SkyWest, Inc. (SKYW) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the SkyWest, Inc. First Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Chip Childs, President. Please go ahead.

Thank you, Travis. And good afternoon. We're very excited to have everybody interested in the results for first quarter of 2015. I’d like to start, to introduce our team here, as well as the outline for the call. Present here today besides myself is Rob Simmons, our CFO. We are very pleased to have him board and we welcome his background and expertise and things that he brings to our enterprise. We also have Wade Steel, our Chief Commercial Officer here with us today, we have Eric Woodward, Chief Accounting Officer; we have Terry Vais, Vice President of Operations at SkyWest, I'd like to excuse Mike Thompson, SkyWest, COO and Alex Marren, ExpressJet, COO, as evident made their job is to be running a couple of very large operations and they are out doing today, so we're going to do this without them today. The call will go as follows, we have Eric Woodward, who is going to take care of some housekeeping with the forward-looking statement disclosure; Rob Simmons will give the financial results and some commentary on the financial results, Wade Steel will give us a brief fleet and commercial update and I will provide some key updates on our strategy and progress and then open it up for questions. So with all that, we'll start with you Eric.

Great, thank you. 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, intend, believe, anticipate, should, likely and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call are made as of the nature of 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 2014 Form 10-K and other reports and filings with the Securities and Exchange Commission.

Okay. Thanks everyone for joining us this afternoon. Today we reported net income $9.6 million or $0.18 per diluted share for the first quarter of 2015, which represents a pretax improvement of $59 million from the first quarter of 2014. This is our best Q1 since 2010. This $50 million year-over-year improvement in pretax earnings was driven by a number of factors which I'd like to highlight. Let me start with the revenue side. As expected, our revenue was down slightly year-over-year as unprofitable claims were removed from production. This led to a reduction of total schedule block hours going into the quarter of approximately 60,000 or 10% compared to Q1, 2014. We estimate the reduction in the fleet and related production would have decreased our revenue by approximately $44 million in Q1 compared to last year, in addition to a correlated reduction in pass-through partner revenue of $28 million. However, in Q1, 2015 we also made some significant improvements in our flight completion rates over Q1, 2014, which cut the impact of our scheduled revenue reduction by about $21 million. We reduced the number of non-weather cancels from 1500 in Q1, 2015 or 0.5% of our schedule from 5700 in Q1, 2014 or 1.6% of schedule. Further, we generated incremental revenue of approximately $33 million compared to last year from three other factors including number one, the addition of 29 E175 aircraft which we begin bringing into service in the second half of 2014 and are nicely accretive to earnings. Number two, we had various contract renewals, extensions and additional used aircraft contract awards since Q1, 2014 and three we saw nice improvement in our operating performance and related contract incentives. Together the production decreased and the operational offsets led to a minor decrease in revenue of $12 million or less than 2% compared to last year, despite our departures and block hours decreasing 6.4% and 5.5% respectively. Turing to operating and other expenses, the primary driver in the $71 million decrease in operating expenses was to reduce fleet size and related production which also includes a decrease of $28 million and directly reimbursed pass-through expenses under our flying contracts. Additionally, operational inefficiencies from last year’s weather were improved upon this quarter. The $59 million improvement in our pretax income compared to Q1, 2014 was contributed to by both ExpressJet and SkyWest Airlines, although ExpressJet's still generated a loss in Q1, 2015, its loss was reduced by approximately $40 million pretax compared to Q1, 2014. We are pleased with how the consolidated $59 million improvement in pretax income came together through solid execution against our plan. With respect to our cash and liquidity position, we ended the quarter with $480 million in cash and marketable securities, the $78 million decrease from year end was expected based on our use of $36 million towards ownership for the nine E175 delivered in the quarter and approximately $46 million of seasonally front loaded aircraft lease payments scheduled for Q1. Additionally, during the quarter SkyWest used approximately $20 million for other capital expenditures which primarily consist of spare aircraft parts. These planned uses of cash in Q1 were offset by strong cash generated from operations. We anticipate synapse [ph] in the remaining E175 deliveries with debt and are forecasting to use approximately $36 million in cash in the second quarter, $20 million in the third quarter and $8 million in the fourth quarter as ownership towards the aircraft. However, during the remainder of the year, we anticipate applying $36 million in previous aircraft deposits as a cash flow benefit. We anticipate our other capital expenditures will run at approximately $25 million in both Q2 and Q3 and then be slightly lower in Q4. Regarding the timing of our future quarterly announcements, it is our intention to continue to report as we did this quarter nearly end of the month following the end of the quarter post-market at approximately 230 p.m. Mountain Time. The timing of the announcement at year end will be announced later. Wade?

