SkyWest Inc (SKYW) 2011 Q3 法說會逐字稿

Good day, and welcome to the SkyWest, Inc. third quarter 2011 earnings conference call and webcast. (Operator Instructions). I would now like to turn the conference over to Bradford Rich. Mr. Rich, please go ahead.

Thank you very much, operator. Thank you to all of you who have taken the time to participate with us this morning. As always we very much appreciate your interest in SkyWest Inc., and your willingness to participate in the discussion of our results for the third quarter of 2011.

Let me first begin by introducing who we have here at headquarters with us who will be participating in the call today. First of all we have Jerry Atkin with us this morning, our Chairman and Chief Executive Officer of SkyWest, Inc. We also have Chip Childs, President and Chief Operating Officer of SkyWest Airlines; Brad Holt, President and Chief Operating Officer of Atlantic Southeast Airlines and ExpressJet Airlines is also with us. We also have Mike Kraupp, our CFO and Eric Woodward, our Chief Accounting Officer.

Before we begin, our discussion this morning, I'd like to turn the time to Mike Kraupp. He will read our Safe Harbor on forward-looking statements.

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, expectation, 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. SkyWest 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 reasons.

Okay. Thank you, Mike. We'll now begin our discussion today by hearing some opening comments from Jerry Atkin, our Chairman and Chief Executive Officer.

Good morning, and thank you for your interest in SkyWest. My comments today will be less about the quarter, and a little bit more about the Company in general and where we are this year, and where we expect to go the following couple of years. I also want to assure you that I have a high confidence in this team, and that I believe we are making significant progress toward improving financial results, while remaining in the strongest position in the regional airline industry, with strong financial resources, strong people resources, high quality product and extremely competitive costs.

I realize your confidence in SkyWest here has undoubtedly been tested a bit, as we announced the first quarter of 2011 as the first quarterly financial loss in a long time, and have missed our own plan each quarter since then by producing a break-even financial operation in the second and third quarter. These are relative surprises to you and to us. I believe we're making good progress, though, in all areas, including more realistic planning.

In my perspective, at least, there's three issues this year, not this quarter but this year, that have been more difficult than we planned. We thought the acquisition of ExpressJet by ASA to be an important strategic move then, and we still do. We believe we are making progress to a successful outcome.

The timing for ASA as the acquirer was less than ideal and has stretched ASA's capability. We pretty optimistic in our ability to acquire and run both entities well all at the same time. Having said that, the operations at both ASA and ExpressJet have steadily improved through the year, and have been at a very high level for three months now.

We have combined many of the functions into one location, and are very close to achieving a single carrier certificate on which to operate both airlines. The labor integration that is so important to get done right at these two Companies is taking longer than expected. It is our expectation to achieve an efficient and effective new combined company in ExpressJet Airlines. We expect it will take a year longer than we initially had thought and we will have spent more than we had planned to do so.

The second issue is one of accommodating our major carrier partners at a time of higher fuel costs with lower daily utilization in off-peak seasons, while still quite high in peak season. The lower and greater variation in utilization is causing higher costs that weren't anticipated in our current rate arrangements, and we are working on ways to mitigate that short fall.

The third issue is one of increasing our fly capacity aggressively going into the summer in literally all three of the companies, and relying on more overtime and more aggressive training to keep up, adding more cost than normal for late spring and early summer. We have mostly caught up. We'll plan better and more smoothly in the future, and we have booked some business that will continue for sometime.

We expect the financial results for 2012 will be better than 2011, but most of that really won't occur until the second half of 2012. We expect notable improvement in 2013 compared to 2012. I'm very confident in our ability to execute on the plan, and believe that our leadership team is focused on the right priorities and certainly wiser and more capable than we were a year ago. We're all working very hard to create a high quality product, very competitive costs, solid financial returns, and to be a great place to work. Thank you for allowing me to make some comments this morning.

