Good afternoon, everyone, and welcome to the SkyWest, Inc. Fourth Quarter 2017 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, 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; 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'll turn the time over to Chip for some comments. Following Chip, I will take you 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, and thanks, everyone, for joining us on the call today. We completed a strong 2017 as we began the final stretch of our fleet transition plan this year. We successfully executed our fleet and business plan during the fourth quarter as the press release and results demonstrate. And while we generally see some seasonal reduction in the fourth quarter, our people maintained very strong schedules through the holiday season. I'd like to thank our more than 17,000 professionals for their ongoing commitment to running a safe, reliable operations. During the fourth quarter, we operated more than 260,000 flights with strong operating reliability. SkyWest Airlines and ExpressJet continued solid reliability, each delivering 99.9% adjusted completion for the quarter. Both airlines are performing very well. Rob will provide some color today on how the new tax reform will impact our financials. But I'll focus most importantly on how it benefits our people. We have strong nonexecutive profit-sharing programs at each airline calculated on after-tax earnings. Following the legislation, we made the decision not to adjust those programs to ensure employees enjoy a permanent increase in any profit-sharing award associated with the reform. This will not be a onetime bonus but an ongoing benefit to our people for the duration of the legislation. Importantly, the legislation helps us provide great careers in aviation as well as enhance rewards programs for the people on the frontlines of our operation. Our people are the foundation of what we do and this is just one way to recognize those who take care of our customers each day. Specific to ExpressJet, we remain focused on returning that entity to profitability and are making meaningful progress to that end. Execution of ExpressJet business and operating plans are on schedule with new long --…

Today, we reported adjusted net income of $43 million or $0.81 per share for the fourth quarter of 2017, up from adjusted net income of $29 million or $0.54 from the fourth quarter of 2016. On an adjusted basis, our pretax income in Q4 increased 47% year-over-year to $68 million. As you can see in the release, our GAAP results for the fourth quarter include a $247 million tax benefit generated from the Tax Cuts and Job Act of 2017, which I will discuss in more detail shortly. This revaluation benefit was the only item excluded from this quarter's adjusted results. Revenue was $797 million in Q4 2017, up $39 million from Q4 2016. This increase in revenue included the net impact of adding 21 new E175 aircraft since Q4 2016, partially offset by the removal of 78 unprofitable or less-profitable aircraft over the same period, including 65 50-seat aircraft. Also, as you recall, we took delivery of 19 E175s throughout the fourth quarter of 2016, which had only a partial impact on revenue last year for comparison purposes. Our total fuel cost per gallon averaged $2.18 during the fourth quarter, up from a $1.85 per gallon in Q4 2016. The increased fuel cost per gallon cost us about $3 million pretax or a $0.04 reduction in EPS from a year ago under our prorate business model. Tax was obviously a big topic this quarter. The tax provision rate used for adjusted earnings per share in the quarter was 36.8%, which excludes the previously mentioned $247 million tax benefit. Under the Tax Cuts and Jobs Act of 2017, we anticipate a 2018 provision rate generally between 24% to 25% before discrete items. Our future provision rate may vary based on the timing and amount of stock option exercises, restricted share…

Thank you, Rob. I'll first review our fleet changes for 2017 and then discuss our current fleet expectations for 2018. We had another busy year executing on our strategy to renegotiate unprofitable contracts and transition our fleet to larger, new aircraft as well as redeploying aircraft with extended flying terms as pilot hiring exceeded our operating plan. From year-end 2016 to year-end 2017, we moved from 652 total aircraft to 595 total aircraft in our fleet. We executed significant movement and transition across the fleet during those 12 months. We added 21 new E175s to our fleet during the year. At year-end 2017, we had 65 E175s under contract with United, 23 with Alaska, 19 with Delta, bringing our total E175 fleet to 107. We also made changes to our 50-seat contracts in 2017. During the year, ExpressJet extended its United ERJ145 contract for five years effective January 1, 2018. The new agreement enhances ExpressJet-United's partnership, significantly reduces the contract risk and provides long-term stability to its model. We anticipate operating approximately 100 aircraft under this agreement during 2018. As of year-end 2017, we had 112 ERJ145s under contract with United. Additionally, during 2017, ExpressJet announced a mutual agreement with Delta to initiate the wind-down of its remaining dual-class flying, including 28 CRJ900s, 33 CRJ700s, previously scheduled to expire in 2019. The 28 CRJ900s owned by Delta will be returned to Delta. As of year-end 2017, 12 CRJ900s had been returned. We anticipate returning the remaining 16 CRJ900s by the end of Q2. We also anticipate removing the remaining 33 CRJ700s from Delta service beginning this month. Of the 33 CRJ700s, three are leased from Delta and will be returned to Delta by the end of the second quarter. We own the remaining 30 CRJ700s, eight of which we will…

Okay, operator, we're ready now for the Q&A.

