SkyWest, Inc. (SKYW) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Skywest Incorporated Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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’ll 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 sell-side analysts. Eric?

Today’s discussion contains forward-looking statements that represents 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 2018 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, and thanks for joining us on the call today. Third quarter build on a strong first half of 2019 as we continue to monetize our fleet initiatives and move forward as a single airline with a more efficient footprint. Third quarter is often seasonally the busiest of the year in terms of departures and this here reflects those results. Our employees just did a remarkable job delivering a solid 99.9% adjusted completion for the quarter and continuing to improve our on-time performance. I want to thank our nearly 14,000 employees for their efforts to work together and deliver a great product for our customers. We continue to prepare for and execute on three contract wins we announced in July and August. 10 used CRJ700s going into flying contract with American beginning in early 2020. Seven new E175s for Delta starting in Q4 and six used E175s going into contract starting in early 2020. These deals along with other progress that we have made recently set us up for growth in future years and illustrate our ability to unlock growth opportunities within our partners existing scope limitations, while also making market share gains. None of this would be possible without our ability to consistently deliver a reliable and efficient product. The people of SkyWest continue working together to ensure we remain agile and responsive to our customers’ needs and are focused on delivering quality service onboard more than 2,200 daily departures, providing a seamless product for our four partners and customers is something our people do better than any other carrier. We continue to manage through a changing market for our product. Scope limitations and competitive dynamics have led to much stronger demand for the older sectors of our fleet further into the future than we previously expected. In response to this strong customer demand, we are planing to invest in our CRJ fleet during the first half of 2020 designed to improve the operational performance reliability of our older fleet. Even with this investment, we expect to continue earnings growth in 2020, but we will be set up for an even stronger 2021 and 2022. Rob will give more details on that in a minute. We intend to continue leveraging our position in the market to realize the value of the assets within our operational scope. We are also in the fortunate position to be able to convert strong pilot availability into market opportunity and to respond quickly to our partners’ needs. With our strong team culture, quality product and opportunities, pilot hiring and recruiting is still running more than 20% above last year’s levels. As mentioned last quarter, about half the current hiring is from our existing pipeline, up from 10% of that pipeline just five years ago. This is another risk area that we reduced meaningfully over the last year. Our recent contract wins combined with reshaping our business model earlier this year reduces our overall enterprise risk and will help us drive a healthy balance of earnings growth and cash flow generation. We remain very focused on sustainable opportunities that position us for long-term success. I want to again thank our great team of aviation professionals for their excellent work during the third quarter. Rob?

