SkyWest Inc (SKYW) 2011 Q2 法說會逐字稿

Good morning, and welcome to the SkyWest second-quarter 2011 earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). At this time, would I like to turn the conference over to Bradford Rich, President of SkyWest Inc. Mr. Rich?

Thank you, Andrew. Welcome, ladies and gentlemen. We thank you for your interest in SkyWest and for your participation today. Before we begin, I'd like to introduce those who will be participating in the call today. First of all, I have with me Chip Childs, President and Chief Operating Officer of SkyWest Airlines. I also have here, in St. George with me, President and Chief Operating Officer of Atlantic Southeast and ExpressJet Airlines, Brad Holt. We have Mike Kraupp, our CFO and Treasurer and Eric Woodward, our Chief Accounting Officer. Before we begin, I've asked Mike Kraupp to read our Safe Harbor disclaimer regarding forward-looking statements.

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's beliefs, expectations, hopes or intentions regarding future events.

Words such as expects, intends, believes, anticipates, should, likely, or similar expressions identify forward-looking statements. All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to update any forward-looking statement. Actual results will vary, and may vary materially, from those anticipated, estimated, projected or expected for a number of reasons.

Okay. Thank you, Mike. Before I turn the time back over to Mike to review the financial results for the second quarter, I would like to make some general comments. Obviously, our financial performance has not been what we expected, not just in the second quarter, but for two consecutive quarters now.

We are dealing with some challenges, and some fairly strong headwinds. Some consistent with our first quarter, and admittedly, some that are new to the second quarter. Some of the issues are unfortunate events that have been out of our control, but many of the issues are simply not. We recognize that as leaders of this Company, we have the responsibility to properly diagnose these issues, develop a comprehensive and aggressive action plan to take corrective action, and to make the changes that will lead to improved and meaningful profitability. We do have the focus and the attention of our leadership group, and we are working cooperatively together. We do, in fact, have an aggressive action plan that is being implemented, and does affect all three operating entities.

A few comments regarding the acquisition and integration of ExpressJet. It probably is not a surprise to know that I've been asked frequently if I still think the acquisition of ExpressJet was a good idea. I would remind that you we're only nine months, approximately nine months since closing. We've had some people even suggest that the transaction was just simply more than we could handle.

Let me tell you what I believe about the transaction. I believe the fundamental strategic objectives of acquiring ExpressJet are unchanged. ExpressJet is a strong operational company and needed some financial strengthening and supporting that we have the resources to provide. I believe that as we work together, that we can bring stability to this situation, and again, that the strategic objectives are very much intact.

There have certainly been some significant challenges that we underestimated, and we do need the cooperation of all work groups to be successful, but in spite of the challenges, we are right on plan with our integration targets at this point, and we are on track to have ASA and ExpressJet -- excuse me, Atlantic Southeast Airlines and ExpressJet, fully integrated by the end of the year. We have reduced costs by approximately $30 million on an annual run rate, and we expect additional cost improvements once SOC, single operating certificate, is achieved at year-end.

At SkyWest Airlines, although we have had some increased crew costs and have had the burden of the increased maintenance costs associated with the United CRJ200 fleet, the fundamentals are relatively intact. The SkyWest operation was profitable in the quarter and the maintenance mismatch, which has been an expense burden recently, will go away by June of 2012. SkyWest prorate flying also showed strong improvement, and was profitable in the quarter, generating over $3 million in operating profit in spite of fuel prices increasing to approximately $3.64 per gallon in the quarter.

During the quarter, we added 13 additional aircraft to our fleet that consists of four CRJ200s and nine CRJ700s. The four CRJ200s are operated by SkyWest in the Delta system and the 700s are also operated by SkyWest Airlines, two in Delta service and five in contract operations with Alaska Airlines. The remaining two 700s are operated by ASA and the Delta network.

