SkyWest Inc (SKYW) 2013 Q2 法說會逐字稿

Good morning, and welcome to the SkyWest second-quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

We please ask that any employees of SkyWest Airlines, Atlantic Southeast Airlines, and ExpressJet Airlines listen to today's presentation via the webcast.

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Mr. Bradford Rich. Mr. Rich, please go ahead.

Thank you very much, and good morning, and welcome to all of you who are participating with us this morning. We're excited to be able to have the opportunity to get on, and to review the performance and the events of the quarter. I will refer -- or I'll begin this morning by, first of all, just introducing who will be participating. I have with me here at SkyWest, Inc. headquarters Chip Childs, the President and Chief Operating Officer of SkyWest Airlines. I have Brad Holt with us this morning, the President and Chief Operating Officer of Express Jet; Mike Kraupp, our Chief Financial Officer and Treasurer; as well as Eric Woodward, our Chief Accounting Officer; as well as other members of our staff here in St. George.

We would like to begin our discussion today by turning the time to Mike Kraupp, who will read the Safe Harbor on forward-looking statements.

Okay. Thank you, Brad. We will be making statements during this conference call which are considered forward-looking. Such statements are based on our beliefs, expectations and assumptions regarding future events, and are subject to risks and uncertainties. Words such as expects, intends, believes, anticipates, should, likely and similar expressions identify forward-looking statements.

All forward-looking statements expressed on this call are made as of the date hereof, and are based on information available to us at this time. We assume 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, including those discussed in today's press release or expressed during this conference call or set forth in our 2012 Form 10-K, and other reports and filings with the Securities and Exchange Commission.

Okay. Thank you very much, Mike. Okay, we'll now proceed as follows. I will give just a few brief overall comments. Then I will turn the time to Mike to review specifically and in more detail the financial performance and some of the -- just a review of the numbers. And then we will turn it over to questions, and you will have our whole team here available to participate in the Q&A.

First of all then, I would refer you to the press release that we put out this morning. We reported net income of $20.7 million, which is $0.39 in fully diluted earnings per share. That compares to $17 million in net income and $0.33 in fully diluted EPS for the same quarter, the second quarter of last year. That represents good improvement quarter over quarter, and I would just assure you that we remain very focused on our returns and on continued margin improvement.

The quarter has been a very busy and a productive quarter, and I want to review, at least from my perspective, some of the highlights of the quarter. First of all, we completed the deliveries of the 34 dual class aircraft. They are part of the Delta transaction that we have been talking about for several quarters now. All of those dual class airplanes are now in and flying, and of course, those airplanes, as you recall from previous discussions, are a combination of 700s, 900s. So we're glad to have all of those aircraft in now and flying.

That is a transaction, which you'll remember, that also involves the termination of 66 CRJ 200s. So beginning this Fall will be the first retirements, or terminations of those airplanes from the system.

During the quarter, we also announced, back in May, -- on May 21, we announced a new CPA with United for 40 aircraft, and at the same time, announced a transaction with Embraer for the acquisition of 40 ERJ 175s. That transaction actually is under a purchase agreement, which could be as many as 200 aircraft. So, both the transaction with United, as well as the purchase agreement and the transaction with Embraer, we are very excited about, and very -- just excited to move forward with that transaction, and pleased that we were selected, pleased that we came to what we think is a -- kind of an industry-leading best-in-class transaction with Embraer.

Shortly thereafter, June 17, we announced a purchase agreement with Embraer to become the US launch customer on the E2. Again, we feel very good about that transaction, and although those deliveries are not until 2020, the importance of that transaction, in combination with the original ERJ 175 transaction, as well as the MRJ transaction, what we feel is very important here is the strategic positioning, where we have now 600 large dual class aircraft under contract, again, in what we believe are best-in-class agreements. When I say that, these are transactions that we have worked on for several years, not just with the aircraft manufacturers themselves, but with the engine providers, the third-party service providers, the component OEMs. We have worked long and very aggressively to get contracts that we think will make us very competitive for a long time into the future. And again, the strategic importance there of having 600 very attractive delivery positions under very attractive contracts, we think is very important to the long-term continued stability and strength of these companies.

