SkyWest Inc (SKYW) 2013 Q4 法說會逐字稿

Good day and Welcome to the SkyWest Inc. fourth-quarter 2013 earnings call.

(Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Bradford Rich, President of SkyWest Inc. Please go ahead, sir.

Thank you very much, Operator. Thank you to all of you for taking the time to join us this morning. As always, we very much appreciate your interest in SkyWest Inc. and our operating companies, and we look forward to having a good and productive call this morning. Let me first of all introduce those who are with me who will be participating this morning.

I have Chip Childs, our President and Chief Operating Officer of the SkyWest Airlines operating entity, as well as Brad Holt who is the President and Chief Operating Officer of Express Jet Airlines. I also have Mike Kraupp who is our Chief Financial Officer; Eric Woodward, our Chief Accounting Officer, and we have other members of our staff here with us at headquarters in St. George.

I am going to begin this morning by turning some time back to Mike Kraupp. He will read our Safe Harbor on forward-looking statements, and then he can just continue and give an update to review the quarterly release that we put out this morning and our financial performance and condition. And following Mike's remarks, then I will make some other general remarks. I will go ahead and the turn to Mike.

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 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 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 or 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.

Let me also thank each of you for being on the call with us today, and likewise, as Brad expressed, for your continued interest in our Company. My comments are going to be brief and I am keeping consistent with past practice. I'll just use our press release to highlight some things for the quarter.

This morning, SkyWest Inc. reported net income of $8.6 million or $0.17 fully -- per diluted share, which compares favorably to a recent downward revision of the consensus estimate of $0.14 per diluted share. This also compares the net income of $13.9 million or $0.27 per diluted share for the same period last year. SkyWest also reported net income of $59 million or $1.12 per diluted share for the year ended December 31, 2013, and that compares to $51.2 million or $0.$0.99 per diluted share for the same period last year. From a production standpoint, our total block hours increased 2.8% during the quarter to 584,594. Our fleet also, at year end, was 757 aircraft, which was a net increase of 13 aircrafts on a year-over-year basis.

The net increase is primarily the result of our continued Delta transition that we started in late 2012 and finished by May of 2013 where we brought in additional dual-class aircraft. We have also continued the removal of CRJ 200 regional jet aircraft operating under our Delta agreement, which was also announced in 2012, whereby SkyWest agreed to remove 66 50-seat regional jets and brought on a total of 34 dual-class aircraft. As of December 31, 2013, we had removed 33 CRJ 200 aircraft and would anticipate removing 29 of the remaining 33 aircraft during 2014 and the last 4 aircraft in early 2015.

You can also see from the press release that total operating revenues decrease about $6.4 million quarter-over-quarter. However, after you removed the noise created from pass-through costs like our fuel, certain engine overhauls, and other pass-through costs that are included in revenues, we actually increased our operating revenues by $23 million for the quarter. That increase was driven by additional block hour production of 2.8%, as well as scheduled rate increases that were provided for in our flying contracts.

Also, our total pro-rate revenues during the quarter was about $90 million, which compares to about $88 million for the same period last year. Also, as noted from the press release, our operating income was lower by about $13 million for the quarter just ended compared to the same period last year.

We believe the reduction is due to three primary factors. Number one, we spent about $3 million pretax in increased crew training costs, as a result of the new FAR 117 rules, which became effective in early January, 2014. We also spent about $5 million in additional C-checks maintenance costs on airframes during the quarter just ended that were primarily related to the used dual-class aircraft that we acquired during late 2012 and early 2013. Then lastly, we invested about $3 million in our future E175 regional jet aircraft program by starting advanced crew training and working to become certified to fly this aircraft.

Incidentally, our first E175 aircraft is expected to deliver on March 24, 2014 and we'll actually take delivery of 21 of those aircraft during 2014. Our pretax income was lower by about $10.5 million for the quarter just ended, compared to the same period last year, as a result of the previously mentioned items, as well as a reduction of about $2.5 million in our interest expense.

Total operating expenses and interest increased $4 million for the quarter just ended, but again, when you remove the noise created by pass-through costs, that I noted previously, our remaining total operating expenses and interest increase $33.4 million or about 6%. Roughly $17 million of the increase is attributable to the increased block hour production of 2.8% and the remaining $16.4 million or 3.2%, is due to the general aging of the fleet, which produces increased maintenance costs in addition to additional crew costs related to the aforementioned training event.

