SkyWest Inc (SKYW) 2014 Q2 法說會逐字稿

Good day and welcome to the SkyWest second quarter 2014 earnings call. (Operator Instructions). Please note this is event is being record. I would now like to turn the conference over to Chip Childs, President of SkyWest. Please go ahead.

Thank you, Youssef. Good morning, and welcome everybody.

We appreciate your interest in SkyWest, and we hope that the call today can provide you with a good reconciliation of events that have happened in the second quarter of this year, as well as provide you with some of our strategic perspective moving forward. I have to apologize. I'm on the back end of a summer cold, so I'll try to be clear and minimize maybe some coughing that may happen in the meantime.

But let me give you a brief introduction of everybody that we have here on the call today. We have Jerry Atkin, CEO of SkyWest, Inc.; we have Brad Rich, Chief Commercial Officer of SkyWest Inc; we have Wade Steel, Executive Vice President of SkyWest, Inc; we also have Brad Holt, President and Chief Operating Officer of ExpressJet; Mike Thompson, Chief Operating Officer of SkyWest Airlines, Mike Kraupp, Vice President and Treasurer as well as Eric Woodward, our Chief Accounting Officer at SkyWest, Inc.

The outline of the call that we want to do today is going to proceed in this fashion. We're going to have Mike Kraupp read us the forward-looking statement, we want to have Jerry give us some opening remarks relative to his perception of current events at SkyWest today, we'll have Wade review the reconciliation of our quarter performance and some of the items that are contained therein, we'll have Brad Rich give a liquidity and cash flow update.

I will give some forward-looking insights as to our strategy moving forward and then afterward we'll open it up for questions. So from that, thank you, Mike, we'll start with you.

Okay. 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 hereof and are based on information available to us at this time.

We assume no obligation to update any forward-looking statements. 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.

Thanks, Mike. We'll turn the time over to you, Jerry.

Good morning, and thank you for your interest. I'm going to give an overall status of our challenges, an update on our progress with ExpressJet and reaffirm the continued progress and consistency of SkyWest Airlines.

The acquisition of ExpressJet in late 2010 and the accompanying contract for flying 50-seat aircraft accounts for most of the current ExpressJet's financial losses. Combining ExpressJet and ASA cost more than we thought and didn't achieve the amount of synergy savings we expected. Additionally, obtaining an efficient and combined labor contract with all groups simply hasn't happened. At the same time, ExpressJet's operating performance has not met expectations.

However, with the naming of new leadership inside and outside of ExpressJet, altered structure and implementation of a number of improved processes, as well as renewed focus on delivering to our major partners, operating performance has steadily improved over the past few months. In fact, ExpressJet delivered the top performance of the seven-contract United Express carriers for controllable completion in both June and July, and was the second from the top performer in Delta connection in those same two months.

We see additional opportunities to make improvements and sustain upper tier performance for all ExpressJet partners. Although we have not fixed all of ExpressJet challenge and opportunity areas, we are encouraged by the progress made thus far.

SkyWest Airlines' financial results are slightly better than planned for the first half of 2014, and forecast to be on track for the balance of the year. The SkyWest Airlines' earning plan for 2014 was a bit less than the actual 2013 results, primarily due to the cost of adding the E175 aircraft to the certificate and placing 20 of those new aircraft into service for United. SkyWest Airlines will bring 20 more E175 aircraft into service for United in 2015.

We do expect that we will fix and reduce the amount of contract flying at ExpressJet, resulting in repairing the financial challenge over time. Our focus will be on increasing earnings through a number of avenues, including some reduction in the size of our fleet in the 50-seat aircraft type, as well as simplifying and increasing efficiency in the quality of our operations.

In May, we redefined some leadership positions at the holding company to help address our current challenges and get additional attention in areas of focus so we can better address the size we are today. Chip Childs and Wade Steel are an important part of that change that should result in increased value for our shareholders. Thank you again for your interest today.

Thanks, Jerry. Wade, how about taking us through the reconciling items this quarter?

