Hello. And welcome to the SkyWest, Inc. First Quarter 2021 Earnings 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 today’s event is being recorded. I’d now like to turn over the conference to Rob Simmons, Chief Financial Officer. Mr. Simmons, 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; 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, and thank you for joining us on the call today. One year ago at this time, we were only beginning to feel the massive impact of COVID-19 around the world and across our industry. We’ve learned much over this past year and we continue to make good progress on our strategy to emerge from this crisis of better, stronger company. I want to thank our outstanding team of professionals for their continued teamwork, flexibility and dedication in order to deliver an exceptional product in any situation. We made some good headway toward recovery in the first quarter and while there’s still ground to cover, we are seeing strong demand improvement. We are working across all areas of the operation to ensure we’re quick and responsive to what our partners need from us to lead the recovery. Under previously announced agreements, we took delivery of one new CRJ900 for Delta and placed nine used CRJ700s into our American system. We still have 16 more aircraft to transition into our American network this year and we’re making maintenance investments with those aircraft as we bring them out of storage and get them ready for profitable operations. As I just mentioned, we are seeing significant demand for all of our products. These maintenance investments are a critical part of our long-term strategy to build reliability into our fleet, as well as preparing for what we expect will be a busy summer ahead. Wade will talk more about our maintenance programs and associated costs in a minute. During the quarter, we also began hiring mechanics, flight attendants and just recently accepting pilot applications once again. We continue to advance our commitment to diversity through important partnerships with organizations across the industry to ensure we continue attracting…

Today, we reported first quarter net income of $36 million or $0.71 diluted earnings per share. Q1 pretax income was $50 million. Our diluted share count for Q1 was 50.7 million shares and our effective tax rate in Q1 was 28.2%. First, let’s talk about revenue. Total Q1 revenue of $535 million is down 27% from Q1 2020 and is down 9% from last quarter. Although, our Q1 block hour production was up 3% sequentially from Q4, as Chip mentioned, the sequential reduction in revenue was primarily driven by PSP2 related temporary partner revenue concessions and prorate seasonality. This breaks down with contract revenue down 27% from Q1 2020 and down 11% from Q4. In both of these comparatives, we have temporary partner revenue concessions in Q1 2021, but not in Q4 2020 or Q1 2020. Prorate revenue is still down 32% year-over-year and was down 4% from last quarter due to seasonality. As we’ve previously said, prorate revenue is nicely levered to a demand recovery. Leasing and other revenue is up 14% year-over-year and 18% sequentially. These GAAP results include the effect of the deferral of $21 million of revenue this quarter, compared to $111 million during 2020. As of the end of Q1, we have $132 million of cumulative deferred revenue that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals and the reversal thereof 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. We may continue to defer some revenue into later 2021 when it could begin to reverse. Let’s move to the balance sheet. We ended the quarter with cash of $836 million, up from $826 million…

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, during the quarter, we put nine CRJ700S into service with American, bringing our total CRJ700S under contract with American to 74. We anticipate placing 16 additional CRJ700S into service from our existing fleet throughout the remainder of the year, bringing our American CRJ700 fleet total to 90 by year-end. These 25 aircraft have been in long-term storage for the past few years and have required a lot of maintenance to return to service. We also have 20 new E175 scheduled for American service in 2022, with deliveries scheduled from Q3 of this year to the first quarter of 2022. This will bring our total American fleet to 110 in 2022. Let me briefly talk about our Delta agreement. During the first quarter, we took delivery of one new CRJ900 under our Delta agreement. The aircraft is owned and financed by Delta. As of March 31, 2021, we have 116 aircraft under our Delta -- under contract with Delta. During the quarter, we worked with all of our major partners on a second round of contract concessions that included temporary rate reductions. These concessions are reflected in our first quarter results. We expect to bring -- we expect to work with our major partners during the second and third quarters for a third round of concessions. Let me review our current production. During the first quarter, our completed block hours were down by approximately 23% compared to the same quarter last year. Based on the current schedules we have from our major partners for the second quarter of 2021, we anticipate that our block hours will be up by approximately 10% compared to the first…

Yes. Thank you. [Operator Instructions] And the first question comes from Mike Linenberg with Deutsche Bank.

