SkyWest Inc (SKYW) 2011 Q1 法說會逐字稿

Good morning and welcome to the SkyWest Airlines first-quarter earnings conference call. All participants will be in listen only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Bradford Rich, Executive Vice President and CFO. Please go ahead sir.

Thank you operator. Thank you to all of you for joining us this morning. As always, we very much appreciate your taking the time to participate with us. We appreciate your interest in SkyWest Inc.

Before we get started, I'd like to just first of all introduce those who are with me here at SkyWest headquarters to participate in the call this morning. I have a Chip Child's, President and Chief Operating Officer of SkyWest Airlines, Brad Holt is also with us this morning, the President and Chief Operating Officer of ASA. We also have Mike Kraupp, Vice President of Finance and Treasurer, who also has primary responsibility for Investor Relations, as well as other members of our staff here at headquarters.

Before we get into the details of the results, I have asked Mike Kraupp to read our forward-looking statement .

Okay. Thank you, Brad. In addition to historical information, this release and conference call may contain forward-looking statements. SkyWest may, from time to time, make written or oral forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 .

Such statements encompass SkyWest belief, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipates, should, likely, and similar expressions identify forward-looking statements. All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date.

Sky West assumes no obligation to update any forward-looking statements. Actual results will vary and may vary materially from those anticipated, estimated, projected or expected for a number of

All right. With that said, we will go ahead and just get into a discussion of the results. As always, I assume that most of you participating have seen the actual press release that went out this morning.

As noted in the release, the first-quarter results, our operating revenues of $866 million for the quarter ended March 31, 2011 compared to $632.2 million for the same period last year. We did report a net loss of $11.1 million or $0.21 in diluted earnings per share for the quarter. That compared to $15 million of net income and $0.26 in diluted earnings per share for the same period last year.

Before we get into the details, just as a general note, as we discuss the results this morning, obviously this is the first full quarter that we have the impact of the ExpressJet Holdings results for a full quarter. And obviously, as we look at the totals or absolute dollars of revenue produced and expenses, that does include -- the most significant item causing the increases in absolute dollars is the full quarter of ExpressJet operations being integrated into the consolidated results.

Just something to keep in mind, and we will talk about that as we move forward. And it's -- I think we have pretty well put in the release the amounts of the ExpressJet to help keep things in perspective there.

Before we go further, just a few comments might be helpful just relative to our overall results of the consolidated entities. First of all, this is the first time in 91 consecutive quarters that SkyWest Inc has reported a net loss. I think that's got to be close to 23 years, doing simple arithmetic. As you would expect, this is not what we expect to produce, and I do not believe that it is reflective of our future potential. As expected, it is outside of just the most obvious things that we're focused on every day, which is safety and reliability.

Obviously, getting our hands around this and making sure that we clearly understand and are accurately assessing the drivers and, you know, the cause and effect that resulted in the financial loss. I mean that is our number one priority. It is our responsibility not only to accurately understand and assess the drivers, but to make sure that we are doing a very honest assessment about those items that are affecting -- that affected this quarter which one -- and do an honest assessment about which ones are one time kind of non-recurring in nature from those that aren't, and then to take corrective action where appropriate to remedy those that are within our control. And obviously that is the primary focus of our management teams at all of the entities within SkyWest Inc.

I do want to just remind you that during the last quarter conference call I did indicate to those of you participating, that the first-quarter results would not be consistent with those reported in the fourth quarter of 2010. I did put out a voice of caution just as a preliminary reminder, I guess, that we had had a very severe winter weather storms that we knew would impact the first quarter. Those storms hit us primarily in January and February.

I also indicated that our first-quarter budgets now have some seasonal implication not just because of a building and growing pro rate operation, but just as we have seen some seasonal volatility in the schedules that have been produced by our major partners. We did see some softening of our first-quarter daily utilization, which we talked about. And then we indicated, too, that we saw rising fuel prices, which was obvious, that that would have some impact on our pro rate flying. And we also indicated that we would still have some impact of the restructuring and the integrating related to the ExpressJet acquisition and that integration. We then -- obviously, at that time we did not know the full impact or the magnitude of the impact of some of these issues.

When that became a little clearer on April 1 of 2011, we issued a press release indicating to the public that our financial performance would be worse than expected and that's when we put out an estimated range of a net loss between $13 million and $15 million, which would've been $0.24 to $0.28 in diluted earnings per share, or diluted loss per share on a consolidated basis. Obviously, in the results that we just released this morning, the net loss was not -- was a little less than what we had expected, but the items that we identified are pretty -- are still unchanged and are consistent with those that I put out in a caution at the end , or in a previous earnings call, and are consistent with the issues that we indicated in the press release of April 1.

