SkyWest, Inc. (SKYW) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the SkyWest Airlines 2013 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. Please note, this event is being recorded. I would now like to turn the conference over to Brad Rich. Please go ahead.

Thank you very much, operator. Thank you and welcome to our call this morning. It’s our pleasure to have the opportunity to be with you this morning to discuss our third quarter of 2013 and we look forward to a productive discussion this morning. First of all, let me make some introductions as to who will be participating on the call today. I am Brad Rich, President of SkyWest Inc. I also have participating Brad Holt, who is the President and Chief Operating Officer of ExpressJet, Brad and I are here on the – actually on the East Coast today at our headquarters in St. George, Utah we have Chip Childs, President and Chief Operating Officer of SkyWest Airlines; Mike Kraupp, who is Chief Financial Officer; and Eric Woodward, who is our Chief Accounting Officer. And we also have participating other members of our team who will be participating as needed. To begin the call I’d like to turn the tide back to Mike Kraupp to read our Safe Harbor on forward-looking statements.

Okay. Thank you, Brad. We will be making statements during this conference call which are considered forward-looking. Such statements are based on our current beliefs, expectations, assumptions and assumptions regarding future events and are subject to risks and uncertainties. Words such as expects, intends, believes, anticipates, should, likely and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call are made as of the date hereof and are based on information available to us at this time. We assume no obligation to update any forward-looking statement. Actual results will vary and may vary materially from those anticipated, estimated, projected, or expected for a number of reasons, including those discussed in today’s press release. Expressed during this conference call or set forth in our 2012 Form 10-K another reports and filings with the Securities and Exchange Commission.

Alright, thank you Mike. As I mentioned myself and Brad Holt are on the East Coast today, we’re having the opportunity to have ask him direct discussion and dialogue with some of our employee groups and I’m grateful for that opportunity. I assume that we’d have employees from the company that are participating on the call and listening into the call. And, I personally wanted to know how much we value our association and value their commitment the more that we meet with our employees the more confidence we have and I’m just really grateful for the quality and the character and commitment of all of the employees of the SkyWest Inc. Company. And, I wanted to begin by expressing that appreciation. I assume that most of you participating today have seen the press release that went out earlier this morning. And we’ll use that as we generally do as the agenda and format for today’s discussion. Generally, we’re very pleased with the financial improvements both our year-over-year and quarter-over-quarter improvements both in our financial results both from a net income and a diluted earnings per share perspective. We’re also pleased with the improvements in the fundamental operating performance of the entities especially at the ExpressJet entity the operational improvements has been significant especially when compared to some of that difficulties that were experienced than earlier in the year lot of those primarily attributable to weather. So, we’re pleased with both the improvements financially and operationally and to go into more of the specific discussion of the financials I will turn the tide back to Mike Kraupp.

Okay, thanks again, Brad. And I’d also like to thank all of those that are participating with us today on the call and for your continued interest in our company. I am going to make my comments brief just as Brad had indicated, and we will use the press release just to highlight some of the things during the quarter. This morning we did report net income of $26.4 million or $0.50 per diluted share, this compares favorably to the consensus estimate of $0.46 per diluted share for the current quarter and the net income of $20.9 million or $0.40 per diluted share for the same period last year. We also reported net income of $50.3 million or $0.96 per diluted share for the nine months ended September 30, 2013. Consistent with our comments and reporting for the previous four quarters regarding how our major partners are currently purchasing the majority of our fuel for contract flights, we continue to experience a reduction in our operating revenues and operating expenses. On our last quarterly results call we indicated to the market that it was our estimate that the significant difference we had experienced in the three previous quarters would be significantly reduced and it was. Due to this change, wherein our major partners buy fuel directly now we experienced a reduction of only $23.8 million related to this particular item. Having said that, you will notice from the press release the total top line revenues decreased only $14.5 million for the quarter just ended compared to the same period last year. After considering a reduction of total pass-through costs included in top line revenues like contract fuel, engine overhaul costs, and landing fees of roughly $47.4 million we actually experienced an increase in top line revenues of about $32.9 million.…

