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SkyWest Inc. (NASDAQ:SKYW)

Q4 2008 Earnings Call

February 11, 2009; 11:00 am ET

Executives

Chip Childs - President & Chief Operating Officer

Mike Kraupp - Vice President of Finance & Treasurer

Eric Woodward - Vice President & Controller

Bradford Rich - Executive Vice President & Chief Financial Officer

Analysts

Mike Linenberg - Banc of America

Duane Pfenningwerth - Raymond James

Bob Mcadoo - Avondale Partners

Operator

Good morning and welcome to the SkyWest Airlines fourth quarter and year end 2008 earnings conference call. For your information, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions)

At this time I would like to turn the conference call over to Mr. Bradford Rich, Executive Vice President and Chief Financial Officer. Sir you may begin.

Bradford Rich

Okay, thank you very much. Thank you to all of you for joining us this morning. As always I recognize that there’s a lot going on, other earnings releases etc. We’ll try to be respectful of your time this morning.

Let me begin by just introducing who is joining us and will be participating in the call today. In addition to myself, we have Chip Childs, President and Chief Operating Officer of SkyWest Airlines. Unfortunately, Brad Holt, the President and Chief Operating Officer of ASA could not join us this morning as he’s conducting a leadership conference with his management group. We do have Mike Kraupp, our Vice President of Finance and Treasurer; Eric Woodward, VP and Controller; as well as several other officers and members of our staff that are participating as well.

Before we get into a discussion of the results, I’m going to turn the time over to Mike Kraupp to read our forward-looking statements.

Mike Kraupp

Okay. In addition to historical information, this release and conference call may contain forward-looking statements. SkyWest may from time-to-time make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements encompass SkyWest’s beliefs, expectations, hopes or intentions regarding future events. Words such as expects, intends, believes, anticipates, should, likely and similar expressions identify forward-looking statements. All forward-looking statements included in this release and conference call are made as of the date hereof and are based on information available to SkyWest as of such date.

SkyWest assumes 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.

Bradford Rich

Okay. Thank you, Mike. Okay, as we normally do, I will stick pretty close to the press release that we put out this morning really as the text in the outlined for our discussion today. I’ll try to get through this as quickly as we can and then make sure that we leave some time for questions.

We released this morning, total operating revenues of $743.3 million for the quarter ended December 31, compared to $854.7 million for the same quarter last year. We reported net income of $21.2 million or $0.37 in diluted earnings per share, compared to $40.9 million of net income which was $0.66 in diluted earnings per share for the same period last year.

When you combine that with the other three quarters and look at our year-end total full 2008 results, we had operating revenues of $3.5 billion compared to $3.37 billion last year. We also reported net income of $112.9 million or $1.93 in diluted earnings per share, which compares to $159.2 million of net income and $2.49 in diluted earnings per share last year.

It kind of goes without saying that the challenges and issues that we are facing and have faced this quarter really are unprecedented. As we look at some of the specific items that have affected our performance, particularly in the fourth quarter, there is some perspectives where we look at the results and of course we are frustrated and disappointed in some respects that the results are below both the market's expectations and our own internal expectations.

At the same time, in the current market conditions and the issues that our major partners are facing, there are some things to feel good about and the fact that we have reported $21.2 million of net income in this quarter. So, I guess it just depends really from the perspective and in looking deeper into an analysis of the factors affecting the performance and our ability to manage and lead through some of these issues in the future, is really where our focus needs to be.

When we look specifically, our operating revenues, again most of you understand that a significant driver of our top line revenue is the pass through costs, the most significant of which is fuel. As we’ve outlined in the release, there was $83 million in our cost structure where the timing of pass through costs and the price of fuel really become the driver. The $83 million decrease was primarily due to the decrease in the fuel price, but that is the same amount that goes through both revenue and expense and does not become a driver of net income.

The part of the revenue decrease that is significant and does affect income is the $30 million that we’ve identified which was specifically due to reductions in our flight schedules and the reduction in our block hours. We had a 12% reduction in the block hours, primarily due to schedule reductions, daily utilization reductions, as scheduled by our major partners in the fourth quarter.

As you can see in the release, we generated 320,932 block hours in the quarter which compared to 364,540 block hours in the same period last year. We have generally taken some questions about specifically where the reductions are, what’s causing it etc, etc.