[Operator Instructions]. And our first question comes from Mike Linenberg from Deutsche Bank.

I have a couple here. Rob, I just, on the 42 airplanes that you're taking, I think you said it would require $150 million of equity. Is that -- did I hear that right?

That's correct, yes.

Okay. So when I do the math, because I know in this last quarter it looked like you took three E175s and it looked like the equity was $15 million, $5 million an airplane. When I look at the 42 and $150 million, it seems like it's a little bit less. And maybe it's because they are different variants, but it does look it's coming in under $4 million a copy. What's the difference there? It seems like it's more than rounding?

Yes. We've talked, Mike, in the past. We generally put somewhere between $3 million and $4 million per airplane in and that's consistent.

Okay. Then that makes sense. And then you -- there's been just with some of these small markets, it does look like you are definitely doing a lot more small market flying on behalf of your partners, notably United with the 50-seaters, the CRJ200s. And I think it was Wade who talked about the demand for 50-seat flying since you're one of the few guys out there who figured out how to make decent money with them. When I look at your prorate flying today, in the past, you've always said it's about 10% and maybe it still is about 10% of your revenue. Can you update us on that number and then what -- of that 10%, what percent of that is -- falls under EAS-type flying, essentially air service markets, if you have that?

Mike, this is Wade. You're right. So I'll give you a little bit of color on our prorate flying. So we have added some new markets to our prorate flying, but what we did, we have some opportunities with one of our major partners to transition some of our prorate flying from prorate to contract. So as part of that, we had some opportunities to create some new prorate flying. So we did some bidding. I think there was 10 to 20 markets that we bid on that we were successful on. And so the prorate flying itself is very much consistent with what it has been in the past and it's about 10% of our production. So it's still very consistent with where we've been historically.

This is Chip. I'll add a little bit to that. I don't think going forward -- I think it's important to realize we're not going to change our strategy and try to expand it. And I think we're comfortable about that 10% mark. And it's something that works well for us and it's also good for our partners as well. But I don't think we're going to do anything to try to expand that in the near term.

Okay, great. And just one last quick one, Rob, just on the numbers. You gave us the debt. I think in the past, I've seen in the press release you gave us usually the present value of the off balance sheet debt, the aircraft leases at some sort of discount rate. Do you have that number?

Yes, I do. And again, it just is approximate. We'll publish that in the 10-K. But the number for ending 2016 was about $795 million and that number will be likely just a little under $600 million in the 10-K this year.

Our next question comes from Savi Syth from Raymond James.

On the CRJ700s, I know last year talking about maybe a sterilization in the fleet there given the demand levels. But I noticed in your fleets for the -- for 2018, you have it going down by 20 aircraft or so. Just wondering if that's permanently going away or if you expect to put those into use either in prorate or elsewhere?

Savi, this is Wade. So in my script, I talked a little bit about this and what it is. In our fleet forecast in the press release, we have excluded the 22 CRJ700s that are coming out of service with Delta. We are very confident in our ability to place those aircraft either in CPAs or under third-party leases. Those aircraft are very attractively financed, and we do have some good opportunities out there. We have just -- but we've excluded them from our forecast right now.

Yes, sorry...

Savi, we are also in the second half of the year, remember.

Okay. Got it. And actually I was talking more about the CRJ200s.

The CRJ200s?

Yes. That are coming out.

Yes. So in our fleet forecast, we have 24 CRJ200s coming out. We -- on our CRJ200s, on the contract side, we always have some fleet that's expiring. And we do that on purpose to give us fleet flexibility. And we're working with all of our major partners right now on those 50-seaters. And depending on the needs of our major partners, we can and probably will extend some of those.

Maybe if I can ask it in another way. Are any of those so old that they need to be junked?