Just as a reminder, those items that we identified that we knew would have a material impact on the quarter were things like the impact of the weather, we had some reduced schedules in our flying that we indicated would negatively impact production, in addition to the weather. We indicated that we have some maintenance issues. Some of that is just due to the timing of the maintenance. And then there certainly is an element that is relative to the price of some of these maintenance events which we will talk about in more detail in a minute.

We indicated we had some crew related expenses, and we will also talk about those in more detail. But, as I said, those are the items that we had previously identified. Those are primarily the issues that are having the most impact on the quarter.

In addition to those issues, this is the first quarter that we have consolidated the results of the Air Mekong operation. We previously indicated that we have 30% ownership in that operation. There is one quarter lag basically in integrating those results into our consolidated results. This is the first quarter that is in and there was a $2 million loss as our share of the Air Mekong operation.

Okay, now having said that, let me get into a little more specifics about some of the changes both in operating revenues and operating expenses. Our operating revenues increased 37% during the quarter and, as I indicated earlier, the primary reason for that increase is an increase of $211 million in additional revenue that is attributable to the ExpressJet operations.

In addition to that, we had a 4.1% increase in our block hour production at SkyWest and ASA combined in the consolidated production, which increased revenues by about $8.6 million. Our pro rate activities generated an additional $10 million in operating revenue, as I indicated that operation is a significant operation, 61 aircraft flying in pro rate operations, and, as I indicated, a $10 million impact on the increase in revenue.

Okay now, although we had a 4.1% increase in the block hour production, obviously that is not what we expected. It is short of what we expected. The winter storms that I previously indicated, we think -- the reduction from what we expected in block hours is primarily attributable to the severe winter storms. It is not the only item , but in total, we produced about 13,500 fewer block hours than we had expected. Which resulted in the loss of just under $10 million in expected revenue.

In addition to the impact of the lost block hours, we have also indicated, and I think I've given a pretty good idea of the impact of our contractual provision to reduce our Delta Connection rates to the second lowest in the portfolio, and that impacted us a by $7.2 million pre tax in the quarter.

Let me talk a little bit about our airline expenses. Total airline expenses increased $274.5 million in the quarter. Again, the primary or most significant reason for that is the consolidated expenses of ExpressJet. Those expenses that were $226.2 million. For those of you doing the math, and you look at $211 million of revenue from ExpressJet and now $226 million in expenses, the operating or pre tax loss at ExpressJet is $15.1 million in the quarter, and I will talk more specifically about that in a minute as well.

But continuing with the discussion of the overall increase. So the remaining increases, when you exclude the impact of the ExpressJet operation, we still have a meaningful increase relative to production in the quarter.

There are a couple of items here that I think are worthy of just mentioning here. We have, as I mentioned earlier, we have some issues with our maintenance. We have been talking for a long time in these, in these conference calls about the timing mismatch and that sort of thing that has been impacting the SkyWest Airlines production, where we have a timing difference between the collection of revenue and the recognition of the expenses as they are incurred. That issue we have talked about for a long time. We have indicated that that is a negative mismatch, meaning we have now have more expense that we are collecting revenue. It's happened in the last several quarters, it happened again this quarter in the area of about $7.6 million negative, and it will continue through the remainder of this calendar year.

In addition to that, we have some impact from the timing of heavy inspections in the ASA operation, and again, a lot of this is simply driven by timing. These heavy inspections, as most of you know, are either time-limited or calendar limited and, as they come due, they come due. We planned, in this quarter to do a significant amount of c/check activity and the fact is we did about five additional c/checks on top of the 28 that we had planned.

In addition to the volume variances we had a fairly material price variance in the cost of the c/checks and that impacted us in the quarter around $9 million pre-tax on that issue. The good -- the positive out of this is that we are identifying some significant and impactful things that we can do in the management of the cost of those events. And we think that we will see some very quick improvement and some meaningful reductions in those expenses moving forward.

Having said that, there will be -- this will create a small -- a smaller negative impact throughout the year, but the majority of this issue, we believe, has occurred and has been recognized in the first quarter. So it won't be nearly to this magnitude in the coming quarters.

An additional issue that drove our expenses a little higher that we had expect are due to pre-delivery training costs. This impacted both SkyWest Airlines and Atlantic Southeast Airlines in that we have additional aircraft deliveries that have recently been negotiated so the growth is good. It is growth that is coming in organically.

We believe it will be very productive flying, but to prepare for that flying, we have done the pre-delivery training and it impacted us close to $10 million pre-tax in the quarter. Now that number is a consolidated number of both airlines, in addition to pre-delivery training costs. There are also some relocation costs and things in that number that are due to the reallocation of flying that was required due to the scheduling by our major partners.

Let me shift now from expenses and talk a little bit about some other corporate issues. During the quarter, we continued our repurchase program in repurchasing our own common shares. We repurchased a little over 1.2 million shares at a cost of a $19.6 million in the quarter. We also placed an order to acquire four additional CRJ700s from Bombardier. We put down $13.2 million in aircraft deposits for those aircraft.

