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Executives

Bradford Rich – President

Mike Kraupp – Chief Financial Officer

Analysts

James Parker – Raymond James & Associates, Inc.

Catherine O’Brien – Deutsche Bank Securities, Inc.

SkyWest, Inc. (SKYW) Q4 2012 Earnings Call February 14, 2013 11:00 AM ET

Operator

Good morning, and welcome to the SkyWest Fourth Quarter 2012 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 that this event is being recorded.

I would now like to turn the conference over to Bradford Rich, President of SkyWest, Inc. Mr. Rich please go ahead.

Bradford Rich

Thank you very much, first of all thanks to all of you for joining us this morning, we always appreciate your time and we appreciate your interest in SkyWest, Inc. and our operating companies. Before we begin this morning, let me just introduce who is here and participating in the call this morning. We have Chip Childs, President and Chief Operating Officer of SkyWest Airlines; we also have Brad Holt, here in our headquarters this morning who is the President and Chief Operating Officer of ExpressJet; we have Mike Kraupp, our Chief Financial Officer; and Eric Woodward, our Chief Accounting Officer as well as other members of our staff that are here with us this morning.

I would like to turn sometime to Mike Kraupp, our CFO, to read our Safe Harbor and forward-looking statements.

Mike Kraupp

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 and assumptions regarding future events and are subject to risks and uncertainties. Words such as expect, intend, believe, anticipate, should, likely and similar expressions identify forward-looking statements. All forward-looking statements expressed in this call are made as of the day here of and are based on information available to us at this time. We assumed 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 and expressed during this conference call or set forth in our Form 10-K, and other reports and filings with the Securities and Exchange Commission.

Okay, with that been said we’d like to jump right into a review of our fourth quarter of 2012. We do recognize it seems like every time we have our conference calls and are discussing our performance, results, there is always a lot going on in this industry. And of course this morning is no exception to that. We will jump right into our discussion as always we want to be respectful of your time and we’ll try to do this as quickly and as efficiently as we can. At the same time we want to be as open and transparent as and as informative as we can be.

With our press release this morning, which announced our results and earnings, we are very pleased with both the financial and operational performance for 2012, and for the fourth quarter of 2012 particularly. Both in the comparisons of year-over-year or quarter-over-quarter improvements, they are both significant.

Our net income increased $31.9 million during the fourth quarter and it increased $78.5 million year-over-year. Now admittedly, those comparisons are in relation to very difficult periods of last year, but the important thing is the improvement that has incurred throughout the entire year and our financial and operational positioning going forward.

I would just make a general comment that the improvements in our performance is due to continuing cost reduction initiatives, as well as unit revenue improvements due to better performance and collection of performance incentives.

Now with those very comments, I am going to turn the time back to Mike Kraupp and he will give a detailed discussion of our financial performance.

Mike Kraupp

Okay. Very good and thanks again, Brad. Also I want to start out by just thanking all of you that are participating on the call with us again today. We do appreciate your interest in our company and what we’re doing.

I would also echo what Brad just said and that is we’re certainly very pleased with the results this quarter as well as the year. They demonstrate very good progress in conjunction with our improvement initiatives and again. So we feel very good about all of that particular progress.

I am going to my live up comments this morning and just be very brief, point out a couple of things that we think are important with regards to the press release, but outside of that field the details [are] within the confines of the press release.

This morning we did report net income of $13.9 million or $0.27 per fully diluted share for the quarter ended December 31, 2012 and that compares to a net loss of $18 million for the same period last year. I also want to point out something that’s important and impacting our revenues and that is you remember from the third quarter results call we actually outlined that there is a significant change in our operating revenues that’s resulted from how we’ve historically purchased fuel for our flights directly and subsequently included them as direct reimbursements from our major partners under our client contract.

To the current situation wherein our major partners now purchase the majority of fuels directly for our flight. So what this does? It results in SkyWest reporting lower operating revenues as well as lower operating expenses due to the lower direct reimbursement.

