SkyWest, Inc. (SKYW) Q4 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the SkyWest Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Rob Simmons, SkyWest 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 and Eric Woodward, Chief Accounting 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 2020 Form 10-K and other reports and filings with the Securities and Exchange Commission. And now, I'll turn the call over to Chip.

Thank you, Rob and Eric. Good afternoon, everyone. Thank you for joining us on the call today. We continue to see very strong demand for our product during the fourth quarter and beyond, while we're facing new headwinds as the industry prepares to operate in a post-pandemic environment, we remain focused on delivering an exceptional product as we enter the next phase of the recovery. Recapping our fourth quarter results, we reported pretax income of $5 million and net income of $4 million. As expected and previously communicated, Q4 results are absent any PSP grants or concessions, which concluded in the third quarter. The holiday travel period was disrupted by the rapid surge in the Omicron variant that began the last week in December and through the month of January. The combination of Winter weather and the surge in COVID cases over the final peak travel period over the year led to a lengthy irregular operation even as we began the New Year and well into January. There were countless accounts of employees who went above and beyond during this challenge and I want to thank our people for their flexibility and good work during this difficult period. I want to address the current environment and where we are today. We continue to experience very strong demand for our flying in all fleet types. We expect to place 46 new E175s into service this year and one more in 2023, putting us at 240 E175s in service by early next year. Our refleeting that has been in progress for the last several years continues to be a priority as we execute on our long-term strategy. While demand is solid, we are facing new headwinds as the industry prepares to operate in a post-pandemic environment. SkyWest is fortunate to enjoy the ability to attract and retain exceptional professionals across our operation. We maintain a robust hiring pipeline and strategy for all work groups and have new hire pilot classes field well into summer. We have long been preparing for an increase in the mainline pilot retirements, however, the 6,000 early retirements taken at the majors during COVID and the steep demand recovery has resulted in a new much higher demand for experienced SkyWest pilots, particularly captains. This demand has created an imbalance of pilots here and across the regional industry. Of course, pilot attrition was anticipated and planned for in our models and strategies. However, the rapid increase in captain attrition was not. So while our pipeline for new pilots is strong, we expect that upgrade timing creates an imbalance and production constraint for the next year or so. To help correct this imbalance, we're working with our major partners to notably reduce schedules for the foreseeable future and have worked with our pilot group to implement upgrade and retention incentives. We have also worked with our partners to offer our pilot sustainable pathways, including guaranteed pilot interview programs for captains. Overall, these disciplined strategies to work with both our partners and our pilot group have already begun producing results. But given the timing we acquired for training and upgrade, this imbalance will likely constrain production into early 2023. This pilot imbalance is an industry-wide challenge as services in various ways and we are working together with our people to ensure that we remain in the best position to manage it aggressively. With 46 new E175 going into service in 2022, we continue to play the long game. We had embedded flexibility in our prorate model to allow for the flex up and down of our prorate flying. And we are utilizing that flexibility going forward to significantly reduce prorate so that we can continue to deliver the highest reliability across our operation. In short, we are aggressively reducing our prorate flying now with the option to flex back up as resources allow. Against this backdrop, we're very honored and humbled to have been named one of Forbes' best large employers for the second year running in 2022. The past couple of years have been incredibly challenging for all of our teams and our ability to work together with our people is the reason for our success. I want to thank our nearly 15,000 employees for their dedication and teamwork. In summary, 2022 looks to be the next phase of our COVID recovery and while demand for our product has never been stronger, the current staffing imbalance and ongoing refleeting doesn't allow us to monetize that demand in the short-term. As a result, we expect block hour production in 2022 to be down 10% to 15% from the 2021 production. We expect this will be another transition year with breakeven profit similar to 2021, excluding government grant income. Our strong balance sheet and cash position remain key differentiators for SkyWest. We are focused on rebalancing our pilot staffing and ensuring our resources are well allocated to deliver a solid and reliable product. We remain aggressive and deliberate in the steps we're taking now to ensure we are well positioned for 2024 and beyond. Rob will now take us through the financial data.