Today, we reported third quarter net income $91 million compared to $83 million in the third quarter last year. Third quarter earnings per share is $1.79, up 14% from $1.57 per share in the third quarter of 2018. Pretax income of $119 million for Q3 is up from pretax income of $110 million in Q3 2018. Our diluted share count of 51.1 million is down 3.5%, or 1.8 million, shares from Q3 last year. Our effective tax rate in Q3 was 23%, down slightly from 24% in Q3 2018. We continue to expect our tax rate to be approximately 25% for Q4 of 2019 and for fiscal 2020. Let me say a couple of things about our balance sheet as of September 30, 2019. We ended the quarter with cash of $572 million, up from $550 million last quarter. Primary uses of cash in the quarter included $25 million for share repurchases; $102 million in CapEx, including $30 million to acquire four CRJ900s off leased early; $39 million for spare engines and $33 million for other spare parts and maintenance assets. Debt for the quarter ended at $3 billion, down slightly from $3.1 billion last quarter. Let me say a few things about capital expenditures. As you recall, the last few years, we have invested heavily in growth aircraft for our fleet. In 2018, we spent $1.1 billion in CapEx, driven primarily by the acquisition of 39 new E175s. In 2019, we expect to deploy approximately $670 million in CapEx for the full year. Absent any additional new aircraft orders, we would expect 2020 CapEx to be in the $300 million to $400 million range, a key driver in what could be a doubling in 2020 free cash flow over 2019. We expect that by the end of 2019, debt levels will continue to come down to under $3 billion and could be under $2 billion by the end of 2022, again, depending on additional orders. Just a reminder that all of our debt is financing aircraft, and the bulk of our $3 billion in debt is financing our fleet of 151 E175s that are under flying contracts largely coterminous with the related debt. We continue to expect to delever via repayment of $350 million in debt each year through the embedded amortization of principal in its mortgage-style term debt before any new financings for new aircraft pursuant to future new orders, if any. We expect strong cash generation over the next couple of years that will allow us to maintain strong liquidity, delever our balance sheet and maintain the agility to respond quickly to any incremental market opportunities. During Q3, we repurchased $25 million in stock under our $250 million program approved by the Board in February. This leaves us $170 million in authorization remaining under this program. We remain committed to returning capital to shareholders via a combination of dividends and share repurchases. As per our policy and practice, let me say a few things about Q4 and fiscal 2020 without giving formal EPS guidance. As usual, we would expect to see the normal seasonal falloff in Q4 2019, from Q2 and Q3 earnings levels that cover the strong summer season. For fiscal 2020, we would expect to see mid-to-high single digit growth in earnings per share over 2019. Free cash flow in 2020 could double from 2019 levels driven by growth in EBITDA and slower CapEx spend. We would expect earnings per share in the first half of 2020 to be flat to slightly up from the first half of 2019 due to the investment in the older part of the fleet referenced by Chip earlier. This $30 million investment to improve operational performance and reliability of our CRJ fleet is in response to stronger customer demand, further into the future than we would have originally expected and ongoing scope limitations. We would expect stronger EPS growth in the second half of 2020, leading to mid-to-high single digit growth in earnings per share for fiscal 2020 over fiscal 2019. Investing this $30 million in fleet maintenance in the first half of 2020 sets us up better for 2021 and 2022 than would have otherwise been the case. Upside to this scenario is possible from additional orders of new aircraft, additional market share wins, additional fleet extensions and incremental leasing opportunities. Our visibility to future cash flow gives us the confidence to continue to make disciplined investments to create shareholder value. As we continue to demonstrate when and if new investment opportunities come, we will be ready with a strong and liquid balance sheet. This future capital deployment could include organic growth opportunities in contract flying, prorate flying or leasing. In addition to organic growth opportunities, of course, we will continue to look at returning capital to shareholders via share repurchase and dividends. As Chip mentioned, we are striving to drive a healthy balance between earnings growth and cash flow. Wade will now give you some details on fleet initiatives, fleet movements and other commercial opportunities. Wade?

Thank you, Rob. As we announced in August, we have an agreement with Delta to operate six used E175s under a multiyear contract scheduled to begin in the early 2020. The aircraft are financed by Delta and will be sourced from a regional operator transitioning out of Delta connection. Also announced in August, SkyWest has agreed to purchase and operate seven new E175s for Delta, instead of SkyWest operating seven new CRJ900s that were to be financed by Delta and scheduled for delivery in 2020. To summarize our aircraft delivery stream, we received one new CRJ900 during the third quarter for Delta. We are scheduled to take delivery of one more CRJ900 next year. This will conclude our delivery stream for the new CRJ900s at 13 aircrafts. These CRJ900s are owned and financed by Delta. We are also scheduled to take delivery of five new E175s for Delta during Q4, six new E175s in the first half of 2020 and six used E175s by mid-2020. This will bring our total E175 fleet to 168 by the end of next year. Let me talk about our American partnership. As discussed last quarter, we announced an agreement to add 10 additional CRJ700s to that contract. We anticipate these aircraft being placed into our American system throughout 2020. This will bring our fleet total to 70 CRJ700s under long-term contracts. Demand for our small RJ flying remains very strong. And as a result of the strong customer demand, we anticipate investing approximately $30 million in this fleet during the first half of 2020 to improve its reliability and customer experience. This investment should show an attractive return as it will allow us to work with our major partners on further contract extensions and to continue to grow our prorate business. Let me shift gears to our leasing business, where we continue to leverage opportunity. This quarter, we delivered four additional CRJ700s under our previously announced agreement with a domestic third party, bringing that delivery count to five of the 29 aircraft. These aircraft are under a 10-year lease agreement, and we anticipate the remaining aircraft will be delivered through the middle of next year. Also we communicated previously, the majority of these aircrafts will be sourced from the 30 CRJ700s from our previous ExpressJet operation. We have also delivered four of five CRJ900s leased to Air Canada under a six-year lease agreement. We anticipate the remaining aircraft will be delivered by the end of this year. During Q3 2019, we acquired four CRJ900s under an early lease buyout. These four aircraft are scheduled to expire under our agreement with Delta in 2020. We have also agreed to purchase seven used CRJ700s from a third party. We anticipate utilizing these 11 aircraft through a combination of operating the aircraft for our partners and leasing the aircraft or engines to a third party. Finally, during the third quarter, we invested $39 million in spare engines, which will be used to support our fleet in 2020. The engines will then be used to help fund the 40 CF34-3 engines we will lease to Delta with an anticipated five-year term. This is an addition to the 13 CF34-8 engines already under lease with Delta. We expect the delivery of the 40 engines to begin late next year through mid-2021. As I’ve discussed, we continue to utilize our flexible fleet and platform for profitable opportunities, leveraging the unique position we’ve built over the past several years to enhance our model and minimize risk. We anticipate ongoing execution of these agreements will help ensure we’re well positioned for 2020 and beyond.

