SkyWest Inc (SKYW) 2012 Q1 法說會逐字稿

Good day and welcome to the SkyWest, Inc. first quarter 2012 earnings conference call. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Bradford Rich, President of SkyWest, Inc. Please go ahead.

Thank you, Operator. Thank you to all of you for participating with us this morning. As always, I very much appreciate your continuing interest in SkyWest, particularly in spite of some of the challenges that we are experiencing at SkyWest as well as some of the challenges and the distractions just in our industry specifically. So having said all of that we know there are some distractions, there are a lot of things competing for your time and we do very much appreciate your continuing support and interest in the Company.

Before we get into a discussion of the results, I would like to just introduce those who will be participating here with me on the call today. We have here at our headquarters Chip Childs the President and Chief Operating Officer of SkyWest Airlines. Brad Holt is here with us, the President and Chief Operating Officer of ExpressJet and Mike Kraupp our Chief Financial Officer and Treasurer. We also have other members and officers of the company here in the room with us and will participate as necessary. I would now like to turn the time to Mike to read our Safe Harbor on 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 and similar expressions identify forward-looking statements. All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date. SkyWest assumes no obligation to update any forward-looking statement. Actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons.

All right. Having said that let's jump right into a discussion of the results. I assume that you all have seen our announcement this morning and probably have access to the press release. As always, we will stick pretty close to the press release as the outline for our discussion today. We intend -- let's see. As far as I just -- the outline of our discussion this morning I will start by making just some brief comments. I will then turn the time to Mike to review in more detail the financial results of the quarter and then we will open it up for discussions and we will have the whole team here available to answer your questions.

First of all, as I already indicated we are acutely aware of the challenges that we have had not only specifically to SkyWest and our companies but the challenges and difficulties of our industry. There are a lot of things that are creating some distraction. There are a lot of our peers and others in the industry that are experiencing some difficulties. We are well aware of that. And having said that, I just want to begin by expressing our sincere gratitude to all of the people of SkyWest and the companies of SkyWest.

We have approximately 20,000 employees who are working very hard. They are working with passion and energy and commitment to create the best quality product in this industry and they are doing it completing approximately 4,000 flights daily. It is a significant operation and we are just very grateful and appreciative for all of our people -- appreciative for all of our people and their efforts. As far as our results of the quarter.

Our first quarter performance was a significant improvement compared to our first quarter performance of 2011 where we had just about $10.4 million net change quarter-over-quarter. It also represents a significant improvement from the fourth quarter about a $17.3 million change from just the December quarter and I would also mention that it is also a significant improvement over our own internal budgets and projections. I think a lot of things that we want to get into this morning, of particular note I would emphasize that the month of March was the first month that the ExJet the combined ExJet operation had a net profit since the integration efforts began in November of 2010.

I think also worthy of pointing out is that embedded in the $700,000 net loss in combined operations for the quarter, embedded in those results is about a $4.7 million pretax loss from our share of the Trip and Air Mekong operations. Obviously when you net out those passive losses from those investments, we would have generated positive net income from our own core airline operations of just over $2 million. Although that is not an acceptable rate of return we are certainly pleased with the directional improvement.

I assure you that we do remain very focused on our continuing post merger integration efforts, on specific cost reduction initiatives, as well as revenue enhancement opportunities that will come as a result of increased productivity and increased utilization at all of our companies. Our leadership teams and our front line employees combined are working very hard at continuing our plan to return to consistent and sustained profitability. I think as most all of you know, one of the most critical factors in our performance and the things that will affect us specifically and as importantly and materially as anything is just our focus on the fundamental quality and reliability of our airline operations. During the first quarter our adjusted completion factors were 99.45 and 99.5 at SkyWest Airlines and ExpressJet respectively.

As far as ExpressJet is concerned we think that is the best performing first quarter that we could find in recent -- well, I think just that, that we could find, and in fact in the month of April our overall adjusted completion at ExpressJet was 99.8%. So we are very proud of the overall operational performance and just the overall quality at both of the carriers. We have also had other successes and accomplishments during the quarter.