I think it goes without saying, that as you look across the industry, there is a significant amount of fleet rationalization, restructuring of fleets going on, and in general total capacity in the industry is down. I think one way to look at these reductions in our schedules, and as it’s translating into reductions in block hours, it’s simply I guess in some way manifesting our participation in the overall rationalization and reductions that are happening in the industry.

When you break down the 12% reduction in our total block hours, it can really be looked at in two perspectives. First of all, although we had more aircraft period-to-period, we had 5.5% fewer scheduled revenue lines, and on those revenue lines, we had a 6.8% reduction in our daily utilization. When you put those two things together, roughly it comes out to a 12% reduction in total capacity.

We are seeing reductions in all three of our partners. Of course, the nine aircraft coming out of Midwest has been a major factor; small schedule reductions on the United side, significant reductions on the Delta schedules, at both ASA and SkyWest.

As we look at and focus on the reduction in block hours and the impact that that played in $30 million less in revenue generated because of those reduced block hours and then look at the cost side; it really shouldn’t be surprising that on a 12% reduction in block hours, that translated into a 13.5% reduction in ASM production.

Our operating costs did not come down proportionately. So with a significant drop in ASMs, we had a 13.5% increase in our non-fuel costs per ASM. I think I misspoke there; the ASM reduction is 12.3%, and again so units of production came down. The operating expenses didn’t come down proportionately and therefore we have a material increase in the costs per ASM.

I would add one bit of commentary here about the cost structure. Not to make excuses for the cost structure, I guess just to help you understand some of the difficulties. When the schedules are changed materially and somewhat inconsistently, meaning in some months the schedules are fairly good and in some months the schedules are really reduced, it is very difficult to manage month-to-month when there’s not a consistent schedule change.

For example, some of the expenses that we normally classify as variable to use an example are crew costs, which are classified as variable costs. From period-to-period those costs don’t change consistently with the change in production, because we have X amount of crews; we have in our pay systems, we pay crews minimums whether they’re flying or not as is consistent and standard in the industry. Simply because the schedule changes, it doesn’t really change our crew costs and that’s just an example of some of the difficulties involved in really proportionately changing the cost structure relative to capacity.

When we have consistency in the schedules, then we have a better ability to manage the cost structure, not just the variables but the overhead component and the infrastructure components to be more consistent with total production. That’s what we are extremely focused on and need to do in the future, is a better match of the cost structure, the infrastructure, the overhead, all the associated costs to be more consistent with hopefully what we have in the future as a more consistent schedule from all of our major partners.

One thing to point out as we look further at the cost structure and we look at the expenses, we have highlighted that there’s a maintenance increase of about $20.7 million. On decreased production, we look at that and expenses shouldn’t be going up when production went down. The interesting thing about this is, I think most of you know that the timing of heavy maintenance has a significant role here.

There’s $15.3 million of the $20.7 million that’s just the timing of heavy engine work which are pass through expenses. The part that’s really concerning is there’s about $5.7 million, what we classify as controllable costs, specifically related to some issues, just as a fleet has aged and become older, we are seeing some increases in our maintenance expenses.

Our interest income decreased $3.4 million during the quarter from the same quarter in 2007. That really shouldn’t come as too big a surprise given I think we all know that interest rates on short term investments have decreased.

We have also talked previously about the modifications that we made to our services agreement with Midwest. We reduced the fleet from 21 aircraft to 12 aircraft. We also agreed to defer a portion of our payments that are due from Midwest. In total, the amount of deferrals is now $9 million.

We deferred $1.1 million during the quarter. That should not be confused though with the total negative impact to our P&L, of the restructuring of the Midwest agreement. The total negative impact there during the quarter which consists of both lost income from the mark-up on the Midwest flying, but also in carrying the expenses of the nine aircraft that we eliminated from service at Midwest. In total that’s approximately $5 million of negative impact in the fourth quarter.

We have also identified as we have normally done, the impact of our stock based compensation programs. It’s $2.6 million pretax in the quarter. When you look at the change in our income now in summary, it really can be summarized in just a few quick points.

First of all, the $30 million of revenue loss due to the production, and the fact that our variable cost did not come down proportionately, it is by far the most significant component. In addition to that, we have the negative impact of $5 million from the Midwest operation, interest income down $3.4 million, controllable expenses and maintenance went up $5.7 million. Now, there are obviously a lot of other pieces by way of summary and from my perspective, those are really the most significant factors impacting the quarter.

