SkyWest Inc (SKYW) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the SkyWest, Inc., third-quarter 2016 earnings conference call. All participants will be in listen-only mode. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest CFO. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, Chief Commercial Officer; Eric Woodward, Chief Accounting Officer; Mike Thompson, SkyWest Airlines Chief Operating Officer; and Terry Vais, ExpressJet Airlines Chief Operating Officer.

I'd like to start today by asking Eric to read the Safe Harbor. Then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results. Then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric?

Thank you, Rob. Today's discussion contains forward-looking statements that represent our current beliefs, expectations, and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement.

Actual results will likely vary and may vary materially from those anticipated, estimated, or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2015 Form 10-K and other reports and filings with the Securities and Exchange Commission. With that I'll turn the call over to Chip.

Thanks, Rob and Eric. Appreciate that.

I want to start the call today by identifying that throughout this past year, we discussed our progress on the execution of our business plan through three different phases. First was to evolve and transition our fleet; two was to reduce our risk profile; and third, to build value through strong cash generation for our stakeholders -- all with a focus on best-in-class safety and reliable operations.

The last little while have been transition years, and I want to begin with a big thank you to our 20,000 people across our organization for their continued commitment to delivering consistent, exceptional reliability, service, and safety.

Our current strategy began in 2014 with a multi-year fleet transition plan. In the last two years we have removed the EMB-120 Brasilia turboprop from our fleet; we have invested in new E175 aircraft; and we've reduced our total 50-seat fleet by more than 120 aircraft. We continue to see positive outcomes from this successful fleet evolution, which Wade will cover more in detail later.

As a result of this evolution, we've also successfully reduced our risk in a number of key areas. As we will discuss, we have essentially mitigated the tail risk on our CRJ700 fleet through 2019, and our new E175 aircraft continued to provide significant improvement to our overall risk profile.

By reducing or removing unprofitable aircraft from our fleet, we continued to minimize losses at ExpressJet, which broke even in the second quarter and produced a small profit in the third quarter, excluding early lease return charges. I want to note that while ExpressJet showed significant improvement in the seasonally strong second and third quarters, we expect that they will still lose money for the full year of 2016.

Our ongoing focus on solid operating performance remains central to our ability to compete. Our two entities continued to deliver exceptional operating performance during the quarter. Specifically, SkyWest Airlines continued to improve its adjusted completion performance, moving from 99.4% in the third quarter last year to 99.9% in the third quarter of this year.

ExpressJet also delivered solid operating performance, with a 99.8% adjusted completion for the quarter, consistent with their strong performance in the same quarter last year. Both of our airlines are delivering top performance within our partners' portfolios, and that's very, very important to us.

In fact, one or both of the airlines have been the top performing carrier in United's network for more than two years now. Together, our two entities operated more than 300,000 flights in the quarter and continued to deliver consistent, exceptional reliability and service.

As we near completion of our first two phases of our multi-year strategy, we expect to continue to build liquidity, improve cash generation, and ensure we are best positioned for continued opportunities. We believe our ability to attract and retain top aviation professionals, as well as our capital strength, set SkyWest apart in our industry and continue to provide added value for our employees, our partners, and our shareholders. I want to again thank our 20,000 professionals for their good work in the quarter and for continuing to deliver best-in-class product as we build our airlines for the future. Rob?

Thanks, Chip. Today we reported net income of $41 million or $0.79 per diluted share for the third quarter of 2016, up from net income of $36 million or $0.71 from Q3 2015. These GAAP results included the $9 million non-cash impact of early lease return charges on six CRJ700s. Excluding these charges, adjusted earnings per share this quarter was $0.90.

Pretax income for the third quarter was $67 million compared to $60 million last year, an improvement of 12%. This strong growth in year-over-year earnings continues to validate the fleet transition plan that we have been executing against over the last two years.

Our continued growth and profitability was driven by the addition of new flying, with 11 new E175 planes placed under contract this quarter; the removal of 18 50-seat aircraft during the quarter; and operating efficiencies realized through improved operating performance. Since Q3 2015, we have taken delivery of 24 additional E175s. We expect to put 19 more into service in Q4 of 2016 and an additional 18 in 2017. In addition to the $9 million lease return charge I referenced earlier, we expect to take a similar charge on 11 additional CRJ700 early lease returns in the neighborhood of $15 million to $17 million over the next six months, if they are returned as scheduled.

Looking ahead, we expect Q4 2016 to be up slightly from Q4 2015, excluding special items. The expected Q4 results are slightly softer than our original plan as a result of higher training and pilot carry costs as SkyWest gears up for a heavy Q4 E175 delivery schedule, and as we continue to transition 37 CRJ700s to American through early 2017.

