SkyWest Inc (SKYW) 2014 Q1 法說會逐字稿

Good morning and welcome to the SkyWest First Quarter 2014 Results Conference Call. All participants will be in listen-only mode. (OPERATOR INSTRUCTIONS.)

Please note, this event is being recorded.

I would now like to turn the conference over to Brad Rich. Please go ahead, sir.

Thank you very much, operator, and thank you to all of you for joining us this morning. We are always very appreciative of your time and of your interest in SkyWest Inc. and our operating companies.

Let me begin this morning by making some introductions here of who will be participating in the call this morning. I have here with me at our SkyWest headquarters Chip Childs, President and Chief Operating Officer of SkyWest Airlines; Brad Holt, President and Chief Operating Officer of ExpressJet Airlines; Michael Kraupp, our CFO and Treasurer; Eric Woodward, our Chief Accounting Officer. We also have other members of our staff here in the room and participating with us this morning.

We will begin the call by -- I'll turn the time back to Mike Kraupp. He will read our Safe Harbor on forward-looking statements. Following that statement, he will then just continue and give a report of the financial performance for the first quarter.

Okay. Thank you, Brad.

We will be making statements during this conference call that 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 set forth in our 2013 form 10-K and other reports and filings with the Securities and Exchange Commission.

And now, with regards to the results, first of all let me just thank you folks for being on the call and for your continued interest in our company.

I'll stay consistent with our past practice and basically use the press release to highlight some things for the quarter just ended.

This morning we did report a net loss of $22.9 million, or $0.44 per diluted share, which was in line with our recent downward revision of expectations for Q1 that was provided on April 25, 2014, where we indicated a range for the anticipated loss of between $0.41 and $0.46 per diluted share. The downward revision was primarily provided to give insight into the additional weather-related cancellations experienced after we gave some initial warning as to the negative impact of the severe weather already experienced from January 1, 2014, through February 12, 2014, and as we discussed on our fourth-quarter results call which was held February 13 of '14.

As noted in the press release, we did cancel a total of 25,000 flights during the quarter, of which 21,000 -- or 78% of the total (inaudible) due to the severe-weather impact. The remaining number of cancelled flights were due to the usual factors like maintenance, crew and other type of things.

To give you some color or comparison to the level of cancels, at ExpressJet Airlines -- which is our East Coast-centric operating airline -- we cancelled 3.5 times the level for weather-related cancels compared to the same quarter last year, and SkyWest Airlines cancelled 1.7 times the level for weather-related cancels compared to the same quarter last year. We estimate the aggregate negative impact from the severe weather to be about $30.3 million pretax from our Q1 operating plan. The impact takes into account lost revenues and incentives from lower block hour production due to those cancels, as well as additional costs incurred primarily for crews and getting aircraft back to locations to resume plan scheduled, as well as some additional maintenance costs due to impact from the cold weather.

As a result of the significant weather-related cancels, our block hour production declined 4.4%, and we produced 546,813 block hours for the quarter just ended, and that compares to 571,991 block hours for the same period last year.

In reviewing our operating revenues from the press release, you can see that the total revenues decreased $31.1 million quarter over quarter. That reduction resulted from about $21.1 million of reduced pass-through costs like engine overhauls, fuel expense, and other, as well as a reduction of about $20.5 million from the significant flight cancellations. That includes missed margin and incentive amounts, and an increase -- those amounts were offset by an increase of about $10.5 million from normal contract escalations, as well as improvements in our prorate flying.

By way of information, total prorate revenues during the quarter just ended were approximately $84 million, which compares to approximately $80 million for the same period last year. Our total prorate fleet consisted of 63 aircraft for the quarter just ended, which compares to 59 aircraft for the same period last year.

Our total operating expenses and interest increased approximately $10 million for the quarter just ended, compared to the same period last year. However, again, after reducing the noise from the pass-through costs as outlined in our press release and mentioned previously, our remaining total operating expenses and interest increased about $31 million. The increase was a result of incurring additional costs related to flight crews and maintenance labor of about $20.1 million, as well as about $6.2 million of increased maintenance costs, some of which relates to the cold weather impact and some of which relates to the general aging of the fleet.