Okay, thank you. I wanted to talk in a little more detail about some of the issues or development or progress both in the quarter as well as moving forward. First of all, Mike indicated that our block hour production was up 2.8% in the quarter that primarily is the result of 32 additional aircraft in the fleet compared to last year’s – at the end of last year’s September quarter. And most of those aircraft additions are dual-class aircraft and I think most of you that are following the company specifically realized that the dual – dual-class aircraft have been financially that leads more productive. And so that’s some good development there on not only fleet increase but the mix of aircraft. I wanted to give some update as to the transaction that was announced sometime ago with Delta where we took 34 additional dual-class aircraft and a great to remove 66 CRJ200s. We have been making progress on that we have had the 34 dual-class airplanes, we have them all, they’re in service and at the beginning of the transitions out of CRJ200s are continuing between now and in the end of the year we have 19 additional 200s that will be removed from service and then the remaining aircraft will come out gradually between at the end of the year and the end of 2015. I wanted also to give a little more perspective on our pro-rate flying performance. Mike indicated that the performance was strong in the quarter, he went through the revenue increases. Our total aircraft fleets that is operating in pro-rate operations is a 61 aircraft, that’s a mix of 35 turboprops and 26 jets. The strong performance I do want to try to keep in perspective. We certainly have seen very strong demand…

Thanks, Brad. I appreciate it. I think that the entire industry and I’ll try to keep this brief and simple but the entire industry is trying to still get their hands in detail around the rules of 117 and the work really associated with those. We are in the press I think of making sure that we are ready for that as it’s implemented in January. We’re very comfortable with our level of preparation as it relates to normal operations. I think our number one focus from now till the beginning of the year is to be focused on IROP situations either for weather or whatever could happen in our industry and making sure that we have proper clarity from the FAA as to some of the circumstances in which we can flow crews and make sure that we have the availability of crews in the right places on that. We are still waiting for some clarity from the FAA on those issues. We are prepared however in a non IROP (indiscernible) situation. We feel like we have adequate crews and reserves, prepare for that inception date in January and think that our number one focus at this point relative to those rules are going to have a very big impact on our industry is going to be in those IROP situations and what we can do and we are hoping to get some clarity from the (indiscernible) from now towards the end of the year. Availability of pilots is interesting and even a little bit seasonal as well. We’ve seen the regionals go through even throughout the year different ways of turnover. Our turnover so far this year has been a lot less than what we anticipated that it would be in 2013. We are planning for more turnover at SkyWest Airlines in 2014, we believe that recruiting efforts for pilots is still extremely strong. We have seen the pool change slightly just during the fall season and we think is the impact of that could be a couple of things one, there is slightly more turnover because of the timing of when the major carrier is higher and also the other reasons now timing we take training classes through the holiday period and sometime folks would rather wait till after that to go through training. So we are very confident however in our ability to meet our demands for both 117 and our training needs for the Embraer 175 that begins in – to come on property in March as Brad indicated and we have a fantastic group of professionals that are getting all these things done. And so we relatively optimistic but the big thing we are still needing is some clarification from the FAA on some of the IROP situations with 117.

Okay, thank you, Chip. I would also ask Brad Holt to make some comments. I think most of you know that we have – we’ve been working for quite sometime now on one of the aspects of the single certificate and the integration of ExpressJet and ASA certainly had to do with our – with the collective bargaining process, with our labor groups, and I have asked Brad to take just a minute and give some perspective and an update where we are with our labor on the ExpressJet side

Okay, thanks, Brad. Yes, real quick, one of the last few things in the integration of the two companies is the joint CBAs and we are in accelerated negotiations with all groups including the pilots. And we’ve had good success and working together with each group, everyone is working hard to get those deals done and I would expect that we will continue to make good progress and get the agreements done as quickly as we can. To heckle Chip’s remarks on 117 and the pilot hiring, we’re much in the same position. We’ve done most of the hiring that we needed to do for 117 thus far in the year and it looks like that our hiring will slow down as we get closer to the first of the year, pilot supplies are drying up to an certain extent but we had ExpressJet and not having too many problems so far with giving the pilots in that we need.

Okay. Thank you, Brad. With that, we’ll go ahead and conclude our formal remarks. Gary, if you would like to open the lines, we’ll be happy to address some questions.

We will now begin the question and answer session. (Operator Instructions) Our first question comes from (indiscernible) of Raymond James. Please go ahead.

Hey, good morning everyone.

Good morning.

What can you tell us about ExpressJet profitability in this quarter?

Okay. (indiscernible), very good question. I mean they’ll certainly give you more details of that in the 10-Q as it filed later this week. I will make just very general comment that there was no profitability had expressed yet in the quarter I mean it generated a net loss. And as I said we’re doing a lot of things there, well I haven’t said that yes we have the loss, we’re feeling very good about the progress that we’re making with our labor groups. But in addition to that there are some very specific things that we have outlined and have chartered out that need to be done to create some long-term sustainability not expressed yet. But for the quarter, specifically we did – we had a small operating loss and of course the profitability for this quarter came out of as we mentioned, Mike went through that in his remarks. We had the gain and then SkyWest Airlines of course had a very profitable quarter.