Also during the quarter, we did place into service the four CRJ 900s with US Airways. Most of you will recognize and understand from previous discussions that those are the four 900s that we had previously had in the Air Mekong operation, which has ceased operations, and those airplanes are now back in service and flying productively.

Okay, let me just mention a couple of things very quickly. We, of course, are pleased with the improvement in the financial performance. It's been a very important and productive last few months for us, as I've just reviewed strategically. We feel good about the strategic positioning, about the improvements.

We have certainly also had some challenges. Particularly during the last quarter, we've just continued to have some very difficult conditions to operate in. We had indicated in our previous quarter's discussion that we had had some difficult challenges related to weather. And that was also very much the situation during the second quarter, particularly in our Express Jet operation.

Just to give you a little perspective on that, in the second quarter alone, we had just over 5,100 weather cancellations in the Express Jet operation only. That compares with just over 1,700 in the same quarter the previous year. And in fact, on a year-to-date basis, we had over 9,700 weather cancellations at Express Jet, which compares to approximately 4,000 in the same six-month period last year. And again, some further perspective, on a year-to-date basis, that amounts to approximately 10,000 lost block hours -- again, just at the Express Jet operation only.

So my point in bringing this up is we're pleased with some of the improvements being made. It certainly hasn't been done without some challenges. It's been done in a challenging environment. And at the same time there, we've -- you know, we still have some issues that we're very focused on.

Our maintenance costs need just continual focus. We need to make some improvement in the fundamental maintenance operating costs. And again, it's pronounced a bit at Express Jet, but we also have to keep in mind there are just simply some timing issues involved. I suspect those of you that are following the numbers, and looking at the numbers very closely are paying attention to the maintenance expenses. And I'll let Mike talk about that in more detail in his discussion.

Just to make you aware as well of some of these challenges, and one that will have some impact on the third quarter -- certainly some of you may be interested in the impact of Asiana 214, the incident in San Francisco, on the SkyWest Airlines side, which of course, has a lot of concentrated operations at San Francisco. Just in a seven-day -- the seven-day period following that incident, SkyWest Airlines canceled over 670 flights in that seven-day period.

I want to make some reference of our pro rate flying. We have highlighted this previously. I'll just make a very general comment. The pro rate flying continues to make good improvement, and we had quite strong improvement year over year in our pro rate flying pre-tax income.

Okay, with that, I'm going to turn the time back to Mike, and let him give a more detailed discussion of the financials.

Okay. Thanks again, Brad. I would also like to thank all of those that are participating on the call with us today. We do appreciate your interest in the Company, and your time that you take. My comments actually this morning are going to be very brief. And I'm just going to sort of follow or highlight some things within the press release.

As Brad had said just a minute earlier, this morning we reported net income of $20.7 million, or $0.39 per diluted share, for the quarter ended June 30, 2013. This compares favorably to reporting net income of $17 million, or $0.33, for the same period last year. We also reported net income of $24 million, or $0.46 per diluted share for the six months ended June 30, 2013. And that compares to $16.3 million, or $0.32 per diluted share for the six months ended June 30 of 2012.

Consistent with our comments in reporting for the previous three quarters regarding how our major partners are currently purchasing the majority of fuel for our contract flights, we continue to experience a reduction in our operating revenues and operating expenses. Due to these changes, we experienced a reduction of $106.8 million in our top line revenues, as a result of these fuel purchases. During the quarter, we also -- during the quarter just ended, we also experienced $11.1 million decrease in engine overhaul costs that are considered pass-through costs under our contracts. That also resulted in a reduction to our top line revenues.

