SkyWest Inc (SKYW) 2011 Q4 法說會逐字稿

Good morning and welcome to the SkyWest fourth quarter 2011 earnings 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 Mr. Michael Kraupp, Chief Financial Officer and Treasurer. Please go ahead Sir.

Thank, operator, and thank you to those of you that are joining with us today on the call and via the Internet. We do appreciate your time and your interest in our Company. I have with me here today Jerry C Atkin, our Chairman and Chief Executive Officer, and various other staff members that will be assisting.

What I would like to do is go ahead and read the forward-looking statement for the call today. I'll then go over our fourth quarter results and then I will turn some time over to Jerry to go over some thoughts and comments relative to the quarter and the future and then we will open that up for some Q&A.

With regards to the forward looking statement. 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, and similar expressions identify forward-looking statements.

All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to update any forward-looking statement. Our actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons.

All right. Well, again, one of the first things I would like to do is obviously thank our work force as well. We've got over 18,000 employees within our combined operating airlines and I do want to say that we appreciate their continued diligence in providing very good experiences for our customers.

Let me just open up by saying as you can tell from the numbers in the press release that we continue to face challenges in the fourth quarter of this year. Internally we had previously estimated to be -- for the quarter results to be very similar to the third quarter and that is, had basically forecasted a breakeven result.

But we continue to experience some additional challenges with some of the same areas that we've been experiencing and you'll notice as I go through some of those items, they are going to be very familiar to you, namely the maintenance issues and challenges in our costs, as well as some crew costs.

From an overall perspective, our block hours did increase to 550,808 for the quarter ended December 31 from 466,633 from the same quarter a year ago. That results in a roughly 18% increase and is primarily related to having a full quarter of operations related to our ExpressJet Airlines entity and that's based on their acquisition date of November 12, of 2010.

Our total fleet at the end of the year was 732 aircraft. That breaks out 687 regional jets and 45 turbo prop aircraft and that compares to 710 aircraft for the same period last year. That net change on a year-over-year basis was 22 aircraft, which consists basically of acquiring four new CRJ-700s from Bombardier, 13 used CRJ-700s that have come from other carriers.

We also picked up 11 used CRJ-200s and then returned to lessors a combination of six CRJ-200s and the EMB120s. Incidentally, the four new CRJ-700s were financed with long-term debt and the remaining other aircraft that we picked up are on lease or sublease type of arrangements.

In discussing the fourth quarter results, I am going to follow the outline of the press release and what I want to do is obviously hone in on the $79.2 million of pretax change on a year-over-year basis.

First of all, I will say that we did have a couple of good guys in the fourth quarter of last year. Those are the first two items that are included in your press release, which consists of $15.6 million gain that we recorded in the fourth quarter of last year that was attributable to a gain on acquisition of ExpressJet Holdings.

And we also recorded $17.2 million of a good guy in contractual rate settlements from our major partners in the fourth quarter of last year as well. Those two items combined equal $32.8 million.

And then in addition, we had a $6.8 million negative swing in the results that are recorded from our ownership percentages in Air Mekong and TRIP Airlines. So, when you combine all those items together that equals about $39.6 million or roughly half of the comparable difference between the two quarters.

The reason I point those out is because those are, in our opinion, non-operational issues and shouldn't be attributed to any operating results. If I didn't get into the other items, let me spend just a couple of minutes on the other items that we had in the quarter.

We did incur $15.6 million in additional maintenance costs in the fourth quarter of this year over the previous year. They related primarily to labor, additional aircraft paint, parts, and heavy airframe check costs.

Incidentally, we spent about -- of that $15.6 million, about $11.8 million of it is related to these additional parts and component repairs that we're spending and we're finding ourselves in a position where with the general aging of the fleet and when these aircraft come in for heavy C checks, et cetera, we're just simply find ourselves replacing more of those parts than what we had previously anticipated.

We also have spent about $2.5 million in additional maintenance charges in that time. We've had a couple of different events that have affected that. We had a sizeable loss of mechanics in our ExpressJet operation that were hired in Atlanta by another party. So, we had to go into a hiring mode, if you will, and as a result of that incurred some additional overtime charges and what not.

