SkyWest Inc (SKYW) 2017 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the SkyWest third quarter earnings conference call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Rob Simmons, Chief Financial Officer. Sir, 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; and Eric Woodward, Chief Accounting Officer. We'd like to excuse Mike Thompson, SkyWest Airlines' Chief Operating Officer; and Terry Vais, ExpressJet Airlines' Chief Operating Officer, as they are out working with their respective operations. 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-K and other reports and filings with the Securities and Exchange Commission. Chip?

Thank you, Rob and Eric. During the third quarter, we continued our progress on our overall business and fleet plans as the press release and our results demonstrate. Third quarter total production is generally high, and this quarter's was no different. Additionally, our teams navigated 2 major hurricanes extremely well. And I want to thank our more than 17,000 people for their great work. Not only did they step up to help each other as their own communities were affected, but both SkyWest and ExpressJet executed recovery operations to ensure our passengers were well taken care of as soon as airport operation resumed after each storm. We have truly exceptional people at both our airlines.

During the third quarter, we operated more than 281,000 flights with strong operating reliability. SkyWest Airlines and ExpressJet continued solid reliability with each delivering 99.9% adjusted completion for the quarter. Both airlines are performing well and have been top performers in United's portfolio for almost 3 years now. Again, our teams managed through this very challenging hurricane season extremely well, and I want to thank them again for their ongoing commitment to quality. The hurricanes had about a $0.05 impact on our results this quarter.

During the third quarter, ExpressJet announced a realignment of its strategy, including a new long-term agreement with United and an agreement with Delta to wind down dual-class CRJ flying by the end of next year. Additionally, they announced the transition of 8 CRJ700s to their American Eagle operation. The execution of this new strategy began during the third quarter, as we continue making meaningful progress in our efforts to solidify ExpressJet's foundation and return that entity to profitability. We expect these transitions to be complete by the end of 2018. Also, during the quarter, we announced flying agreements for 30 E175 SC aircraft with Delta Air Lines and 15 E175 aircraft with Alaska Airlines. Delivery of those 45 aircraft has already begun, and we expect to have 149 E175s in our fleet by the end of next year. Wade will talk about our fleet in detail in just a minute. We do expect 2018 to be another busy year with significant fleet movement, and that our continued execution of this strategy will set us up for a strong 2019. The significant fleet transition we began back in 2014 is beginning to wrap up with 2018 representing the final stretch of our transformation into a smaller, but more profitable fleet mix and maintenance footprint.

To recap that progress, we had 717 total aircraft in 2014, and anticipate that number to be 592 by the end of 2017. Our aviation professionals have performed remarkably throughout this fleet transition and continue to do so as we move this -- to this next phase.

Moving forward, we remain focused on operational excellence, profitable growth and strong capital deployment. We continue to see strong demand for our product, and our objective is to ensure that we're the best positioned to meet the industry's demand.

Again, I want to thank our more than 17,000 professionals for the exceptional work across our operations.

Bob?

Today, we reported net income of $54 million or $1.01 per share for the third quarter of 2017, up from net income of $41 million or $0.79 from Q3 2016. Our pretax income increased 30% year-over-year to $87 million. As a reminder, last year's GAAP numbers included $9 million or $0.11 of early lease return expense. Revenue was $832 million in Q3 2017, up $32 million from Q3 2016. This increase in revenue included the net impact of adding 37 new E175 aircraft since Q3 2016, partially offset by the removal of 75 unprofitable or less profitable aircraft over the same period, including 50 ERJ145s, 22 CRJ200s and 3 CRJ700/900 class aircraft. We expect to put 3 more E175s into service during Q4 of 2017 to bring our total fleet of E175s to 107 by year-end. Wade will provide some more color on the fleet in a minute. The tax provision rate for the quarter was 38%. 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% and 39% in Q4, and between 37% and 38% for all of 2018. Our total fuel cost per gallon averaged $1.99 during the third quarter, up from $1.75 per gallon in Q3 2016. The increased fuel cost per gallon cost us $3 million or a $0.04 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 $5 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 37 new E175s in our fleet since last year at this time. We believe our engine Power-by-the-Hour agreements significantly improve the predictability of 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 things about our balance sheet, a critical point of differentiation in our model. We ended the quarter with cash at $675 million, up from $635 million last quarter and $564 million last year at this time. We issued no new debt during Q3 of 2017. Total debt as of September 30, 2017, was $2.7 billion, down from $2.8 billion last quarter. SkyWest also used $30 million in Q3 2017 for other CapEx, along with $27 million in cash toward the total of $49 million in manufacture deposits we have funded, supporting our order of 45 new E175s.