Yes. Thanks, Chip. Thanks, Jerry.

For Q2 2014 our net loss was $14.7 million or $0.29 per diluted share. This compares to net income of $20.7 million or $0.39 per diluted share for this same period a year ago.

There are four main items that negatively affected our profitability. Our crew cost increased by $20.6 million for the quarter. These costs include labor, hotel, per diem, and simulator cost.

The increase in crew cost are affected by a few main items. First, FAR117, this is the new flight and duty rules that affect how we can schedule our crews. FAR117 has increased the number of pilots we need to staff our schedules and increased the number of hotel nights and the amount of per diem we pay.

Second, the induction of the E175 aircraft. We are hiring and training pilots for this aircraft. We will continue to take delivery of the E175 through the middle of 2015.

Third is pilot attrition. We have been hiring at both airlines to keep up with pilot attrition. The majority of the pilot attrition is due to the hiring from our major partners.

The second item affecting our profitability was a decrease in passenger revenue. $9.8 million of the decrease is due to two reasons.

First, we earned lower performance incentives under our flying contracts. As many of , we get paid a markup based on certain operating metrics such as completion and [ND0]. We also have unfavorable contract settlements with our major partners.

The third item affecting our profitability is we wrote off certain assets associated with our paint facility in Saltillo due to the fact that the facility is no longer being used. We also wrote off obsolete equipment that resulted in a combined write off of $6.8 million.

The fourth item is our tax provision. During the quarter we increased our valuation allowance on certain state NOLs by approximately $5 million. We also made a change in estimate for our effective tax rate for the year that resulted in an increase to our tax provision. Thank you.

Thanks, Wade. Brad?

Thank you, Chip. Obviously with the decrease in our cash marketable securities of over $200 million since year-end, some brief but specific comments regarding our cash and securities we felt was very important. There are admittedly portions or components of the decrease that are more concerning than others.

The most concerning aspect of the decrease in cash is related to $46 million that is a result of the pretax loss. Those of you that have been following and understanding our models understand the ExJet model has very little depreciation and most of the losses coming from ExpressJet are in fact cash losses.

There was also a decrease that's attributable to the increase in our prepaid rent. That portion of the decrease is less concerning given that's a timing-related issue.

Although there are quarterly fluctuations in our prepaid rent accounts, when we look at this over the next two years on an annual basis, this really is a timing issue. The increase in prepaids will be a very small increase in 2015 and then by 2016 that will reverse and turn positive.

We also invested heavily in the first six months of the year in E175 program. Those investments consist both of investment in parts and a spare engine of approximately $26 million and then we have invested $34 million in equity in the interim financings of the eight aircraft that were done prior to quarter end. The portion of the equity investment we expect to come back into cash in the near term as we replace the interim finances with permanent lease financing on those aircraft.

We also invested another $20 million in the CRJ200 program. The good thing about these investments, both in the 175 and the 200s are that the economics of those operations, we believe and strongly feel, justify the investments and that we will have an adequate return on that invested capital.

We also invested $8.4 million in repurchase of our own shares. We have stated previously our intentions of buying back enough shares to offset the dilution from our equity compensation programs. That has been accomplished and we would not expect continued stock buybacks for the remainder of the year.

Subsequent to quarter end, we did receive the final payment of $17 million from the sale of our TRIP investment. Of course, with the completion of that sale we would expect a gain of approximately $20 million that will be recorded in the third quarter and is factored into the models and the estimates that most of you analysts are assuming already.

As we look forward to CapEx for the remainder of the year, we would expect a more normal CapEx period. We expect about $28 million of additional CapEx for the remainder of the year, of which an additional $12 million will be related to the E175 program.

In total, by the end of the year we would expect our cash and marketable securities balance to be back approximately at the $500 million level.

Thanks, Brad, for that reconciliation. At this point on the call, I want to spend a little bit of time and be very concise about some of our views and perspectives going forward to make sure that you all have a good understanding about what our thinking is with the current situation and what we think our opportunities are.

