SkyWest Inc (SKYW) 2014 Q3 法說會逐字稿

Good morning and welcome to the SkyWest third-quarter 2014 conference call.

(Operator Instructions)

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

Thank you, Denise. Appreciate everybody calling in.

Good morning and welcome to our third-quarter earnings call for 2014. We are pleased to present what we believe are results that are indicating some progress toward delivering some strong value to our stakeholders.

Before we get into the details I would like to introduce our team here as well as a brief outline for how we want to proceed with the call. First we have Brad Rich, who is ours Chief Commercial Officer. We also have Wade Steel, who is Executive Vice President of SkyWest Inc.

We have Mike Thompson, the Chief Operating officer of SkyWest Airlines. We also are pleased to have Alex Marren with us who has recently replaced Brad Holt as Chief Operating Officer at ExpressJet. We have Mike Kraupp as Treasurer and Eric Woodward as our Chief Accounting Officer here as well.

We would like to proceed as follows. We will have Mike Kraupp take care of some housekeeping with the forward-looking statement disclosure, and we would like to turn some time over to Wade Steel to give a brief explanation of our earnings for the quarter, and then have Brad Rich give us a brief update on our liquidity situation that has happened over the last quarter and I will provide some key strategy points and then open it up for questions after that. So with that let's start with you, Mike.

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 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 the 2013 Form 10-K and other reports and filings with the Securities and Exchange Commission.

Thanks, Mike. For Q3 our net income was $41.3 million, or $0.79 per diluted share.

The $41.3 million of net income includes a tax affected gain of $15.3 million related to the sale of TRIP. This compares to net income of $26.4 million, or $0.50 per diluted share for the same period last year. Operating income, which excludes the gain on TRIP, increased $2.9 million for the same period last year.

There are four main items that are affecting the increased profitability this quarter. First, total operating revenues excluding pass-through items increased $12.7 million during the quarter.

The revenue improvement was primarily due to certain contract renewals and modifications. In addition the increased E175 flying for United also increased our operating revenue.

Second, direct maintenance expense, excluding engine maintenance, decreased $12.2 million during the quarter compared to the same period last year due to the following reasons. First, its cost reduction initiatives. We have and continue to make investments in our maintenance, training and infrastructure.

Second, we've been able to remove older aircraft from our fleet since the prior year. During the quarter we removed 16 E145s from contracts.

Third, our crew cost increased by $13.8 million for the quarter. These costs include labor, hotels, per diem and simulator cost.

The increase in crew costs are affected by a few main items. Number one, is FAR117.

This is the new flight and duty rules that affect how we can schedule our cruise. FAR117 has increased the number of pilots we need to staff our schedules and increased the number of hotel nights we use.

Second is the introduction of the E175 aircraft. We are hiring and training pilots for this aircraft. We continue to take deliveries of the E175 through the middle of 2015.

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

Fourth is the gain on the sale of TRIP. During the quarter we received the final payment attributable to the sale of our TRIP shares. We recorded a pretax gain of $24.9 million as a result of completing this transaction.

We also received $2.1 million of interest payments which we recorded as interest income during the quarter. Brad?

Okay, Chip mentioned that I would make some brief comments about our liquidity and cash position and I will try to be brief.

Assuming that most of you have seen the release this morning where you saw that we reported that our cash and marketable securities position at the end of the quarter was $555.7 million. That balance represents an increase of $88.7 million during the quarter. The primary reason -- factors -- affecting the increase, Wade reviewed with you the issue of the TRIP gain and the cash impact of that was approximately $20 million in the quarter.

Also the cash that came in as a result of our IROP settlement was about $14 million. And then of course a significant factor is the increase during the quarter in our pretax earnings. Also of note during the quarter is that we invested another $24 million in the equity in six additional E175s and then invested another $8.9 million in just general capital expenditures and tooling, etc. to bring on the E175s.

I think one issue worthy of note is that in the last quarter we estimated that by yearend we expected to be approximately $500 million in our total cash and securities position. As you can see at the end of this quarter we are at $555.7 million. So a couple of things that you need to know about going forward as it will affect our cash and liquidity.

That assumption assumed at -- to get to $500 million by yearend -- there was an assumption that we would refinance our aircraft into operating leases. The cash balance of $555 million currently is without those aircraft being refinanced. But we do expect -- so even if we move through the rest of the year we continue to take the remaining balance of the E175s even if we continue to invest the equity in those aircraft, which would require another $28 million on top of the $56 million that we've invested in equity, our current estimates are that we would still be over $500 million of total cash and securities by yearend.