Nonaircraft acquisition capital spending in the fourth quarter and into 2018 should continue to run in the $25 million to $40 million per quarter range with $12 million deployed in equity toward the purchase of 3 E175s, expected to be delivered by year-end.

With the order of 45 new E175s expected to be completed by the end of 2018, we plan to raise close to $1 billion in new term debt over the next 5 quarters for those planes. But we expect that by the end of 2018, our debt will be approximately $3.2 billion, up only $500 million from where we are now from normal principal payments embedded in our fully amortizing term debt. Assuming an end of '18 -- 2018 peak in debt and no additional growth airplanes, we expect that in 2019 and 2020, we will pay down debt in excess of $300 million per year, while generating free cash flow after debt service of over $200 million per year, or a $1 billion reduction in debt net of cash expected in 2019 and 2020, cumulatively. We would expect cash at the end of 2018 to be flat to slightly up from where we are now, primarily because we plan to invest $161 million of our free cash flow in equity in the new 45 E175s between now and the end of 2018.

We ended the third quarter with approximately $300 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 Q3, we did not repurchase any stock under our 3-year $100 million repurchase program authorized by the board in Q1. We have $90 million in authorization remaining under this program and expect to fully utilize it. Wade?

Thanks, Rob. In the third quarter, we continued to execute on our fleet strategy, removing aircraft from unprofitable agreements, transitioning our fleet to larger, new aircraft and redeploying aircraft with extended flying terms to mitigate financing risk.

During the quarter, we entered into an aircraft purchase agreement and capacity purchase agreements to acquire and operate 45 new Embraer E175s. Of those, 30 are E175 SC aircraft to fly under an agreement with Delta in a 70-seat configuration. These SC aircraft have an E175 airframe and can be retrofitted to 76 seats in the future. 15 of the 45 aircraft are E175s that will fly under an agreement with Alaska in a 76-seat configuration, similar to our other aircraft in service with Alaska. Expected delivery dates of the 45 E175 aircraft run from September 2017 through the end of 2018, bringing our total E175s to 149 at that time. During the third quarter, we took delivery of one E175 for Alaska, bringing our total E175 fleet to 104. Also, during the third quarter, as Chip mentioned, ExpressJet announced a new long-term agreement with United for its ERJ145s effective January 1, 2018. The new agreement enhances ExpressJet's United partnership, provides long-term stability to its model and significantly reduces contract risk. We anticipate operating approximately 100 aircraft under this agreement. Additionally, earlier this summer, ExpressJet announced a mutual agreement with Delta to initiate the wind down of its remaining dual-class flying, including 28 CRJ900s, 33 CRJ700, previously scheduled to expire in 2019. The 28 CRJ900s owned by Delta, will be returned to Delta, 4 CRJ900s were returned to Delta earlier this month. We anticipate a total of 12 CRJ900s will be returned by year-end, with the remaining being returned to Delta next year. ExpressJet owns 30 CRJ700s currently operating for Delta and expects to redeploy these aircraft with other major partners throughout 2018. As previously announced, ExpressJet has secured an agreement with American Airlines to transition 8 CRJ700s to its American Eagle operation during the second quarter of 2018. This will bring the total number of ExpressJet CRJ700s flying for American to 20. At the end of 2016, we announced our plan to remove 46 CRJ200s from the ExpressJet fleet in accordance with their natural contract expiration.

As of September 30, 44 of the 46 have been removed from contract. We anticipate that the remaining 2 aircraft will be removed during the fourth quarter. We expect the majority of these aircraft will be returned to lessors under natural lease expirations this year, while the remaining will be sold to other third parties.

Demand for our remaining 50-seat aircraft remain very strong, and we are working with each of our major partners to meet their ongoing 50-seat needs. We recently extended 33 aircraft under our SkyWest Airlines-Delta agreement. We continue to execute on our strategy of removing unprofitable flying, redeploying aircraft with other partners and placing larger, new aircraft into service to minimize our risk and continue to deliver on our commercial agreements.

So thanks for your interest in SkyWest, as we continue our evolution and progress. We'll now take time to do Q&A. Jamie?

(Operator Instructions) Our first question today comes from Savi Syth from Raymond James.