Okay. Operator, we’re ready for the Q&A session now.

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Steve O’Hara with Sidoti & Company. Please go ahead. Steve O’Hara: Hi, good afternoon. Thanks for taking my question.

Hey Steve. Steve O’Hara: Hi. I guess first just on the moves of the aircraft and the commitments for this year and next. You all own the ones that you’re taking this year in terms of E175s but not own the ones that are coming next year. Is that correct?

Steve, this is Wade. So we will take delivery of five new E175s for Delta during the Q4 of 2019, and we will own those. There will also be six new E175s in the first half of 2020, that we will also own those. There are six used E175s that Delta has financed that we’re operating for another Delta connection carrier. Now they will transition over to us that we will not own. And so those – that’s how the stream goes. Steve O’Hara: Okay, thank you. That’s helpful. And then just on the kind of the commentary about first half of 2020 and expectations around the earnings growth. So first half versus second half, I think, the comment was around the CRJs and maintenance into those aircraft. And I guess, I’m just wondering is this capitalized maintenance or does it run through the expense line? And is it – how much of the – let’s say, flat to up slightly in the first half is due to that? Or maybe just continued building pilots and things like that for the flying that you’re taking on as well? Thank you.

Yes. Thanks, Steve. The $30 million in the first half is the expense component of that, that will run through the P&L. And as a result of that and other seasonal factors and what not, we would expect, again, like we said, the first half of 2020 to look a lot like the first half of 2019 in terms of EPS. But then the second half of 2020, the growth picks up as a result of lower investment, obviously, in the fleet as well as the deliveries that Wade outlined already that will be coming into service in the first half of 2020. Steve O’Hara: Okay. And then maybe just lastly, I think, the commentary was that based on what you’re looking at right now, it seems like 2021 and 2022 would see better earnings growth than 2020. Is that – was that the comment that was made?

Yes, the comment was that – I think some of the things we’ll be doing in 2020 will set us up nicely for 2021 and 2020, without getting into any specifics, which we’ll, obviously, do a year from now. But I think that the message was that the investments that we plan to make this year will set up us up very nicely for 2021. Steve O’Hara: Okay. Thank you very much.

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

Hey, thanks. On the 700s that you’re leasing out that are going to be transformed into CRJ550s. Is that universe of 29, the total amount? Or could it be bigger than that? And is there any chance that you’d be operating them at some point down the road?

Yes, Duane. This is Wade. Right now, we currently have 29 aircraft under commitment to lease to that third party that’s going to fly them in a 550. We have additional CRJ700s in our fleet. We have very good conversations with all of our partners around the demand for those. I said in my script the demand for the small CRJ aircraft is extremely strong right now, and we’re having very good conversations with everyone around that. So we’re definitely working with all of our partners on the best use of those aircraft.

In a word, why aren’t you operating this first round? Was it just a function of economics, or do you want to see the fleet type proven out? Why isn’t SkyWest operating those?