We again have included a summary balance sheet in the press release prior to the filing of our form 10-K later this week. As indicated, we have $670.1 million in cash and marketable securities as of December 31, 2013, which compares to cash and marketable securities of $709.4 million for the year ended December 31, 2012. The reduction was about $40 million year-over-year, and you can likewise see the deposit on aircraft amount of $40 million on the summary balance sheet as well.

That amount represents the total amount that we will pay on deposit for our recent order of E175 regional jet aircraft. And those deposits will be returned during mid-2015 depending on how we finance the deliveries, either through leases or traditional debt financing. Our net debt position improved during the year and reduced by about $132 million. We also spent about $44 million in non-aircraft capital expenditures during the quarter just ended of which about $10 million was related to advanced purchase of rotable spare parts and a spare engine for our new fleet type, the 175.

We also included another page in the press release, outlining our estimated fleet numbers at the end of each of the quarters during 2014, in addition to block hour production and available seat miles. In 2014, we will begin in earnest, returning additional CRJ 200 aircraft that I have outlined, as well as the start of E145 aircraft, under our United agreements. Those agreements are consistent with the standard reductions within the confines of that particular agreement.

Lastly, the block hours as indicated for the first quarter were adjusted earlier in the week for the previous weather events that we have had, but I would also suggest that you adjust those hours downward by about another 2,200 block hours, to take into account the additional weather-related cancels just over the last couple of days. With that, I'll turn the call back over to Brad.

Okay, thank you, Mike. Okay, I want to spend a few minutes addressing a few very specific issues. We'll have a discussion concerning our readiness for the E-175's rapidly approaching. We'll talk about, a little further, we'll discuss the impact of the weather in January and February. We'll talk about some of the pilot issues that are affecting the industry. And then we'll have a very specific discussion about some things that are required to -- some changes and improvements that are required at Express Jet.

First of all, a quick word about our readiness for the Embraer E-175 aircraft. SkyWest Airlines remains on schedule with its certification efforts for the E-175's, which will fly under the United Express brand. We expect delivery the week of March 24 and we'll begin service, we expect, in late May of 2014. The initial routes will be announced by United, we think very shortly. That announcement is one that needs to come from United and will probably be made next week. We are very encouraged, we're on plan.

Everything is -- although it's required a tremendous amount of effort and work, our people have been on task. We feel very good about our preparations and our readiness to bring on this aircraft type.

Next, let me talk about the impact of the weather in January and February. As most of you know, we began the year with some of the coldest US temperatures in decades. And again as most of you are aware by some reports the impact of this severe weather resulted in more than 100,000 delayed and canceled flights, affecting somewhere around 10 million passengers across the industry. For SkyWest operating entities, the weather irregular OPS produced the most significant and challenging impact at ExpressJet given their east coast presence and their concentration in Chicago, Newark, and Cleveland.

We have experienced around 15,000 total cancellations with approximately 13,000 of those directly attributable to weather. Those numbers are from January 1 through February 12. To put those numbers in perspective, what we had thought were an unprecedented number of weather cancellations in the first six months of 2013 -- we had in that period, we had 10,000 weather cancels. And in all of 2012, we had 12,000 weather cancels.

So, in the first part of year, from January 1 through February 12, we have, in that short period of time have exceeded what we had thought previously were unprecedented numbers of difficult weather-related cancels. This is obviously going to have a significant impact. Those issues have been compounded and exacerbated by the impacts of FAR 117 and it certainly contributed to a significant amount of additional cancellations. And again, the whole situation was exacerbated by these new rules as displaced crews and aircraft resulted in crew time-outs.

Earlier, they (inaudible) would have been under the previous rules creating somewhat of a HALO affect under the significant irregular operations events. We expect losses due to weather affecting ExpressJet's operations to be around, and again, this is an approximate number, but it is a significant number. We expect it to be around $24 million pretax.

That number is a combination of lost revenue, from not operating the block hours, as well as the additional expenses incurred just due to all of the irregular operations where we have crews displaced, maintenance members commuting to airplanes, instead of airplanes being under hangers and that sort of issue. So, again, it's a significant weather-related impact that will certainly create a negative pretax impact on the first quarter.