To provide some color, the softer Q4 can be attributed to two factors that are positive for us over the long-term. Number one: pilot carry and training costs are up. As pilot attrition has slowed, pilot hiring has increased, and we positioned for delivery of 37 new E175s over the next few quarters.

Earlier this year we anticipated tighter pilot availability for Q4, and we were somewhat conservative in our Q4 flying commitments. We expect this pilot carrying cost to be temporary and will be corrected in early 2017, as we deploy pilots against new aircraft deliveries.

Two: additionally, we are in the process of transitioning 37 CRJ700s from United to American. During this transition there will be some normal off-line time, as these aircraft are painted and placed back into service under the new contract flying. Again, this temporary inefficiency should be resolved by early 2017. This transition resolves the financing tail risk on these planes through 2019, and Wade will speak more to this in a minute.

Our future outlook for 50-seat flying may evolve as we evaluate our partners' long-term needs as part of our year-end fleet planning process. Changing market conditions may impact our previous assumptions regarding the value of our 50-seat fleet. Total fuel cost per gallon averaged $1.75 during the third quarter, down from $2.02 per gallon in Q3 2015 and up from $1.69 per gallon in Q2 2016.

Let me say a couple things about our balance sheet. We ended the quarter with cash of $564 million, an increase of $51 million from last quarter. We issued $249 million in new long-term debt during Q3 to finance 11 new E175s delivered during the quarter, with total debt increasing by $185 million, net of scheduled debt service payments.

Total debt as of September 30 was $2.2 billion, up from $1.9 billion as of December 31, 2015. Cash used for CapEx during the quarter was $61 million, including $44 million in cash to buy the 11 E175s, and $17 million in other equipment.

We expect to be able to fund the cash investment for the 37 remaining E175 deliveries out of internally generated cash flow while maintaining the strong levels of liquidity we enjoy now. We expect to end 2016 with cash in the area of $500 million. Once this delivery cycle winds down next year, we expect our cash position to grow unless new positive NPV investment opportunities present themselves.

As you can see from our Q3 results, SkyWest continues to operate at an improved trajectory. Wade?

Thanks, Rob. In the very busy third quarter, we continued to execute on our strategy to remove aircraft from unprofitable agreements and transitioning our fleet to larger new aircraft, as well as redeploying aircraft with extended flying terms to mitigate financing risk. During the quarter we signed an agreement with American to redeploy 30 CRJ700s from our United fleet to our American fleet, essentially mitigating any financing risk on our CRJ700s through 2019.

These 30 aircraft are in addition to the 7 previously announced aircraft, for a total of 37 CRJ700s with American. As of December 30, 13 of the 37 CRJ700s have been placed into service in our American operation, and we anticipate transitioning the remaining 24 aircraft through the middle of 2017. In addition to the CRJ700s, we extended 9 of our CRJ200s on short-term agreements with American during the quarter.

To provide a little color on the fleet changes in the quarter, we removed 7 ERJ145s from our United contract, 11 CRJ200s from various contracts, and 16 CRJ700s from various contracts -- 6 of which were early lease return aircraft, as previously discussed, and 10 that were subsequently transitioned back into service with other partners during the quarter. We also added a number of aircraft our fleet during the quarter. We received and placed into service our first five new E175s under our Delta agreement, added two new E175s under our United agreement, and four E175s under our Alaska agreement.

During the fourth quarter we anticipate removing 13 ERJ145s from our United contract, as well as 3 CRJ200s under various contract through the remainder of the year. Looking ahead to 2017, 11 ExpressJet CRJ200s are scheduled to expire during the first quarter of 2017. We expect to replace these CRJ200s with dual class aircraft within our existing fleet.

As discussed in previous quarters, we expect to return a total of 20 CRJ700s under an early lease return agreement. We have removed the first 9 of those 20 CRJ700s during the past six months and are scheduled to remove the remaining 11 CRJ700s during the next six months. As Rob discussed, we anticipate additional lease return charges for these aircraft, if they are returned as scheduled.

We also expect delivery of 19 E175s during the fourth quarter. Of those 19 we plan to operate 9 under United's contract; 8 under Delta's contract; 2 under Alaska's contract; with the scheduled deliveries of 18 E175s in 2017. We expect 104 E175s in our fleet by the end of 2017.