We did have a very successful launch of our Alaska Airlines relationship, which began on May 14th. We believe it's been successful for both us and Alaska, and we do believe that may lead to additional future opportunity. We've been very busy during the quarter, not just with the integration and additional aircraft deliveries, but we've also responded to the requests of our major partners in adding new aircraft and reallocating existing aircraft to new locations on a relatively short notice. Some of these events have been costly and somewhat disruptive in the short-term, but we believe they will be productive and lead to opportunity in the long-term. With those comments, I will now turn the time to Mike Kraupp, who will review our second-quarter financial performance.

Okay, again, thank you, Brad. Thank you all for being on the call today. Just as Brad said, I would echo his same comment in that we do appreciate your continued interest in our Company, and sort of hanging in there through these challenges. I would also echo Brad's enthusiasm and confidence that we will be able to overcome these challenges, and then move our companies back to profitability.

As you know by now, we pre-released our results when it became sure we were going to miss the Street estimates. Today we reported results in line with that pre-release. We did report operating revenues of $933.7 million for the quarter ended June 30. This compares to $649.8 million for the same period last year. Net income was reported at $1.6 million or $0.03 per diluted share.

We did have a pre-tax loss of $1.8 million, which was an improvement from our pre-tax loss of $18.5 million for the first quarter ended March 31, 2011. Net income was a result of recording a tax benefit of $3.3 million, and that's based on truing up our income tax provision for the six months ended June 30. We also recorded a pre-tax loss from our ownership percentage per trip of $1.2 million and $1.7 million for our interest in Air Mekong. This compares to recording a pre-tax loss of $1.1 million for the same period a year ago, and that obviously was just per trip.

Operating revenues increased $283.9 million or 43.7%, $235 million of that increase was generated from our ExpressJet operations, while $38.8 million was generated from basically additional pass-through costs for increased fuel costs and Delta engine overhauls. As many of you know, these costs are directly reimbursable by our major partners, under our capacity purchase agreements. Lastly, we experienced an increase of about $10.5 million in ground handling and additional prorate revenues. Our prorate operations consist of 62 aircraft that generated about $3.1 million of operating income, compared to about $0.2 million for the same period last year on 63 aircraft. So that represents an improvement of $2.9 million for this quarter on a year-over-year basis.

Let me just turn real quickly to block hour and ASM production. Our block hours did increase 60.6% as we produce 574,372 block hours in the quarter, and that compares to 357,645 for the same period last year. When excluding the block hours related to ExpressJet, which were 199,460, block hours for Atlantic Southeast and SkyWest on a combined basis increased 4.8%. Additionally, ASMs increased 58.1% to 9.4 billion for the quarter ended June, compared to 5.9 billion for the same period last year. Also, when excluding ExpressJet's ASMs of 3.1 billion in the quarter, our ASMs increased 6.8% for Atlantic Southeast and SkyWest. By way of forecasting, we are projecting for the third quarter 9.7 billion ASMs and 9.1 billion for the fourth quarter of 2011.

With regards to the cost side of our operations, this is where we obviously experienced the greatest challenge. Total operating expenses and interest increased $312.6 million or 50.2%. After excluding expenses of $245.5 million related to the ExpressJet operation, and after excluding fuel and engine overhauls that are directly reimbursed by our major partners, our costs increased approximately $31 million.

The largest cost increase year-over-year and outside of our expectations were crew costs of $13.7 million. I think Brad sort of alluded to some of this, but some of that cost was self-inflicted and some was not. We did take delivery of five CRJ700s and four CRJ200s that were outside of our plan. That resulted in additional crew training events for approximately 100 pilots to staff those aircraft. Additionally, due to block hour production increases from our major partners, some of which was seen, and some that was not, it created a situation where we were short on pilots.

As a result, training efforts began in earnest, some of that in the middle of the first quarter of 2011, and then we ramped up quite heavy in the current quarter in order to be able to train enough pilots to be able to meet that demand in block hours. Further, we started out behind the curve, which resulted in paying crews already on premise overtime and premium pay, on a portion of that flying. We've continued training efforts in all three operating airlines, and should now be adequately staffed at Atlantic Southeast and SkyWest. ExpressJet will continue with some hiring efforts, most likely into the fourth quarter of this year. We also experienced about $4.4 million of additional simulator and lodging costs that were associated with these crew events. Our prorate fuel increased $7.4 million for the quarter ended June 30, 2011, as a result of the price per gallon increasing from $2.58 for the quarter ended June 30, 2010 to $3.64 for the quarter ended June 30, 2011 or roughly 41.1%.

