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SkyWest, Inc. (NASDAQ:SKYW)

Q4 2013 Earnings Conference Call

February 13, 2014 11:00 AM ET

Executives

Brad Rich – President

Mike Kraupp – Chief Financial Officer and Treasurer

Chip Childs – Chief Operating Officer, SkyWest Airlines

Brad Holt – President and COO, ExpressJet

Eric Woodward - Chief Accounting Officer

Analysts

Savanthi Syth - Raymond James

Richa Talwar - Deutsche Bank

Helane Becker – Cowen and Company

Duane Pfennigwerth - Evercore Partners

Glenn Engel – Bank of America

Bob McAdoo – Imperial Capital

Operator

Good day, and welcome to the SkyWest Inc. Fourth Quarter 2013 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 this event is being recorded.

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

Brad Rich

Thank you very much, operator. Thank you to all of you for taking the time to join us this morning. As always, we very much appreciate your interest in SkyWest Inc. and our operating companies and we look forward to having a good and productive call this morning.

Let me first of all introduce those who are with me who will be participating this morning. I have Chip Childs, our President and Chief Operating Officer of the SkyWest Airlines operating entity, as well as Brad Holt, who is the President and Chief Operating Officer of ExpressJet Airlines. And I also have Mike Kraupp, who is our Chief Financial Officer, Eric Woodward, our Chief Accounting Officer and we have other members of our staff here with us at headquarters in St. George.

I am going to begin this morning by turning some time back to Mike Kraupp. He will read our Safe Harbor on forward-looking statements and then he can just continue and give an update, review the quarterly release that we put out this morning and our financial performance and condition and following Mike’s remarks, then I will make some general– some other general remarks. We’ll go ahead and turn the time to Mike.

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 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 or expressed during this conference call or set forth in our 2012 Form 10-K and other reports and filings with the Securities and Exchange Commission.

Let me also thank each of you for being on the call with us today and likewise as Brad expressed for your continued interest in our company. My comments are going to be brief and I am keeping consistent with past practice. I’ll just use our press release to highlight some things for the quarter.

This morning, SkyWest Inc. reported net income of $8.6 million, or $0.17 per diluted share, this compares favorably to a recent downward revision of the consensus estimate of $0.14 per diluted share this also compares to net income of $13.9 million, or $0.27 per diluted share, for the same period last year.

SkyWest also reported net income of $59 million, or $1.12 per diluted share for the year ended December 31, 2013, and that compares to $51.2 million, or $0.99 per diluted share, for the same period last year.

From a production standpoint, our total block hours increased 2.8% during the quarter to 584,594. Our fleet also at year end was 757 aircrafts, which is a net increase of 13 aircrafts on a year-over-year basis.

The net increase is primarily the result of our continued Delta transition that we started in late 2012 and finished by May of 2013 where we brought in additional dual-class aircraft. We’ve also continued the removal CRJ200 Regional Jet aircraft operating under our Delta agreement, which was also announced in 2012 whereby SkyWest agreed to remove 66 50C regional jets and brought on a total of 34 dual-class aircrafts.

As of December 31, 2013, we have removed 33 CRJ200 aircrafts and would anticipate removing 29 of the remaining 33 aircrafts during 2014 and the last four aircrafts in early 2015. You can also see from the press release that total operating revenues decreased about $6.4 million quarter-on-quarter.

However, after you remove the noise created from pass-through costs like our fuel, certain engine overhauls and other pass-through costs that are included in revenues we actually increased our operating revenues by $23 million for the quarter. That increase was driven by additional block hour production of 2.8% as well as scheduled rate increases that were provided for – in our fine contracts. Also our total pro-rate revenues during the quarter was about $90 million which compares to 88 million for the same period last year.

Also was noted from the press release our operating income was lower by about $13 million for the quarter just ended compared to the same period last year. We believe the reduction is due to three primary factors. Number one, we spend about $3 million pre-tax in increased crew training cost as a result of the new FAR 117 rules, which became effective in early January 2014.