First and foremost, among the four things I wanted to have a conversation about is, our perception is that partner credibility is paramount to everything that we're going to do going forward to fix the current situation within our entities. And credibility goes further than just a strong relationship with our partners. It's quite simply our partners want a very strong product that's sustainable, predictable, and reliable, and everything that we do on a go forward basis is to take care of not just the relationship with those partnerships, but to make sure that we have some of the best credibility in the industry and we have relationships that are going to work for both ourselves and the partner.

The other concept that we want to make sure that we've learned over the last three years or so is that bigger isn't necessarily better. We are anchoring more of our philosophy in the fact that better is better.

As you can see from the press release, we have a large number of aircraft that are expiring within the next 18 months. We think that provides some opportunities for us to do some right bandwidth sizing to make sure that we get back to delivering the product that we need with our partners and delivering their expectations. We're not as much interested in size anymore as much as we have been relative to quality to our shareholders, quality for our partners and especially quality to our people as well.

On the positive side, when you look at the enterprise as a whole, I think that we see very strong pockets of profitability, and we also see very strong pockets of unprofitability. We can say that the fleet that we've announced this morning that is going to be expiring over the next 18 months is some of the most unprofitable flying that we have at the entity. I would assume, from a shareholder perspective, that there is some strong value in that.

We are a very, very large enterprise. We have a lot of 50-seaters and it's not necessarily something that's been a secret in the industry about the perception of what the value of the 50-seat fleet is. We think that there is a strong niche for 50-seaters still, but I think we would agree with our partners that there's still a bit too many in the industry and we need to capitalize on that opportunity to make sure that we use that to provide a sustainable model for us going forward.

Let me, lastly, talk quickly about at least my first impressions of ExpressJet. My historical role at SkyWest Airlines has been very much that.

I think that a lot of people may or may not understand that the way that SkyWest Inc. operates both of these operations is very independent of each other. My experience at SkyWest Airlines has given me some very good perceptions about the industry, and I can tell you in the last three months, as myself and Wade and other executives have spent time in Atlanta, we have some very good impressions.

First and foremost, is that there are fantastic people at ExpressJet that do a fantastic job each and every day. A couple of impressions that we have to move ExpressJet going forward. First and foremost, and I alluded to this a little bit earlier, in the short-term we have to improve reliability and move their operating performance more to a top tier performer within the respective major partner portfolios.

We have a very strong trend, as Jerry mentioned, over the last six to eight weeks at ExpressJet. They're doing a fantastic job relative to reliability, but it's critical that we continue the progress of making that trend a standard. Something that they're used to, particularly and especially, in the winter months.

The other thing on a short-term basis with ExpressJet, we absolutely have to stop the financial bleeding. Of the fleet reductions that we've announced, expirations are coming out within the next 18 months, we have about 100-plus of those on the ExpressJet side.

And as I stated earlier, a lot of those are some of our most unprofitable flying. And from the perspective of what we can do relative to that, we know that we have to be disciplined, we know that we need to take care of our people in the process, and certainly manage the process of that reduction in a way that's going to continue to add value to shareholders, make sure we take care of our partners and make sure we mitigate the impact to our people.

The other thing relative to stopping the short-term bleeding at ExpressJet, we've got to continue to have a dialogue with our partners. We've expressed this on previous calls that we're having those dialogues with our partners. We're not going to get into any of the details today.

We hope to provide potentially some insight, color and flavor of that in the upcoming quarters. But we're cautiously optimistic about the dialogue with our partners that long-term sustainability works very well for both of us and is essential for this to move forward.

The third piece with ExpressJet on a long-term basis -- and I mentioned it already, is the fact that long-term, we know what our partners value and we know what we can deliver. We need to look at that from a long-term perspective, that we're going to provide the product that they need and it needs to be at a base that they compensate us and provide us the adequate return.