As a result of the aforementioned items, we experienced a significant reduction in our pretax earnings from about $5.4 million for Q1 of 2013 to a pretax loss of $43.2 million for Q1 of 2014. On a positive note, for our ExpressJet Airlines entity, absent the negative weather impact, they were actually very close to their Q1 budget.

With regards to the income tax rate in the quarter, let me provide just a little color. We do provide for taxes based on a yearly estimate of taxable income or loss. Since our estimates of taxable income or loss have been lower due to the negative weather impact that we've cited, and taking into account primarily the permanent tax items we have, our tax rate for the quarter increased to about 47%. We do estimate that our tax rate for the year should approximate that similar level due to our current estimates of taxable income and loss and the impact of those permanent items in relation to that taxable income or loss.

Let me mention a couple of items of impact on the summary balance sheet that's been included in our press release for Q1 for you, and as compared to year-end, which is December 31, 2013. We had total cash and marketable securities of $542.7 million at the end of Q1, which compares to $670.1 million as of December 31, 2013. This does represent a reduction of about $127.4 million for the quarter. While this quarter is typically a heavy quarter for use of cash due to the semi-annual lease and debt payments, we had forecasted our total cash and marketable securities balance to be about $583 million. We were slightly lower than that, due primarily [due] to the additional weather-related losses from our ExpressJet Airlines entity.

Also during the quarter, we did acquire our first E175 regional jet aircraft using a debt-type arrangement at this point in time. We do anticipate using that debt facility to acquire probably the first 6 to 8 of these deliveries, and we are currently working on a lease facility which we anticipate closing these aircraft into for -- well, within about the next 60 or so days. As another side note, we do anticipate with regards to our deliveries for 2014 that we're currently estimating to be 21 to (inaudible) aircraft -- we do plan on utilizing this lease facility and don't anticipate spending additional amounts of cash with regards to that.

With regards to our capital expenditures, we did budget for a spend of about $33.5 million for the quarter. Again, these are non-aircraft cash expenditures. We incurred about $41 million. We were slightly ahead of our expectation there simply due to front-loading of some rotable spare parts, etc. -- capital-type expenditures -- for our E175 program. We're also in the process of acquiring some engine [cores] and doing a bit of engine refurbishment as well.

As we've stated previously, we would be in the market from time to time to repurchase our outstanding common shares under a board-approved authorization with the intent of primarily offsetting dilution from the current year's stock grants. You can see from the press release and for the quarter just ended, we did purchase 242,250 of our outstanding shares, and we spent approximately $3.1 million in the quarter with regards to that effort.

Lastly, we've included a page in the press release detailing our estimates for aircraft by seat type for the remainder of the year, as well as our estimates of block hour production and ASM production. For the remaining three quarters of 2014, we do show an estimated reduction of about 61 50-seat regional jet aircraft and an increase of another 22 76-seat regional jet aircraft, which are our new E175 deliveries. Brad in his comments will provide a bit more commentary with regards to the fleet.

And so with that, I'll turn the call back over to Brad.

Alright. Thank you.

I would first of all like to add just a little bit more -- an additional perspective into the impact of the weather on the first quarter. I know it's getting a lot of attention, at least with us, as you saw with both our pre-release, as well as from Mike's comments. It is a significant impact. It is not certainly the only impact affecting our performance in the quarter, but I would like to add some additional clarity.

The impact of the weather on the ExpressJet operation is very disproportionate as compared to what you have seen in the market as other airlines have been reporting. It is disproportionately severe for several reasons. First of all, the concentration of the ExpressJet operation at hubs that were severely impacted by weather cancellations. When you look at what has happened throughout the country -- particularly in some Midwest as well as East Coast hubs -- for example, Chicago, Houston and Newark -- that is where a significant portion of the ExpressJet operation is concentrated and had some very negative and severe impacts from the weather. The second impact is that our contracts in most of the ExpressJet operation do not allow for any reimbursement due to weather or ATC cancellations. And by the way, that is not exactly the same as in some of our other SkyWest-type contracts, and so that also lends itself to some disproportionate impact. Item number three is kind of a continuation of that, which is that as the block hours are lost due to these cancellations, it is just plain and simply lost revenue. We do not have, like some of the major carriers, the opportunity to move that revenue to other flights. It is just a lost billable block hour. All of that does create additional volatility. It's a different risk profile and it has more volatility and more susceptibility to the negative impacts of weather.

