Good afternoon. And welcome to the SkyWest Incorporated Third Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today's event is being recorded. I would like to turn the conference call over to Rob Simmons, SkyWest's Chief Financial Officer. Please go ahead, sir.

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 we will excuse Terry Vais, ExpressJet Airlines' Chief Operating Officer. He is out running his operation today. I would like to start today by asking Eric to read the Safe Harbor. Then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results. Then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric?

Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2017 Form 10-K and other reports and filings with the Securities and Exchange Commission. With that, I will turn the call over to Chip.

Thank you Rob and Eric. Good afternoon, everyone and thank you for joining us on the call today. SkyWest had a great third quarter as outlined in our press release. Summer and the third quarter is typically peak travel season and our production reflects that same trend this year. Overall, our Airlines performed well during the quarter and our teams continued to execute with precision. With more than 260,000 flights during the third quarter, SkyWest and ExpressJet each delivered strong operating reliability. SkyWest achieved 99.9% adjusted completion and ExpressJet achieved 99.8% adjusted completion for the quarter. Our Airlines also led the industry in the most recent VOT report with SkyWest and ExpressJet placing first and second respectively as the airlines with the fewest complaints for the month of August. I want to thank our teams for their work and great work delivering seamless exceptional service for our partners and passengers across North America. As noted in our press release, SkyWest Airlines agreed to an extension with United for 60 our existing CRJ-200 aircraft. We continue to see strong demand for both 50 seat and dual class aircraft across our fleet. We also continue executing on our current fleet plans with delivery of eight more new E175 aircraft and four CRJ-900 aircraft expected in the fourth quarter under our previously announced agreement. We are focused on delivering on our commitments, maintaining strong fleet flexibility and executing with discipline. With the largest tranche of ExpressJet's Fleet transition and a new pilot agreement complete, we continue to expect modest profitability for that entity in 2019 as we indicated last quarter. We've had significant fleet movement over the past three years to put a smaller, leaner ExpressJet and we are positioned where its losses are expected to finally come to an end. During the…

Today we reported net income of $83 million or $1.57 per share for the third quarter of 2018, up from net income of $54 million or $1.01 per share from the third quarter of 2017. Pretax income of $110 million during Q3 was up 27% from $87 million in Q3, 2017. Revenue was $829 million in Q3, 2018 up $16 million from Q3, 2018. This increase in revenue included the net impact of adding 34 new E175 aircraft since Q3, 2017, partially offset by the removal of 65 unprofitable or less profitable aircraft over the same period. Our total fuel cost per gallon average $2.69 during the third quarter, up from $2.06 per gallon in Q3, 2017. The line item in our P&L for aircraft fuel was $7 million pretax higher than a year ago, reflecting the higher rate paid 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 Q was 24.5% compared to 38% 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 fourth quarter and 24% to 25% for 2019 as a whole. Let me say a couple things about our balance sheet and important point of differentiation in our model. We ended the quarter with cash of $705 million, up from $649 million last quarter. We issued $243 million in new long-term debt during Q3, 2018 financing 12 new E175s. Total debt as of September 30th, 2018 was $3.1 billion, up from $3 billion last quarter. SkyWest used $43 million in cash and deposits toward equity for new planes and $30 million in other CapEx. Non aircraft acquisition capital spending…

Thank you, Rob. I'll first review our fleet changes and flying agreements during the third quarter and then I'll discuss the implementation of these changes from June 30th to September 30th, 2018. Our fleet moved from 583 total aircraft to 574 total aircraft, specifically we added 12 new E175 aircraft to our fleet during the quarter, bringing our total E175 fleet to 138 at the end of the quarter. This includes 65 E175 under contract with United; 32 with Alaska and 41 with Delta. We anticipate taking delivery of eight E175s during Q4 for Delta bringing our total E175 fleet to 146 by year-end. We also took delivery of our first new CRJ-900 during the third quarter as part of our previously announced agreement to operate 20 of those aircraft for Delta. We anticipate taking delivery of four more CRJ-900s during the fourth quarter; eight during 2019 and seven during 2020. Demand for 50 seat flying remains very strong. We are working with each of our major partners to meet their 50 seat needs. As a result of that demand, we have reached an agreement with United to extend 60 CRJ-200s for an additional three years with SkyWest Airlines. Separately, we began executing on previously announced fleet transition agreements during the third quarter, placing the first four of 20 CRJ-700 into American Service during the quarter. We expect eight more CRJ-700 to be transitioned into American Service during the fourth quarter and the remaining eight in early 2019. We also transitioned the first 4 of 20 ExpressJet CRJ-200 to United Service on October 4th. The remaining 16 aircraft are expected to be placed into service between now and early 2019. With this continued fleet movement and contract changes, we anticipate some transition noise in the fourth quarter and Q1 of…