Okay. Thank you, Jerry. Next we'll turn the time to Mike Kraupp, Chief Financial Officer to review the financial results for the quarter.

Okay, again, good morning, all. I would like to extent my welcome and thank you as well for your continued interest in our Company. As Jerry said, we have had some pretty big challenges this year and I believe that we are appropriately addressing them, and we do look forward to having some of those issues behind us and be able to move forward and generate improved results for our shareholders and investors. I also wanted to thank our work force of over 18,000 from all three of our operating airlines and for their continued diligence in providing great experiences for our customers.

What I would like to do is follow the format of the press release in our discussion of the third quarter results. It obviously should go without saying, but I am going to say it, that we are disappointed in the results. We did have expectations of having some of our cost challenges we faced in the second quarter of this year somewhat mitigate and produce a little bit of pre-tax income. However, as we made progress on certain issues previously identifies, we experienced other cost challenges that basically offset that progress and produced $2.1 million pre-tax loss.

Overall block hours increased to 585,146 for the quarter just ended from 379,129 from the same quarter a year ago. That's a 54.3% increase, and is primarily related to the ExpressJet acquisition that we completed on November 12 of 2010. Without the ExpressJet operations ASA and SkyWest block hours increased about 1.4%.

Our total fleet totaled 727 aircraft as of September 30, compared to 466 for the same period last year. The increase of 261 was again, primarily related to acquiring of ExpressJet aircraft of about 242.

We have added two new CRJ700s in the quarter, and three used CRJ200s that are being flown in our Delta operations. During the fourth quarter we will deliver two additional CRJ700 that will complete our firm orders, and three more used CRJ200s all going into our Delta operations. As a result for the year we will have added 28 regional jets.

In discussing the results, also noted from the press release, again, we generated a pre-tax loss of $2.1 million for the quarter ended September 30, compared to $39.2 million of pre-tax income for the comparable period last year.

I want to walk through some items to help explain the difference of about $41.4 million of pre-tax reduction. Some of these items are going to be familiar as they represent carry overs from the second quarter. However, with some progress being made on them. I'll also talk about a couple of new items.

First with regards to the quarter we spent $10.7 million more in additional UA CRJ200 engine overhaul costs for the quarter just ended compared to the same period a year ago. The total spend on engine overhauls in this quarter was about $28 million versus $17 million we spent last year. We further believe the spend in the current quarter was the result of the timing of overhauls, and remind you that we under spent our expectation in the second quarter for these overhauls.

Next we incurred about $9.7 million in additional crew related costs due to the additional staffing needs. That amount includes crew labor, simulators, lodging, and per diem charges that are associated with that training.

This is an area where we did make improvement from the $18.1 million outlined in the second quarter as an overage, and is also a combination of crew labor dollars, simulator and lodging that also are tied to training. We do fully expect to be fully staffed by year end with all of our crews at all three operating entities.

We experienced a pre-tax loss of about $7 million at ExpressJet for the quarter just ended, and obviously we didn't have that entity last year, so that explains that difference. Also related to ExpressJet, when we were completing our 2010 tax return, we did identify some true-up items related to the acquisition.

One item in the amount of $5.7 million has been identified as a purchase accounting adjustment and is reflected in the accompanying statements. Also at the same time, we identified items totaling about $7 million that created tax benefit, and these items are reflected in the income tax benefit line. When considering both items in the amounts it resulted in a slight benefit.

As a reminder we recorded a gain on the acquisition in the fourth quarter of last year of about $15.7 million, and the $5.7 million that we've just adjusted downward is being offset against that, and that results in a net gain on the acquisition of about $10 million.

During the quarter, we also experienced $6.7 million of additional maintenance costs year-over-year as outlined in the release. This has to do with the timing of C-checks, repainting of aircraft and experiencing higher usage of aircraft parts. That $6.7 million breaks down to about $2.7 million in C-checks, $1.2 million of paint jobs and about $3 million in aircraft part and component repairs.