During the quarter, as of December 31, and I think we mentioned this in the prior call, but we did enter into an agreement with Horizon to acquire eight additional CRJ700's. During the quarter ended March 31, we took delivery of four of those aircraft under subleases from Horizon. All of the aircraft will be operated in the Delta Connection agreements by both SkyWest and ASA and we anticipate the remaining four of these particular eight aircraft will be all delivered by the end of June.

Subsequent to quarter-end, SkyWest Airlines entered into a capacity purchase agreement with Alaska to operate five CRJ700s. That is on a term of seven years and it will be -- it is a contract that operates very similar to our existing capacity purchase agreements with other carriers.

Maybe just some, a quick summary of the aircraft that are coming into the system might be helpful. In total, we have announced the growth of 21 additional 700's. Okay, four of those aircraft came last fall, and they came into the ASA system. We just reiterated the eight that will be acquired from Horizon, four of those will go into the SkyWest system, and four will go into the ASA system.

We also -- and then with the five aircraft that are coming into the CPA with Alaska, those five will be flown by SkyWest Airlines, and then we have the four factory new deliveries, those will be flown by SkyWest, also in the Delta system, and those airplanes will be replacing CRJ200's.

Okay, let me talk a little bit about our cash and securities at the end of the quarter. Our cash and securities at the end of the quarter will be $706.9 million in cash and marketable securities, which compares to $804.9 million at the end of December. The approximately $98 million decrease is concerning in some ways, in other ways it is very explainable. And it really can be explained in the three primary items.

First of all, the prepaid rents in the first quarter are always our very significant period for aircraft ownership costs. The increase in prepaid rents in the quarter is approximately $53 million. Okay, now this is something that happens every first quarter . We know it, we expect it, and it happened as expected. In addition to that, we had, as I mentioned already, a $19.6 million spend in repurchasing our own treasury shares, or our own common shares. And then, in addition to that, we put $13.2 million into aircraft deposits. Those three issues are the primary issues.

Now, as I indicated, at least as it relates to the prepaid aircraft rents, it happens every quarter. The big difference this time is that, normally in the first quarter, we have pre-tax income that generally offsets the increase in the prepaid. And of course, with this quarters pre-tax loss, we didn't have that to offset the impact of the working capital change primarily attributable to the prepaid rents.

Okay, let me talk a little bit more specifically about the fleet and production. We do have some issues with production relative to just general issues of scheduling, utilization, and then just specific things that we do and have some control over internally, relative to block time reliability and those sorts of things. And I only bring it up to say in some respects our production is really just driven by the schedules that we are handed by our major partners. In other respects, it is our responsibility to manage those schedules, to have as much influence as we can into overall productivity and efficiency and utilization.

And I would just, I guess, make a comment here that, look, we are doing everything we can to meet the needs of our partners. We are learning more and more how to do that cooperatively. We have seen improvements in the schedules. The primary impact of production really did -- had it's most negative impact in January and February. In our March production, we have seen a significant improvement, which has continued into April.

So, all indications are that we have general increases in the schedules, our aircraft utilization is improving, and the things that we can control relative to the schedule and production, we see some pretty significant increases. Anyway, so that's at the top of our list to make sure that we are paying attention to and doing what we can to make sure that the aircraft are being properly utilized.

Having said that, at the end of the quarter, our total consolidated fleet consisted of 707 airplanes. We have detailed the composition of the fleet for you in the press release, and I won't take the time to go through that specifically. As it relates to production as measured by ASM's, the guidance that I gave to you last quarter is still pretty much intact. Of course, the first-quarter actual ASM consolidated production was $8.6 billion. Second-quarter is still estimated to be $9.4 billion, third-quarter $9.6 billion, fourth-quarter $9.2 billion. That would give us a consolidated ASM total for 2011 of $36.9 billion.

Again, to just reiterate aircraft deliveries, first quarter we brought in the four 700's which I have already talked about. The production coming up -- okay, the production coming up in the next couple of quarters is -- okay so second-quarter will be nine 700's, third-quarter will be two 700's, and fourth-quarter will be two 700's.

Okay, now I wanted to just -- I have already talked about the impact of Air Mekong, at least it's impact on the first quarter, and I am sure that some of you are wondering what the impact will be in the next -- in the upcoming quarters. First of all, let me just say that the Air Mekong investment, I mean, it is in fact a startup. The losses were predicted, they are budgeted, and they are not coming as any surprise.

The second-quarter impact we expect to be similar to the first-quarter. Then as load factors continue to improve, which they are doing, as we get some relief in some of the regulations that regulate the fare levels, there are some easing of that, and of course those are due to some government regulations in Vietnam. We are also seeing the ability to carry more freight and mail, and generally ways to improve the yield there. So we combined improving yield with improving load factor as we move forward, and we expect those losses to come down in the third and fourth quarters, but still I would lead you to expect about $1 million loss per quarter in third and fourth quarters.