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

[Operator Instructions] Our first question comes from Savi Syth with Raymond James. Please go ahead, sir.

Hey, good afternoon. It's helpful to understand kind of the low risk around the 30 CRJ-700s sales next year. Could you help us understand as you know what you're looking at from especially kind of CRJ-200 with the bigger aircraft? What that tail risks you have and like 2020 and 2021?

Yes. So, Savi, this is Wade. So I think your question was what kind of tail risk we have on the CRJ-700 beyond 2020 and 2021. Yes, so the majority of those aircraft, they're going to be flying for a good part of 2019 and in the middle of 2019 we start to have some exposure. The majority of that debt or all of that debt is paid off by the end of 2020. So there's really very little cash exposure left on those airplanes. We'll get through most of that in 2019 and early 2020. And we've got some very good and interesting opportunities with some of those aircraft. We're actually working on some LOIs for some --to lease some of those engines and other parts. So we're very confident in placing those airplanes.

Great. Are there any kinds of additional aircraft that come off [Technical Difficulty] contract that we should be mindful of? Is like 2020 or 2021?

Yes. So, we all of our CRJ-200, there's very little or no risk associated with those aircraft. All of our 175 and CRJ-900s, there's no tail risk in those periods either. There becomes a little bit of tail risk in the first part of 2020 with some CRJ-700, but we have plenty of time to work with our major partners to renew and extend those aircraft.

Helpful and then if I might on the --it was kind of help to get the color on earning for next year. If we take you a status quo and looked at 2020 especially given that some of those pilot contracts increases are getting fully incorporated, what kind of growth can we expect? Again not assuming any significant changes.

So, Savi, it's Rob here. So, look, I would say that our comments, we're sitting in October of 2018 here. We made some comments on 2019 today. I think you can expect as usual that we will give more color in the quarters ahead, but I think I would say that between all of the actions that we're taking right now, obviously what we're trying to do is set ourselves up very nicely for 2019 and 2020. We've got growth opportunities in a number of different areas including continuing to improve the economics of our legacy fleet as those renewals and opportunities come up you. We feel like we've got opportunities to continue to take opportunities from smaller, weaker competitors over the next couple of years and then as Chip mentioned, we feel like we've got other opportunities within the existing scope to be creative with our partners and mine opportunities within the existing scope right now. And I think all those opportunities for earnings are sort of enabled by this new pilot feel that we've done and the liquidity and the balance sheet that we've got for these new investment opportunities when and if they come.

Our next question comes from Mike Linenberg from Deutsche Bank. Please go ahead.

Hey, good afternoon, guys. Just a couple things here just, there's obviously a lot of moving parts here. I just want to make sure, so the 20 CRJ-700 I guess that are going into American what there were four that went in and there's eight in the December quarter, and then eight in early 2019. Those are distinct from I guess what is it the 2018 that will not be extended that are coming out in 2019, is that right? So merely it sounds like there's a swap of just airplanes coming in and airplanes coming out almost the same amount.

Yes, Mike. This is Wade here. You are right on the phasing in of those aircraft. We've got four in there, there's eight. Yes and the timing is, they're fairly close to match up, but they're not exactly the same but it's fairly close when the planes come out and the other ones come in.