We did complete what we referred to as phase two of our US Airways startup. We added an additional six aircraft to that operation during the quarter for an additional -- for a total of 15 aircraft. That is 14 aircraft in contract operations with US Airways as well as one aircraft that is doing pro rate flying. We also completed the corporate merger between ASA and ExpressJet. That was completed on January 1 of 2012.

Now, I think another thing that we are also very proud of and would emphasize for the third consecutive year SkyWest Airlines was awarded the most reliable CRJ 200 operator in the Americas and congratulations to our leadership teams and our maintenance groups and all involved. That takes a whole team of people and we are proud of the accomplishment there. Let me just conclude by making just a few comments or share some observations about the condition or the status of our industry. Obviously our industry is in a state change and continuing evolution. There have been many of our peers that have had some difficulties is as well as just the continued evolution of the industry at the mainline level.

I think what the way that I would summarize this is that we are in a period now where our strategic positioning is probably more important now than it has ever been. Not only are we extremely focused on the things that I mentioned earlier in finding ways to create revenue enhancement through productivity and efficiency and utilization, but we are focused and remain focused on post merger integration activities, specific cost reduction initiatives to make sure that we are as competitive as possible. But in addition to that our strategic positioning I think is worthy of reviewing and mentioning. When we think of strategic positioning we think of things like the strength of our balance sheet, our liquidity, our access to capital at competitive rates where we clearly think we have a strategic advantage in the regional airline space.

We are well diversified now with the two largest aircraft fleets in the world on both Bombardier product and ERJ product. We are well positioned strategically all across the country in all of the major hubs and locations with a group of 20,000 aviation professionals that gives us a breadth and depth of presence across the United States that can't be matched by any other carrier. So when you put all of those things together although the industry has some challenges, we still think we are the best positioned with our people, our financial resources, the strength and breadth and depth of our platform across the country which position us to take advantage of opportunities whether the opportunities come from the difficulties of others, whether it comes by the restructuring or reallocation of aircraft at the major level.

Wherever and, however, it comes we just believe we are very well positioned strategically to take advantage of whatever opportunities may become available in this space. We are confident in our people and our positioning and think that we will be very productive as we head to the future. Having said that, I will now turn the time to Mike to review in a little more detail the specifics of our financials for the quarter.

Thank you, Brad. First of all, let me thank all of you for joining us on the call today as we discuss our first quarter 2012 results. We do appreciate your time today and your interest in the Company. I would also like to join Brad in thanking our employees for all that they are doing to help make us successful and to ensure that our passengers are having positive experiences as they fly with us.

As you can also tell we are also happy to report on much improved results on a year-over-year basis. We recognize the fact that we still have much work to do but we are committed to achieving profitability this year and the improved results that we just achieved from this quarter are in the right direction to help us achieve that objective. I'm just going to highlight a few things here. I will keep my comments fairly brief here this morning.

Starting with our production or block hours we achieved a net increase of 3.1 or about 16,500 hours on a year-over-year basis. That was actually after reducing or a planned reduction in our prorate flying block hours of about 4900. As you can see, our contract flying actually increased 21,400 hours on a year-over-year basis or about 4.3%. Our total fleet at the end of March 31, 2012 was 727 aircraft compared to 713 aircraft for the same period last year. That's a net change of 14 aircraft consisted of primarily adding some used 200s and 700s.

You can also see from the press release this morning that we did experience a $17.3 million reduction in our pretax loss so we reported a pretax loss this quarter of $1.2 million compared to the pretax loss of $18.5 million for the same period last year. That came in the form of some increased revenues and reduced costs that I will talk about in just a minute. After excluding the higher pass through costs primarily fuel and engine overhauls and the reduction in prorate revenues from our reduced flying our operating revenues actually increased $30.1 million from the increased block hour production that I noted previously.

We also intentionally reduced our prorate flying aircraft to 57 for the quarter just ended compared to 64 for the same period last year. As a result we reduced the pretax loss from $6.8 million a year ago to $2.2 million this period which was an improvement of about $4.5 million and it is coming primarily from pricing. Our revenue per ASM in the pro rate operations has increased 14.6%. Those improvements were actually offset by us incurring another $5.7 million inadditional United engine overhaul costs which were planned.