Some people have asked, "Well, don't you plan for these type of weather cancellations?" and the answer is yes we do. We did plan for a significant amount of weather cancellations in our operating plans -- in our profit planning. As Mike indicated, the weather cancels this time were 3 times what we had -- what we experienced over the prior 3-year average. So if you remember in the first quarter of last year, we had a very severe and negative impact of weather, and at that point, the weather cancellations were significantly more than the prior year, and we thought we were being conservative in our planning and planned for cancellations at the actual level of last year's first quarter. And as Mike has indicated, it was approximately 3 times worse than that. And that is kind of what's created a lot of this kind of unusual -- we hope unusual and quite severe impact on our financials.

As Mike already mentioned, I think the point is worth re-emphasizing that excluding the impact of the weather, the ExpressJet operation was essentially right on our original operating plan. And it's also probably worthy of pointing out that the negative impact that we have highlighted here is that negative impact above and beyond what was included in the operating and profit planning process.

Although it was essentially -- if you exclude the weather, their performance financially was essentially on plan, the difficult part -- that it was a planned loss. As I have said before and I will continue to say today, those losses are not acceptable and they're not sustainable. We have made several leadership changes, as well as other changes and focuses that I will touch on briefly, specifically designed to make the required improvements and corrections and changes needed at that operation. We have -- as I mentioned, some leadership changes have been made. Charlie Tutt, our former VP of Flight Operations, announced his retirement. Brad Sheehan is our new Vice President of Flight Operations. Ken Ashworth, our Vice President of Maintenance, announced his retirement. That position has been filled by Mike Gibson. Formerly Vice President of Maintenance for SkyWest Airlines, Mike has assumed a role at ExpressJet and will be assisting with that maintenance operation. Several other changes have been made in the areas such as operational control center, crew resource management, etc. These changes have obviously been done with the objective of a focus on improving reliability and the efficiency of the operation.

Now we still remain very committed and focused on cost reduction initiatives. Many of those also involve SkyWest Airlines where we're trying to use all of the size and volume of the combined entities to create value wherever we can. At the same time, I want to draw some additional attention to the fleet plan that we have included in the press release. You will notice in the press release a significant reduction of the 50-seat flying. Over the next roughly 12 months, there will be essentially 61 reductions in the 50-seat environment. Most of those reductions are reductions that, at least at this point, are expected to come out of the Express Jet operation, and those are in the type category that has been the least financially productive. So my point being that there is a fairly significant reduction in the area of the flying that has been the most challenged, and those reductions will either happen as scheduled or as we have scheduled, or they will be extended at -- with rate corrections that will enable us to get back closer to our return -- our required return targets. So I think that's a significant thing for you to be aware of as we move forward and is an important part of the plan here for making the required corrections. I think it's also worthy of emphasizing that we are working aggressively with our major carrier partners in an effort to re-optimize the flying network, particularly at ExpressJet, and to make the required contract corrections.

Now on the positive side, here we have -- as Mike talked about, we have previously announced a deal to add the E175. In just a minute, I will turn the time to Chip Childs to have a discussion about the certification process and our expectations for the 175. At the same time, I've asked Chip to give a bit of an update on some of the -- one particular issue that's facing our whole industry, which is that of kind of the supply and demand of pilots in our industry. We also -- on the positive side, I'll just make a brief mention -- we previously announced a deal to add an additional four CRJ 200 aircraft to the American contract. Those airplanes actually are being operated -- or added to the contract in prorate structure. We added one aircraft in the first quarter and three more in the second quarter. Just a general note about our prorate flying. It continues to perform very well, especially given the seasonality that is in that system. But it has performed very well in the quarter. As far as the size of the prorate flying, it's -- it represented about 6% of the block hours in the quarter and about 11% of the revenue. SkyWest Airlines' performance generally just remains very consistent, very strong performance.

