SkyWest Inc (SKYW) 2018 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the SkyWest Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please also note today's event is being recorded.

And at this time, I'd like to turn the conference over to over to Mr. Rob Simmons, SkyWest's Chief Financial Officer. Sir, you may begin.

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 uncertainty. 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 2017 Form 10-K and other reports and filings with the Securities and Exchange Commission.

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

Thank you, Rob and Eric. Good afternoon, everyone, and thanks for joining us on the call today. SkyWest had a strong second quarter as outlined in our press release. Much of that strength can be attributed to disciplined execution of our fleet transition as well as the solid operating performance of our teams.

As we discussed in previous calls, this year was planned to be a very busy year with a lot of fleet movement. Overall, both SkyWest Airlines and ExpressJet performed well during the second quarter, and we're pleased at how well our team's executing through all of the transition. We operated approximately 255,000 flights during the second quarter with very strong operating reliability.

Both SkyWest Airlines and ExpressJet delivered exceptional 99.9% controllable completion factor, despite experiencing both late winter and early summer storms across our networks during the quarter. Our professionals are the best in the business, and I want to thank them for their great work during the second quarter.

Our new agreements with Delta, United and American demonstrate our continued ability to turn strong demand for our products into strong flying contracts and extensions. This movement and progress is setting up well for 2019, 2020 and beyond. Strategically, we continue reducing risk across our business including fleet tail risk, operating risk and contract risk. This focus is essential to both our short and long-term success.

Our 50-seat fleet remains a competitive differentiator for SkyWest and demand for that product is as strong as ever. Although we continue to see high demand for our dual-class product as well. The introduction of the E175 SC has gone well, and we continue taking delivery of those and other E175 aircraft through year-end.

We expect these aircraft will continue to create solid growth and cash flow in 2018 and beyond.

Additionally, with the developments during the second quarter and continued progress we're making at ExpressJet, we believe we're finally getting that entity to a place for modest profitability in 2019. We'll provide more information on that progress next quarter.

We anticipate ExpressJet will be an all 50-seat operation by early next year. Wade will share more specifics on the total fleet in a minute.

Looking ahead, we're focused on maintaining our strong balance sheet and liquidity. We also believe our fleet flexibility remains key to unlocking new opportunities and helps mitigate the various risks I talked about earlier. Our multi-year fleet transition has allowed us to eliminate problematic contracts and better meet the evolving needs of our major airline partners.

The remainder of 2018 will stay busy with our fleet transition, and as we've discussed, should set us up well for a strong 2019 and beyond. We remain focused on disciplined execution of our strategic business objectives including operational excellence, fleet transitions, risk mitigation and balance sheet strength. Again, I want to thank our 17,000 aviation professionals for their excellent work during the second quarter. Rob?

Today, we reported net income of $76 million or $1.43 per share for the second quarter of 2018, up from net income of $50 million or $0.95 per share from the second quarter of 2017. Pretax income of $98 million during Q2 was up 21% from $81 million in Q2 2017.

Revenue was $806 million in Q2 2018, up $14 million from Q2 2017. This increase in revenue included the net impact of adding 23 new E175 aircraft since Q2 2017, partially offset by the removal of 66 unprofitable or less profitable aircraft over the same period.

Our total fuel costs per gallon averaged $2.63 during the second quarter, up from $1.93 per gallon in Q2 2017. The line item in our P&L for aircraft fuel was $10 million higher than a year ago, reflecting both the higher rate and higher volume under our prorate business model. Just a reminder, that approximately 90% of our model is not subject to fuel risk.

Our effective tax rate in Q2 was 23% compared to 37.5% last year at this time, with the year-over-year difference being obviously driven by the new tax law. We continue to expect our tax rate to be approximately 25% for the second half of the year and into next year.

Let me say a couple things about our balance sheet, an important point of differentiation in our model. We ended the quarter with cash of $649 million, up slightly from $646 million last quarter. We issued $282 million in new long-term debt during Q2, financing 14 new E175s. Total debt as of June 30, 2018, was $3 billion, up from $2.8 billion last quarter.

SkyWest used $50 million in cash toward equity for new planes and $35 million in other CapEx. Nonaircraft acquisition capital spending in the second half of 2018 should continue to run in the $25 million to $35 million per quarter range. With the remaining 20 E175s expected to be delivered this year, we plan to invest $70 million of our own capital and raise approximately $400 million in new term debt by the end of the year for these planes. We expect that by the end of 2018, our debt will be approximately $3.2 billion, up only $200 million from where we are now because of the $200 million in normal principal payments embedded in our fully amortizing term debt over the next 2 quarters.

