SkyWest Inc (SKYW) 2013 Q3 法說會逐字稿

Good morning and welcome to the SkyWest Airlines third quarter 2013 earnings conference call.

(Operator Instructions)

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

Thank you very much, Operator. Thank you, and welcome to our call this morning. It's a pleasure to have the opportunity to be with you this morning to discuss our third quarter of 2013. We look forward to a productive discussion this morning.

First of all, let me make some introductions as to who will be participating on the call today. I am Brad Rich, President of SkyWest Inc. I also have participating Brad Holt, who is the President and Chief Operating Officer of ExpressJet. Brad and I are here on the -- actually on the East Coast today. At our headquarters in St. George, Utah, we have Chip Childs, President and Chief Operating Officer of SkyWest Airlines; Mike Kraupp who is Chief Financial Officer; and Eric Woodward, who is our Chief Accounting Officer. We also have participating other members of our team who will be participating, as needed.

To begin the call, I'd like to turn the time back to Mike Kraupp to read our 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 current beliefs, expectations, assumptions, and assumptions regarding future events, and are subject to risks and uncertainties. Words such as expect, intends, believes, anticipates, should, likely, and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call, are made as of the date here of, 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, expressed during this conference call, or as set forth in our 2012 form 10-K and other reports and filings with the Securities and Exchange Commission.

Alright. Thank you, Mike. As I mentioned, myself and Brad Holt are on the East Coast today. We're having the opportunity to have some direct discussion and dialogue with some of our employee groups. I'm grateful for that opportunity. I assume that we have employees from the company that are participating on the call or listening in to the call, and I personally want them to know how much we value our association, and value their commitment. The more that we meet with our employees, the more confidence we have, and I'm just really grateful for the quality and the character and the commitment of all the employees of the SkyWest Inc. Companies. And I wanted to begin by expressing that appreciation.

I assume that most of you participating today have seen the press release that went out earlier this morning. We'll use that, as we generally do, as the agenda and format for today's discussion. Generally, we're very pleased with the financial improvements, both our year-over-year and quarter-over-quarter improvements, both in our financial results, both from a net income and a diluted earnings per share perspective. We're also pleased with the improvements in the fundamental operating performance of the entities, especially at the ExpressJet entity, the operational improvements have been significant, especially when compared to some of the difficulties that were experienced earlier in the year. A lot of those primarily attributable to weather, so we're pleased with both the improvements, financially and operationally.

And to go into more of the specific discussion of the financials, I will turn the time back to Mike Kraupp.

Okay. Thanks again, Brad. I'd also like to thank all of those that are participating with us today on the call, and for your continued interest in our company. I am going to make my comments brief, just as Brad had indicated, and we will use the press release just to highlight some of the things during the quarter.

This morning we did report net income of $26.4 million or $0.50 per diluted share. This compares favorably to the consensus estimate of $0.46 per diluted share for the current quarter and to net income of $20.9 million or $0.40 per diluted share for the same period last year. We also reported net income of $50.3 million or $0.96 per diluted share for the nine months ended September 30th, 2013.

Consistent with our comments and reporting for the previous four quarters, regarding how our major partners are currently purchasing the majority of our fuel for contract flight, we continue to experience a reduction in our operating revenues and operating expenses. On our last quarterly results call, we indicated to the market, that it was our estimate that the significant difference we had experienced in the three previous quarters would be significantly reduced, and it was. Due to this change, wherein our major partners buy fuel directly now, we experienced a reduction of only $23.8 million related to this particular item.

Having said that, you will notice from the press release the total top line revenues decreased only $14.5 million for the quarter just ended, compared to the same period last year. After considering your reduction of total pass through costs, included in top line revenues like contract fuel, engine overhaul costs, and landing fees of roughly $47.4 million, we actually experienced an increase in top line revenues of about $32.9 million. This increase in top line revenues was the result of a 2.8% increase in block hour production from having a larger fleet for the comparable quarters.

