SkyWest Inc (SKYW) 2015 Q1 法說會逐字稿

Welcome to the SkyWest Inc. first-quarter 2015 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to hand the conference over to Chip Childs, President. Please go ahead.

Thank you, Travis, and good afternoon. We are very excited to have everybody interested in the results for our first quarter of 2015. I'd like to start to introduce our team here as well as the outline of the call. Present here today beside myself is Rob Simmons, our new CFO. We are very pleased to have him on board and we welcome his background and expertise and the things that he brings to our enterprise. We also have Wade Steel, our Chief Commercial Officer, here with us today. We have Eric Woodward, Chief Accounting Officer. We have Terry Vais, Vice President of Operations at SkyWest. I'd like to excuse Mike Thompson, SkyWest COO; and Alex Marren, ExpressJet COO, as evidently their job is to be running a couple of very large operations and they are out doing that today. So we are going to do this without them today.

The call will go as follows. We have Eric Woodward who is going to take care of some housekeeping with the forward-looking statement disclosure. Rob Simmons will give the financial results and some commentary on the financial results. Wade Steel will give us a brief fleet and commercial update and then I will provide some key updates on our strategy and progress and then open it up for questions. So, with that we'll start with you, Eric.

Thank you. 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 expect, 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 our 2014 Form 10-K and other reports and filings with the Securities and Exchange Commission.

Okay. Thanks, everyone, for joining us this afternoon. Today, we reported net income of $9.6 million or $0.18 per diluted share for the first quarter of 2015, which represents a pretax improvement of $59 million from the first quarter of 2014. This is our best Q1 since 2010. This $50 million year-over-year improvement in pretax earnings was driven by a number of factors which I'd like to highlight.

Let me start with the revenue side. As expected, our revenue was down slightly year-over-year as unprofitable planes were removed from production. This led to a reduction of total scheduled block hours going into the quarter of approximately 60,000, or 10%, compared to Q1 2014. We estimate the reduction in the fleet and related production would have decreased our revenue by approximately $44 million in Q1 compared to last year in addition to a correlated reduction in pass-through partner revenue of $28 million.

However, in Q1 2015, we also made some significant improvements in our flight completion rates over Q1 2014, which cut the impact of our scheduled revenue reduction by about $21 million. We reduced the number of non-weather cancels from 1,500 in Q1 2015, or 0.5% of our schedule, from 5,700 in Q1 2014, or 1.6% of schedule.

Further, we generated incremental revenue of approximately $33 million compared to last year from three other factors, including, number one, the addition of 29 E175 aircraft which we began bringing into service in the second half of 2014 and are nicely accretive to earnings. Number two, we had various contract renewals, extensions, and additional used aircraft contract awards since Q1 2014. And three, we saw nice improvement in our operating performance and related contract incentives. Together, the production decrease and the operational offsets led to a minor decrease in revenue of $12 million, or less than 2% compared to last year, despite our departures and block hours decreasing 6.4% and 5.5% respectively.

Turning to operating and other expenses, the primary driver in the $71 million decrease in operating expenses was the reduced fleet size and related production, which also includes a decrease of $28 million in directly reimbursed pass-through expenses under our flying contracts. Additionally, operational inefficiencies from last year's weather were improved upon this quarter.

The $59 million improvement in our pretax income compared to Q1 2014 was contributed to by both ExpressJet and SkyWest Airlines, although ExpressJet still generated a loss in Q1 2015. Its loss was reduced by approximately $40 million pretax compared to Q1 2014. We are pleased with how the consolidated $59 million improvement in pretax income came together through solid execution against our plan.

With respect to our cash and liquidity position, we ended the quarter with $480 million in cash and marketable securities. The $78 million decrease from year end was expected based on our use of $36 million towards ownership for the nine E175s delivered in the quarter and approximately $46 million of seasonally frontloaded aircraft lease payments scheduled for Q1.

Additionally, during the quarter, SkyWest used approximately $20 million for other capital expenditures, which primarily consist of spare aircraft parts. These planned uses of cash in Q1 were offset by strong cash generated from operations.

We anticipate financing the remaining E175 deliveries with debt and are forecasting to use approximately $36 million in cash in the second quarter, $20 million in the third quarter, and $8 million in the fourth quarter as ownership towards the aircraft. However, during the remainder of the year, we anticipate applying $36 million in previous aircraft deposits as a cash flow benefit. We anticipate our other capital expenditures will run at approximately $25 million in both Q2 and Q3 and then be slightly lower in Q4.

