SkyWest Inc (SKYW) 2014 Q4 法說會逐字稿

Good morning, and welcome to the SkyWest, Inc., fourth quarter 2014 earnings call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Chip Childs, President of SkyWest, Inc. Please go ahead, sir.

Thank you, Dan. Good morning, and welcome, everyone, to our 2014 fourth quarter earnings call. This quarter had, obviously, some significant items, but, in general, we are very pleased with what we believe is meaningful progress toward our broader strategic goals.

To start with, I'd like to introduce our team here, as well as an outline for our call. With me here today is Wade Steel, our Executive Vice President, Eric Woodward, our Chief Accounting Officer, Mike Thompson, Chief Operating Officer of SkyWest Airlines, and Alex Marren, Chief Operating Officer at ExpressJet.

The outline of our call today will go as follows - we'll have Eric Woodward take care of some housekeeping with the forward-looking statement disclosure. Wade Steel will then give a brief explanation of our earnings and the special charge we're taking. Eric Woodward will then give a liquidity and fleet update. And then I will provide some key updates on our strategy and progress, and then open it up for questions.

So with all that to open it up, Eric, turn some time over to you.

Thank you, Chip. Good morning, everyone. 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 may, will, expect, intend, believe, anticipate, should, likely, and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call are based on information available to us at this time. We assume no obligation to update any forward-looking statement.

Actual results may 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 10K and other reports and filings with the Securities and Exchange Commission.

Thanks, Eric. Excluding special items, SkyWest's pre-tax income was $33.5 million for the fourth quarter of 2014, which is an increase of $18.4 million over the fourth quarter of 2013.

Our diluted earnings per share, excluding the special items, was $0.30 per share. SkyWest's GAAP net loss, including special items, was $27.9 million, or $0.54 per diluted share for the December 2014 quarter, compared to net income of $8.6 million, or $0.17 per diluted share for December 2013 quarter.

There were primarily four items affecting SkyWest's profitability in the fourth quarter. First, revenues, excluding pass-through items, increased by approximately $19 million during the quarter. The revenue improvement was primarily due to certain contract renewals and modifications. Improved operational performance at ExpressJet and the delivery and operation of additional E175 aircraft at SkyWest Airlines.

Second, crew-related costs decreased by $1 million for the quarter. These costs include labor, hotels, per diem, and simulator cost. This is a significant improvement from prior quarters, primarily due to better planning related to the new flight and duty rules and a decrease in flying at ExpressJet.

Third, total operating expenses, excluding pass-through items, remained essentially flat during the quarter, due to the following reasons. Cost reduction initiatives, we have made and continue to make investments in our maintenance planning and infrastructure. Fleet makeup modifications, we were able to remove older aircraft from our fleet. We removed 26 ERJ145s from contract during 2014.

The fourth item affecting our profitability during the fourth quarter was a special charge. The fourth quarter includes a one-time special charge of $70 million associated with the removal of the EMB-120 aircraft, and modifications to the term of the ExpressJet's ERJ145 contract.

Of the $70 million, approximately $60 million consisted of non-cash write-down of asset values. Of the $60 million non-cash write-down, $48 million relates to the EMB-120s, primarily reducing the aircraft and engine values. And approximately $12 million relates to the ERJ145, primarily spare engines and spare aircraft parts to its estimated fair market value.

The other $10 million consists of obligations resulting from the accelerated removal of leased aircraft from service.

For 2014, SkyWest's pre-tax income, excluding special items and the trip gain that was recorded in the third quarter, was $34.9 million. However, our pre-tax income, excluding special items and the trip gain for the last six months of 2014, was $78.3 million. This is a significant improvement compared to the first six months of 2014.

Thanks, Wade. Eric?

In regard to our cash and liquidity position, SkyWest ended the fourth quarter with $559 million in cash and marketable securities, which was consistent with the cash position at September 30.

During the fourth quarter, SkyWest invested approximately $25 million in cash as ownership towards the six E175 aircraft that were delivered during the quarter.

Additionally during the fourth quarter, SkyWest used $17 million to purchase spare aircraft parts and related equipment, of which approximately $4 million was specific to the E175 aircraft type.

In regards to the fleet and looking forward into 2015, for the E175 deliveries, we anticipate taking delivery of nine aircraft in the first quarter, nine aircraft in the second quarter, five aircraft in the third quarter, and two aircraft in the fourth quarter, for a total of 25 E175 aircraft deliveries in 2015.

We currently anticipate using debt to finance the 2015 E175 deliveries. If we use debt financing, we anticipate using $36 million in cash during the first quarter of 2015, and $21 million in the second quarter, as ownership payments towards the aircraft. Net of approximately $19 million in return aircraft deposits.