Also experiencing increases in our block hour rates due to normal contract escalations as provided in our CPA agreements with our major partners, and from generating additional prorate revenues. Total prorate revenues during the quarter ended September 30th, 2013, were approximately $98 million which compares to prorate revenues of approximately $87 million for the same period last year. Total block hours for the quarter ended September 30th, 2013 were 613,281, and this compares to 596,901 for the same period last year.

As noted in the press release, our total operating expenses, which includes total operating expenses and interest, decreased $18.2 million or roughly 2.2%. However, after excluding the effect of the reduction of certain pass through costs, like contract fuel, engine overhaul costs, and landing fees, our total operating expenses increased $29.2 million. After taking into account the volume increase in block hours of 2.8%, total operating expenses and interest increased only about 1.4%. We reported total operating income of $56.2 million for the quarter ended September 30th, 2013, as compared to $54.9 million for the same period last year. This resulted in an operating margin of 6.6 for the current quarter ended, compared to 6.4 for the same period last year. Pretax income was $44.4 million for the quarter ended September 30th, 2013, compared to $32.9 million for the same period last year. The positive change in pretax income came primarily from other income and expense items, which again, was roughly about $10.3 million, the largest of which was the result of shutting down Air Mekong in February of 2013. Brad's going to discuss some details on that in his comments.

I'd also like to highlight or point out that the tax rate was slightly up in the quarter at 40.5%, and was a little higher than we anticipated, and really was the result of permanent items and the timing of those permanent items, as well as some tax return true ups that we recorded during the quarter. We do look for the year for our rate to be in the neighborhood of about 39.5 to 39.7.

You'll also notice from the press release, that we included a balance sheet information for you rather than waiting to review this from the 10-Q, that will be filed later this week. As noted, we had a total of cash and marketable securities of $727.8 million as of September 30th, 201,3 compared to $709.4 million as of December 31st, 2012, or an increase of $18.4 million. The increase includes the impact of making cash payments of $11.5 million for the repurchase of treasury shares in the quarter, and making deposits of $11.4 million on our new E175 redoll jet aircraft order for a total of $22.9 million in cash payments. Our net debt position as of September 30th, 2013, was $796.4 million, compared to $890.4 million as of June 30th, 2013 or a reduction of $94 million. For the 9 months ended September 30th, 2013, our net debt position has decreased $136.2 million.

During the quarter ended, we just spent $33.4 million in non-aircraft capital expenditures. Also, we've slightly updated or modified our ASM production for the fourth quarter from what we've previously given you, and that number now stands at $9.4 billion. I think we've given you roughly the $9.4 billion before, but the digits have changed just slightly.

And with that, Brad, I'll conclude forward remarks and turn the time back over to you.

Okay. Thank you. I want to talk in a little more detail about some of the issues, or developments, or progress both in the quarter as well as moving forward.

First of all, Mike indicated, that our block hour production was up 2.8% in the quarter, primarily as a result of 32 additional aircraft in the fleet, compared to last year's at the end of last year's September quarter. Most of those aircraft additions are dual class aircraft, and I think most of you that are following the company specifically, realize that the dual class aircraft have been financially, at least, more productive, and so that's some good development there on not only fleet increases, but the mix of aircraft. I wanted to give some update as to the transaction that was announced some time ago with Delta, where we took 34 additional dual class aircraft and agreed to remove 66 CRJ 200s. We have been making progress on that. We have had the 34 dual class airplanes. We have them all. They're in service, and the beginning of the transitions out of CRJ J 200s are continuing. Between now and the end of the year, we have 19 additional 200s that will be removed from service, and then the remaining aircraft will come out gradually, between the end of the year and the end of 2015.

I wanted also to give a little more perspective on our prorate flying performance. Mike indicated that the performance was strong in the quarter. He went through the revenue increases. Our total aircraft fleet that is operating in prorate operations is at 61 aircraft. That's a mix of 35 turbo props and 26 jets.

The strong performance, I do want to try to keep in perspective. We certainly have seen very strong demand, as I think is consistent with what you see happening in most of the industry. And of course strong demand leads to strength in pricing power. At the same time, some of the performance here and the demand is seasonal, with 61 airplanes in that operation. You know, the seasonality of the operation is, you know, is there, and this is a very strong quarter seasonally, and I'm saying that because, yes, it's a very strong quarter. That needs to be tempered a little bit, given that seasonally this is the most productive quarter in our prorate flying.