Okay. And some of the items that you’re putting in place, when do you expect that to start benefiting?

Well, we’re doing some of these things I mean immediately but as you know some of that as it relates – for example I mean when you break this down into kind of components there is just continual process improvements and some refinements that we need to make. There are some more aggressive issues relative to – I’ll just for lack of better way to describe it some restructuring that we need to do relative to every aspect of how we do business expressed yet. We’re in the process of relooking at basically everything we do. Then add to that some of the – we got to get as Brad mentioned the collective bargaining agreements done with our labor groups. And then you add all that together, I think it will produce some meaningful positive results but I mean but it will take some time I mean this is not going to change overnight. At the same time we’re making some of these improvements, we have to figure out how to deal with for example the increasing cost of 117 that of course will be an issue of both airlines as it will for the whole industry. But look it’s going to take little bit of time with labor, with the restructuring that we are undertaking. So, look generally speaking I would still expect that through 2014, we’ll make continued progress but I would say 2014 will still generate a lot. And then into 2015 we got to get it to that point back to breakeven and some earnings. So, I mean it’s admittedly is going to take little time.

Understood. All right. Thanks so much.

You’re welcome.

Our next question comes from Helane Becker of Cowen and Company. Please go ahead. Helane Becker – Cowen and Company: Thank you, very much operator. Hi, gentlemen, thank you so much for the time. Just a couple of questions, Brad. On 117, when do you think you will hear about IROPs because I feel like from what I’m hearing from other companies that’s going to be a big concern in terms of crew. So, did they given you any indication of when they’ll get back to you because you never going into a period of time in your part of the world where weather can be a factor sooner rather than later?

Yes. Let’s see. Chip?

Yes.

Why don’t I have you take the first comment on that one?

You bet. Thanks, so much. And that’s an excellent question and I wish we had all of those answers but the truth that matters is that we don’t really know when we’re going to get some of the answers and to be candid we don’t know the depth of the answers that we’re going to get. I will tell you that we have a lot more questions and we expect answers too. And it’s interesting because when you look at the timing of this issue we believe in January and February where we could face a significant amount of weather IROP situation. We do have plenty of crews to mitigate the impact of that if we can make sure the crews are in place at the right – under the right circumstances. I think March in our anticipation is the timeframe that makes us probably mostly concerned because our schedules get ramped up very, very heavily in March. And so, our reserve for crews is not as high and if have IROP situations in March and that’s obviously the month that we’re mostly concerned about. So, with sequestration that happened in the last several weeks we were hoping to have some of the answers sooner than later. However, we just been hearing through our CMO and through some of the national officers that we will get some clarity for sure by the end of the year, we would love to have it today or tomorrow. But we’re proceeding in a manner particularly in January and February where we have a significant amount of crews that help deal with this issue. And we’re just going to have to evaluate what we’ve done in the past if we don’t have these answers and make sure that it hit the spirit of what the laws or rules are going to provide for us if we don’t get all of the answers that we need but we certainly do wish that we could get much more clarity than what we have today and sooner the better. Helane Becker – Cowen and Company: Do you think they would delay implementation since the kind of – because of the shutdown, do you think hold off maybe a month or two?

I’ve heard rumors of that, to be candid we can’t speculate that that’s going to happen. So, our focus line is just to be prepared for it on January 4. Helane Becker – Cowen and Company: Got you. And then Brad, what is the MRJ order, is that still outstanding. I feel like they delayed like they delayed everything.

Well, they did. So, that MRJ order is still there. We’re still very much committed to that agreement. But of course the agreement certainly specify the airplane has to be built as advertise, we have some very specific issues there that have to be met. Look, the timing is not particularly helpful I mean the MRJ order for us is kind of that bridge agreement for us. And they’re furthering the delays I mean it compromises that for us a bit. But no, I mean the process is still there, we’re committed to it but the folks at Mitsubishi have to deliver all the airplanes advertise and they need to do it in a timeframe that it makes sense for us and if that doesn’t happen then of course we have no financial obligations or commitments to take the time. Helane Becker – Cowen and Company: Okay. And then can I just ask one last question please. On – just another follow up on pilot, sorry about that. Do you know how many pilots that are on your – in your working area – I don’t know your firm, your company that are – it might be on furlough from the majors?