Next, we experienced additional merger and integration costs, as well as increased healthcare costs, totaling about $7 million. I can separate those out into two buckets, one of $3 million sort of related to the merger and integration, and then another $4 million bucket if you will, that's related to healthcare cost increases. Putting a little more visibility on the $3 million, we believe about $1.4 million of that was related to third-party payments in for efforts in achieving our SOC or single operating certificate and some related to severance costs, although those are becoming smaller and smaller. The remaining $1.6 million was due to additional legal expenses related to CBA negotiations for merger and integration, as well as other general corporate matters. With regards to the healthcare coverage, all of our health care programs are self-insured, which means that we're paying the claims, et cetera. Our actual experience during this last quarter is that we experienced an unusual number of claims. We experienced an increased number of high-dollar claims, those that we define as $50,000 or greater, and we did have one catastrophic claim of just under $1 million.

We also experienced a good guy in that our CRJ200 engine overhaul costs on the United operations decreased $6.2 million for the quarter ended June 30, 2011, and that compares to the quarter ended June 30 of 2010. We also experienced a decrease in the net amount of actual engine overhaul expense, over the rates collected from United of $7.8 million for the quarter ended June 30th, compared to the same quarter a year ago, $5.9 million for the quarter ended June 30, and that compares to $13.7 million for the same period last year. I'm going to give some visibility in just a minute here with regards to some of these costs, and how we sort of see those reducing over the next couple of quarters. I won't go over the fleet in detail, as it's advertised in the release and Brad has covered that just a little bit as well. I will also make mention, though, that we do have two CRJ700s that are delivering in the third quarter of this year, and also two in the fourth quarter. These aircraft will replace CRJ200s that currently flying for Delta. Outside of that, there are no other material changes with regards to the fleet.

We continued our stock repurchase program in the quarter by purchasing 1.3 million shares at a cost of $20.7 million. This leaves the remaining balance of about 3.2 million shares that we can repurchase. Since 2007, when we began repurchasing our shares, we've acquired 16.8 million shares at a total cost of $317.4 million, and then obviously we'll continue to be in the markets from time to time with that remaining portion.

Our balance sheet remains strong, and our ratios remain at acceptable levels. Our cash did decrease $120.3 million from December of 2010 to June 30, 2011. This was primarily from spending about $40.3 million on stock repurchases for the six months. We also made $13.5 million in aircraft deposits on our CRJ700 order, and we experienced working capital changes of about $50 million. The working capital changes come primarily from making prepaid lease payments, and some receivable increases. These changes are normal, however are more noticeable this period, since we're not producing pre-tax income at the levels budgeted for.

I can also tell that you SkyWest Airlines and Atlantic Southeast are cash flow positive from operations, and we're using a small level of cash in our ExpressJet operations. Lastly, we spent about $21.5 million in cash capital expenditures for the quarter ended June 30, 2011. With that, that will conclude our formal remarks with regards to the quarter, and so operator, we'd like to open it up for Q and A at this time.

We will now begin the question-and-answer session. (Operator Instructions). We will pause momentarily to assemble our roster. The first question comes from Jim Parker of Raymond James. Please go ahead.

Good morning, Brad and Mike. I wanted to ask you about, we've heard at least a couple of airlines with which I'm familiar have the LLP expenses that are being incurred for engine overhaul, and not all, in some cases, maybe none is being reimbursed by legacy carrier partners. Can you tell us what's going on with SkyWest in this regard what LLP expenses might be out there coming?

Jim, this is Brad. Obviously, this is an area that we are very focused on, and have been for quite some time. Unlike some of the other carriers, well, you know from history, that we have some different ways of accounting for some of these types of expenses in our contracts, and then accounting in our systems, our book accounting as they're treated in the contracts, so our primary issue is what we're facing right now with the United 200 engines. That's our primary maintenance event, and that's the burden we've been carrying now for several quarters. We don't expect any spikes to be created from individual LLP events coming forward.