Okay, that's helpful. And then my second question is I don't know if you mentioned anything about the E175 order that United made recently. I know United is going to start taking those airplanes I think sometime in early 2019. So presumably we're going to find out probably in the not-too-distant future where those airplanes go which partner. Do you have any sense of timing on that number one? Number two will you have the wherewithal to be able to if in fact to bid for that and to induct those airplanes into your fleet given the fact that you're going to be dealing with a lot of I guess transition noise presumably right around the same time that those airplanes would be inducted into a United Express flying.

Yes. Hi, Mike, it's Chip. So just a couple of quick comments on that. One is, yes, you're right and to be candid we have certainly spent a good amount of time with United in trying to find a way to make all that be workable for our enterprise. We certainly can't comment on the progress or anything that we have with those. I don't dispute anything that you've assessed relative to timing. I can tell you that it's a pretty complicated situation. And that we are deeply engaged into it, but we honestly today don't have anything to share we would probably share it. So I think we're going to continue to work with United, if there's something that would work for us with that.

Okay, great. Just my last question. Rob, you sort of gave us guidance 2019 versus 2018, you said slower EPS growth but then with respect to 2018, we did hear that there's going to be a lot of transition noise in the fourth quarter. When I look at where consensus is it does look like we have a meaningful deceleration in earnings growth. We --you just reported a $1.57; it looks like as we get into the fourth quarter, the street seems to be right above a $1. And so trying to get a sense of the magnitude of the potential impact of this noise in the fourth quarter so that we can get the right base for that high single-digit EPS growth from 2018 off of 2019. So I don't know if you can give us kind of a range of the expenses associated with this transition cost. Is this a $5 million exercise? A $10 million type exercise when you talk about the bridging of the aircraft, delivery changes, maintenance, crew relocation et cetera?

So, Mike, this is Rob. So what I would say is that the transition friction that Wade made reference to in Q4 and into Q1. There's nothing new about that that we're announcing this quarter. That was all related to the deals that we announced last quarter. So that --it's just sort of reiterating what was said a quarter ago on this call about that transition. And again, as Wade laid out in his script, it's like some of the transition is just having aircraft temporarily out of service. Some of it has got some other operating expenses associated with it. Some of the delivery charges, but a lot of delivery charges for painting are covered by our partners, but there's other sort of friction and noise and that. But again, none of that is new. So as you know, we don't officially comment on street consensus or anything but I would just reiterate that the noise and the friction that Wade made reference to is not new.

Okay, that's what I thought. That's what I thought because we were -- we are all well aware the fact that there's-- this is --there are a lot of transitions going on and you painted out in the last couple of press releases. So we kind of know what we're will be dealing with. I appreciate it. Thanks, good quarter guys.

Our next question comes with Steve O'Hara from Sidoti and Company. Please go ahead.

Yes, thank you for taking my question. Can you just talk about the guidance that you gave or the comments about 2019, we'd be in the friction that you'd noted. I mean that's kind of included in that outlook generally and I mean obviously this kind of a continuing issue. So is that correct?

It is, yes. The friction is included in our guidance.

Okay and then just I mean sitting where you are today versus a few years ago and the comments around tail risk, I mean are you in a better position today than maybe you expect it to be or maybe here you could be a few years ago? And I guess how does that look going forward? I mean is there a reasonable expectation that tail risk will improve as the --your partners need evolved I think was the word you guys used in the press release.

Yes. So, Steve, it's Chip. I think your question about fleet exposure in that compared to where we were honestly three four years ago, it's an entirely different picture. And it's taking a lot of patience; a lot of hard work; a lot of capital to position where we are in today. We talk about where we're going to be in the next year or two with this exposure. And it continues to get better with time and that's a key element of our strategy because when we talk about fleet flexibility, it's also about being able to be agile among four outstanding partners, but it's also the ability to be flexible with costs and meet what is very, very dynamic needs of the partner. So in a big broad picture it's a lot better than what it has been in the past. As time goes on it will get a lot better, and to be candid, all of the aircraft that we've taken in the last three or four years have strategically been done and financed with that and intentionally not with leverage leases so that we can continue to utilize what Rob is outlined is some pretty strong cash flow in the years to come to continue to offset these risks. And so we're very pleased with where we are today with fleet risk and flexibility compared to where we were and we're very optimistic where we're going to be in the years to come.