For 2015, we also anticipate using $25 million for capital expenditures in the first quarter and $25 million in the second quarter. We currently anticipate the CapEx requirements will decrease in the second half of 2015.

Additionally, under our combined aircraft lease arrangements, we are scheduled to make approximately $60 million in prepaid lease payments during the first quarter of 2015. However, the increase in the lease prepayments related to the first quarter will be significantly reduced in the second and third quarter, simply due to the timing of scheduled semiannual lease payments.

The earnings release includes the 2015 scheduled contract removals for the ERJ145 and ERJ135 aircraft that we operate under our United Code-Share Agreement. Such ERJ aircraft are subleased from United and will be returned to United after removal from contract service.

As you can see in the release, we have several anticipated fleet changes scheduled for 2015. For reference, the fleet and production forecast included at the end of the earnings release is based on aircraft scheduled for operations and reflects the various anticipated fleet changes we've outlined in the release.

With that, I'll turn the call back to Chip.

Thank you, Eric, Wade, appreciate it. So, I mean, in summary, while the fourth quarter results indicate strong improvement in the right direction, I think it's very important that we recognize we still have a lot of work to do to improve profitability, which was represented in a number of notable areas in the fourth quarter.

First of all, ExpressJet's operational improvement remains very noteworthy. We've maintained strong momentum in ExpressJet's operations, with 99.6% adjusted completion, representing another strong improvement over the previous quarter, and a five point improvement over the same quarter last year.

Strong reliability has been a top priority and represented some of the improved financial results for the quarter as well. This was accomplished with continued process improvement and communication improvements across the organization, which will be key to deliver what our partners and passengers expect in the future.

SkyWest continued to perform well financial in the fourth quarter. Though the airline did experience some operational challenges, they did produce strong profitability. We won't get into details on this call relative to the profitability of our segments, but we would refer you to the 10K that will be filed sometime next week, for further details on those elements.

We continue to execute on our strategy, to increase flexibility within our fleet, to reduce unprofitable flying, and simplify the fleet during the quarter. I will address specifically what's going on with each of the entities separately here.

As outlined in the release, SkyWest Airlines took delivery of six E175 aircraft during the quarter under it's flying arrangement with United, for a total of 20 deliveries in 2014. The remaining 20 deliveries will happen throughout the first three quarters of 2015.

Additionally, SkyWest reached an agreement with Alaska to operate seven new E175s, and those will begin delivery in the third quarter of this year and will go throughout the first quarter of 2016.

Finally, SkyWest also reached agreement to operate 12 additional used CRJ200s. [They] started delivery in 2014, and scheduled to continue through the second quarter of 2015. These are being flown with Delta.

Regarding Brasilia, [it is] previously discussed with our special charge, SkyWest Airlines began its transition to an all-jet fleet, and is expected to be complete in May, with the final removal of the EMB-120 Brasilia. With the one-time write-off that has been discussed, as realized in the fourth quarter, the successful execution of the transition -- and the successful execution of the transition, we expect the overall cost savings and associated improvement to be realized in about May of 2015, or May of this year.

On the ExpressJet side, ExpressJet moved 10 ERJ145 aircraft in the quarter and has continued to simplify its network and support operations to reflect these changes. Additionally consistent with what we have announced in the previous quarters, 59 ERJ145s and 9 ERJ135s are scheduled to be removed from service throughout the rest of 2015.

Also on the ExpressJet side, we reached an agreement with American to operate 15 used 145 aircraft that will be leased from American.

Looking forward, pilot resources continue to be a key focus across the U.S. industry. While SkyWest, Inc., and our entities are able to fill new hire classes to date, each remains very focused on proactive efforts to maintain a strong pipeline as the major carriers increase hiring and new regulations restrict access to new pilots.

We're very focused on addressing this issue as proactively as possible and ensure that we're able to take good care of our people and continue to attract the top industry professionals.

So in summary, while the fourth quarter provided strong traction and movement in a positive direction, overall, we continue to expect that 2015 will still continue to be a very large year of transition. We expect to evaluate our fleet in light of profitability improvements and size sustainability. Our focus is to execute our strategy to focus on solid, reliable operations, simply our total fleet makeup, and ensure we're positioned to deliver the best of what our major carriers expect from us.

Finally, and most importantly, I would like to thank the nearly 20,000 SkyWest, Inc., employees clear across the country for their continued work every day to continue a fantastic product. They are clearly the key to our success and our continued ability to evolve and meet the needs of our partners.

That concludes our written comments. With that, Dan, I'll turn it back to you for the Q&A session.

We will now begin the question-and-answer session. (Operator Instructions)

At this time, we will pause momentarily to assemble our roster. Savi Syth of Raymond James.

This is [Lana Parker], actually. I'm covering for Savi. And I apologize if you covered this already. But related to the United contract, do you still expect to return 23 ERJ145s and 9 ERJ135s in the first half of 2015?