Today, we reported fourth quarter GAAP net income of $4 million or $0.09 diluted earnings per share. Q4 pretax income was $5 million. Our diluted share count for Q4 was 50.8 million shares and our effective tax rate in Q4 was 14%. First, let's talk about revenue. Total Q4 revenue of $777 million is up 32% from Q4 2020, consistent with our year-over-year block hour production increase of 30% and Q4 revenue is up 4% from Q3. As discussed last quarter, our Q3 revenue included certain revenue concessions to our partners related to government COVID support. Q4 revenue breaks down with contract revenue up 29% from Q4 2020 and up 9% from Q3. Prorate revenue was $109 million in Q4, up 53% year-over-year and down 15% from last quarter. Leasing and other revenue is up 28% year-over-year and flat sequentially. These GAAP results include the effect of a release of $23 million of deferred revenue this quarter, compared to $19 million released in Q3 and $21 million that was deferred during Q4 2020. As of the end of Q4, we have $104 million of cumulative deferred revenue, that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals or reversals into revenue depends on the shape and cadence of the recovery of our flying. All deferred revenue will be reversed into revenue by the end of the various contract periods. As expected, we did not have any additional grant income recognized in Q4. Let me move to the balance sheet. We ended the quarter with cash of $860 million, down from $913 million last quarter. Our CapEx during the fourth quarter was $322 million for 12 new E175 aircraft, four used CRJ700 aircraft and other fixed assets. Total 2021 CapEx was $556 million, including the purchase of 18 new E175 aircraft, 11 used CRJ700's and other fixed assets. This compares to $438 million in CapEx in 2020. We ended Q4 with debt of $3.1 billion, down from $3.2 billion as of year-end 2020. The only government debt we have on our balance sheet is a total of $201 million in PSP 10-year unsecured no amortization, low coupon loans. Let me say a couple of things about liquidity. As of December 31st, '21, our cash position of $860 million included the effect this quarter of having repaid an incremental $92 million of debt before adding $237 million of debt financing for the 12 new E175s. We also have approximately $1.5 billion of unpledged collateral that could be deployed for additional liquidity if ever needed. As of 12/31, 2021, our debt net of cash balance is actually $224 million lower than it was pre-COVID at the end of 2019. Additional flexibility comes from the fact that including partner-owned aircraft, over 50% of our fleet in service now has no financing obligation. Especially in times of great uncertainty like this and consistent with our policy and practice, we are not in a position to give any specific EPS guidance at this time, but let me give you a little color. First, at this time, we expect 2022 to be roughly breakeven for earnings, flat with 2021, excluding over $200 million of government grants, net of partner revenue concessions that were recognized in 2021. Similarly, we expect EBITDA in 2022 to be in the neighborhood of $500 million, also similar to 2021 adjusted for the net grant benefit. Second, we expect block hour production in 2022 to be down 10% to 15% from 2021 production related to the staffing imbalance as we focus on growing our ERJ fleet and pulling down some of our CRJ fleet. The staffing challenges related to COVID, mix and attrition have extended our COVID transition for another year or two. Third, we won't see the full-year impact of the 47 accretive new E175 aircraft going into service in 2022 and early 2023 until 2024. 31 of these are growth aircraft, 16 are replacing other CRJ900 flying. Fourth, we will continue to focus on liquidity and expect to end 2022 with a strong cash position in spite of having a strong delivery pipeline of 28 accretive new E175s this year. 2022 being flat with 2021 with breakeven profitability is caused primarily by lower expected year-over-year production from the labor imbalance, higher investments in labor and training to go after the imbalance, offset partially by lower maintenance expense in 2022. We believe that the actions we are taking now to focus on the growth of our ERJ fleet work through the pilot imbalance affecting the industry and preserve the optionality of bringing back CRJ opportunities over time will position us strongly in the regional sector. Wade?