Let me talk about some of the pilot issues. There's quite a bit of conversation across the industry surrounding pilot availability and new regulatory requirements. To recap a couple of the most recent industry changes, the new federal minimum experience requirements became effective in August of 2013.

Both of our operating entities were prepared for the change well in advance of it's effective date and have continued to attract highly qualified professional pilots. That being said, it has had an impact on the number of qualified pilots across the industry to meet the new requirements and at least in our opinion, this will be a challenge in the future.

Additionally, the new requirements of FAR 117 were implemented in January of this year, which has increased the need for crew members across the entire US airline industry, not just the regional carriers. As I mentioned, both of the SkyWest Inc. operating entities have executed the necessary changes associated with this rule.

I think some of these issues have become highlighted in certain media articles and have gotten some media attention. One of our partners announced some changes in Cleveland and attributed some of those pull-downs to some of the issues relative to these crew requirements and new rules and generally the impact on the availability of pilots. Let me just say, that we expect that ExpressJet will be a presence in Cleveland in the future, both flying and maintenance, but there will be more clarity to this issue, in the future, as we get additional clarity and continue to work with United on those future schedules.

SkyWest Airlines has a smaller presence in Cleveland, and we don't expect material impact there. In short, it's clear that the various factors and changing industry dynamics have made fewer pilots available industry-wide, and we aren't immune to those factors as an entity. However, our operating entities continue to attract qualified pilots. But again, as I said, we do expect that this is getting harder and harder and will be a challenge in the future. We do remain very conscious and proactive about our ability to attract and retain qualified professional crew members.

Now speaking of crews, both of the operating entities completed voting on their respective pilot compensation packages in January of 2014. SkyWest Airlines has secured a solid pilot agreement that helps maintain competitive position in the industry. The ExpressJet pilots did not agree to the proposed new compensation package and they continue to operate under the existing contracts.

We will continue working with the ExpressJet pilots to secure agreements that will allow that entity to become competitive. The financial health and stability of ExpressJet is a significant priority and focus. Now, speaking of that priority and focus, let me make some specific comments relative to our current situation at ExpressJet.

After three years, the ExpressJet entity -- and I'm talking about the combined ExpressJet, since the acquisition of ExpressJet -- the entity continues to lose money and is generating negative cash flow. This plain and simply cannot continue. One of our highest priorities is a specific defined action plan for the returned profitability of ExpressJet. The recovery is simple in some ways and very complicated in others, depending on the area of focus and the level of control, and will require coordination with our major partners. To that end, we have a very specific plan to secure the required and expected returns.

Again, these are returns that we expect, that our shareholders require, and returns that will create a stable and productive work environment for our employees into the future. This plan is focused on three specific areas. Number one, specific cost reductions, which we are working to achieve through the following. Number one, process improvements and productivity enhancements including very specific coordination with SkyWest Airlines involvement to implement best practices across the entire SkyWest Inc. platform. Second, within specific cost reductions, our labor agreements. We plain and simply must complete our joint collective bargaining agreements with all labor groups. Next, vendor and service provider negotiations using the combined volumes of SkyWest Inc. to create value.

We have had material improvement and success in this area over the last few months and we expect more in the future. Okay, the second area of the improvement plan. We need to improve our operation reliability to deliver the product our partners and customers deserve and expect, which will both reduce cost and increase our base mark-up and our contract performance incentives. Specifically in 2014, we will improve our spare ratios to better support the network. We will continue to implement organizational and structural changes to ensure efficient and reliable operations and we will continue to work with our major partners to optimize the route networks to ensure that crews and maintenance are flowed most efficiently and effectively through the system.

Third point, we need to modify and in some cases renegotiate our major airline CPAs. The legacy Express Jet contract is materially below market. The contract requires certain modifications or we need to reduce the size of the fleet in those contracts to eliminate future losses. Getting ExpressJet to profitability requires success in all three of these key areas -- cost reductions, operational reliability, and contract modification.

We are very aware that there are many factors and stakeholders that contribute to achieving each key objective, but we remain very focused on this approach. As you would expect, we do conduct very specific and detailed analysis of our operations by segment, by type, by code, by location. We know where we're making money, and we know where we are generating positive cash flow, and we know where we're not.