Duane, It’s Chip. I think you just answered the question a little bit just in your two comments there. From our perspective, when you look at what our block hours are doing, and what we’re doing with the E175 fleet, right now, I would – I mean, I think the underlying term is our plate is full. And from our perspective, this worked out extremely well for us as an enterprise to be able to do this. Your first question is, is there ever a chance that we may fly these 550s or any 550s? I think Wade answered that question really well. We’re probably the largest operator of CRJ700s in the world, and we know how to do it really well. And so – look, I think the overall point here is that we have a business model where through leasing and the operation of these aircraft, we can focus on some of the things that we want to that best add value to our partners as well as our shareholders and balancing those components is something that we spend a lot of time making sure we do the right way.

Okay. Leave it there, thank you.

The next question comes from Savi Syth with Raymond James. Please go ahead.

Hey, good afternoon.

Hi, Savi.

Hey. Just clarification on that $30 million investment. Is that for the CRJ200 fleet or also the kind of the 200s and 700s? And just curious if that just about extending the life of the aircraft, or is there kind of you are doing more interior adjustments as well, and just how much of the life of the aircraft gets extended with this investment?

Yes, Savi. This is Wade. So the $30 million is – I said in my script, it was for the small RJ fleet, which would include both the CRJ700s and the CRJ200s. We’re going through both a reliability campaign, and then also we’re going to make some changes to the interior of the aircraft as well to enhance the customer experience. So it’s going to be a combination of these. We’ve been doing events to extend the life of the CRJ200 for the last couple of years. We will continue to do that. The aircraft is – we’re just continuing to invest in the aircraft. So it continue to – it can go for the foreseeable future.

If I’m guessing this CRJ200, are they – is that like 10 years left in the life of the aircraft on average?

The airplane, itself, right now, we could – in our fleet plans, we definitely see that going out there for another seven, eight years. It still has a good run in front of it. We don’t think that it’s anything immediately going away for sure. It will continue to invest in it, and we’ll monitor scope and see what our fleet will look like in the future. But the airplane can go for a nice run and still in front of us.

Yes, Savi. This is Chip. Just to add to what Wade has said, I think, to a certain extent, we didn’t know if we’re going to be flying CRJ200s this long. I think, certainly, when we bought them – started buying them back in 1994, we didn’t know that we were. But the way the world works is that the demand for this product is extremely good. And our folks along with the people and the engineers that we work with, like Wade said, this product can continue to operate for quite a while, and we’re going to continue to monitor demand and scope and all the things. But given the economics of this thing, we’re willing to do a lot to keep it in the system and being able to provide great service to our customers.

That make sense. And if I might add, I realize this is kind of a smaller segment but since it’s some of your own business. I wonder if you can provide some color on what you’re seeing on the leasing side, and I know you’re focusing on the kind of the equipment that you’d understand well. Just kind of what is the biggest driver? Is it kind of demand and yield on that side and generally your outlook for that business like next two to three years?

Well, I think Savi, we’ve kind of set this up where what started this was a different approach to financing aircraft compared to what we’ve done in the past. As we transformed our business model and as we candidly did some things through the sale of Express that we’ve ended up with a lot of assets and extra assets that we’ve been able to monetize through leasing. And on a go-forward basis, if we evaluate this, there’s something to be said about our business model where we’re the largest operator of the Bombardier product. We’re becoming one of the biggest in the Embraer aerospace now as well, and we have good capital. We have good credibility within the marketplace, and we love the flexibility that it gives us relative to returning a good return to our shareholders and taking care of our people, being able to go and have some flexibility back and forth with this. Again we’ve always said that this leasing model is only going to be within our existing platforms that we can operate. We’re not going go outside of that. But being the largest regional carrier in the world with a fair amount of assets as well, this is just strategically taking care of our people yet also finding ways to deliver a very good return for our shareholders and these two business models work pretty well with each other in order to do that.

Is it being driven by just strong demand for the aircraft type too? Or why doing it now versus maybe five years ago, I guess, maybe another way to ask it?