Having said that, let me turn the time to Chip to talk about the 175 and the current situation for pilots.

Thanks, Brad. Excuse me.

The project of bringing the E175 on project over the last -- it's been more than 15 months now -- is coming to a very strong close. We have taken delivery of our -- we took delivery of our first one back toward the end of March, and we received official signature certification a couple of weeks ago from the FAA. It's been a project under the environment -- as you all can imagine, with government shutdowns and challenges with FAAs and that type of stuff -- that has been a tremendous amount of work for our people. Our team has been absolutely fantastic, and we can say that it was pretty much a very -- not without its problems, but a flawless execution of making sure we can get that terrific aircraft on to our certificate.

A couple of things relative to the fleet today. We do have two aircraft on property today -- 103SY and 105SY -- and we are currently using them for heavy pilot training today. Our first date of service that we are initiating out of Chicago starts on May 17. And we have what's been released publicly from United -- we start in Reagan National on the 17th of May, we go to -- start in Boston on the 19th of May, Minneapolis on June 5, Atlanta on June 15, and New York/Laguardia on June 23. I can certainly report that our team is very, very excited about the prospects of what this aircraft does with our business model. We have a fantastic amount of crews and people associated with it and we're very excited to continue to deliver that service for United here in the coming months.

As far as pilot staffing is concerned, I think that we are not completely out of the woods with the impact on this. We anticipate that this is going to continue to be a very strong challenge going forward. So far this year, our attrition numbers on SkyWest Airlines has been anywhere from 20 to 25 a month. That's pretty much about what we expected. We anticipate that the fall will get slightly higher than that as majors continue to ramp up hiring for that. Today we do not foresee a significant problem relative to being able to meet the demands of the flying schedules with our partners. It has not yet impacted anything that we have done with our partners. We have not gone to the partners yet and indicated that it's a problem. We have a couple of things that we strategically continue to work toward to make sure that it's not a problem. We do have some flexibility, as Brad's identified, within 50-seaters that we can use to help manage that expectation. We also -- from a hiring situation, we are filling the classes we need today, although we are working harder than we ever have since I've been here at SkyWest to fill those classes, and I think that's the way it is throughout the industry. So at a high level, we recognize that it's still continuing to be a very significant issue that we need to be very proactive in working with our partners on, working with crews on and being very surgical, if you will, in making sure that we manage that and deliver the product that our partners deserve. That having been said, we have fantastic crews. The candidates that we are getting and training are -- we are very excited to have with us and we're optimistic about what we can do with this issue going forward.

Okay. Thank you very much.

Let me just restate we are very determined and very focused on making some corrections here and things to get the improvements that we have at least touched on at a high level. We have very specific and targeted plans for some improvement. The things that we have outlined relative to the new contract for the 175 and our expectations there and our plans for that airplane -- we feel very optimistic about, as well as in our ability to get some of the corrections and improvements that we need. We're not only focused on it, but we're optimistic that we will get these changes made and the corrections made.

Now I do want to make some -- just a final statement just regarding all of the employees of these combined companies. We have just been through a very difficult period operationally, and the men and women of these companies have worked very hard to perform, to keep these airplanes in the system operating and flying, and we are very appreciative and grateful for all of the efforts of this workforce.

Having said that, we will conclude our prepared comments and we will open the lines for questions.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.) And our first question comes from Michael Linenberg of Deutsche Bank. Please go ahead, sir.

Good morning. This is actually Catherine O'Brien filling in for Mike. My first question is do you have any estimate on the financial impact of the E175s entering into service this month? Just trying to figure out if there'll be a positive impact on day one of service [or] will the ramp-up cost of the operation offset your revenue generated for some time?

Particularly, Katherine, with the amount of pilot training we have with the fleet that's coming, I think that certainly day one we do get good revenue generation from the first couple of aircraft. But we're not anticipating a significant amount of benefit on this until we get into 2015. So this year we'll see maybe a little bit toward the end of the year, but we're still developing this brand new fleet in our models and so I wouldn't expect too much until we get into 2015.

