SkyWest Inc (SKYW) 2017 Q2 法說會逐字稿

Good day, and welcome to the SkyWest, Inc. Second Quarter 2017 Earnings Conference Call. (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's Chief Financial Officer. 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?

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 2016 Form 10-Ks and other reports and filings with the Securities and Exchange Commission. Chip?

Thank you, Rob and Eric. For the second quarter, we continued with good progress on our overall business and fleet plans as demonstrated by the results outlined in the press release. The quarter also brought about planned increases in total production as we prepared for peak summer months and both airlines delivered strong reliability overall. I want to thank our more than 18,000 employees for their great work during the quarter. There's a lot of noise about airlines this year and our employees have done a great job focusing on strong service and reliability. I appreciate the dedicated efforts of our people to deliver a very good competitive -- in a very competitive environment.

The number of flights our 2 entities operate across North America is very significant. And together we operate more than 280,000 flights during the quarter. Operational reliability for our airlines was as follows: SkyWest Airlines continues its exceptional operating reliability with 99.94% adjusted completion in the second quarter, even with increased total departures in June. ExpressJet also delivered strong 99.85% adjusted completion for the quarter. Both of our airlines have great reliability and have been top performers in United's portfolio for over 2 years.

During the second quarter, SkyWest Airlines secured a 4-year extension to its existing pilot contract with a new agreement through mid-2022. We believe it's important to continue to invest in our people and while we don't disclose the details of these agreements, it delivers competitive compensation within the industry and positions us well to continue to attract and retain exceptional professionals. Importantly, securing this agreement provides a solid foundation in which to pursue opportunities within the marketplace.

Pilot staffing is a central issue across the airline industry and it's a challenge we're continuing to monitor at each of our entities. During the second quarter we experienced reduced attrition at both of our entities and each remain well staffed. From an industry perspective, however, there is no question that it's a challenge that we come -- that will become more acute. We are focused on proactively addressing the issue and ensuring we continue to provide exceptional pilot careers.

Also during the quarter, we continued progress on our fleet plan which Wade will cover in detail in just a minute. To date, we have 103 E175s on property and expect to have 104 by year-end. We have nearly completed our CRJ700 transition from United to our Delta and American operations and removed 50-seat aircraft from unprofitable contracts as we previously discussed. Demand for all aircraft types from each of our four partners remains very strong.

It's been a very dynamic few years in the regional space and our proactive evolution has helped us continue to meet our partners' needs. We have built and maintained very strong relationships and credibility with each of our four partners and that remains a key focus going forward as we continue to adapt and respond to what we're seeing as strong demand for solid, efficient and reliable operations. I will say that operational performance has been somewhat of a challenge in certain areas of ExpressJet operations and we continue to work for evolving that entity towards stability.

As we've stated in previous quarters over the past couple of years, the long-term success of ExpressJet requires significant change as we make progress toward a smaller, more efficient and productive airline. And we're increasingly optimistic about that progress, as we successfully evolve and move forward the stability and long-term outlook at ExpressJet's model continues to improve.

Overall, we continue to see strong demand for our product. Our objective is to ensure we are the best positioned to meet the industry's demand, better than anyone else. Again, I want to thank our more than 18,000 professionals for their work across our operations during the quarter and every day. Rob?

Today, we reported net income of $50 million or $0.95 per share for the second quarter of 2017, up from net income of $40 million or $0.77 from Q2 2016. Our pretax income increased 22% year-over-year to $81 million. Revenue was $810 million in Q2 2017, up $9 million from Q2 2016. With fewer aircraft in service but with an improving mix, the moderate increase in revenue included the net impact of 47 additional E175 aircraft, less the removal of 51 ERJ145s, 18 CRJ200s and 7 CRJ700s from service compared to 1 year ago. We expect to put 1 more E175 into service during Q4 of 2017, to bring our total fleet of E175s to 104 by year-end. We also completed the transition of 49 CRJ700s from other partners to American under a previously announced multiyear agreement, further mitigating our financing tail risk on those aircraft. Wade will provide some color on the fleet in a minute.