We likewise experienced a similar result in the fourth quarter ended December 31, 2012 where revenues were reduced $92.5 million as a result of lower direct field purchases by our operating companies. We also experienced some reductions in other directly reimbursement cost such as engine overhaul. So, from our perspective this really should not have any kind of a material impact or consequence to our financial statements simply as a result of the fuel buying going down as well as the revenues going down by a corresponding amount.

Also, after considering the reductions in operating revenues as a result of these lower reimbursable costs under our partner flying agreement, we did experience additional revenues of $27.5 million primarily as a result of additional block hour and other normal contract escalations in our rates.

Our actual block hours were 568,808 for the quarter to standard, compared to 550,808 or an increase of 3.3 compared to same period last year. Our total airline operating expenses decreased to $139.1 million, or 15%, however after excluding certain reimbursed cost like fuel and certain engine overhaul expenses our total operating costs decreased $35.2 million for the quarter just ended.

This was primarily the result of our continued efforts to reduce our maintenance costs as well as experiencing reduction in some of our customer service labor, due to the elimination of some of our ground handling at certain airports. These efforts resulted in SkyWest reporting operating income of $43.7 million for the quarter just ended compared to an operating loss of $5 million for the same period last year or $49 million in improvement.

Our operating margin improved 6 points with SkyWest reporting a 5.4% operating margin for the quarter just ended, compared to a negative margin of 0.6 for the same period last year.

Turing our attention the other income and expense category, it was reduced, net expenses were reduced by about $4.5 million as a result of recording lower level of losses related to our investments in TRIP and Air Mekong. And as a reminder, we announced the sale of our TRIP shares earlier this year and therefore we only have 12 days worth of their results that were included in this quarter and remember that we report those on a quarter lag.

I also want to make you aware at this point in time with regards to Air Mekong that they have announced that they will be seizing operations at the end of this month. As a result of that you’ll recall from our previous third quarter report, we had already written this investment down to about $1.3 million. So, we anticipate that with the seizing of operations at Air Mekong at the end of this month that we will record that $1.3 million loss in the first quarter of this year.

Also for the full year real quick we reported operating income of $166 million compared to $41 million from last year, that’s an improvement of $125 million. Net income for the full year was $51.1 million or $0.99 per fully diluted share compared to a net loss of $27.3 million or a loss of $0.52 per full diluted share for last year. That’s obviously an improvement of $1.51 per fully diluted share for the comparative period.

Turning to balance sheet, we ended the year with $709.4 million in cash and marketable securities compared to $646.5 million for last year or an increase of $62.9 million. We did indicate in our third quarter results call that we were targeting end of the year cash balances to be about $700 million, so we slightly exceeded that.

Additionally as a result of our improved cash and marketable securities position as well as a result obtained down our debt, during 2012. Our net debt position decreased about $236 million down from the $1.2 billion at December 31st, 2011 compared to $932 million at December 31st, 2012 this year.

Let me conclude by just giving our ASM estimates for the next four quarters, and again these are estimates and are subject to schedule changes by our major partners. For the first quarter of 2013 we are estimating 9 billion ASMs, in the second quarter we are estimating 9.9 million, in the third quarter we are estimating 10.1 million, and for the fourth quarter we are estimating 9.2 million, should be about 38.2 million for the entire year.

And with that I will conclude formal remarks and turn the phone back to over to Brad.

Brad Rich

All right, thank you very much. Just a couple of other items that I wanted to discuss briefly, it has been a very busy time for our companies both in the fourth quarter of 2012 as well as so far this in this first quarter of 2013. We did begin a very successful launch of our American Eagle plane. SkyWest Airlines began that operation with a very successful launch on November 14th, operating 12 aircraft out of Los Angeles, ExpressJet actually began with their first flight for American last night, and we will continue to launch of service from Dallas for we’re today with the 11 aircraft. We are very pleased with the relationship and look forward to providing very high quality, and efficient service for American.

Our Delta transaction which we announced sometime ago, I just want to touch briefly on. That transition is going I would say very seamlessly and efficiently. This is the transaction where we agree to an early exit of 66 CRJ200 out of the Delta system and we would bring in an additional 34 dual-class CRJs. The execution of that is underway. We have taken as of today 24 of those 34 additional dual-class airplanes. The remaining 10 aircraft we’ll deliver by May of this year.