I did want to give a little more detail as to where we are with both Air Mekong as well as TRIP. Throughout 2013, we've been working on the sale of our equity ownership in Air Mekong. During the third quarter, we executed a stock purchase agreement and sold 100% of our ownership in Air Mekong. Based on the compensation that we received, we recorded a gain of $5 million during the quarter, which is reflected in the other income, in the income statement. And I think as most of you know -- oh, excuse me. I want to make sure we're talking about Air Mekong. Okay.

So, specifically to Air Mekong, $5 million recorded on the sale, which is reflected in the other income. I also want to make it clear, though, that the $5 million gain, as reported in other income, certainly was partially offset with some additional expenses to get the four aircraft that we were leasing to Air Mekong, out of that operation. The airplanes have been placed into contract flying with another carrier, but to get the airplanes transitioned over, to get them back to the US and in our specs, there were at least $2 million worth of maintenance and rollover type expenses associated with getting those airplanes back in the US and into service. Okay.

And then very quickly on TRIP, we've discussed this previously. The developments of TRIP, nothing really have changed since we talked about this last. During 2012, we sold our equity ownership in TRIP. The buyer that's purchasing the stock, that will be done in three annual installments. During the quarter, the buyer made the second scheduled payment which was $17 million, and then I think, as we've described this transaction previously, you know that there is a restriction on those shares that we sold until we receive the final payment, and we will not recognize the gain on the TRIP transaction until the final payment is received, which we expect will happen in the third quarter of 2014.

I wanted to make just a couple of comments relative to our preparations for the ERJ 175s. Our work on the certification of the -- of that aircraft type is on track. That may be of some question to some of you with the government shutdown and possibly some other types of delays related to what's happening in the government, but we feel like we are very much on track. We have our first delivery scheduled for March of 2014, with an in-service date of June, and so I would just say that certification seems to be right on track, and we don't expect any problems getting those airplanes delivered and in service.

Having said that, though, the certification process not only takes time, there's some expenses involved, and I want to give some caution for performance in the fourth quarter. We not only have some of the seasonality, which affects some of the operation including, you know, the schedules and utilization, and that sort of thing from the major carriers, that our pro rate operation certainly is seasonal, and we are not expecting to be as financially productive as it was in the third quarter. Still productive, but not -- you know, we have to consider the seasonality, but we, in addition to those two things, we'll also have some training expenses and some continuing expenses of the certification of the EI75s, which will show up in the fourth quarter. So I want to make sure that there's at least some voice of caution relative to the fourth quarter and the corresponding expectations. Okay.

Having said that, I want to turn some time first to Chip Childs, President and Chief Operating Officer of SkyWest, and I specifically asked Chip to make some comments relative to pilots, to some of the expectations relative to the availability of pilots. And then as most of you know, we have an upcoming regulation effective in the new year relative to FAR117.

So Chip, I'll turn the time to you.

Thanks, Brad. Appreciate it.

I think that the entire industry -- and I'll try to keep this brief and simple -- but the entire industry is trying to still get their hands in detail around the rules of 117, and the work rules associated with those. We're in the process, I think, of making sure that we're ready for that, as it's implemented in January. We're very comfortable with our level of preparation as it relates to normal operations. I think our number one focus from now until the beginning of the year, is to be focused on IROP situations either for weather or whatever could happen in our industry, in making sure that we have proper clarity from the FAA as to some of the circumstances in which we can flow crews and make sure we have the availability of crews in the right places on that.

We're still waiting for some clarity from the FA on those issues. We are prepared, however, in the non IROP situation. We feel like we have adequate crews and reserves prepared for that inception date in January, and think that, you know, our number one focus at this point relative to those rules, are going to have a very big impact on our industry, is going to be in those IROP situations and what we can do. And we're hoping to get some clarity from the FA on that from now -- toward the end of the year.

