Good afternoon, and welcome to the SkyWest Incorporated Fourth Quarter 2018 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 turn the conference over to Rob Simmons, Chief Financial Officer. 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; and Mike Thompson, SkyWest Airlines Chief Operating Officer. I'd like to start today by asking Eric to read the Safe Harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric?

Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and 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'll turn the call over to Chip.

Thank you, Rob and Eric. Good afternoon, everyone, we appreciate your joining us on the call today. The fourth quarter completed a strong 2018 and we're pleased to report solid continued progress on our key objectives to reduce risk, enhance fleet flexibility and maintain strong cash flow. We're focused on delivering on our commitments and executing with discipline. As our press release outlines, we continue to make great progress in all of these areas. With the completion of the ExpressJet sell to ManaAir this month, we successfully mitigated a significant risk to our model. We believe our ability to focus on 1 operating entity in SkyWest Airlines will help us better achieve our objectives and deliver an exceptional product for our partners. As we've discussed in previous quarters, another component of our risk-reduction strategy is to further reduce our utilization of expensive and inflexible leverage leases across our fleet. As we outlined in our press release, we're executing early lease buyouts on 52 aircraft this month, as we continue to delever our balance sheet and reduce tail risk. Rob will talk more about that in a minute. Our operating performance remained strong during the fourth quarter with SkyWest Airlines delivering 99.9% adjusted completion on over 200,000 flights during the quarter. This caps off the year of SkyWest producing top-tier reliability for the entire 2018 year, a year in which we operated the most departures in our history. Also during the year, we became the first airline to launch an all-electronic maintenance log, as we work to stay on the leading edge of our industry. SkyWest has been named one of Fortune Magazine's most admired companies in 2019 and is the only regional airline on that prestigious list. We attribute that distinction and our operating credibility to our incredible team of…

Today we reported net income of $67 million or $1.28 per share for the fourth quarter of 2018, compared to adjusted net income of $43 million or $0.81 per share in Q4 2017. For all of 2018, we reported net income of $280 million or $5.30 per share compared to adjusted net income of $182 million or $3.43 per share from 2017. As a reminder, the adjustment to the 2017 numbers was to take out a large gain related to the tax law change. Pretax income of $91 million during Q4 was up 33% from Q4 2017. Revenue was $803 million in Q4 '18, up $42 million from $761 million in Q4 2017. This increase in revenue included the net impact of adding 39 new E175 aircraft since Q4 2017, partially offset by the removal of 48 less profitable aircraft over the same period. Our total fuel cost per gallon averaged $2.66 during the fourth quarter, up from $2.25 per gallon in Q4 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 Q4 was 26% and for the full year was 23.5%. We continue to expect our tax rate to be approximately 24% to 25% for 2019 as a whole. Let me say a couple of things about our balance sheet, an important point of differentiation for us. We ended the quarter with cash of $689 million, down slightly from $705 million last quarter. We issued $159 million in new long-term debt during Q4 2018, financing 8 new E175s. Total debt as of December 31, 2018 was $3.2 billion, up…

Thank you, Rob. I'll review the new contracts signed, discuss the changes to the fleet and related flying agreements and then we'll walk through the implementation of these changes and our new leasing opportunities. During the fourth quarter, we entered into an agreement with Delta to acquire and operate 9 new E175s under a 9-year term. We expect to take delivery of the first 5 aircraft during the first half of this year and the other 4 during 2020. We expect to remove 9 used CRJ900s from our Delta contract as the new E175s are placed into service, 4 of those CRJ900s will be returned to the lessor, the other 5 CRJ900s will be leased to Air Canada. You may recall that we have a number of CRJ aircrafts set to expire this year and next year under our Delta contract. During the fourth quarter, we extended 32 aircraft including 15 CRJ900s, 3 CRJ700s and 14 CRJ200s from our legacy Delta CRJ contract. The CRJ700s and 900s were extended through December 2022 and the CRJ200s were extended for an additional 1 to 2 years. We also extended the term on the first 19 E175's under contract with Delta from 9 to 11 years, 2018 was an incredibly busy year for SkyWest and this work sets us up for success for many years to come. During the year, we received 39 E175s, 30 are under a 9-year contract with Delta. The other 9 are under a 12-year contract with Alaska. At year-end, this puts our E175 fleet to a total of 146, 65 under contract with United, 49 with Delta, 32 with Alaska. As I mentioned, we expect to receive 9 more E175s for Delta during 2019 and 2020. By the end of 2020 we expect to have 58 E175s under…

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

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

Hey, good afternoon, everyone. You guys gave definitely been busy end of the year and at the beginning here. Just on the fleet counts, end of the year was about 21 more aircrafts than previously projected. Is that related to the aircraft that you've now confirmed with Delta, or kind of what led to higher aircraft count at the end of the year?

