SkyWest, Inc.
Q3 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Good morning and welcome to the SkyWest Third Quarter 2014 Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chip Childs, please go ahead, sir.

[Chip Childs:]

Thank you, Denise. I appreciate everybody calling in, good morning and welcome to our third quarter earnings call for 2014. We are pleased to present, we believe the results that are indicating some progress for delivering some strong value to our stakeholders before we get into these details, I’d like to introduce our team here as well as a brief outline for how you want to proceed with the call. First we have Brad Rich who is our Chief Commercial Officer, we also have Wade Steel, who is Executive Vice President SkyWest Inc. we have Mike Thompson, the Chief Operating Officer of SkyWest Airlines, we also are pleased to have Alex Marren with us who has recently replaced Brad Holt as Chief Operating Officer of ExpressJet. We have Mike Kraupp, he is Treasurer and Eric Woodward, our Chief Accounting Officer here as well. We would like to proceed as follows; we’ll have Mike Kraupp to take care of some housekeeping with the forward-looking statement disclosure. And we would like to turn sometime over to Wade Steel to give a brief explanation of our earnings for the quarter and then have Brad Rich give us a brief update on our liquidity situation that’s happened over the last quarter and I’d provide some key strategy points and then open up for question after that. So with that, we will start with you Mike.

[Mike Kraupp:]

Okay. We will be making statements during this conference call which are considered forward-looking. Such statements are based on our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. Words such as expects, intends, believes, anticipates, should likely and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call are made as of the date hereof and are based on information available to us at this time. We assume no obligation to update any forward-looking statement. Actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons, including those discussed in today's press release or expressed during this conference call or set forth in our 2013 Form 10-K and other reports and filings with the Securities and Exchange Commission.

[Chip Childs:]

Thanks Mike.

[Wade Steel:]

Our Q3 our net income with $41.3 million or $0.79 per diluted share to $41.3 million of net income includes the tax affected gain of $15.3 million related to the sale of trip. This compares to net income of $26.4 million or $0.50 per diluted share for the same period last year. Operating income which excludes the gain on trip increased $2.9 million for the same period last year. There are four main items that are affecting the increased profitability this quarter. First, total operating revenues excluding pass-through items increased $12.7 million during the quarter. The revenue improvement was primarily due to certain contract renewals and modifications. In additions, the increased E175 flying for United also increased our operating revenue. Second, direct maintenance expense excluding engine maintenance decreased $12.2 million during the quarter compared to the same period last year due to the following reasons, first it’s cost reduction initiatives. We’re being continued to make investments in our maintenance, planning and infrastructure. Second, we’ve been able to remove older aircraft from our fleet since the prior year, during the quarter we removed 16 E145s from contract. Third, our crew cost increased by $13.8 million for the quarter, these costs include labor, hotels, per diem and simulator cost. The increase in crew costs are affected by a few main items. Number one is FAR117, this is the new flight we in duty roll that affect how we can schedule our crews, FAR117 has increased the number of pilots we need to staff our schedule and increase the number of hotel nights we use. Second is the induction of the E175 aircraft. We are hiring and training pilots for this aircraft. We will continue to take delivery of the E175 through the middle of 2015. Pilot attrition, we have been hiring to keep up with pilot attrition. The majority of the pilot attrition is due to the hiring from our major partners. Fourth is the gain on the sale of TRIP, during the quarter we’ve received payment attributable to the sale of our TRIP shares. We recorded a pre-tax gain of $24.9 million as a result of completing this transaction. We also received $2.1 million of the interest payments which we recorded as interest income during the quarter. Brad?

[Brad Rich:]

Okay, Chip mentioned that I would make some brief comments about our liquidity and cash position and I’ll try to be brief. I’m assuming that most of you have seen the release this morning where you saw that we reported there are cash in marketable securities position at the end of the quarter was $555.7 million that balance represent an increase of $88.7 million during the quarter. The primary factors affecting the increase, Wade reviewed with you the issue of the TRIP gain and the cash impact of that was approximately $20 million in the quarter. We also, the cash that came in as a result of our IROP settlement was about $14 million, and then of course the significant factor is the increase during the quarter in our pre-tax earnings. Also of note during the quarter is that we invested another $24 million in the equity in six additional E175s and then invested another $8.9 million in just general capital expenditures and tooling etcetera to bring on the E175s. I think one issue worthy of note is that in the last quarter we estimated that by year-end we expect it to be approximately $500 million in our total cash and securities position. And as you can see at the end of this quarter we’re at $555.7, so couple of things that you need to know about going forward as it will affect our cash and liquidity. That assumption assumed to get the $500 million by year-end there was an assumption that we would refinance our aircraft into operating leases. The cash balance of 555 currently is without those aircrafts being refinanced, but we do expect – so even if we move through the rest of the year we continue to take the remaining balance of the E175s even if we continue to invest the equity in those aircraft which will require another $28 million on top of the $56 million that we’ve invested in equity, our current estimates are that we would still be over $500 million of total cash and securities by year end. Now having said that we’re currently evaluating our tax situation and various other factors as to the final completion of the financing of the E175s and will make those decisions as we move forward. But my message is that even if we continued to invest equity in those airplanes and debt finance them, we’re still projecting that by year end we will be about $509 million of total cash and securities by year end. As it relates to continued CapEx, we know that many of you have questions about just what kind of capital requirements will be required as we move forward with the E175s. As we have mentioned and we have been investing heavily in that operation but as we move forward into the fourth quarter we think that investment in CapEx requirement will come down to just a little over $2 million in the fourth quarter. So that’s the update on cash liquidity.