Availability of pilots is interesting, and even a little bit seasonal as well. We've seen the regionals go through, even throughout the year, different ways of turnover. Our turnover so far this year has been a lot less than what we anticipated that it has -- would be in 2013. We're planning for more turnover at SkyWest Airlines in 2014. We believe that our recruiting efforts for pilots is still extremely strong. We have seen the pool change slightly in, you know, just during the fall season, and we think that the impact of that could be a couple of things. One, there is slightly more turnover because of the timing of when the major carriers hire, and also the other reason is because now's the time when we take training classes through the holiday period, and sometimes folks would rather wait until after that to go through training.

So, we're very confident. However, in our ability to meet our demands for both 117, and our training needs for the Embraer 175 that begins in -- to come on property in March, as Brad indicated. And we have a fantastic group of professionals that are getting all these things done, and so we're relatively optimistic, but the big thing that we're still needing is some clarification from the FAA on some of the IROP situations with 117.

Okay. Thank you, Chip. I've also asked Brad Holt to make some comments. I think most of you know that we have -- you know, we have been working for quite some time now on one of the aspects of the single certificate and the integration of ExpressJet and ASA. Certainly has to do with our -- with the collective bargaining process with our labor groups, and I've asked Brad to take just a minute and give some perspective and an update of where we're at with our labor on the ExpressJet side.

Okay. Thanks, Brad. Yes, real quick, one of the last few things in the integration of the two companies, is the joint CVAs, and we are in accelerated negotiations with all groups, including the pilots, and we've had good success in working together with each group. Everyone's working hard to get those deals done, and I would expect that we will continue to make good progress, and get the agreements done as quickly as we can.

To echo Chip's remarks on 117 in the pilot hiring, we're much in the same position. We have done most of the hiring that we've needed to do for 117 this far in the year, and it looks like that our hiring will slow down as we get closer to the first of the year. Pilot supplies are drying up to a certain extent, but we at ExpressJet have not had too many problems so far with getting the pilots in that we need.

Okay. Thank you, Brad. With that, we'll go ahead and conclude our formal remarks. Gary, if you would like to open the lines, we'll be happy to address some questions.

We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from Savanthi Syth of Raymond James. Please go ahead.

Hey, good morning, everyone.

Good morning.

Just wondering, what can you tell us about ExpressJet profitability in this quarter?

Okay, Savanthi, very good question. I mean there'll certainly be more details of that in the 10-Q, as it's filed later this week. I will make just a very general comment that there was no profitability at ExpressJet in the quarter, I mean that generated a net loss. And, as I said, we're doing a lot of things there. I haven't said that yet.

We are -- we have the loss. We're feeling very good about the progress that we're making with our labor groups. But in addition to that, there are some very specific things that we have outlined and have charted out that need to be done to create some long-term sustainability at ExpressJet.

But for the quarter specifically we did -- we had a small operating loss, and of course the profitability for the quarter came out of, as we mentioned, Mike went through that in his remarks. We had the gain, and then SkyWest Airlines, of course, had a very profitable quarter.

And some of the items that you're putting in place, when do you expect that to start benefiting?

Well, we're -- doing some of these things, I mean, immediately, but as you know, some of that, as it relates, for example -- I mean, when you break this down into kind of components, there's just continual process improvements and some refinements that we need to make. There's some more aggressive issues relative to -- I'll just, for lack a better way to describe it, restructuring that we need to do relative to every aspect of how we do business at ExpressJet. We're in the process of relooking at basically everything we do.

Then add to that, some of the -- we've got to get, as Brad mentioned, the collective bargaining agreements done with our labor groups, and then you add all that together, I think it will produce some meaningful, positive results, but I mean, but it will take some time. I mean, this is not going to change overnight. At the same time, we're making some of these improvements, we have to figure out how to deal with, for example, the increasing cost of 117. That of course will be an issue of both airlines, as it will for the whole industry.

But look, it's going to take a little bit of time with labor, with the restructuring that we are undertaking. So, look, generally speaking, I would still expect that through 2014, we'll make continued progress, but I would think 2014 will still generate a loss. And then into 2015, we've got to get it, at that point, back to break even and some earnings. So I mean it, admittedly, is going to take a little time.