We are incurring some additional time on the C checks and just in general things that are related to the general aging of our fleet. The next item that I want to talk about is that we experienced about a $15.2 million change in the pretax loss on our ExpressJet operations. We generated about $2.2 million of pretax income a year ago and then recorded a loss, a pretax loss on that for this year.

The items that are included in the ExpressJet operation really relate to spending additional costs on crews there. One of the most significant items that we had on the ExpressJet side was that as soon as we had acquired it, our major partner, United Continental, had come to us at that time and had dramatically increased the block hours from what the previous ExpressJet had been operating. As a result of that, we simply had to go to work hiring additional crews and spent additional dollars doing that over the course of the year.

Another item that had impact on the quarter year-over-year was that we did spend an additional $8 million of the crew related costs. That is not isolated to any one particular entity, but rather we experienced those staffing issues from all three of the operating airlines during the course of this last year.

Again, as a reminder from previous comments that we've made, that had to do with the fact that we took some additional aircraft during the year that was not built into our profit plan from the year before and then we had these additional block hour issues from our major partners in addition to other staffing issues.

We also, again, had the $6.8 million swing related to our foreign investments in Air Mekong and TRIP. That loss is primarily coming from TRIP and has to do with the fact that most of their financial obligations are denominated in US dollars and so with regards to the foreign currency fluctuation and subsequent translation on their financial statements, they have been taking hits with regard to that and then we're just simply recording our portion of that.

With regards to the balance sheet, we did end the quarter with $646.5 million in cash and marketable securities. This represented a reduction from the previous quarter ended September 30, as well as for the entire year. We ended last year at $804.8 million. So, we've used $158 million this year. If I could cover off just a couple of main items that caused that this year or where do we spend our money. Number one, we did spend about $69.1 million in stock repurchases and dividends.

We also experienced a $43.5 million increase in our working capital accounts, which consists primarily of spending about $30 million in additional prepaid lease rents on aircraft and the balance of that came from other working capital accounts.

And then lastly, we incurred a pretax loss of about $50 million for the year. In spite of the reduction in cash for the year, our balance sheet does remain strong with a current ratio of 2.05. We have $2.94 in cash per share, which translate to about 23% of our current stock price. Our book value per share has remained fairly consistent year-to-year at about $26.36.

For the quarter ended December, we also repurchased about 375,000 shares of our common stock at a cost of about $4.4 million. And we do have a remaining authorization at this time of about 1.6 million shares. We will continue to be in the market from time to time as we deem necessary.

Also, I would like to give you in my remarks the ASM forecast for next year. In Q1 we would anticipate a 8.9 billion ASMs. In the second quarter we would anticipate producing 9.3 billion. In the third quarter, 9.7 billion. And the fourth quarter, 9 billion. That makes 36.9 billion for the year. That will conclude my sort of formal remarks on the quarter and I'd like to turn the time over to Jerry now.

Good morning and thank you for your interest in SkyWest as an investment. I appreciate the opportunity with you this morning. I am going to comment a little bit more on the year taken as a whole and a little bit what we expect going forward.

This year was an initial year of transitioning the ExpressJet acquisition under the ownership and management of ASA and it started literally at the beginning of the year. Our expectations for a near-perfect execution were quite unrealistic from a financial perspective.

It took us longer to gain good control of the planning and financial management of ExpressJet than we had planned, which resulted in missed financial plans pretty much every quarter this year.

The challenge of getting control of ExpressJet also delayed cost reduction efforts at ASA. We experienced substantial contract rate reductions at ASA at the end of 2010 that affected all of 2011.

We had a substantial number of aircraft out of service during the year at both Companies and paint jobs for delivery changes for the new Delta and the new United all year long.

SkyWest added a number of aircraft last year -- SkyWest Airlines added a number of aircraft last year with the related training and fix up costs, as well as transitioning out of an AirTran relationship and preparing aircraft to enter into a new US Air flying contract, which we are part way through right now.

We experienced losses at both foreign investments that were higher than expected. What we did do right and well last year, ASA or the new ExpressJet did achieve some outstanding operational performance in 2011. We achieved single operating certificate in record time of one year.

The merger was complete technically and legally at the end of the year. The operational measures of completed flights and on-time flights and other measures have been at a very high level at ExpressJet for the fourth quarter and so far in 2012 and certainly it's our expectations to keep it that way.