We also spend about $5 million in additional C-check maintenance costs on airframes during the quarter just ended that were primarily related to the used dual-class aircrafts that we acquired during late 2012 and early 2013. And then lastly, we invested about $3 million in our future E175 regional jet air program by starting advanced crew training and working to become certified to fly this aircraft.

Incidentally, our first E175 aircraft is expect to deliver on March 24, 2014 and we’ll actually take delivery of 21 of those aircrafts during 2014.

Our pre-tax income was lower by about $10.5 million for the quarter just ended compared to the same period last year as a result of the previously mentioned items as well as a reduction of about $2.5 million in our interest expense.

Total operating expenses and interest increased $4 million for the quarter just ended, but again, when you remove the noise created by pass-through costs that I noted previously, our remaining total operating expenses and interest increased $33.4 million or about 6%.

Roughly, $17 million of the increase is attributable to the increased block hour production of 2.8% and the remaining $16.4 million or 3.2% is due to the general aging of the fleet which produces increased maintenance cost in addition to additional crew cost related to the aforementioned training events.

We again have included a summary balance sheet in the press release prior to the filing of our Form 10-K later this week. As indicated, we have $670.1 million in cash and marketable securities as of December 31, 2013, which compares to cash and marketable securities of $709.4 million for the year ended December 31, 2012.

The reduction was about $40 million year-over-year and you can likewise see the deposit on aircraft amount of $40 million on the summary balance sheet as well. That amount represents the total amount that we will pay on deposits for our recent order of E175 regional jet aircraft and those deposits will be returned during mid-2015 depending on how we finance the deliveries, either through leases or traditional debt financing.

Our net debt position improved during the year and reduced by about $132 million. We also spend about $44 million in non-aircraft capital expenditures during the quarter that just ended of which about $10 million was related to advanced purchase of routable spare parts and spare engine for our new fleet type the 175.

We’ve also included another page in the press release outlining our estimated fleet numbers at the end of each of the quarters during 2014 in addition to block hour production and available seat miles.

In 2014, we will begin in earnest returning additional CRJ200 aircrafts that I’ve outlined as well as the start of E175 I am sorry, E145 aircraft under our United agreements and those agreements are consistent with the standard reductions within the confines of that particular agreement.

Lastly, the block hours is indicated for the first quarter were adjusted earlier in the week for the previous weather events that we’ve had, but I would also suggest that you adjust those hours downward by about another 2200 block hours to take into account the additional weather-related cancels just over the last couple of days.

And with that, I’ll turn the call back over to Brad.

Brad Rich

Okay, thank you Mike. Okay, I want to spend a few minutes addressing a few very specifically issues, we’ll have a discussion concerning for our readiness for the E175s that are rapidly approaching.

We will talk about a little further, we’ll discuss the impact of the weather in January and February, we’ll talk about some of the pilot issues that are affecting the industry and then we will have a very specific discussion about some things that are required to some changes and improvements that are required at ExpressJet.

First of all, a quick word about our readiness for the Embraer E175 aircraft. SkyWest Airlines remains on schedule with the certification efforts for the E175s which will fly under the United Express brand.

We expect delivery the week of March 24 and will begin service – we expect in late May of 2014. The initial routes will be announced by United we think very shortly, but that announcement is one that needs to come from United and will be probably made next week.

But we are very encouraged, we are on plan. Everything is although it’s required a tremendous amount of effort and work, our people have been on task and our – when we feel very good about our preparations and our readiness to bring on this aircraft type.

Next. Let me talk about the impact of the weather in January and February. As most of you know, we began the year with some of the coldest U.S. temperatures in decades. And again, as most of you are aware by some reports the impact of this severe weather system resulted in more than a 100,000 delays and canceled flights affecting somewhere around 10 million passengers across the industry.

For SkyWest operating entities, the weather irregular ops produced the most significant and challenging impact at ExpressJet, given their East coast presence and their concentration in Chicago, Atlanta, Newark and Cleveland.

We have experienced around 15,000 total cancellations with approximately 13,000 of those directly attributable to weather. Those numbers are from January 1 through February 12. To put those numbers in perspective, what we had through were an unprecedented number of weather cancellations in the first six months of 2013 in that period we had 10,000 weather cancels and in all of 2012, we had 12,000 weather cancels.