I think that we've become a bit neutral relative to some of those long-term decisions. If there's some things that we think that we can do and provide value to them and they're willing to compensate us properly with the right return, then we will be engaged very, very heavily in those activities. If there's a situation where we are not so profitable and we are transparent with them on those situations that we may not be able to make it work for both of us, then we will aggressively adapt and move away from those particular operations.

Like I say, there's been a very good operational trend at ExpressJet and we're optimistic about some of the things that we're doing internal and operationally to provide a very strong fundamental base to move forward. Just real quick, I want to give a little bit of guidance for the rest of the year.

The overall for the rest of the year, we expect that we will lose money for all of 2014, but we do anticipate that we will make money in the last half of 2014. There's a lot of fluid moving pieces relative to these numbers. We don't want to get into more specifics about that, so we'll leave it at that.

And, Youssef, we will open it up for questions now.

Thank you. (Operator Instructions). Our first question comes from Duane Pfennigwerth with Evercore. Please go ahead.

Good morning. Just on ExpressJet, I'm sorry if I missed it in the release, how much did ExpressJet actually lose in the June quarter?

So we haven't necessarily disclosed that today and we typically don't disclose that on the call. We are going to be filing our 10-Q --

-- by the end of the week --

-- by the end of the week we'll file the 10-Q and you'll be able to look at the segments in the 10-Q to see the difference between the different entities there.

Okay. But, I mean, it was substantially loss making, I guess based on your tone. I guess the real question is how long before you think you can get that back to break even?

And just to be fair, I mean I think the message from the Company has been one of a restructuring and a transition of ExpressJet for some time. So maybe you could just help us understand, what are the specific things you're doing that are different than the things you've tried in the past to turn this asset around?

That's a good question. I think that the difference between where we are today and I'm going to say this just at a very high level, Duane, and leave it at that -- I think the difference is, where we are today, where we've been in the past, is you've got a couple of factors.

One, we have the element of a very, very strong flexibility relative to the fleet that we see in the upcoming couple of years, 18-month time frame. I think that we have become a little bit more impatient, if you will, relative to extending aircraft. Some of the aircraft that are going to be going away over the next 18 months have been previously extended with some patience of hoping that we're going to get some things right internally with ExpressJet.

I think that it's not that we don't have a very fundamental strategy to make ExpressJet a long-term sustainable product. I think in the next upcoming years we have fleet flexibility to deal with a very wide range of bandwidth issues that are creating, what I view, as some operating problems within the entity, as well as the ability to remove, what we view, as some of the most unprofitable flying at ExpressJet and the entire enterprise. As we take that fleet out, it's going to put us in a position where we can deal with the bandwidth items better.

And then also, first and foremost getting back to the original point of the call; making sure that we can, first and foremost deliver a very, very solid operation to our partners which in turn will give us more opportunity to try to look at ways in which we can be creative from a revenue perspective to help as well. But again, I think that some of those conversations are ongoing with our partners, but I think the fleet flexibility that we are seeing is going to provide a good baseline to move it in a different direction from what we've seen in the past.

Okay. Appreciate that. Then just lastly, I don't know if you're prepared to do it today but I think it would be helpful if you could give us a sense, kind of rough numbers for each of these 50-seaters that you take out. So I think you talked about 56 this year and over 100 next year. Like what is the level of profit improvement, or how much are you losing per aircraft to help us gauge the rate of margin expansion? Because I assume even though they're loss-making, maybe they're also contributing to your overhead. So any help you can give us in how to think about that would be great.

That is a great point, and we anticipate to do that in the future. I think that it's a little bit premature today to do that because of, Duane, what it sounds like you see the many variables in dealing with this.

First and foremost we have to coordinate that with the partners. We have to coordinate that economically from a geographic perspective and we've got to make sure that we mitigate the impact of all this with our employees. We do anticipate in the next three months we'll have a lot more visibility for that for you.

Thank you.

Our next question comes from Helane Becker with Cowen and Company.

Thanks, operator. Hi, guys thanks for the time. Just a couple of questions here. Can you say how much the cancellations are affected by the runway closures in San Francisco and in Newark during the second quarter?