Five years ago, when we actually decided to change our approach in financing aircraft. And five years ago is when we started to really have to make some tough decisions on assets relative to ExpressJet. I think the decision back – long ago, we used to do leverage leases all over the place, and quite candidly, it didn’t really help us be cost competitive and deliver the right return to our shareholders. What this also does in this other approach of owning assets and even having flexibility to lease them is also, like I said, not just being able to take care of our people but also being able to work well within our partners. Our partners have a unique set of needs by their capital structures as well and relative to what we do with engines and aircraft and all of the things, particularly as Wade has announced with Delta, we’re in the business now providing value to our partners by more than just being the best operator in the industry. And from our perspective, that’s a huge competitive advantage, and we can take our capital, apply to our partner’s model and help them with multitude of their business need. And that’s kind of strategically, I think, our partners are getting that. And that’s why it has seen more success now than it has in the past. But part of what our job is, is to be able to bring that type of creativity to our partners and see what we continue to help capitalize on our relationship and help their business model as well.

Okay. That’s all I have. Thank you.

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

Hey everybody. I guess this is a question to both Chip and Wade. I just I want to clarify the way you answered Duane’s question, and then you went on to answer Savi’s question. I guess one could connect the dots, and reasonably conclude that maybe you were planning to reconfigure some CRJ700s into 550 sometime next year. Is that – you weren’t saying that. Is that the case?

No. We are not saying that. No.

Okay, okay. Because you talked about enhancement, improvement, and your little color around that. So, okay. Okay, so that helps that. You have that large order out there for either the MRJ90, and I’m just curious whether or not you have the rights to swap into the MRJ100, the space jet. And I’m curious about your thinking around that airplane. I realize that maybe that’s not coming until 2021, maybe 2022. But with basically Bombardier out of the regional jet business, thoughts on that airplane. And whether or not that would make sense. But I guess we have to start with swap rights first.

Yes, Michael. Great question. I’d probably tilt back from the question candidly just a little bit, just because of the elements that are happening within Mitsubishi and Bombardier, quite candidly, we’ve got a very strong Bombardier fleet. There’s no question that we’re having a significant number of conversations with Mitsubishi and existing Bombardier folks relative to the entire platform. And when you talk about swap rights, I can tell you that certainly when you have the bandwidth and the size that we are, anything is negotiable. So with this to say, will it work or not? Well, I’d be candid but it doesn’t work, and there is going to be something else very clearly and very similar, if not even better by the time we’re done just because of the volume of what our needs might be going forward in the future. But to that end, the overall conversations that we’re having with the parties on, some of the key elements of what our business model is are going very well. Very good engagement, good clarity and good direction generally.

Okay, great. And then just one – that’s great. And just one last, really quick one. You mentioned that your pilot availability, right now, you’re running above 20% above last year’s levels. What – how does that compare to turn over though? So are you doing better? Are you seeing – holding on to more than what you’re losing? I’m just getting a sense of how many people are actually leaving SkyWest at this point? I should say pilots, what’s that turnover? Thank you.

Yes, very much so, and it’s part of our strategy to always make sure we have a healthy complement of pilots for several reasons. You’ve heard us talk about operational reliability. It’s good to have a lot of pilots for operational reliability. It’s also good to have a lot of pilots to make sure that they get the livelihood that they deserve, and they get time off with families and everything that we believe is incredibly important, so in all of the strategic analysis that we do relative to pilot, our hiring is extremely good. We’re filling classes into late spring of next year now, and the attrition is in a position where we continue to build pilots as we’re going along. So we monitor it. We’re getting more and more comfortable with how that visibility takes place and are comfortable with our position, where we’re at today.

Great. Thanks, Chip. Thanks everyone.

Thank you.

Our next question comes from Catherine O’Brien with Goldman Sachs. Please go ahead. Catherine O’Brien: Hi, good afternoon everyone. Thanks for the time. Hey guys. So I guess I can tell that I worked with Mike for quite some time, so I was thinking the same thing on the CRJ550 there. But maybe just to ask the question on the $30 million investment another way, are those investments for aircraft that currently have several years less on their contract? Or these setting up for potential contract extensions. These investments, are they – so basically are they being made on aircraft that – it’s been requested within this current contract? Or more a setup for the next one?