So, in the first part of the year, from January 1 through February 12, we have in that short period of time have exceeded what we have thought previously were unprecedented numbers of difficult weather related cancels.

This is obviously going to have a significant impact. Those issues have been kind of compounded and exacerbated by the impacts of FAR117 and it certainly contributed to a significant amount of additional cancellations and again the whole situation was exacerbated by these new rules. It’s displaced crews and aircrafts resulted in crew timeouts earlier done would have been under the previous rules creating somewhat of a halo effect under the significant irregular operations events.

We expect losses due to weather affecting ExpressJet’s operations to be around and again this is an approximate number, but it is a significant number we expected to be around $24 million pre-tax.

That number is a combination of lost revenue from not operating the block hours as well as the additional expenses incurred just due to all of the irregular operations where we have crews displaced maintenance members commuting to airplanes instead of airplanes being under hangers and that sort of issue. So, again it’s a significantly weather-related impact that will certainly create a negative pre-tax impact on the first quarter.

Let me talk about some of the pilot issues. There is quite a bit of conversation across the industry surrounding pilot availability and new regulatory requirements. To recap a couple of the most recent industry changes, the new federal minimum experience requirements became effective in August of 2013. Both of our operating entities were prepared for the change well in advance of its effective date and have continued to attract highly qualified professional pilots.

That being said, it has had an impact on the number of qualified pilots across the industry who meet the new requirements and at least in our opinion, this will be a challenge in the future.

Additionally, the new rest requirements of FAR117 were implemented in January of this year which has increased the need for crew members across the entire U.S. airline industry, not just the regional carriers and as I mentioned, both SkyWest - both of the SkyWest Inc. operating entities have executed the necessary changes associated with this rule.

I think some of these issues have become highlighted in certain media articles and have gotten some media attention. One of our partners announced some changes in Cleveland and attributed some of those pull downs to some of the issues relative to these crew requirements and new rules and generally the impact on the availability of pilots.

Let me just say that we expect that ExpressJet will be a presence in Cleveland in the future both flying and maintenance, but there will be more clarity to this issue in the future as we get additional clarity and continue to work with United on those future schedules. SkyWest Airlines has a smaller presence in Cleveland and we don’t expect a material impact there.

In short, it’s clear that the various factors and changing industry dynamics have made fewer pilots available industry-wide and we are immune to those factors as an entity. However, our operating entities continue to attract qualified pilots. But again as I said, we do expect that this is getting harder and harder and will be a challenge in the future.

We do remain very conscious and proactive about our ability to attract and retain qualified professional crew members.

Now speaking of crews, both of the operating entities completed voting on the respective pilot compensation packages in January of 2014. SkyWest Airlines has secured a solid pilot agreement that helps maintain competitive position in the industry. The ExpressJet pilots did not agree to the proposed new compensation package and they continue to operate under the existing contracts.

We will continue working with these ExpressJet pilots to secure agreements that will allow that entity to become competitive. The financial health and stability of ExpressJet is a significant priority and focus.

Now, speaking of that priority and focus let me make some specific comments relative to our current situation at ExpressJet. After three years the ExpressJet entity and I am talking about the combined ExpressJet since the acquisition of ExpressJet the entity continues to lose money and it’s generating negative cash flow. This plan simply cannot continue.

One of our highest priorities is a specific defined action plan for the returned profitability of ExpressJet. The recovery is simple in some ways and very complicated in others depending on the area of focus and the level of control, and we will require coordination with our major partners.

To that end, we have a very specific plan to secure the required and expected returns and again these returns that we expect that our shareholders require and returns that will create a stable and productive work environment for our employees into the future.

This plan is focused on three specific areas. Number one, specific cost reductions which we are working to achieve through the following, number one, process improvements and productivity enhancements including very specific coordination with SkyWest Airlines involvement to implement best practices across the entire SkyWest Inc. platform.

Second, within specific cost reductions, our labor agreements, we plan and simply must complete our joint collective bargaining agreements with all labor groups. Next, vendor and service provider negotiations using the combined volumes of SkyWest Inc. to create value.

We have had a material improvement and success in this area over the last few months and we expect more in the future.