Regarding the timing of our future quarterly announcements, it is our intention to continue to report, as we did this quarter, near the end of the month following the end of the quarter, post-market at approximately 2:30 PM Mountain time. The timing of the announcement at year-end will be announced later. Wade?

Thanks Rob. With respect to the key changes in our fleet for the quarter, the following are the additions to our fleet. We took delivery of nine E175 aircraft for our United Express operations during the quarter. And we are scheduled to take delivery of six E175s during the second quarter for United and our first three E175s for our Alaska operation. We are also scheduled to take delivery of five E175s for United during the third quarter and two E175s during the fourth quarter for Alaska.

We received five used CRJ200s which we'll operate with Delta. We anticipate receiving seven additional CRJ200s in the second quarter for our Delta operation.

We also received six used ERJ145 which we'll operate with American. We anticipate receiving nine additional ERJ145s in the second quarter. We anticipate these additional aircraft will have a positive effect on our operating results. As we continue to evaluate and execute our overall fleet transition plan for 2016, we may have some noise in our results during this transition.

We also removed 29 unprofitable 50-seat aircraft from service under our United Express agreement during the quarter. As of the end of Q1 2015, we operated 209 ERJ145s with United. By the end of the year, we anticipate having 157 E145s under contract with United. We also returned three EMB 120s on lease terminations and sold two EMB 120s during the quarter. Our last scheduled operations in the EMB 120s are scheduled to be May 5.

Thanks Wade and Rob. As both of them have pointed out, we are very pleased with the improved first-quarter results and think it's worth noting that it is the most profitable Q1 for SkyWest Inc. in about five years. First quarter's profitability is large in part as a result of operational improvement, improved operating incentives and contract improvements.

ExpressJet's adjusted completion performance improved a significant 1.6 percentage points year-over-year. SkyWest Airlines also showed some improvement on adjusted completion year-over-year as well. ExpressJet's improvement as a result of internal structural and operational improvements as well as our improved ability to recover from irregular operations caused by weather or other disruptions. We've consolidated ExpressJet's operation to reflect the reduced fleet size and implemented changes across the operation, from planning to execution, to improve our reliability and recovery from irregular operations. While seasonally the first quarter is generally weaker than other quarters, SkyWest Airlines continued to perform very well financially in this quarter.

We also continued execution on our overall fleet and transition simplification. As Wade outlined, we removed 29 unprofitable 50-seat aircraft from service and ExpressJet has continued to simplify its bases, network, and support operations to reflect these changes.

Today, we have 209 ERJ145s under contract with United and we expect to have 157 under contract with United by year end. It's important to note here that while we reduced the term of some of our most unprofitable flying to 2017, contract improvements remain a critical part of our recovery plan. As we approach contract expiration throughout our fleet, our goal is to ensure that ExpressJet remains a viable company over the long-term. We continue to make strong improvement in their business and operation and remain focused on its long-term success.

Additionally, SkyWest Airlines continued its transition to an all-jet fleet, which is expected to be complete next week with the final removal of the EMB 120 Brazilian. While the one-time write-off was realize in the fourth quarter, with successful execution of the transition, we expect the overall cost savings and associated improvement to be realized in Q2.

SkyWest Airlines will be taking 175s for Alaska in Q2. The manufacturing process is on schedule and we feel well-prepared for a successful service starting in July. Overall, our strategy is to maintain efforts and execution on reducing unprofitable flying contracts and our ability to renew and/or extend under terms that are mutually beneficial to both SkyWest and our partners.

Within each of our operations, we are focused on delivering strong operating performance and reliability. The benefits of producing a strong product are realized financially through performance incentives, contract revenues, and completed flights and simply in delivering value to our partners and what their needs are. We believe a large part of our ability to deliver reliable product remains in attracting and retaining the industry's best professionals. As the industry continues to respond to pilot staffing and major airline hiring, we remain focused on proactive efforts to attract top pilots. We are seeing good results in these efforts and will continue to be proactive about this issue.

To summarize, while the first quarter provided strong traction and movement in a positive direction, overall, we continue to expect that 2015 will remain a year of transition. We will continue 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, simplify total fleet makeup, and ensure we are positioned to deliver the best of what our major airline partners need.