This is Wade. So that’s a great question. It’s actually – the answer is it’s a combination of both, honestly. A lot of these airplanes are under contracts for long periods of time, more than three, four, five years, right? Some of them also have some shorter expiration. So at the end of the day, we need to and we want to make the investment in the fleet, in the aircraft, whether they’re going to – whether we know they’re going to be under long-term contracts or they’re under short-term contracts, we believe, the fleet, ultimately, will be a long-term fleet because of the demand that we’re seeing from our major partners. And so we’re making the investment in both – if the airplanes are under a short term or long term, we’re making the investments in the fleet because we believe that it will be there for a long time. Catherine O’Brien: Understood. Maybe just a quick follow-up to that before I ask another one. Would you ever – would SkyWest ever make the decision to do an interior modification without having first side of discussion with the major partner?

That’s a great question. At the end of the day, we work very, very closely with our major partners on the interiors of their aircraft. And so we would not go out there and do something without the blessing and working with our major partners. We’re carrying their brand and their customers, and we just want to make sure we’re seamless and in lockstep with our major partners. Catherine O’Brien: Totally make sense. And then I apologize in advance, kind of a long-winded question. But as we think about your impressive margin growth in the last couple of years. I know that’s been driven by a combination of adding new profitable flying and getting out of some unprofitable flying or less-profitable flying. And I guess, first this quarter if I back into the SkyWest only operating margins from last year, based on some of the cost of revenue figures that you gave in the release, looks like SkyWest margins are flat or maybe slightly down year-over-year. That I realize that could also been driven by changes in prorate margins. And so I guess like was the majority of your margin growth this year driven by the reduction of unprofitable flying? Is that right? And I guess, if so, what inning are we in, in terms of getting out of unprofitable of less-profitable flying? Thank you so much.

Sure Catie. Let me answer the question as simply as I can. I think it’s a combination of a lot of different things. It’s a better mix. It’s a richer mix of airplanes. It’s improvements on the economics of aeroplanes that we’ve achieved when we get extensions. It’s the elimination of unprofitable flying, obviously, that we’ve worked hard over the last five years to eliminate any end profitable pockets of our fleet, and we’ve done a pretty good job of that. So it’s really – our profitability and our ongoing profitability is a combination of all of those things. And again, I think we have a nice opportunity going forward to continue to work creatively within existing scope for our partners. We have opportunities to continue to take market share. We’ve got some opportunities, incremental opportunities in leasing and all of these, I think, can help be part of our growth story going forward from here going forward. And obviously, part of that growth story is we’re going to invest along the way where it makes sense and drive this business for profitability in the long term. Catherine O’Brien: Great. Thanks for the color.

Our next question comes from Helane Becker with Cowen. Please go ahead.

Hey guys. This is actually Conor Cunningham on for Helane. I know you have some contracted business going on for 2020. But just curious on how you feel about additional growth in the years to come. Clearly, there are some restrictions on scope, but wanted to see if there was any opportunities coming up in the near term that you feel you’re really well positioned to win?

Hey, Conor, it’s Chip. Yes. No, I think that our outlook is pretty optimistic, honestly. I would, certainly, say, from our perspective, that we – I think we say this every single call that we have a very close dialogue with our partners all the time. Ours is not just a matter of responding to RFPs but one where we engage heavily with their overall strategic ideas and initiatives that we feel like that we can fill in, in a multitude of ways. There’s no question that we’ve been had this for a while. We’re typically pretty straight down the centerline relative to we know we have to block and tackle, if you will. And do the basics better than anybody else and commit to do what we say we’re going to do. And I can tell you that, that model over the past four, five years that we’ve been working on continues to have us optimistic about our future as much as we ever have been. So that’s kind of what our view is on the overall thing. I know there’s scope restrictions and those type of things. But if we continue to deliver the way we’ve been delivering and have the right dialogue with our partners the way we have, we continue to be optimistic.

Okay. And then just on the aircraft that you purchased off lease. You guys have been pretty active in the last couple of quarters in terms of doing that and buying just aircraft in general. Just curious of how many of your aircraft, right now, are unencumbered? And if you might have a target going forward? I realize that a lot of this stuff, over last couple of years, is new on E175 so maybe not a lot of equity in those yet but just curious if you have an unencumbered number right now?

Yes, Conor. If you look at our fleet, roughly a third of our fleet has no financing, no leasing, no debt on it of any kind. There’s some other parts of our fleet that are owned by our partners. But we’ve got a significant chunk on our balance sheet of unencumbered assets.