I will make you aware, by way of information, that this quarter should be the last quarter where we'll see the significant reductions in top line revenues. In the third quarter of this -- or the upcoming third quarter, you're going to see a significant mitigation, again, of those top line revenues coming down. During the quarter ended, just ended, we generated a 6.1% increase in our block hours, or approximately 35,000 additional block hours compared to the same period last year. As a result of these things, we generated $28.2 million of additional revenues. Total block hours, actual block hours for the quarter just ended were 609,711, and that compares to 574,884 for the same period last year.

Our total operating expenses, which does include total operating expenses and interest, decreased in the amount of $103.7 million, or 11.4%. However, after considering the reductions for contract fuel and pass-through engine overhaul costs, our total operating expenses increased only $14.2 million, or roughly 1.9%. And that was well below and compares favorably to the increase in our block hour production of 6.1%. As a result of the foregoing items, we reported operating income of $50.6 million for the quarter ended June 30, 2013, compared to $46.8 million for the same period last year. Our operating margin was 6% for the quarter just ended, and that compares favorably to the 5% that we generated in the same period last year.

With regards to the balance sheet, we ended the quarter with $665.6 million in cash and marketable securities. That compares to $631.5 million as of March 31, 2013, or the end of our first quarter, so an increase of $34.1 million. Our net debt position as of June 30, 2013 was $890.4 million. That compares to $978.9 million as of 3/31/2013, or a reduction of about $88.5 million. Also during the quarter ended June 30, 2013, we spent $25.7 million in non-aircraft capital expenditures.

Another item of interest that we do want to make you aware of is we received a full payment on a loan that was outstanding by United Airlines in the amount of $49 million. That was a good producing asset for us with regards to the interest, and on a go-forward basis, that particular obligation from them generated about $3.9 million in annual interest for us. So we will be experiencing a slight reduction in our interest income as we move forward.

Lastly, let me provide you with an updated ASM production for the third and the fourth quarters. In the third quarter, we believe that we will generate about 10.1 billion ASMs, and in the fourth quarter, we will generate about 9.4 billion ASMs. That fourth quarter will represent some upward movement, as our scheduling folks have updated their numbers from what we've originally had, based on the additional 34 dual air class, or dual class aircraft that we have actually flying now. So you're going to see a slight increase there.

And with that, I will turn the call back over to Brad.

Okay. Thank you, Mike. Operator, why don't we go ahead and open up the lines, and we would be happy to address a few questions.

(Operator Instructions)

Our first question is from Duane Pfennigwerth with Evercore.

Good morning. This is Jeff Reisenberg in for Duane today.

Quick question on expansion opportunities at American. When do you think the emerged entity will be in a position to do another CPA? And in addition to the timing, maybe help us size what the incremental opportunity associated with that would be.

Okay. That's a very good question.

I wish we knew the answer to the question. Probably, even if we did, that would be something that American needs to address, or the new American and their leadership need to address. What I can say is that from our previous discussions -- I should say, previous and ongoing -- we are doing the best we can to keep in regular contact with that leadership team. Certainly, the transition affects timing, but as we understand it, we think there will be a meaningful regional large dual-class opportunity there for someone. And we keep in regular contact.

We are doing the best we can to position ourselves to win and be awarded a portion of that flying. But as to the timing and as to the volume and which types and which parts they will do at what times, we are just not in a position at all to give any clarity to that. I wish we had better answers. But that's more up to them to describe to the market.

Okay, thanks. And one more quick question. Given the fleet growth, when do you think you'll be in a position to buy back stock again?

Okay. So very good question.

Our first priority relative to stock, assuming that all of our analysis and numbers indicate that it's a good investment, our first priority is to buy enough shares to offset current-year dilution. So that's another equity type of program -- equity comp programs and those things. So, as we've said before, our first priority there is to just make sure we're buying enough back to offset the current-year dilution. That still remains our objective.