We also want to acknowledge -- and this is, in my view, one of the most important parts of the quarter. We want to acknowledge that SkyWest was the only regional airline company named on Forbes Best Employers in America for 2015. Our ability to perform reliably and produce a solid quarter is the direct result of more than 20,000 SkyWest professionals across our operations. We continue to believe our ability to attract and retain the industry's best is the formula for our success. My hats off to them for a solid performance and continued progress toward our long-term objectives.

That concludes our written remarks. And Travis, we'd like to open up for the question part of the call.

(Operator Instructions). Michael Linenberg, Deutsche Bank.

Good afternoon everyone. This is actually Catherine O'Brien filling in for Mike. You mentioned some improvements in contract rates and performance incentives on renewals and extensions. I was wondering if the issue of operational penalties in some of your ExpressJet contracts with United have been revised to include passes for bad weather related issues, which I know was an issue last year. And if not, could you give us some way to gauge the impact of those penalties?

Catherine, thank you. I think that the best way to gauge that -- I have to tell you it's a little bit difficult to gauge that because while we did have some conversations when we renewed and had conversations about modifying the contract. The number one point that we thought about all of this is the success in the contract is making sure that we delivered exactly what the partners want, which is strong reliability.

In some respects, the operation sort of outpaced the negotiations, if you will, meaning that there is no doubt that, in Q1, as Rob has pointed out, we had some good advantages to the operation and not as much bad weather in Q1. But to quantify exactly what that meant in Q1, I would tell you that the majority of the -- the vast majority of the improvement on the ExpressJet side is by far and away on the contract improvement and very little on the contract negotiation because of the solid operation.

Okay. If I could ask one more. How would you characterize the RFP environment for regional flying at the moment? I was just wondering if you've noticed any new flying or contract extensions that you attribute to lower fuel making regional jet flying more economical?

I think, Catherine, that's a great question and to put it in light of the way we are seeing the market today, there's actually, in our view, very few formal RFPs out there that we see and that we are participating in. There certainly is some for larger gauge 76-seat lift. But what we're also seeing in the marketplace is there certainly is a strong demand for what we're doing on an existing contract basis and expanding that no matter what the size of the aircraft or the seats on the aircraft in a very, very strong, in our view, environment to continue to build upon what's already been established and not so much by form of new and existing contracts. So we are pleased with the environment. We are having a lot of conversations with a lot of our partners. We also are participating in a couple of RFPs, but we see the vast majority of the business opportunity is to continue to work within our existing fleet and infrastructure and improve on our invested capital within those platforms.

All right, great. Thanks for all the color.

(Operator Instructions). Savi Syth, Raymond James.

I was just wondering if you could give a little bit more color on where the other 50-seat ERJs are coming out of. It seems like there is about maybe 27 or so coming out elsewhere, outside of United.

Wade, do you want to address that?

I'm sorry. Could you repeat the question again please?

Sure. Just outside of the E145s that are coming out, where else are the aircraft coming -- the 50-seat ERJs that are coming out this year?

Yes, so we definitely have some contract expirations at United. We have some other contract expirations with all of our major partners honestly in the 50-seat category. And we are working with them on potential extensions, potential redeployment and other opportunities. But all of our major partners definitely we have some opportunities to, you know, reduce the fleet or renew depending on where the environment is at.

All right. And so is the fleet plan that's in the press release today, that assumes no renewals and assumes everything is returned?

Yes, that is what is it assumed in there right now.

Got it. And then just on the 700s that are somewhat white-tailed, has there been any kind of forward momentum on the contract negotiations on those?

Relative to the 700 platform, we do have a significant amount of conversation with several different parties on what to do with the 700s. I can certainly say that there's -- as Wade mentioned in his comments, you may hear some noise in the next 18 months on the ongoing fleet transition. But I can also tell you that the conversation about 700s is wide and colorful on many things that can happen with that fleet, most of which we are very comfortable with. You know that fleet is a great airplane. With 70 seats in that aircraft, there is a very high demand for it in the right market. We have to look at it in light of also what's happening with several of our 50-seat expirations.

So, when we say we've got some good transitional conversations over the next 18 months, that's true. There's a lot of good conversations and we are committed to be transparent when we have more concrete information on that type of stuff. But we can tell you today there's a lot of conversations about our 700 fleet today.