Okay. I have a little bit of a history with ASA, and I know that it has historically at least, not been quite the operation that SkyWest has been, and so ASA seems to have the greater proportion of the unusual expenses in here. What are you doing in that regard to improve the profitability of ASA?

Let me take the first stab at this one, and certainly Brad Holt can offer his thoughts as well. First of all, I think we have a lot of issues here that there's no other way to say it, but just deserve increased management focus on some of these issues. And we are doing that. As I have said, we have a very specific plan in place that Brad Holt and his group have been executing for quite some time, which has, in fact, led to some significant cost reductions already.

We have some other issues that are simply relative to the schedule, that admittedly are difficult issues because, as you know, our major partners need to be able to schedule and have the flexibility to produce schedules that optimize their networks. But in cases where it reduces our utilization and our stage lengths, it does make it very difficult to have effective cost controls. That is a large part of our issue right now, is that we have to make improvements on schedules and get better utilization out of the fleet. So that's a big issue and a very big challenge. Brad, do you have some thoughts?

First, Jim, there's a couple of things, really two main things from an expense standpoint right now. We went over half of that through the post-merger integration and SOC discussion. And there is some significant -- I mean, part of the reason for this deal is just what you stated earlier. There are a lot of good things that can come out of the synergies we get by merging these two companies that maybe Atlantic Southeast may not have been able to do on their own, and we are seeing some good progress in that area. The post merger integration process we've gone through could save significant money.

We do have a lot of work to do, specifically at Atlantic Southeast, but most of those plans, and the action plans to reduce costs at Atlantic Southeast started 24 months ago. We are seeing some good progress, especially on the maintenance end of things, with some real good solid plans to reduce maintenance costs, and we're seeing that come to fruition now in this last quarter, and going forward. And I think, the other thing, from a cost standpoint, as we bring these two companies together, our people are working well together, and have a reel good sense of where we need to go from a cost standpoint, so through negotiations and all of the other things we're doing, we're going to be able to better align some of those contracts.

Okay. Thank you.

Thanks, Jim.

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

Thanks very much, operator. Hi, gentlemen. Just a couple of things with respect to me getting some meat onto the bone here. Can you go through maybe your plan for ExpressJet consolidation into Atlantic Southeast, and if you started two years ago, improving the operations and improving the maintenance events with ASA, I feel like you should be further along the curve at this point with those events. So now you're adding the complexity of ExpressJet. I'm just wondering if you could put some meat onto the bone about where you're going with the combined operation?

Okay, look, a very good question. The honest answer is in the five years -- I'll go back even a little further, Elaine. In the just over five years now that we've owned Atlantic Southeast Airlines, we have not made as much progress as fast as we should have. The progress curve recently has been better, and it is, as Brad Holt explained, it is improving. For example, our maintenance costs, our non-engine maintenance costs in July are lower than they've been, I think in the previous three or four years. So there is tangible evidence that some of the programs that are being implemented are working.

When I say programs being implemented, it is some of the fundamentals. It's improved planning and just general efficiency programs that have been put in place. It's more management focus on some of the fundamentals, and it is leading to progress. Now, the objective is certainly to have a fully-integrated operation between ASA and ExpressJet. So all of the efforts that we are making now, that we refer to as our single operating certificate work, is with the objective of having a single operating certificate between the two entities by the end of this year.

We are on track to do that, I think, as you know, this is a very comprehensive undertaking. It's time consuming. We have enlisted the help of a lot of people to help with this, and as Brad said, the value and benefits of bringing these two entities together, we believe, will be valuable, not just as a combined entity in realizing the synergies and the integration benefits that you would naturally assume would come from this type of integration, but we believe it's also going to lend just some general benefits and value creation opportunities for ASA as a stand-alone entity as well. So we see that as kind of the combined value of the integration.