We're prepared to take the steps to remove unprofitable segments or operations that generate losses and negative cash flow. Again, our ExpressJet recovery efforts in 2014 are specific and focused and a critical part of our short-term strategy.

Now, let me end on what I think are a couple of very positive notes. As some of you may know, in 2013, we were just awarded the air transport world regional airline of the year. We are proud of our people for helping create many successes and our thanks and appreciation go out to them. We're grateful to all of the men and women of SkyWest Inc. and our operating entities for their dedication and for helping us, again, achieve many successes.

We have, as we have discussed, many challenges ahead. But most of all, this award makes us even more determined to be the leaders of our industry into the future. I would also say that we are very optimistic. We see opportunity and we have the resources to productively act.

Those assets and our resources are our people and other strategically valuable resources. Our priorities are centered on allocating those resources in a way that will generate both current and future value. With that, I will now close our prepared remarks and open it up for questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) Our first question will come from Savi Syth of Raymond James. Please go ahead.

Hey, good morning. Thanks for laying out the plan for returning to profitability at ExpressJet. I was hoping you could provide a little bit more context in maybe relative size of the various components and perhaps the likely timing of when these items can be addressed.

So, Savi, it's a very good question. I'm trying to be as specific as I can be in this environment.

Obviously, the plan is very detailed. It has many facets and aspects. I would just say that in addition to what I have said, let me just add to it that, look, we are focused on productivity enhancements, best practices, using our size and volume wherever we can to create productivity, efficiency, and value.

So what we are doing is, we're working very cooperatively as SkyWest Inc. with both entities using all of the intellectual knowledge we have at both airlines, combining it with our systems, our size, and just re-looking at everything. So with the help and cooperation of both entities, we have identified very specific initiatives that we are working on.

Those initiatives are very specific to those areas that I addressed: process improvement, cost reductions, improving the reliability, revenue enhancement that will come through reliability, as well as the reality that we have some contracts that are just -- there's no other way to say it -- that are significantly below market.

We have either got to improve on those or reduce the size of the fleets that are flying in those unproductive contracts. We think this is an environment where the resources that we have available at SkyWest are very valuable.

I mean, look, I mean size means nothing to us if it can't create value. So if we can't create value through size, then we need to downsize.

If our size and volume positions us with crews and things that are strategically very important today and we can utilize those and allocate those in a way that can create value to both us and our major partners, that is certainly our preference.

So I just need to leave it with the detail that I have given. We're very focused. We do have detail-specific initiatives in all of those areas, and we are acting on them immediately.

Okay. Understood, and so the second question on the fleet detail was very good as well. I appreciate that.

It looks like there are 56 50-seaters being removed this year in 2014, and 29 of that is related to Delta. I was wondering where the rest were coming out of and maybe how many you might -- what kind of a reduction we might see in 2015?

This is Mike again.

The balance of those will be sort of onsie/twosie with CRJ200 aircrafts throughout the system, non-Delta-related. And then the balance of those will be E145 (technical difficulty) that we have schedule reductions on coming out of our United contracts.

Okay, and then 2015?

I don't have the 2015 numbers right in front of us, Savi. We will file the Form10-K later this week, and we have actually got scheduled reductions outlined within that; so we'd welcome you to take a look at that.

I would also caution folks to remember that when we put those numbers out there, those again are estimates.

We have found that historically our partners actually come in and deviate just a little bit on the time for that, and it is actually extended. So just be aware of that as you look at that data.

Got it, thanks so much.

Our next question will come from Mike Linenberg of Deutsche Bank.

Hello, this is actually Richa Talwar filling in for Mike. Just a few questions here.

You guys talked about the pilot issues and mentioned that the media has been focused on it, and it will be maybe a challenge for you more in the future.

I was wondering, though, if its impact to your current fleet plan for 2014; and then specifically looking out, I mean, you have those options on remaining 60 E175s. Do you feel comfortable enough with your position and your crew numbers to be able to fulfill that flying, if you find the right partners and the right contracts for that?

Okay, so there is actually quite a lot to that question. First of all, the pilot issues.

These changes, both in the minimums and the impact of FAR 117, are very significant issues. And not only by themselves are they significant, but they are happening at a time when the majors are hiring fairly rapidly and will be in the next few years, and at a time when our industry will experience thousands of retirements at main line just due to a mandatory age retirements.