We also incurred an additional $4.1 million in losses attributable to our ownership in international investments on a year-over-year basis. And lastly we incurred some additional employer related benefit costs of $3.8 million quarter over quarter. When taking into account the block hour increase and excluding increased fuel, our net change in operating costs was only 1.8%. So we feel good about that improvement in light of the cost structure and the cost increases that we have had last year. So good directional movement on that.

With regards to the balance sheet we ended the quarter with $583.3 million in cash and equivalents which was the reduction of about 63 million from the quarter ended December 31, 2011. We incurred about $58 million in prepaid lease payments and experienced an increase in other working capital accounts of about $7 million primarily receivables. These amounts were offset by the issuance of about $2 million in common stock from our employee stock purchase programs the combination of which resulted in a net change in cash and cash equivalents.

I will also make you aware that from a cash flow perspective this is a heavy quarter for us. We were about break even obviously from operations and then spent these additional dollars in working capital accounts. We do expect to generate cash throughout the remaining quarters.

Lastly, let me give you estimated ASM production for the remaining three quarters. In the second quarter, ASMs are currently estimated at $9.3 billion,Q3 is $9.7 billion, Q4 is $9.0 billion. And with that I'll conclude my formal remarks and turn the call back over to you, Brad.

Okay. Thank you. We will now just open it up to you for if you have some questions.

Thank you. (Operator Instructions). Our first question will come from Michael Linenberg of Deutsche Bank. Please go ahead.

Hey, guys, Brad, Mike. A couple of questions here. With the engine overhaul costs for the CRJ 200 I guess we are up to $21.5 million, when do we start seeing that, as we look out over the next few quarters? How does that trend over the --

Mike (inaudible)

Okay, Mike with regards to your question we will have probably a similar or close to that spend in the second quarter. That will then go down in the third and the fourth quarters primarily to where the revenue or the rates we're recovering from United will match the overhaul costs and then in 2013 and beyond that will flip to where it will be positive again with revenues in excess of the costs.

I see. So then third and fourth quarter will go down but it will still be some charge, right?

Right.

And then moving to positive territory in --

2013.

2013. How fast does it come down in the third and fourth quarter, though? Does it go from $21.5 millionto $15 million, $10 million...

We'll have expenditures of $21.5 millionand then close to that or slightly less in the second quarter and the third and the fourth quarters we go down real close, about half of that.

Okay, good. Okay, good. I want to go back to just the international business that you have, the Air Mekong and the Trip. The way it's here, it says it's an additional $4.1 million loss attributable to them, so I just want to make sure I'm reading --You are saying that the loss expanded by $4.1 million versus what you -- (multiple speakers)

Yes.

What was the baseline last year?

It was close to break even actually, about $0.5 million loss.

I see. Then my follow-up is what -- I mean these businesses have been generating losses and I know you account for them under the equity method and looks like that they may continue to generate losses. What sort of recourse do you have to get out of those investments and what can you take out of them? I mean what is your staying power and your patience with these investments?

Mike, I think we need to answer them both from a book accounting standpoint and then relative to overall value created in those investments because from a just a book income perspective, yes, they have generated losses. On the Air Mekong side maybe it is just worth pointing out the accounting for that investment. Our investment account where we expect by the end of the second quarter our investment account in Air Mekong will be at zero.

So that is good

Which means we will not be booking through our income statement.

Yes.

Our share of those losses. Financial impact from that moving forward should be zero.

Okay. Brad what would you say Air Mekong was this quarter? It was most of it? Was it half of it? Was it --

It was a third of it.

Okay that is helpful. But then Trip is you have, what, 26% of Trip and that is ongoing?

That is ongoing. We need to look at that I think from two perspectives. First of all Trip is growing very fast and the rapid growth is generating some financial -- their financial productivity is less than we had expected it to be. The strong majority of the booked loss is simply due to currency, okay? So operationally they are doing better than would be reflected in the losses that are being booked. When it is a good share of it coming just from the currency translation.

Okay.