The TRIP investment is doing reasonably well . There are some issues going on in Brazil relative to overall transportation and alliances and those sorts of things that we see as very productive. We are still very optimistic about TRIP and see that as a productive relationship going forward.

I wanted to talk before I turn it over to questions, to just talk a little more specifically about the integration of ExpressJet into the Atlantic Southeast operations. As we look at this integration, we, first of all, are very optimistic and we have made significant progress to date. We kind of look at this integration in two different pieces. First of all, well I should say three different pieces. First of all, the SOC work to integrate to the point of single operating certificate is one specific component. That is a very comprehensive undertaking, and it is time-consuming. I would just tell you at this point that that integration work is very much on track. We are -- we had previously indicated a timeframe of the end of calendar 2011, and there is nothing that we see that would indicate that that is nothing but just on track with the end of 2011.

The other component -- another component of the integration is what I would term just the administrative integration. It is taking a lot of those administrative functions relative to accounting and information systems and those types of things. That has been a huge undertaking, but is substantially complete, as far as the that part of the integration goes. Of course, a third part certainly has to do with labor. There is a lot going on with labor and still a lot of work to be done. But as it relates to SOC and the administrative integration, my general statement there is that things are very much on track. Nothing that we have seen that is materially different than we had expected.

Okay, with that, I think I will conclude the formal remarks and be happy

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Jim Parker of Raymond James. Please go ahead.

Brad and all good morning.

Hi Jim.

Regarding ExpressJet. So the loss in the first quarter was $15 million. Will you look out over the next few quarters, how does that progress? And I believe, of course, that you have suggested that there is a very positive , I guess maybe, what, $0.040 or $0.50 per share that could come out of that in 2012? So how are we progressing in that regard

Okay, first of all let me just say, I am going to be a little bit careful in this. Only because Jim, as you know, it is very unusual for us to specifically go into entity level, you know, P&L's. Admittedly, the ExpressJet situation is, it doesn't exactly fit in that category. And we need to be as open and transparent as we can be about our expectations there. So, your general question is, I think, are we on track to get the integration benefits that we have expected and that we previously indicated to the market?

And the answer to that is that yes. Admittedly, the first-quarter loss is not what we expected. But it is not due to our inability to make progress on the integration efforts. Okay, the impact of the weather that I previously mentioned, impacted ExpressJet significantly more than either of the other two operating entities. Okay, It was very disproportionate to the ExpressJet operation. I think, you know, the impact on Houston, for example, and the closures at Houston, I think have been pretty public. And of course, with the concentration of the they're flying in Houston, it had a very significant impact.

There are some things that we did not expect in some of these scheduling requirements from our partners that also had a fairly material impact. Now, I'm not complaining. Our mission and our purpose is to meet the needs of our major carriers, and that's what we're going to do. But having said that, there are some things asked of us that had a fairly -- a difficult and a negative financial impact on the quarter .

As we were reallocate crews, and we had some disruption relative to that reallocation of flying. But, those are things that the weather part, certainly we hope, is a one-time nonrecurring behind us. The scheduling issues and relocation of assets, that is something we are getting our hands around and we don't expect to be a long-term recurring issue. So, then we are left with, how are we progressing with the integration ? Is it on target? Is it still in check with what we expected? And the answer to that

Okay. Second question would be with regard to your prorate flying. First off, what were the revenues in pre-tax loss/earnings for the first quarter? And then I want to inquire a little bit further about that.

Okay, we had a -- our prorate flying lost $6.9 million in the quarter, but keep in mind our fuel cost in prorate flying, if you just take our expected fuel costs, compared to our actual, multiply it across the actual gallons consumed in prorate flying, it increased our fuel cost just a tad over $6 million. So--

What were the revenues?

Total operating revenues in the prorate flying were $75 million -- just a little over $75 million .

Now the question is why are you in this business? Because it loses money I guess a quarter or two, and maybe it makes a little, and it's subject to these fuel prices, and it is something that you were in many, many, years ago. But a lot of those people that were working there in scheduling and yield management are gone. So, my question is, why are you guys in this business?

Okay, so I will take a shot at answering that very quickly. And certainly, Chip, as I mentioned, is here in the room, and if he wants to comment on that, certainly he can. First of all, I just want to remind you that there is always some mismatch in the timing of adjusting the fare environment, to rapidly rising fuel costs. We have been seeing a very good improvement in the prorate flying results. The rapid increase in fuel prices has not fully shown up in our ability to adjust the fares in that flying yet. But we are seeing a good fare increases. And a general strengthening of yields in that flying.

So, the next issue, I think of relevance, is that as we have indicated previously, we have a lot of flexibility with this fleet. It is not flying that we are doing because we have to, because we are committed to airplanes with nothing else to do with them. And we have felt that it was a productive segment of flying to develop, given that we thought we had -- anybody can say they have unique opportunities in certain markets.