As demonstrated in Q3, execution of our fleet strategy continues to produce tangible results to our model and overall profitability. As we have discussed today, we expect fleet transitions to continue during the fourth quarter and 2017 as we reduce unprofitable flying, redeploy aircraft with other partners, and place larger new aircraft to service to deliver on our commercial agreements.

Okay, thanks, Wade. Kate, we are now ready for Q&A.

(Operator Instructions) Steve O'Hara, Sidoti and Company.

I guess just on the tail risk, if you could talk about -- it sounds like you guys are doing a good job kind of mitigating what's there and working that down. Can you just talk about what remains for the rest of the fleet, maybe as of right now?

And then also you had mentioned, I think, about changes that may impact the value of your 50-seat fleet. I was just curious what that was alluding to. Thank you.

Yes, so Steve, thanks. This is Wade. So first of all, just on the financing tail risk, so for the rest of 2016, 2017, and 2018, we don't have any meaningful -- and 2019 -- we don't have any meaningful tail risk on our fleet, which means basically we have matched up our contract expirations with the financing.

After 2019, we do have some additional risk. But at that point in time, we feel like we will be able to cover it off with other flying arrangements.

Okay, great.

Steve, this is Chip. On the second point, you know, the impact on 50-seaters -- as you know, we always are evaluating that. We've got quite a number of 50-seaters right now. I can certainly say there's still, interestingly enough, very good, strong current demand on our short-term profile for this stuff.

Q4 is a time when we match up long-term fleet plans with our partner needs. And as we continue to evaluate that in the fourth quarter, we are going to evaluate what some of the opportunities are with 50-seaters, and if there some opportunities to replace some dual class with that. So we're going to need to let the partners kind of give us a little bit more color on what their needs and desires are and, hopefully, in the fourth quarter come back with some good -- better information with you to cover what that information may be long-term.

Okay. Maybe just a follow-up. As you guys deploy the E175s, I assume you don't get maybe the full benefit until 3Q of 2017. But I mean, I assume that going forward you should still see additional growth in your earnings, maybe offset by some of the transition costs you talked about -- and then maybe kind of the stress on the system for adding so many aircraft and training, etc. Is that the right way to think about it?

So, Steve, obviously Q4 is a very heavy delivery cycle with 17 new planes coming online. It sort of continues through the first half of 2017, but the bulk of the deliveries will be done by the middle of 2017.

So that's -- you know, we've been gearing up our infrastructure to be able to handle that. We are really gratified that the pilot situation is very strong as we head into this -- the rest of this delivery cycle for the E175 product.

Okay, thank you very much.

Michael Linenberg, Deutsche Bank.

Just a couple questions here. Rob, just a clarification: you mentioned that Q4 of 2016 should be up, I guess, modestly from Q4 2015. Does that Q4 2016 -- does that include any lease return charge in that number? Is that excluding the impact of that?

So when we talk about it slightly over Q4 last year, that would be excluding any of these special items, including any lease returns that could hit in Q4.

Okay, good. And then when I look at the debt that you put on balance sheet tied to the airplanes, it looks like you're putting down, what, about 15% into the airplane, and then financing 85%? Is that right?

That's right. It's exactly right. It's roughly $4 million per airplane that we are investing and then financing the rest of it on a long-term basis.

Can you give us a feel for what that cost of debt was? It is on a secured basis. What sort of a ballpark? Or maybe you could give us something -- maybe the exact coupon on that? That would be helpful.

Yes, sure. Obviously, we've been closing on airplanes, like, virtually every week the last little while, as the deliveries are starting to ramp up. But our long-term cost of debt for those is typically running in the neighborhood of 3.6% plus or minus a few basis points.

Okay. Very good. And then just lastly, there was a headline maybe a month, a month at half ago -- Delta considering a big regional jet order. I know they have a captive, but the size of the order sounded like it was something more than just for their own subsidiary.

I mean, what -- any anything with respect to that or how you think about that? And does it make sense for -- well, I think I know the answer to this one, whether or not it makes sense for the major carriers to get more involved in owning regional jets. But just any thoughts on that or how you would respond to that?

I think specifically -- this is Chip. It's good to hear from you.

Specifically relative to that, I want to just kind of put it in context, because I think that -- I want to make sure you know that on an ongoing basis, we are always having conversations with our partners about potential new opportunities.

Our number-one strategy, as I think we've demonstrated quite well lately, is that we want to make sure that we are the carrier that has the pilots and the capital to give options to our partners. And that's not -- that's kind of rare in our space to be able to, A, provide both the pilots and the capital to buy the airplanes.