Thanks, Rob. With respect to the key changes in our fleet for the quarter, the following are the additions to our fleet. We took delivery of nine E175 aircraft for our United Express operations during the quarter. And we are schedule to take delivery of six E175s during the second quarter for United and our first three E175 for our last operation. We are also scheduled to take delivery of five E175s for United during the third quarter and two E175s during the fourth quarter for Alaska. We received five used CRJ200s which will operate with Delta. We anticipate receiving seven additional CRJ200s in the second quarter for our Delta operation. We also received six used ERJ145s which will operate with American. We anticipate receiving nine additional ERJ145s in the second quarter. We anticipate these additional aircraft will have a positive effect on our operating results. As we continue to evaluate and execute our overall fleet transition plan for 2016, but we may have some noise in our results during this transition. We also removed 29 unprofitable 50 seat aircraft from service under our United Express agreement during the quarter. As of the end of Q1, 2015 we operated 209 ERJ145s with United, by the end of the year we anticipate having a 157 E145s under contract with United. We also returned three EMB 120s on lease terminations and sold two EMB 120s during the quarter. Our last scheduled operations in the EMB 120s are scheduled to be May 5th.

Thanks, excuse me, Wade and Rob. As both of them have pointed out, we're very pleased with the improved first quarter results and think its worth noting that it is the most profitable Q1 for SkyWest Inc. in owning about 5 years. First quarters profitability is large and part of the result of operational improvement, improved operating incentives and contract improvements. ExpressJet adjust its completion performance improved significantly 1.6 percentage points year-over-year. SkyWest Airlines also showed some improvement on jets [ph] completion year-over-year as well. ExpressJet improvement is a result of internal structural and operational improvements, as well as our improved ability to recover from a regular operations caused by weather or other disruptions. We consolidated ExpressJet's operation to reflect to reduce fleet size and implemented changes across the operations from planning to execution to improve our reliability and recovery from a regular operation. While seasonally first quarter is generally weaker than other quarters, SkyWest Airlines continue to perform very well financially in this quarter. We also continued execution on our overall fleet and transition simplification as Wade outlined we removed 29 unprofitable 50 seat aircraft in service and ExpressJet has continued to simplify its basis, network and support operations to reflect these changes. Today we have 209 ERJ 145s under contract with United and we expect to have a 157 under contract with United by year end. It’s important to know here, that while we reduced the term of some of our first unprofitable flying to 2017, contract improvements remain a critical part of our recovery plan, as we approach contract expiration through our fleet, our goal is to ensure that ExpressJet remains a viable company over the long-term. We continue to make stronger improvement in their business and operation and remain focused on its long-term success. Additionally, SkyWest Airlines continue its transition to all jet fleet, which is expected to be completed next week with the final removal of the EMB-120 brasilia, while the one time write up was realized in the fourth quarter with successful execution of the transition, we expect the overall cost savings and associated improvement to be realized in Q2. SkyWest Airlines will be taking 175s for Alaska [ph] in Q2, the manufacturing process is on schedule and so well prepared for success with service starting in July. Overall our strategy is to maintain efforts and execution on reducing unprofitable flying contracts and our ability to renew and or extend under terms that are mutually beneficial to both SkyWest and our partners. Within each of our operations, we're focused on delivering strong operating performance and reliability. The benefits of producing a strong product are realized financially through performance incentives, contract revenues and completed flights and simply in delivering value to our partners in what their needs are. We believe a large part of our ability to deliver reliable product remains attracting and retaining the industries best professional. As the industry continues to respond the pilot staffing and major airline hiring, we remain focused on proactive efforts to attract top pilots. We are seeing good results in these efforts and we'll continue to be proactive about this issue. To summarize it, while the first quarter provided strong traction of movement in a positive direction, overall we continue to expect that 2015 will remain a year of transition. We will continue to evaluate our fleet in light of profitability improvements and size sustainability. Our focus is to execute our strategy to focus on solid reliable operations, simplify total fleet make up and ensure we're positioned to deliver the best what our major airline partners need. We also want to acknowledge and this is in my view one of the most important parts of the quarter we want to acknowledge that SkyWest was the only regional airline company named on Forbes best employers in America for 2015. Our ability to perform reliably and produce a solid quarter is a direct result of more than 20,000 SkyWest professionals across our operation. We continue to believe our ability to attract and retain the industries best is the formulae for our success. My hats off to them for a solid performance and continued progress for our long-term objectives. That concludes our written remarks, and Travis we'd like to open up for the question part of the call.