Wow. I mean, Helane, by the way, thanks for the question. I think it's a very good question because it's something that both entities have been proactively dealing with for about the last six to seven months.

I think that, from the perspective of both, I won't tell you that we have the numbers nailed down exactly. I will tell you that these are two runway closures that we've been trying to proactively work with United for about six to seven months.

I think on the San Francisco side, we have mitigated it relatively down to zero impact in the way that we have tried to progress with a very difficult runway construction. And then on the Newark side, it's probably about the same.

Newark is Newark. Incrementally trying to find out how much of it's related to the runway construction, I would say it's probably not material given just the natural operations of Newark, anyway.

Not to be difficult, but if I look at your flight cancellations at SkyWest over the past month, let's say, compared to say the first quarter of the year by month. You guys never cancel flights at SkyWest, and all of a sudden I'm seeing numbers.

Like yesterday you canceled 42 flights and had 4 diversions. I'm seeing numbers in the 30s and 40s on a daily basis, and that must be runway-related.

So the point is really, when you go to United and you say,"hey, look, we can't deal with this. This is ridiculous and it is contributing to our losses. You need to come back and give us, A, a schedule that works, and, B, money to compensate." What's their reaction?

I'm going to split this. I'm going to let Mike Thompson take a bit of a conversation about the cancels that you've seen in the time frame you've talked about. And then I'll add a little bit of dialogue on that as well.

Okay. So, Helane, this is Mike Thompson. As far as the cancellations are concerned, certainly a lot of those cancellations are due to ATC, weather. We've had some other operational challenges as it relates to some crew issues.

We are at our minimum staffing levels right now. Based on the high block hour numbers that's something that we expect to have some relief with in the fall. But as it relates to the runway construction, in San Francisco, certainly, we've seen an up tick in the number of cancellations as it relates to our San Francisco operation and our overall operation.

Thanks, Mike. I think relative to that plan I think your observations are very true, but I'd have to be candid. I think that most of the cancellations are due to just straight, a very, very high volume of flying at SkyWest.

We've never flown the block hours at SkyWest that we're flying now. I think that we are pushing the maintenance side hard. I think we're pushing the crew side hard.

I think from all of that perspective it's not a situation where we go back to our partners and say give us more money. We have to take some ownership of some of this, and there's a very high volume of flying right now.

Given your comment about how we handle this on a go forward basis, we are very transparent with our partners when we see these issues and we're very transparent when they're happening. When we see these operational issues, if it's something that they're contributing to, we have a very good dialogue in order to deal with this. But we probably have some more ownership on this than just blaming the runways or the partners.

Got you. And then can you say, of ExpressJet, what percent is Delta and what percent is United?

Well, on the ExpressJet side, the United part of our operation is in the 60% range, 40% Delta. Pretty much everything we do on the Delta side of it is out of Atlanta, or Detroit on the East Coast.

Got you. Okay. And then just on the pilot situation. I think at one point, maybe on the last conference call, you guys said you were losing like 20 to 30 pilots a month.

If I think about the next 18 months, you've got 157 aircraft that are coming off lease which theoretically would free up 1,570 pilots to reallocate to the 175s. So am I thinking about that correctly in that the issues with pilot hiring may be mitigated at some point in the next six months?

I would say primarily, yes. It's not that simple, but the math certainly goes in our favor in dealing with taking away that amount of fleet. It's not a simple formula, but I think that you're overall high-level assumption is correct.

Okay. Great. Well, thank you for answering the questions and good luck with this process.

Thank you, Helane. Appreciate your support. Thanks.

Our next question comes from Savanthi Syth with Raymond James.

Hey, good morning, everyone. Just on the contract performance incentive side.

I know there was a little bit of weather in April, but could you help me understand just where the issues are? Because obviously it means a deterioration from the level of performance in the prior year.

Yes. Wade, do you want to give it a little more color on that.