Okay. And then I guess the other part of that question is, I guess I understand why you're doing ExpressJet with ASA, but now you've got United-Continental in one operation and Delta in the other operation. Would it have made nor sense -- that's a bad phrase, I'm sorry, would it have made sense to put ExpressJet with SkyWest, where you're operating a whole United-Continental operation, as opposed to with ASA or is it fencing off SkyWest because of the union situation?

Yes so as you sit down and look at all of the issues, there's certainly pros and cons of each organizational structure, right? So at the end of the day, you're right, there are some very significant labor-related issues that we believe led to a more logical integration into ASA.

Got you. Then my last question is just with respect to the aircraft fleet. I think you're operating the largest fleet, probably in the world now, of regional jets. Are you thinking about as part of the process, and maybe this is a 2012 or 2013 event, just is there a lot you can do with streamlining the fleet, eliminating older aircraft kind of to improve the operation that way?

The answer is yes to everything you just said. We're operating the largest fleet of regional airlines in the world. I think people have gotten a little tired of hearing me talk about the long-term strategic objectives of growing. I have always said that we have no interest in growing unless we can translate that growth and size into value. Some of the things you're talking about are the reasons that we're growing, and have felt strongly about growing to develop mass to give us leverage to do things that we otherwise couldn't do.

So look, we feel very strongly about this point, and that is that yes, we have some short-term current challenges that we are very focused on, that we have to take the responsibility for to get, to take corrective action, get repaired and get back to meaningful profitability in the short term. Long term, I feel very strongly that when you look at the breadth and depth of our platform, the size of this operation, the amount of just volume that we control in the regional space, combine that with our financial positioning and our balance sheet, we are uniquely and strongly positioned to do some things that others can't do in this space.

So I know that's a very strong statement, but I feel very passionate about that from a long-term strategic position. We are doing things and working on changes and revisions to our models. We're looking at things as fundamental as how we buy and maintain aircraft, which are things that we can do because we control volume. And I don't want to get into any more detail probably than that on this call, just to give you some comfort that we recognize we're in a unique position. And I think we're, at least I think we're thinking through the proper issues. We've got long-term strategy in mind, and we're taking that part of this challenge very, very seriously.

Thank you very much for your response. I really appreciate it, Brad.

You're welcome, Helane.

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

Hi, everyone. This is [Ashley Richardhauer] filling in for Mike. Two questions. First one, regarding the $3.3 million tax gain you reported in the quarter, I was hoping you could share more specifically what drove this larger-than-expected benefit and if you could provide some guidance on what tax rate we should be forecasting for future quarters?

Yes. This is Mike. Let me take a stab at answering that. What that's coming from is, we have to go through and estimate taxes, obviously based on what we think is going to transpire during the year.

We also have permanent tax differences or discrete items, and in this case, I'm going to use an example of per diems that we pay. Only a portion of that is deductible, and as a result, creates a permanent difference, so when pre-tax income -- where pre-tax income historically has been very, very high that particular permanent difference has not had a great impact on the overall provision. Now that we have come down to a loss position, and are more of a break-even type scenario, those discrete items that are permanent differences will have more of an impact. As a result, that tends to drive the overall tax rate up.

So part of what you're seeing within this second quarter as well is, in going back and looking at the calculations, and taking into account what we've done now through six months, we did have a bit of a true-up that came into this quarter versus the first quarter. We probably should have had a bit larger benefit within the first quarter. Now those tax accounts are trued up.

Okay. For future quarters, are we going to see an impact there, or is it going to be more normal?

During the last half of the year, yes it'll certainly be up, and certainly higher from where we are currently at, based on the fact that in the pre-release that we had go out, we're cautioning the markets relative to what we think we can do in earnings for the next couple of quarters. We haven't given absolute amounts obviously, but have led the markets to believe that those will be reduced. So as a result of that, we will have a higher provisional benefit, if you will, during the next couple of quarters.

Okay. Thank you. My second question, I wanted to know if you could talk more about your foreign investments and with Trip and Air Mekong, the $3 million pre-tax loss from the investment, just sort of what you saw and when we could expect in the second half, if you expect a profit on either of those two investments? And if you could share with regard to TAM's recent proposal to acquire a stake in Trip, what implications you think that has on the companies, and ultimately your reported results?