Next of all is we just look at the value that is being created on the investment. Our share of the loss is one thing. Our value in the invested capital relative to what we think the market value of the investment is, is a totally different thing. We think we have a fairly strong embedded gain in that investment that just isn't being -- just not being reflected in the financials. We do have by contract some rights to liquidate that investment. We have ongoing discussions with Trip about that, we are in those discussions but we are willing to absorb a little bit of negative financial impact when the overall value of the investment we believe is accreting.

Okay. Very good. Thank you.

You're welcome.

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

Thanks very much, Operator. Hi, guys. Can you just give me the number of aircraft you have at the end of the next three quarters?

Helane I don't think we have that data with us here in the room. Can Ihandle that with you offline after?

Sure. No problem at all. Or e-mail or whatever. The other questions I had were really with respect to some of the changes.

You guys really went did very well in getting to an operating income this quarter from the losses that you had been seeing. So you must feel good about that but the question is so is it sustainable now? So have you made enough changes and not so much on your cost side because there is only so much you can do. The revenue side with United and as your largest partner and Delta I guess, too, to feel comfortable with the changes you are making will last?

So Obviously you know that that question gets us into some sensitive territory because we are not in the business of forecasting our earnings in this context. Let me just speak to it directionally and conceptually.

And also Brad, speak it to with respect to the 50-seaters. That seems to be the problem. Nobody seems to like the 50-seaters anymore. So maybe just talk about it big picture wise. That would be helpful.

We feel a little differently than I think a lot of people do in the market about the 50 seat market. It is no secret that particularly one of our partners has been fairly vocal about the fact that they believe they have too many 50-seaters. Okay, so we know that and what we are doing first and foremost is our overall objective is to meet the needs of our partners. So we have a very strong interest and objective to do all that we can to run our business in a way that meets the need of those partners. So what that means and particularly what it means to us in respect to the 50 seat environment is that we are doing whatever we can, however, we can to find creative ways to use that fleet.

We have put airplanes into prorate where we have seen an opportunity to help partners and to help us in developing certain very selective markets that we think can work in that environment. We are trying to figure out, just generally be very receptive and creative and trying to solve that issue. When we look at the factors that are involved in this whole issue certainly the market knows that when fuel prices go up the economics of the 50-seater change. And that just is -- those are the facts.

However, when we take it beyond just fuel and look at all of the other factors involved we are just in a state admittedly of a little uncertainty in this area but what we do believe firmly is that even though the market and particularly for 50-seaters is evolving, there is going be a market because in one is making 50-seaters. Scope clauses are not becoming unlimited by any stretch, so depending on the evolution of the scopes, depending on what happens with technology, all of those impact this question but at the end of the day, number one we have our contracts lined up better with our financial exposures on the 50 seat fleet, better than any regional period.

We do not have a lot of tail exposure, I mean very little. Airplanes will be going away naturally but then we feel strongly that through refurbishments or whatever there is still going to be a need and a place for 50 seat aircraft in the market. Our challenge is to continue working very aggressively on our cost structure to make that we can economically operate those airplanes where they will create value to our partners and that is where our focus is.

That's great. That's a great answer. Thank you for your time. Thank you very much.

You're welcome.

The next reason came from Ray Neidl of Maxim Group. Please go ahead.

Just a couple of general things. I know you are turning cash flow positive for the rest of the year but your cash levels do continue to go down generally I think. And for opportunities going forward or just for safety do you think you may have to do a cash raise in some form to continue the strong liquidity that you have had over the past couple of years especially in the light where I think you said before that you have to do a major refleeting over the next five years?

Ray, this is a very good question. I'm glad you have asked it. First of all, I just want to be very clear. We have a couple of things happening that are affecting cash flow. Not only is the first quarter a very heavy cash outflow quarter both in payments of debt and pre-payments of leases but when we look at the profile of our leases and if you look at them so within a 12-month period the first quarter is the heaviest.

When you look at them over the full-term of the leases we also is have a bit of a bell curve that is created simply that was created by the large ramp up and expansion of aircraft into the fleet several years ago that has created a bell curve in about a three year period that we are in right now, where so we have first quarter that is heavy. And then in the full term of the lease we have a three year period that is heavy. We have a bell curve that is within a bell curve and we are in that right now and it will be tailing off both within the year and within the three year period. So our cash generation we believe will get back quite strongly positive. And there will not be a need for an external any kind of a transaction or a cash raise.