All of these things combine to be a very significant issue to SkyWest and the industry. I mean, all of us together are going to have to deal with this.

Now, this is one area that I think two things that create some advantages for us. Number one, we do have very attractive entities to come and join and fly for.

In addition to that, our current size has some advantages because we will be having some natural retirements of fleet at the same time that we see some opportunity for some additional aircraft, even within the additional dual-class environment.

So in some ways, what we expect and are working towards, is just a reshuffling of the fleet; the elimination of some of the 50-seat airplanes; and just repositioning them in hopefully additional dual-class airplanes.

So I mean that's certainly ideal. And when we have the base of pilots and crew members we have, that should give us some advantages over the rest of the industry.

Okay. That's helpful.

And then on your turnaround plan for ExpressJet, one of the legs you said is to modify and renegotiate some of your CPAs. I was wondering if you've already started having conversations with your major partners on this and how receptive they are to (technical difficulty) [amending] some of those contracts?

As you can imagine, this is a very sensitive and very challenging issue. Yes, we have begun discussions; and we will continue them in the very near term. And as far as to their receptiveness to that, I am not going to comment on that publicly.

I will just say (technical difficulty) that we have either got to have improved rates in certain areas; or as airplanes are scheduled for natural terminations, then we would not expect to renew those airplanes. And in a very natural way, you could see a fairly significant reduction of the ExpressJet fleet.

Certainly, our preference will be to have the major carrier in this instance properly value the lift and continue flying and extending. But if that doesn't happen, then we will simply reduce the number of aircraft in those unproductive contracts.

Thank you. If I could just ask one more.

You said that the losses at ExpressJet for the first quarter, I think you said, was $24 million pretax?

Okay, let me clarify. That is an additional.

What I am saying is if you take your initial estimates and expectations for the first quarter, this would be an additional $24 million of negative pretax impact from what you were already expecting.

Okay. Understood. Thank you.

The next question will come from Helane Becker of Cowen and Company. Please go ahead.

Thanks, Operator.

Hello guys, thank you very much for the time.

I just have a couple of questions. One is, I don't know how much you can talk to the terms of the new pilot contract, but does it provide for starting salary increases at the first level, you know, at the joining level?

Helane, are you talking -- when you say the new pilot contract -- the SkyWest airlines pilots voted in their agreement. Is that the one you're referring to?

Yes, because the ExpressJet pilots -- I think you mentioned and I saw a couple weeks ago -- rejected the TA.

That's correct.

For the compensation agreement for the pilots at SkyWest Airlines, did it provide for a base salary increase? Because we are seeing discussions in the press that pilots, and this is generic, start at regional airlines as low as $20,000 a year.

I am not sure how that comps to your guys; but I was wondering, maybe you could just speak to that directly?

Okay, I'll ask Chip Childs, President and COO of SkyWest Airlines, to address that.

Helane, that is a great question.

I think we have to get to the point when we talk about pilot pay. We have a conversation, a little bit we have to divide it up between RJs and resilience because I think from our perspective, we have a unique line of business where we fly Brazilias along the West Coast and Salt Lake City; and have about 45 or so of those airplanes.

A lot of our new hires come in to fly the Brazilian. So this last pay package -- not to get into specifics -- to increase that pay quite a bit to attract folks into the Brazilian, which we think is still a very viable business.

From the perspective of going directly into an RJ, becaise some of our pilots go directly into a jet, we did not make any modifications to those. Those rates are [higher] than that.

And I think when you look at our competitive base compared to where a lot of the industry is, particularly, when you look at the moves we have made on the Brazilian side, we are very well within the range of being able to attract pilots.

In fact, I spent time with our new hire class last week, and we have a tremendous group of pilots that continue to have interest in SkyWest and want to fly for us. It's an exciting story relative to a lot of things that you hear out in the media.

Can you say what your pilot turnover rate has been, or what you think it will be this year?

I think for SkyWest Airlines, I will speak specifically for SkyWest and let Bradford speak to ExpressJet.

Last year in 2013, we budgeted to lose about 20 pilots a month. And on average last year, we were around the13-pilots-a-month range. So we were last year significantly lower than what we anticipated for 2013.