We made progress on cost savings related to the combination of ASA and ExpressJet. During the fourth quarter we transitioned the operational control center and combined the Houston operation with the Atlanta operation and have all of the control center and the related crew support and scheduling all in one place in Atlanta, which has made both our ability to manage and plan both operations better and more efficient.

SkyWest Airlines is partly through the implementation of this new 15 aircraft flying contract with US Air and continues to produce excellent operating results. In all of this, we expect to make substantial improvement in financial results in 2012 to include earnings for the year. We do, however, expect a loss in the first quarter.

So far in 2012, we are ahead of our financial plan and expect to demonstrate much improved financial results in 2012. I would just remind you, as a little editorial here, that as a quality product, both of our carriers are at the top of the house in what they do in an on-time high completion factor operation and there really isn't any that are any better than that.

We also, because of our size, can do things for our major partner in sizes and sizes of fleet that others really can't do. We have an extremely talented group of people at all levels in both Companies. The competitive costs at SkyWest are in quite good shape. Can always be improved, but they are in good shape. ExpressJet has work to do, as we've made fairly clear. And we have work to do there and we expect to get them cost competitive over the next two years.

We do continue to have the best balance sheet in the industry, which gives us better financing costs and better financing availability than anybody else, and in general, I think we are extremely well prepared for the future, probably better than any regional in the United States. That completes my comments. We will answer questions, I think, for both the quarter and anything about the last year and going forward that you would like to ask.

(Operator Instructions) Helane Becker of Dahlman Rose.

Just a couple of things. One, are you scheduled to have any aircraft deliveries this year? Or can you just talk about what the retirements may look like to get to your almost $37 billion ASM forecast? I'm sorry, 37 billion ASM forecast.

Yes, Helane. First of all, we don't have any firm aircraft on delivery at this point in time. We only had four this last year and as we've said earlier in comments, have taken those. The overall fleet changes next year are pretty inconsequential. You have got the numbers that we ended with at this year.

I think this next year we go down to about 710 or so over the course of the year. So again, not material changes. I suspect we will have some of our long-term used CRJ-200s that we will let expire, as well as probably some of our older Brazilias. So, not material changes relative to the fleet. You can see that the overall ASM estimates are pretty flat on a year-over-year basis.

And then maybe, Jerry, could you maybe speak to the regional airline industry in general? You've seen, like me, we have seen a lot of change in the industry. We have seen the industry grow from a pro-rate to a CPA model. The major airlines don't seem to really -- either they don't understand or they don't care about the need for you to earn a decent return. And yet, you still need to address your shareholders, provide your employees with good carriers. So when you talk to your counterparts at the major airlines, what are they saying to you? Are they giving you any ideas for how things can improve going forward for you?

First of all, we are talking to our major carriers about the exact problem that you described, which I think would be increasingly squeezed margins, part of which are of the industry's own doing and part of it is our major carrier partners using us competitively against each other in some ways that our industry didn't respond very well to. We make no secret of that fact.

I think a couple of observations that go along with this, Helane. That is that as this is happening, for different reasons that the major carriers are consolidating you're seeing a fair amount of consolidation on the regional side. You have more sophisticated regionals that have been beat up in this process that know what has to happen going forward and there is not quite as many people to go to.

So I think we are gaining some discipline in our own industry for some of the same reasons that the major carriers are and we're talking with our major carrier partners and as such an important part of them, I think they have certainly some attitude of solving that. But it is a very different mindset than where they have been in the last few years and the competitive arrangement has just changed a little bit. I am hopeful of making some progress there. It is a change that is a pretty substantial change.

Okay. Thanks very much.

Duane Pfennigwerth, Evercore Partners.

Just wondered if you assumed no improvement in reimbursement levels or in rates from your partners, what is the earnings power potential of SkyWest and how do you get there?

That might take Mike and I both on that. Let me take a shot at it first. In this, in 2012 in general, we think we are able to move without rate changes, which we believe need to occur, but we don't have rate changes in our plan for the year, but we certainly have it in our, it isn't in our financial plan assumption. It is certainly on our agenda to deal with and improve it and expect to before year end. We have not built it into our plan.