Moving to some discussion about just the fleet, upcoming deliveries and capacity; at year end, the fleet consisted of 442 aircraft. We have described for you there, the types and where the aircrafts are flying. I will not walk you through all of that, because it’s in print.

One item maybe to spend just a moment on, we have identified there are nine SkyWest aircrafts. Obviously those aircraft are the nine that came out of the Midwest operation. We are aggressively trying to find alternate uses for those aero planes. Those alternate uses could include sale, sublease of the aircraft, as well as finding productive uses for them.

We have currently signed an LOI to place two of the aircraft. We are currently negotiating on a significant portion of the remaining aircraft to place those leases in other operations with other carriers, so we would become basically a leaser on those aircraft, but we are optimistic that we can find an alternate use for those aircraft.

On January 8, we announced that we would have an additional ten CRJ-900s coming in to the system. Those aircraft will be operated by ASA. This is a significant issue, not only will it bring in some growth, but it’s significant that we get the aircraft on ASA’s certificate and position them to be hopefully a much stronger player and playing a more vital role as the CRJ-900 operator in Atlanta. So there are both some strategic reasons as well as getting some growth and all of that, so that is a very significant deal.

Those aircrafts are expected to all be in and delivered by May 2009. The aircraft will serve as replacements for CRJ-200s. Basically, again from a high level here, the agreement with Delta is for every 900 we take, one year from the delivery of each 900, we will take two 200s out of service.

So, we do have the responsibility to find alternate uses for those airplanes. We think we have already found uses for a significant portion, for at least seven of the aircraft. So we need to get to work. We do have some time to work on this issue and to solve it, but that is part of that transaction that you need to be aware of.

In addition to the ten CRJ-900s coming into the system, we do have the CRJ-700s. That’s part of a fleet transition deal that we have made you aware of in previous quarterly calls. That’s a deal where we’re taking 22 aircrafts and eliminating some Brasilia turbo prop flying.

That deal consists of four CRJ-900s, all of which have now been delivered to SkyWest Airlines and we will take an additional 18, 700s, and the deliveries of those 700s will be as follows: Three will deliver in the second quarter of this year; five in the third quarter; five in the fourth quarter; and then the remaining five will be in the first quarter of 2010. So in total, for 2009 deliveries, we have the ten CRJ-900s and we have 13 CRJ 700s.

I wish that we could tell you that with the decline in fuel prices that we would see utilization on the fleet and schedules begin to return to historical-type levels. It seems that although fuel is down, now due to slowing demand driven by the economy, we are still seeing schedules and utilization similar to what we saw in the fourth quarter unfortunately.

That would mean that for ASM production, I will go ahead and tell you at least if we take our current utilization and extrapolate that over 2009, it would give us ASMs as follows: we would estimate and again I’m saying estimate here, because there’s obviously these numbers as seen in the fourth quarter can be somewhat volatile, but our closest estimates at this point would be that the first quarter ASMs would be very similar to what we just saw in the fourth quarter, which would be about $5.1 billion. In the second quarter, we are estimating $5.4 billion; third quarter $5.6 billion; fourth quarter $5.4 billion.

Now again, that is assuming similar levels of utilization as to what we have currently. We are certainly optimistic that as we move through the year, certainly we’ll see some strengthening of that as we move through the year or that would be our hope and expectation. The numbers that I have given you, we think are on the conservative side if utilization continues at its current levels.

As most of you have seen, we have been active in repurchasing of our own shares. During the fourth quarter, we repurchased 856,074 shares at an average cost of $13.81 per share, which is $11.8 million in dollars spent during the quarter. When you combine that with our previous activity in 2008, we repurchased a total of $5.4 million shares during the year at a cost of $102.6 million.

Let me just remind you, we do have board authorization to repurchase an additional 4.6 million shares as we deem it appropriate. Our current plan for repurchasing is to continue to repurchase enough shares to offset the current year dilution from our stock based equity compensation programs and then I would also say that our focus right now is more on cash preservation due to the current economy and to preserve cash, to take advantage of opportunities.

That is one thing that although the actual financials are not what we had expected, we all recognize that in these difficult times, opportunity is created and we do feel it prudent at this point to put more of a focus on cash preservation, really to position us to take advantage of the opportunities that are and will be created, and so that’s kind of our current thinking.