So we realize that we are in a bit of unique niche, and we can have good conversations with our partners. Without getting into detail, but -- I can say that the conversations continue to be fluid and ongoing. Scope has a lot to do with it.

And we -- in the end I can only say that we are very comfortable with our position and that we do have good conversation with all four of our partners. Our main focus is to be prepared when that event may take place, where they are ready to do something like what you have described.

Great, just one last quick one. The $9 million, where does that -- is that -- what line item does that appear in? The lease return charge?

That's hitting the rent line item.

Okay. Very good, thank you.

Savi Syth, Raymond James.

Just wanted to touch on the pilot side of things. I know it's always kind of difficult to kind of schedule and figure out the right size. So wondering if you can provide a little bit more color. Does that get rightsized when kind of the summer flying or maybe the Easter flying starts to pick up, and so there will be still a drag in 1Q as well? And then I'll ask another question after that.

Savi, it's Chip. It's good to hear from you as well.

I would present this as -- I think that we have ended up in a pilot situation today that's better than expected. And I hope that that goes to our respect of what the issue is with pilots. I think that we, at both entities, have a very, very aggressive and strong pilot recruitment programs at both entities.

And when we commit to flying, we want to make sure that we deliver what our partners are signing up for. So we do exercise some conservatism for that.

But I will also say, relative to your timeline, we have the ability, with the strong demand of aircraft on a current and continual basis, that we believe that we can recover from where we are today, largely in Q1, by the partners asking us to fly some things on short-term. So it's not like we've got to muscle through this for another six months or anything.

We think that we can -- there's some demand that we can -- and our fleet flexibility allows us to respond quickly. Agility to the needs of our partners is a key core competency for our philosophy.

And then I think that the other thing is we are not going to -- you know, we are fundamentally not going to pull our foot off the throttle in recruiting. We're fortunate to have an outstanding culture at both entities that have unbelievably solid operations. And pilots are very, very smart; they see through the things that they think have the biggest impacts on their career, and their development, and who they want to fly for.

And we are fortunate with that. And we don't intend to back off of that at all. And if by chance more opportunities come our way because we have pilots, we're going to continue to look for those opportunities.

So it's not a long-term work through problem, if you would call it a problem today. It's more short-term. We think we are going to get back to it in Q1.

Definitely high quality. To follow up on that, Chip: so we've seen some pretty big pay increases across the board, and more recently at some of the in-house subsidiaries. How is that dynamic impacting kind of recruiting? And it doesn't sound like it has, but just kind of curious. It's so hard to compare contracts.

It really is difficult to compare contracts. And you'd have to get into a lot of granular detail, because there's some attractive things that they are offering; there some attractive things we are offering. It really is apples and oranges most of the time.

But I can tell you from our experience, because we have spent so much time on this in the last year, that we fundamentally believe that the aviation professionals we are recruiting today are extremely smart. It's a lot about money; it's not entirely about money.

I think that they see within our entities that we do a couple of things for their career progression. One is that we -- like we have said before, we have outstanding, solid, safe operations. We have, I would say, best-in-industry training, and things that we do to make sure that they are outstanding pilots and provide outstanding service.

Plus, the number-one thing that they, I think, have compared to a wholly-owned carrier might be that they have a lot of flexibility. When you invest that much money and time into your career, I fundamentally and we fundamentally feel like it's good to have options to go to many different types of opportunities. And we are very good, strong -- you know, in a great position to help our folks do that.

That being said, like I said, I think that it's sometimes an apples-and-orange scenario. And since some of these things have come out, we really have not seen a significant impact in our recruiting efforts as of now.

But again, Savi, as you know, we have a very strong, healthy respect for this problem. But we continue to work a lot of different things to make sure -- you know, the core part of our business to have the best professionals there are out there.

That's helpful. Thanks, Chip.

And if I may ask just one last question on the CRJ700s as you transition them between United and American: are some of those kind of repainting costs and things covered in the contract? Or is that kind of just on costs as you transition?

This is Wade. As Rob said in his script, there's definitely some inefficiency during the transition period. Some costs are definitely covered, but not 100% of the costs are covered during the transition. And so there are definitely some of the inefficiencies during the transition that are going to hurt some of our Q4 results, as Rob said.

Makes sense. All right. Thank you.

Helane Becker, Cowen and Company.

The first question I have is with respect to the lack of scope relief that Delta seems to be negotiating with their pilots. Is that going to affect your future opportunities with them?

This is Chip again. I think it's a great question, because as I said earlier, we spent a lot of time talking with partners about brand-new airplanes.