Thanks, Lana. Hang on just one second. Eric, do you have those numbers?

I do. That's very close to the schedule that we currently anticipate, yes.

Okay. Great. And my follow-up is, how many ERJ145s are expected to be removed in 2016, under the new agreement?

Under the new agreement, there's probably about 20.

There are 20 that are scheduled to be removed in 2016.

Okay, got it. Thanks so much.

Michael Linenberg of Deutsche Bank.

It's Richa Talwar filling in for Mike. So just a couple of questions from me. First, you've done a very good job bringing the business back to profitability, at least on an ex-specials basis, over the last two quarters, despite having what we think are still a bunch of assets that are, we assume, a drag on financials.

I'm just wondering if you can quantify how much of a headwind those assets are for us. Particularly, I'm talking about the ERJ145s and 135s, as well as the E-120s that you're looking to remove from the fleet this year. In other words, what would your profit have been if those aircraft had already been removed from the system?

So that's a very interesting and kind of a difficult question. We appreciate it. There's a couple of things I think I'd respond to the question. If we were to -- I think what you're asking is, if we did not have those assets in for 2014, what would have the picture have looked like?

We're not really prepared to kind of do that analysis. But I will back up and give you the strategy of why we've done what we've done and what we can expect in the future. Part of what we talked about in previous quarters is that we've got a strategy where we need to be right-sized to be able to deliver what our partners need.

So first and foremost, while we can see retrospectively what this would have done in 2015, what we're trying to do in 2015 and 2016, is make sure we've got the bandwidth of fleet that approximates what the needs of our partners are. And from that perspective, we've got a lot of issues such as a pilot, impending pilot shortage, and some various fleet exposures.

And what we've done with the fleet to try to shrink it a bit was to try to make sure that when we execute on what we think that we can actually do for our partners that we can deliver on it. We've just been too big and we've been too spread out. And by consolidating them into a couple of the hubs, we've already closed a couple of hubs on the ExpressJet side, and as we continue to do that, it makes it significantly more efficient.

We know that this is working because of what we said earlier on the call relative to the operational reliability. We had to shrink the fleet to get to the operational reliability that we ended up with. And at the end of the day, we think that that's going to continue to hopefully evolve into more efficient costs, more efficient deliverability to our partners, and be able to manage it a lot better than what we have.

So I know that's not exactly probably the answer that you want, but it certainly is the strategy of what we've been trying to do over the past six or seven months to position us for the future.

Got it. That's really clear, Chip. So just to confirm, the runway EPS that we should be expecting will be better than what you did in the fourth quarter, you'd assume, right, once you get all your ducks in a row regarding your strategy?

Yes. I would caveat that a bit. I would turn you probably more to what we've done over the last six months of the year, and certainly apply some seasonality and difficulty index for what usually happens in the first six months of the year, and discount that a bit.

But again, there's a lot of variables. We're not -- we've never really given strong guidance to the Street. 2015 is still such a transitional year, I'd probably look to kind of what's happened overall in the back half of the year. Look at the fact we have great reliability on our side this time going into 2015, and kind of discounting for some of the seasonality that we have in the first half of the year.

Okay. And then secondly, you did walk through a lot of the contracts and mandates that you've won, but we also noticed that there were some large regional mandates that other operators had won.

So I was curious if you were out there actively bidding for a lot of the business and if you still see opportunity to pursue deals this year.

Yes. I would say that we are actively out bidding for a fair amount of business today. Certainly with what the industry looks like today, there is a lot of chaos within fleets across the entire regional spectrum.

So we're engaged in all of our partners in meeting their needs. Some are formal RFPs, some are just conversations. And we are optimistic about some of the things that we're working on.

We fundamentally, our primary focus, again, has gone back to making sure that we can deliver the best product in our space. I think that we've got great momentum to do that. We've seen what's happened with other carriers, and some of those we've been participating in, some we haven't.

But I think where our focus has been the last six months and what we're seeing on the results on the operating side, it's going to give us a lot of good opportunities here within the next year to hopefully secure some more larger gauge growth.

Okay. Great. Thank you.

Duane Pfenningwerth of Evercore.

This is Jeff Eisenberg in for Duane. Wondering with fuel down at these levels, have you seen any increased demand for your product from your partners? And if so, do you have the pilots to satisfy that demand?

So I think it's a unique picture with the fuel where it's at around the $50 a barrel. We've seen -- what I would suggest, and this is not a surprise to anybody, probably more viability in the smaller aircraft. It didn't obviously translate to what the Brasilia operation was doing. We still felt the need to continue to put that fleet down.

But we have seen a bit of resurgence from a 50-seat perspective, as is evidenced in taking more 50-seaters on both the SkyWest side and ExpressJet side for other partners.