We ended the year with $705.2 million in cash and securities, compared to $660.4 million at the end of last year. So we had a fairly strong free cash generation for the year; obvious net of the $100.6 million of treasury shares, net of debt repayment, dividends, CapEx and all of those things. I already mentioned that. I know some of you use slightly different equations in calculating free cash flow. It’s been fairly strong when you consider it net of all of those items.

Let’s see, a few other items, just more oriented toward the balance sheet. Current ratio at the end of the year was 3.2 times the mix of debt and equity, 57% debt, 43% equity. I know you can calculate these numbers on your own, but our cash and securities per share is $12.51; book value per share is $22.63 per share.

We take frequent questions just asking how we’re analyzing and managing our counterparty risks. As it relates to the balance sheet, the most significant item relative to that is our accounts receivable balance. I would just make a general statement, no particular concerns at all with our accounts receivable from Delta and United, but of course we are watching the Midwest situation very closely and I'll just make a general statement, they are current on all required payments.

Our deferred taxes at the end of the year are $507.1 million. We did currently defer 97% of our total 2008 provision. From a CapEx perspective, our non-aircraft CapEx for the fourth quarter was $44.7 million. It’s interesting to note that $41.1 million of that was specifically related to maintenance.

Our plan for the coming year is a very, very tight control on our CapEx spending. We expect to spend company wide, $17 million for CapEx in the first quarter and for the full year $67 million. That $67 million, again that’s non-aircraft CapEx, but that $67 million for 2009 compares to $137.8 million in 2008.

On a very positive note, we do take questions from time-to-time about how our prorate flying is doing. We do have 27 turbo props dedicated to prorate flying. I’d just remind you that it’s different than independent flying and although it's prorate; we’re still doing that prorate flying in the United and Delta codes.

In previous quarters, we had indicated that our prorate flying, that we are really struggling, but I had also indicated that we felt in the fourth quarter we are going to see that turn and in fact it did. In the fourth quarter performance, our prorate flying had operating income of $1.6 million; although for all of 2008, we had an operating, I should say, a pretax loss of $6.9 million but good trends.

The improved performance in the fourth quarter is not only due to lower fuel prices, but higher yields that we saw, and partly due to some state and local Government subsidies that our people have pursued very aggressively and has helped that performance.

With that, I will go ahead and conclude the prepared remarks and we will be happy to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mike Linenberg from Banc of America; please go ahead with your question or comment.

Mike Linenberg - Banc of America

Yes hey, good morning Brad; a couple of questions here. I wanted to follow-up, I know in the last quarter in your press release you indicated that Delta was still withholding money related to I guess how you account for regular operations. Can you just update us on that? It looks like that the accumulated amount was the same as in the last quarter. So, presumably maybe they’re not withholding money anymore. Any update on that would be great.

Bradford Rich

Okay. No, there’s actually no change in the situation. It’s just running through the legal process, we’re in discovery. So, I mean the legal process is still continuing. The only reason that the disclosure hasn’t changed is that we have not recorded any of that as revenue in the current quarter. So, I mean although we are taking a conservative position on it relative to what we’ve booked in our financials, certainly it shouldn’t be taken as an indication that we feel any less strong about our case.

Mike Linenberg - Banc of America

Okay, but also they’re still not withholding. I mean I realize there’s the conservative piece, but in the last press release you indicated that they were still withholding a certain amount of money, has that…?

Bradford Rich

No, they are still withholding the money. So they’re withholding, we just haven’t booked any of it as revenue and therefore a receivable. So we’re in a sense just writing that off, which obviously has had a negative impact on our quarter.

Mike Linenberg - Banc of America

Yes. Okay, my second question is the CRJ-900s that are coming in from Delta, are those airplanes going to be on Delta’s balance sheet or will Delta have the head lease? Will they be subleasing those airplanes to you?

Bradford Rich

Yes, Delta will own and finance the airplane; we’re just taking the sublease.

Mike Linenberg - Banc of America

I see and then the 20 airplanes that will be going out in ‘10 are those airplanes where the ownership cost burden, is that with the SkyWest today or is that with Delta?

Bradford Rich

No, that’s with SkyWest.

Mike Linenberg - Banc of America

Okay. So then the ten airplanes coming in, they are bigger airplanes, but we should expect that the margin to you or maybe the margin is not the right way to characterize it. The amount of benefit that you will get will be less, because you won’t be out there putting your own balance sheet at risk?