Great. I ask you this question almost every quarter and get the same answer about the independent flying you want to keep doing that to make sure that you still have that skill level in case the industry further changes but what are your plans now and where do you stand now? Is that sector going to be growing or shrinking or staying the same size?

I'm going to ask Chip to think about -- let me take it quick and then I will have Chip. First of all, yes. We believe strongly we have the skill and talent level to manage a very effective prorate operation and it is improving and we expect it to be profitable for this year. The other issue, I just ask you to keep in mind as we have said just about every quarter is the strong majority at least of the CRJs that we got in prorate are short-term commitments. So we are developing it. We think it is going to be profitable. And if it isn't, we have short-term flexibility with those airplanes. Chip, I will let you speak to it.

I think Brad summarized it very well. As we look at what particularly 50-seater do from a contractual perspective with our partners we he have a fair amount of (inaudible) that are under the prorate model. But as we continue to hone this in we have very good improvement with this model over the last two to three years but it has been very disciplined on the markets that we serve, the costs associated with it and the decisions of how that goes. I think in the future we are going to continue to explore this concept maybe even a little bit beyond the prorate concept to where we have models that work well for our partners. That's the majority of what we want to assess going forward. What works well with our partners. Is there a model in it there that is prorate or a hybrid of prorate, interline, hybrid prorate contract those types of things are things that we continue to always evaluate. But there's a good trend with this right now. We keep a very close eye on fuel. So from that perspective we are cautiously optimistic and continue to be creative about how we can get some of this to continue to work going forward.

Great. Thank you.

You're welcome.

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

Good morning to all.

Hi, Jim. (multiple speakers)

Okay it appears that SkyWest Airlines is considerably more profitable than ExJet which is the former ASA and former ExJet. What do you need to do from this point going forward to have those ExpressJet operations meet your original game plan before you acquired ExJet and to bring that up to SkyWest Airlines level?

So a very good question. Let me just make a -- with the current structure of the ExpressJet I will say it in a way of both contracts and capital structure and aircraft exposure. I don't believe the ExpressJet operations will ever be at the same level of profitability as the SkyWest system and quite honestly it wasn't intended to be nor did we invest capital at the same levels that would warrant that. And the reason being is that it's a fundamentally different structure. The biggest difference being that we have absolutely no tail risk on the legacy ExpressJet fleet.

As such the rates of return and they were not expected to be as significant nor was the invested equity as significant. How to having said that do we expect that we can get ExpressJet at sustained levels of profitability and the answer to that is, yes. We have to do it in cooperation with contracts that recognize differing varying levels of stage length and utilization. That is something that we have to work with our partners. As we change out and replace the fleet we believe the economics of that specific ExpressJet model will also change.

We believe what we see happening at least at the mainline level is more of a move away from the major airlines financing and owning the regional fleets and as we take that risk and use the strength of our credit and our access to capital the economics of that model will change so that is one factor. The continuing focus on the post merger integration and then really nothing to do with integration, just our focus on cost reduction initiatives when you combine all of those things we believe we can get ExpressJet at acceptable rates of returns and consistently profitable.

The status of the collective bargaining agreement that you are working on with ExJet pilots, what is that?

I will have Brad Holt speak to that.

Hey, Jim. Well, the best is just a quick overview. I think progress with all of our groups are -- is moving along just about the way we had expected. Pilots specifically I think were making good progress. Everyone is working well, together and I'm optimistic that we are going to be able to come to an agreement. With them.

Okay. Thank you.

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

This is actually Steven Lee stepping in for DuaneJust two quick questions. Do you see any opportunity arising for SkyWest result of Pinnacle's restructuring? And is it safe to say that we are pretty much through with all of your staffing-related issues? Thank you.

Some -- two very good questions. First of all, I do believe we have got a very good handle now on our staffing during the integration and all of that and some things that we have that happened last summer and increases in our schedules and us taking on some additional flying in the summer. We did have some struggles last year and I do believe that part is under control now. As to the first part of the question, what was the first part of the question?

Pinnacle.