Now having said that, we are currently evaluating our tax situation and various other factors as to the final completion of the financing of the E175s and we will make those decisions as we move forward. But my message is that even if we continued to invest equity in those airplanes and debt finance them, we are still protecting that by yearend we will be at about $509 million of total cash and securities by yearend.

As it relates to continued CapEx we know that many of you have questions about just what kind of capital requirements will be required as we move forward with the E175s. As we have mentioned, we have been investing heavily in that operation but as we move forward into the fourth quarter we think that investment in CapEx requirement will come down to just a little over $2 million in the fourth quarter. So that's the update on cash and liquidity.

Thank you, Brad and Wade. While the third-quarter results indicate a strong movement in the right direction, I think it's important for us to outline we still have a tremendous amount of work to do.

SkyWest Airlines continues to perform well economically; in fact, as well as it is ever performed. However, during the quarter SkyWest had a couple of operational challenges but was still able to produce good profitability.

It is also important to indicate at the outset that a lot of the things that -- probably will refer to throughout the remainder of the call and through the Q&A portion is data that is likely to be contained with our 10-Q. We believe that that is going to be filed on Monday. So some of the issues relative to the specific entities within our enterprise can be reviewed and updated in our 10-Q that will be filed on Monday.

As for ExpressJet, there continue to be a lot of moving pieces within this model and let me just give a couple of highlights of those. As Wade indicated first, and as outlined in the release, 16 ERJ 145s were removed from contract in Q3 of this year. We are expecting another 18 to be removed in Q4 of this year.

In the first half of 2015 we are looking to remove an additional 23 ERJ 145s and 9 ERJ 135s in again the first half of 2015. In the last half of 2015 we are scheduled to remove another 37 145s in the latter part of 2015. We think that these reductions are important for a couple of reasons.

One is to make sure that we improve the overall economic performance. These are some of the most unprofitable aircraft within our entire enterprise.

We are also committed to continue to have our strategy of making sure that we get ExpressJet in the proper size of fleet in order to effectively deliver what our partners' expectations are and at a position where we have a lot more economic sustainability within that model. One of the biggest highlights for ExpressJet is the operational improvements. This is a piece that we are taking great pride in and are seeing some very good things happening during the quarter.

It was significant mostly due to controllable completion achieving a level of 99.4% for the quarter. It represents the best controllable reliability for an entire quarter that ExpressJet has had in several years. And that is important to our model because not only does reliability deliver what our partners and their passengers want to experience but it also certainly changes the dynamic relative to the revenue that we need to be successful.

Most of these improvements were accomplished with some leadership changes as we mentioned last quarter earlier in the year as well as some planning and process improvements within the ExpressJet operations. We are also very excited to announce Alex Marren as the Chief Operating Officer at ExpressJet effective October 1.

She brings a wealth of experience in almost every aspect of the industry and especially in business and operational transformations. Her experience and knowledge are critical to our strategy with ExpressJet and we are very very fortunate to have her on board.

Wade mentioned in his comments earlier that a portion of our increased profitability was the result of favorable contract renewals. Both of these occurred both at SkyWest and ExpressJet and I think that we can emphasize the contract improvements continue to be a critical part of our recovery plan.

To summarize before we get to the Q&A portion, I just want to make sure that you understand that we feel like we are developing some strong momentum in all the right areas with continued strong financial performance on the SkyWest side as well as driving very strong operational improvements on the ExpressJet side. We will obviously continue to evaluate our fleet and live profitability improvements and site sustainability across the enterprise.

Finally and honestly most importantly, we continue to feel most fortunate to have the strongest team of aviation professionals in the industry. Our folks at both carriers within the enterprise this last quarter delivered a very strong product to our partners with safety and with continued improvements that are following into the fourth quarter. As we all know as we are trying to continue to recover both of these enterprises I think that we are in a position where evolution in this industry is not easy but we all know that evolution is necessary to have some long-term sustainability in this day and age.

So that concludes our comments. Let's turn it back to Denise for the Q&A portion of the call.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Yes, I just want to go back to I think Chip you talked about favorable contract renewals at SkyWest and ExpressJet. Now was that with all of your partners, or is it ExpressJet now have contracts that as a company you can live with and can build upon going forward that economically they make sense?

I will start, Michael, by -- the term that you used contracts that we can live with, I don't know that we could ever find those in this industry, to be honest with you but we certainly will try. If you go back to some of our comments, I would say that the contract improvements are categorized largely where we have aircraft coming off of contract and we had a favorable renewal to continue to fly them.