Okay, the second area of the improvement plan. We need to improve our operational reliability to deliver the product, our partners and customers deserve and expect which will both reduce cost and increase our base mark up and our contract performance incentives.

Specifically, in 2014 we will improve our spare ratios to better support the network. We will continue to implement organizational and structural changes to ensure efficient and reliable operations and we will continue to work with our major partners to optimize the route networks to ensure that crews and maintenance are flowed most efficiently and effectively through the system.

Third point, we need to modify and in some cases re-negotiate our major airline CPAs. The legacy ExpressJet contract is materially below market. The contract requires certain modifications or we need to reduce the size of the fleet in those contracts to eliminate future losses.

Getting ExpressJet to profitability requires success in all three of these key areas, cost reductions, operation reliability and contract modification. We are very aware that there are many factors and stakeholders that contribute to achieving each key objective but we remain very focused on this approach.

As yo9u would expect, we do conduct very specific and detailed analysis of our operations by segment, by type, by code, by location. We know where we are making money and we know where we are generating positive cash flow and we know where we are not.

We are prepared to take the steps to remove unprofitable segments or operations that generate losses and negative cash flow. Again, our ExpressJet recovery efforts in 2014 are specific and focused at a critical part of our short-term strategy.

Now, let me end on what I think are a couple of very positive notes. As some of you may know, in 2013 we are just awarded the air transport world regional airline of the year. We are proud of our people for helping create many successes and our thanks and appreciation go out to them.

We are grateful to all of the men and women of SkyWest Inc. and our operating entities for their dedication and for helping us again achieve many successes. We have, as we discussed, many challenges ahead, but most of all, this award makes us even more determined to be the leaders of our industry into the future.

I would also say that we are very optimistic. We see opportunity and we have the resources to productively act. Those assets and resources are our people and other strategically valuable resources. Our priorities are centered on allocating those resources in a way that will generate both current and future value.

With that, I will now close our prepared remarks and open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Savanthi Syth of Raymond James. Please go ahead.

Savanthi Syth - Raymond James

Hey, good morning. Thanks for kind of laying out the plan for returning to profitability at ExpressJet. I was hoping you could provide a little bit more context in – maybe relative size of the various components and perhaps the likely timing of when these items can be addressed?

Brad Rich

So, Savi, it’s a very good question. I mean, I am trying to be as specific I can be in this environment. Obviously, the plan is very detailed. It has many facets and aspects. I would just say that we – in addition to what I said, let me just add to it, that, look, we are focused on productivity enhancements, best practices, using our size and volume wherever we can to create productivity efficiency and value.

And so what we are doing is, we are working very cooperatively as SkyWest Inc. with both entities using all of the intellectual knowledge we have at both airlines combining it with our systems, our size and just really looking at everything.

So with the help and cooperation of both entities, we have identified very specific initiatives that we are working on those initiatives are very specific to those areas that I addressed.

Process improvement, cost reductions, improving the reliability and revenue enhancement that will come through reliability as well as the reality that we have some contracts that are just – there is no other way to say it that are significantly below market. And we’ve either got to improve on those or reduce the size of the fleets that are flying in those unproductive contracts.

We think this is an environment where the resources that we have available at SkyWest are very valuable. I mean, look, I mean size means nothing to us if it can’t create value. So, if we can’t create value through size, then we need to downsize.

If our size and volume positions us with crews and things that are strategically very important today and we can utilize those and allocate those in a way that can create value to both us and our major partners that is certainly our preference.

So, I just need to leave it with the detail that I have given. We are very focused. We do have detailed specific initiatives in all of those areas and we are acting on them immediately.

Savanthi Syth - Raymond James

Okay, understood and just a second question on the fleet detail was very good as well and I appreciate that. It looks like there 66 50C that is being removed this year in 2014 and 29 of that is related to Delta. I was wondering where the rest were coming out of and maybe how many you might – what kind of a reduction we might see in 2015?

Mike Kraupp

Well, the balance of them will be sort of – sorry this is Mike again 1z, 2z with CRJ200 aircrafts sort of throughout the system. Non-Delta related and then the balance of those will be E145 aircrafts that we have scheduled reductions on coming out of our United contracts.