Thank you. Look, it is -- we are just optimistic enough to think -- I mean we always have opportunity. There is nothing specific and I want that emphasized there is nothing specific today that is being discussed at all. We just as a matter -- as a general statement we just consider ourselves very well positioned and it maybe -- we see ourselves as the go-to team here. If our majors need us to step in and help in some way we just generally think we are best positioned of all of the regionals to do that. So we always think we have opportunity. There is nothing specifically being discussed, though, and I need to emphasize that.

Great. Thank you.

You're welcome.

The next question comes from Glenn Engel of Bank of America. Please go ahead.

Good morning. A couple of questions please. One is on the maintenance side you talked about the engine side and that is peaking in the first half. There's also issues on the air frame side that has been rising as well. How are we in curbing those costs?

So, we have -- you're right. We have had some peaks here in both air frame and engines. Both of those will be trailing down. And -- but I might in addition to we have two issues here. We have quantity of air frame and we have price of air frame checks.

Not only will quantity be tailing down because we have had these peaks, but we also made very good progress specifically on the ExpressJet side of bringing the cost of the air frame checks down. We have worked very closely in concert with our service providers specifically Bombardier. We are look at the scopes and all of those things and the ExpressJet leadership team has done a fantastic job of just bringing the overall cost of the seat checks down.

Second is weather last year was an issue and this year it was relatively good. How much do you think weather contributed to a year-over-year improvement?

Very good observation. You're exactly right. It did contribute. If anyone in the room has a number they can help quantify it. Certainly you're free-- I don't have it quantified, it doesn't look like anybody in the room does. You are absolutely right. It was a positive impact in the quarter.

Finally on the aircraft side I think in past quarters that you hinted that you are talking for more aircraft orders and made it seem like it was sooner I guess. Where are we in terms of where you think the timing is of more aircraft orders?

This is an interesting thing, too. We have -- we do have situations where aircraft just in our contracts will naturally begin to expire and in some cases under certain conditions we have replacement rights for those airplanes as the airplanes expire. So we have been working very aggressively on a fleet replacement program. Really trying to revamp, restructure how aircraft are purchased and managed through their life cycle.

And there are two intended purposes to employ that new concept. One is in the replacement of our own fleet and the other is bidding for other work as it becomes available or as other regional carriers' aircraft begin to expire. The interesting thing to us is we are -- first of all, we are making very good progress on this whole concept. We expect within the next few months we will have the very clear direction as to exactly how this will work and what the costs will be and even the way I just described it like we really don't know today we have a couple of critical pieces we are working on but we do have a lot of clarity on it today.

The interesting thing to us is that we seem to be in this -- in a feeling within the industry that we just don't have any regional opportunity and yet we are being asked all the time as to what we can do, what our pricing is. We are being asked to respond to inquiries as to our pricing and how soon we can get additional aircraft. I wish we had the program up and ready to use today because we are being asked by various carriers to respond to these inquiries as to new lift.

And these aircraft for or the replacement aircraft at least are for starting 2014, 2015, 2016? When did the actual aircraft?

Begins in small numbers in 2013 and then starts to just gradually ramp up in 2014 and then 2015, 2016, 2017 gets pretty heavy.

Congratulations and thank you .

You're welcome.

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

Hi, good morning.

Good morning.

I was wondering if you could talk about maybe your hurdle rate for new contracts today or maybe in the near future versus maybe what it was back seven or eight years ago, how that has changed and do you think the industry is getting better on pricing these contracts because I think some of the assumptions made at the beginning of the contracts really haven't panned out I would guess.

This is an excellent question. First of all, I'm not going to answer specifically the first part of the question because I'm not going to tell you exactly what our targeted rates are. I think that would be inappropriate. I will just tell you that we have them. We have very clearly identified targets and I will also tell you that we will be disciplined.