Can you talk a little bit about -- I know next year is going to be heavy on the transition, and I'm guessing there is going to be a lot of pilot training related to some of the aircraft that you're getting, and the aircraft that you're getting out of. Could you talk a little bit about what that might look like, either from a magnitude standpoint or a timing standpoint?

Yes, Savi, again, I think that you're right, that 2018, as Chip said in his script, is going to be a year with a lot of fleet movements, a lot of training, a lot of new deliveries coming online. So -- but 2018 should set us up beautifully for 2019. So again, I think that we're -- 2018, despite that noise, should still be a reasonably nice year for us. But again, as we've said, 2018 is really the final year of the fleet transition setting us up for 2019.

Got it. And if I may follow-up on the CRJ700s that need to be placed or returned. Could you talk a little bit about just so we understand kind of the -- a worst-case scenario, the risk around if those aren't placed. Like how long you have left on those? And just how we can think about kind of the risks around the placement?

Savi, this is Wade. So as I said in my prepared remarks, we have already placed 8 of those 30 with American. The other 22 CRJ700s that we have, those are all financed, they're all owned aircraft. They do have a little bit of debt on them, but we're very comfortable with the asset value of the aircraft compared to the debt. So we're not nervous about the financial exposure on those aircraft.

Okay, very helpful. And if I may squeeze one more in here. Just as you think about, you are kind of now transitioning a little bit into growth. And just any kind of updated thoughts on pilot sourcing. It seems like maybe you're starting to see some supply come in maybe from other areas into kind of the commercial flying. But just any latest thoughts on what you're seeing on the pilot side, both internal trends, and ability to hire?

Yes. Savi, this is Chip. Yes, this is a topic that we spend a lot of time and energy on. I can certainly -- as we've said in other quarters, the key strategy for us is to manage our fleet from a flexible nature to where we can deploy our fleet and meet our commitments with our partners. Because at the end of the day, that's our number one responsibility is what we're committing to with our customers. From our perspective, our staffing today remains very good. With the fleet transitions that you brought up on the ExpressJet side, obviously, there is some transitions of a fair amount of aircraft that are going to be coming out. But as we develop that model for long-term sustainability and profitability, we're certainly going to need to energize our efforts a bit there. But we are very well staffed there and our recruiting processes at SkyWest are extremely strong as well. So we're in a very good position at a global level. Are we seeing anything different from a supply side? I don't know that our outlook is technically that different than what we've had in the past. We're still very conscious of the very organic nature of how pilots are developed, and we won't get into the details, but we certainly are involved in a lot of efforts to making sure that we have pilots coming for years to come. So at a high level, Savi, I wouldn't say that our perspective has changed significantly as of late. But we are certainly doing what we've done in the past several years to manage our fleets and our recruiting efforts and being very, very astute in what we're committing to here.

Our next question comes from Michael Linenberg from Deutsche Bank.

This is actually, Katie O'Brien. Let's see, the first one I had was, how would you categorize the market for RFPs post your recent close announcements? Do you think there's more to do out there? Or do you think after we get these deliveries by the end of 2018, that's really the end of the growth cycle for you guys? Then kind of a second one on that is, do you think the potential increased liability of the C Series program could mean more small market flying done at the mainline level?

Okay, Katie, thanks for calling in. Let me start with the first one with RFPs. I think it's an interesting world in the regional world these days. I mean, we've had a lot of growth and fleet transitions, and we haven't really been involved in many RFPs. A lot of it's been with a very strategic sitdown about the future conversation with all of our partners. We really embrace that process, because I think RFPs are great. When they come out, we're going to respond to them. But a lot of what we've done within our business model is really spend a lot of time with our customers, and understanding their needs and having the fleet flexibility to respond to things. Because in our dynamic world, not only do you have to respond to things in the long term, but you also have to help out in the short term as well, and that's where some of the things that we're really good at doing. From that perspective, we certainly have a full '18, as we've announced the last quarter. We do anticipate some additional RFP activity, probably leading into some portions of 2019. But then I would also reiterate, we're still -- even though we're kind of coming on the tail-end of this refleeting exercise over -- that we've done over the past couple of years, we do still see a lot of opportunity within our existing fleet without even adding aircraft, that we need to respond to the right opportunities with. So we're overall extremely optimistic. And Katie, I'm sorry, the second portion of your question was?