Exclusive of those, all the plan -- the plan right now has basically $100 million pretax swing in it. That is not based on rate changes and is based on, and I can -- there is really four simplistic ways and that is the engine overhaul program that you may remember that we have been in for the last 2.5 years, completes about midyear this year and we have a $20 million improvement in 2012 simply because we don't have to overhaul as many engines. And we will have a $30 million improvement the year following that.

We do have some additional synergy savings or a combination savings from ExpressJet and ASA that will still be achieved this year, in addition to what were achieved last year. ASA has some competitive cost challenges that we can knock off another part of that this year.

And then the other part that we will have and we have got a dumb name for it, but we call it disturbance or distraction costs that last year of getting our handle on the planning part of ExpressJet and ASA in combination so that we could plan pilots properly for what we were flying. And that cost, I believe, is under control and won't show up again this year. Those four components are relatively close to the same number to make up the $100 million. We are hopeful of more on the rate side, but we have not put it in our financial plan at this point.

And then I know it is difficult to probably speak to at this point, but can you just give us a sense for the ways that you might be able to help American as they restructure and what that economic opportunity could be for the partners that ultimately end up helping them?

I understand the question and I can't answer it.

Duane, this is Mike. Let me just put a little more color on it and that is we are early into the American bankruptcy at this point in time. I think it is very safe to say that American is still trying to figure out what they would like to do opportunity wise. And that includes both opportunities at big American, as well as with American Eagle.

At this point in time, I think it is just uncertain for us to guesstimate or say what we may or may not do. We will have to stay tuned and probably determine most likely down the road whether or not there's any opportunity for that one. Again, it is an opportunity that we just haven't defined at this point in time.

What we could say is that our preparation and ability to help them in different ways that they would likely want to do are extremely good.

If I could just sneak one more in. As you look back on ExpressJet, not sure you would attempt something like that again or if that's even on the table strategically, but just from a contracting perspective, what would you have done differently to maybe avoid some of the losses that you incurred within ExpressJet. Thanks for taking the questions.

I think there's probably two things in doing it over again. I think we are glad that we did it. It accomplished some things and will accomplish some things long-term that are of value. I think the two things, one of them I'm not sure you could do it again. It was basically sort of a hostile type takeover.

So, our ability to do as complete of due diligence as you would like to do, we had some risk in what we had to see and the ability to put the entire management team in, which you would normally do to go through every bit of what they are responsible for so that they knew and got a handle on the planning ahead of time. Not unlike what a Delta, Northwest or a United Continental combination would do. We didn't have the benefit of that.

So, whether we would not do it again or not, I think we would just realize that the risk that we were taking and the variability that comes out of not being able to have the entire team scrub through it for several months and get a handle on the planning ahead of time is a very different risk quotient and we'd add a cost to that risk quotient to it and we'd bid it in the cost or we would not do it if we couldn't get that recovered.

I am still reasonably hopeful that, because the costs are so competitive that we agreed to that there is some adjustment can be made by our major partner to accommodate part of that to get it a little more squared up on the economics and the additional $20 million, $30 million of losses is a cost of doing it that was probably within our range, but we didn't have it in our plan that way.

Those are the two things that we missed a little bit and I don't know that how we would do it again would change in terms of our perspective and how we would price it would probably be just a little bit different.

Duane, let me also piggyback on that and say that from our perspective to, ExpressJet, we think, still makes long-term strategic sense. And with regards to getting access to their fleet and the expiration that will occur within their fleet over the upcoming years, it gives an opportunity to re-fleet that entity, hopefully, with larger gauge equipment. That's obviously subject to scope clause changes if possible.

Just to be added into Jerry's comments, we really feel that the ExpressJet acquisition in the long-term will turn out to be the right thing. We can see that in the future how this thing can be profitable if we can get to further cost reductions and better integration and just obtaining additional synergies. We don't think that we fully explored all of those things. This is phase 1 for us. Meaning we are into that first year. We executed on the PMI side by reorganizing the organization itself.

ExpressJet and ASA have now achieved single operating carrier status. That is probably the fastest that has ever been done in our airline industry. And they did that within the course of a year. The entities are also combined from a corporate standpoint now, with the remaining name being ExpressJet Airlines. We have achieved a lot of good things during the course of the year and we think long-term it does continue to make strategic sense.