We really do given what the mission of the majority of this flying, in that it is replacing, in many cases, flying that was previously done with larger mainline aircraft. Okay, but we do have the fleet flexibility to adjust, and in fact we are planning some adjustments to the flying in the future. But we are just watching it and managing it and adjusting it as we see appropriate. Chip?

I think, Jim, Brad's covered it very well. I think there's a couple things to remember, particularly as he's outlined the fleet flexibility that we have here, the trying to catch up to the fuel prices piece. I think that we obviously approach this with a significant amount of concern, however, I think some of the financial data that he is also provided is also on a fully allocated basis. And we also see a tremendous amount of utilization uptick as we have this prorate flying, and do it with and without an integrated contract fleet at the same time.

So, there is also something that it helps us from a cost perspective on our contract line, due to the volume and utilization of the fleet. And as we have that flexibility we are still, what I would say, cautiously optimistic that this is going to break even at least throughout the rest of the year. But, we have to monitor fuel prices and we also watch very closely the essential air system, the developments there, and essential air service system, and also, some of the markets that may need to be modified. We are watching it very closely. We have very good flexibility and it really does provide a lot of good utilization for the rest of our fleet.

Okay, guys. Thanks.

Thank you Jim.

Our next question comes from Duane Pfennigwerth of Evercore Partners. Please go ahead sir.

Hi, thanks, good morning guys.

Hi, Duane

Just want to follow-up a little bit on the ExpressJet loss. I was wondering if you could put a finer point on the $50 million pre-tax, how much would you say was due to weather? And can you quantify what you view as integration expense related to ExpressJet?

I will do it very generally, Duane, I would say close to half of it, at least half of that is weather. And look, we know it is easy to, with the severity of the weather, to just say, we have this issue and it is all weather. Well, look, it is not all weather, but yet a meaningful portion, and when we have this material of disruption, you've got to appreciate, there is a halo effect that occurs because of stoppage and cancellation that impacts a lot of things. And in total, we think that impact was just about half of the loss. I'd put the other 25 -- the other half, in two pieces of 25% each, which is the crew related issues and then integration costs and impact.

Okay, that's helpful. Thanks. And then just on the scheduling issues are beyond weather that you discussed, could you go into a little bit more detail about what you are asked to do, in terms of changing, you know, maybe the areas that you are flying to? And then did you actually go -- did you see utilization below your minimums, related to these schedule changes?

The answer to the second question is no, as it relates to the scheduled production. And, more specifics about the issue, look, we were asked to just reallocate some of the flying at some of the Houston-based flying to Chicago and take some of the Chicago-based flying to Houston. Okay, and on the SkyWest Airlines system that was done fairly seamlessly. I mean it is not easy to do, and when I say seamlessly, it is almost underestimating the challenge. But on the ExpressJet side of that equation, for a number of reasons, it had a more meaningful disruption impact that was not as easily managed.

Okay, that's great. And just lastly, on the 700's that you are bringing into Delta, and I think you are swapping 200's there, what happens to those 200's? And could you just give us over the next two or three years, how many 200's can you just return to the lessor?

Okay, so Duane are you -- you are asking two questions. I've indicated that the four 700's coming in are going replace some 200's, and your first question is, what is the situation with those 200's?

Yes.

Okay, we are still obligated on those 200's but for a very short amount of time. I mean like roughly a year or so. So there's number of things there where we have -- there's a number of things that can be done with those aircraft, whether or not they are in revenue service or not. Meaning, we are running airplanes it through paint at the encouragement of our major partners, where corporate livery is changing, and those sorts of things. Using them to, for spares as airplanes are going down heavy maintenance lines.

So yes, we have a small amount of what I would call tail risk, but the airplanes can be productively utilized, even if they are not in scheduled revenue service. So we are not overly concerned about those four airplanes. Then, your question is, I think your question, Duane, is, and if I'm miss reading it here, correct me, but I think you are asking a little more specifics about the flexibility we have in the 200's.

Exactly.

In that we have short-term leases on a number of these airplanes, and that we can replace them very -- or return them very quickly. We have around 22 of the CRJ200's that fit in that very short obligation category. And when I say very short, it's 60 to 90 day cancellation rights.

That's helpful. Thank you.

Okay.

The next question comes from Michael Linenberg of Deutsche Bank. Please go ahead.

Hey, Brad, couple questions here. You gave us the background on Air Mekong. What was the trip contribution?

$1.5 million positive.

Okay, and the $1.5 million, that does coincide with their March quarterly result?

There's a --

Is there a lag?

It's a one quarter lag, just like the Mekong.

Okay, so for both of them it would be the December quarter of 2010?

Yes.