Bradford Rich

Well, yes. The way that we have looked at and analyzed this is that, it’s not just the 900s are larger aircrafts, it’s that we’ll have larger aircraft for a much longer term than we would have been flying the 2200s; because those would have naturally expired and come out of the contract much sooner than the ten 900s which will stay in contract flying for ten years.

So we do have a period where we take the aero planes out of Delta contract service, prior to the expirations of their leases. We feel that it’s a relatively short amount of time. We’ve analyzed it on an aircraft month basis, how many of those aircraft months we have to find alternate uses for before we start, first of all breakeven and then start making our regular rates of return.

We are very confident that we’ve already got alternate uses for, as I said, seven of the aircraft and we’re confident that in the year that we have to deal with this, that we’ll be successful in placing the airplanes, but whether we make money or not on the deal is dependent on how many of them we place and we’ve got that part pretty well covered off already. So we think it’s a positive deal to P&L, and as well as the strategic importance of getting the 900s on certificate at ASA.

Mike Linenberg - Banc of America

Okay and then just my last question. You have these long term agreements with Delta, United, maybe Midwest. These were signed some time ago, 10 year, 15 year type agreements; what amendable dates do we have on the horizon, and I realize you have multiple contracts with each of your major partners, but in the next year or two or three do we have any parts of the contracts where we come up to an amendable date? I know you are always talking, but usually that some times is an opportunity for either party to come back to the table and maybe address or redress some of the elements of the contract.

Bradford Rich

Okay well, so first of all, there’s just a contractual response, right. I mean the Delta agreements go out to 2020 at both SkyWest and ASA, so those are both long term contracts, and then I think you all pretty well know that the united expirations are in three different trenches, but relative to amendable dates.

Really the only amendable date we have are related to rate resets and so we are in discussions right now with Delta about the three year average requirement, that rate reset point and then we will have another one at year five, where we will have another rate reset.

On the United side, we’ve just concluded our rate reset and there is no other rate reset. It just continues with contracted costs and contracted escalations and so forth. So that’s the contractual response. The more meaningful response is really based around our responsibility to understand specifically what our major partners want from us, relative to quality and cost and flexibility and you can go down the list of the things that are becoming really obvious to us, that our major partners need and we got to figure out ways to be responsive and address the needs of our partners.

I specifically am calling them partners because these are long-term partnerships and partnerships are strengthened when we respond appropriately to satisfy the needs and the demands of our partner, and that’s what we are trying to do, whether it’s contractual or not.

Mike Linenberg - Banc of America

Okay. All right, that’s helpful. Thank you.

Bradford Rich

You’re welcome.

Operator

Our next question comes from Duane Pfenningwerth – Raymond James.

Duane Pfenningwerth – Raymond James

Hi. Thanks, good morning.

Bradford Rich

Hi, Duane.

Duane Pfenningwerth – Raymond James

Just in terms of the change in your margin and some of the things you discussed; if you had known that that was the level of production that you were going to get for the quarter, with regard to costs that you can control, what might your margin have been?

Bradford Rich

Duane, I’m not going to answer that specifically. What I will say generally is that when we know ahead of time that production is going to be X and we also have some degree of confidence that it’s going to be consistently X, then we can make appropriate adjustments to all of our overhead and infrastructure, as well as the components of our variable cost structure that are appropriate for that level of production. As I mentioned earlier, crew costs.

Okay, now ASA is a good example. I mean now that we are understanding that some amount of lower utilization is probable, we have announced some furloughs to our crews. This is not pleasant. It is not what we wanted the answer to be, but now that we know that we have decreased levels of production that will be somewhat consistent, those are the types that we have to do to match the cost structure to the production. So, obviously if we’re able to do that perfectly, then our margins should be consistent with what they’ve been historically.

Duane Pfenningwerth – Raymond James

So just thinking about that near term and that [sell through], so a similar level of production in the first quarter, should we think about something similar to your 4.5% pre-tax margin or…?

Bradford Rich

Probably, what I would lead you to think here, is in the first quarter it may be similar. As we move through the year and can really execute on some cost reduction programs that are appropriate given the level of production, then we should see some improvement.

Duane Pfenningwerth – Raymond James

That’s helpful. Can you just quantify the number of aircraft that were idle or not in revenue service in the fourth quarter and the corresponding ownership costs or un-reimbursed ownership costs on those if any?