Above and beyond that, we have some things here that we are making sure that we get some good clarity to, relative to capital that we will be required and liquidity that will be required for expansion. We're in a very critical time, where we think there's some opportunity -- not just opportunity with American -- but we can see where some other opportunities sort themselves out here. So we're in a critical time, I think, for the next six or nine months, where we would like to see a little more clarity to some of these opportunities, which will give us additional clarity on our liquidity and how much capital will be required for opportunity. And then put that in the equation and then make a recommendation to our Board relative to further stock buyback.

Great. Thank you for taking the questions.

You're welcome.

Our next question comes from Jim Parker with Raymond James. Go ahead, please.

Good morning to all.

Good morning, Jim.

Mike, just would you give us the revenue and pre-tax year to year for the second quarter on pro-rate?

We can hardly hear you.

Yes, I asked about pro-rate. What was the revenue year to year on pro-rate.

Okay, revenue, year to year, we recorded $88 million for this quarter just ended and we had $80 million from the quarter a year ago.

And pretax?

Jim, we're not going to go down that road. You remember, in general we typically don't break out things on a contract basis. And we feel like the pro-rate fits in a very similar category.

So you're saying -- Brad said it was up nicely year to year. Is that correct?

We did have good, solid year-over-year margin improvement.

Okay. Now -- what was the profitability, in the quarter, of ExpressJet?

Again, we'll let you look at all the details of that when we file the Q later this week. I will just say in general, ExpressJet did have a small operating profit, which means that a significant portion of the total net income came from the SkyWest Airlines operation.

So ExpressJet continues to lag, apparently substantially, continues to lag the profitability of SkyWest. So what is being done to improve the profitability at ExpressJet?

There are a number of things being done, Jim. Very specific and continued focus on the cost side of that operation is one part. We are at a critical time with our labor groups, where we have essentially open contracts and are in the negotiating process on all of the contract labor agreements. So we need to get some clarity to those and need to see where our total labor costs will come out.

And then, as we have said before, we have some contract rate issues that need to be -- I mean, we've got to figure out a way to get some improvement in the rates, because part of this equation is cost. The other part is rate.

Now, in the legacy express side of the deal, of that operation, as groups of airplanes naturally terminate, we would expect to do one of three things. Either extend aircraft at rates that are back to market rates; or replace airplanes as they terminate with a different aircraft type, which we would expect to be at market rates; or just eliminate that flying from that fleet, which would reduce the amount of aircraft flying in sub-par performing contracts. And at the same time, we need to just continually work the best we can to get general improvement. Now, in the first few groups, aircraft that have come up for natural termination, I'm not allowed to go into much specifics. I will just say, in general, we have had some success at extending aircraft at improved rates.

Okay. Now, one other question here.

Looks like over the next several years, actually the size of your fleet, the number of aircraft, may shrink and replace 50-seaters with 76-seaters. Okay. That may imply that you have a reduction in labor force, which means that your average labor costs are going to go up, just because of more senior people. So how do you counterbalance? How do you offset those cost increases in labor with no growth and perhaps shrinkage in the labor force?

Okay. Well, first of all, keep in mind, Jim, this is happening at a time when there is a lot of uncertainty relative to the impact of some new regulations -- the new flight and duty, which all indications would indicate -- well, there are two things. First of all, there's a lot of talk in the industry about general pilot shortages.

Okay. So, yes, for example in the ExpressJet fleet, we just brought in the additional dual class airplanes in the Delta transaction. Then we will lose some of the CRJ 200s. When you put that in context with that happening at a time where there are predicted pilot shortages and increased requirement or demand for pilots because of the new flight and duty, that's not an entirely bad situation to have at this particular time. So we're going to take all of these factors, including the new flight and duty -- all of these things together -- and then do the best we can to manage that issue. But when you look at it in context, the timing here of some of these issues, actually, we think, is working out very well.

Okay. Thank you.

You're welcome.

(Operator Instructions)

And our next question is from Glenn Engel with Bank of America.

Good morning.

Can you go over the -- you get typically service bonuses in a quarter for delivering on your reliability measures. How did you do this year versus last year?