The tax provision rate for the quarter was just a little under 38% and benefited slightly from the new equity accounting rules that went into effect starting with Q1. Our future provision rate may vary, based on the timing and amount of stock option exercises, restricted share vesting, stock price performance and other factors. Generally, we anticipate a future effective tax rate between 38% to 39% in Q3 and Q4 and between 37% to 38% for all of 2017.

Our total fuel cost per gallon averaged $1.89 during the second quarter, up from $1.69 per gallon in Q2 2016. The increased fuel cost per gallon cost us about $2 million or a $0.03 reduction in EPS from a year ago under our prorate business model. You can see in our release that the expense line item for aircraft maintenance is up about $10 million year-over-year. This increase largely relates to a higher percentage of our engines now being covered by long-term Power by the Hour maintenance agreements, including the 47 new E175s in our fleet, since last year at this time. We believe our engine Power by the Hour agreements significantly reduce volatility in future engine maintenance costs. The vast majority of our engines are now covered either by long-term agreements or are a direct expense pass-through to our partners.

Let me say a couple of things about our balance sheet, a critical point of differentiation in our model. We ended the quarter with cash of $635 million, up from $586 million last quarter and $513 million last year at this time. We issued $227 million in new long-term debt during Q2 to finance the 10 new E175s delivered during the quarter, with total debt increasing by $146 million net of debt service. Total debt as of June 30, 2017, was $2.8 billion, up from $2.6 billion last quarter. SkyWest also used $21 million in Q2 2017 for other CapEx along with $40 million in cash and deposits toward the acquisition of the 10 new E175s.

Absent new investment opportunities, nonaircraft acquisition capital spending in the second half of the year should continue to run in the $20 million to $30 million per quarter range, with only 1 remaining E175 aircraft left in this order by year-end. Debt -- again, absent additional aircraft orders -- is likely at a near-term peak. With little CapEx in the second half, we continue to expect strong cash flow ahead.

We ended the second quarter with $365 million of prepaid aircraft rents under our long-term lease agreements. We anticipate this asset will amortize over the next several years as a noncash rent expense that will contribute to our operating cash flows and will enhance the cash flow quality of our earnings. During Q2, we did not repurchase any stock under our 3-year, $100 million repurchase program authorized by our board in Q1. We have $90 million in authorization remaining under this program and expect to fully utilize it. And finally, net of the items mentioned earlier by Chip and the ongoing transitions, we would expect Q3 earnings to be slightly better than Q2. Wade?

Thanks, Rob. We continue to execute on our strategy of removing 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. For March 31, 2017, to June 30, 2017, we moved from a total of 632 aircraft to 626 aircraft in our fleet. During the second quarter, we added 10 new E175s to our fleet, including 5 E175s under our United agreement for a total of 65 under contract with United, and 5 E175s under our Delta agreement for a total of 18 under contract with Delta. This brought our E175 aircraft count to 103 at quarter end. We expect to put 1 more E175 into service during December of 2017 to bring our total fleet of the E175s to 104.

We've recently signed an agreement with Alaska for 5 additional E175s that we expect we will be -- that will be delivered during 2018. During 2016, we signed agreements to redeploy 50 SkyWest Airlines CRJ700s from United to other major partners, 38 to American and 12 to Delta. As of July, 37 of the 38 aircraft were in service under our American contract. We expect the remaining 1 will be redeployed during Q1 2018. All 12 Delta CRJ700 aircraft were operating within our Delta system. As we discussed, these redeployments essentially mitigate any financing risk on our CRJ700s through 2019.

At year-end 2016, we announced our plan to remove 46 CRJ200s from the ExpressJet fleet, in accordance with their natural contract expirations and as a part of our plan to move ExpressJet CRJ operation to dual-class. As of June 30, 20 of the 46 have been removed from contract. We anticipate that the remaining 26 aircraft will be removed during the third and fourth quarter. We anticipate the majority of these aircraft will be returned to the lessor under natural lease expirations this year while the remaining will be sold to other third parties. ExpressJet also placed 2 CRJ700s into service for American during the quarter. These 2 aircraft bring the total to 12 CRJ700s operating for American under a multiyear agreement as we move ExpressJet CRJ operation to primarily dual-class.