Oh, yes. Sure. So now with the recent announcement of Airbus investing in the C Series program, potentially making it a more viable aircraft program, do you think you could see more small market flying done at the mainline level over the coming years? Obviously, this is a longer-term question.

Yes, I think from a market development -- I don't doubt that there is probably some opportunities for an aircraft like the C Series to be integrated into smaller communities as population changes and that type of stuff happens. But I think that also translates into our existing fleet opportunities as well. I think mathematically you'll see that from an operating cost with how we're financing aircraft and how we're operating aircraft today, that -- I think that there will be as equal of opportunity with smaller aircraft with our dual-class fleet as well as even 50 seaters. We've said for a long time that we're still fans of the 50-seat aircraft. And there is the unique niche in how we can continue to provide excellent service to existing and potentially new communities with 50 seaters and given the dynamics of scope and everything like that, I think that we're still very comfortable and confident in the size of fleet and -- of aircraft that we fly today.

Okay, understood. If I could squeeze one more in. Now you've secured this growth you've been talking about, which is very exciting, what do you think that means in terms of looking at returning cash to shareholders via share repurchases or dividends? I know you're committed to completing your current program, but maybe programs beyond that?

Yes, Katie, this is Rob. So I think that what you'll see is that we'll continue to keep a strong balance sheet first and foremost. We always want to have the liquidity and the balance sheet available for growth opportunities that come our way. Like these 45 airplanes, whatever there is in the future, we want to make sure that we're ready from a balance sheet standpoint. But we're also -- we're in a place where if that -- those investment opportunities don't come or if they slow, we're going to be in a position to generate significant cash flow in the future. And we'll look for shareholder-friendly ways to invest that, whether it's investing in new growth airplanes, potentially repaying debt, repurchasing stock or some combination of all of the above. We feel like we've got the balance sheet and the liquidity to be able to manage whatever opportunities come our way.

Okay, great. And then I want to be a pest and ask one more quick one. Usually you guys give some sort of EPS guidance. Any comments on that for the fourth quarter?

No. So we don't usually give any specific EPS guidance. The only thing that we've said, and we said this last quarter is that with respect to 2018, don't expect to -- EPS to have a 4 in front of it. But 2018 is set up, the last year of our fleet transition setting us up for what should be a nice 2019.

(Operator Instructions) Our next question comes from Helane Becker from Cowen.

It's actually, Conor. Just to piggyback on Savi's earlier question on the CRJ. Can you -- is there any potential for any short-term contracts? I would imagine that, given the issues at Horizon for Alaska that there might be some potential for maybe the CRJs to pick up some of the slack there. Can you just maybe address that a little bit?

Yes, this is -- Connor, this is Chip. I think from our perspective, we do always like to have a complement of CRJs available for spare, C-checks, potential short-term flying. Certainly, as it's the fall right now, there is a little bit of an opportunity where we're kind of flexing up with Alaska as we have some pilots and as we are -- have a small complement of aircraft in the fall. But you're right, a lot of that's temporary and a lot of it is based on some flexibility that we have beyond our commitment. So from our perspective, like I said in some earlier comments, we do try to do what we can do to have a flexible fleet to respond to certain things within our partners -- all of our partners. And it's a good strategy for us and it's helping out Alaska a bit right now.

Okay, great. And then on the E175, that's configured specifically for Delta, the smaller one. Has there -- since that announcement, has there been any like other carriers that have been interested in potentially seeing an aircraft configured that way? Or is it just specific really to Delta at this point?

No. This is Wade, Conor. That's a great question. Obviously, Delta saw a very unique opportunity to take advantage of the new E175 SC configuration. We've had discussions with other partners related to that. We're still working with the partners on potentially what that may look like.

Okay. And then just one last one. You gave the $0.05 headwind from the storm -- from the storms in the quarter. Can you just talk -- is it possible -- do you guys have an estimate in terms of the revenue impact? I just want to make sure that I'm -- that we're looking about the business there correctly going forward, because I imagine it would be onetime in nature, so.

Yes, nothing on the revenue side. Just we estimate about $0.05 of EPS impact from the storms.

And ladies and gentlemen, at this time I'm showing no further questions. I'd like to turn the conference call back over to Chip Childs for any closing remarks.

Thank you, Jamie. Again, we appreciate your interest in SkyWest. As we said in our call, we're going to continue to be focused and evolve the businesses as we've outlined, and look forward to giving you a update for the year in late January. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.