I would also say that we have made and continue to make very good progress on I would say cost reduction initiatives in general and particularly on the integration efforts that are going on at ExpressJet. Mike has discussed as well as I mentioned earlier, the significant improvements both quarter-over-quarter and year-over-year in our financial performance.

And I would say just in general, I think most of you know that we have been very focused on the continuing integration and cost reduction and overall profit improvement at ExpressJet. There has been a significant year-over-year turn there on the ExpressJet operational loan. There is approximately $85 million of year-over-year improvement. Over $60 million of that has come from cost reduction. The remaining amount is through general unit revenue improvements that have come primarily through operational and reliability improvements.

So we feel good about the progress that has been made there as far as SkyWest Airlines has gone continuing improvement there on the cost side. We do have as we have said for many years, the issue with the mismatch of the some of the maintenance expenses that has gone as we have told you generally, where we were expecting some year-over-year improvement there and that has in fact happened. I do want to give at least one word of caution as we see things happening in the first quarter of 2013, we have in fact had a bit of a difficult start particularly on the ExpressJet side. The recent East Coast storm, which you all know about, certainly has had some impact. We have had approximately 800 weather related cancels and few hundred additional cancels due to just all of the related interruption that has been created by that storm, and we will see some impact of that in the first quarter.

In addition to that this is not unplanned, but we have had a bit of a bow wave of sea check activity particularly on the ERJ fleet at ExpressJet. Again nothing hasn’t been planned. Some of those events have been accelerated due to some of the utilization of that fleet, which on one had it’s a good thing to have improved utilization, but some of the timing of the events have been accelerated and that has had some impact and we’ll have some impact on the first quarter.

On the SkyWest Airline side, I just want to make a quick and general comment about our pro-rate flying. The pro-rate flying is up to a total of 58 aircraft, those 58 aircraft consist of 24 CRJs and 34 EMB 120s.

First comment I would make is that flying from a performance perspective has had significant year-over-year improvements. The flying is making money. The second comment I would make is that, that fleet of aircraft; we still maintain a lot of flexibility on that fleet whether it is in – just owned aircraft down to depreciable values that are very reasonable or through very short-term flexibility on operating leases. But in general that flying has done very well and we expected it to do very well in 2013.

I would just conclude by just mentioning and expressing some optimism relative to all that’s going on in the industry. From a strategic positioning and preparedness standpoint, we feel very good. Mike has just reviewed our financials and that included an update of our balance sheet and our liquidity for which we feel very good.

Our operational capability and performance, we think is extremely good. The thanks for that go to Chip and Brad Holt and their operational teams. The difficulties – it seems like each winter, we talk about some of the difficulties of the system. I think it goes without question that the last six months from a whether and interruption type standpoint has been clearly outside of normal.

And our people throughout both systems have done just a fantastic job and it would not be right if we didn’t express our sincere gratitude to all the people of our companies. They've just done a fantastic job getting us through these difficult times.

Structurally, we think the companies are in very good shape and again a lot of that is just due to our people and their experience, and the depths of longevity in positions and just the breadth and depth of people talent that we have spread throughout the systems, it’s just unmatched particularly in the regional environment. And that we think is not only strength, but it’s something for which we’re very grateful and appreciative to our people for.

Having said that, I will conclude our formal remarks and we will open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from Jim Parker with Raymond James.

James Parker – Raymond James & Associates, Inc.

Brad and Mike, good morning; and good morning to the others with you. Just a couple of questions, recently we have seen two business, two pieces of new business from legacy carriers and of course that look like competitors were awarded those two business, two pieces of new business. It appears there is more new business to come. Can you talk about why SkyWest prospects are very good on the competitive basis about gaining mostly early some of that business?