We also made changes to our ERJ145 fleet during the second quarter. We removed 13 ERJ145s from our fleet, 7 of them which were removed from an unprofitable United contract and 6 from our American contract. As we previously discussed, United has exercised its first 1-year option to extend our ERJ145's contract at modestly improved rates through 2018. Our conversations with United are ongoing and productive and we are optimistic about the opportunity to secure a positive long-term solution.

Demand for our remaining 50-seat aircraft remains very strong and we are working with each of our major partners to meet their ongoing 50-seat needs. We have recently added 17 CRJ200s with United under a contract with SkyWest Airlines. These aircraft will be placed into service by the end of the third quarter. We continue to execute on our strategy of removing unprofitable flying, redeploying the aircraft with other partners and placing larger new aircraft into service to minimize our risk and continue to deliver on our commercial agreements.

Okay, Drew. We are ready for Q&A now.

(Operator Instructions) The first question comes from Michael Linenberg of Deutsche Bank.

Just want to -- in the press release, you call out some financing tied to 10 E175s, I guess there's some cash up front, there's some debt financing. That's for the same 10 airplanes, right?

That's right, yes. That was -- we took delivery of 10 airplanes during the quarter, Mike, and that was -- we raised $227 million of new debt against those deliveries.

Okay, great. That's helpful. And then I believe you are taking your last E175s this year and I just am curious, when we saw what I thought was an updated fleet plan from Alaska, it looked like that there were another 5 E175s coming from you in the '18, '19 timeframe. And I wasn't sure if that was incremental to your current fleet or if you had E175s coming out of 1 partner agreement and moving over to Alaska, 1.5 year, 2 years from now. What's the status of those?

Yes, Mike, this is Wade. So we recently signed a new agreement with Alaska to add new -- 5 new E175s to the agreement and they'll be delivered during 2018.

Okay. Okay, great. So that -- is that something that's coming in the earlier part of the year, later part of the year?

It's the middle part of the year.

Okay, okay. And then just last question. With all the talk on the reauthorization and maybe corporatizing or privatizing air traffic control, I mean it really comes down to just the FAA reauthorization and what they want to put in this plan. I know that there is an effort to try to put in some language to help the pilot situation and it just seems like that, I'm not sure, it's either not going to go anywhere or it's going to have to get stripped out because this whole privatization of ATC isn't going to happen. Is there anything that your people in D.C. or the RAA is telling you that we could see -- that we should expect relief? Maybe some measures that will help really mitigate this situation because it is -- it's starting to show up on a lot of different fronts.

Michael, this is Chip. I'm impressed how much detail you know about this from the perspective of the how it -- not that I don't think you are an extremely smart guy, but I think that (multiple speakers) the last month or so I've been living this a little bit in D.C. and talked to lot of people about the FAA reauthorization bill. And in our view, look, we love the concept of it, but from our perspective it falls short in 2 distinct areas: One, it does not address the pilot issue. And fundamentally from our perspective will it? I hate to speculate. I will tell you that if we look at the data it is absolutely positively clear if we're really going to move the dial on what is a very emotional safety issue, if we really want to look at concrete data to enhance safety relative to this situation, we have to address it through additional training programs and modify the pathway.

I'm actually for 1,500 hours but I'm also for alternate programs that clearly need to be evolutionary toward safety. And I don't think anybody who has looked at the data or is willing to look at the data could argue that there's not some significant opportunity there. Second of all, we're a bit concerned about some of the funding models as it goes into reauthorization for privatization of ATC. And we're optimistic and we're very supportive of the overall process but in its current form today I can tell you it's falling short of what we think that several local communities -- both with the pilot issue and the funding issue, many local communities throughout America are going to have a big impact if this is not addressed in this bill.

The next question comes from Helane Becker from Cowen and Company.

I just have a few questions. The first question is just a modeling question. I'm not exactly sure why salaries went down in the June quarter. Did -- and I didn't hear you talk about that specifically on the earnings call.

Yes, Helane, salaries are correlated with production and as you can see we're down about 5% year-over-year in block hour production.

Okay. That's helpful. And then my other question -- I'm sorry. Go ahead.