Helpful. Thanks. And if I may ask one more question, just on the cost side, it seemed like -- or just overall it seemed like a lot of the kind of additions came in and we are starting to get more and more of the aircraft that are getting retired. How should we think about, one, are there any kind of expenses related to the returns here that may build up over the rest of the year? And two, I know last year and the year before kind of pilot training and retention was kind of a big issue and part of it was the new rules. But just how is that trending and are we seeing a lot of that go away, or is that continuing to build?

I can't remember how many questions I heard in there, but maybe we first and foremost start about the cost conversation that you had relative to the retiring fleet. I think that, admittedly, today, we have built an infrastructure to return aircraft. And ironically there's some of that that's also -- I mean when you are taking new aircraft, you build an infrastructure to bring in new aircraft and you also have an infrastructure to retire aircraft. We have a couple of infrastructures built relative to that.

From a cost perspective, as we said, we're going to have cost of fleet transition throughout the rest of this year. If you look at what's going on out throughout the rest of 2015 relative to cost and expectations of this fleet transition, I would say that we've always shied away from giving direct guidance but, in Q2, we expect to carry some good momentum like we did in Q1 relative to our expectation. And I think we said on a previous quarter we have a lot of aircraft still coming out in the last half of 2015 and we expect the results to mirror that, maybe slightly better than 2014 but very close to that.

2016, we would expect to get some cost efficiencies on the ExpressJet side of those retirements. And, you know, we've got to see what happens as we continue to have these conversations with the 700s.

Now I'm going to come back to you Savi, because I think you asked a couple of things that we probably haven't addressed in that part of my response. What was your other question?

I think that was great. The other one was just related to costs on the pilot side. I know that was a big kind of headwind from a cost standpoint the last kind of maybe in a couple of years. Just wondering how that is trending and then if it's maybe all these retirements means that the pilot costs aren't is high because you just have more pilots now and a smaller fleet.

Yes, so I think that, in some respects, we may have to probably admit that we've digested the impact of 117 in most of our models today. And I think that we've certainly integrated that with our partners in some of the contract that we've had conversations with. Other pilot costs we are experiencing today, we obviously have high training costs. We're still growing on the SkyWest Airlines side. There's a lot of training going on today getting ready for the heavy summer schedule. ExpressJet is also in hiring mode right now, and so there's some training costs associated with that. But those training costs on the ExpressJet side are pretty much mostly normal course of attrition type of stuff. And we've kind of accepted these costs and as we look forward in our models in the future, we are just going to have to digest the fact that we've got to integrate some of these costs into our contract models and move forward.

All right, great. I'll jump back in the line. I've clearly asked more than my fair share of questions. Thank you.

(Operator Instructions). Bob McAdoo, Imperial Capital.

Just a couple of things here. As we look at the chart that shows the fleet dropping from 693 to 633 through the end of the year, obviously that frees up a number of pilots. What is the current attrition or how is the rate at which people are leaving compared to the number of pilots that are in effect freed up to continue to fly as you shrink the business? Are you really having to go outside to hire or is the shrinkage in numbers of people going faster than the shrinkage in the number of aircraft?

Bob, right now, our models when you take a look at our fleet, our opportunities, our bids, and our attrition numbers, we feel comfortable throughout 2015. In our opening comments, when we get to 2016, a lot of the hiring we are doing today is for 2016, but part of what we find is one of our responsibilities as we manage our relationship with partners is make sure we deliver within the parameters of what we committed to. And all of our models today are demonstrating that we are very comfortable through the rest of 2015.

In 2016, you know, in this industry with pilots and depending upon how many pilots the majors hire, we're going to have to continue to approach it with our partners on a very, very proactive basis and continue to monitor. But over the next nine months, it looks like our models are matched up very well.

And then secondly, you know, from time to time, we've had discussions about prorate flying. Where are you? Do you still have prorate flying, or does the demise of the EMB 120s mean the end of the prorate flying as well? Where are you on that process?

I'm going to trend that over to Wade and let him approach that one.

We still have some prorate flying. A lot of the EMB 120s were operated under prorate agreements. And those, as we said in our prepared remarks, will be done by May 5. We are transitioning markets where we can into a CRJ200, but we still do have a prorate operation out there, yes.

So, the aircraft numbers that we see on the back of the release today include aircraft that are active because of prorate flying?