Yes, so the majority -- Savi, this is Wade. So the majority of those aircraft that are in there as of year-end are the CRJ200s that ExpressJet was operating for United as of year-end. That's what the increase was.

Okay. And I have a bunch of smaller questions related to the different movements, but so the -- with the 70 engines that are under lease agreements, does that mean that by mid-2019 you just still have only about 13 CRJ700s that you have to figure out what you want to do with? Is that correct?

Yes, Savi, this is Wade again. So yes, we have 30 of those airplanes. As I said in my script, the majority of those airplanes are currently flying under agreements with American, the engines are being leased and so there's just, as you said, 12 to 13 aircraft that still we're looking for homes for.

Got it. And 1 last question and I'll -- I'm going to jump back on the queue. Related to these kind of the leasing opportunities that you have, is this one where your just going to work with the fleet that you have? Or would you consider going out, if the opportunity arises, going out and buying aircraft specifically to lease? Like lease out brand new aircraft to airlines that want to.

Thanks, Savi. This is Chip. Just real quick relative to that point, I think where we are today, as we start a lot more external leasing activities, first and foremost, it's important to remember our objective is to utilize assets that are already within our existing portfolio. That's the number 1 part. Most of what we're incrementally talking about on the call today is assets that we already have. There's no question that if there are additional assets available for us to purchase within the existing platform, we would be very open to evaluating that along with other opportunities to deploy them either through leasing or with flying. The objective of this entire leasing activity is to make sure that we continue. We talk a lot about fleet flexibility and we find that this is another very strong tool that we can utilize to meet the needs of our partners and maybe a multitude of different ways by deploying these assets that are already within our existing platform. So we will patiently monitor the market and some of the demand for this stuff and keep you updated in the future if there's any new movement relative to this model.

Got it. Appreciate it. Thank you.

Your next question comes from Michael Linenberg with Deutsche Bank. Please go ahead.

So you talked about the leasing of the engines, the leasing of the airplanes to ExpressJet the CRJ's, and then the CRJs to Air Canada. How are you going to depict this in your P&L? Is there going to be like a revenue from leasing and also the associated expenses?

Hey, Mike. This is Rob. So this sort of activity will all be reflected in our leasing segment.

Okay, okay. Then my second question with all of the extensions or renewals that you've completed with Delta, is it fair to assume that the economics of the extensions or renewals is similar on average with what you had in place previously?

Yes, Michael, this is Wade. We've obviously been working with Delta on this. They're very consistent with what we've had. Obviously, adjusted for additional pilot costs that we have, but yes.

Okay, great. And then just my last question, now that you've jettisoned the ExpressJet business and you gave us the guide for 2019 and it's a sizable increase even on this higher base, given the strength of the fourth quarter. When I think about the elimination of ExpressJet and as I recall, I believe, it was a separate dispatch, a separate COO, separate executives. There's clearly some cost savings here in running only a single entity rather than 2. Is that partly what's helping to drive a better number? And can you give us a sense of maybe what that P&L benefit is of being just the single stand-alone entity instead of trying to manage 2 different operations?

Yes, Michael, this is Chip. I appreciate the question. It's a great one. I think there's a lot of opportunity here with a single carrier. I mean, it's been well over a decade since SkyWest was on its own. And there's no question that a significant portion of why we strategically made this decision was no question efficiency, no doubt increased focus on being able to execute with such a fantastic operation that SkyWest has as well as to focus on cost and deliver what our partners want. There's also a cultural aspect to it. I think that it'd be -- you'd be hard press to find a culture as strong as what SkyWest Airline has along with outstanding aviation professionals. And so from our perspective, the transaction is just a couple of weeks behind us but our strategic focus moving forward is going to be, I think, significantly intangible and down the road continue to reduce risk and provide some good solid opportunities for what the operations that SkyWest Airlines can provide. Now relative [Technical Difficulty] guidance within his script for 2019 and I think that all of that, that we've discussed relative to the transaction is largely embedded in that guidance.