Okay, and then we now have had the Southwest/AirTran's merger close. Do you still have aircraft -- I mean I saw on the schedule it looked like there were CRJ's up in Milwaukee. Do you have any up there? How many? And what is the timing with that? Do you have any sense on that?

Yes, Chip will address that .

Okay.

We have 4 aircraft up in Milwaukee with AirTran right now, and obviously you've heard that there (technical difficulty) deal, and we have not had a form to be able to have strong conversations about strategically on that business going forward. So technically, right now where our tension is pointed to see what may be as opportunity for that fleet, particularly in Milwaukee and anything else that may come from that business model. But we don't have anything definitive today to discuss.

Okay. And then just, my last question, and this really has to do with how we think about profitability going forward. There was obviously a lot of, you could say one timers in this quarter. Things that should work their way through, or we shouldn't see them reappear in the next couple quarters, on the one hand. On the other hand, we do have, call it, lower margins now at the ASA business, and of course there are obviously things that have to get dealt with at ExpressJet.

As we think about the earnings of the SkyWest out over the next couple of quarters, is it fair to assume that, we are going to see meaningful margin compression? Maybe that's too strong of a characterization, but we should anticipate that margins are going to be a bit lower in the second and third and even fourth quarter of this year? Is that the way to think about the profitability, at least in 2011?

I think you have said it pretty well, Michael. And so, in looking at future potential, the way I think about this, and the way we as a Management group are thinking about it, is that you have to break the expectations down a little bit in the near term, and then longer-term, meaning the next year, and then beyond the next year. And as you have articulated it, I think is pretty accurate. And let me give -- may be this is an appropriate time to give just a bit more meaningful -- again I hate to ever go into specific entity level results or expectations, but in this environment with so many moving pieces it might be appropriate.

SkyWest Airlines system itself is still doing, with the exception of some expenses preparing for some of these growth aircraft, and that sort of thing, if you take out the prorate fuel and the timing mismatch on those United overhauls, the SkyWest Airline system is pretty much intact. So as we move through the next year, and the overhaul negative mismatch works its way through, then part way through '12 it actually will flip again. The SkyWest Airlines at margin potential is very strong. And similar to what we've seen for many years.

Admittedly, the ASA performance, you should expect lower margins than previously generated. It is going to take some time to adjust the cost structure to the second lowest rate requirement in the Delta contract. Having said that, Brad Holt and his team have very specifically identified, and are executing, to different components. One is an ASA-only cost reduction initiative that we are very confident will have a meaningful impact. Separate from the ASA specific initiatives, are the impact of the integration benefits that will come through the integration of ASA and ExpressJet.

And as I previously indicated, we expect that that will -- we just don't see anything that would indicate that that's not on track with what we've previously discussed. So with the ASA cost reductions, we believe we can get a positive margin back in, due to that alone. When I say that alone, we also need at the same time, to make progress on some of the fundamental production issues that we have indicated have negatively impacted us, even in this quarter.

But I think we are not just well on our way to identifying those issues, but we see meaningful improvement, as I indicated, already in March, April, and in the upcoming quarter's scheduled production. So, when you put the integration into the mix, you put the cost reduction initiatives at ASA, which I am confident will be properly executed. You look at SkyWest Airlines if the timing --the overhaul, and by the way, the overhaul issue it will level than slip positive, then go away for good. Okay, so once the negative impact gets worked through in the next year, it will go away and won't return again.

Okay, and when you put all of that together, with the opportunities that we see to do fleet replenished and fleet replacement within our contracts, as we make these improvements, we see very meaningful potential and very meaningful upside as you get a year out. Sorry for the long explanation, but that is how I see this internally, and see the next, through 2011, pretty much as you had articulated, it is going to take some time to get some of these things integrated and initiatives executed. At the same time we are improving utilization and production. And then, beyond a year out, we have even more meaningful upside margin potential than that.

Can you share with us at what the order of magnitude is regarding in the ASA cost reduction initiative or initiatives? Is it like a per annual savings amount?

I have some reservations about doing it, giving you the specific numbers right now. I don't hesitate, though, to tell you that they are of an order of magnitude that we believe will -- if you just take ASA on its own, and you take both production -- you have to appreciate that some of the cost issues we have, have been materially exacerbated by lower production. Okay, and it's lower production in both stage lengths, if you look at our average stage lengths in the ASA only system, Brad can help me with this, but our average stage at length at ASA has gone from in the mid-450's --

Down to 300.

Down to 300. When you do that, and by the way, I'm not bringing this up to be critical of our major partners, I'm just talking about the facts, and what we have to deal with. Let me just put it -- make it a little more relevant. Take one item, like cycle driven maintenance components. When you bring down at this stage lengths, your cost per cycle will go up. And we are seeing a material impact on those costs. So when we talk about the cost reductions and the fixes and the initiatives, it's hard to separate, to isolate them purely to just saying we are going after cost reduction here, because a lot of this issue is very tied to increases in the daily utilization and stage lengths.