Certainly. [Operator Instructions] The first question today comes from Michael Lindenberg from Deutsche Bank. Please go ahead.

Good afternoon, everyone. This is actually Catherine O'Brien in for Mike. You mentioned some improvements in contract rates and performance incentives on renewals and extensions. I was wondering if the issue of operational policies [ph] in some of your ExpressJet contract 59 had been revised to include passes for bad weather related issues, which I know was an issue last year, but if not could give us some weighted gains that impacted those policies?

Yes. Catherine, thank you. I think that the best way to gauge that, I have to tell you it’s a little bit difficult to gauge that because while we did, had some conversations and when we renewed we had conversations about modifying the contract. The number one point that we thought about all this is the success and the contract is making sure that we delivered exactly what the partners want, which is stronger reliability. In some respect, the operation sort of outpaced the negotiations if you will, meaning, that there is no doubt that in Q1 we – as Rob has pointed out we had some good advantages to the operation and not as many – as not as much bad weather in Q1. But to quantify exactly what that meant in Q1, I would tell you that the majority of – the vast majority of the improvement on the ExpressJet side is by far away on the contract improvement and very little on the contract negotiations because of the solid operation.

Okay. If I could just ask one more. How would you characterize RFP environment for regional flying at the moment? I am just wondering if you've noticed any new flying or contract extensions that you know, should be to lower fuel making regional jet flying more economical?

I think Catherine it’s a great question and to put in light of the way we're seeing the market today, there is actually in our view very few formulae that plays out there, that we see and that we're participating in and there is certainly is some of the larger gauge 760 lift. But we're also seeing in the marketplace is there certainly is a strong demand for what we're doing on an existing contract basis and expanding that no matter what the size of the aircraft or the seats on the aircraft and a very, very strong in our view environment continued to build upon what's already been established and not so much by form of new and existing contracts. So we're pleased with the environment. We're having a lot of conversation with a lot of our partners. We also are participating in a couple of RFPs but we see the vast majority of the business opportunities to continue to work within our existing fleet and infrastructure and improve on our invested capital within those platforms.

All right, great. Thanks for all the color.

Thank you. [Operator Instructions] The next question comes from Savi Syth from Raymond James. Please go ahead.

Hi. Good afternoon, everyone. I am just wondering if you could give a little bit more color on ready, are 50 seat RJs are coming out of it, it seems like there is about maybe 27 or so coming out elsewhere outside of United?

Wade, you want to address that?

I am sorry, Savi, could say the question, repeat the question again please.

Sure. Just outside of the E145 that are coming out, where else are the aircraft coming in the 50 seat RJs that are coming out this year?

Yes. So we definitely have some contract expirations at United. We have some other contract expirations with all of our major partners honestly on the 50 seat category and we're working with them on potential extensions, potential redeployment and other opportunities. But all of our major partners definitely we have some opportunities to reduce the fleet or renew depending on where the environment.

All right. And so is the fleet permits, that in the press release today that assumes no renewals and assumes everything returned?

Yes, that’s what assumed in there right now.

Got it. And then just on the 700 that are somewhat white tailed [ph] and others – have those – has there been any kind of forward movement on the contract negotiations on those?

Relative to the 700 platform, we do have a significant amount of conversations with several different parties on what to do with 700s. I can certainly say that there is – as Wade mentioned in his comments, that you may hear some noise in the next 18 months on ongoing fleet transition. But I can also tell you that the conversation about 700s is wide and colorful on many things that can happen with that fleet, most of which we are very comfortable with that fleet. It’s a great airplane, with 70 seats in that aircraft, there is very high demand for it in the right market. We have to look at it in light of also what's happening with several of our 50 seat expirations. So when we say we've got some good transitional conversations over the next 18 months, that’s true. There is a lot of good conversations and we're committed to be transparent when we have more concrete information on that, we can tell you that there is a lot of conversations about our 700 fleet today.