Okay. So I'll address that one generally, and I'll just say with the -- and by the way, I'm just going to do the best I can to answer the question. I certainly don't want my answer to come across as excuses or anything for sub-par performance. The fact of the matter is, we are not achieving levels -- and then by the way, Glenn, this is in two components, right? It's either performance incentives that we may forego because of reliability; and in some contracts it actually is the payment of penalties for less than expected performance, right?

So when we put all of that together in a bucket, either increases in penalties paid quarter-over-quarter or same quarter this year versus last year, or lost incentives, it has been almost -- we have either lost revenue or paid penalties at almost twice the level that we did the same quarter last year. So our performance has not been as good.

Now, one of the reasons for that is the extreme level of weather-related cancels. And although weather is generally excluded from the performance metrics, the downlight, or secondary impact of this challenging and difficult weather creates a tremendous amount of pressure on the rest of the system. Simply having airplanes out of position, pilots out of position, and those sorts of things which, although not directly coded weather cancels, put an extreme amount of pressure on the system.

And we had almost three times the level of weather cancellations that we had the same period last year. And so, look, again -- I'm not trying to make excuses for them. I'm just trying to say there's been an extreme amount of pressure on these systems due to this difficult weather period that we have had. And that's, I would say, the primary cause for the increase in lost incentives or paid penalties.

So the margin improvement happened despite the fact that your service performance bonuses were less.

That is exactly right. And so in spite of some significant headwind in the quarter, we had good margin improvement.

Can you talk about employee turnover? You mentioned main line guys started to hire more a little bit more. Are you starting to see turnover increase?

Let's have Chip Childs address that one.

At least on the SkyWest Airlines side, we have not seen a significant impact on that. We keep a very close eye on what's out there in the future and what the announced hirings are with the major carriers. But at least on our side, the SkyWest side, we have technically some of the lowest turnover we've had in a long time. But we're very astute to see what the risk may be going forward.

And finally, can you give any very broad views on 2014 capacity?

At this time, Glenn, let me answer that.

We just barely started into the profit planning process for next year, so unfortunately we don't have that at this point. We will have that in the third quarter when we produce. Yes, but I think in general, when you look at the mix of flying, and we've got the dual class airplanes in, some 200s going out -- overall we'll have the dual class in at the front end, the 200s out in the back end, and overall, we're looking at a relatively flat production year, from '13 to '14.

And the fleet itself, will it end up being lower at the end of '14 than the end of '13 because of the 200s dropping?

Glenn, I think at this point, we're just kind of projecting flat, total [block] hour production. The two drivers of this, of course, are the fleet itself, but then just utilization in the schedules by the majors has a tremendous impact on the overall production. So a small change in daily utilization can have a material impact on total production.

The variable we know is the fleet. The variable we don't know is the scheduled utilization. So at this point, the best we know is that those factors will be fairly close to flat.

Thank you very much.

You're welcome.

Our next question is from Mike Linenberg with Deutsche Bank. Go ahead, please.

Yes, good morning, everyone. I have a couple here.

Brad, you talked about the 40 ERJ 175s that you're going to be taking delivery of for United, and then you said you had maybe commitments that upwards got you closer to 200. When do those airplanes start delivering? And when do you start paying your initial delivery deposits? How does that CapEx ramp up over the next couple years?

Okay. So the initial 40 airplanes -- they start in April of 2014, in general. So those are first deliveries. The actual service dates -- that actual date has not been determined; and we'll work cooperatively with United to actually determine the first in-service dates. It will be shortly thereafter April. So the airplanes come in and we basically have 20 in '14 and 20 in '15, spread pretty evenly from April through the end of '15. So that's the timing of the aircraft coming in.

So relative from a CapEx perspective, of course there is a lot of time and some money being spent now just in the certification process. The hard dollars and ramp-up of CapEx -- first of all, let's put it in perspective. We're talking somewhere around $50 million worth of CapEx spend on that fleet, and I would think we'll have an initial spend to get stock for parts and tooling and that sort of thing prior to the April deliveries.