We also recorded an additional $4.8 million from our share of TRIP and Air Mekong losses resulting from our minority investment in these entities. We booked these amounts based on a 90-day lag, so the result recorded in September for us was reflective of each of these entities results from June.

The last couple of items that impacted revenue and in essence have offset each other, but we still wanted to make mention of them. We experienced a decreased revenue of about $5.3 million in the quarter just ended as a result of our second lowest rate provision from our Delta contract. And at the same time, we experienced a positive improvement of about $6 million in the pre-tax results of our pro-rate operations.

Let me switch to the balance sheet for just a minute. With regards to the balance sheet we did end the quarter with $724.2 million in cash and marketable securities, which represented a $40 million improvement from the second quarter ended in June. For the nine months ended September 30, our cash balances have declined $80 million which we think can be explained primarily with two items.

We did spend $56.2 million on stock repurchases year to date and also had a reduction in our working capital of about $19.5 million which is the result of pre-paid aircraft lease payments being made. New aircraft that are being delivered are being financed with long-term debt, and we have reduced our total debt by a net amount of $72 million for the nine months ended September 30.

Lastly, our updated ASM look for the fourth quarter, based on what we're seeing right now is about 8.95 billion ASMs. And with that I'll conclude my formal remarks, and turn the call back over to Brad.

Okay. Thank you, Mike. I wanted to just make a couple of very brief comments about some things that I feel are very important as we look to the future, and we look at the things that we know that we need to do, and the things that are of primary focus to us as we move forward.

The results of the year to date and of the quarter, as already been mentioned, are not what we had expected, and in fact Jerry indicated in his remarks, that we do have a very specific action plan that we are very focused on, which we believe will enable us to return not just to meaningful, but sustained profitability as we move forward. In spite of some of the challenges that we have had this year, and particularly this quarter, there are a lot of things that we're quite proud of, and things that we feel will really assist and help us as we move forward.

First of all, we didn't mention specifically this quarter, but the startup of the Alaska relationship and the Alaska flying that we began in the June quarter, continues to go very well, and we're very pleased with the operations and feel like we're having some real successes in that startup of that flying. As we've previously announced, we also begin the US Air operations this December with a meaningful ramp up to a 15 aircraft operation that will begin in December and then ramp up pretty quickly in the first quarter of 2012.

Mike indicated we have seen significant improvement in the quarter in our pro-rate flying. Not only has that flying improved and the financial performance improved, I think an important part of that flying is to continue to remind you that we do have what we think is some unusual flexibility in the aircraft flying in that operation, which we believe really mitigates the financial risks of that operation.

Mike did indicate as well that also in spite of the financial challenges of the quarter, our cash balance and liquidity did improve $40 million from the from June 30 balances. So we continue to pay very close attention, are very focused on the capital structure on our liquidity and the balance sheet in general. We feel the strength of our balance sheet and our overall financial position has been and still remains a significant competitive advantage as we feel that we are one of the best positioned regional carriers as to our financial strengths.

A little more specifics as to the action plan that we are very focused on, which we believe will return us to sustained and meaningful profitability. First of all we have talked in these calls for a long time about the timing difference in the United CRJ200 engine expenses. As we move through the end of 2012 and into 2013, that negative mismatch will go away, and that will assist in just eliminating that negative expense variance.

In addition to that as part of the plan, we need to eliminate and have plans to very specifically eliminate the negative variances that have come into this year in our true related costs. We also expect to receive and work very hard to realize continued benefits from our integration efforts and those integration efforts are really in two stages, both the integration of ASA and ExpressJet as well as just continued items of expense, cost reduction initiatives of things just generally throughout the combined companies that we can eliminate as far as redundant fees and duplicated efforts.