Assuming an end of 2018 peak in debt, with no additional orders for airplanes, we expect that in 2019 and 2020, we will continue to pay down debt in excess of $300 million per year. We would expect cash at the end of 2018 to be up from where we are now, including our plan in the second half to reinvest $70 million of this year's free cash flow in equity toward another 20 airplanes by the end of the year.

During Q2, we did not repurchase any incremental stock under our 3-year, $100 million repurchase program authorized by our board last year. We still have $70 million in authorization remaining under this program and expect to fully utilize it.

The second half of 2018 is expected to be very busy from a fleet perspective, as we execute the new contracts and extensions that we reported earlier today. We would expect earnings percent -- earnings per share in the second half to be similar to the first half earnings per share of $2.46 because of all the fleet movements and transitions in the second half.

Wade will now take you through the newly inked agreements and extensions we announced today and give you some color on the fleet movements in the second half of the year. Wade?

Thank you, Rob. I'll first give an update to our flying agreements and related fleet and then discuss the implementation of these changes. During the quarter, we reached an agreement with Delta to operate 20 new Bombardier CRJ900s under a 9-year flying contract. The aircraft will be acquired by Delta under a previously announced agreement with Bombardier and will be operated by SkyWest Airlines.

SkyWest Airlines anticipates taking delivery of these 20 CRJ900s from the second half of 2018 through 2020. These aircraft will replace 20 CRJ700s scheduled to expire under SkyWest Airlines' flying contracts with Delta during the same time period.

We also took delivery of 10 E175 SC aircraft under our Delta agreement during the quarter. We anticipate the arrival of 17 additional E175s during the last 6 months of the year for a total of 30 E175 SCs under contract with Delta at year-end.

We further developed our partnership with American during the quarter by securing a new agreement to place 20 CRJ700s under a 4-year contract. These aircraft are expected to be sourced from within our existing fleet. The first aircraft in this agreement was placed into service in June 2018 and all 20 aircraft are scheduled for service by early 2019.

We extended an existing agreement and secured a new agreement with United during the second quarter as well. We agreed to extend 19 CRJ700s operated by SkyWest Airlines for an additional 3 years. These aircraft were previously scheduled for expiration during mid-2019 and 2020.

As a result of this extension, all of our dual-class aircraft operating for United are under long-term agreements.

Separately, we agreed to a 3-year contract for ExpressJet to operate 20 used CRJ200s for United. The 20 CRJ200s are expected to be sourced from within our existing fleet through contract expirations with other partners. These aircraft are expected to be placed into service with United between September 2018 and early 2019.

We expect that by early 2019, ExpressJet will enjoy additional operating efficiencies by flying exclusively for United under long-term agreements.

Under our Alaska partnership, we received 4 E175s during the quarter. We anticipate taking 3 additional E175s during the third quarter after which we'll have 32 E175s under contract with Alaska. With all of these fleet movement and contract changes, we do anticipate some transition noise in the third and fourth quarters.

First transitioning 20 CRJ200s to ExpressJet United operation will result in some incremental operating cost associated with bridging the aircraft, livery changes and maintenance as well as crew location changes. We also anticipate some aircraft downtime as we transition 20 CRJ700s to the American contract, primarily to accommodate the aircraft delivery change.

Additionally, as part of our agreement to wind down ExpressJet's dual-class Delta connection flying, all Delta owned aircraft including 28 CRJ900s and 3 CRJ700s have been returned to Delta.

We anticipate completing the removal of the ExpressJet 30, ExpressJet owned CRJ700s from Delta service by the end of the year.

For the short-term, we expect to retain the majority of these aircraft under our various American flying agreements with some transition expense. However, since we own these aircraft with very little debt remaining, we are evaluating various options for these aircraft including selling, leasing to third parties or utilizing or selling their parts.

Separately, we expect that the 18 CRJ700s flown by ExpressJet from American will not be extended beyond early 2019. These 18 CRJ700s include 12 aircraft from the original contract with American and 6 short-term aircraft that transition from the Delta contract. The majority of these aircraft are leased with no tail risk. We expect to return these aircraft to the let source by early 2019. As Chip and Rob have discussed, the fleet movement is part of our broader strategy to reduce our overall risk and improve our model.