[Chip Childs:]

Thank you Brad and Wade. Well, our third quarter results indicated strong movement in the right direction. I think it’s important for us to outline as we still have a tremendous amount of work to do. SkyWest Airlines continues to perform well economically in fact as well as is ever performed however during the quarter SkyWest has couple of operational challenges that we were still able to produce good profitability. It’s awesome forum to indicate at the outset, lot of the things that we are probably one is the first throughout remainder of the call onto the Q&A portion is dated it’s likely to be contained within our 10-Q we believe that that’s going to be filed on Monday. So some of the issues relative to the specific entities within our enterprise can be reviewed and updated in our 10-Q that we filed on Monday. As far express, yes there are continue to be a lot of moving pieces within this model and let me just give a couple of highlights of those. As Wade indicated first as outlines and is outlined in the release 16 ERJ145s were removed from contract in Q3 of this year, we are expecting another 18 to be removed in Q4 of this year. In the first half of 2015 we are looking to remove an additional 23 ERJ145 and 9 ERJ135S again in the first half of 2015. In the last half of 2015 we’re scheduled to remove another 37 145s, in the later part of 2015. We think that these reductions are important for couple of reasons; one is to make sure that we improve the overall economic performances and these are some of the most unprofitable aircrafts within our entire enterprise. We are also committed to continue to have our strategy and making sure that we did express it in the proper size of fleet in order to effectively deliver what our partner’s expectations are and at a position we have lot more economic sustainability within that model. One of the biggest highlights for ExpressJet is the operational improvements, this is a piece that we are taking very pride in and are seeing some very good things happening during the quarter it was significant mostly due to controllable completion achieving a level of 99.4% for the quarter, it represents the best controllable reliability for an entire quarter that ExpressJet has had in several years and that’s important to our model because not only there is reliability delivered with our partners and their passengers want to experience, but it also certainly change the dynamic relative to the revenue that we need to be successful. Most of these improvements were accomplished were some leadership changes that we mentioned last quarter earlier in the year as well as some planning and process improvements within the ExpressJet operations. We are also very excited to announce Alex Marren as the Chief Operating Officer of ExpressJet effective October 1. She brings the wealth of experience in almost every aspect of the industry and especially in business and operational transformation. Her experience and knowledge are critical to our strategy with ExpressJet and we are very, very fortunate to have her on board. Wade mentioned in his comments earlier that a portion of our increased profitability was a result of favorable contract renewals both of these occurred both at SkyWest and ExpressJet and I think we can emphasize the contract improvements continue to be a critical part of our recovery plan. To summarize before we get to the Q&A portion I just want to make sure that you understand that we feel like we are developing some strong momentum in all the right areas with continued strong financial performance on the SkyWest side as well as driving very strong operational improvements on the ExpressJet side. We will obviously continue to evaluate our fleet and live profitability improvements and site sustainability across the enterprise. Finally and honestly most importantly we continue to feel most fortunate to have the strongest team of aviation professionals in the industry, our folks are both carriers within the enterprise this last quarter delivered a very strong product to our partners with safety and with continued improvements there following into the fourth quarter. We all know is we are trying to continue to recover both of these enterprises, I think we are in a position where evolution in this industry is not easy but we all know that evolution is necessary to have some long term sustainability in this stand there. So that concludes our comments. Let's turn it back to Denise for the Q&A portion of the call.

[Operator:]

[Operator Instructions] We have a question from Michael Linenberg from Deutsche Bank. Please go ahead.

[Michael Linenberg:]

I just want to go back to, I think Chip you talked about favorable contract renewals that SkyWest ExpressJet now was that with all of your partners are is it ExpressJet now have contracts that as a company you can live with and can build upon going forward that economically that make sense?