Hey. Good afternoon, everyone. Hey. Just a couple here, if I compare the temporary rate reductions. So if I heard you correctly, Rob, the second phase was obviously this March quarter, right? And there was nothing in the fourth quarter of last year, the first quarter. So the first phase, I think, covered the second quarter and third quarter of 2020 and I think we have a third phase that will be in the second quarter and third quarter of 2021. Is that the timing on these temporary rate reductions, the concessions?

Yes. That’s correct.

Have you called out the magnitude of those reductions in your Qs or can you give us a feel or how do they tie to when we look at deferred revenue. Is that a good guide as that builds up to give us a sense of what these reductions are? I am just -- I am trying to get a sense here for the magnitude, I don’t want to double count on a couple of items here.

Yeah. Michael, this is Wade. So on the…

Hi, Wade.

On the temporary rate -- hi. So on the temporary rate reductions, we’ve been working with our partners for several quarters. As you said, during the second quarter and third quarter of last year, there were temporary rate reductions this quarter. We’re not going to get into the magnitude of these, but they are significant. We’ve worked with them. We want to make sure we’re a good partner. We’re proactively helping them with their businesses and their recovery as well.

So, Wade, as I think about modeling for, though, because these are temporary, when they come back, as well as a reversal in deferred revenue as we go out to 2022,2023, there will be a meaningful bump up, right, is that...

Yeah. Mike, look, as we talked about for the rest of the year, where we expect Q2 to be in the breakeven neighborhood and then positive earnings in Q3 and Q4, that is ignoring the effect of -- the net effect of the PSP grant income that will come in over Q2 and Q3 and the partner concessions related to that, that will also come in over…

Okay.

… Q2 and Q3.

Okay.

So that guidance, just to be clear, was before any PSP3 noise in those numbers.

Okay. That’s helpful. Then, Wade, I’ll probably hit you on this question as it relates to the 18 American airplanes. So they’re coming -- I guess, 18 are going to come in the third quarter and fourth quarter. Two are going to come in 2022. You’re going to incur the CapEx this year. It’s pretty sizable. But it looks like they’re not going to go into service until the March quarter of 2022. So are you just going to deliver them to American and get some sort of compensation or not? I am just -- it seems like there’s like a two quarter, three quarter mismatch between when the planes come in, when they actually go into productive service. I am curious about the timing on that.

Yeah. So you’re right, we have 20 new 175 coming in, and as you said, the majority of those are coming in in Q3 and Q4 of this year. And we’ve worked with either the OEM or the partner to cover the…

Okay.

… costs associated with carrying those for a little bit.

Okay, Okay. That’s great. And then just my last one, this is just on pilots. Hard to believe, we obviously, were dealing with a pilot shortage and then, I think, at one point, we thought we all of a sudden went from a deficit to surf it, and now all of a sudden, everybody’s hiring again, including yourselves, as well as new entrants, Avello, Breeze and even carriers like ExpressJet, it looks like that they’re going to be reincarnated as a prorate operator. So I am curious sort of where your pipeline is tie into either flight schools? And are we going to go from a situation where we thought we were going to have a lot of pilots out because of the PSP and new entrants coming into the market, that it’s actually going to get pretty tight, pretty quickly, combined with the fact that we have a slew of retirements across the industry. I mean, you’ve got a pretty great workforce. So it’s a broad question there, but I am just curious if we’re going to start running into pilot problems over the next six months to 12 months? Thanks.

So, Mike, it’s Chip.

Hi, Chip.

That’s a great question. And I think that it teed us up really, really well and it’s almost like we want to go back to where we were over a year ago. You remember the conversation we had on previous pre-COVID earnings calls that we are built for a pilot shortage. We have 300…

Okay.