I think when you say what's the impact on our growth model, I would probably categorize it into maybe two or three different things. One, I would say that we have still very strong opportunities, even through 2020, without new aircraft to transition our fleet and contracts within the existing fleet with some improved profitability.

I would say even as you look out from 2016 to 2017, we still have a good, consistent trajectory in that effort. And we continue to probably have some solid opportunities to keep this growth and earnings momentum going.

One thing that we also are trying to do is reduce our overall risk; that helps with that. And then the other thing is that, I think that as I said earlier, we want to be positioned with pilots and capital when that opportunity comes.

But it's also not a bad thing when you've seen what we've done over the last couple of years -- with all the context of that I just given to you, a bit of a break in taking new aircraft may not be such a bad idea for a little bit. Because we still have plenty to focus on, like I said, even through 2020. And a lot of the mainline contracts are being negotiated today go through 2018 and 2019.

So to be candid, we are not nervous about the timeline. We have pilots and capital for the opportunity when they come. And we are also still, even now, in conversations with all of our partners about opportunities for this long-term in the future.

Okay. And if I can just follow up on the fourth-quarter delivery schedule: is it evenly spread throughout the quarter? Is it front-end loaded, backend? How are we -- how should we think about that?

This is Wade. So the 19 deliveries that we have coming in Q4 is definitely weighted more towards the back end of the fourth quarter. The deliveries during the first half are pretty evenly spread in 2017. And then we only have one aircraft that delivers in the second half of 2017. So most of the deliveries are in the first half of 2017.

Right. And then most of the fourth-quarter deliveries are more towards December?

Yes, they are.

Okay, because I noticed you gave us the block hours and the ASMs for the quarter, but not for the months. So just --.

That's right. Most of that will show up in Q1 insert.

Got you. All right. Okay, that's really all I had. Thank you.

Savi Syth, Raymond James.

On the other revenue line, that's been performing well the last couple of quarters. I was just wondering what's driving that.

This is Eric. The other revenue line is primarily ground handling and other services. So it's various ground handling services we are providing to third parties, and then just other revenues that we are generating.

Does something change in there, Eric? Or it's just small numbers moving around?

It's a small number that's just moving around. So it's primarily volume-driven.

Okay. And then, if I may also ask on the -- how many aircraft do you guys have on the prorate fleet today?

This is Wade. We have approximately 50 aircraft in the prorate fleet.

Got it. And my last question: on the CRJ700s that are getting redeployed, do the new contract terms line up with the financial obligations for those aircraft, or are those some of the ones that then in 2019 come up again?

On the CRJ700s, some of those financings go out there beyond 2019, and so there are still some other opportunities to redeploy those at the end of the contract with American.

Got it. All right, thank you.

Duane Pfennigwerth, Evercore ISI.

This is actually Ray filling in for Duane. I just wonder if there's been any developments in the discussions with United regarding those E145s?

I think in total terms, relative to the 145 fleet at ExpressJet with United, we continue to have fluid conversations about what happens with that fleet long-term. We are optimistic. I think the desire for everybody is very clear: we want to continue to fly it as long as we can.

We obviously have some contractual business model things that we've got to close the gap on between the two of us. But I would certainly fundamentally think that as we continue to progress through Q4 and Q1, we should get some more progress on that beyond 2017.

But I can say the opportunities for us to extend -- and the desire, I think, from a partner on that is I think we are aligned. It's a matter of getting to work and seeing what's going to work for both of us.

Okay. Great. Thanks a lot, guys.

Michael Linenberg, Deutsche Bank.

If I can squeeze in two here, just the prorate -- how did that perform year-over-year? Was it more profitable this year? Any color on that front would be fine.

So the prorate is very consistent year-over-year. Not a lot of change between the years. It's performed -- seasonally is always better in Q3, and it was seasonally strong again.

Okay. Good. And then just last on the DOT metrics, you give us the raw completion factor; you give us the adjusted completion factor. In each of your carrier contracts, presumably -- is it the adjusted in every single one of them? Or does it differ by contract?

This is Wade. It differs by -- there's different metrics in all of our contracts. The majority of them are measuring adjusted completion.

There are some on-time metrics that we also -- that we are measured on. But most of the significant incentive dollars are based on adjusted completion.

Okay. Great, thank you.

There are no additional questions at this time. 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, Kate. Appreciate everybody's interest in our evolution in this model. One more thank you to the 20,000 professionals that are the best in the industry and work hard every day to make sure that we continue to evolve and have a strong, solid, safe operating model.

And thank you all for your interest in SkyWest as we continue our progress. And we will talk to you next quarter.

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