As I've outlined, we are going to be busy with fleet transitions in the second half of the year. The net impact of all these fleet movements and agreements in the second half of 2018 and early 2019 leave us with a smaller, more efficient ExpressJet operation, continue to reduce overall tail risk and positions us up well for 2019 and beyond.

(Operator Instructions) Our first question today comes from Michael Linenberg from Deutsche Bank.

I have a couple questions here. The 20 CRJ700s that are coming out of Delta, are those airplanes that are owned by Delta and so they're just going back to Delta or are they SkyWest airplanes?

Michael, this is Wade. Those 20 -- so those 20 CRJ700s that are flying at SkyWest for Delta, those are all SkyWest owned or SkyWest controlled aircraft. And the majority are transitioning to the American contract.

I see. So the majority are coming to that. Okay. My second question is to just go back and to touch on what Rob said about the P&L impact for the second half of the year. Presumably, there's a lot of puts and takes but net-net, it sounds like there's more positives than negatives.

And when I say negatives, it's the transition costs right, because you said what we should anticipate for the second half of the year is similar to what you were able to achieve from an earnings perspective in the first half of 2018. Is that right? The right way to look at it?

That's right Michael. We're expecting to take delivery of 20 more E175s by the end of the year. But there's also going to be some transition expense related to some of these other fleet movements that Wade was talking about. So net-net, we would expect the second half of the year to look a lot like the first half.

Okay. And then just lastly, there were airplanes out there that had to be replaced as of the last call. And these were airplanes that were coming out of Delta, and I believe there were some airplanes that were also coming out of American.

It sounds like some of the airplanes that ExpressJet flies, I believe for American, that are coming out, there -- you indicated there is no tail risk in the sense that they're coming up, I guess, on the lease terminations. So you'll just return them.

Can you just give us a sense of what aircraft -- the number of aircraft and type that will -- that still have to be placed somewhere. These are the airplanes that you said that you would potentially, I don't know, part out or sell. What's that number and what's the date?

So for example, we get to what, March quarter of 2019 and you've gone through all these machinations. What's left, what's left to either be placed and/or sold? Just trying to get a feel for what aircraft you are ultimately liable for.

Michael, this is Wade again. I'll go over just a little bit. Like you said, there was a lot of fleet movement that we talked about. The American side, there are 12 planes that go back to the lessors and there is no tail risk.

Of the Delta ones at ExpressJet that we're talking about, number one what I would say on those aircraft, there's very little debt and the debt that is remaining is very attractively financed. So it's giving -- going to give us a lot of great opportunities with those aircrafts whether to lease, sell or do something with those.

To really answer your question, the exposure that we have, we get about half of the airplanes, so somewhere in the range of 12 to 15 become available. And it's in the middle of 2019, where they -- where we start to have that exposure.

Okay. Okay. So that's actually really helpful because at some point we were up to like 30 or 40 airplanes that were looking for homes, based on what had been announced up to this point in time.

And so now it sounds like you found a home for a lot of those airplanes. You got new opportunities with the CRJ -- the new CRJ900s coming in with the atmosphere cabin, et cetera. So that's actually very helpful. So at the end of the day, it's like slightly more than a dozen airplanes that you'll be dealing with in mid-2019.

My last question, how should we think about the profitability of the CRJ900s coming from Delta, since they own those airplanes? So you're not going to be taking a margin on ownership because Delta is the one who bears that burden or cost.

Are those airplanes overall going to be less -- not well -- I guess, they'll be less margin accretive or less profitable, but I'm trying to figure out, are they half as profitable, bringing in a wholly-owned E175 SC and leasing that to -- or operating that on behalf of a Delta or a United. How should we think about that?

Yes. Michael, this is Wade again. Yes, so there's 20 of those CRJ900s that are coming in. Delta will be owning all of those. And to your point, Delta is providing all the capital associated with that all. All of the down payment, the debt, so there will be no capital. So our return would be less than what it is on a wholly-owned 175. But we won't get into the specifics about how much it is.

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

So I just have a couple. One, is on some of your aircraft that are leased in from Bombardier, are there any opportunities to improve the lease terms on those aircraft?

So I would say Helane, we have a couple of pockets of opportunity that we're looking at in our fleet on some of our older and more expensive leased airplanes.