Thank you, Rob. I'll provide a fleet and production status update, as well as an update on our prorate and leasing businesses. To update by partner, last quarter, we announced an agreement with Delta to add 16 new E175s. We anticipate these aircraft will be placed into service beginning in the middle of this year through the first part of 2023. These aircraft will replace 16 older SkyWest-owned CRJ900 aircraft currently operating under contract with Delta. After we take delivery of these aircraft, we will have 87 E175s under long-term contracts with Delta. Under our American contract, we currently have 90 CRJ700s under contract and in service. We placed 25 CRJ700 into service during 2021. We also have 20 new E175 scheduled for service throughout this year. We have received 18 of those during the third and fourth quarter of 2021 and will receive two in the second quarter of this year. Together, these E175s and CRJ700s will bring our total American fleet to 110 by the end of 2022. We have an agreement with Alaska to add 11 E175s to our contract. We expect to place 10 of those aircraft into service this year and one more during the first half of 2023, for a total of 43 aircraft under long-term contracts with Alaska. After we take delivery of the E175s currently on order, our fleet will be 240 E175s. The demand for our E175 remain very strong and is becoming the backbone of our flying. Let me review our current production. Based on the current schedules we have from our major partners for the first quarter of 2022, we anticipate that our block hours will decrease by approximately 5% compared to the fourth quarter of 2021. As we look to Q2 2022, we anticipate that our Q2 block hours will be 11% lower than the fourth quarter of 2021. Let me talk a little bit about our prorate business. We anticipate that our prorate model will continue to decrease during 2022 and 2023, as we expect to reallocate most of these block hours to our contract fleet. We have intentionally built flexibility into our prorate model and will preserve that flexibility to return this flying once we are comfortable with our staffing balance. Shifting gears to our leasing business, we currently have 39 CRJ700s and 900s under long-term leases with third parties. This line of business has very good cash flow and strong margin characteristics. Demand for our engine leasing business is returning and we anticipate placing several engines under long-term leases this year. Next year, we'll have 16 CRJ900s that come out of the Delta contract and are not currently placed. We anticipate placing these aircraft in our leasing entity after removal from the Delta contract, where we may pursue leasing opportunities for the aircraft or engines. We have spent the last several years reducing risk and enhancing fleet and financing flexibility to ensure we're well positioned. This flexibility will continue to be a differentiator for us and we are committed to continuing our work with each of our major partners to provide solutions.

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

Thank you, Mr. Simmons. [Operator Instructions] Our first question is from Savi Syth with Raymond James. Your line is open.

Hey, good afternoon everyone. Could you provide maybe Wade, appreciate the block hour kind of cadence a little bit as well through the year. But I was curious is that mostly then coming out of safety prorate and CPA stays a little bit more steady? Or could you provide a little color as to kind of where that reduction is coming from in terms of segment and maybe kind of aircraft type? And the -- and how this has maybe changed versus how you were thinking about it during the last earnings call?

Yes, Savi, this is Wade. Yeah, so as I said in my script, we expect Q1 to be down about 5% compared to Q4 2021 and Q2 to be down 11% compared to Q4, 2021. The majority of that as I talked about, we are reallocating several of the block hours from our prorate model into our contract models. We have also seen kind of an overall decrease in utilization and primarily in our CRJ fleet, but we've seen a little bit of reduction also in our E175 daily utilization as well.

Got it. And then if would -- and Rob, maybe this is for you, just as you talk about kind of breakeven profit for the year, is that fair to assume that kind of making money over the summer and losing in one losing income in 1Q, 4Q? Or is there something about this year where the normal seasonality would not play out?

Yeah, I mean the breakeven guidance is obviously meant for the full-year. But yeah, there will be some of the usual cadence throughout the seasons.