On top of that, we are working very specifically on a general cost initiative plan to reduce our controllable costs. I think as most of you know, the way that our models work today our bid rates are comprised of a grouping of expenses that we refer to as controllable costs. That controllable cost base is about $2 billion per year, and we have some initiatives very specifically to reduce our expenses in those controllable cost categories.

At the same time, we're very focused on the importance of improving the utilization of all of our asset, particularly of our aircraft. This is an effort that needs to be done in cooperation with our major carrier partners, as it comes to the scheduling, the utilization, the stage lengths and the fleet. And we very specifically need to improve the utilization of those assets.

In addition to that, our operational performance needs to result in the realization of additional performance incentives that are part of our contracts, and admittedly, we have not realized this year as many of those performance incentives as we need to. And very specifically, we need to position ourselves to achieve and realize more of those operational incentives.

Mike reviewed with you our progress on our stock repurchase program. I would just make a general comment that we still remain committed to that program, but as always we'll make decisions as to the level of our repurchases based on conditions that exist currently in the market.

Having said that, it's always very difficult to come up with adequate ways to express our appreciation to our employees. The employees of this Company are working very hard every day, it's just hard to come up with ways to properly express that gratitude, but we are sincerely grateful to all of the efforts of the men and women of SkyWest, Inc. With that we'll go ahead and conclude our remarks, and be happy to address some questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Duane Pfennigwerth of Evercore Partners. Please go ahead.

Hey, guys, good morning.

Good morning, Duane.

Wondered if you could talk a little bit about the turnover at ExpressJet and ASA. I think last quarter we talked about a hiring bubble and higher than expected turnover. Has that started to stabilize and when do you think training and staffing expense normalizes?

We'll have Brad Holt address that question.

Okay. Duane, actually it has stabilized. From a flight crew standpoint, it's running along very normal, and from the hiring standpoint at ExpressJet and ASA we're on top of the hiring, and staffing is looking great going forward.

The expense associated with training will normalize in the fourth quarter, and I don't expect that to be anything different in 2012 the way it looks right now. And the turnover in the rest of the departments at both companies, really tapered off towards the end of spring, and we're in good shape now.

Thank you. Our next question comes from Helane Becker of Dahlman Rose. Please go ahead.

Thanks very much, operator. Hi, gentlemen. My first question with respect to aircraft that you are taking this quarter. I was confused by what you were saying in terms of the CRJ700s, 200s and so on. Can you just give me a year end total aircraft yield and then the US Airways aircraft? Can I have a year end total of what there will be?

Helane, this is Mike. I think right now as of the end of the quarter we have 727. In my remarks, we're going to add two new CRJ700s that are being delivered from the factory, and we're also acquiring three other used CRJ200s, so we will be up to 732 by year end is what our expectation is.

Maybe just a little more color on that. We mentioned that the US Airways operation will be a 15 aircraft operation. We're not sourcing additional CRJ200s to do that flying. Those will be sourced from the existing fleet as we have certain aircraft coming out of some contracts.

We have some coming out of Delta, we have others that will be sourced from a couple of pro-rate lines. We have the discontinuation of the AirTran flying, and then just general changes in some of our planning as it relates to C-check lines, paint lines and that sort of thing. So that whole operation will be funded with existing aircraft.

Thank you. Our next question comes from Bob McAdoo of Avondale Partners. Please go ahead.

Hi. Just a couple quick ones. On the pro-rate flying, how many total aircraft is involved there? What is the total aircraft involved in? And could you tell us the mix of how much of that is jet versus turbo?

Bob, this is Mike again. We have a total of 57 aircraft as of September. 21 of those are the CRJ200s and 36 are the EMB-120s.

And one other quick thing. Seems like last time when we talked about Air Mekong and TRIP and whatever, the impression was that TRIP was doing fine, but Air Mekong as it was spooling up was generating losses.

In this particular thing where you have these losses, is it safe to assume that TRIP is still profitable or break-even, and the losses are coming out of the spool up of Mekong, or how should we think about that split of that?