And like we announced last quarter where we had successfully refinanced one chunk of it in an accretive way, we're going to continue to look for opportunities to do that, but as of today, I don't have any new news. But that is one area of potential capital deployment that we're interested in and pursuing.

Okay. And then my other question is with respect to this $1.245 million line item underneath other income loss, what's that?

Yes. So that's -- we just -- if you remember last quarter, we had an equity investment that we marked-to-market. This quarter, we had another mark-to-market. It was positive the first time around and negative this time, but the net of it was a capital gain for us, which is nice, which is one of the things that helped drive our tax rate lower.

But that equity investment has now been fully monetized and the gain fully realized. So there shouldn't be any more noise related to that going forward.

Okay. Well obviously, I didn't remember that so thank you for clearing that up for me. And then, my last question, maybe is, have you talked to United at all about the new E175s that they're taking?

Yes. Helane, this is Chip. I would say, we clearly have talked to them about it, yes. We really don't have anything to discuss relative to what we know about those 175. As we talked about with Delta, there certainly is a bit of a trend for the major carriers to own the aircraft this wave, and I don't know that United has necessarily decided the operator.

I know that all of us are very interested in it, and we're very interested in it and working with them on ways to potentially see if there's something that we can provide for them on those. But as you know, we are very disciplined in our approach and we may not win everything, and sometimes we don't want to win everything.

So we're going to approach it with the same strategic things that we have in mind with the other parts of our business that we pursue and hope that something may come of those. But if not, we still, as you can tell from what we've talked about on the call, we got a lot going on still. So we'll keep you informed as we know anything.

That's great, thank you. And then, I just have one last question about something, I don't know if you said this or Wade said this but when you talked about moving crews around like -- I mean, obviously you've got all these moving parts, all these aircraft have to go different places, American's hub is different from United's or Delta's.

Do you worry about, I don't know, operating in a different location with weather and other issues? Because remember a bunch of years ago, you guys were -- like United had you all over the map and your metrics completion factor reliability and so on fell, in part, because they just kept changing the schedule on you arbitrarily.

So I know it's a long-winded question, but have you been able to work out with them that they are not going to just move your equipment here, there and everywhere without some reliability for yourselves?

Yes, Helane, that's an excellent point. Because when you look at -- if you go to our website and you look at the consolidated fleet map, there are very few airports we don't fly to. And we have a tremendous amount of destinations in every single major city that we fly to and several of the smaller cities that we fly to have their own set of unique operational challenges and no 2 airports are the same.

So we can say that part of our transition about what we've discussed with risk and managing contracts and meeting the needs of our partners, all of this has been developed over time within various contracts to make sure that we contemplate the dynamic ability for SkyWest to be agile. I mean, I think, in our world, it's all about agility, being able to respond to partners but also making sure that we have transparency within the contracts that contemplate any additional cost, sometimes there's cost savings in these things.

And so the evolution of our contracts over the last decade plus has started to contemplate items of weather, ATC, airport operations, unique local challenges. And so we're -- as we talk about reducing risk, this is a big element of what we've done through our partners, so we're comfortable about it. Are there preferences of where we would like to fly, no question, but that having been said, our #1 priority is making sure we deliver what our partners need.

Our next question comes from Savi Syth from Raymond James.

Just on the -- just a couple of questions here. On the transition, I know there's a lot of moving parts here. Could you talk about like when that becomes really intensive?

And when we should see some of that start to abate and understanding that you could -- you might have new announcements going forward and that might change the picture. But as it stands today, when does the transition cost, like, when does that peak and when does that start to kind of taper off?

Yes. Savi, this is Wade. So as far as the transition cost, it really starts to kick off for real starting in September. And it will really peak in the October, November, December timeframes and then it starts to taper off the first part of the year.

That's helpful. And then, just on the -- and maybe this is, Wade, for you again too. On the CRJ200s that are being placed with ExpressJet or even some of the CRJs of maybe for spot one, does that -- is that at similar economics as the kind of the E145s? Or how should we think about that?

And then even like the extensions that you've talked about, do those get extended at the current rates? Or is there any kind of improvement as they've gotten extended?

Well, Savi, this is Wade again. I'll just talk a little bit about the CRJ200s. The 200s are a little bit different model than the 145s. We will own the aircraft so it's a little bit different there. The economics are similar to what we'll get on the 145s next year.

And then as far as the extensions, we work with all of our partners to deal with our anticipated cost and such going forward. And the new rates anticipate our anticipated cost going forward.