Got it. And if I might ask one last kind of longer-term question. Chip, you mentioned that a lot of this, hopefully, kind of gets resolved as we get into 2023. I'm just kind of curious, is there anything that you're seeing today that's a little bit more kind of a permanent change where maybe certain aspects of your kind of business model that worked in kind of the prior business cycle maybe does not come back in kind of when things recover.

Savi that's -- again, this is Chip, that's a great question because I think back to a couple of your questions, there is something that's foundationally changed in our business model relative to this. I would honestly say that as we made our way through particularly the month of January on the backdrop that we have incredible recruiting of pilot, attrition is certainly higher and we're adapting to higher attrition. We also have adapted to higher hiring, so for the record our overall hiring continues to outpace attrition. But I think that one of the things that we've experienced just recently is the pressure on the captain seat relative to specifically our major partners, hiring primarily Captains. Probably the paradigm has been in the past, our attrition was like 50-50 first officer to Captain and it's probably moved to 75-25. So look, I think that as you can understand the sensitivity in some of these models, we certainly have relooked at the way we are going to allocate resources and do the things we think are good for the long-term to invest in the right level at the right place within our business model, with Captain upgrades and those types of things that are going to get us to where we need to be in the long-term. So there's a bit of conservatism and caution in the breakeven analysis and the block hour reductions. But again, everything is making sure that we pivot in the right timing and in the right way to be positioned really, really well for the long-term.

Appreciate that, thanks.

Next we have Mike Linenberg with Deutsche Bank. Your line is open.

Hey, good afternoon everyone. Just, I guess, a quick question here, Wade. What is the fleet count, the total fleet count at the end of 2022 versus the end of 2021? Do you have those numbers handy?

So at the end of 2021, you can look in our release today. As of today, we have for out the end of the year, we have 509 aircraft. A couple of things that we'll be working on as I talked in my script, after we take delivery of all of our current E175s, we will have 240 E175s under long-term contracts. The CRJ side is more -- especially the CRJ200 is more of a flexible fleet, right? And so we are going to have a lot of flexibility around our CRJ200 fleet if we continue to have good hiring, get caught back up on our balance. We will be opportunistic and be able to put some of those back in there. So we're going to have a lot of flexibility going forward on what we do. So right now, it's probably a little too early to say what we will be at the end of 2022, but we do know we will have 240 E175s under long-term contracts.

Okay. And then when you lose a Captain to a major, and I guess more specifically a major who happens to be one of your partners. As a consequence, we're seeing all airlines being forced to take rates up. And so, what sort of protection do you have under the CTA that as you take up your pay rates for first officers and Captains so that you can continue to get a healthy flow of feedstock that that's not going to undermine your margins in your CPAs? Are you protected especially when some of this is being driven by your partners, some of this wage inflation?

So, Mike, this is Chip, that's an exceptional question that we certainly have been dealing with in last for decades. The idea of raise new sets and the strategies around all of that, we've anticipated some of that when we knew about the pilot shortage five years ago, six years ago, 10 years ago. And from our perspective, there's a couple of dynamics that we have as you look at the -- our fleet and the length of contract, we have a lot of rate renewals coming up starting at the end of 2023. They get heavier in 2024 and 2025. To give color, our strategy is always with a fleet like our CRJ fleet that is very unencumbered, yet very valuable. We typically enter into short-term contracts for those shorter-term two to three years. Certainly, when we're going to go and put this type of capital outlay for 175, those are longer-term. But the way we handle those in the contract, there's a couple of opportunities to look at it. But back to your question, as we've evaluated this issue and what we have to do to make sure that we get good aviation professionals into our system, retain them, train them and do the things that provide the value that they do for us. We contemplated those economics and that's -- we can't fix it in a year, but as we move forward with our partners, there's a good dialogue and conversation about the long-term business plan in this situation.