Okay, thank you. And then maybe just one quick follow-up just on the pilot contract in SkyWest. I know it's not a union work group but you have a contract with them. Is there, I mean was there any change within, I don't know, last two month or so where you thought you needed a new contract, was a new contract kind of do and there -- has there been any change in maybe your ability to source pilots or any in the churn at the hiring et cetera.

No, that's a good question, Steve. I think first and foremost of the onset I think our strategy with the SkyWest pilot deal was consistent with our long-term approach to stability and opportunity. I could honestly say that there was no quantitative data that would have us alarmed or concerned about the need to go back out and do an amendment to the existing pilot agreement. But we do fundamentally admittedly within the agreement, thought that it was an out of balance. We were very strong and among the top in compensation with captains, but candidly first officers were lagging behind and given the situation having the flexibility with other fundamentally believe that a carrier that does not have a top tier pay for pilots over the next several years is not going to be one that you are going to be able to grow and have some strong stability. So with that we had a good opportunity to do this. We certainly looked at the overall economic model and its entirety over the long term, and saw good opportunities to take care of pilots. And this is not just about just getting pilots either. It's about getting the best pilots because our model is based upon extraordinarily high performance and safety metrics and from that perspective we have to deliver what the flying public and what our partners need and you need exceptional aviation professionals to do so. So it all came together very well for all parties involved in. We look forward to moving forward long term and continuing to develop the model together with our -- with all of our professionals.

The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead with your question.

Hey, thanks for the question and thanks for moving the call to a more convenient time. What was the margin on prorate in this quarter versus this quarter a year ago? Is there any visibility you can give us into the profitability of that as fuel moves around?

Yes, this is Wade. So our prorate fleet is very consistent year-over-year both in size and profitability. We did see an increase in fuel, but the profitability is stayed very consistent with what we have been experiencing, but we don't give exact margins for that, but it has been very consistent year-over-year.

But it is a positive number.

It's very consistent, yes, so it's a little bit up, yes.

Okay. Can you just remind me what is the aircraft CapEx that's left this year, the gross CapEx number and does any of that trickles into 2019?

Hi, Duane, it's Rob here. So we've got eight more E175 that will take delivery of by the end of the year. So that's roughly going to translate into a $150 million or so of new debt that will serve us or that will put on in somewhere in the neighborhood of $35 million of equity and deposits that will deploy against those. So in terms of aircraft CapEx, this sort of brings us to the end of our E175 delivery stream and as Wade mentioned, we'll have a total of 146 on property by the end of the year. With respect to non aircraft CapEx, again that will continue to run somewhere in the neighborhood of $25 million to $35 million a quarter just as that's historical.

And so that's how you're thinking about 2019 at this point.

That's right. I mean as I mentioned it's like this year in 2018 we spent close to $160 million of our own cash in acquiring new airplanes. In 2019 that numbers going to be barely close to zero depending on what happens but this is one of our thesis that I hope came through clear on our call today that we would expect to be generating very significant cash over the next several years.

What is your target cash level? Is this a level that feels about right or do you want it to build to some higher level?

With respect to our balance sheet, Duane, I mean the thing that's most important to us is being disciplined about how we deploy our capital and making sure that we've got the liquidity. And the debt availability for whatever opportunities comes our way. So we're very comfortable that we're in that place right now that we have more than adequate liquidity for whatever future opportunities, the future may hold for us, but we don't have a specific number in mind. We're just going to be disciplined about the organic growth that we do. And to the extent that we consider ourselves having excess capital, and we'll look at ways to return that effectively to shareholders via share repurchase and dividends in the future.

Thanks Rob. And then just one last one. What is your high single digit earnings guidance assumes for buybacks next year?

So I would say that we would --this is a conversation that will obviously have with our board and we do regularly, but we would expect to continue to buy into next year.

Our next question comes with Conor Cunningham from Cowen. Please go ahead.