Alright. Great. And then just one more on the ExpressJet contracts. You spoke about that -- I think last quarter, you said -- and this quarter as well -- that even in the case of extreme weather, you still don't get kind of a (inaudible) some of (inaudible) you experienced or having to cancel flights. And I know that you said you were going to reach -- try to come to some sort of negotiation with the major carrier partner there to get them more in line with your SkyWest-type contracts. And if not -- and if you were unable to do so, you'd have to start taking those aircraft out. And so I'm wondering if this quarter's announcement to start taking down a lot of 50-seat of capacity over the next year -- if that is reflective of the fact that you were unable to come to an agreement with that major carrier.

Okay. Very good question. We -- as I did say last quarter, we are working specifically to get some -- what I had mentioned as contract corrections in place. The comments related to the reductions of the fleet need to be understood very clearly as these are just the normal scheduled retirements of aircraft -- airplanes out of the contracts that have just been in contract and therefore -- since -- just the normal retirements that we're outlining here. So one of two things will happen with these aircrafts. Either they will just naturally go away and expire. And by the way, we have no tail risk on any of these airplanes. So a couple of questions then come in. [Do] major partners that have these airplanes currently under contract want to renew and extend them, is the first question, which is entirely up to them. Second question, if they do, then they need to be extended at the rates and with the corrections that will make sense to us to continue to fly them. And if that happens, then we will continue to fly them. If that doesn't, then we'll let them terminate. And either way, it should create some improvement to our financial performance.

I agree. Thank you so much.

You're welcome.

And our next question comes from Savanthi Syth of Raymond James. Please go ahead.

Hi. Good morning. On these 50-seat retirements I've been looking at it, it's not too different from the plan that you outlined earlier in this year. But I was just curious -- what do you think the reduction in profit loss would be as a result of the aircraft that are coming off contract this year? Like how much could we reduce the loss at ExpressJet?

[Savanthi], again, it's a good question. It's one that we are not going to give a whole lot of clarity on today just because there's so much uncertainty surrounding any kind of -- whether the airplanes actually go away as scheduled or whether they do get extended and at what rate. So there is just some uncertainty about -- and it probably is -- we're working with the major carriers on this question, first of all, about what the fleet plan really needs to be and how many of the airplanes they would like to just naturally retire or that would -- they would naturally like to extend and continue to fly. And even that question has not been resolved yet with the major carriers. So we're still working through all aspects of that and it's a little too early to start giving even ranges or estimates of the impact.

I understand.

But look, we will keep you updated as we do through the normal course of working through our investor relations.

Got it. And just on the same topic, I notice that the turbo props -- there are going to be 5 less by the end of the year than previously expected. I thought that was a part of the business that you were happy with and wanted to continue, and I was curious what the decision point was behind that.

Yes. This is an interesting situation for us because we've been expecting for a number of years now to let this fleet just get to a -- continue to decline and get to a point where it just didn't make enough concentrated sense to make -- to continue flying that fleet. But it just continues to be productive to the system and continues to make money. So we're going to continue looking for ways to use the airplane, at least for the time being.

(Inaudible) you do have it reduced [in this year]. Did anything change?

Did anything change --

Natural termination.

No, not anything other than just the natural schedule of the fleet plan.

Okay. Got it. And then if I might ask just one last question. The contribution from the mismatch of the timing (inaudible) the revenue and the cost on the United CRJ200 maintenance -- it was larger than I would have thought, maybe by $3 million in this quarter. Is that a timing issue and you still expect only kind of a -- or similar trend to last year? Or how should we think about that?

Look. Generally, the answer to that question is we had a few airplanes that were naturally scheduled to terminate that we've found uses for the airplane. So as we plan our maintenance [to] be timed around the natural expiration -- and then we decided to keep the airplanes and do some work and refurbishment, make some investment into the airplanes to keep them flying in what we think are productive uses of the airplanes, it increased our maintenance expenses. And basically it is that $3-million gap. But that's just related to about 4 airplanes that we decided -- that were scheduled to retire that we kept in service and where we found productive ways to use the airplanes.