Understood. All right. Thanks so much.

You're welcome.

Our next question comes from Helane Becker of Cowen and Company. Please go ahead.

Thank you very much, Operator. Hi gentlemen, thank you so much for the time. Just a couple of questions, Brad. On 117, when do you think you will hear about IROPs, because I feel like from what I'm hearing from other companies, that's going to be a big, you know, concern, in terms of, you know, crews. So have they given you any indication of when they'll get back to you? Because we're going into a period of time in your part of the world, where weather can be a factor, you know, sooner rather than later.

Yes. Let's see. Chip, why don't I have you take the first comments on that one.

You bet. Thanks, Helane. That's an excellent question. And I wish we had all of those answers, but the truth of the matter is, we don't really know when we're going to get some of the answers, and to be candid we don't know the depth of the answers that we're going to get.

I will tell you that we have a lot more questions than we expect answers to, and it's interesting because when you look at the timing of this issue, we believe in January and February, where we could face a significant amount of weather IROP situations, we do have plenty of crews, to, you know, mitigate the impact of that, if we can make sure the crews are in the place in the right -- under the right circumstances. I think March, in our anticipation, is a timeframe that makes us probably mostly concerned because our schedules get ramped up very heavily in March, and so our reserve for crews is not as high, and if we have IROP situations in March, then that's obviously the month that we're mostly concerned about.

So with sequestration that happened the last several weeks, we were hoping to have some of the answers sooner than later. However, we've just been hearing through our CMO, and through some of the national offices that we'll get some more clarity for sure by the end of the year. We would love to have it today or tomorrow, but we're proceeding in a manner, particularly in January and February, where we have a significant amount of crews to help deal with this issue.

And we're just going to have to, you know, evaluate what we've done in the past, if we don't have these answers and make sure that it hits the spirit of what the rules are going to provide for us, if we don't get all of the answers that we need. But we certainly do wish that we could get much more clarity than what we have today, and sooner the better.

Do you think they would delay implementation since they kind of, you know, because of the shutdown? Do you think they would hold off maybe a month or two?

I've heard rumors of that. To be candid, we can't speculate that that's going to happen, so our focus, Helane, is just to be prepared for it on January 4.

Got you. And then Brad, what of the MRJ order? Is that still outstanding? I feel like they delayed -- like they delayed everything.

Well, they did. So, yes, the RJ -- the MRJ order is still there. You know, we're still very much committed to that agreement, but, of course, the agreement, you know, certainly specifies the airplane has to be, you know, built as advertised. We have some very specific, you know, issues there that have to be met.

Look, the timing, you know, is not particularly helpful. I mean the RJ -- the MRJ order for us is, kind of, that bridge agreement for us, and, you know, the further the delays, I mean, it compromises that for us a bit. But, no, I mean the order's still there. We're committed to it. But, you know, but the folks at Mitsubishi have to deliver, the airplane as advertised, and they need to do it in a time frame that makes sense for us, and if that doesn't happen, then of course we have no financial obligations or commitments to take the type.

Okay. And then can I just ask one last question, please? On just another follow up on pilots, sorry about that, do you know how many pilots that are on your, you know, your -- -- in your working area? I don't know, your firm, your company, that are -- might be on furlough from the majors?

Chip, go ahead and then I'll let Brad comment as well.

This is Chip. I don't know that we have any that are on furlough from the majors. Well, I mean, I guess, I think your question is two things.

Is there a risk that they could go to the majors, because they used to work to the majors? Typically when they take an employment with another airline, they forfeit that obligation. So technically from that aspect of our airline, we do not have any that are furloughed from majors and, you know, we're going to go back in that fashion.

Okay. Thank you.

Helane, Brad wanted to make some comments on the ExpressJet Side.

Okay. Thank you.

Well, I was just going to add to that. That most of the people that were furloughed from major carriers that came over to regionals have returned to the major carriers at this point, or have elected to stay on long-term and turn down their recall rights.

So we don't expect any problems in that area from recalls. There are very few recalls out there now.