Savanthi Syth - Raymond James

Okay, and then 2015?

Mike Kraupp

I don’t have the 2015 numbers right in front of us, but Savi, we will file the Form 10-K later this week and we’ve actually got scheduled reductions outlined within that. So we would welcome you to take a look at that.

And then we’d also caution folks to remember that when we put those numbers out there, those again are estimates. We found that historically our partners actually come in and deviate just a little bit on the time for that and have actually extended. So just be aware of that as you look at that data.

Savanthi Syth - Raymond James

Got it. Thanks so much.

Operator

Our next question will come from Mike Linenberg of Deutsche Bank. Please go ahead.

Richa Talwar - Deutsche Bank

Hi, this is actually Richa Talwar filling in for Mike. Just a few questions here. You guys talked about the pilot issues and mentioned that the media has been focused on and it will be maybe a challenge for you more in the future.

I was wondering though if it impacts to your current fleet plan for 2014 and then specifically looking out, I mean, you have those options on the remaining 60 E175s. Do you feel comfortable enough with your position and your crew numbers to be able to fulfill that – you find the right partners and the right contracts for that?

Brad Rich

Okay, so there was actually quite a lot to that question. First of all the pilot issues, look, these changes both in the minimums and the impact of FAR 117 are very significant issues and not only by themselves are they significant.

But they are happening at a time when the majors are hiring fairly rapidly and will be in the next few years and at a time when our industry will experience thousands of retirements at main line due to – just due to mandatory age retirements.

So, all of these things combined to be a very significant issue to SkyWest and the industry. All of us together are going to have to deal with this. Now, this is one area that I think, two things that create some advantages for us.

Number one, we do have very attractive entities to come and join and fly for. And in addition to that, our size, our current size has some advantages, because we will be having some natural retirements of fleet at the same time that we see some opportunities for some additional aircrafts even within the additional dual-class environment.

So, in some ways, what we expect and are working towards is just a re-shuffling of the fleet, the elimination of some of the 50 seat airplanes and just repositioning them in hopefully additional dual-class airplanes.

So, I mean, that’s certainly ideal and when we have the base of pilots and crew members we have that should give us some advantages over the rest of the industry.

Richa Talwar - Deutsche Bank

Okay, that’s helpful. And then, on your turnaround plan for ExpressJet, one of the lags you said is, to modify and renegotiate some of your CPAs. I was wondering if you’ve already started having conversations with your major partners on this and how receptive they are to maybe amending some of those contracts.

Brad Rich

Look, as you can imagine, this is a very sensitive and very challenging issue. Yes, we have begun discussions and we will continue them in the very near term and as far as to their receptiveness to that, I am not going to comment on that publicly.

I will just say that, we’ve either got to have improved rates in certain areas or as airplanes are scheduled for natural terminations, then we would not expect to renew those airplanes and in a very natural way.

You could see a fairly significant reduction of the ExpressJet fleet certainly our preference will be to have the major carrier in this instance properly value the lift and continue flying and extending. But if that doesn’t happen, then we will simply reduce the number of aircrafts in those unproductive contracts.

Richa Talwar - Deutsche Bank

Okay, thank you and then if I could just ask one more, you said that the losses at ExpressJet for the first quarter I think you said was $24 million pre-tax…

Brad Rich

Okay, let me clarify, that’s an additional – so when you look at – so, what I am saying is, if you take the – your initial estimates and expectations for the first quarter, this would be an additional $24 million of negative pre-tax impact from what you were already expecting.

Richa Talwar - Deutsche Bank

Okay, understood. Thank you.

Operator

The next question will come from Helane Becker of Cowen and Company. Please go ahead.

Helane Becker – Cowen and Company

Thanks operator. Hi, guys, thank you very much for the time. I just have a couple of questions. One is on the – I don’t know how much you can talk to the terms of the new pilot contracts, but does it provide for starting salary increases at the first level at the joining level?

Brad Rich

Helane are you talking – when you say the new pilot contract, we do have – the SkyWest Airlines pilot devoted in their agreement is that the one you are referring to?