Oh, how much is the -- yes?

Bob, you are kind of asking a general question, I guess about general direction of both entities and then --

I would love to have specific numbers, but I'm sure you won't give them.

No, but the second part is your asking in the quarter, you want the breakout of the losses, our share of the losses at both entities?

Yes. I guess the question is TRIP profitable and are all these losses coming out of Mekong and the losses at Mekong are greater than what you can make at TRIP? Or have they both turned into loss-making entities now? What's the status of these two companies?

So we get questions about why you are involved in this kind of thing, given all of the other balls you have got up in the air right now?

Okay. Well, first of all, Mike can go ahead and give the breakout of the losses between the two.

To your general question, Bob, yes, for this quarter they are losing money, and the break out of that is about $3.8 million came from TRIP, and about $1.7 million or so came from Air Mekong. Again, the $1.7 million on the Air Mekong side is simply the result of their startup losses, and we certainly hadn't expected for them to make money at this point in time.

Let me make a few comments, and if Jerry wants to add it to, certainly, that would be welcome as well. First of all as it relates to TRIP, please keep in mind that two things have changed a little bit at TRIP. Number one, their growth rate is a lot higher than I think what had originally been expected. They are very aggressively taking additional aircraft and ramping up the growth of that operation, and as that growth is taking place, the financial results have been less than expectedsimply because of a little bit of a change in their growth plan.

The other issue there is just that their results are very seasonal. So we have to keep those two things in mind.

The other issue to keep in mind is that -- I'm not going to go into a lot of detail about the contractual nature of the relationship, but we're in a good position where we can continue to evaluate very closely, and if or when we felt it appropriate to make a change in that relationship or liquidate part of that investment, or all of the investment. There are both just some financial reasons that we would, as well as some contractual issues that make that possible. So we're watching the situation closely, and we'll make some decisions as would seem appropriate.

Thank you. Our next question comes from Michael Linenberg of Deutsche Bank. Please go ahead.

Yes, hey, and good morning, everybody. Brad you probably have seen I think it was maybe in the "daily" a day or two ago, where Republic they had indicated that the 50 seat jets that they are flying, based on the rates they are getting that they're either not nearly as economic as in the past, or they are now uneconomic, and there was some talk about maybe renegotiating some of the leases.

Look they are low cost, you are also very low cost and operating 50 seaters. A lot has changed, you have a lot of 50 seaters. What are your thoughts on that? Is that a view that you share, and if so is there a plan maybe to address that?

Let me just say, yes, we did see that article. We do see the costs of our 50 seaters as they age, the expenses are going up as the fleets age.

We have done some things very specifically and what we think is aggressively to try to mitigate the impact of that. It's one thing that the size does help with in these instances, is that it does provide some leverage for us to negotiate what we think are some industry leading very competitive contracts that help mitigate the impact of some of those increasing costs. So that's our first focus is to do everything we can on the cost structure.

Secondly, we have made some references to some things we're trying to do that we think are different than what are being done in the market relative to a significant fleet replacement project as well as just a complete change of the model as to how we buy and maintain aircraft. And so we're doing some specific work in that model, working very hard on it, which is intended to address this very issue.

So first of all we're working on the cost side. And then trying to do some things that relates to fleet replacement to help address this.

Thank you. Our next question comes from [Savantee Seth] of Raymond James. Please go ahead.

Hi, thanks for taking my question. I was just wondering if you could give us an updated color on your expectations for integration synergies here, and the timing?

Yes. Okay. So I don't think that any of the numbers that we have shared in the past have really changed. From the outset, we expected to get around $60 million to $65 million of total synergy savings, and I'm talking specifically just the integration of ExpressJet into ASA. So we have already realized around $30 million of annual run rate type of savings.

The additional savings are somewhat dependent on two things. First of all single operating certificate, which we are very much on track with that SOC time line. We previously indicated that we expected to have SOC by the end of this year.