W have 300 schools that we work with and we had a very strong machine going and tremendous demand to come fly at SkyWest. Now I will say this, as we open the doors back a couple of weeks ago to start hiring again, bringing guys back to class, getting the pipeline up. We were astonished at the response and…

Okay.

… we knew it would be strong because of how we’ve managed through the pandemic. We’ve had a lot of credible awards and things happen to us as we’ve tried to manage through what’s happened this last year and I think it goes to show the demand to come with SkyWest. So I would say, honestly, we’ve been overwhelmed with the demand to come here. We’ve been pleasantly surprised. I don’t think that SkyWest is going to have a problem anytime in the next foreseeable future. Long-term, is it going to get tight, possibly, but so far there’s still very strong supply and there’s a lot of new entrants, but I don’t think they’re SkyWest and I think a lot of people feel the same way. So we’re excited about the opportunity. It’s never been -- there’s never been a better time to come to SkyWest. I will say that, and we’re excited to do some things with the schools to enhance the professionalism and diversity that we want to -- the type of company that we want to be.

Great. Great. Thanks, Chip. Thank everyone.

Thank you.

Thanks, Mike.

Thank you. And the next question comes from Duane Pfennigwerth with Evercore ISI.

Hey. Thanks. On your 4Q block hours back to flat. I wonder if you could just outline what the fleet changes year-over-year and does that imply higher or lower utilization? And for my follow-up, if we assume kind of keeping that more normalized utilization into 2022, plus your booked growth, what sort of topline -- high level topline should we be looking at into 2022?

Hi, Duane. This is Wade. I’ll talk a little bit about the production. So the production mix, if you compare Q4 of 2019 to Q4 of 2021, we are going to see a pretty sizable production mix difference, right? As I said in my script, even this quarter, the E175 are only down 3% compared to where they were a year ago, and as we continue to bring on airplanes and continue to put them in service, that mix is going to change. And our 50-seat mix, the CRJ200, we’re down about 53% and so the mix will definitely change quite significantly. The revenue side of this should -- net of -- if you exclude the concessions, once those get out, you should be very consistent to -- the revenue side should be very consistent with where we were at in 2019.

Thanks. And I guess, just to extend that, right, if we keep that more normalized level of production, combined with the booked growth that you have, what is sort of baseline production growth into 2022, if we just sort of run rate that forward?

Yeah. So, at this point, I don’t think we’re prepared to quite talk about 2022, but we will see continued growth. As I talked about, the American E175, we have 20 of those coming into service in basically Q1 and Q2. And so we will continue to see growth there and so we will have additional growth on top of that, but at this point, we’re not prepared to give guidance on where it will be in 2022.

Okay. That’s fair. And then just to follow-up on Mike’s question and maybe you answered it in your response to him, but should we be thinking about the consent -- concessions very similarly to the amount of PSP grant funding that you’re receiving?

Yeah. So directionally it will be very close. It’s directionally the same amount, yes. Some of it can…

Okay.

… stick a little bit with us, but not all of it, but directionally, yeah.

Thanks. Thanks so much.

Thank you. Next question comes from Savi Syth with Raymond James.

Hey. Good afternoon, everyone. I think the plan for the E175 fleet is pretty clear. But I wonder if you could talk a little bit about how you’re thinking about what your other fleet types would look like kind of exiting this year from fleet count standpoint?

Yeah. Savi, this is Wade. So the CRJ700s, we have a lot of movement in our CRJ700s right now. As of today, as of the end of the quarter, we had 74 CRJ700s under contract with American. By the end of the year, we will have 90 with those guys. So there’s 16 airplanes that we are going to put into service with American through the back half of 2021. So that is the primary fleet growth on the other ones. The CRJ200s are very consistent with where they are at. We shrunk the Delta fleet a few quarters ago on the CRJ200s and then on the CRJ900, it’s a very stable fleet at this point. So that’s -- the primary growth on the CRJ side is going to be in the CRJ700.