Got you. Thank you so much.

Thank you, Helane.

Our next question comes from Duane Fenningworth of Evercore. Please go ahead.

Hey, good morning, this is Jeff Eisenberg in for Duane.

Yes.

We see about 95% of your capacity in Delta United markets, and while they've each reported third quarter load factor up about a point. Yours stands about down a point. Is there any color that you could offer there? And in particular, are your -- are you being scheduled above your block hour contractual minimums?

Yes, we are being scheduled above our contractual limitations in the contracts. And, you know, load factor is, as I think you know, relative to how our contracts work. We certainly are extremely interested in the effectiveness and the productivity of our roots.

But as far as the -- you know, the pricing and the management of the fleet inventories, you know that the major carriers are in control of that. So I certainly do not want to indicate that that's of little interest to us, because it's of primary interest to ensure that what we're doing makes sense to the majors. But I think you know that they are in control of the pricing and the fleet management.

Got it. Thanks. And then second, on the certification expenses associated with the E75 in Q4, can you size that a bit for us? And then, is that partially or completely billable, ultimately, to the contractual party?

Okay. So -- I think at this time we're still -- I think for as far as any kind of particular expense guidance, or things that could be translated to EPS guidance, for purposes of this call, that's still in development. And those of you that are working models and things, I would just suggest that you, you know, work in the normal course as you do with Mike Kraupp, you know, in follow-up calls and things, as we're developing more of that information.

I will say, though, that some of that is being handled in a number of ways. Of course, the expenses we incur up front and record them as incurred. Reimbursement for them happens in a couple of ways. In some cases, the reimbursement comes at the time of the aircraft delivery, and in other cases, some components of those costs are recovered over time in our contracts.

So, I mean, one of the issues is how much of it hits up front. The other issue is the timing of the reimbursement, but I would suggest rather than going into specifics on this call, if you would, you know, hold those calls as you're working through your models and things and coordinating that through Mike Kraupp.

Okay. Thank you for your time.

You're welcome.

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

Good morning.

Good morning.

First question -- prorates, you gave us the revenues, could you give us what the profits were?

Mike Kraupp?

Yes, Brad, let me -- Glenn, what we've done is we'd had this question in the quarter before, and we're not in a position where we're going to disclose that. We're sort of treating our prorate business similar to what we do with the contract side, so we won't make any mention of what the actual profitability is on those.

Can you talk about how it was versus last year?

It was up last year. I think Brad had indicated, and I had indicated, as well, that from a revenue perspective we were up, so profitability was up slightly on a year-over-year basis, as well.

You said there was a $5 million Air Mekong gain, and I wasn't sure if -- and you said there were transition expenses that showed up, I guess, above the line. I might have missed it. Did you say what those -- the amount of that was?

So, yes, we indicated there's $5 million in gain in non-operating income. And then approximately $2 million of expenses, above line, that just ran through normal operating expenses.

If I look at the P&L, the landing fees dropped sharply from the second to third quarter. Why was that? And is that something that is just a pass through and not really an effect on profits?

That's exactly the answer Glenn, more and more of the landing fees have been paid directly as a pass through. So not affecting -- so in essence, the same number in both decrease of revenue and decrease of expense.

And finally, the engine mismatch, a bad guy last year, a good guy in this year. How long does it remain a good guy and when do we start seeing that just sort of flatten out?

Mike, do you have that? I think you're probably best to address that.

Yes, it's obviously turned into a slight good guy. It was a little better in the quarter. By year-end, we'll have a few more of those, so that we're predicting it will be flat on a year-over-year basis. In 2014, it turns slightly positive.

Really no material change, but the good news there, again, and we'll reiterate, Glenn, that we won't -- we've done mostly the overhauls on those and they won't have overhauls again. So we won't be back in the situation where we create the huge negative drag. So, again, on a go-forward basis 2014, we think it will be flat to slightly positive.

And have you given capacity guidance yet for 2014?

We have not. We're just in the process of finalizing that, and we'll have some discussion with our Board of Directors next week regarding the plan. So at that point in time, we'll most likely issue some guidance on ASM production for 2014.