Hey, guys. Just to drill down a little bit on your confidence in the 50% offset to the pilot contract next year. Can you just, I know you mentioned a little bit on the leasing side of engines but how much of it will actually be done via like flying on prorate or short-term contracts. First like parting out and the whole engine leasing stuff that you were talking about. And the only reason why I'm asking I'm just trying to figure out if there's any stickiness to that type of revenue going forward.

So, Connor, this is Wade. So as far as the offsets that there's, we have almost 500 airplanes; 450 some odd airplanes that operated SkyWest Airlines. And with those airplanes, we have lots of contract renewals that are constantly taking place. And as part of those contract renewals that we're doing and we've even done a lot of those pilot costs are baked into those contract renewals. So we believe there is some stickiness to it. There is also on certain provisions in some of our contracts that we reset the rates every few years. And some of those cost, obviously the pilot cost will be baked into those rate resets as well. And it will have stickiness to it so.

And Connor this is Chip. I think part of the process here to clarify is as we review our business model with our partners, it's important for us to have good strong transparency at the onset of our strategic approach to managing the fleet. So it's not just even pilot costs. I think one of the things that we've improved on over the past several years is our ability to be transparent and work very creatively with our partners no matter what the issue that being pilot compensation or maintenance things or and those types of things that moves forward. So we really do think we have a best practice in place and how we work with our partners and make sure we their needs and the constructs of what we're talking about here.

Okay, great. And then just on the balance sheet a little bit. So we're going to be paying down a quite a bit of debt in 2019-2020 given your cash flow. Is there a leverage target that you want to get to or that you like think about that would be adequate for you guys, it's like still have like liquidity to go do whatever you want if incremental growth kind of was out there?

Yes, Connor, this is Rob. So again as I mentioned, it looks right now based on our view of the market that our debt should peak at the end of this year in the neighborhood of about $3.2 billion from a leverage standpoint. That's going to put us somewhere in the 0.62 range and again the important thing for me is not the absolute number, but it's what that translates into in terms of access to capital in the market. And I think as you've seen leverage has not been a problem for us with all of the new airplanes that we've brought into service over the last year. We've gone from a year ago our leverage was 0.64 at the end of Q3, 2017. We've actually come down in leverage between growing building up our equity piece and just the normal amortization that comes, the pay down that comes as part of these fully amortizing debt structures that we've been exclusively using over the past few years. So right now we feel like we've got access to any capital market that we need. And we've got the liquidity and access to market that could provide for any new opportunities, new organic opportunities that might come our way. But that said, if again without any new orders coming in 2019, there will be $300 million to $400 million of debt per year come off our balance sheet just as a natural de-levering as a result of the fully amortizing structure.

Great and just last one, what's your underlying assumption on the fleet at the end of 2019? And is it safe to assume that you'll see increased aircraft utilization in 2019 given your transition to E175 and so on? Thanks again guys.

Yes, so the fleet, we anticipate the fleet to be somewhere around 575 airplanes at the end of 2018. We expect a little bit of growth in there probably somewhere around 3% to 4% just with some of this new airplanes that are coming in. And to your point here, Connor, on the utilization as we take out planes that our 50 seat aircraft, the utilization on those airplanes are less than the 175. So we do expect to see a little bit of an uptick in the -- to block our utilization as we go forward.

And just to be clear that moves into 2019 as well, so we should like to continue to expect like utilization to improve and I mean obviously the fleet -like will continue to shrink a little bit I assume. Just any additional color there. I know you just kind of quoted 2018 numbers but I didn't know if you had anything for 201 as well.

Yes. So in 2018 where we'll go there'll be a little bit of shrinkage on the 50 seat side, but then we'll also have the new aircraft coming in. And so we should be very consistent. It may be a point or two higher year-over-year.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Chip Childs for any closing remarks.

All right, thank you and thank you all for joining us on the call today. We continue to be excited about executing our business plan remain, make sure we remain flexible and ensure that we're best positioned for long-term opportunities. We hope that everybody has a good holiday season. We'll chat with you next year. Thanks.

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