Helane, one more thing, this is Chip. On a per unit basis I thinks it's up slightly but on a -- when you take that much production out on a gross basis, it shoves down. But it -- I think that -- I think on a unit basis we're up a bit, which is in a balance where we want to be. We want to make sure we're taking care of our folks the right ways.

Got you, okay. Obviously, I haven't done all that work yet. So the other question is with the return of the CRJ200s to the lessors, is there going to be maintenance cost provisions that we should be aware of?

Helane, this is Wade. Most of those costs are covered under either our capacity purchase agreements that we have with our major partners or they've substantially been accrued for.

Okay. Perfect. And then my last question is on the 5 new aircraft for Alaska Air that are going in next year. Is there room to add additional aircraft beyond these 5?

Helane, this is Wade again. We continue to work with all of our major partners on their demands. Alaska is a great partner. We continue to have discussions with them around their needs and what they want to do in the future. So, yes. So stay tuned.

The next question comes from Savi Syth of Raymond James.

Just a couple of quick follow-ups. Just on the United CRJ, the new aircraft that you put there, is that fixed fee or prorate?

Those are under capacity purchase agreements, so it's all contract.

Okay, got it. And then just it's great to see the deal with the SkyWest Airlines pilots and having that visibility. Any update on the ExpressJet pilot side?

Yes, Helane, this is Chip. We continue with all workers on ExpressJet to have active dialogues about new contracts. We have both pilot groups are coming due at the end of this year. Our fundamental strategy, as we talked about it in the script, I think it's necessary for us to be transparent and provide some good long-term vision about a longer-term fleet strategy with ExpressJet and then enter into those dialogues more substantially. So I can tell you right now that the dialogue that we have with the pilots of ExpressJet is fantastic. There's good engagement and a good collaboration on long-term success of that entity.

Okay. And then just a little bit of a strategic question. I think that the team in general has done a great job of managing a pretty complex fleet transition here. And I think maybe a majority of the heavy lifting is coming towards a little bit of the end, at least in the sense of kind of moving things around. You still have the 50-seat fleet and trying to figure that one out. As you kind of get through the E1 -- big E175 deliveries and getting to the second half and looking into 2018, where is the focus? I mean what's -- strategically does anything change? And are there kind of new directions that you look to focus on?

Savi, it's Rob here. So I would say that it's sort of more of what we've been talking about. That we feel like there are still a number of opportunities from the legacy side of our fleet to make improvements. In terms of turning pink squares to green in our presentation model. I mean I think there's still a lot of opportunities to do that. And so I think growth can still come from a number of different areas but we feel like we're far from the end at this point.

The next question comes from Steve O'Hara of Sidoti & Company.

I guess -- so just looking at the quarter sequentially going into 3Q, I see you -- it looks like -- I think you took down the guidance for ASMs, and I didn't check the block hours, relative to your prior forecast. Can you just talk about what that was -- that just aircraft coming out sooner than expected?

So the question is just on the block hours came down slightly from our entire guidance on block hours? There's just been some -- as we're taking down some of the 46 CRJ200s, some of those are coming out probably a little quicker than we had originally anticipated, which is fine and stays within our models.

Okay. And I guess just on the -- and maybe you mentioned this, I apologize, but on the maintenance line, I mean it looks like a pretty decent jump year-over-year. And I'm just wondering with that aircraft coming out that, that has to be maintained or just what happened there?

Steve, so I sort of hit that in my script but again a lot of it has to do with when you're looking year-over-year. We have 47 new E175s, that are in there and they all have Power by the Hour maintenance agreements on their engines. And so like a bigger percentage of our fleet year-over-year are under those Power by the Hour agreements where you accrue it as you go. And -- so that explains the bulk of it.

Okay. So that number should be kind of something -- a good number per block hour or something like that going forward, I guess, then?

Well, yes, I mean -- like we say, like right now, like virtually all of our engines are under either a long-term Power by the Hour type maintenance agreement or are pass-through expenses to our customers.

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

Thank you, and again we want to thank everybody for your continued interest in SkyWest, especially as we continue our long-term evolution and progress. And we'll talk to you next quarter. Thank you.

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