That's right. We definitely have prorate aircraft in our fleet plans.

How big an operation is it?

So, we have 56 aircraft currently operating under prorate arrangements.

And those --

I'm sorry. So at the end of March, we had 56, and nine of those were Brazilians, so after we retire the last Brazilians in May, it will probably be around 45-ish 200s on an ongoing basis in our prorate operation.

And those are all profitable?

Yes, well, Q1 is always a hard gauge. I think fuel certainly is something that can help us out with that. And this fleet we have with three different carriers and we are optimistic of what's going to happen this year. Q1 was okay I'd say.

Okay, thank you.

Savi Syth, Raymond James.

On the maintenance side, I notice that the kind of the accounting for American and the US Air are similar to how United's CRJs were done. Is there a potential for a bubble to occur there? Not a bubble but a mismatch that we saw in the United CRJs. Is there the potential for that to happen on the American USAir aircraft?

Savi, this is Eric. We don't anticipate a significant bubble on any of the remaining CRJ200s. Based on the age of those aircraft, most of those have gone past the significant overhaul event period and they are primarily with some hot section and some follow-up engine maintenance events. So we don't anticipate a significant bubble on the remaining American fleet.

Got it. And just on the pilot -- we are hearing that, in kind of some areas, some regional carriers, that they are having difficulty having sufficient pilots and things like that. Are you doing anything different to make sure you can source sufficient pilots? Are you seeing partners come to you needing to do additional flying to kind of offset issues elsewhere?

Yes. I think I would probably respond by the fact that we feel like we are blessed, if you will, to be fortunate today relative to the pilot situation, but it's not as easy as it has been in the past. I think that's the opening statement.

We fundamentally believe that with, an issue as big as this pilot shortage, that you have to be very proactive and plan with the partners and make sure that we can deliver what the partners are wanting to deliver to their customers. That having been said, I responded earlier that we are comfortable with our 2015 plan and we are picking up more one-off flights, if you will, than we ever have, especially on the ExpressJet side, and we are doing it in conjunction with our partners. And so at the end of today, we want to make sure that the flying public is taken care of, there is no surprises, we don't have drama within the system and we are taking care of our partners. And it takes -- I don't know if we're doing anything different than anybody else, but we take very, very seriously very, very strong well-advanced planning on our fleet and moving forward in a way that we can deliver more than their expectations on the back end of things just to help them out in a crunch. So --.

Got it. And then my final question. Is there any reason to believe that the pilot integration can be done either this year or next year?

On the ExpressJet side?

Yes.

You know, we are optimistic on the ExpressJet side if we can get and integration within that group. We continue to have good evolutionary conversations. I think that, at the end of the day, what we've seen from the entity over the last nine months is outstanding on the performance side. They continue to deliver exactly what we need. There's improvements on the financial side. And it's our intent to continue to work with both groups. They represent fantastic individuals and we want to continue to be very transparent with them in what we think the world looks like going forward. And we are optimistic about that, that we can do something here in the near-term on that.

All right, great. Thank you.

Michael Linenberg, Deutsche Bank.

Just one quick follow-up on the network simplification going on at ExpressJet. I was just wondering, one, how the wind down of Dulles went in March and then, two, if there are any other cities beyond DC and Denver that you are thinking might make sense to wind down or reallocate.

This is Terry from ExpressJet. Yes, the Dulles wind down went very well in March and we didn't have any issues there. Also, our partners are also -- with our fleet reduction and consolidation, we are pulling out of Denver on our United operation and also announced a few other locations that we are consolidating in our network. So, it's going very well at this point.

Okay, great. And then the planes that came out of Dulles, those were retired or did they go elsewhere in the network?

Yes, they were retired.

Great. Thanks.

Thank you. This does conclude our question-and-answer session. I would now like to hand the conference back to Mr. Childs for closing remarks.

Thank you Travis. Again, we appreciate your interest in SkyWest. Again, we are very pleased with the momentum that we have today. And hopefully, we've communicated a very clear strategy of what we want to do on a go-forward basis to continue to add shareholder value. And again, we are very appreciative of the efforts of over 20,000 aviation professionals that we believe are the best in the industry and continue to deliver just an outstanding product to help do the things we need to with our partners and our shareholders. So, at this time, we'll end the call. Thank you.

Thank you. The conference is now concluded. Thank you for attending. You may now disconnect your line.