I would just add in the meantime, that the ExpressJet acquisition it is the flying that it does and it is the nature of where it is being flown for United/Continental is that it is good long stage lengths, it's high utilization and thereby is a pretty efficient operation that allows us to have a petty good base to work on in terms of these costs things.

Thanks very much.

Jim Parker of Raymond James.

Mike, you mentioned earlier about, or maybe Jerry did as well on the cost increases that you've seen for maintenance that are anticipated and additional parts that are required and prices have gone up. We have seen that with several other regional airlines as well. And are you optimistic and, if you are, why that your legacy partners will cover that unexpected cost or cover part of it?

Jim, let me take a first stab at that. First of all, we are experiencing the additional cost. And I think what we have got to do now is it's incumbent upon us to go to our major partners to help them understand that. As Jerry had said earlier in his comments, those discussions have already started.

And, so it is a matter of really just educating our partners. We're hopeful that they will see that and the fact that the industry as a whole is experiencing just additional maintenance costs on these aircraft from what was previously anticipated as all of us acquired them. We're hopeful in that process. We certainly can't sit here today and make any guarantees as to what we will achieve. But again, we are confident and hopeful that our partners will see that and as a result we hope to get to some level of reimbursement for those additional cost.

What we do know, Jim, is, is that the entire regional industry, as well as the major carrier industry, does have increasing maintenance costs as their planes get older. So it isn't that somebody has got it figured out and somebody does not have it figured out, the entire industry has that and the -- as part of the feeding operation of the major carriers, that piece of it, which I think is important, will have to be dealt with in a way to make it work or it is not sustainable.

And a second question would be, you all have mentioned, just generally, about a new paradigm for regional airlines in working with your legacy partners and also working with manufacturers and financiers of aircraft. Where are you with that potential new business model?

I am going to be a little cagey about the answer, Jim, because some of it, the entirety of it is not something we want to share with our competitors. Having said that, it does involve our size and our financing strength that allows us to buy aircraft at lower prices, finance them at lower prices, and have other aspects of that that are an improvement.

There's a lot of other things that go with it that I really can't describe more than to say that we are well along in that process. Some of the things that we expected to have been better than we thought. Some of them were worse than we though, but in total, I think, our preparation and our ability for the next round of financing is we have some competitive benefits that we have enough of it actually nailed down.

There's some things that aren't nailed down, but there is enough nailed down that I'm pretty confident that we have some competitive advantages when that happens. It could happen tomorrow, which it won't happen tomorrow, but I think we've got quite a bit in the bag if it did.

All right, thank you.

Glenn Engle, Bank of America Merrill Lynch.

Can you go over pro forma how the profits were in the fourth quarter, profits and revenues for the fourth quarter and full year 2011? Pro-rate, not pro forma. Pro-rate business, the at risk business.

First of all, with regards to the fourth quarter, we did have some improvement on a year-over-year basis. In fact, it was just under $10 million. We were basically breakeven, slight profit a year ago operating with 61 aircraft in that fleet. This year we, again these are pretax operating income numbers, we were about $10 million.

$10 million plus.

$10 million plus, yes. So, we had some nice [improvements] in that pro-rate business on a year-over-year basis.

And for the revenues?

We typically don't break out the revenues on that, Glenn. It is just included as a part of our passenger revenues.

How many airplanes was it?

61. We had 61 in both periods.

Second, you touched a little bit on the ExpressJet and mechanics. Can you talk about turn over in attrition in general with your labor groups?

In general, the attrition is -- outside of that issue that we talked about on the ExpressJet side, which was ASA in Atlanta, outside of that there is virtually little to no turnover within our maintenance rate. Our pilots run about probably 10 a month for each of the airlines, so 20 in total, and that's on a base of about 7000 pilots. The flight attendants are more than that. I don't have exact numbers on that, but probably as much as double what is happening on the pilot side. And then traditional turnover within the customer service ranks. No real changes there.

Finally, there's new pilot fatigue rules that are coming out next year. Can you talk at all about how they may impact?

Glenn, we haven't fully quantified the impact of that yet. We're certainly aware of the issue, the regulations. Each of our respective operating airlines are analyzing that right now. The other thing that we are doing is comparing where we currently are in relation to those regulations and I'm sure that you are going to find throughout the industry that we are all a little bit different in how we operate. So, we've gone to work engaging our operational groups in that process. We don't have any numbers, so I am not able to throw anything out at this point in time, but it's probably something that we can do on a future quarterly call.