Okay. Great. And just if I can squeeze in one last one. When I think about your fleet and the fact that the E175 as you said it is the backbone and you do fly into a lot of smaller cities. And you can see the some of the issues, the 5G issues that carriers are facing, especially those who operate some of these smaller jets, the Embraer aircraft in and around airports, say, like a Key West, for example, which is a market that you may go in and out of or other markets. What are you seeing on that front? And what -- do you have a good sense of timing when this will actually get resolved, these alternative sort of methods to deal with this, the alternative methods of compliance? Are we going to get something very soon with the Embraer planes, are we going to still be dealing with this problem three to six months from now? And obviously, that will have some impact on your ability to dispatch and operate and obviously, consequently take costs higher. Just any sort of light at the end of the tunnel on this? Thank you.

Yeah, look I think from our fleet specific, look, we got [Amax] out there for our fleet. We have not seen a major amount of disruption on this issue like maybe other regional carriers have.

Great.

That's your bigger question, do we think that there is something going to happen in the near-term to fix this? I'm not optimistic about that. This is a big issue between the aviation industry and the cellular carriers. And so look I think that this is something from our perspective first and foremost, we're going to be safe in our approach to this. We're going to be very transparent in collaborating with the FAA and those and our manufacturers. So we're all over the issue. It's a big enough issue, I wouldn't assume that we're going to be rid of [Amax] anytime soon and have a permanent solution.

Okay. Thanks, Chip. Thanks, everyone.

Next, we have Duane Pfennigwerth with Evercore. Your line is open.

Thank you. Appreciate the time. Can you help us frame the gap between demand and your ability to execute? So for example, obviously, the 1Q is a little squirrely, but if you think about the June quarter relative to that block hour guidance that you gave us, how much higher would that be if you didn't have these constraints? And is it all prorate flying that you're cutting? Or is there some CPA flying that you just can't really deliver in this environment?

Yeah, Duane, this is Wade. So we've been working with all of our major partners on our schedules as we talked about. The demand is extremely strong. It would -- we'd probably 10% to 15% higher if we were able to fix our imbalance and our staffing issues. And it's been a mix of both. We've pulled down both prorate and we've reduced utilization on our contract fleet as well. So the demand is extremely strong out there. We're going to continue to work with our partners, but we are going to have a balanced approach on how we do this between prorate and decreasing contract utilization.

Okay. That's super helpful. And then maybe as a follow-up to one of Mike's questions. Can you speak to this from a network perspective, what is the profile of markets that are losing service here? Is this all about frequency, kind of any anecdotes you could share about the markets that are losing as a result of these constraints would be great.

Yeah, so Duane, this is Wade again. So it's a combination once again of both. We've looked at frequency. There may have been a market pre-pandemic that we're having three to four flights a day into that market. Now we're down to one or two something like that. There are certain markets that are going to go dark, right, that just won't have service going forward from SkyWest. So it's going to be a combination of both frequency and there'll be certain markets as you've probably seen that just aren't going to have service.

Okay. And then maybe just for my last on this Eve partnership, I know it's very early, but when do you think you'd be in a position to take delivery of some of these new aircraft types? And then just conceptually, how are you thinking about utilizing these? Would you be flying them on behalf of majors? Would it be your own service? And any thoughts on the type of pilot that would be required to operate that. Thanks for taking the question, guys. Really appreciate it.

Yeah, Duane, this is Wade again. So as far as the good partnership with them and the Eve entity, we think it's a great thing for our sustainability initiatives as well. As far as delivery of these, these are going to be more in the back half of the decade for sure. We're still working on potential commercial solution for this. We don't have those quite yet. We're still developing an operating plan. So this is still very much a work in progress, but we want to get out in front of it and start working with Embraer and some potential solutions here.

Okay. I'm so sorry to be persistent there, but again, super long range conceptually, would this potentially replace some of the flying that you've done historically on like 50-seat CRJs? Or is it just a totally different network thought?

Yeah, it's a totally different network thought. The 50 seaters have a average stage length of 350 miles to 400 miles, this aircraft or this vehicle will not have near that range. So -- and it's something, it's more in urban-type setting than it is in the regional historical markets.

Thank you.