Okay, great. Very good. Thank you.

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

Thanks. Just to follow along where Mike left off. Would you be able to provide like a pro forma revenue for 2019 ex ExpressJet?

Duane, it's Rob here. So if you'll -- as you know on the 21st of January, we filed an 8-K that had some split out of that, but just in terms of a high level ExpressJet contributed $564 million in revenue during fiscal 2018 and had a segment level loss of $16 million.

Okay, that's great. And then on Air Canada, is that just aircraft or is it aircraft on an outsourced basis? What is the total opportunity there?

Yes, so Duane, this is Wade. So this is just aircraft and engines. We will not be doing the flying. I think they've selected another operator to do that. And we've got plenty of flying with our 4 major partners.

And then just for my last one on -- maybe on a per aircraft basis, can you just walk us through the P&L impact, the accounting impact of why this is a benefit for you to buy these out? And thanks for taking the question.

On the leverage, I assume you're referring to the leverage lease buyouts. So and -- we're not going to get into too much granularity on that but I can say that the money, the capital that we're deploying against that has got a nice double-digit, sort of, ROI characteristic and should contribute in the neighborhood of a $0.25 of EPS a year.

Thank you.

Your next question comes from Helane Becker with Cowen and Company. Please go ahead.

Hi, everybody. Thank you so much for your time. A couple of little things. One, is you mentioned your pilot hiring as being on track and so on. Can you just talk about retention?

Yes, Helane, this is Chip. So again, as we mentioned our pilot hiring this year is as good as it's ever been. Retention is -- our anticipation for 2019 is about flat compared to what it was for last year. We do certainly monitor that extremely closely as well as the pipeline of pilots coming in. And I think net-net between the 2, we feel like we're in a very, very good position going into 2019 where we can assist partners real-time and any needs that they may have throughout the year. And also completely honor all of our existing flying agreements throughout the year.

Great. And then my other question is probably one for Rob, with the purchase of the aircraft off-lease, do you -- would you have a write-down to the fleet? Or should we be looking for anything like that?

No, nothing like that, Helane.

Okay. And then my last question is, I think you might have answered this actually. You were talking about having stubborn lease agreements. Can you just clarify what you were saying about that?

Well I think, what I said was expensive and inflexible. And so there were a couple of pockets there, we were sort of attacking. One of them we got done and another one, again, we're not going to give up on. But I wouldn't expect that, that will happen in the next year but I think still reflects a longer-term opportunity as we get closer to maturity on that, we'll continue that. We'll continue to work on that piece of it. But we were delighted to get the piece done that we did.

Okay. And you can't say how many, right?

Well, it was 52 airplanes in the deal that we got done today. And again, the capital deployed is $110 million.

Okay, got you. And then one, if I can just sneak in one last question. Do your partners ask you what you're doing in the area of carbon offsets and sustainability and stuff like that? Or do they just provide that to you, with the jet fuel that they're providing to you, and making your employees like, for example, United and their Eco-Skies program. Do they follow up with you on that in that area at all?

Yes, I think -- Helane, this is Chip. Just real quick. As we work real time with our partners, that's a topic that we absolutely have a lot of conversation about. Anything that we can do in any platform we have relative to flight procedures, for fuel savings, anything from an environmental perspective, I can say without a doubt there our partners are very engaged with us as we want to be naturally, anyway, in any type of dialogue that we can have some environmental responsibility together in a partnership. And I'm actually very impressed with how that process works with our partners. So that's a long answer to the word of yes.

Okay. Its really helpful. Thank you.

Your next question comes from Catherine O'Brien with Goldman Sachs. Please go ahead.

Hey, everyone. So maybe just one more on this new leasing part of the business. Should we be thinking about these leases as closer to breakeven, covering the cost of ownership on these aircraft? Or should we be expecting a decent profit on this part of the business?