Bradford Rich

Sure. Well, first of all, let me just say we have been working aggressively and diligently and positioning ourselves with both aircraft manufacturers and the engine providers on the respective aircraft types. We think we are very well positioned with the necessary manufacturers and delivery positions and all that sort of thing. You are correct that there have been some significant pieces of business that have gone to other regional carriers. We think there are some specific and unique situations and reasons why that has happened. We don’t believe that it impacts negatively, at least our ability to win a meaningful amount of these – of our RFPs or the opportunities for additional business in the future.

And I’d add to that we don’t – I mean we have never planned on or expected to get a 100% of these new aircraft opportunities. I mean our focus has been on preparing for the opportunity, positioning ourselves both financially and with manufacturers, which I think we have done very well. When you look at the demand and the opportunity that still exists, and I don’t that it is appropriate to go through each carrier and discus the opportunity, but we do think there are still hundreds of aircraft worth of opportunity out there. But we are in active negotiations with carriers on and think that we are very well positioned to win.

James Parker – Raymond James & Associates, Inc.

Okay. One more question. And sorry for the background noise. I am on my SkyWest flight about to take off. I apologize, but it appears that you don’t have a certificate for E-Jets, and there may be demand for E-Jets. How long would it take you to add that aircraft type to your certificate?

Unidentified Company Representative

Very good question Tim. We know that that exists. We know that there seems to be not only demand, but obviously with what one major carrier has just done. There is definite interest in that type, we’re very well position in our discussions with manufactures and our people are very well prepared and preparing for that type. The timing involved could be between, I mean think to do it right, it’s somewhere between six and twelve months. And by the way that’s not discouraging to us, because we think that aligned very well not only with our delivery positions, but we have, when the next round of demand will be from the major carriers.

James Parker – Raymond James & Associates, Inc.

Okay. Thank you.

Operator

Thank you. (Operator Instruction) And the next question comes from Michael Linenberg with Deutsche Bank.

Catherine O’Brien – Deutsche Bank Securities, Inc.

Good morning everyone. This is actually Catherine O'Brien filling in for Mike. Just one quick one on the impact of the storm, just wondering if you could give us maybe just a feel for the revenue impact of those cancellations.

Bradford Rich

Are you talking about the most recent East Coast storm the Nemo or Sandy or

Catherine O’Brien – Deutsche Bank Securities, Inc.

Nemo, yes.

Bradford Rich

Yeah Michel let you take this real quick with regards in Nemo, I know fall through still playing a little of bit data together, but I think in general we were just under about 700 cancels, they get primarily on the East Cost. And revenue impact is about, we think at this stage about 800,000 so that we’ve identified so far.

Catherine O’Brien – Deutsche Bank Securities, Inc.

Okay, great. And then, just given today's announcement on American, I'm sure everyone is going to be paying attention to that now. Just kind of wondering how you think this will affect SkyWest? I know your recent agreement [about] American Eagle has a four-year contract term. Do you guys feel any risks there, given there some bankruptcy? Or do you see this merger as an opportunity for new business?

Bradford Rich

Very good question. I don’t know how to answer it in any degree of specificity, because of course those are decisions that The new American will need to make. We obviously – when we have had active and diluted shares, I would say somewhat advanced discussions with both carriers involved in The new American, but look at [sell new]. Those are decisions that they are going to have to make. I certainly would not say that we’re viewing this in any way as negative.

We still think there will be a significant opportunity for The new American to acquire and bring into service additional large regional aircraft. So we still are very optimistic. We would have to think that the systems will see some efficiency and optimization related to the network. But even considering that we would, at least our expectation, we can’t speak for the new company, but certainly our expectation would be that there would still be material opportunity there.

Catherine O’Brien – Deutsche Bank Securities, Inc.

Okay. Thanks. Thanks, guys.

Bradford Rich

You’re welcome.

Operator

Thank you. And this concludes the question-and-answer session. At this time, I would turn the call back to Mr. Rich for any closing remarks.

Brad Rich

Okay. Well, again, as I said earlier, we are always very grateful for your interest and your time. We remain optimistic. We’re very pleased with our positioning and again thank you to our people for all what you’re doing. And with that, we will go ahead and conclude our call today. Thank you very much.

Operator

Thank you. Thank you for participating in today’s conference call. You may now disconnect your phone lines. Have a nice day.

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