And I will say we are working better and more cooperatively and openly with Delta on trying to help with these issues, they are aware of the issues, and we are seeing improvements. But, to get this back with a meaningful, solid margin, it's going to take both. We've got to get the production back, and we've got to go after the cost reduction initiatives . And I'm just saying, when those two things happen together, which we believe they will, we will have back a -- it will be smaller than the margin we have had in the first four years at ASA, but it will be a solid positive

Okay, good. Thank you.

The next question is from Ray Neidl of Maxim Group. Please go ahead.

Yes, I just wanted to go over again some of the problems that you had in the first quarter, just to make sure I understood where they lie. The volatility of your partners schedule, did you say that was mostly due to the merger of the big airlines, the Uniteds, Continentals, and Deltas, and so forth? And if that's the case, that volatility should not exist in the future, is that a correct assumption?

I don't know that I would classify it that way, Ray. I think there is as much to do with the economy and rising fuel and that sort of thing, as well as -- what I think we are coming to accept now is there is more seasonal volatility in the schedules than what we have had before. I guess partly driven by economy and some impact on fuel. So I don't know that I would put it in a category that it is driven simply by merger activity at the majors.

Okay. And the other thing that was the softening of the utilization. Is that mostly prorated flying? And it looks like, with the merger of ExpressJet, your prorate flying has gone down from 10% to 7% or 8% of your total revenues, and I think you said that's going to be shrinking a little bit further as you evaluate that system?

Yes, what you said at the end is certainly correct. The reduction in utilization in that prorate flying, I would not classify it that way. We have just seen utilization, and again this is more pronounced at ExpressJet and ASA than it is SkyWest Airlines, but it is just general schedule utilization.

Okay, and as far as the AirTran contract goes did you say that is terminate now with the South West merger and you're looking for a home for those aircraft?

Chip, go ahead.

It is not terminated, no. We certainly with the combination of Southwest and AirTran's have to go look at that model to make sure it is something that may have some legs for them. We love the relationship we have, and now that the deal has finalized now, we have to sit down at the table with Southwest to see if that's something we want to continue to pursue. We don't have any update beyond, now that they've just barely finished the merger.

Okay. And finally, one last thing is, did you talk about the Delta lawsuit, the progress being made there and when that might finally be settled?

Sure, I can answer that one pretty quick. There is not much change since last quarter. It's still just -- well I will -- we paused briefly with the litigation to enter into a settlement discussions with Delta. That did not result in settlement. And so, we are just back at it in the courts and it is just going through its legal process.

Okay, great. Thanks guys.

Okay.

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

Thanks very much operator. Hi guys. Hi Brad.

Hi.

Okay, just some easy questions for you, since you have answered all the hard ones. Can you just say -- the increase in ground handling and other revenue, from $9.1 million to $21.5 million. Can you just break that out as to what accounts for that substantial increase?

You are right. That is an easy question. That is just the XJet ground handling.

Okay. And then, the second question is with respect to the horizon aircraft that you're taking delivery up, do you have to put them through modifications? And if so, who pays for that, and how should we think about that cost?

This is Chip. We don't have to modify them, but we have to do a rollover inspection and paint and that type of stuff. From that perspective, it is essentially relative to the agreement. It's something that is not a significant cost and I don't have the details about the contract and how that's recovered. I think that we are going to be fine on it, but I there is not a lot of modification that need to take place to the aircraft.

And Helene, a lot of times, a lot of our pre-delivery cost, when it requires full training and aircraft in advance of the flying. We had previously, in some of our contracts, negotiated that there be an upfront integration payment. These costs aren't that significant, and the cost to cover that is just built into our contracted rates.

Okay, that's great. And then the next question is on the Alaska aircraft. Who's going to be doing the ground handling on that? Is that them?

Yes, it is Alaska.

Okay. See, I said they were easy. And the last question is on DRIP. I noticed that TAM, I think, put out a press release awhile back that they were interested in buying up to 10%, I think, of DRIP. Would that come from your holding, or would that come from other shareholder earnings?

That will come from -- that will dilute our earnings. So, we actually have a contractual provision that required a look back, to look back to certain financial targets and things. Actually our ownership right now is a little higher than that, then the 20% we've been talking about. But then when the TAM deal finalizes, we will be diluted down. By the time both traunches of the investment are made we will be diluted back down a little under 20%.

Okay.

But I will also add that the investment and the, I will call it, partnership, I mean is a very material development. And certainly has a meaningfully positive impact on the implied valuation of our DRIP investment .

Right, because it looked like actually they are investing at quite a premium to book value.

Yes.

So, that should -- then how would that be accounted for? For you guys that would just show up as an increase in the value on the balance sheet?

Yes, it would be -- actually, the way we are accounting for it, it won't have any financial statement impact to us until we dispose of the investment.