All of the submissions have been made to the FAA and we do expect approval somewhere around November 15. That's still very much on track, and by the way we think it will be the fastest SOC of this type that has ever been done in the industry, and it's very important because some of the remaining synergies are dependant on that SOC. But we also need to add some caution that simply because we have single operating certificate at ASA, Atlantic Southeast and ExpressJet -- and by the way we do plan to be operating as the new ExpressJet by January 1, but there are still parts of those integration savings that are dependent on the collective bargaining agreements, as it relates to our labor.

Jerry indicated in his comments that he felt the integration may take a little bit longer than we had originally expected. So I think those comments were primarily directed towards the success in getting those collective bargaining agreements completed. So the timing of realizing that additional $30 million to $35 million is going to be dependant to a large extent on the timing of the collective bargaining agreements. And that is the area where we need to give some caution; just recognizing that these negotiations take time.

Thank you. Our next question comes from Glenn Engel of Bank of America, Merrill Lynch. Please go ahead.

Two questions on the fleet side. One is I read somewhere that 15 aircraft CRJ700s are going to be taken away from Atlantic Southeast and given to GoJet, and wanted to know why that happened and what is the financial, ASM and revenue impact?

And two, there were some comments I think earlier about fleet replacement and where you are in terms of making a fleet replacement order.

Okay. Let me give a little color on that. First of all, yes, we are losing some 700s, but it's 12 not 15. Four of the airplanes are operating at SkyWest Airlines, eight of the aircraft are at Atlantic Southeast Airlines. These are airplanes that we brought into the fleet five years ago, and kind of an additional flying contract with Delta. That five-year contract ended.

As I mentioned these are in a separate contract that had a completely different rate structure to them that has not been -- I'll say this is a little sensitively, has not been our most productive contract. When the contract expired and we rebid the rates, we did not feel it appropriate to just renew the rates at the existing rate agreements, and as we said before, one of the things that we need to do is to be patient and more disciplined in some of our fleet decisions. This is one where we chose to exercise discipline rather than get too anxious to do an agreement that we didn't feel was appropriate.

So the decision was made by the major partner to put those airplanes somewhere else. And that's about all there is to say about that.

Let's see. Then your second part of the question was just about fleet replacement. Just the general statement here is that we control -- have either direct control or indirect control of a very large fleet. As we look to the future, and look to either the expiration of some of these aircraft coming up, either as to the contracts they are in with the major, or the underlying financings of these aircraft, we have to begin now to plan what we think will be a very significant fleet replacement.

So we have been in negotiations with all of the regional manufacturers. Very specifically on a program to replace the feet over the next several years/ A long-term project here that could be a seven to eight-year project.

So we have been making very good progress with the manufacturers. We issued an RFP back in January, and we have been working very diligently and aggressively on that program.

So I'll just say at this point, we're making progress. We are not ready at this point to make any firm decisions, as we're still in negotiations with manufacturers, but I will say, making very good progress to date.

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

Yes, just going back to the performance incentives that you mentioned. You're not realizing them, and what does it take to get there, and is this something you can do going forward from a scheduling standpoint or efficiencies in general?

I think there's a direct correlation here to some of the crew-related issues that we have had this year, the impact that has on our operational performance and the realization of some of the incentive dollars. So as we get some stabilization to our crews that has been mentioned previously, that Brad addressed, and some issues relative to some unplanned growth on the SkyWest Airlines site that we've had that happened really not an ideal timing as some of that was happening during the busy summer schedule.

As we get that stuff properly planned and get some stabilization that will have a direct impact on the operational performance of the entities, which should position us to realize additional performance incentives. So there's nothing we can do here, other than just improve our operational performance to realize better incentives.

Thank you --

Yes, Jerry is making a comment here, our September and October performance at both entities is seeing significant improvement.