Okay, great and then just a quick question on operation. I know it’s going really well as of late. And this may be a slightly weird question but you guys are running like near 100% on a completion factor on an adjusted basis, 90 – almost 99% on the raw flight. I was always on assumption that was incredibly expensive to run near 100%, especially on a regional side, just curious if you have any thoughts on that. I mean, I know that you guys get paid to complete flights but just curious if there’s any additional thoughts. Thanks for the time.

Thank you, Conor. I think you’re right. I think it is expensive but it’s an investment that yielded tremendous return. Our whole culture, the DNA within our people, who we are, we want to – it’s not just a competitive thing compared to our competition is that we want to be perfect. And we want to be able to deliver a product and that’s a cultural thing that goes so deep within our organization. You know when you have a reliable operation, life is better for crew members and for everybody and so strategically, as we deploy our assets and as we continue to try to be the best of what we do, we know it’s not cheap. We try to find levels of efficiency to do it, but it is certainly an investment that yield a strong return for us.

Great, thank you.

Our next question comes from Bert Subin with Stifel. Please go ahead.

Hey, guys. Good afternoon. Thanks for the time.

Hey, Bert.

Just wondering how do you think about prorate? So you’ve talked a little bit about the CRJ investments. Just wondering, can this business exist with larger regional jets or does this program just start to wind down when those retirements happen?

Hey, Bert, this is Wade. So – our prorate fleet, it’s somewhere around 10% of our flying. The prorate from our perspective can exist in this market. There are so many small communities out there that are underserved or not served well right now, and the opportunities are – there’s so many good opportunities out there in the prorate. We want to keep it very balanced approach between contract and prorate to make sure we’re fulfilling all of our contract obligations to the best that we can and then we’ll – if there are prorate opportunities out there, we’ll continue to look for those. But the demand, the opportunities and prorate continue to be very, very strong right now.

Yes. I guess my question was maybe a little more longer-term. I know you said earlier that seven to eight years left maybe on 200s. I’m just wondering down the road, does that business sort of – because that’s like 61 jets now. Does that start to just move back towards CPAs in the long run? Or you just haven’t really got to that point yet?

Yes, Bert, this is Chip. It’s a great question, I think, fundamentally, I don’t know exactly what we would say 5 to 10 years down the road relative to these markets. I can tell you, particularly as you evaluate some of the things we already are saying small communities particularly in an economy like this demand a fair amount of air travel and the demand is good there. And when we talked about that on this call – on another call that demand for this type of stuff is very, very strong. If something happens with the CRJ200s or something like that, I have no doubt one way or the other to our fleet or a larger fleet or if the majors wanted to deploy something else, that demand would be met. Right now, in the – from now until the foreseeable future, that’s why we’re making this investment in CRJ200. This demand is strong, that’s why we’re going to make the investment in the fleet, and we continue to evaluate it going forward. But the good news is today as the demand and the size of the community to this demand is being created and is something that’s right in our wheelhouse.

Appreciate that. Thanks. Just one quick follow up. I guess it’s probably for Rob. So assuming no CPAs end up materializing next year, it seems like free cash flow should become pretty material. Can you just walk through sort of what the top uses are if that plays out? Thanks.

Yes, sure, Bert. Again, all this is we’re going to call audibles from the line of scrimmage if we need to but based on what we see today, that we would think that our CapEx next year is going to be roughly half where it is. We said $300 million to $400 million, you know of $670 million. So the combination of the lower CapEx, and what we expect to be continued growth in EBITDA should generate powerful cash flow – free cash flow growth and it could double in 2020 over 2019. So I think that we’re in a great place that based on what we publicly announced today, we should generate a hell of a lot of cash flow next year. But obviously, we’ve got the flexibility in the balance sheet and the liquidity that if other opportunities come, there’s upside to what we’ve talked about. There’s upside from additional orders of new aircraft potentially. There’s an upside from additional market share, additional fleet extensions, leasing opportunities. We want to make sure we keep a very nimble balance sheet, and we have it.

Great. Thanks for the time.

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 joining us on the call today. We are excited about our future and some of the things that we have set ourselves up for in the near and long term. And we will get back to you and review our year end results in three months. Thank you.

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