Got it. But the other, like, if I look at -- you had 74 CRJ700s with American and 98 in total, just the other 24 kind of stick around or should I just assume 90 plus 24? What does that total go to?

Yeah. So -- yeah. So that’s a great question. So we have 19 under contract with United and they -- we anticipate leaving those with those guys and then the rest of them are with Delta and they are also under contract with Delta and we anticipate them staying there.

Make sense. And thanks for that Wade. And then on just on the 1Q quarter, it seemed a little bit stronger than anticipated, is that fair? Did that come from block hours, is there anywhere else that may be came in better or it may be came in line with what you were thinking?

Yeah. No. As we talked about, Savi, I mean, production was up sequentially. And I guess, net-net, we’re pleased with the level of demand that we’re seeing for our product and we’re obviously investing right now in that product in the form of maintenance and getting ready for a busy summer.

Okay. Make sense. So this is -- and is it fair to say the surprise came out on the CPA side more so than the prorate side?

Yeah. I would say, yes, demand continued -- was strong on the CPA side. Again, we continue to -- on the prorate side. Again, prorate was not profitable in the first quarter. But again, as we see volumes coming back in general that, that’s going to -- that will benefit that prorate side of the business during the summer and beyond.

Make sense. Thank you.

Thank you. Next question comes from Catherine O'Brien with Goldman Sachs.

Hey. Good afternoon, everyone. Thanks for the time. So I’ve got a similar one to Mike’s first question as well. Just as we think forward to back when you’re fully up and running, you’re full schedule with your partners again at a minimum contract -- contractual minimum, it sounds like more like back to pre-COVID levels. How should we think about your margin profile? I can think of a couple of tailwinds. So higher percentage of E175 flying, probably, the pre-COVID, you take some of these new deliveries? And then the probably the positive impact of that deferred revenue coming back on, as you talked about earlier. So if we put those things together, should we just think about margins probably being higher post COVID or are there some tailwinds, I am not giving enough do? Thanks.

Hey. Thanks for the question, Catie. It’s Rob. So, look, I think that, I mean, as we sort of indicated that there are some gives and takes in the margin question. I think in the near-term, as we indicated that things like maintenance are going to continue to run hot, as we bring new airplanes back into service again, as we prepare for what’s looking -- what’s shaping up to be a pretty busy summer. I think there’s some puts and takes in there and they’re. Obviously prorate is another area that’s a drag currently on our overall margins as prorates not profitable, but obviously, we’re going to -- we’re hoping that, as we said that, that business is nicely levered to the recovery and those will come back. You mentioned deferred revenue, that’s another one, that -- again in the next quarter or so we could have some modest amounts of incremental deferred revenue. Again, depending on how quickly things come back. But, obviously, when that starts to reverse, that reversal will be 100% margin in that deferred revenue. So as things -- again, as -- it’s sort of a long-winded answer to your question, but I think near-term again, we’ve got those headwinds on the expense side. Longer term, we hope that the combination of demand and the reversal of some of these other items will be positive.

Okay. Great. Thanks for that. And then yesterday we had one of the big global lessors talking about airlines starting to make -- starting to take action to plan for the future and lock in additional aircraft, hopefully, will we get back through the recovery and back to growth perhaps versus 2019. Not asking about your leasing business, but just more in general, are you starting to have conversations with your partners potential incremental regional flying over the next couple of years? I imagine they were mostly just concerned with semi cash burn throughout 2020. So would love just to hear if the long-term growth planning conversations are back on the table or if it’s still really flat? Thanks.

Hey, Catie. This is Chip. That’s a great question. Thanks for asking that because I think it has good perspective as our strategy. First thing that we’re still focused on through the rest of this year is out executing everybody relative to helping our partners recover. But in all candidness, we’ve been having those conversations even through the pandemic, because we also thought that, that was a big part of how they could recover. And certainly, today is big demand for a regional lift and we think as the economy post-COVID continues to evolve, the smaller locations and midsized cities are going to have more travel demand. And so we’re having a lot of conversations with the partners about this long-term aircraft orders. We’re also having a lot of conversations with manufacturers about evolutionary ways that we can meet the needs of the environmental footprint that we’re trying to achieve with our partners and all of those things. So in quick answer to your question, we’re having a lot of dialogue with both partners and manufacturers. But it’s secondary to making sure we continue to recover from the pandemic, but those conversations are alive and well.