Helpful. Thanks. And if I may ask one more question just on the cost side it seem like or just overall it seem like a lot of the additions came in and we are starting taking, get more and more of the aircraft that are getting retired. How should we think about one, are there any kind of expenses related to the returns here that may build up over the rest of the year and two, right now last year and a year before in a pilot training and retention was a kind of big issue and part of it was the new rules, but how is that trending and then are we seeing a lot of that go away or is that continuing to build?

I think, I can't remember how many questions I head in there, Savi, but – maybe we first and foremost start about the conversation that you had relative to the retiring fleet. I think that, at many weeks today we have build a infrastructure to return aircraft and I want to clear some of that its also I mean, when you're taking new aircraft you build an infrastructure to bring in new aircraft and you also have infrastructure to retire aircraft. We had a couple of infrastructures build relative to that. From a cost perspective as we said, we're going to have cost of fleet transition throughout the rest of this year. If you look at what's going on out throughout the rest of 2015, relative to cost and expectations of this fleet transition, I would say that it will – we've always shied away from giving direct guidance. But in Q2 we expect to carry some good momentum like we did in Q1, relative to our expectation and I think we said on the previous quarter, we have a lot of aircrafts who are coming out in the last half of 2015 and we expect the results to mere that maybe slightly better than 2014 but very close to that. 2016, we would expect to get some cost efficiencies on the ExpressJet side of those retirements and then we got to see what happens as we continue to have these conversations with 700. Now I am going to come back to you Savi, because I think you asked a couple of things we would probably haven’t addressed and that’s part of response.

What was your other question?

No, I think that was great. The other one was on just related cost on the pilot side, I know that was a big kind of headwind from a cross standpoint, the last time, maybe couple of years, just wondering how that’s trending and then if maybe all these retirements means that the pilot cost aren’t as high because you just you have more pilots now that toward –smaller fleet?

Yes, so I think that in some respects we may have to probably admit that we've digested the impact of 117 and most of our models today and I think that we've certainly integrated that with our partners and some of the contracts that we've had conversations with. Other pilot cost we're experiencing today, we obviously have high training cost. We're still growing on the SkyWest Airline side. There is a lot of trainings going on today getting ready for the heavy summer schedule. ExpressJet is also in hiring mode, right now and so there is some training cost associated with that, but those training cost on the ExpressJet side are pretty much mostly normal course of attrition type of stuff and then we kind of accepted these costs and as we look forward in our models in the future, we're just going to have to digest the fact that we had to integrate some of these costs into our contract models and move forward.

All right, great. I'll jump back in the line. [indiscernible] questions. Thank you.

Thank you, Savi.

Thank you. [Operator Instructions] The next question comes from Bob McAdoo from Imperial Capital. Please go ahead.

Yes, just couple of legs here. As we look at the chart that shows the fleet dropping from 693 to 633 through end of the year. Obviously that’s freeze up a number of pilots, what is the current attrition or how is rate at which people are weaving compared to the number of pilots that are freed up to continue to fly as you shrink the business, are you really having to go outside the hire or is this shrinkage in numbers of people going faster than the shrinkage in a number of aircraft?

Bob, right now our models when you take a look at our fleet, our opportunities, our bids and our attrition numbers we feel comfortable throughout 2015, part of in our opening comments, when we get to 2016, a lot of the hiring we're doing today is for 2016, but part of what we find is one of our responsibilities as we manage our relationship with partners is make sure that we deliver within the parameters of what we committed to and all of our models today are demonstrating that we are very comfortable through the rest of 2015. In 2016, in this industry with pilots and depending on how many pilots we may just hire, we're going to have to continue to approach it with our partners in a very, very proactive basis and that continue to model, until the next nine months it looks like our models are matched up very well.

And then secondly, from time to time we've had discussions about pro rate flying, who are you, do you still have pro rate flying or does the [indiscernible] the E 120s mean the end of the pro rate flying as well, where are you on that process?

I am going to turn that over to Wade and hand the pros [ph] for that one.

Yes, we still have some pro rate flying, a lot of the EMB-120s were operated under pro rate agreement and those as we said in our prepared remarks would be done by May 5th. we are transitioning markets where we can into a CRJ200 but we still do have a pro rate operation out there, yes.

So the aircraft numbers that we see on the back of the release today includes aircraft that are active because of pro rate flying?

That’s right. We definitely have pro rate aircraft in our fleet plans.