Helane Becker – Cowen and Company

Yes, yes, yes, because the ExpressJet pilots I think you mentioned and I saw a couple of weeks ago rejected the TIs.

Brad Rich

That’s correct.

Helane Becker – Cowen and Company

So on the new – for the compensation agreement for the pilots at SkyWest Airlines, do they provide for a base salary increase? Because we are seeing discussions in the press that pilots and this is generic, start at regional airlines as low as 20,000, I am not sure how that comps to your guys, but I was wondering maybe you could just speak to that directly.

Brad Rich

Okay, I’ll ask Chip Childs, President and COO of SkyWest Airlines to address that.

Chip Childs

Helane, it’s a great question. I think we have to get to the point when we talk about pilot pay. We have a conversation and little bit we got to divide it up between RJs and resilience, because I think from our perspective we have the unique line of business where we fly – along the West Coast and in Salt Lake City.

And we have about 45 or so of those airplanes. And a lot of our new hires come into fly the – so there is flat pay package. Not taking into specifics it did increase that pay quite a bit to attract folks into the – which we think is a very viable business.

From the perspective of going directly into an RJ, because some of our pilots go directly into a jet. We did not make any modifications to those rates or higher than that and I think when you look at our competitive base compared to where a lot of the industry is particularly when you look at what we have been on the – side.

We are very well within the range of being able to attract pilots. In fact, I spent some time with our new hired class last week and we have tremendous group of pilots that continue to have interest in SkyWest and coming a lot flight for us and it’s an exciting story relative to a lot of things you hear out the media.

Helane Becker – Cowen and Company

Can you say what your pilot turnover rate has been or what you think it will be this year?

Chip Childs

I think for SkyWest Airlines, I’ll speak specifically for SkyWest and that Brad Holt speak to ExpressJet. Last year, in 2013, we budgeted about to lose about 20 pilots a month and on average last year, we were on the 13 pilots a month range. So we were last year significantly lower than what we had anticipated for 13.

In the fall, it jumped up a bit like it did throughout the industry at closer to 20 and we are budgeting slightly more than 20 this year and so far what we have seen for January and February, we are slightly below those estimates.

Brad Holt

Well, Helane, on the ExpressJet side, we are running – if you look at an average over the rolling 12 months, we are running between 8% and 10% turnover. That equates with our size fleet to about 30 pilots average a month and of course, that’s up and down. We have very high months and then there is very low months and that’s all dependent on the major airline hiring, but on average it takes 10% at present.

Helane Becker – Cowen and Company

Okay. And then, just on the ExpressJet specifically, I don’t know how the CPA works, but I know that you get bonuses if you reach certain goals. Do you have to pay your major partner if you fall below and do you get a buy for weather?

Brad Rich

So, Helane, that's a very good question and the answer is yes and no depending on which contract we are operating in because even within ExpressJet, of course, we’ve got two different major carriers and we also within United have several different contracts. So, yes, the contracts have performance incentives.

And on a large portion of the ExpressJet contract, there - the contract calls for performance bonuses and penalties. And so, yes, if you fall below a certain liability, there are penalties. On the ExpressJet side, the contracts – I will just say this generally there – again they are different by carrier.

But generally there is very little and in most of their cases no compensation for weather related cancels. That’s why the impact of this is so disproportionate both location and the impact of the contracts all the legacy ExpressJet contracts did not allow for any compensation for weather cancellations.

Helane Becker – Cowen and Company

Okay, but, they must - I mean, we see the numbers everyday they must understand you can’t operate with them canceling 500 to a 1000 flights a day on some weather days.

Brad Rich

Well, yes, they do realize that and look in most of these real severe days like what we have going on today, yesterday and today. A lot of the flights are just pre-canceled and in some cases, we just had, I mean, virtually just hard stops. I mean, our flights are just pre-canceled.

Helane Becker – Cowen and Company

Great. Gotcha, and then what about the MRJ order? Is there any update to that how – what’s the timing? I know they are behind, I think about a year, so, are you making pre-delivery payments on those? Or can you suspend those waiting for them to catch-up or can you just update us on that?