Thank you very much.

Yes.

(Operator Instructions)

Our next question comes from Mike Linenberg of Deutsche Bank. Please go ahead.

Yes, hello, everybody. Brad, I want to go back to just the comments that you made about ExpressJet, and you mentioned that 2014 you still expect it to generate a loss. And 2015, you know, maybe you hit break even.

What's -- you know, why the long time line? Are you working with a fairly conservative forecast here, or are there just significant structural changes that are going to -- they're going to take some time to implement? What's up with that?

It's -- well, it's both of those, Mike. I certainly would like to think that that guidance is conservative. I think then, we're certainly very gun shy of getting expectations ahead of our ability to deliver, so I think there is some of that. But then, look, we've got -- we're optimistic about some things that we have that we can do to improve the operation.

But we have, at the same time, some very significant issues like the expenses of 117, that we -- the FAR117, that we need to -- you know, that we're uncertain, at this point, as to when and how much of that is reimbursable by our partners. So there's both some fundamental heavy lifting and things that need to be done. We've got to get the CBAs done, and that's -- you know, as you know, that doesn't happen overnight.

Yes.

And then once they're closed, you know, some of the changes and things are staggered in over time. And then, look, the other kind of uncertainties or things that are taking some time, is that we need to be in a position where the natural expirations of the aircraft in ExpressJet are either renewed, or, I mean, extended or replaced.

And certainly our expectation would be that as those contracts are -- you know, as they term out and then we extend or renew or replace, that those will be back at what we would consider market rates. And so, I mean, all of that together is just going to take some time.

Okay. Now I understand. And then just another question on just the fourth quarter. You know, you sort of characterized it, or maybe your approach, you said you were going to, you know, sort of the -- led in with some cautionary language, maybe you used the word caution.

You talked about the training and certification expenses. I know in the past, when you've ramped up with new airplane types, you know, in the past, you've given us what those numbers are. As we think about our fourth quarter, what -- you know, how should we think about what those costs could potentially be? And maybe it rolls into the March quarter of 2014.

And then just I know last year you did give us our -- the prorate profits. How -- was it a loss last quarter or, excuse me, in the fourth quarter of 2012 for the prorate? Or was it closer to break even? I'm just trying to get a feel for the year-over-year.

Okay. So Mike Kraupp, you be thinking about the answer to the second part of the question. The first part of the question, as to a specific any more specific guidance, we've got -- I just -- I would prefer to hold the detailed updates of the quarter expectations.

We need to have our -- we've got our board meeting as Mike indicated this coming week. We'll have our board-approved plans, which will give us more guidance and direction on capacity and some directional issues.

And once we have that, and can share it with the market, we'll -- we can also begin updating on the specific as to, you know, how much impact we think the fourth quarter will have on, you know, certification and training costs. But I'd really prefer to wait until we have a little more specifics developed.

Okay. That's fine. And just one last one, you know, in the press release, you did call out the escalation increases in the contracts. And that's -- you know, in the past, I mean I know they exist. Typically you wouldn't highlight them, and I just -- you know, my impression is this a quarter where you have several contracts that reset, or is it no different, you know, throughout the year? You have lots of contracts out there and every single quarter may be the same number of rate resets kick in. How should we think about that?

So primarily those resets happen on a calendar year. So, once the increase goes in, it most -- I mean, they're all slightly different, but generally it happens calendar year based.

Okay. Very good, and that's helpful. Thank you.

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

Okay. Well, again, thank you for your time and for your interest. We've had you on the phone now for quite some time. We want to be respectful of your time.

Again, I express appreciation to you for your participation and interest, and, again, I'll repeat our thanks and gratitude, appreciation, to all of our employees for their dedication and commitment. We feel, we in some respects, we have some -- you know, some continuing industry challenges and things to deal with, but predominantly, we are very optimistic.

We look forward to the future with anticipation. We think we're very well positioned with our people and our financials, our balance sheet, and so we're very optimistic about the future. With that, we'll go ahead and again, thank you for your participation and conclude the call.

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