Yes, the performance incentives are split between both airlines at this point. There has been a reduction in the control book completion factor at both airlines, and we've had some financial consequences of -- (inaudible -- technical difficulty)

So in a little bit more detail, I think when you look at what's happening with the operating performance starting I think in April and May, we've seen some good stuff in June and July, so we've seen a good trend.

I think that's a good message to outline, that we see a very strong trend from particularly on the ExpressJet side. But April and May, we're not good.

I mean, we need to own up to, like we just told Helane, some of the stuff that we had in there was related to maintenance cancels, some crew cancels and just some of the ways in which we've been operating the fleet. It's been a bit of a struggle relative to this summer given the volume particularly on the SkyWest side.

The number one thing, as I stated earlier in my messaging, is that we have to have credibility with our partners. Again, we have some very good trends, but we've got to make them not just trends. We've got to make them very strong standards at both airlines.

Maybe if you can expand on like so what did you do in June and July that improved the performance, or is it just a matter of the crew count catching up?

Let me give it a little bit of background into what the process is. It is not necessarily that something that I have done in my involvement in ExpressJet, or anything. They have got some fantastic people that are extremely smart.

I think there has been certainly a strong urgency to improve operating performance. I think that we've provided some assistance to make sure that there are the right things happening in probably three or four critical areas.

We've had some management turnover out at ExpressJet. We took Mike Gibson out and put him over maintenance at ExpressJet. We promoted Brad Sheehan.

These are two very top notch operating folks. I think it has helped us utilize spares better. I think Terry Vais with the dispatch program over there.

We have provided some good strategic insight. They have a lot of strong asset. They've got a lot of strong people out there.

I think that from a strategic perspective we've got some new processes in some of these places and some different thinking that's going on. And I think people are embracing the change and making it more of a standard.

I understand. Then to follow up on one of Helane's questions that you do have the 50-seaters likely coming off contract and that will free up some pilots. Does that mean there will be increase pilot training costs related to getting them to the 175s level?

Not compared to what I think that we're seeing today. On an incremental basis, no.

Okay. And then finally just on the pilot cost that you saw this quarter. I was hoping you could help us understand a little bit more of a breakout as to maybe what might be recurring and what might be just one time as you ramp up to cover any rules or ramp up to get E175 pilots training.

Let me let, Wade start with that one, and I may follow up with some comment.

Yes. So there are three main items in there.

The FAR117, clearly that will be a reoccurring item. We are getting better and better at each airline managing the new rest rules and understanding them and getting more efficient with them. So the level of expense that we've had this quarter is high, we're getting better at it, but there will be reoccurring expense for FAR117.

As far as the hiring for pilot attrition, as we've discussed on the call, we expect that to decrease just due to the amount of aircraft that will be going away. And then the hiring for the 175s, as you've stated, there will be some cost associated with that, getting folks from a different aircraft type to the 175. And so, we will have some additional expense on that through the middle of 2015.

Okay. Any ability to give us levels on each of those buckets?

Given like we said earlier, I think given the fluidity of what's happening with some of these fleet transitions, we're not prepared to give any more guidance relative to those items, but we will probably be in a position to do a better job of that in the next quarter call.

Understood. Thanks very much.

Thank you.

Next question comes from Michael Linenberg with Deutsche Bank.

Hey, good morning, everyone. Just two questions here.

Can you give us on the Delta situation -- it looks like that that's been cleaned up, you mentioned that in the press release. What were some of the puts and takes in that agreement? How did that play out?

I think that we'll keep this at a very high level, Mike. Thanks for your question. I think that relative to that, as you know, that's been a long-standing issue.

I think that what we did to reconcile that was something that we thought was not only important to the relationship but important from a business perspective. And mostly important to have a resolution to that and move forward and not have to spend time, energy, calories and money trying to continue to resolve that. I will just tell you that I think that it's been amicable between Delta and us in resolving that issue. We're happy to have it behind us and it had little to no impact on the financial statement.

Okay. That's good then.