Catie, this is Chip. I would in a very general sense, say that this is not an activity to try to breakeven. These are in our view opportunities, we do have a fair amount of assets. Each asset that we've talked about relative to this opportunity, we can fly it or we can lease it or we can even sell it. So in my view, I would view this as a profitable opportunity as we move forward within our existing asset base that we have.

Okay, got it. And then maybe just thinking about like a few, the puts and takes that we've seen change since you last gave the high single digit, now we're low double-digit guidance. It seems like based on Rob's characterization of the [indiscernible] aircraft on lease being about a $0.25 of EPS a year. It seems like that might be the largest chunk of that change, from some quick math. Is that the way to think about it or should we be thinking about more of an equal split between some of the new aircraft at Delta, the contract extensions? Just trying to think about some of the changes since you last guided?

Yes, Catie, it's Rob here. So yes, I think that the leverage lease buyout is probably slightly more than sort of half of the Delta and some of the other Deltas related to the opportunities that Wade was talking about in the leasing and commercial side of the business.

Great. And if I could just sneak one quick last one in?

Sure.

Should we still be thinking about your E175 being the most profitable in your fleet? Or have some of these new and extended contracts with your partners on other aircraft caught up profitability-wise?

Yes, Catie, this is Wade. We don't get into fleet level profitability, but we're making money on all of them today.

I appreciate the time. Thank you.

The next question comes from Steve O'Hara with Sidoti & Company. Please go ahead.

Hi, good afternoon. Maybe just relative to your original guidance that you have provided. How many of the things that seem to be impacting the improvement, I guess, net, so the pilot contract, I would assume would be a negative on that, the sell of ExpressJet and then the lease buyouts. I mean, how many of these things were kind of contemplated but maybe factored in less than expected or something like that when you guided previously?

So Steve, I think that with respect to our original guidance, that clearly contemplated the -- that additional pilot contract cost that we had -- that we did last year. And I think largely is related to and sort of what we said, we get some of the accretion that we get from the leverage lease buyout as well as some of these incremental leasing opportunities.

Okay. And then you talked about the pilot hiring and things like that being as strong as it's ever been. And maybe Helane asked this but I missed it. Just on the attrition rate, I mean has there been an increase in the attrition rate, or is that still kind of where you think it should be? I guess I'm just wondering I mean, it seems like you're taking more aircraft from Delta but that should be slowing relative to what you did last year I guess, which was a very big year in terms of taking aircraft?

Yes, Steve, this is Chip. Again, it's a good question. With strong pilot hiring, and we take a look at the retention of our pilots and yes, the question is that where we think it should be. Well, no, it's not where we think it should be. We don't think we should have any attrition. But from the perspective of what we have the reality to deal with our major partners hiring so many. We monitor that very, very closely and as it is today and as we look at the forecast, we think it will be about the same, maybe up slightly from 2018, but you continue to monitor that. You know the math of the increased pilots coming in relative to same attrition, not as much growth on paper is what we had in 2018 does mean that we have a lot of opportunities and more flexible basis with a flexible fleet to have good conversations with our partners, which we always do. And it seems to me I think we mentioned this last quarter, we do anticipate higher volume of smaller deals, real time with our customers as they have needs that arise on a very aggressive basis and that's what our approach is going to be in 2019 and monitor all things with our pilots all the time and make sure we don't have too many, but definitely make sure we have enough to respond to the needs of our partners.

Okay. And maybe one quick one, are there more opportunities along that line because of the leverage lease buyout? And did the -- I think, the change in account -- the lease accounting affects you guys this year? Did that have any net negative or positive impact?

No, we'll adopt the new leasing standards next quarter. But I think as I mentioned earlier, Steve, that what -- we had a couple of pockets of opportunity with some of these leverage lease structures that have been in place for many, many years and one of them, we got done. The other pocket of opportunity is sort of potentially of similar size that I again, I don't know that, that's something we're going to get done in 2019, but we'd like to try to get it done in the next couple of years as we start to get closer to the expiration of that contract.

Okay. Thank you very much.

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

Thank you, everyone, again, for showing interest in SkyWest. It's a pleasure to address some of the questions and elaborate more about what our strategy and our model is. Again, I want to thank the more than 14,000 professionals throughout our company and the great work that they do to give us the credibility to make sure we take care of our partners and our shareholders as well. So thank you for the interest, and we'll meet back up next quarter.

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