Those are largely across-the-board with most of the partners. I think that you are alluding to the fact that we have had long-standing conversations specifically with United and ExpressJet.

I can tell you that we continue to make great progress and are wrapping those up. But we are in a situation where we cannot and will not have any communication relative to that because nothing is finalized even though it is very close. And our results do not reflect the impact of any of those conversations.

So in summary, we see that there is some improvement. We don't -- we are very comfortable with the direction that things are going but we still have some work to do and will probably have better disclosure in the next quarter on that.

Great. Great clarity on that, thanks.

And my second question, with respect to airplanes coming off later this year, first half next year, should that address the FAR117 and pilot turnover issues that you face? Are we at the tail end of that?

Will that be mitigated because of all of those airplanes going out? You will be able to source your current pilot group to roster the new aircraft coming in?

In some ways, yes. In some ways, no. And I will split this up between the two carriers.

First and foremost as we disclosed, the majority of these changes are coming out on the ExpressJet side and it does help relative to a pilot supply issue. We do have ample pilots to help with the 117 issue. It is still an expensive process and program, there is no question about that and it certainly does reverse some of the issues we've had earlier this year when we were so short on pilots at ExpressJet that it was causing some operational difficulties.

On the SkyWest side, while there is some fleet evaluation because on the SkyWest side, we continue to still be recruiting pilots there. We are having great success in making sure that we are attracting pilots. So on a go-forward basis in the next 12 to 18 months, we are actually pretty comfortable about our pilot situation over that time period.

Okay. Very good. Thank you.

Savi Syth, Raymond James.

Good morning. Just with the aircraft that are being returned, could you provide any color? Are there any additional increased costs related to the returns and how that is progressing?

So the aircraft that are returning we do not own any of the aircraft. We are not the head leasor on any of the aircraft. Most of these are owned by our partners that we are returning.

So from an increased cost perspective, certainly when you are taking out the volume of fleet that we are taking out, we have and are in the process of modifying a very specific plan to mitigate some of the cost associated with that. To be candid, the turnover is relatively high on the ExpressJet side, which helps mitigate that. We do have very good coordination with United on the return of these aircraft to make sure that it is done in an orderly and timely way.

There is no question we're going to have some cost that are going to linger a little bit over the next year and we are continuing to develop a plan with that. We cannot give a ton of visibility on that on the call today but it is mostly understanding the size and volume of fleet that is coming out, making sure that we have a very very detailed, specific plan that we can execute to try to mitigate that. Surprisingly we are pretty comfortable with our position and how that is going to roll out as of today.

Great. And just a follow-up on the pilot attrition, at what levels are you seeing is that easing, or worsening, or how has it progressed year?

It's kind of picked up a little bit in the fall as the major partners continue to hire. I think that from the perspective of ExpressJet we are running at a range of about 50 to 60 per month. And on the SkyWest side we are probably about half of that, 25 to 30 per month.

So the trend is always higher in the fall months because that's when a lot of the carriers are rehiring and doing that stuff. So we have seen a pickup lately in the latter months but we also anticipate here getting into December in January and February that it is going to tail off again.

All right. Appreciate that color. Thanks.

(Operator Instructions) Bob McAdoo, Imperial Capital.

Hi, guys. I want to kind of go back over what some of what Michael was asking and I am going to ask it a little differently.

We have obviously been hearing for a number of quarters that the ExpressJet side has been a money loser. And the question is, with what you have done so far is back to breakeven, or when we get rid of 16, or 16 plus 18, or 16 plus 18 plus whatever that is, 32, more of what you refer to as the most unprofitable equipment that you have, does that alone get you back to breakeven, or making a little money on the ExpressJet side?

No, it does not. You can see if you go back to the previous 10-Qs that we filed, Bob, you can see that particularly what has happened this last year, it's a big big loss number. We believe it significantly mitigates that and that is part of our strategy with ExpressJet when we had the discussion last quarter.

First thing we have got to do is you mitigate these huge losses that it incurred in the previous months of this year. This significantly mitigates that but I would say even with some of the conversations we are having with United, it is not a case of bringing ExpressJet back to breakeven.

If you wanted a year when that would happen I would have to use the term plural, it would be at least two or three years even with some of the big efforts that we are taking before we can get ExpressJet to a breakeven. That's the visibility that we have today. Our job is to continue to explore, be creative and be aggressive and find other ways that we can hopefully shorten that timeline. We are comfortable with what is happening with the fleet in our conversations with United that there's been a significant mitigation of what has happened earlier in this year and part of last year, however.