Next we have Helane Becker with Cowen. Your line is open.

Oh, thanks very much. Hi, everybody and thank you very much for your time. Just maybe a couple of questions. The one question I had was one of the issues you guys talked about last year with maintenance and the ability to get spare parts to getting aircraft out of maintenance, is that an issue that's now behind you?

Yeah, Helane, this is Wade. So we made a very large investment during 2021 in getting our fleet prepared. And generally from a C check perspective, I think at the end of the year, we had approximately 30 lines of C checks or heavy maintenance going on. And that issue is resolving itself right now and we're getting in a very good position. And it will -- and our maintenance expense as we look forward into 2022, we do see a decrease in our maintenance expense going forward.

Okay. That's really helpful. Thanks, Wade. And then my other question is with respect to the cancellations or I don't know how you want to classify them, but flying the fewer block hours. Is it a -- is it -- do you have to pay penalties? Or are you able to negotiate that away?

Yeah, so Helane, this is Wade again. So we've been working with our major partners on these issues and many other issues during the pandemic. Now as we emerge from the pandemic, we've been dealing with utilization issues for a while. And we've been able to work with them very collaborative on solving these issues. And so that that's something that we're working very, very much hand-in-hand with our partners right now. And we've got great relationships with all of our major partners. And so that's something that we're working through as we speak.

Okay. So are there penalties included in the -- as a deduction to revenue then for last year? Or I know -- maybe you can walk me through how the revenue comes in offset by the revenue you were or whatever you want to call it, credits. You were giving them for the government financing offset by the penalties for not being able to live up to the commitments you made because of the staffing issues that are caused by them hiring your people away, okay?

Yeah, and that's the complexity with this issue, Helane, is they've -- a lot of this is on the industry issues. And in our forecast, we definitely have a reduction in our block hours and the associated revenue associated with that.

Okay. All right. I will be less persistent than my colleagues and let you go. Thank you.

Next we have Catherine O'Brien with Goldman Sachs. Your line is open. Catherine O’Brien: Hey, good afternoon, everyone. My first question I think is a bit of a follow-up to something along lines Helene and Duane are both asking you, so forgive me. But I understand staffing is what's driving the lower block outlook for this year. But could you like walk us through how that decision gets made between you and your partners? Like for 2022 specifically is that you're going to them to say, you only have crew to fly x number of block hours? Or is some of that decision also your partner is coming to you to say they need you to fly less than you're technically capable of because they don't have ground staff and some other workers, they need to run a full regional operation.

Yeah, so Katy, this is Chip. Just relative to the process on that, it's actually a very seamless process. It's one thing I think that we have demonstrated, we're probably one of the best at in the entire industry, where we foundationally feel that, that communication and transparency is absolutely critical, primarily because of the demand that our partners want us to fly today. Back to a previous question, I mean, our reduction in block hours that we're talking about is based upon what we thought we were going to likely be able to provide three months ago. I can tell you that the actual demand for that what we thought we were going to produce three months ago is even much higher than that. So to go back to your point, who says what? I mean right now, they are asking us to fly a tremendous amount of flying more than we have even contracts for. Our perspective is, we are very transparent with them about our staffing needs. Given the fact that they're hiring our people, they know exactly what is happening to the model as well. And in the spirit of three main things, one, we want to provide an outstanding opportunity for all of our aviation professionals to go directly through these partners that we fly for. That's an outstanding model that our partners have absolutely embraced. And two, we are typically the ones that are saying that here's our staffing models. We want to make sure that we deliver for you, we know we can, particularly in the most sensitive times. And we give them what our estimate is and they digest it and work through it and it can even be domicile and location specific, but also in general we do this long ways out. So to get to the plan that we've presented to you guys so far, there's been a lot of thought going into it, there's been a lot of assumptions going into it. And there's been some caution this year quite candidly with all of our partners and they all have worked really well with that dialogue. And goes to the fact that they value the product that we produce on a daily basis and yet also value our employees, which is also outstanding from our view. Catherine O’Brien: Okay. Great. That's really helpful to understand the puts and takes between demand and staffing. Maybe we could -- it would be great to get some stats on the attrition, low-cost carrier, call it yesterday, attrition for them usually 5% or 6%, now it's low double digit based on commentary from other airlines on where they're hiring their pilots from, I'm guessing that might be a bit more acute than you. Any figures you can give us on attrition lately versus where you're running at in '18 or '19?