In the fall, it jumped up a bit, like it did throughout the industry, up closer to 20. We're budgeting slightly more than 20 this year, and so far what (technical difficulty) we have seen for January and February, we're slightly below those estimates.

Well, Helane, on the ExpressJet side, if you look at an average over the rolling 12 months, we're running between 8% and 10% of turnover. That equates with our size fleet to about 30 pilots average a month. Of course, that's up and down.

We have very high months, and then there are very low months; and that's all dependent on major airline hiring. But on average, it's 8% to10% at the present.

Okay. And then, just on the ExpressJet specifically, I don't know how the CPA works, but I know that you get bonuses if you reach certain goals. Do you have to pay your (technical difficulty) partne if you fall below, and do you get a bye for weather?

Helane, that's a very good question. And the answer is yes and no, depending on which contract we're offering. Even within ExpressJet, of course, we've got two different major carriers. And we also within United have several different contracts.

So, yes, the contracts have performance incentives. And on a large portion of the ExpressJet contract, the contract calls for performance bonuses and penalties. And so, yes, if you fall below a certain reliability, there are penalties.

On the ExpressJet side, the contracts, I will just say this generally; again. they're different by carrier. But generally, there is very little and in most of their cases no compensation for weather-related cancels.

That is why the impact of this is so disproportionate -- both location and the impact of the contracts. All of the legacy ExpressJet contracts did not allow for any compensation for weather cancellations.

We see the numbers every day. They must understand you can't operate with them canceling 500 to 1,000 flights a day on some weather days.

Yes, they do realize that. In most of these real severe days, like what we have going on yesterday and today, a lot of the flights are just pre-cancelled.

In some cases, we just had virtually just hard stops. Our flights are just pre-cancelled.

Right, gotcha.

What about the MRJ order? Is there any update to that? What is the timing?

I know they are behind, I think about a year-or-so. Are you making pre-delivery payments on those, or can you suspend those waiting for them to catch up? Or can you just update us on that?

As you'll see from our financials, there is a big increase in the quarter in pre-delivery deposits. That was all related to the E175 contract. and that level of deposits is capped. So, we will not make any further pre-delivery payments.

As far as the MRJ site goes, look, there are no changes from what you have seen previously as reported by Mitsubishi relative to the timing.

As it relates to us, our deliveries were originally scheduled for first quarter of 2017 and are now moved to second quarter of 2018. But there are no remaining pre-delivery deposits to be made.

Okay. And then can I just ask one more question?

On ExpressJet, this has been a problem for years, as you pointed out. When did you decide that this had to -- there was almost an end date. Have you be been talking about this at the Board level for several months or did this just start?

I'm kind of surprised you didn't start to take some of these -- because you guys are pretty good at being profitable and focused on your business -- that you didn't start to take some of these initiatives last year rather than this year.

We have been working on some of these initiatives very specifically for several years.

As you know, there are several things that are -- let me just say, there are things that have changed within ExpressJet and the network that we operate. Some of the improvements and the cost reductions and the initiatives we have been working on have been overshadowed by other inefficiencies in the system.

We have some cost increases in some -- I hate to make excuses and call them uncontrollable; but for example, in Maintenance we have some escalating cost primarily due to either age of aircraft or the utilization on the airplanes that are causing increases in maintenance that are escalating higher than our rates are escalating.

So, we knew when we bought ExpressJet that we had to get some efficiency and productivity and integration savings. We also (technical difficulty) knew that in the near term, the results would underperform relative to our normal expectations because we didn't have tail risk.

We (technical difficulty) were on the very low end of the market. But as the natural terminations happen, and we expect to -- the original thesis, I will say -- to renew and extend contracts at what would then be market rates.

Well, in the meantime, the system has changed. The system has been spread out. It was very concentrated in Newark and Cleveland and Houston, and now we're flying in Chicago and Denver.

The utilization on the airplanes have gone up. The spare ratios are not adequate. I mean, there's just a number of complicating factors here that have kind of exacerbated the problem.

In the meantime, we haven't achieved the joint collective bargaining agreements that we need to get, and that's delaying some of the efficiency and productivity improvements that we needed to realize.

So, look, all of this is just -- the Board has been talking about this for a long time. And then, yes, as you can imagine, the Board is not very patient with this. So, things are just -- it's just moved to a higher priority and a sense of urgency, and that is where we are.