And then my second question is when I look at ExpressJet there's obviously issues with the airplanes, but I know that in the past I think there was also issue with labor costs, there are probably a few other things. When you look at holistically, it would seem that ExpressJet as a whole would be a very good candidate for the Chapter 11 bankruptcy process.

My question is have you considered that? Why haven't you gone down that path, and could it be that maybe SkyWest, is a guarantor on some of the debt? I mean, are there cross-default provisions where if ExpressJet were to go to the Chapter 11 process, it would put the holding company at risk?

Because this has been ongoing for some time and it would seem like you could clean up a lot fairly quickly, and then have a vehicle or a regional platform that would be one of the lowest cost providers of regional service which I think would actually be quite attractive to your partners. Just your thoughts on that. I realize it's a pretty comprehensive question.

Mike, you're hitting the new guy hard, man.

Sorry about that.

It actually is a very, very good question. I will say that certainly understand as a representative of our shareholders and your insights on that, it's our job to consider all things in a solution and under the circumstances. We have not taken that approach seriously.

We fundamentally believe that the dynamics of the industry and our relationships with our partners is going to fundamentally provide what we believe is a likely better scenario down the road to get this thing sustainable. It's not going to be an easy road, it's not going to be a quick road. We think, with the fleet flexibility, the dynamics of the industry and what partners want, we believe that we can do some things without a Chapter 11 bankruptcy to move it forward and take care of the people that are associated with making sure it's successful, and that's employees and shareholders and stakeholders alike.

From a cost perspective, I think that there are certainly some challenges there. I think we've been very clear that the primary challenge at ExpressJet is not necessarily the cost side. Although there are those issues, but the contract side with some of our major partners, and that you say what we're focused on today.

So, while I think we appreciate the concept and we appreciate the insight on it, that's something that we certainly have done some due diligence on. There is a lot of hair on that process that we won't get into with the call that may have an impact on the holding company, may not have an impact on the holding company, but overall we are more optimistic about a different approach to resolve the issue before we go down that path.

Okay. Thanks. And then if I could just squeeze in one last one on the taxes, because you did take that reversal and obviously that drove a much larger loss. Can you just walk through that tax piece and what we should expect for the rest of the year?

Yes. Wade, why don't you take that.

Yes. For the current quarter, to your point, there's two items. Number one is the valuation allowance against some state NOLs and that was approximately $5 million. And then the second piece that affected this quarter was the change in estimate related to our effective tax rate that drove a reversal of the benefit that we recorded in Q1. So that's what's happened to this quarter.

Going forward, if you look at it for the next six months, it will be very close to the statutory rate. Within each quarter there may be a little bit of differences, but overall for the last six months of the year it will approximate the statutory rate that we have.

Perfect. Thank you very much.

Yes.

Thanks, Mike.

Our next question comes from Glenn Engel with Bank of America.

Good morning. A few questions. One, the comment about the second half being profitable. Did that include or exclude the $20 million gain?

Include.

Includes.

It includes it.

And would you be profitable without the $20 million gain, or you don't want to go into that?

We believe we would be profitable without the $20 million gain.

Second, of the 156 planes, 50-seaters that are leaving, can you a give a rough breakout of what's CRJs and what's ERJs, and also what percent of those you get to shed the capital cost as well?

Yes. Mike.

Okay. Glenn, let me give you this for the last six months and then 2015. For the last six months of 2014, ExpressJet will retire a total of 52 aircraft that consists of 17 CRJ200s and 35 ERJ145s, SkyWest Airlines will CRJ200s during that time frame. In 2015 ExpressJet will have a total of 79 aircraft removed from service. 20 of those are CRJ200s and 59 of those are ERJ145s, and SkyWest Airlines has 22 of the CRJ200s on that.

It just so happens that underlying financings typically will run the same time that these contracts expire, so we won't necessarily have much if any tail risks with regards to those.

And finally, you often in the quarter give the engine revenue expense mismatch and what prorate revenues were this year versus last year.