That (inaudible) on the United CRJ or am I confusing with some [of the other] --

We're just taking these -- are you looking specifically at the mismatch in revenue and expense --

It's on the United CRJ200s.

Just on the United 200s?

Yes.

Okay. So Mike, you have --

Yes. Just real quick (inaudible). Actually, with regards to our plan, we were actually very close to our plan. We did show a positive on a year-over-year basis. And for the year -- which was the other part of your question -- we actually show a teeny bit of improvement. It is not a material difference from the positive amount that we had last year. And so again, we were very close to our plan within the first quarter.

Okay. Understood. Thank you very much.

And our next question comes from Helane Becker of Cowen. Please go ahead.

Excuse me. Thanks very much, operator. Hi, guys. Thanks for the time. Just a couple of questions. Can you just say how profitable -- or is the prorate business profitable? And if it is, can you move more aircraft into that business where you have more control and maybe can get better results? Is that possible?

So Helane, look. As consistent with past practice, we have been very hesitant to give specific P&L performance or margin performance of the prorate flying, and we're going to keep it that way even today. I will answer the question generally to say yes, that prorate flying is profitable. But we have got to be very careful with that business model. It involves, to a large extent, just the life cycle of the airplanes we're trying to manage, reducing ownership costs with increasing maintenance costs, and then making sure that we don't subject the overall model to just more and more volatility that comes with the prorate flying. So yes, it's doing well today. It's productive. The other thing we're trying to make sure that we do is keep a significant amount of fleet flexibility in that prorate model. So when we can do that -- operate that system with a -- at least a material part of the system that has very short-term flexibility relative to the ownership of the fleet, then it makes sense for us to continue to develop the model. But we have to be very careful with it and make sure that we don't subject the overall model to just increasing amounts of volatility and risk. So those are the things that we're trying to keep in mind. And again, in that answer, I certainly alluded to the fact that we have at least a material part of that fleet that has very short-term ownership commitments.

Gotcha. Okay. And then the other question I had is I suppose -- I don't know if you can do this -- but of the decline in cash, can you say how much was related to the ExpressJet losses?

It is basically -- that entity doesn't generate cash in and of itself, so when you look at the losses -- for example, that were over plan -- that ate up additional cash.

Oh okay.

Helane, another way to say that -- we don't own the majority of that fleet. That's all -- as you know, United has the ownership of the majority of those airplanes in that model. So basically the operating losses are cash losses.

Okay. Oh, I was going to ask that question. Who had the residual value risk on the 61 aircraft, and you answered that. So that was helpful. And then the other question I have is -- I think in the press release you talk about earnings or operations getting back to a more normalized level, and nobody wants that more than me, given how much I actually fly in and out of Newark as, Mike, I think you know, with all the comments I've made about the flight cancellations that ExpressJet has taken. And you even mentioned 2014 was worse than '13 which was worse than 12. Have you guys talked to, in great detail, United about -- I don't know how much of the 2,300 flights a day your scheduled -- your schedule include of ExpressJet -- includes United, but that's an incredible amount of flying for 50-passenger aircraft to do. And I'm just wondering -- do they give you any sense of, a, what the right size of that fleet is; b, if this kind of weather is normal for us going -- for this country going forward, what can be done really to mitigate the frustration that you -- because I know your passengers have -- but that you also -- and your employees must have -- in running this operation what has just got to be taking up an incredible amount of management time.

So okay. Very insightful observation, Helane. And yes, you're right. We and -- so I guess I'll just say yes, generally we agree to what you just said and we share the frustration. But no, look. We need to -- this is where we need to be very focused on the needs of our major carrier, number one, and listen very clearly to their objectives and what they indicate as their preferences for the size and volume of flying. Then we need to be proactive in giving our assessment, our analysis, our input into the strategic development of the network. And we will be more proactive and more aggressive on that than we have been to date. So I don't know how else to answer that question, but --

No, I think that's fair.