Got it. And maybe I’ll just sneak one more in since you brought it up. But I guess any thoughts on like what the future aircraft for growth will be for SkyWest? I am pretty sure the EQ is still not scope compliant. Not sure what other options there are out there in terms of new -- next-generation aircraft, so would just love to hear what your thoughts are? Thanks.

Yeah. Thanks, Catie. That goes to an entirely different conversation as well. I mean, I can tell you very, very clearly that we -- part of our long-term approach for the last almost 50 years of SkyWest is to out execute the competition and continue to make sure that we’re strategically in a strong spot and we’re evaluating a lot of opportunities. One thing I will say is that the world is recognized this as an excellent performer, a dispatcher of aircraft and we do have a lot of conversation about the future of aviation with several entities. We are not going to get into more detailed conversation or announcements about anything of that nature until we are comfortable with that. But again, I’ll go back to the original premise of your other question as we need to get ourselves out of this pandemic and we need to get recovery. We need to take care of our people, take care of our partners and our customers. But again, we’re also not oblivious to the needs of what the flying public is going to want and we stand to be -- our strategy to be at the forefront of all those things. So, hopefully, that helps kind of give you the perspective of where we are.

Yeah. All right. Thanks for the time.

Thank you. And the next question comes from Helane Becker with Cowen.

Thanks very much, Operator. Hi, gentlemen. Thanks for the time. So two questions, one is pre-pandemic was the prorate business ever profitable in the first quarter or is that just normally a seasonally weak quarter?

Yeah. Helane, this is Wade. We’re very consistent with the rest of the industry. Q1 is always -- even pre-pandemic was definitely weaker. But, historically, we did make a little bit of money in Q1 but not a lot on the prorate side.

Okay. And then my other question is, I think, last year, some of the airports we’re working with the airlines to mitigate landing fees and other airport facility charges using their care spending, right, to help you guys. So is the decline in year-over-year expense net line item more related to -- is that the run rate or is that the -- should we think about that as being coming back is flying some stock?

Yeah. Helane, this is Wade again. So, on the landing fee side, the majority of those, the partners take care of directly and are not reflected in our financial statements. The other line item on our expenses is primarily just volume related and the decreases associated with volume.

Okay. Thanks. Very helpful. Thank you.

Thank you. Our last question comes from Joseph DeNardi with Stifel.

Hi. Thanks. Good afternoon. Just one quick question for me, I think, I just want to understand, Wade, on the maintenance challenges you’re facing with your third-party providers. Is that just a byproduct of the tight labor market or are you kind of displeased with the performance of those providers?

That’s a great question. There’s a lot going on obviously. As we said, there’s 30 -- we have over 30 lines of C check going on, a lot of it is just the ramp-up, right? So we never really stock during the pandemic, but we definitely have increased as we anticipate the flying come back and as we got some of these American contracts. Our third-party providers there are great partners of ours. They do a lot of things. They’re just bringing back their workforces. They’re getting them trained. They’re getting them back up to speed. So I anticipate that they’ll be able to execute at a very high level for us going forward. SkyWest is very uniquely positioned with the size of our fleet and the strength of our own internal maintenance capabilities that we can -- we should be able to navigate through any challenges that are in front of us, so.

Helpful. Thank you.

Thank you. 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, Keith. Thanks to everyone for joining us again on the call today. We really appreciate your support and interest in SkyWest. I especially, again, want to thank our people. I am proud of our airline and our team and the great work they’re doing to support each other in the long-term success of SkyWest. I couldn’t be more proud and fortunate to be involved with such a great team. Thanks again and we’ll talk to you next quarter.

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