Got it. And then...

I think Savi, what he's -- I think in other words, since we agreed to the extension, I think it's good for both parties. I think from our perspective, we try to predict the cost. I think everyone has a good understanding of those, that's not a difficult part of the conversation. And it -- that was obviously, when we did extensions, it was good for us as well as United and our other partners as well.

That makes sense. And just like one last question on the cash side. So with these changes, does that change any of the use of cash for 2019? Or since this is just kind of mostly moving around and there is no real purchase, 2019 kind of cash flow is still just kind of dry powder or share -- return it to shareholders.

Yes. Savi, this is Rob. So I think the comments that we've made about cash flow, definitely continue to hold true that, I think, cash that we're deploying this year in 2018 for the acquisition of these 39 new E175s, obviously, won't be repeated next year. So that's incremental cash that potentially we have next year. So I think that the overall cash flow story remains very strong.

Our next question comes from Steve O'Hara from Sidoti.

Just quickly on the pilot front. Just wondering if everything is still as it was there, in terms of your ability to source key pilots, et cetera?

Yes, Steve, it's Chip. I think, as of today, we are extremely comfortable with our pilot situation. I know we kind of refer to this every quarter, but I can say it. Both airlines we are very adequately staffed, which is kind of what generates some of the transitions that we have, and have our ability to execute so well on some of these transitions. So as of today, we're well staffed and continue to be optimistic.

Okay. And then, maybe on the -- I know last quarter you talked about some things that I think you had talked initially about sub $4.50 for the year, and then I think it was add a quarter to that and now it looks like, we're close to $5.

And just on the things that came together, did kind of everything come together that was kind of -- you were hoping to get done? Are there still a few bogeys out there that could be more incremental?

And then just relative to that, it looks like the block hour guidance dropped down a little bit. I'm just wondering -- it seems like if everything kind of came together, is that just the transition cost and noise you were talking about?

Let me talk a little bit about the quarter. I think -- we obviously had very strong production this quarter, and it was strong in the right areas. Since all block hours are not created equal, obviously, we were pleased with our operating performance and our production during the quarter.

But vis-a-vis the comments we made about the second half, as you know, as Wade talked about, a lot of the -- this transition movement that we've talked about is really -- it's really in the second half of the year. So when you think of it in terms of the full year, most of that operating -- incremental operating expense from some of that friction will be in the second half of the year. That's our guidance, the way that it was.

Okay. And then, just -- I mean, obviously, there's other aircraft that come up over time and things like that. Are you more confident today that you can work with your partners and there is demand for those aircraft based on what you've done so far? I mean, how do you feel on that and that's my last question.

Thanks, Steve. This is Chip. I'll give a comment I think of what you're referring to about overall demand, and we've got -- I mean, it seems like every quarter we come up with some new transition opportunities, some new flying opportunities.

I would go back and just kind of reiterate that our strategy continues to be the same and has yielded great results so far. When we're disciplined, when we engage our partners' needs. I can say there's a lot of things that we don't -- that we don't do that sometimes they want us to do. And there's a lot of things that we're eager to do as long as we can work together and meet that -- meet the demands for what they have.

I don't doubt that if we continue to stay disciplined with our existing strategy, take care of our people, do it in a safe manner and be the top operator, that demand in the next year or 2, 3 years is going to continue to stay very, very solid. And I think it's reflective of a couple of factors, it's our view of the economy, it's our view of the traveling public and the demands on travel over the next several years.

So from our perspective, we think we've got a good formula that 2 years ago, I don't know that we'd be saying -- that we'd be here talking about the exact same things that we're talking about and -- but we can see very clearly that it's reflective of a very disciplined strategy the way we've been able to execute. And we can't do what we're doing without the best 17,000 aviation professionals in the entire country, and we have these things going for us.

And so I think that for a long answer to your very short question is we're optimistic about what we can do, what's out there from a demand perspective, as long as we're disciplined and continue to execute the same strategic ways that we have.

And ladies and gentlemen, that will conclude today's question-and-answer session. I'd like to turn the conference call back over to Chip Childs for any closing remarks.

Thanks, Jamie. Thanks, everyone, for your interest in SkyWest. We're very, very happy with the results of this quarter. We're humbled and grateful to be associated with such great partners, outstanding aviation professionals throughout our companies, and we look forward to updating you further next quarter. Thank you.

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