So what that says is that the problem is not simply that the rates that you were able to collect on these the legacy ExpressJet stuff that came in with the acquisition of that company, that it isn't just a rate issue there that there's other things that also need to be addressed within the ExpressJet company?

I would say that. I would still put a lot of heavyweight toward the contract, however, and the truth of the matter is that we have signed up for something with a partner.

We are going to honor what we signed up for. We are going to be creative in ways to make sure that we can execute the agreement that we've agreed to in all the best ways.

And I think that this quarter and with Alex's help, we're going to have a lot of help making sure that we do that. But from the perspective of where you are trying to understand, it is mostly a contract issue, yes, but we also see some opportunity within the operation that is going to help mitigate that issue as well.

But even as a contract issue, getting rid of this substantial number of airplanes is not enough to make it work is what you're saying though?

Correct.

Okay. Very good. Thank you.

Duane Pfennigwerth, Evercore.

Good morning. Just wanted to follow-up on one thing Mike referenced. Was there some impact in the quarter from the IROP settlement in the third quarter?

Go ahead, Wade.

So as far as the financial impact, there was no P&L impact to the IROP settlement. But as far as a cash, we did collect, I think Brad mentioned, $14 million during the quarter related to the settlement of IROP.

Okay. And then just a question on the fleet plan and the guidance on ASMs and block hours. It looks like ASMs are down about 11% year-over-year whereas block hours are down about 7%, so I'm just curious as you are getting rid of smaller jets why would ASMs be down more than block hours?

I think it's a couple of things. I think it's depending upon how the schedules work, utilizations within that I think most of our guidance as it comes out into the winter months we do know that the partners are trying to seasonalize a couple of things a little bit more, certainly in the slower months of June -- I'm sorry, January and February and April and May. Our block hours are down from a schedule perspective in those months.

I think a lot of it has to do some of the seasonality from the revenue perspective that the major carriers are seeing and trying to match that with their own fleets at the same time. So I think those are some of the main reasons why there may be a bit of a mismatch on that.

Okay, thank you.

Savi Syth, Raymond James.

Thanks. Just wondering if you have any update on any kind of potential growth opportunities out there? Is there any of the majors looking to add regional flying here?

You know, Savi, I could represent that part of the fun part of our job is that we are having conversations with all four of our partners -- four if you combine US Airways and American, so I will tell you there's ongoing dialogues. There are some formal RFPs.

There's also some informal conversations that we are having. A lot of them have to do with fleet replacement. A lot of them have to do with potential new opportunities.

I think that our general take is that scope continues to be the largest piece of that conversation. We know that there is a lot of opportunities in the next two to three years with the major carriers with their existing pilot negotiations.

Scope likely may be one of those conversations but we are very actively engaged with all four of our partners on having some conversations about fleet replacement, new fleet. I think that the conversations at least -- we can't say anything specifically about it today but I can say the conversations are as active as they have ever been.

Got it. Could you provide an update just on how many of those [50 feet aircraft] are being retired -- I know you outlined the ERJ side of it but are there some on the CRJ that are unprofitable that are being let go as well?

Yes, let me let Wade --

Yes, so from the CRJ side there are certain aircraft coming out on the ExpressJet side. There's 14 CRJs that start to come out. They started to come out at the end of Q3 and all 14 of those will be out by the end of Q1 of 2015 and then there's some other kind of smaller ones that come out throughout the rest of the year.

Okay, but the big opportunity to improve profitability is on the ERJ side?

Correct.

Okay. Got it. All right, thanks.

I'm showing no further questions. I would like to go ahead and turn the call back over to Chip Childs. Please go ahead, sir.

Thank you Denise. Again we really appreciate your interest in the operation that we have and we know that based upon the call and some other conversations with you folks that as we are moving forward with our strategy with both of the airlines and within the enterprise, I want to reiterate what we said before that we've got a lot of work to do.

We feel like we've got some positive momentum and some specific plans to continue to improve it. And again I can't emphasize how honored and proud we are to represent almost 20,000 aviation professionals within our industry.

The results that we talk about on this call is certainly a result of our folks being the top of their game and making sure that we deliver the product that we need to in a safe and efficient manner and we appreciate and are honored to be a part of that team. With that we appreciate your interest and we will turn the call back over to Denise and end it at this time.

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