That's a great question. There are some of them that we start looking at. The engines are still great on them. But there becomes a time where we can start parting out the airframes and using it within our existing fleet for parts and other things. So we are getting to the point on that. We've done that with a handful of them, and we'll continue to look a few of those.

Okay. Great. And if I might ask, on the ExpressJet profit, loss, just curious what's driving that. Is that because it's a transition year and -- or because I thought the United contract was maybe breakeven to slightly positive and you're not going to have any of the CRJ200s in and I don't think the 700s and 900s...

Savi, I'm sorry, can you repeat the question. You sort of broke up at the first part of that? What was your...?

Sure. I was just kind of curious why ExpressJet is still unprofitable in 2018.

No, I think there's a couple of things. First and foremost, I think we talked last quarter about we did extend our agreement for five years with United, which is a great agreement. We're very comfortable with the long-term stability and the opportunities at ExpressJet. But when you look at our fleet plan and the large number of fleet transitions and winding down the Delta operation, there is enough going down as we continue to strengthen the footprint that it's still slightly less than breakeven that we're planning for in 2018.

So if I might just follow up on that. So if you weren't doing this transition, that business will be profitable? And if you could on that topic, just if you look at the whole of SkyWest and ExpressJet, if you can kind of compare what you're doing in 2018 that might be different, because 2017 and '16 were big transitioning years as well. Is there anything more complex that you're doing in 2018 than the past years? Just curious.

Yes. As far as the fleet transition next year, Savi, this is Wade, from the number of aircraft we took delivery in 2017, 21 E175s. Next year, we are taking 42. In the prior years, there was a lot more movement with CRJ700s and 200s around. Primarily this year, the big fleet movement is just bringing in 42 E175s and bringing down the Delta side. So I would say overall it's probably a little bit less than 2017, but there is still a significant amount of fleet movement in 2018.

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

Just on the guidance for 2018. When you say you're excluding the 700s, does that mean you don't expect them to be signed with another partner? Or you are completely excluding them from the guidance? And if you did sign them up with a partner, maybe what would that add to or could that add to 2018? Depending on when it happened or 2019 even.

Yes. So this is Wade. So we definitely excluded them from our forecast in the future and also including the profitabilities in our models. And so there is definitely some upside to the model when we place those in the back half of '18. As Rob said, most of those aircraft are under contracts for the majority of 2018. This is primarily happening in the fourth quarter of '18, and we're very confident, as we said, that we can place those aircraft.

Okay, okay. But I mean in terms of the kind of prior 2018 guidance, I mean the -- you're not assuming -- you're kind of assuming they don't get placed right now. Is that right?

That's correct.

Okay, okay. And then just maybe CapEx-wise for 2019, I mean what's maybe a normalized maintenance CapEx the way you think about 2019 with assuming no new fleet deliveries at that point?

Yes, we would expect that CapEx, Steve, is probably going to continue to run somewhere in the $35 million to $50 million per quarter, excluding, obviously, the purchase of new aircraft.

Okay. $35 million to $50 million per quarter. And that's maintenance CapEx level in 2019?

That would roll into 2019 as well.

Okay, okay. And then I mean, just on the -- I mean, it sounds like lot of the mainline carriers are little more aggressive on capacity growth here. I mean, what's your feeling maybe on further growth in the E175? You feel any more confident now than maybe you did six months ago or anything like that?

Yes, Steve, this is Chip. So technically we've got an aggressive plan with 175s and 175SCs in '18. I think that in '19 and beyond, we're going to be a dependent upon what happened with scope. There certainly is a lot of shuffling around within the industry that may create some opportunities. But the bulk of our -- I think our growth story moving forward outside of scope is going to be the fact that we have a lot of legacy contracts. We need to work with our partners to create some profitability. We still have a good strong relationships with all of our partners and a lot of good opportunities internally still to build. We talk a lot about our fleet transition plan. So we also still have some good contract opportunities moving forward outside of 175s. But beyond '18, getting into '19 and '20, we're going to be looking to just scope relief for some other strategic type of things with our partners to get more 175 dual-class type of growth.

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

So just a couple of clarification points. On the -- you mentioned the mechanics in getting the new contracts. So is that been voted for and in place? And now when does it become amendable again?

So it's voted for, in place. We're excited about the baseline of what we can work with now. But it's amendable, again, in one year. But it was helpful for as long as this has been open to get together and get some progress moving forward. But we will be sitting back down to mechanics of ExpressJet again in one year.