Great. I really appreciate the depth and breadth of your answers. Thank you very much.

You're welcome, Helane.

The next question will come from Duane Pfennigwerth of Evercore. Please go ahead.

Thanks, guys.

Just on ExpressJet, if you don't have ownership risk on an aircraft and you're not generating profit operating an aircraft, how is a customer winding down operations in a place like Cleveland bad for you? It seems like it could actually be accretive.

I don't think you've -- look, we're very sensitive about this from a number of respects. There are people involved, and we're very concerned about people. But as it relates directly to your question, I don't think you have heard us say this was necessarily a bad thing for us.

Until we see more detail from United, just generally as a market, we shouldn't draw conclusions about what the impact is to our entities. We still expect to be a presence in Cleveland.

I certainly appreciate your detail on the three points of the plan. And then there has already been a couple of questions on that third point.

We haven't really seen mainline carriers rushing to open their wallets for higher rates on existing contracts. So my question is, what is your sort of timing?

How patient should we expect you to be with respect to that third point? And if you don't get there, what is a Plan B?

Well, as Mike said, you will see in our 10-K that will be filed here very shortly -- Friday, tomorrow -- there will be a fairly detailed plan of expiration, natural expirations in there.

Our point and position is that this feed needs to be property valued, or the terminations will happen. So some of this will just happen naturally based upon what will soon be a fairly aggressive termination just scheduled by contract.

At the same time, we have other partners that you know have been very vocal about their desire to reduce 50-seat lift. Okay, so there are a number of things that could play out here that could result in fewer aircraft and a smaller fleet.

Thank you, guys.

You're welcome.

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

Good morning. A few questions.

First on the CRJ side, as you return those planes, is there return costs to those aircraft under certain conditions?

And, two, on the engine mismatch, there was a $3 million good guy this quarter in the engine mismatch. And is that likely to continue in 2014?

Okay. This is Mike again, Glenn.

With regard to your questions, yes, typically when an aircraft goes back, we do incur some costs. It really depends on the condition of the aircraft.

We have got negotiative provisions primarily under our leases that we have to return those to. So, yes, there could be some small level of cost depending on where that aircraft is in its cycle.

With regards to the second part of your question, yes, your observation is correct in that we have a small good guy in this quarter.

For the remaining quarters of 2014 and for the year, we do anticipate that that United engine overhaul event will be a good guy to the tune of about another $3 million over the course of the year. So similar, but a little bit higher next year.

And the CRJ return costs, your comments would be you don't think there are going to be large numbers affecting estimates?

This is Brad. I would just say I don't expect this to be a material number.

With the size of fleet we have at our experience at returns, our maintenance teams are very focused on operating these airplanes to return conditions and then dealing with those required return conditions relative to within service and all that.

So our teams are getting very efficient at this and I don't expect that to be a material number.

On the pilot side, can you give us a sense roughly of just applications to openings?

You're saying the relativity of how many people we have and kind of an active hiring pool relative to positions available?

Correct.

This is Chip.

At SkyWest we have, I think, excellent coverage. We're planning for a very strong month in March. And we're planning for a very, very busy season in the summer months with the inception of bringing in the 175.

And so far, there's no question that it's a little tougher. You have to work and dig a little harder to get the right candidates to fly the airplanes But from where we are and what we see the next six-seven months, we're comfortable in our position.

I think I remember an airline telling me they get, maybe with Southwest, nine applications for every job opening they have. When you have a pilot opening, how many applications do you tend to get per opening?

I don't necessarily have those details, but I will tell you I'm sure that the majors have a lot more applications per opening that they have than we do. You know, there's no question about that.

As to the specifics, I'd go back to my original message. I think we're getting very qualified candidates to implement our business plan on our side.

Do we have to work harder? No question. But it's part of what we do.

On the pro rate side, you were kind enough to give the revenues. Can you give us a sense of profits and pro rates in 2013?

Actually we can't do that.

I think consistent with previous asks on this, sorry, we do treat that like a contract and don't offer specifics. All we give is the revenue.

I guess final question is that when you lose flights -- lets say you lose a lot of the Cleveland flying that currently is unprofitable. Even though you're losing flights that are losing money, doesn't it have a negative impact on the remaining flights because you have higher overhead -- the same overhead is being spread out over much fewer flights.

