymond James.

Brad, regarding the new rate agreement with Delta, how much of a hit there? How much lower are rates? What's the annual cost of that?

There's a lot of different ways to answer that question, Jim. The first thing I would point out is that the rate -- the reduction in the rates, obviously the intent of that is to match rates with market, which means the expectation is that our costs have to be market. Okay, now admittedly, we have some work to do at the ASA operation, Atlantic Southeast operation, to get the costs at market. So the focus -- I'm not skirting the issue, but our focus I want to make very clear is that we need to -- we have more work to do to get our costs at market, just as our revenue reimbursement rates have come down to market. Okay, and that's what our focus is on, just continued -- and we have specific plans in place, things that we're working on to get the cost down.

If you look the -- what I've said -- there's a couple of different ways to look at the actual impact of the rate reduction. But I would say generally, we're going to be looking -- it's about a $25 million or so annual rate reduction. But we have to be careful with that number compared to what we've been recording because of the impact of the $17 million true-up that just happened. Okay, so -- but, I mean, on a -- kind of a steady state run rate, it's in that neighborhood.

Okay. So you're suggesting that you can get approximately $25 million in lower costs ex -- the XJet impact. Is that correct?

Okay, so, no, not exactly, Jim. We're looking at this in two different ways. First of all, when you isolate Atlantic Southeast as a stand-alone entity, first of all, we have specific things in place that we're working on to reduce that specific cost structure. Then you layer in the value of the integration with ExpressJet, and that, admittedly, creates more opportunity, we think, to lower the costs not only in the integrated ASA -- Atlantic Southeast and XJet operation, but we also think there will be some residual or kind of halo benefit across all of the companies to continue to reduce redundancies, to get more efficient, to increase our buying power, to renegotiate buying contracts, that sort of thing.

All right, Brad, let me ask this. You've got a nice increment to earnings coming as a result of the XJet acquistion.

Yes.

I think it could be $0.45 to $0.50 annually in 2012.

Yes.

What I want to know, these new Delta rates, what's the net? How much of that $0.45 to $0.50 positive is taken away by the new Delta rates?

Certainly for the next 12 months some of the rate impact will erode some of that added value, but within the next 12 to 18 months then we've got -- certainly our plans are to get the cost reductions that we need to make those rates applicable -- I mean to make the new rates appropriate for a new cost structure. So yes, we think we can take additional costs out of the ASA only platform, so temporarily there will be some dilution of the accretive impact of ExpressJet, but I think that's a 12 to 18 month kind of issue.

So you're saying --

And, by the way, at that time same time, we're reducing the cost structure at ASA. We're also going to be -- I mean, this maintenance mismatch issue will be mitigating and then flipping again. So about the same time that I've said, 12 to 18 months will give us some time to get the cost structure back in line, about the same time we'll also have that maintenance -- and by the way this is not -- and I think I've mentioned in this earlier calls. This is not an issue that's going to continue with multiple flips. Okay, we'll go through our negative period, then it flips back positive, and it will stay positive until the airplanes go away.

Okay. All right, thanks.

Okay.

(Operator Instructions)And our next question comes from David Freed from Free Asset Managements.

First of all congratulations on what looks like a great quarter. My question is a little bit different from the others. As a shareholder and really kind of a longtime shareholder at this point, seeing the stock price at basically cash value is a very frustrating. Now, I know you're not responsible for how the market values your shares, but you must have some thoughts about realizing some value for this. It just feels like you're the Rodney Dangerfield of the stock market. I don't think you get any respect for -- for making money. Way below book, and certainly your cash value is kind of unusual for a profitable operation like this. So I wonder if you have any comments on that, or have you, and would you consider some more aggressive steps? Does tender offers et cetera to boost the share value?

You're asking a very good, but yet a very broad question. We obviously are giving a lot of thought to this issue that we don't -- we don't have time to go into on this call. But generally speaking, I would just say that I think, for whatever reason, I think your comments are accurate in that we get painted with kind of the broad industry brush relative to market multiples and industry evaluation, and I would agree with you, as you would expect that I would, that I don't think we're getting enough credit, enough value in the multiples for some of the things that I think are unique and different about SkyWest.

And some of those things are that we have long-term contracts in place. We haven't subjected ourselves to a lot of tail risk that has caused some problems with other carriers. We now have the largest and broadest platform which should position us to increase productivity and reduce costs. And so those kinds of things I'm not sure are properly valued. At the same time, you know, our earnings -- our earnings, when you plot our earnings, the plot is affected by, for example, the mismatch in our -- by this maintenance issue that I've spent some time talking about. And as much as we have informed the market and we've tried to educate the market on this issue, now that it's happening and it's affecting us negatively, although it's a temporary issue. It's -- I think it's impacting us a bit.

But, having said all that when we look at the overall capital structure, our liquidity, the things that we can do to create value, we're trying to find some balance in maintaining a somewhat conservative, and I will admit that we may be a little more conservative, but I think we need to be in this market and in this industry, relative to our cash balances. Okay so, we will always, at least as long as I'm CFO, be conservative in our cash position. Okay, now, some investors don't like that, and we're trying to find some balance in the amount we're allocating for share repurchase programs, which I think is a very good value today, and it's a good investment. It's good use of some of our liquid resources.

And that's why I've previously indicated we do plan to continue to be aggressive in that area. But at the same time, we'll stay liquid, and continue to look for ways to create more value. We're working specifically on some definitive specific strategies for this -- for this segment of our market that we think will create -- will be strategically important and will create value as we move forward. So, look, I mean, market valuations are what they are. We're doing the best we can to education the market, to point out the differences that we think exist with SkyWest. We are going to be liquid. We are going to continue repurchasing shares, and hopefully all of that comes together and leads to increased value in the share price.

All right, well I appreciate the answer. I just want to point out the following, that -- and I know you know it, but at a market cap of even after the appreciation in stock today of $880 million and cash value of $800 million, you guys are getting enterprise value of $80 million that you're running the risk of losing control. I mean, I don't -- I don't have the wealth, but I'm sure somebody out there might have the wealth to make a run at this and then you wind up selling for what really isn't a fair price for what you guys have built, and with the shareholders who have been with the Company for a long time think it's worth. So just to consider.

Yes, you're -- your comments are well taken, and that's certainly not a point that's gone unnoticed.

Thank you, and congratulations again on a good quarter.

Yes, thank you.

Due to time constraints, we will now end the Q and A session and turn the conference call back to over to Mr. Rich for any closing remarks.

Well, just once again, thank you very much for your participation today, for taking the time to join us. We always enjoy the opportunity to get on and talk about and discuss with you the -- not only the results, but our strategic direction. We just feel very strongly about what we're doing, think we're very well positioned in many respects to continue to be very productive into the future. Again, I express and acknowledge the efforts of our employee groups. We did have some discussion about labor through the Q and A section.

I would just say that one of our very strong and important focuses and emphasis is to do everything we can to maintain productive and cooperative relationships with our employee groups, and I think you see evidence of that cooperation and good relationships in the quality of the product that our employees are putting out every day, and that does not go unnoticed. We're grateful and appreciative of that, and with that, I will go ahead and conclude. Thank you again for your participation, and we will now end the call. Thank you very much.

This concludes today's teleconference. We thank you for attending. You may now disconnect your telephone lines.