Okay. And then two other questions and they're kind of related. So I know at one point it was reported that United was considering acquiring ExpressJet. And I guess with whatever you can tell us, does the agreement that you signed with them basically take that off the table?

So first, there has been some of those reports. And, obviously, Helane, we never comment on market speculation of that matter. But as we reported previously, we did sign a very good contract with United, one that's great for our relationship for five years, provides a lot of good opportunity with our relationship and the people associated with that. And as we move forward, our main focus is to execute our existing agreements that we have with both partners. So that's kind of what our strategic focus is relative to this. We've got some great road ahead of us with this.

Okay. And then my other part two of that question, which comes out -- from a slightly different angle. I think, I might know the answer to this given your experience with ExpressJet. But would you consider further industry consolidation and doing another acquisition of another provider?

Well, I'd probably -- Helane, you've moved us into a very speculative moment right now. But I would give some of our philosophy about it. I don't know that we would ever say no given the right opportunities for our people and for our partnership. I would reiterate as of even today and what we've done over the last 3 or 4 years, we have plenty on our plate today. We are very optimistic of some of the things that we can continue to work with our partners on internally. And certainly if something comes our way, we would strategically look at that along the line if it's good for our investors, our people and our partners. But we have plenty on our plate for the near and long term to keep us busy and continuing to add value for everybody.

Okay. And then my last question, promise, is on the share -- on capital returns. I know you said that you would buy back fully the $80 million worth of shares that are left on the share repurchase program. Would you also, with some of the cash on the tax savings, consider raising the dividend?

Helane, look, I think that what we've said historically has never been more true today than -- we want to maintain a strong balance sheet, strong liquidity for whatever opportunities are out there for investing beyond the 42 E175s that we've got. So our first priority is to maintain that strong balance sheet, but we're absolutely -- we've got many, many ways that we can create value for our shareholders around here, including continuing to look at share repurchase and continuing to look at dividend.

And our next question comes from Duane Pfennigwerth from Evercore ISI.

So excluding Alaska, if you took legacy contracts to the max under current scope, how many incremental shells are up for grabs? Are there any? Or do you basically need new legacy pilot contracts to get any industry growth from here?

Yes. So this is Wade, Duane. We can go through that. At a high level, you look at the dual-class right now for each of the partners, most of the partners have maxed out their scope, excluding Alaska. As you said, most of the major partners have maxed out their max scope in both their 76- and 70-seat categories. They still have room in the 50-seat category. The majority of them do. I think you know that American has a very unique scope provisions with 65 seats. And they do -- I believe, they do have some scope in that category that we work with them on. But at this point, I think the major partners are maxed out on their scope in the 76-seat category, so.

And then on the United ExpressJet Agreement, do fleet changes tell the whole story? So you've been in this moderating trend, and it looks like you're stabilizing around 100 shells. But could you actually see utilization or block hours increasing in '18 versus '17 on the 100 shells?

Duane, this is Chip. I can tell you that, that's certainly what our hope is. The contract is intended to move forward with clearly a smaller footprint than ExpressJet has had in the past. But streamline the operation and be in a position where we can maintain at least 100 aircraft and move it upward if at all possible. The contract, again, provides great value to us and United. And we think under the circumstances, '18 is going to be still a little tough for ExpressJet, given the fleet transition and what we're doing. But with the United contract, we're optimistic about profitability in the long term.

And then just last one, I don't know if you'd be willing to comment on this. But can you speak to margins on prorate? How much money do you make flying that business? And at what fuel price would you breakeven on that flying? I think it's predominantly 50 seaters and just as we watch fuel tick higher here, just wondering where you see the break points for fuel on 50-seat RJs.

Yes, Duane, this is Wade, again. We don't get into the specific margins in any of our lines of business. The prorate flying right now, it is profitable. And it -- we look at it and it seems to be -- and it'll be fine based on our forecast of fuel for 2018.

Okay, operator. We're ready to wrap it up.

All right. At this point, we will end today's question-and-answer session. I'll turn it back over to management for any closing remarks.

Again, this is Chip. Thanks, everybody, for your interest in SkyWest. We continue to do our best to provide value to our people and our partners and our shareholders, and we're very thankful for your interest in the call today. And we'll give you another update next quarter. Thank you.

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