Bradford Rich

Well Duane, we’ll be happy to give you those specifics individually. I am not prepared to do it on this call, but I can give you some points of reference.

Duane Pfenningwerth – Raymond James

Okay.

Bradford Rich

We finished the fourth quarter with 442 aircraft and 379 revenue lines. Okay, now that is not a normal spare ratio and for a reference point, December of ’07, we ended the year with 436 aircraft and 401 revenue lines, okay, but it’s not only the decrease in the scheduled revenue lines, it’s on those respective lines, the 401 revenue lines in ‘07, the average utilization on those lines was 9.87. On the 379 lines, the utilization was 9.2. So it’s both, it’s a combination of the reduction of the scheduled lines and the utilization of those lines. That’s been really challenging.

Duane Pfenningwerth – Raymond James

Okay, that’s helpful. Then just lastly in term of rates, so I get fewer lines and lower utilization, but is there anything on the rate side that has surprised you?

Bradford Rich

No, no. This is not a rate driven concern; it's utilization and production.

Duane Pfenningwerth – Raymond James

Thank you.

Operator

Our next question comes from Bob Mcadoo from Avondale Partners. Please go ahead with your questions or comments.

Bob Mcadoo – Avondale Partners

Hi Brad.

Bradford Rich

Hello Bob.

Bob Mcadoo – Avondale Partners

Just to make sure I understand this, the 15.3 maintenance expense, the timing segments you talk about which is directly reimbursed. I guess I never heard you talk about the directly reimbursed portion of maintenance. Does that mean that because that’s 15.3 more maintenance with your revenue, it’s like in fuel your revenue was up 15.3 as well.

Bradford Rich

Yes.

Bob Mcadoo – Avondale Partners

And what kind of components; I mean is it all kind of powered by our engine maintenance, where you’ve go it on a contract somewhere, what is it that you got that’s a direct reimbursement on maintenance, what parts of the maintenance is it?

Bradford Rich

Well, let me just give you one example. In our Delta contracts for example, the timing of overhauls, I mean the overhauls are a direct pass through, so we don’t have any power by the hour rate reimbursement.

Bob Mcadoo – Avondale Partners

This is engine overhaul.

Bradford Rich

On engines. So my only point is that the number both in revenue and expense is simply driven by the timing of the overhaul, but it’s a direct pass through so it shows up in our revenue and in our expense as the same amount.

Bob Mcadoo – Avondale Partners

Okay, and so we need to be careful on that just like we are with fuel when we take them. The comments you made about first quarter margin, we got to be thinking about fuel price and what that does to margin and this could also influence margin a little bit as this thing happens to bounce around depending on the actual timings of the overhaul, it sounds like.

Bradford Rich

That’s correct and which also emphasizes the point that I tried to make and maybe didn’t do very well, but it’s the controllable portion; it’s part direct pass through that has had some negative impact on margin. That piece is the controllable element that we’ve got to manage more appropriately.

Bob Mcadoo – Avondale Partners

Understood and then one last thing. If I remember right, in prior calls you’ve made comments that said that the way your Delta deal works, if they squeeze you too much on utilization or whatever, over so many months that you have it automatic, you got to come back to the table, because these rates don’t make sense kind of provision.

Bradford Rich

That’s correct.

Bob Mcadoo – Avondale Partners

So, where are we relative to that?

Bradford Rich

We are below our minimums.

Bob Mcadoo – Avondale Partners

So, do we have another month or two before they have to come back to the table or how do you see that happening? What’s going on?

Bradford Rich

Okay. So the contract says that if they’re below the minimums for more than two consecutive months, then we have to get together and decide upon a rate adjustment. We are in those discussions right now with Delta.

Bob Mcadoo – Avondale Partners

That would be helpful.

Bradford Rich

I want to make sure; I mean, there’s an important point here that really can’t be overlooked. I mean when we established these rates, our block hour, our scheduled daily utilization was at about 10.5. Okay, so going down to nine, at which point a rate adjustment is appropriate, we’ve already taken a 14.5% reduction just to get to the minimum.

Bob Mcadoo – Avondale Partners

So, the 14.5% is the difference between your half and what you’re actually seeing, which is this 9.2.

Bradford Rich

Well, and our current schedules are below 9, okay.