So we do see a little bit of a increased demand on the 50 side with that. And as what we've committed so far today, we believe that we've got the pilots to deliver, otherwise, we wouldn't be committing to it. That's something that we are taking very serious with our partners, is that when we are looking at new growth or new opportunities, we intend to deliver on what we're committing to.

Great. And then, I guess a quick modeling question. On the first quarter of 2014, I think you called out about $30 million in pre-tax income hit. Can you discuss how much of that is revenue and how much of that is sticky cost, as we think about modeling that as a tailwind into 1Q 2015?

I'm going to let Wade take that one.

Yes. So Q1 of 2014, we did call out about $30 million. That was divided up primarily -- there were two sides of it, right. There was a revenue side and a cost side. A lot of it was related to the weather. We weren't able to complete some flights due to that.

We're very optimistic that Q1 of 2015 will not have that level of reduction in revenue and the increased cost. So we're feeling very good about Q1 right now.

All right. Thank you for taking questions.

(Operator Instructions) Bob McAdoo of Imperial Capital.

Just a couple quick questions. You say you closed some hubs. Which ones did you close? Were these related to the old Continental stuff, where you've been saying they've been expanding, dragging you all over the place, and now you wanted to go back to where you were? Is that really what was going on there?

I'll let Alex address that one.

Yes. So we have closed two bases, currently at Dulles, which winds down for us at the end of March, and we also announced a closure at Denver. That will allow us a lot of operational efficiencies and improvements in reliability, as, obviously, we consolidate both from a crew and a maintenance perspective, and working very closely with our partners in coordinating that smoothly transition-wise for our customers.

One other thing. There's a line or two in the disclosure talking about shortening the life of one of the agreements, which I assume is probably the old Continental agreement related to that and United. Is that, in fact, what it was? How much was it shortened? And what are the nature of the other kinds of changes? Not necessarily the specifics. Just what are the kinds of other things that have gotten modified in that contract? So it seems to me that over last year or two, that's been one that you guys have discussed as a kind of a problem child contract. I'm just curious how much change really did happen there.

So it's a great question, Bob, and let me address it in a couple of ways. First and foremost, we did shorten the term of the agreement, and there was a couple of reasons why we did that. And then the other thing that we did is we put just a couple of other high-level enhancements within the agreement on some various, what we term to be market reimbursements, but mostly enhancements relative to items of an [i-rupt] situation or that type of stuff.

So in total, the reason why we went and we shorted the term of the agreement is that we had to have a situation where we needed to have some visibility or flexibility sooner than later. And I think that there was some value in that to both United and us. It certainly was a contract negotiation where we wanted to make sure that we both were getting significant value out of it.

The elements of the contract negotiation, I will tell you, were largely minimized by outstanding performance. We spent a lot of time with United in the conversation that we wanted to achieve long term with that. And at the end of the day, we think that we're developing and delivering a product that they're very happy with. I think that their reliability has been the best today that it's ever been since we've owned ExpressJet.

And there are some of these things at the end of the day that we wanted to make sure we were delivering what their expectations, because we simply hadn't been doing that. And some of that clarity enabled us to make some investments in the entity. And even though we've shortened the term of the agreement, it is fully our intention to continue to work with them to get contract extensions and continue to fly for them under the arrangement with some extensions and renewals for a very, very long time.

Over the last several quarters there have been disclosures that basically said that the ExpressJet entity as a whole was a cash burn problem. Has that now stopped with all these changes?

It has not entirely stopped. But I will say that it's been significantly mitigated, primarily with outstanding performance.

Great. And one last thing. Are you completely out of the prorate business now, [jet and prop]?

No. We are getting out of prorate business in the turboprops as we're putting that fleet down. But we still have probably approximately --

Well, after the turboprops are out, there'll still be around 30 to 40 of CRJs that are under a prorate arrangement.

Yes. So we still have 30 to 40, at any given point of the year that are still under prorate.

I assume with these kind of fuel prices, that that's working better now?

It does help, yes.

Is it making a nice contribution or are you just kind of hanging in there?

It's nice to hanging in there. How's that?

Nice to hanging in there, okay. That's enough. I've taken enough time. Thanks a lot, guys.

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

Thank you, Dan. I think that the quarter, from our perspective, is still a stepped process where we still have some very strong, long-range goals that we need to achieve throughout 2015. We're very comfortable with the momentum that we have, but we also have a very healthy respect for what we still need to do to accomplish in 2015, to set both of these outstanding entities up for a very, very strong future.

With that, again, we want to thank all of the people and the professionals throughout both entities. We couldn't be doing this without you, and we appreciate your ability to evolve and continue to meet the needs of our partners. And with that, well close the call.

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