Yeah, I mean given the sensitivity that we have four partners and not our own brand compared to what others have, we're going to probably keep those statistics internal. But I would tell you that the statistics of us pulling down flying in 2022 by 10% to 15%, probably that's relatively well with what the attrition is. So I think that's about as far as -- given the nature of our relationship with our partners, we're probably best and I'll leave at that. Catherine O’Brien: Okay. Got it. I won't [indiscernible]. Maybe just one more quick modeling one if I can. With block hours down 10% to 15% for next year, do you expect to book deferred revenue from prior periods? Just trying to get a sense of what like the threshold is for that as you did book deferred revenue in the last two quarters, the block hours down a bit, the relative compare was a little bit closer to '19 than what you're expecting over the course of next year. Thanks.

Hey, Katy, this is Rob. So on the topic of deferred revenue going into the New Year, we've got around $100 million of deferred revenue sitting on the books. Again, the timing of how that will be unwound will -- is still little bit up in the air. It depends on sort of what the cadence of our recovery looks like, but the key to that is that that's revenue that for which we've collected the cash already. So -- but I don't know that we're going to spend too many calories on modeling that to perfection. But again, it will all be reversed by the time the individual contracts that represented that $100 million of deferred revenue by the time those expire, all that revenue will eventually flow through for sure. Catherine O’Brien: Okay. Do you think it's like really going to come back to you on that one, Rob?

Sure. Catherine O’Brien: Because I think in the past that you've guided to is that as you approach '19 levels of block hours, that's when we should start to see that come back online and that's held like down 5, 10 block hours in the fourth quarter, we saw some of that revenue show back up. I guess just like looking back historically in a quarter where you maybe even down 10%, 15%, have you been able to book that deferred revenue or no? Thanks so much for all the time.

Sure, Katy. No, that's fine. So look, I think if you go back and look at 2021 as an analog, some of the early quarters of the year, which were still sort of in recovery mode. We did book a little more revenue in the first half of the year. And then in wound $19 million in Q3 and then wound $23 million in Q4. So you've got the cadence of how the block hours work there. So I think as you go forward, it will unwind slowly over the next few years as those contracts again approach their expiration point. And again, if things get stronger than we expected in '23 or '24 that will be likely wiped out by the end of that window. Catherine O’Brien: Thank you very much. And to get to you 111 CRJ700s with American by mid-2023 or because of the current issues, is that getting deferred? And it also seemed like there were maybe a couple more with the last seven we had heard before. Wondering if what the changes were there?

Yeah, Savi, this is Wade. So just on the American side, we are working with them on the timing of that. I do not anticipate that the 700s will come in the first half. Right now, we have the ability to work with them and push them out into the second half and we'll continue to work with those guys on our staffing models as we get better clarity. And yes, on the Alaska question, that is correct they were two more added, so... Catherine O’Brien: Okay, great. Thank you. And I don't know if this is for Chip. I know they're kind of conceptual industry question. Just I realize maybe M&A is unlikely for SkyWest given your size, but do you think from a regional airline industry perspective, the whole industry might benefit from further consolidation so that you're not wasting resources in terms of recruiting and training pilots and fly defendants and mechanics. And more importantly, what's your sense of with your partners have the appetite to see kind of further consolidation in the regional airline industry.