But of course, some of that's done on a per-aircraft basis and will be done as the airplanes come, as the airplanes deliver. So there will be -- probably half of that will be upfront before April and then the other half, we could assume would be spread out as the aircraft deliver.

Okay, good.

And then going back to the pilots, I know you mentioned a new duty -- flight and duty rules -- go into effect. I guess that was August 1.

What about the -- I don't know if we had an official start date to have an air transport pilot license, the minimums were going to go from 250 to 1,500. I know that's out there and I'm not sure if they actually set the date although I thought it was actually in August as well. Is that in effect now? And so as a consequence, I guess of both of those, what do the staffing requirements look at SkyWest over the next 6 to 12 months? And if you look at your current roster of pilots, how many more pilots do you have to put on the payroll to meet the new duty and flight rules?

Okay. Good question, Mike.

First of all, I'll have Brad Holt give some color to that, as it affects the ExpressJet operation. And then, by the way, the answer might be slightly different between entities. So we'll have Brad Holt address it first and then Chip can add on.

Okay, great.

Mike, I'll just start with the ATP requirement. That did go into effect August 1.

Okay.

All carriers are required to have FOs with ATPs. The 117 or the flight and duty rule goes into effect in January, so we've not had to deal with that yet. In general, industry-wide -- and this is very general statement -- the pilot work force to deal with those rules will be somewhere between 5% and 9% increase in overall pilots. So it is going to be a bit of a strain on the system, with the increased flight time requirements of pilots that went into effect August 1. But we are not seeing a big problem yet.

We also do have some buffer in that we have aircraft going away this fall and winter, and so those pilots can be used to cover the 117 rule. As far as turnover goes, we have not seen a lot of turnover to this point, above the normal turnover. But the majors will start hiring this fall, so there will be some of that.

Okay. Okay, that's helpful. And then just if I can squeeze--

Mike, let's let Chip -- I think Chip has something to add as it relates specifically to SkyWest Airlines.

Mike, just real quick, I think what Brad's identified is along the same lines that we're seeing at SkyWest. I think at the end of the day, though, we've got some good estimates out there. We're still trying to get, candidly -- and I think all carriers are -- a lot more feedback from the FAA relative to those rules. There are still a lot of things where even their documentation is not entirely finalized to help us get specific to that. But what Brad's indicated as the impact is consistent across the board.

Okay, great.

And then if I could just squeeze in one last one, I want to go back to the question on performance. And I know you had discussed it with Glenn. You had at one point an improvement in op margin and yet there were some operational issues. And you've talked about weather cancellations and I know some of that you're on the hook for. It was a pretty sizable impact.

Brad, is there any way, can you quantify those cancellations or whether it was the lack of -- whether you didn't receive -- you got less incentive payments or you had to pay the penalties? I mean how much of a margin impact was that on the quarter? Was that a point or more? And I realize that it may actually be a bigger number when you start including in all of the accommodation issues and moving crews around and airplanes being in the wrong airports at particular times because of these.

How much of a margin point headwind did you have from all this? Because these were some big numbers.

Yes, they are some big numbers. It's a very good question, Mike. I'm going to be very general, but I'll at least try to give you some perspective. And, by the way, some of this, I will acknowledge up front, is very hard to quantify. What we do know is what lost block hours amount to as far as lost revenue.

So if you look at the volume -- and I'm going to give you a reference point that is just the number above and beyond a typical run rate of weather. Because we know we're always going to have weather and we've always got to deal with weather and we've got to be prepared to react and get the system back running as efficiently and as quickly as possible when it happens. So that's our responsibility to manage and lead through normal weather conditions. I mean, it just happens.