Let me just add my perspective to it, Glenn. And that is there's three components to it. One is, is that at face value it would appear that it would add some expenses from the pilot stand point, because it requires more rest and more things that you have to work around, A. B, what Mike just said is we are probably part way there into what we are already doing. Our practices are part way to where they are already doing.

The other part of it is the regulation allows individual carriers to demonstrate that they can provide adequate fatigue management and alternative methods from what the regulation says. So, we may be able to accomplish what it says in ways that will be more efficient than it looks like at face value. It is probably not going to be a zero hit, but how much of a hit or increase it will be is not perfectly clear. It is within, certainly, under a -- it's a 5% or less number, at least from what I know about it. But that is a pretty guessy number just to say it is not 20%. It is not ridiculous, but it is not zero either.

What is driving the bit pro-rate gains?

It is really pricing. We started this about a year ago in the fourth quarter and our folks have done a lot better job of learning some yield management, if you will, and have gained some expertise through the course (technical difficulties) translates into some pricing.

Well, I would add to it that what the major carriers have been able to do this last year of increase their yields better than they have been for quite a while and we are enjoying riding along with that in the pro-rate side.

Yes.

Thank you very much.

(Operator Instructions) Mike Linenberg of Deutsche Bank.

Just the loss at TRIP and Air Mekong, the $6.8 million, what does that compare to last year? What was that number?

That number last year was a positive of about $2 million.

The swing of $8 million.

$0.8 million. The loss was only $4 million this year. So the swing is, or the change is $6.8 million.

Jerry, did you -- so ExpressJet, did you say that -- you made a comment about achieving cost competitiveness at ExJet and did you say over the next two years? I want to get a clarification.

What I was suggesting is we admittedly have a gap in terms of our cost competitiveness at the ExpressJet operation. We will get some of it this year. It'll take a least a second year and maybe a small part of the third year to get it to fully competitive costs.

Why not faster? Why can't that be on a faster timetable?

We're trying to make it faster, but we were so unrealistic in so many things last year, we're trying to be a little bit more realistic this year.

My last question, with respect to -- I think, Mike, you said that the fleet -- it sounds like it is going to drop by about 10 or 12 shells over the next year. I think you are going to get back to I think you said like something like 710. Just based on aircraft that are either coming off lease or aircraft that are approaching the end of their term or maybe that are fully paid for with respect to mortgages, how much more could you flex down? How many more airplanes could you get out of your fleet with minimal cost? Where do things stand in that regard?

First of all, as you play this out the next couple of years and really what's been happening to us, Mike, is we've actually had a larger complement of our CRJ-200s, if you will, that were set to expire and have done so from original leases, but we are finding that our major partners are wanting to extend those. But rather than just having normal lease terms where aircraft are going to be done and over with and go back, our major partners have wanted us to continue to fly them.

Now that answer is a little different relative to the United signing of our business versus the Delta side. I think you've heard public statements from Delta that have indicated that they would like to have CRJ-200s go away. And I suspect as we move forward in the next couple of years, that as we have CRJ-200s, and again those numbers are fairly small until we get out to the 2014, 2015 timeframe and beyond.

Outside of that, our estimates would be for Delta to probably let those aircraft maybe go back, based on what we are currently seeing. And then we would expect or anticipate that United, if past practice over the course of these last couple years is any indicator, it may be likely that they would extend them.

From that perspective, certainly during the rest of the 2012 timeframe and maybe even to 2013, we don't necessarily see material changes there. We do have a portion of our ERJ fleet that is with Continental United that will expire in 2013. Again, it is unknown because that is out into the future. It is unknown as to what United will want for us to do with those aircraft at that time. So, I think, in answer to your question, relatively little changes over the next couple of years.

But one [smashed] act that may be in answer to your question and maybe it isn't, Mike, is -- and Mike Kraupp's going to have to help me with the answer. We have a number of short term that are extensions that we could be out of in less than six months. And how many airplanes?

There's 20 of those, Jerry.