[Chip Childs:]

I will start Michael by the term you used contracts that we can live with. I don't know that we could ever find those in this industry to be honest with you, but we will certainly will try. If you go back to some of our comments I would say that the contract improvements are categorized largely where we have aircraft coming off of contract and we had a favorable renewal to continue to fly them. Those are largely across the board with most of the partners. I think that you alluding to the fact that we have had longstanding conversations specifically with United and ExpressJet. I can tell you that we continue to make great progress in wrapping those up, but we are in a situation where we cannot and we will not have any communication relative to that because nothing is finalized even though it's very close. And our results do not reflect the impact of any of those conversations. So in summary, we see that there is some improvement. We don't – we are very comfortable with the direction that things are going but we still have some work to do and we will probably have better disclosure in the next quarter on it.

[Michael Linenberg:]

Great, great clarity on that thanks. And just my second question with respect to airplanes coming off, later this year first half next year, does that – should that address the 40117 and pilot turnover issues that you face – I mean are we at the tail end of that will that be mitigated because of all those airplanes going out, you will be able to source your current pilot group to roster than new aircraft coming in?

[Chip Childs:]

In some ways yes, and in some ways no and I will split this up between the two carriers. First and foremost is as we disclosed the majority of these changes are coming out on the ExpressJet side and it does help relative to a pilot supply issue. We do have ample pilots to help with the 117 issue. It's still an expensive process and program there is no question about that and it certainly does reverse some of the issues we have had earlier this year where we were so sort on pilot to the Express as the winds causing some operational difficulties. On the SkyWest side, while there is some free evaluation that goes on the SkyWest, we continue to still be recruiting pilots there. We are having great success in making sure that we are tracking pilots. So, on a go forward basis in the next 12 to 18 months we are actually pretty comfortable about our pilot situation over that time period.

[Michael Linenberg:]

Very good. Thank you.

[Operator:]

And our next question is from Savi Syth from Raymond James. Please go ahead.

[Savi Syth:]

Hey good morning. Just like the aircraft that are being returned, could you provide any colors, are there any additional increased costs related to the returns and how that is progressing?

[Chip Childs:]

So the aircraft that are returning we do not own any in the aircraft. We are not the (inaudible) on any of the aircraft. Most of these are owned by our partners that we are returning. So from an increase cost perspective certainly when you are talking out the volume of fleet that we are taking out, we have and or in the process of modifying very specific plans to mitigate some of the cost associated with that. To be candid the turnover is relatively high on the ExpressJet side which helps to mitigate that. We do have very good coordination with United on the return of the aircraft to make sure that it's done in an honorably, orderly and timely way. There is no question we are going to have some costs or we are going to linger a little bit over the next year and we are continuing to develop, fine with that we can give a ton of visibility on that on the call today. But it's mostly understanding the size and volume of fleet that’s coming out making sure that we have very, very detailed specific plan we can execute to try to mitigate that. Surprisingly, we are pretty comfortable with our position and how that’s going to work as of today.

[Savi Syth:]

Great. And just the follow-up on the pilot attrition, what levels are you seeing is that easing or worsening or how is it progressed through the year?

[Chip Childs:]

It’s kind of pick up a little bit and falls the major partners continue to hire. I think that from the perspective of ExpressJet we are running at a range of about 50 to 60 per month and on the SkyWest side, we are probably about half of that 25 to 30 per month. So the trend is always higher in the fall months because that’s when a lot of the carriers are rehiring and doing that stuff. So we have seen a pick up lately in the later months but we also anticipate here getting into December and January, February that’s going to tail off again.

[Savi Syth:]

I appreciate that color. Thanks.

[Chip Childs:]

Thanks.

[Operator:]

[Operator Instruction] our next question is from Bob McAdoo from Imperial Capital. Please go ahead.

[Bob McAdoo:]

Hi guys. I want to kind of go back what Michael was asking let me ask it differently. We have obviously hearing for number of quarters that the ExpressJet side has been a money loser. And the question is with what you have done so far is it back to breakeven or when we get rid of 16 or 16 plus 18, or 16 plus 18 plus whatever that is 32, more of what you referred to as the most unprofitable player equipment that you have does that alone get you back to breakeven or making a little money on the ExpressJet side?

[Chip Childs:]

No. it does not. You can see if you go back to the previous 10-Qs that we filed Bob you can see that’s particularly what’s happened this last year, it’s a big, big loss number. We believe it significantly mitigates that and that’s part of our strategy with ExpressJet when we had the discussion last quarter, first thing we’ve got to do is mitigate these huge losses that have incurred in the previous months of this year. This significantly mitigates that. But I would say even with some of the conversations we are having with United it is not a case of bringing ExpressJet back to breakeven. If you wanted to hear when that would happen I would have to use the term (inaudible) that would be at least two or three years even with some of the big efforts that we are taking before we can get ExpressJet to breakeven that’s the visibility that we have today. Our job is to continue to explore, be creative and be aggressive and find the ways that we can hopefully shorten that timeline. We are comfortable with what’s happening with the fleet in our conversations with United that there has been significant mitigation of what’s happened earlier in this year and part of last year however.