This is a delicate balance.

I'm sorry?

This is a -- in some ways, it's a delicate balance because we're trying to do the very best that we can to be good partners and to fly the schedules that our major partners feel are important for them to fly. At the same time, we have to do the flying in a way that will make sense both financially and, very importantly, from a reliability standpoint.

Right. No, I gotcha. It's just -- for -- I don't think there's much you can do, other than what you're doing and being more aggressive at it so that you're not as frustrated as what's been occurring over the past, I would say, really two years. I don't necessarily think United's been the best partner, but that's that. Anyway, thank you very much for your answers.

We -- okay. Thank you, Helane. We think they've been a good partner and we just need to work more aggressively and more cooperatively with them in designing schedules that can be flown reliably.

Fair enough. Thank you.

You're welcome.

And our next question comes from Duane Pfennigwerth of Evercore. Please go ahead, sir.

Hi, guys. Good morning.

Good morning, Duane.

Just looking at your -- maybe we could just take a step back here. So I assume that the target audience for these calls is equity investors. And if that's the case, what is the investment thesis at this point in SkyWest? When do you think you're going to be in a position to expand margins again? And what is the real earnings power of this business?

Okay. So I think you're definitely right in the target audience for this call. And the -- let me give at least some initial thoughts relative to your question. And by the way, I wish I could answer this question with a lot of detail and a lot of specificity. We have some very targeted and very specific objectives about what the return should be on this business model. And we have developed those based on the risks of the model. We're trying to do it in -- with a full awareness of the industry in which we're operating and all of that. Now the question to me is when will we -- rather than answering the question as to the exact margin -- we're not going to be in the business, at least right now, of giving EPS targets or margin percentage estimates or anything like that. What we -- I will say is that we have very specific targets that we think will meet ours and our shareholders' objectives, recognizing that the equity groups you're talking about have differing but yet very similar, I would think, return expectations of us. The question is over what -- we obviously -- we have got to accelerate our return to normal expected profitability. With some of the things that we are trying to articulate today, we're making both some leadership changes, we're making some structural changes in the network, we're making -- we've got a very aggressive discussion going on to make some contract corrections, and then we have the fleet itself. And so the fleet and the structure and composition of the fleet itself is a very important part of this. And look, with the ExpressJet operation, we are now at a point in that contract where the airplanes start naturally terminating. And so although the first few years of the agreement have not gone as expected, now we're at a point where the fleet will start very aggressively winding down. Over the next 13 or 14 months, there are roughly 108 airplanes, for example, that are scheduled to come out in the near term. We've highlighted 61 or so of them in the press release, but the next few months after that just continue. And so as those airplanes come down, as I tried to articulate, we will either be seeing extensions in that part of the system at rates -- at improved rates that will enable us to return at least closer to our return targets, or the airplanes will go away, either of which should create some acceleration in the earnings power of the model. So Duane, when we combine all of that together -- just the structure of the fleet, the terminations -- they're either going to go away or be extended -- combine that with some of the things that we're doing on our cost reductions, as well as just reliability and efficiency improvements -- some of them targeted at ExpressJet, some of them in cooperation with both entities -- we think we can -- we feel very confident that we can create some accelerate momentum in the earnings model. And more -- I think more important than telling you exactly what that target is today or what we expect our margin to be is -- hopefully is to articulate to you that we feel strongly and confidently that we are making the changes and corrections that will create some momentum in the earnings power of the model.

Appreciate those detailed thoughts. If I could maybe just ask a shorter-term question. Unless I'm wrong here, it looks like excluding weather, your margins were down year to year. Based on the guidance for ASMs, it looks like it's down 10% year to year in the second quarter. Should we continue to expect that margins are down year to year in the near term, or when should they begin to expand?