Okay. There's several, I think several questions in there. First of all, the Trip and Air Mekong operations are very different from the standpoint of earnings. Of course, Air Mekong is truly a start-up. It has not been running for a year yet, so the losses that are being incurred right now were planned and expected losses. Having said that, we are looking very specifically at that relationship. We're looking at our investment very closely, but I can just say that the losses at this point were planned and expected, knowing that it's a true start-up and I don't know that I've ever seen a real true start-up like this profitable out of the chute. We didn't expect it to be, and it's not. I'm just saying that part is not that unexpected.

On the Trip side, it's very different, in that it's an up and running operation, but it's very -- the operational performance, or financial performance is veryseasonal. So we incurred a loss this quarter, and you know that we're reporting on a quarter lag. We do expect there to be some profits in the next six months. Our share will be a profit in the next, by year-end in total. We are looking, again, we have the responsibility to look at our investment there, we watch it very closely. We're in a lot of contact and frequent interaction with the folks at Trip.

One of the things that is affecting their performance a bit is that they are growing very rapidly. The growth rate is a little higher than we had expected it to be. They're taking aircraft deliveries quicker than we originally expected, but there's some good news and some bad in that. The good news is that they're doing well and they're growing. The bad news is that when you're in that high a growth rate, it's hard to create stable earnings, simply because you're preparing and training and growing, and that sometimes takes a bit of a -- puts a burden on current earnings, when you are preparing for the future. That's some of what is happening at Trip.

Relative to the TAM investment, I think certainly we are very supportive of that relationship, not only just an operational relationship that has developed there, but certainly supportive of TAM making an equity investment into Trip. Our understanding is that investment at least it's been delayed, and again I think that's partly due to the high growth rate at Trip where certain EBITDA targets have not been hit because of the high growth rate, and so there's some interest -- and again, I'm not a TAM or Trip spokesperson, let's keep that in mind. I'm just giving you my own thoughts here, it may take some time for those earnings to stabilize before TAM may proceed with the investment. I don't know that. I'm just giving you my thoughts.

In the meantime, we have to look at the value of our investment and make decisions, of course, with what we know currently. So we're watching it very closely. None of what's going on there is that unexpected. We do expect there to be some profits out of the Trip operation between now and year-end simply driven by the seasonality of their operations.

Okay. Thank so you much for taking my questions.

You're welcome.

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

Hi. Good morning, guys.

Hello.

I'm wondering if you could just break out very simply what did ExpressJet lose in the second quarter?

Duane, I don't think we're going to get into that kind of breakout in this call. As you know, I made some general comments about the profitability of SkyWest Airlines, but we don't make a practice of breaking out entity level performance, so this is not the time to start, I think.

Okay, fair enough. I was just thinking it might help us understand the ramp on how you get back to some of your, or closer to some of your historic ale margins.

So let me provide this amount of just color to it. One thing, and look, admittedly, let me just share a bit of my own frustration. I did report that we think we have -- that we've realized integration benefits already, of just about $30 million out of that operation. Now, that $30 million is $30 million in annual run rate.

So one of the frustrations has been, well, we have been successful. We were right on plan with integration, but yet we're not seeing the value of the integration showing up in the financial performance. And the simple fact is that yes, in fact that value is there, it's being realized, however it's being offset by the increases in certain issues like the increase in crew costs. Okay. So and again, we have some current challenges. I don't think they're long-term systemic kind of issues so we're taking corrective action to get some of these, what I'll call unexpected, and I know that sounds like a bad term to use in this context, but we'll get some of the unexpected increase back in check. We'll get fully staffed.

I mean, it sounds -- we're hesitating a little bit to go into a lot of detail here because I don't want some of this to sound like excuses for the performance, but the facts are that when I talk about some of these issues, I mean, the facts are that as part of our integration, I'll just use this as one example. We had a very specific integration plan, that we've said all along we would begin implementing as soon as we closed. Well, that integration plan included a workforce reduction out of ExpressJet, of approximately 200 people. And although these are very sensitive and difficult things to do, we implemented that plan, and we terminated approximately 200 people.