There is 20 of those. But, they are doing useful things. They are either on a contract or in a pro-rate business right now, but that's a flexibility. The rest of them there's the contract with major carrier partners and the ownership contract, whatever that is. And they pretty much match and there's not a whole lot of reduction activity over the last couple of years -- or the next couple of years.

That's very helpful. All right, gentlemen, thank you.

(Operator Instructions). Ray Neidl, Maxim Group.

Just to summarize some of the things you were talking about with your maintenance costs and your fleet. I think you had said earlier, over the next five years there will have be some major re-fleeting going on and that gives you a little bit more flexibility with how the industry is changing and what the needs might be for the regionals. In what direction, longer term, do you see the re-fleeting moving. Is it away from turbo props entirely, fewer 50 seaters, more larger aircraft in the 70 or 90 seat area? Do you think that is the future of the industry and do you think that's the future of SkyWest?

Let me take a crack at that. Directionally and with certainty, there will be less -- fewer 50 seaters by 2020, for instance. There will be more of the over than 50 seaters, in my opinion. The turboprops are still a bit of a question.

The small turboprops are unique answers to real small, very small community questions. The 30 seaters, we've still got some. Most of the Saabs are gone so the 30 seat sizes literally all not quite disappeared from the landscape, but what hasn't will over the next few years, I would expect You have got quite a few of the 19 seaters doing some interesting things.

And then you get into the large turboprops and there's been a question whether the Q400 and the ATRs are sort of a (inaudible) alternative and a lot of different things. That one is still an unknown to me. I wouldn't bet anything on whether those are going to be around or there will be none of them by 2020. I'm not sure in my mind they play a big role going forward. Could be wrong about that.

And then it's really a question of what size. The number of seats may not change that much going forward, but I think they will shift from fewer 50 seaters. And it is just really a matter of the fuel efficiency as hubs get combined, ala United/Continental, ala Delta, they're concentrating on a few fewer hubs it looks to me or maybe that is my opinion. Maybe that fact, it's a little bit of both probably.

But as that happens, it'll justify the little bit larger ones, which if you can and they are a little bit more efficient. Now, obviously, you know there is the labor quotient in there. So, the fewer 50 seaters has got to be a fact, because nobody's making any new ones and they are getting older and some of them won't last forever.

Regardless of what anybody thinks strategically, there's no question but what the 50 seaters are going to be reduced and to what degree the over 50 seaters is able to be increased is going to be based on the scope clause and labors cooperation in doing it, but the fact that there is the smallest airplane, if you put it in all economy, I think, is the 320 or 737-800 that any major carriers ordered in the next little while. So, there's still an awfully big gap between that and zero to be filled.

So exactly how labor and the economic -- and the customer demand is going to -- but, directionally, I think it is the direction that I just pointed out. We are prepared to do that in different size categories. And that is part of the question that we got asked a little earlier about the size of our airplanes is the agreements that we are reaching with suppliers it expands the whole size that we can switch from one to another.

Basically, it seems to me with higher fuel costs, that the legacy carriers are going to lose all appetite for feed from smaller cities that use less than 50 seater aircraft, which means everything below that, they are not going to want to rent from the regional carriers anymore. Do you think that is a fair assessment?

I don't know whether that's a prediction or a statement of what's already happened. I'd say it is closer to what has already happened.

Yes, that's what I'm seeing as well. The last thing is, your independent flying component, is that something that you would want to keep or is that something that you think that is not worth having and will eventually phase out of?

Here is why we did it and why we think it has value. We did it because we didn't know clearly what the future is going to be and we still don't. We thought it had value to get in that and know what the strengths and what the challenges were and to develop some expertise in that which we'd kind of lost from 20 years ago when we did that. So, we've reconstructed the expertise and the ability.

Frankly, I've been a little -- it has been a little better than I thought it would be. To say it is just a perfect answer for a lot of things right now, it is not. But, we're in a position if things should change, we know what it's strengths and challenges are and what we'd need to do to go forward with that in a meaningful way. It could be part of a solution with one or more of our major partners.

Okay, great. That's a great thought. Thank you, guys.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Michael Kraupp for any closing remarks.

Thank you all for participating. Your time is appreciated, your interest in our Company is appreciated and we'll look forward to upcoming calls. Thanks, again.

Thank you.

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