Bob Mcadoo – Avondale Partners

I though you were at 9.2 for the quarter. When you gave us this number, the lines at 440 versus 442 lines and those lines were only 9.2 hours, now you’re saying it’s even less than that?

Bradford Rich

There’s a whole lot of detail I can get into with you here. The 379 and the 401 I gave you, this is, this -- I’m getting into more detail than I should in this forum, but as it relates to the calculation of the minimums, there’s a different calculation to determine scheduled revenue lines as it relates to the minimums. As it relates to the nine hour minimums, we are now below those nine hour minimums, and my point here regardless is how you calculate it, the real issue to us is not getting in place a rate adjustment to get us back to an equivalent of nine.

Bob Mcadoo – Avondale Partners

It’s to get you something that covers you where you were originally at something like 10.5.

Bradford Rich

No, we don’t have anything to cover us there, other than our prudent management of the cost structure, and that is by far the most significant component. I mean we can’t fall back and say. Well, let's negotiate it with Delta and get an appropriate rate adjustment. I mean that’s important, but it’s the smaller part of the issue.

Bob Mcadoo – Avondale Partners

Yes because all they got to do is cover the nine in effect. So if you were flying nine and then you’re stuck for that last, the impact of the fact you’re not at 10.5 which is where you would’ve probably been when you sat down and negotiated the thing.

Bradford Rich

That’s correct and by the way it’s a significant material issue, but it’s manageable. I mean, once we have some confidence in the stability and consistency of the schedules, then we can make the appropriate adjustments, and I think that’s the point we’re at and that’s why we’ve seen an announced furlough on the ASA side.

Chip Child and his group are aggressively working on things on the SkyWest Airlines side and that’s why I said, maybe more similar to what we just saw unfortunately, but then improving as we move through the quarter, hopefully a combination of better utilization as we move through the year, but our ability to manage the cost structure will become clearer and better.

Bob Mcadoo – Avondale Partners

Have you announced anything like early op programs or anything like that on the SkyWest side?

Bradford Rich

Chip, do you want to address that?

Chip Childs

Yes, I’d be happy to. We have spent a significant amount of time working with our pilot group and by the way, I take a second to applaud the efforts of our pilot leadership group in sitting down and looking at the schedule for the rest of the year, looking at the pilots that we have on hand now and looking what we can do to better utilize those. All of that has created a significant amount of creativity with programs that some are out there in the industry; some are not out there in the industry.

We hope to have some of the plus programs implemented hopefully in the March to April time frame, and there are some things that we’ve never offered before to this group and it’s been done with a lot of feedback from our pilots and our people. The rest of our staffing throughout the rest of the airline industry is appropriately balanced going into the springtime, but we are hopeful and very optimistic about what we can do with our pilots throughout the rest of the year with some of these long-term programs.

Bob Mcadoo – Avondale Partners

Cool. All right, very good. Thanks, guys.

Bradford Rich

Yes. Thanks Bob.

Operator

(Operator Instructions) Mr. Rich, at this time I’m showing no additional questions. Would you like to make any final comments?

Bradford Rich

My only comments would be that we really haven’t spent a whole lot of time on this call talking about opportunities, about strategies moving forward. Let me just assure you that we feel very confident in a combination of the leadership and talent that we have in our people. I mean all of the people of the SkyWest, Inc. families and combine that with the strengths of the platforms that we’ve got and our financial strengths, we really are very optimistic, very confident in our ability to create value in this environment.

As we look at opportunities, we are paying a lot of attention and a lot of focus on our strategies moving forward and we feel very confident just in our overall positioning and what that means for the future and particularly the opportunities that will be created in difficult and challenging times.

The other thing that comes to mind is that I appreciate the participation of those of you on the call. I appreciate your questions. The questions are stimulating and thought provoking and I appreciate that and your participation and your interest in the company.

With that I just again express our thanks not only to you participating on the call but, but we really have what is sometimes overwhelming, a sense of appreciation and gratitude to all of our people who are sticking with us in these difficult times, who are giving their hearts and souls to this operation everyday and that is not unnoticed and overlooked and we appreciate it very much. With that I will go ahead and conclude. Thank you.

Operator

That concludes today’s conference call. Thank you for joining, you may now disconnect your telephone lines.

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Source: SkyWest Inc. Q4 2008 Earnings Call Transcript
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