Yes, with regards to the CRJ engine 200 overhaul issue, we've decided not to disclose that anymore within the confines of the press release primarily because on a year-over-year basis the numbers are about the same. They'll be slightly positive this year, and we're on track for achieving that. So for that reason, that's come out of the actual release.

Then also with regards to prorate revenue in the quarter, it was $109 million.

And last year was?

Last year was like $88 million.

That's up a lot, okay. Thank you very much.

Thank you, Glenn.

The next question comes from Bob McAdoo with Imperial Capital.

Yes. Just starting to think about the uneconomic or the unprofitable work. I think Jerry had mentioned that one of the bigger issues has been the acquired contract that you got when you bought ExpressJet. Looking at the number of airplanes that are coming off as Mike just described it, the ones that are ExpressJet ERJs. I assume those are part of that piece, but there's a lot of these that are not part of that, and I'm curious what percent of the old acquired legacy ExpressJet stuff is going to still be there and still be a burden once you get rid of these 100-some airplanes?

I would tell you, I think it's around 155 to 160.

Still there.

Still thereby the end of 2015.

Okay. Secondly, if you have pilot issues in terms of recruiting and whatever, why do you continue to do the prorate? Because sometimes it's a good month, sometimes it's a bad month and it never seems to be that much profits.

Why do you continue to do the prorate business at all? Why don't you just wind that down and use those pilots to supply some of your other needs?

I think your point, Bob, is spot on. I think when we look at our segments, whether prorate or contract, I think when we look at our most unprofitable segments within the entire enterprise, it doesn't matter if it's prorate or contract, we're going to get out of the most profitable stuff the soonest. And then the least profitable stuff soonest, and then make a procession that way.

We do have some prorate stuff that is performing better than the contract side. We have some prorate stuff that's not performing as much as what we should. So you're right in that there's a very strong balance as this fleet goes away, we are looking at those pockets of profitability to make sure that we're maximizing and eliminating the nonprofit operations.

I guess my assumption has been that if it's on prorate, it's something that neither one of your partners probably values that much or they'd be putting it on contract. And so if credibility and ability to satisfy the needs of your partners was a big deal, maybe it would make sense not to fly some stuff that they don't think is that important, and make those people available.

And then also on the pilot issues, are the 175s coming in, are they all going to be over on the SkyWest Airlines side, or are there going to be some on each side?The question is, as you wind down the ExpressJet is there an issue of having new airplanes on one side but surplus pilots on the other, and is there a way for those guys to go back and forth at all, or is that all bolluxed up with union rules?

Okay. There's a couple things in there, but I'm going to start real quick by saying all the 175s are coming to SkyWest Airlines as is contracted with United. As those come over, there really is not a formula or program where we can trade pilots back and forth for that. There's some very clear rules and guidelines relative to that stuff.

However, I think the most important part is when we take a look at these fleet reductions in light of the pilot attrition that's happening, we are going to do our best to manage the impact to people and try to match it. So from that perspective, we're going to do our best to make sure that things work as fluidly with our people as possible in all of these transitions.

Okay. Thank you.

I'm showing no further questions. This concludes are our question-and-answer session. I would like now to turn the conference back over to Chip for any closing remarks.

Thanks, Youssef. We really appreciate your interest in our current situation. We certainly view this situation as something that's fluid.

We would like to have maybe given some more insight as to some of the things that are developing. We can say that there is a significant amount of development relative to our partners, relative to our strategic thinking to get the overall enterprise back in a very strong position to take care of our employees, our stakeholders, and our shareholders. From that perspective, I think that we have a lot of work to do.

We are hopeful to provide maybe some more guidance in the next quarter relative to some of the specifics of that work. There's not a day that goes by that none of us around this table here are not humbled by the level of effort that happens at both enterprises in order to accomplish the goals that we have.

We still fundamentally believe that the biggest asset that we have are the people. Every day they do a fantastic job.

We are optimistic about some fleet flexibility we have relative to the problem, and we're also optimistic about our partner credibility and some of the relationships that we have to progress this thing over the long-term. So thank you very much, and we'll end the call at this time.

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