Thank you, again. Our next question comes from Helane Becker of Dahlman Rose. Please go ahead.

Thanks, operator. Thanks, guys for taking my follow up question. Just a quick one on maintenance. How should we therefore based on your comments today think about fourth quarter maintenance costs? Do you have some number we should think that you are working towards? And 2012 outlook for maintenance costs.

Helane just in general, obviously the primary component there is those CRJ200 engine overhauls and that will be down about $10 million from what we just spent. As I mentioned on the call, we spent about $28 million this quarter. That will go back down, around $18 million, $19 million is our current estimate.

And then with regards to paint and some of these other things, excuse me -- I suspect that we'll see $2 million related to those. We're pretty heavy into our paint schedules and trying to catch-up on some of the paint jobs. So should have a reduction again in the CRJ200 overhauls, but slightly over is our estimate for some of these other items.

And I would just add that we have -- at least our two largest major partners have just been through some things -- transactions requiring [delivery] changes and that sort of thing, which is driving some of the additional paint and the timing of the paint, but that will get worked through by first half of 2012.

I think the additional important thing here is that -- I mean, our non-engine -- I mean, we have had a lot of focus, and a lot of discussion, not just today, but in all of our previous calls, about the engine maintenance part. And the non-engine maintenance is also an area of particular focus, and is a huge priority for us, and I just want to comment, -- and this is the area that is airframe inspections, the seat checks, landing gear overhauls, I mean, these types of things where we have made what I would just term as some pretty significant improvements, particularly at the Atlantic Southeast Airlines side of the business in the planning and renegotiating contracts, which are all reducing the costs of some of those non-engine maintenance expenses. And we have seen good progress in that cost category.

Thank you. (Operator Instructions). Our next question comes from Duane Pfennigwerth of Evercore Partners. Please go ahead.

Hi. Thanks for taking the follow-up. Just very briefly I want to go back to one of Jerry's comments about variability in utilization by your customers. Seems like perhaps they are using you to flex their capacity seasonally, which is stressing your profitability.

My question is what can you do to manage this? Because it feels like this is maybe not one time in nature, but a persistent trend. Can you make your labor pool more variable, or is there some mechanism in your contracts that you feel can be better enforced? Thanks.

Let me just make a couple of comments, Duane, this is Jerry. There may be others. You have described the problem quite well. And I think it syncs up with what Republic said a day or two ago as well. The utilization on the smaller aircraft is a bit of a challenge and it is not defined extremely well in the contracts about how those rates move when those utilizations move, so we're contractually talking with our major carrier partners about some alternatives to that to allow that flexibility.

Second of all with regard to the operational side of it, there are some things we can do with it, within a range. But for instance, managing within a 15% range, you can do what you just suggested in terms of vacations and the way you manage the labor force, but if the difference between the high month and the low month and the year gets beyond 10% or 15%, you have got some carrying costs of labor, because the training events that have to occur. Even if you just directly furloughed almost instantly. You can't furlough instantly because you have got to get people out of the left seat into the right seat and push it all backwards.

So there's a little bit of an equation with whether going through all of that is worth it in the time frame that you might need them back. So as it stands right now. We can do some things, but there are some things we can't do about it. And it's not necessarily because of labor contract, as much as just the practical notion of seniority when you move people back, it moves them in and out of different seats, and there are training events to accomplish that and it takes two or three months to do that, and then it's time to have them back.

So it's a practical problem we have to solve both internally, and with our major partners. It's unsolved at this moment. And that's Republic's comments on the same issue.

Sorry there's not a perfect solution to that one yet. We know what we need to do. It's not done yet, and it could be a persisting challenge. I'm sure the pressure will continue to be there.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rich for any closing remarks. Please go ahead, sir.

I don't have a lot more to say, other than to again, express our appreciation for your interest in SkyWest, and thank you for your participation today. And with that, we'll go ahead and conclude the call. Thank you very much.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.