Mike – yes Chip, go ahead. And then I’ll let Brad comment as well

This is Chip. I don’t know that we have any that are on furlough from the majors I mean well I mean I guess I think your question is two things is there risk that they could go to the majors because they used to work to the majors typically when they take an employment with another airline they forfeit that obligation. So, technically from that aspect of our airline, we do not have any that are furlough for majors and we’re going to go back in that fashion. Helane Becker – Cowen and Company: Okay. Thank you.

Helane, Brad want to make some comments on the ExpressJet side. Helane Becker – Cowen and Company: Okay. Thank you.

I was just going to add to that, the – most of the people that were furloughed from major carriers that came over to regional have returned to the major carriers at this point or have elected to stay on long term and turn down their recall right. So, we don’t expect any problems in that area from recall, there are very few recalls out there now. Helane Becker – Cowen and Company: Got you. Thank you so much.

Thank you, Helane.

Our next question comes from Duane Pfennigwerth of Evercore. Please go ahead. Jeff Reisenberg – Evercore: Hey, good morning guys. It’s Jeff Reisenberg in for Duane.

Yes. Jeff Reisenberg – Evercore: We see about 95% of our capacity in delta united markets? And well they reach reported third quarter load factor up about a point, your stands about down a point. Is there any color that you can offer there and in particular are your – are you being scheduled above your block hour contractual limitations?

Yes, we are being scheduled above our contractual limitations in the contracts. And load factor is – as I think relative to how our contracts work. We certainly are extremely interested in the effectiveness and the productivity of hour routes but as far as the pricing and the management of the seat inventory you know that the major carriers are in control of that. So I certainly do not want to indicate that that’s a little interest to us because it’s a primary interest to ensure that what we’re doing makes sense for the majors but I think you know that they are in control of pricing and the seat management. Jeff Reisenberg – Evercore: Got it thanks and then second on the certification expenses associated with E75 in Q4 can you size out a bit for us and then is that partially or completely billable ultimately to the contractual party?

Okay so I think at this time we’re still, I think as far as any time a particular expense guidance or things that could be translated to EPS guidance for purpose of this call that’s still in development. And those of you that who are working models and things I would I just suggest that you work in the normal course as you do with Mike Kraupp and follow-up calls and things as we’re developing more of that information. I will say though that some of that is being handled in a number of ways. Of course the expenses we incurred upfront and record them as incurred, reimbursement for them happens in a couple of ways. In some cases the reimbursement comes at the time of the aircraft delivery and in other cases some components of those costs are recovered over time in our contract. So I mean one of the issues is how much of it hits upfront the other issue is the timing of the reimbursement. But I would suggest try and going into specifics on this call if you would hold those calls as you’re working through your models and things and coordinating that through to Mike Kraupp. Jeff Reisenberg – Evercore: Okay, thank you for your time.

You’re welcome

Our next question comes from Glenn Engel of Bank of America. Please go ahead. Glenn Engel – Bank of America: Good morning.

Good morning. Glenn Engel – Bank of America: First question program-rate you gave us the revenues, could you give us what the profits were?

Mike Kraupp?

Yes, Brad let me, no Glenn what we’ve done is, we’ve had this question in the quarter of four and we are not in a position where we’re going disclose that. We’re sort of treating our pro-rate business similar to what we do with the contract side. So, we won’t make any mention of what the actual profitability is on those. Glenn Engel – Bank of America: Can you talk about how was it versus last year?

It was up last year. I think Brad had indicated and I had indicated as well that from a revenue perspective we were up so profitability was up slightly on a year-over-year basis as well. Glenn Engel – Bank of America: You said there was a $5 million Air Mekong gain and I wasn’t sure if, and you said they were transition expenses that showed up I guess above the line I might have missed it did you say what those, do you remember that was?

So yes we indicated there is $5 million in gain non-operating income and then approximately $2 million expenses above line that just ramp through the normal operating expenses. Glenn Engel – Bank of America: So if I look at the P&L the landing fees dropped sharply from the second to third quarter why was that and is that something that is just a pass through and not really going to affect in profit?

That’s exactly the answer Glenn it’s more and more and more of the landing fees than paid directly at the pass-through, so not affecting any so in essence the same number in both decrease of revenue and decrease of expense. Glenn Engel – Bank of America: And finally the engine miss match a bad guy last year a good guy this year how long does it remain a good guy and when do we start seeing that just sort of flatten up?

Mike do you have that I think you probably address that.