Yeah, Savi, this is Chip. I don't know exactly how our partners would view that. I know we are so anti-M&A at this point as our history has proven that it has not worked out great for us. I think that from our perspective, we still -- even under the current situation prefer an organic process to grow and to recover and all the things we want to do. We have the ability and reputation to attract outstanding aviation professionals and like we said earlier, that's not the headwind we're talking about right now and that continues to be strong. So that data point being strong really does take the M&A side out of the equation for us. Catherine O’Brien: Thanks. All right, thanks.

Next we have Duane Pfennigwerth with Evercore. Your line is open.

Thanks for the follow-up. I just wondered if there was any movement on the 1,500-hour rule. I mean, if you look what used to be here in the US and clearly much, much lower requirements in other geographies in Europe, et cetera. Do you think there's any chance for kind of movement just given the constraints we're seeing across the industry?

Duane, this is Chip. It's a great question and I fundamentally, as you know, we have been working on this issue for a decade. And I think that is -- I think to your previous question, as we continue to get out of various flying in smaller communities, some cities will lose service altogether, some will drastically reduce frequency. I can tell you is we've had those conversations with the small communities, we were having politicians finally engaged after more than a decade of this talk. So I guess my point is, do we think there will be a movement in 1,500 hours. I will tell you, I don't know the answer, but there is more engagement than ever before in that dialogue. I think certainly even things like ESG and those types of things, why we are having people fly a 172 for that much time where we know the data points are very clear, they are much more efficient and safer ways to get it done. That data is extraordinarily compelling. We are very much in a mindset that if somebody wants to continue particularly politicians have this dialogue. We have the data, we have real life now as we talked about on the phone call today, that's going to show what we've been saying for over 10 years. So I'm hopeful, the data points point to something like this, but again, it's a very interesting political environment that we're at. We fundamentally believe that the FAA also has the ability to do some things with this that would be extraordinarily helpful and we hope that, that dialogue continues to take place because at the end of the day there are plans in place to make a safer and more efficient process for people to become aviation professionals and we love the prospects. We've been talking about it for a long time and hopefully we can get more traction now than ever.

Appreciate the thoughts.

Next we have again Mike Linenberg with Deutsche Bank. Your line is open.

Yeah, you know I just chip, I was thinking on Duane's question also with [Avi's] question about, one, how do you address this? And obviously, you said that you rather kind of grow organically. But there are some sizable Part 135 carriers out there with a lot of pilots, I don't know maybe it brings on another airplane type, but it does bring on a lot of capable pilots, many with hours that probably aren't that far away from 1,500. And maybe some of the communities that you've pulled out of, those are markets that maybe would work with some of these smaller airplanes. Again, I -- that may be the beauty of like investing in these either mobility that, that becomes sort of your pipeline because you don't have to worry about the 1,500-hour rule, but unfortunately we're not going to get that platform for, I don't know five years, eight years, 10 years. So I don't know, I don't know if you've looked at a 135 carrier because there are several out there, and there's some that...

Michael, this is Chip. You cut off, but I will -- I think I know what your question is going to be and I will answer it. Just relative to what you're talking about for 135 operators, we do have a different view of that. And we have a lot of relationships with some outstanding 135 operators. And from the perspective that we may be engaged in some partnerships or additional flying relative to that, we would be very much engaged in looking at those opportunities. But going back to the previous question, 121 operator, any consolidation there we would not be interested in.

And there are no further questions at this time. I'll turn the call back to Chip Childs for closing remarks.

Thank you, Eli and thanks to everyone for joining us again on the call today. We appreciate your interest in SkyWest. I'll just close by saying a couple of things. Despite some of the headwinds we're facing, the demand for our product has really never been stronger. We will continue to work with our partners and our people to navigate the next phase of the recovery and we're confident in a very strong hiring pipeline as we work through this current staffing and balance. Again, I want to thank you and thank our people for the great work that they do and the continued flexibility that they have and their ability to look at the things that we need to accomplish long-term. With that, we'll end the call and talk to you next quarter.

And this concludes today's conference call. Thank you all for your participation. You may now disconnect.