Well, the unexpected part of that was, we thought in this economy, we would not have a hard time holding onto a large part of the remaining employees. Well, the fact is, that in addition to the 200, we lost 900 more. Okay, well that 900 was not expected. We've had to hire and train. There has been some disruption created from that loss of employees. Now, once we get that situation stabilized and the impact of that disruption gets normalized and stabilized, then we'll see the benefits of the integration efforts. Not only the current integration but the benefits of the SOC integration which will happen at year end.

That's helpful detail. Can you give us any idea in terms of that 900, sort of what types of roles they were?

In that number is everywhere from crew members, mechanics, to administrative support, crew scheduling. I mean it's probably not a single work group that was unaffected.

Okay. So when we think about sort of the catch up on hiring, that is an ExpressJet-specific issue, not a SkyWest issue?

Much more specific at ASA ExpressJet, than at SkyWest. SkyWest has not been immune to this. We have some, as Mike explained, we've taken some, and as I commented on as well, some of the aircraft that we have taken, we have taken on very short notice. And when you do that, it does put some stress and strain on the system, puts stress on your training programs, et cetera, et cetera. We have some of that, but look, we've made a conscious decision to do it, but it will stabilize, it's not as big of an issue as it has been at ASA ExpressJet.

Okay, great. Then just one last follow-up here with respect to pilots, because I think we've heard this from at least one other regional. Is it an issue of attrition? So if we think about pilot availability generally, it an issue of attrition or is it an issue that pilots are harder to find than they were, say, six, nine months ago?

Well, I think this is Brad Holt. I think we're dealing with about the same amount of attrition that we have historically dealt with. The issue with pilots specifically, is that the reaction time from a training standpoint is the problem. So when you take aircraft on short notice, the footprint for training just doesn't match up with when the airplanes re delivered. We've all had some of those problems. And specifically on the ExpressJet side of things, there was a significant number of airplanes that were in charter service that we were able to put into contract service over the last six months, that ExpressJet hadn't previously been flying. So there was a lot of hiring going on there to staff those additional airplanes, that were setting there on the charter side of the house.

Okay. Thanks for the detail, guys.

You're welcome.

The next question comes from Bob McAdoo from Avondale Partners. Please go ahead.

Yes, just a couple of quick questions. Let's go back to the life limited parts question that Jim Parker asked about. When you say you've got that under control, and it's really primarily the United thing, what you're saying is, as far as you know, there is no future bubble of expenses or whatever going to come rolling through on the ERJ side over on the ExpressJet, that's all taken care of?

Yes. I mean that is what -- look, this is not coming easy. I mean, we've done a lot of things to try to mitigate the impact of this everywhere from very aggressive negotiations with our suppliers and vendors to just the way that our contracts work. So yes, what you explained is correct. We're not there without a lot of focus and energy but yes.

So it's not like we're facing some kind of wall of expense on ExpressJet with life limited parts going sometime in the future.

No.

Okay. Just a couple other very quick ones. You talk about taking four new or four additional CRJ200s, are those planes that you actually are taking title to, or they are just planes you're operating for somebody else? Are you really bringing CRJ200s into the fleet at this late life part of their life cycle?

Well, the most detail that I'm giving you is that we don't own the aircraft.

Okay. So it's just a new contract you picked up to operate somebody else's airplanes?

Yes.

Finally, on the 62 prorate airplanes, what's the mix between their props versus jets on those?

Roughly 22 jets and the rest Brasilias.

That's all I've got. Thanks a lot.

Thank you, Bob.

The next question comes from Steve O'Hara of Sidoti & Company. Please go ahead.

Hi, good morning. Could you just talk about, and I don't know -- you've mentioned to Duane that you don't really break this out but could you talk about the operating margins that you guys see possible or maybe a range in there where you think is poor performance good performance into the future after some of these costs and kind of unforeseen circumstances are resolved?