This has been, admittedly, very unusual. The revenue loss only, just at ExpressJet in the six-month period to date, through June, is approximately $6 million in lost revenue simply from those lost block hours. And as you've astutely pointed out, there is a corresponding number that just is the secondary impact of the weather on the system that affects your costs. And that number, although hard to pinpoint, it could be as high as dollar for dollar of lost revenue, which would be a corresponding increase in costs.

So you have the number at a minimum, we think, is $6 million. The number -- the total impact could be as high as $12 million. Okay. We have not paid much attention to it until you asked the question, because we don't want to make excuses. We just want to report, give you confidence that we have those things that are controllable under control and that we have a good, strong grasp on what's happening in our systems.

But admittedly there's a material impact both in revenue loss and the corresponding increase in costs. Some people think -- well, shoot, yes, there is a weather cancel but you didn't fly the flight, so you must have saved costs. That is not what happens, and especially when it happens to this extent. The other part of this that has cost us, I will just say generally, as we talked about before, either in lost incentives, lost markup, or paid penalties, that number has also been several million dollars year to date.

Okay, great. That's great color. Thanks, Brad. Appreciate it.

You're welcome.

Our next question is from Bob McAdoo, Imperial Capital. Go ahead, please.

Yes, hello. Just a couple questions on these 40 United airplanes that are coming in. First, are those new incremental units for United that you're flying? Or are any of those replacing some of the old Continental X Jet stuff that might be disappearing that was probably lower-margin stuff?

And secondly, in terms of your relationship with Embraer, with these airplanes, are the terms under which these aircraft are purchased -- are those driven by negotiations between United and Embraer, or between you and Embraer, or a combination of the two? How does that relationship work between you guys and United and Embraer in a situation like that?

That's a very good question. Let me deal with the last question first.

So in this particular case, the discussions were specifically very separate transactions. We did a large transaction on the current version of the 175 that could be as many as 200 aircraft. I mean, in firm and options. When I say as many as, I mean I want to make it very clear that, although we have hundreds of airplanes under contract, we are not speculating on aircraft.

So we do have some contingencies in there that are based on securing CPAs to fly the airplanes. But when you look at our total fleet and the fleet of the industry and look at the amount of replacement that's going to need to happen, we think it very strategically and wise and prudent for us to position ourselves for a very material fleet replacement. And that's what we've done.

Now, the discussions between us and Embraer were very separate and distinct from what United did, in the 30 that they announced, where they went direct to Embraer. No coordination or discussion amongst those parties at all -- just very separate and distinct transactions.

Now, the first question you asked was, are these airplanes in the United system incremental growth aircraft or are they replacement? So, unfortunately, I have to tell you I don't know exactly the answer to that question. I think, in general, United has made statements -- and again, I don't want to in any way appear to be or represent that I'm a United spokesperson. I am not. I think they have made some general statements in the market indicating that they are either limited or will be very careful at incremental growth in the total regional system. But we're not the only ones in that regional system, and so how they manage these airplanes relative to their total fleet, we honestly don't know exactly. So some of these could be temporarily incremental aircraft, but we don't know the exact answer to how this plays into their overall regional fleet management.

So are you still flying the same number of ex-Continental lines of flight roughly that you did when you took over [X Jet]?

Yes.

Okay. All right. And aren't those some of the lower-margin flights?

That's correct.

All right. So that's some of the ones that Jim Parker was talking about earlier.

Yes.

In your response to him then, that are still out there.

Yes.

Okay. Very good. Thanks a lot.

You're welcome.

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

Okay. We have nothing further to add, other than, again, to express appreciation to all who have participated with us today. We respect your time. We'd appreciate your interest. And as we have discussed in this call, we feel very good about our improvement. We feel very good about our strategic positioning.

We have had some challenges during the quarter, made some real difficult conditions to operate in -- not just weather, but general operating conditions, issues of aircraft, and the overall thanks and acknowledgment needs to go to all of the employees of these companies. We as a leadership team are very grateful for all of those efforts and for the commitment of our people and with that, we will conclude the call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.