How big an operation is it?

So we have 56 aircraft currently operating under per rate arrangements.

And those…

I am sorry, so at the end of March we had 56 and nine of those were brasilia, after we retired the last brasilia in May we will be probably be around 45ish 200 turn on going back on a per rate operation.

And those are all profitable?

Yes, well, Q1 is always a hard gauge, I think fuel certainly is something that can help with that and this fleet we have, with three different carriers and we're optimistic what's going to happen this year. Q1 was okay I'd say.

Okay. Thank you.

Thank you. The next question is a follow up from Savi Syth from Raymond James. Please go ahead.

Hey, guys just on the maintenance side, I noticed that the kind of accounting versus for America and US there are similar to how United CRJs were done, is there a potential for a bubble to occur there, just a matter what we saw, or not a bubble, but a mismatch that we saw in the United CRJs, is there the potential for that to happen on the American US Air aircraft?

Savi, this is Eric. We don’t anticipate a significant bubble on any of the remaining CRJ 200s. Based on the age those aircraft - most of those have gone past a significant overhaul event period and there primarily was some hot section and some follow up engine maintenance of them. So we don’t anticipate a significant bubble on the remaining American fleet.

Got it. And just on the pilot, we're hearing that in kind of airs [ph] at some regional carriers that they are having difficulty having sufficient pilots and things like that. Are you doing anything different to make sure you can source sufficient pilots, do you think partners come to you needing to do a additional flying to kind of offset the issues elsewhere?

Yes, I mean, Savi, I think I would probably respond by the fact that we are – we feel like we're blessed if you will to be fortunate today relative to the pilot situation, but it’s not as easy as it has been in the past. I think that’s the opening statement. We fundamentally believe that with an issue as big as this pilot shortage that you have to be very proactive and plan with the partners and make sure that we can deliver what the partners are wanting to deliver to that customers. That having been said, I'd responded earlier that we're comfortable with our 2015 plan and we are picking up, we are picking up more one off flights if you will than we ever have expect on the ExpressJet side and then we're doing it in conjunction with our partners. And so at the end of the day we want to make sure that the flying public is taking care, but there is no surprises, we don’t have drama within the system and we're taking care of our partners. And it takes, I don’t if we're doing anything different than anybody else, but we take very, very seriously, very, very strong well advance planning on our fleet and moving forward in a way that we can deliver more than their expectations on the back end of things is to help them out in the current [ph].

Got it. And then my final question, is there any reason to believe that the pilot integration can be done either this year or next year?

On the ExpressJet side?

Yes.

We're optimistic on the ExpressJet side, if we can get any aggregation within that group. We continue to have good evolutionary conversations. I think that at the end of the day what we've seen from the entity over the last nine months is outstanding. On the performance side they continue to deliver exactly what we need. There is improvements on the financial side. And it’s our intent to continue to work with both groups. They represent fantastic individuals and we want to continue to be very transparent with them. But we think the world looks like going forward and we're optimistic about that, that we can do something here in the near term on that.

All right great, thank you.

Thank you. The next question comes from Michael Lindenberg from Deutsche Bank. Please go ahead.

Hi, again. Just one quick follow up the network simplification going on ExpressJet, I was just wondering one, how the wind done of Dallas went in March. And then two, if there are any other cities beyond, DC and Denver that you are thinking might make sense to wind down or reallocate?

This is Terry. From ExpressJet. Yes, Dallas wind down run very well in March, and we did not had any issues there. Also our partners are also with our fleet reduction, in consolidation we're flowing out of Denver and our United operation and also announced a fewer other locations that we're consolidated our networks. So it’s going very well at this point.

Okay, great. And then those, the planes that came out of Dallas those were retired or do they go elsewhere in the network?

Yes, they were retired.

Okay, great. Thanks.

Thank you.

Thank you. This does conclude our question and answer session. I would now like hand the conference back to Mr. Childs for closing remarks.

Thank you, Travis. Again, we appreciate your interesting SkyWest, again, we're very pleased with the momentum that we have today and hopefully we've communicated very clear strategy of what we want to do on a go forward basis to continue to add shareholder value. And again we're very appreciative of the efforts of over 20,000 aviation professionals that we believe are best in the industry, and continue to deliver just an outstanding product. The help to do the things we need to with our partners and our shareholders. So at this time we'll end the call. Thank you.

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect you lines.