You're asking a good question, one that I really am not prepared, nor do I think that we should give a whole lot of color to. What I will say is that, and again, I apologize, but I am going to, for the sake of caution here, just answer this very general, and I apologize for the generality. But we do believe that we are in a position here to aggressively work on, whether we call it cost reduction, whether we call it integration or synergy, we can apply whatever term or adjective we want, but we do expect, and we have the responsibility to create a meaningful reduction in our operating costs of the combined entities, and we do have a very specific plan to do that.

As part of that, I think it's worth mentioning that the mismatch in our maintenance costs that is on the SkyWest Airlines side has been about a $70 million kind of expense burden in the last two years. That is simply timing and math. I mean, that alone, that will go away, as I have mentioned earlier, by June of 2012, that negative mismatch should stop. It will then level out and go away, never again to return.

So there's a $70 million pre-tax improvement that is simply related to that kind of kind of timing wall of engine maintenance that's just the way that our accounting has worked on this grouping of airplanes, and that will be eliminated and will not return. And it won't return because of the way we're doing our contracts and our accounting. So there's a very meaningful improvement right there, and then when we incorporate the integration and the cost reduction programs that we have underway, I will just say that we are optimistic. We're enthusiastic about the potential here to get this back to not only sustained but meaningful profitability.

Now in putting some timing to that, I think we have to be very honest with you and realistic about the timing. The overhaul issue, the maintenance mismatch issue that I just described, that will go away, and be kind of -- the full $70 million will go away by 2013. Next year we'll still have, in 2012, we'll have some, but by 2013, it will go away. The other -- the integration and getting crew costs back to more of a normalized run rate, getting our maintenance back to a normalized run rate. I think we have to look at those, in step-by-step gradual improvements, getting half of it in 2012 and full benefit in 2013. So admittedly, there's a timing question involved here, in what I'll term a general restructuring. The overall objective of returning back to meaningful sustained profitability, we're very optimistic that will happen in that timeframe that I described.

I'm just kind of curious, do you have a return on invested capital goal, or something you guys have in your internal forecast that you hope to achieve at some point, if you could talk about that a little bit.

We certainly have those objectives, and yes, we have them. We discuss them, of course, not only with our management group but with our Board, I don't think -- I'm going to keep those as well confidential at this time. Some issues with the utilization with our capital, but we're paying very close attention to it. It gets to issues of everywhere from usage and allocation of that capital to repurchasing of Treasury shares.

So it's quite a complex issue, especially with the capital structure that we've got. Some people thinking that we have too much cash and liquidity, which leads to too much equity, and how do we most appropriately and effectively allocate that capital? So, it's a broad and comprehensive issue here, that I think would be a little difficult to just say this is our return, our return or our required capital return targets or something.

Okay. Then I guess finally, I mean, have those targets changed, not to go through what the numbers exactly, but have the targets changed materially in say the last year or since you guys have purchased ExpressJet?

No. They have not.

Thank you.

You're welcome.

Seeing no further questions, I'd like to turn the conference back over to Brad Rich to make final comments.

Okay. Thank you very much. Again, thanks to all of you for your participation today. I know that we've had a fairly lengthy call already. I would just summarize by saying that -- by just restating, we know that we have some challenges here. We know that it is all hands on deck, and that is what we've got here.

With some of the challenges that we have, when you are integrating large companies, when you have some of the challenges and the head winds that we've got, there really no people at SkyWest and companies that have been unaffected. There is a large amount of stress and pressure that has been put on these systems, and we're asking all of our people to do a lot. We recognize that. We recognize that just the demands put on our people have been great.

We have over 18,000 men and women in the SkyWest Inc family. We are grateful for your efforts, we recognize your efforts, and we thank you for them. To those of you in the investment community, again, we have some challenges. We are focused and we're optimistic that we can take the actions necessary to return to, as I said earlier in meaningful and sustained profitability. With that, we will go ahead and conclude the call. Again, thank you for your participation.

That concludes the SkyWest second-quarter 2011 earnings conference call. You may now disconnect your line. Thank you.