I think a couple of things. First of all, we have some unusual things in a -- that I think are near term relative to the cost of crews. We have -- we increased some maintenance cost expenses for some reasons that I've articulated that I think are more short-term in nature and more one-time events. As we -- at the same time, we have some kind of accelerated and advance costs in anticipation of the E175s coming on, which I think is a short-term event. As that passes and we get towards the end of this year, then we start to realize the earnings power of a new contract and a new fleet type. And as Chip already articulated, there's still going to be some integration and upfront costs of that system -- of the new 175 platform, but as we get to the end of the year and clearly into '15, then we think things will -- you'll see a noticeable change. And then by the way, that will happen both as -- we feel like the 175 will be a very productive fleet and it's -- we -- look, we think it's a very productive model that we -- rate agreement and all that that we have on those airplanes. And then as things start to improve and -- either through the rate corrections or the reduction of the fleet at Express, all of that we think will create some -- both momentum and some expansion of the margin.

Thank you.

You're welcome.

And our next question comes from Glenn Engel of Bank of America. Please go ahead, sir.

Good morning. One is a follow-up to the last question. Why did the ASM forecast drop from 9.8 to 9.1 in the second quarter? It seems like a lot.

Well, obviously we go into the year based on -- well, in the profit planning process, I should say, based on some expectations. But then, to the extent that our partners change schedules, etc., we simply are building that based on the known schedules that our major partners are giving us. So again, that scheduling is obviously in their hands and the ASM production represents those scheduling changes.

I guess that surprises me that it changed so much in two months.

Well, again, it's based on our partners. [You know what?] Our partners are -- how they're viewing the fleet, how they want to utilize the fleet. And so I don't know that we have anything different other than to offer these are the results of what our scheduled partners have asked for us to do.

Is this partly because the schedule reliability because of the weather and the changes in the rest rules in the first quarter were so bad, they decided to proactively just have less flying in the second quarter?

Look, I think it's -- first of all, we have a very unexpected kind of seasonal thing here. March, for example, is always a very strong month from a scheduling standpoint with a lot of block hours, a lot of utilization on the airplanes. April and May are not quite as strong in utilization of the fleet. And then we get into the summer and the utilization picks back up. So -- and with us, at the same time the heavy utilization picks back up in the summer months, we're going to see some reductions of the fleet. So it's just a combination of all those things, and the numbers that we've put out are reflective of all of those factors that are creating a little volatility in the block hour production. But that is what we expect it to do and it is all based around the size of our fleet and the schedule of the majors.

The permanent differences -- is that a $4-million-type number a year? What's the size of permanent difference on the tax rate? I was thinking $4 million pretax -- is that the impact from permanent differences?

Yes. We think that's in the [hunt], yes.

Okay. And then finally, I guess one of the problems is you can be dropping a flight that loses money -- one of the 50-seaters -- but then those 50 -- the flights that are dropping aren't going to cover the overhead of the other flights. So does losing -- money-losing flights really help the profitability that much if we lose the coverage of the overhead?

Okay. Good observation. And look, it's our responsibility to manage the overhead at the same time. So yes, it's a complicated issue and it's not going to be easy, but that is our expectation.

And finally, the -- again, the level of the good guy this year in the CRJ200 reimbursements versus expense. Are we in a several-year process where it's going to stay at this level or should it be dipping back down again in a couple years from now?

No. We have gone through the major bell curve and cycle with regards to those CRJ200 engine overhauls. So we've got the bad guy, if you will, behind us. It is a positive -- was a positive last year. It's slightly higher this year. And so outside of that, we don't expect for that situation to turn dramatically negative like it had done before.

Will the gains -- spreads narrow next year or will it remain at something closer to this level?

We would expect that it would initially stay close to this level.

Thank you very much.

Yes.

Very welcome.

(OPERATOR INSTRUCTIONS.)

Operator, do we have any additional questions?

It appears at this time we have no additional questions.

Okay. Very good. We've kept you on the phone for a little while and we want to be respectful and sensitive to the time. So we thank you for your participation. We thank those of you that have asked insightful questions. And we, again, are appreciative both of all of you that have participated in the call, we're grateful for all of the stakeholders of this company and for all the efforts -- the interest and all the efforts. As a leadership team, we are committed to remaining very focused on the improvements that we know need to be made, and we're committed to making them. And with that, again, we will thank you for your participation and we'll go ahead and close the call. Thank you.

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