Yes. it obviously turned into a slight good guy, it was a little bit better in the quarter by year end we’ll have a few more of those. So that we are predicting it will be flat on a year-over-year basis. In 2014 it turned slightly positive not really, no material change but the good news there again that we will reiterate Glenn that we won’t, we’ve done mostly the overhauls on those and they won’t have overhauls again. So we won’t be back in the situation where we create the huge negative drag. So again on a go forward basis 2014 we think it would be flat to slightly positive. Glenn Engel – Bank of America: And have you give capacity guidance after – 2014?

We have not we’re just in the process of finalizing that and we’ll have some discussion with our Board of Directors next week regarding the plan. So at that point in time we’ll most likely issue some guidance on ASM production for 2014. Glenn Engel – Bank of America: Thank you very much.

Yes.

(Operator Instructions) Our next question comes from Mike Linenberg of Deutsche Bank. Please go ahead. Mike Linenberg – Deutsche Bank: Hi hey everybody. Brad I want to go back to the just the comments that you made about ExpressJet you mentioned that 2014 you still expect it to generate a loss and 2015 may be a hit break even what’s, why the long timeline, are you working with a fairly conservative forecast here or are there just significant structural changes that are going to take some time to implement, what’s up with that?

It's, well, it’s both of those Mike. I certainly would like to think that that guidance is conservative. I think then who are certainly very gun-shy of getting expectations ahead of our ability to deliver. So I think there is some of that. But then look we’ve got – we’re optimistic about some things that we have that we can do to improve the operation but we have at the same time since there are significant issues likely expenses of 117 that we the FAR117 that we need to, that we’re uncertain at this point as to when and how much of that is reimbursable by our partners. So there is both some fundamental heavy listing in things that need to be done we’ve got to get the CBAs done and that’s you know that that happened over night. Mike Linenberg – Deutsche Bank: Yes.

And then what’s the codes some of the changes in things are staggered in overtime and then what the other kind of uncertainties there are things that are taking some time is that we need to be in a position where the natural expirations of the aircraft in ExpressJet or either renewed or I mean extended or replaced and certainly our expectation would be that those contracts are as they term out and then we extend renew or replace that those will be back at what we would consider market rate and so I mean all of that together is going to take some time. Mike Linenberg – Deutsche Bank: Okay, okay. Now I understand and then just another question on just the fourth quarter you sort of characterized it or maybe your approach you said you were going to sort of blood red and with some cautionary language may be you used the word caution. You talked about the training and the certification expenses. I know in the past when you’ve ramped up with new airplane types in the past you’ve given us what those numbers are. As we think about our fourth quarter what, how should we think about what those costs could potentially be and may be it rolls into the March quarter of 2014 and then just I know last year you did give us the pro-rate profits how, was it a loss last quarter, excuse me in the fourth quarter of 2012 for the pro-rate or was it closer to breakeven? I’m just trying to get a feel for the year-over-year?

Okay so Mike Kraupp you’d be taking about the answer to the second part of the question. The first part of the question – as specific – in a more specific guidance we’ve got I just I would prefer to hold the detailed updates of the quarter expectations we need to have our, we’ve got our Board Meeting as Mike indicated this coming week. We’ll have our Board approved plans which will give us more guidance and direction on capacity and some directional issues and once we have that and can share it with the market we’ll we can also begin updating on the specific as to how much impact we think the fourth quarter will have on certification and training cost. But I’d really prefer to wait until we have a little more specifics developed. Mike Linenberg – Deutsche Bank: Okay, that’s fine and just a one last one. In the press release you did call out the escalation increases in the contracts and that’s in the past I mean I know they exist typically you won’t highlight them and I just, my impression is, is this a quarter where you have several contracts that reset or is it no different throughout the year you have a lots of contracts out there in every single quarter maybe the same number of rate rests kick in how should we think about that?

So primarily those resets happen on a calendar year. So, once the increase goes in it’s mostly I mean they’re all slightly different but generally it happens calendar year based. Mike Linenberg – Deutsche Bank: Okay, okay, very good, and that’s helpful. Thank you.

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

Okay well again thank you for your time and for your interest. We’ve had you on the phone now for quite some time we want to be respectful of your time. Again I express appreciation to you for your participation and interest. And again I’ll repeat our thanks and gratitude, appreciation to all of our employees for their dedication and commitment. We feel, in some respects we have some continuing industry challenges and things to be aware that predominantly we are very optimistic. We look forward to the future with anticipation. We think we’re very well positioned with our people and our financials, our balance sheet and so we’re very optimistic about the future. And with that we’ll go ahead and again thank you for your participation and conclude the call.

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