Right, okay just wanted to make sure I got that correctly. Okay, thanks very much. I appreciate the help.

Okay, thank you.

The next question is from Bob McAdoo of Avondale Partners. Please go ahead sir.

Hello guys just one quick question. You have gone through the additions of the 700's here. Could you go through and summarize, or recap for us, what are the existing airplanes that are coming off contracts with United or Delta or whatever, thus far this year and for the balance of the year?

For the balance of the year, other than the 200's coming out of Delta, we have already talked about, that's the only meaningful reductions.

So, everything else that you started out the year with, stays here all year. These are just swapouts, but everything else is as it was?

Yes, so we have identified -- well, okay, let me be a little more specific here. Of the -- I walked through the addition of about 21 airplanes.

Right .

17 coming from Horizon, four of which were delivered in the fourth quarter last year, 13 that will be delivered this year, plus the four factory deliveries. All of those airplanes, they are all net new, except these last four 700's.

Which you are going to kick out some 200's?

Which will kick out 200's. Those are the replacement airplanes. In addition to that, in the ExpressJet system, we have some airplanes (technical difficulty) United System.

Those ones that went in starting that one spring?

They went in three different traunches, and so those are currently scheduled to come out -- Brad?

The first traunch at the end of August.

And so, I didn't put those in my response only because we are in discussions with United to figure out how to deal with those airplanes.

Because ExpressJet did not have any -- they didn't run the cost of the airplanes through their system. I assume that is still the way that those airplanes are handled, and those are really all on the Continental books, or whatever they are called now?

Yes, this is an interesting issue, because they were Continental airplanes that we put in contact with United, and now it's all Continental/United. So it's got a little dynamic to the discussion.

But you don't have any ownership obligation with those airplanes. If they quite flying, they just quite flying.

If they don't renew, we are not committed financially to the airplanes, that's correct.

Okay. And how money of those were there, do you remember?

There's 16 now. There have been some modifications to it from where it started, but there are 16 involved in the first traunch currently.

And what are the other, if they decide to pull that back? You say the first traunch comes up in August, and you are working with them, and maybe there's some hope there, a way to put something together there. Are there other traunches that expire here, that are known to be scheduled to expire?

Bob, there are two other additional traunches, basically 13 -- or 11 airplanes each, that go basically out till, one traunch to '12 and one traunch to '13.

Okay, all right. All kind of into the summer?

Yes. Spring, and then the generally, it's not the best time to make changes right as you are setting up for the summer schedule, so we would expect probably through the summer, but I think contractually they are spring of those years.

Okay, very good. And everything else is longer than that?

Yes.

Okay, very good.

Thank you, Bob.

Yes.

Your final question is from Glen Angle of Bank of America Merrill Lynch. Please go ahead sir.

Hello. Two questions. One on the turnover. When you look at the crew cost is there any element that turnover is starting to increase now that legacy airlines are hiring pilots again?

Let me have Brad Holt get some perspective on that one.

We haven't seen a significant increase in turnover due to go in the major carriers (technical difficulty) fairly consistent for the last 12 to 18 months. Although we are watching that closely, we do expect some uptick in that, but in general the answer to the question is no, not yet.

And on the maintenance side, I guess people's experience of regional jet aircraft getting older is not all that extensive, and so, are you finding that as the airplanes get older the checks are longer than you expected, or is it just that the contractual prices have been higher than you expected?

I think it's a little bit of both. I mean there is obviously some experience now with aging aircraft, and of course the second and third checks are little more expensive than the first ones. But, I don't see a real problem in that. We are able to forecast it pretty well at this point.

And finally, just a quick nit, you said [Maycon] had a $2 million loss. How much of the revenue went through your consolidated line?

None

Okay, so just start up loss. Thank you very much.

Okay. Thanks, Glen. Okay, operator do we have any more questions?

No, sir. That concludes the question-and-answer session. I would like to turn the conference back over to Bradford Rich for closing remarks.

Okay, thank you. I know that we are a little over the time that we normally take. In conclusion though, I do want to specifically express our heartfelt thanks and appreciation to all of the employees of these companies. It goes without saying that we have been through a difficult last few months. I mean with the challenges of the weather, and it's hard to gain a full appreciation for the stress and the burden that puts on our people . They are out on the front lines, and dealing with those kinds of situations, and the things that people have been going through with the integration, and some of the disruption.

We just are so grateful to all of the employees of these companies for their commitment and their dedicated service and work, and we are just very appreciative. And we recognize that you are helping us with all of these things, and it's going to take a united team and the continued cooperation in the future. But for what you've just been through, we recognize it and we are very grateful for it. Thanks to those of you who are more on the investment side, and participating and interested in SkyWest. We always very much appreciate your participation and your interest in SkyWest. With that, we will go ahead and conclude the

Thank you for your time everyone. The conference has now concluded. Thank you for attending. You may now disconnect.