This is an interesting situation because we have the largest fleets of Bombardier product and the largest fleet of ERJ product and we have access to a lot of data and we have been very specifically and comprehensively studying this data to identify very specifically by type the cost of these airplanes by age. We have very specifically developed aging cost curves of these aircraft in basically all of the types. And we know what our costs are. As is that relates then to responding to RFPs and the bidding process you combine the knowledge that we have about the aging costs of airplanes, and by the way I'm not just speaking about the aging costs, I mean year one, year two, year three, through their life. We think we know this with more precision than any other--

Quite honestly we have more data and so we know our costs and we are going to bid our costs plus our targeted returns. And if in the process the rest of the industry doesn't do that and they under price contracts for whatever reason, we aren't going to do that. We will be disciplined. We're going to take advantage of these opportunities when they make sense for both us and our majors and if we have to pass on some opportunities or just fundamentally get outbid because of this then that might be the case. But we will be disciplined and we are not going to just chase other carriers' bids when we think they are under pricing the contracts.

Having said that, our responsibility is to fundamentally do everything we can to make sure are that we are a competitive bidder. And the new-- the concept that I discussed just as one example we combined all of the things we talked about our focus on integration, on cost reductions combined with a new way to buy and manage the assets to begin with and we think all of that leads to a very compelling product. And so we do expect that we will be competitive but in the process along the way if we are being outbid that is just the way this goes sometimes but I can tell you we will be disciplined and we will be flying when it makes sense to us.

As a follow-up it sounds like in terms of ExpressJet versus SkyWest you expect there to be a continual or permanent difference in terms of the margins there. Does it make sense to have exposure both to a union and a non-union pilot group? And I guess do both airlines make sense in the long-term. Are there enough synergies between the two of them?

Let me make sure I'm clear on this. I think that the differences I'm talking about -- now, the two airlines are different airlines, and right down to operating statistics, stage lengths they operate. They are just very different. My reasons for stating that I just think there will be differences, it is primarily just to do just with the capital structure and the risk. I mean if we have absolutely no risk in an airplane we just think that risk profile is different and that translates into expected return.

It isn't to do because one force is organized and the other is not. That -- and we are trying to just do everything we can to create as much efficiency at both airlines. Take advantage of purchasing power because of our size at both airlines and translate that into pricing power and then value. But the differences again are capital structure and risk related not labor force related.

Thank you. Are that's helpful.

Okay.

(Operator Instructions). The next question comes from David Frey of Frey asset management. Please go ahead.

Good morning, gentlemen. I have followed your company for are a very long time and I have discussed online and offline with you about some of these forays into the other operations which I think at this time have clearly zapped some of the momentum and focus from the group. What strikes me in these conversations about bids and pricing and passing business which is in general a good thing aren't there a lot of these markets at this point where you have some pricing power and there really aren't other available carriers for the main airlines to go to? It would seem that way at this point given the number of flights and the number of locations there isn't really anybody who has your network and I'm wondering why that doesn't -- and I know in the airline business pricing power is an oxymoron. I'm wondering why that isn't appearing in some place as pricing power?

Okay. So look, I -- I generally agree with what you are saying. And the fact of the matter is that the regional airline pool or market is shrinking and there are fewer operators and fewer peers, I guess, that are buying for this business. So yes what you are saying, just logically as the pool shrinks, fewer bidders that should translate into as you have described it some purchasing power. We don't really choose to -- I mean we don't look at it that way necessarily. What the way we choose to look at it is as the pool shrinks and as we have grown we just look at it as our responsibility to translate our size into value and just make the product more valuable to our majors.

And whether the pool is big or small we just have to fundamentally meet the needs of our partners which will have them logically want our product. So look, and I'm he just saying as far as our company focus and what our leadership team is focused on, is positioning ourselves to create value. And you're right. There is a smaller portfolio of regional carriers and that should translate into what you have just described. And I agree with that. That is really not the way we look at it, though. We just need to be efficient. We have to have high utilization of our fleets. We need to do everything we can possibly do that is within our control to create efficiency and value.

And when we can do that and position ourselves to where it makes sense to our majors then we're here and we can do it safely and reliably. And if someone else thinks they can do it cheaper then that might be the case. We are just going to do everything we can to be efficient and create value.

Thank you.

You're welcome.

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

Thank you all. Again, we always appreciate your time. We know it is competing with other things is so thank you again very much. Again, thank you to all of the people of SkyWest who are putting their hearts and souls into this operation. We are very grateful. And we look forward to speaking with you again in a quarter. Thank you.

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