[Bob McAdoo:]

So what that says is that the problem is not simply that the rates that you are able to collect on these legacy ExpressJet stuff that came with the acquisition of that company but it is just a rate issue there that there is other things that also need to be addressed within the ExpressJet company?

[Chip Childs:]

I would say that. I would still put a lot of heavy weight toward the contract however and the truth of the matter is that we have signed up for something with our partner. We are going to honor what we have signed up for. We are going to be creative in ways to make sure that we can execute the agreement that we have agreed to in all the best ways and I think that this quarter with Alex's help we are going to have a lot of help making sure that we do that. There is – but from the perspective of where you are trying to understand it's mostly a contract issue yes but we also see some opportunity within the operations that’s going to help mitigate that issue as well.

[Bob McAdoo:]

But even as a contract issue getting rid of this substantial number of airplanes is not enough to make it work that’s what you’re saying though if it's more – okay very good thank you.

[Operator:]

Our next question is from Duane Pfennigwerth from Evercore. Please go ahead.

[Duane Pfennigwerth:]

Hey good morning. Just wanted to follow-up on one thing Mike referenced was there some impact in the quarter from the IROP settlement in the third quarter?

[Chip Childs:]

Quite right. So as far as the financial impact there was no P&L impact to the IROP settlement. But as far as the cash we did collect I think Brad mentioned $14 million during the quarter related to the settlement of IROP. Duane Pfennigwerth – Evercore Okay. And then just a question on the fleet plan and the guidance on ASMs and block hours it looks like ASMs are down about 11% year-over-year whereas block hours are down about 7% so I am just curious as you are getting rid of smaller jets, why would ASMs be down more than block hours?

[Chip Childs:]

I think there is a couple of things. I think it's depending upon how the schedules work utilization within that. I think most of our guidance as it comes out in the winter months we do know that the partners that are trying to seasonalize the couple of things a little bit more certainly in the slower months of June and I am sorry January and February and April and May our block hours are down from scheduled perspective in those months. I think a lot of it has to do with some of the seasonality from the revenue perspective that the major carriers are seeing and trying to match that with their own fleets at the same time. So I think those are some of the main reasons why there may be a bit of a mismatch on that.

[Duane Pfennigwerth:]

Okay. Thank you.

[Operator:]

And we have a follow-up question from Savi Syth from Raymond James. Please go ahead.

[Savi Syth:]

Hey. Thanks. I just want to know if you have an update on any kind of potential growth opportunities out there, is there any other majors looking to add regional plane here?

[Chip Childs:]

Savi, I could represent that part of the fun part of our job is that we are having conversations with all four of our partners. Four of you combined U.S. airways and American so I will tell you there is ongoing dialogues. There are some formal RFPs. There is also informal conversations that we are having. A lot of them have to do with fleet replacements. A lot of them have to do with potential new opportunities. I think that our general take is that scope continues to be the largest piece of that conversation. We know that there is a lot of opportunities in the next two to three years with the major carriers with their existing pilot negotiations scope like we maybe one of those conversations but we are very actively engaged with all four of our partners on having some conversations about fleet replacements, new fleet. I think that the conversations at least, we can't say anything specifically about it today but I can say the conversations are exactly as they have ever been.

[Savi Syth:]

Got it and then could you provide an update just on how many this kind of 50 seat aircraft are being retired over, I mean I know you outlined the ERJ side of it, but are there some on the kind of the CRJ side that are unprofitable that are being like go as well?

[Chip Childs:]

Yes. Let me let Wade.

[Wade Steel:]

So from the CRJ side there are certain aircraft coming out on the ExpressJet side there is 14 CRJ that start to come out. They started to come out at the end of Q3 and all 14 of those will be out by the end of Q1 of 2015 and then there is some other kind of smaller ones that come out throughout the rest of the year.

[Savi Syth:]

Like the big option to improve profitability is on the ERJ side?

[Chip Childs:]

Correct. Yes.

[Savi Syth:]

Okay. Got it. Alright. Thanks.

[Chip Childs:]

Thank you.

[Operator:]

And showing no further questions. I would like to go ahead and turn the call back over to Chip Childs. Please go ahead sir.

[Chip Childs:]

Thank you Denise, again we really appreciate your interest in the operation that we have. We know that based upon the call and some other conversations with you folks that as we are moving forward with our strategy with both of the airlines and within the enterprise I want to reiterate what we said before that we have got a lot of work to do. We feel like we have got some positive momentum and some specific plans to continue to improve it and again I can't emphasize how honored and proud we are to represent almost 20,000 aviation professionals within our industry. The results that we talked about in this call is certainly a result of our folks being the top of their game and making sure that we deliver the product that we need to in safe and efficient manner and we appreciate and honored to be a part of that team. With that we appreciate your interest and we will turn the call back over to Denise and end it at this time.

[Operator:]

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