There certainly is the potential for a very short-term negative impact. But it's our responsibility to manage those remaining costs. And over the long term, we do not believe that will be the case.

If you discontinue unprofitable flying, if you don't extend with higher rates, then, no. Over the long term, we have to be able to reduce the flying and mitigate the loss.

Thank you very much.

You're welcome.

(Operator instructions) The next question will come from Bob McAdoo of Imperial Capital. Please go ahead.

Hi, guys. You've obviously spread out a lot of different kinds of projects here that you are working on.

If you could magically wave a wand and everything got fixed at once, how big a swing is it? Is the total target trying to clean up a $20 million negative cash flow a quarter or $20 million a year?

Can you give us a ballpark on how big an issue is this? If you got really lucky and everything worked, what kind of a swing would it make?

Okay, Bob, in what we have reported publicly so far, you can gather from that that the ExpressJet entity has lost a significant amount of money this year. I mean, in the neighborhood of $50 million.

Okay.

Okay, so first priority is to eliminate that loss.

Okay.

So there's a $50 million swing.

Then will we continue to operate this size of an entity with no financial return? No. So we've not only got to eliminate the loss, but we have to get it producing back to an acceptable return.

Are those returns at the same level as the rest of our business? We have to account for the fact that we don't have tail risks on any of those airplanes, at least on the legacy ExpressJet side, all of those things.

So we take all that into account. But by the way, that is also dealt with in the amount of equity that we invested. Because we don't own the fleet, we have got a smaller equity investment.

So our return on capital invested requirement has not changed, but it is a smaller amount of net income per aircraft month because there's a lower investment per aircraft, as well. So, we're taking all that into account.

We have to eliminate the loss, and we have to get it back to an acceptable level of profitability.

You can do your estimates of what equity we have invested and how many airplanes we have on a return per aircraft, and then you come to an amount that is in excess of a $50 million swing.

So the obvious thing there is that then what you do report as income on the SkyWest Airlines side is whatever you have here plus $50 million is how much you're making on that side, obviously. But you have a different kind of investment there than maybe you have on the other side.

We have a number of different things that are different. We've got a different level of equity invested. We've got a different (technical difficulty) environment. We've got different contracts. A lot of things that are different.

When you go back and think about what your, quote, investment is on the ExpressJet side, there's the new ExpressJet side that came out of Houston, et cetera. And then there's the old ExpressJet side, which is the residual of the Atlanta side. And there was a big chunk of money put out at that point, if I recall, when you bought that company.

I assume you think about that as something you need to get a return on as well, right?

We do. So if you go back to 2005 and look at the original ASA acquisition, for the first few years of that acquisition, we generated very strong earnings and very strong cash flow.

We had the impact of some very valuable tax assets that were acquired in that transaction, and so the investment was recovered fairly quickly on the original ASA acquisition.

Today we have an entity that combined -- and we have gone through rate resets and all those things on the Delta side, and so the entity in total, combining both the legacy Express and the legacy ASA, both systems are, in today's terms, are not meeting their return objectives. If that helps answer your question.

That's helpful. That's helpful. Okay. Gives us a way to think about it. Appreciate it.

Okay.

And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Brad Rich for his closing remarks.

Okay. Well, thank you very much to all of you for participating.

Again, I recognized our employees earlier. I always feel a desire to express appreciation to all of the dedicated employees; and not just their dedication, but for just their day-to-day efforts to help us be successful. So, I again thank you.

I thank those of you from the financial market side and your interest in the Company.

We have been very detailed, not only in our prepared remarks. We have tried to be very transparent with you this morning in our responses to questions.

We know that we have some areas where we need to keep our heads down and just keep focused and keep producing. We have some challenges in many areas on the pilot side and those things that we (technical difficulty) discussed.

The initiatives at ExpressJet. Again, we have tried to be very candid and very transparent about our issues there. And so we know we have got work to do.

Our overall objective, and we recognize (technical difficulty) very clearly is our responsibility to allocate assets and resources in a way that will increase value. That is our focus and our priority, and we will continue to work very hard to that end.

And with that, we again will thank you for your participation and terminate the call. Thank you very much.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.