Brad Rich

So, as you will see from our financials, there was a big increase in the quarter in pre-delivered deposits. That was all related to the E175 contract and that level of deposit is capped.

So, we will not make any further pre-delivery payments and as far as the MRJ side goes, look there are no changes from what you have seen previously as reported by Mitsubishi relative to the timing. As it relates to us, our deliveries were originally scheduled for first quarter of 2017 and are now moved to second quarter of 2018. But there are no remaining pre-delivery deposits to be made.

Helane Becker – Cowen and Company

Okay and then can I just ask one more question? On ExpressJet, when did you – I mean this has been a problem for years as you pointed out, so when did you decide that this has to – there is like almost an end date?

Have you been talking about this at the board level for several months or just is this just start? I am kind of surprised you didn’t start to take some of these, could you guys are pretty good at being profitable and focused on your business. Then you didn’t start to take some of these initiatives last year rather than this year?

Brad Rich

So, look, we have been working on some of these initiatives very, very specifically for several years. And as you know, some of the – several things that have – that are – let me just say there are things that have changed within ExpressJet and the network that we operate.

Some of the improvements and the cost reductions and the initiatives we have been working on have been overshadowed by other inefficiencies in the system. We have some cost increases in some, I mean, I hate to make excuses and call them uncontrollable.

But for example, in maintenance, we have some escalating costs, primarily due to age of – either age of aircraft or the utilization on the airplanes that are causing increases in maintenance that are escalating higher than our rates are escalating.

So, we knew when we bought ExpressJet that we had to get some efficiency and productivity and integration savings and but we also knew that in the near-term, the results would underperforms relative to our normal expectations, because we didn’t have tail risk.

We knew the rates were on the very low end of the market, but as the natural terminations happen and we expect to – the original thesis I will say was to renew and extend contracts at what would then be market rates. Well, in the meantime, the system has changed.

The system has been spread out. It was very concentrated in Newark and Cleveland and Houston and now we are flying in Chicago and Denver, the utilization on the airplanes have gone up.

The spare ratios are not adequate. I mean, there is just a number of complicating factors here that have kind of exacerbated the problem and in the meantime, we haven’t achieved the joint collective bargain agreements that we need to get and that’s delaying some of the efficiency and productivity improvements that we needed to realize.

And so, look all of this has just, I mean, yes, the board has been talking about this for a long time and yes, as you can imagine, the board is not very patient with this and so, things are just moved to a higher priority and a sense of urgency and that's where we are.

Helane Becker – Cowen and Company

Great. I really appreciate the depth and breadth of your answers. Thank you very much.

Brad Rich

You are welcome Helane.

Operator

The next question will come from Duane Pfennigwerth of Evercore. Please go ahead.

Duane Pfennigwerth - Evercore Partners

Thanks, guys. Just on ExpressJet, if you don’t have ownership risk on an aircraft and you are not generating profit, operating an aircraft, how is the customer winding down operations in a place like Cleveland bad for you? It seems like it could actually be accretive.

Brad Rich

So, I don’t think you’ve – look, we are very sensitive about this from a number of respects. Look, there are people involved and we are very concerned about people, but as it relates directly to your question, I don’t think you heard us say this, this was necessarily a bad thing for us.

And until we see more detail out of – from United just generally as a market, we shouldn’t draw conclusions about what the impact is to our entities. I mean we still expect to be present in Cleveland.

Duane Pfennigwerth - Evercore Partners

Okay and certainly appreciate your detail on the three point to the plan and there has already been a couple questions on that third point. We haven’t really seen main line carriers rushing to open their wallets for higher rates on exiting contracts. So my question is, what is your sort of timing, how patient should we expect you to be with respect to that third point? And if you don’t get there, what I guess a plan be?

Brad Rich

Well, so, look, as Mike said, you will see in our 10-K that will be filed here very shortly later – Friday tomorrow. There will be a fairly detailed plan of expiration natural expirations in there.

So, look, this is - this is our point and position is that this feed needs to be properly valued or the terminations will happen. So, some of this will just happen naturally, okay based upon what will soon be a fairly aggressive termination just scheduled by contract.

At the same time, we have other partners that you know have been very vocal about their desire to reduce 50C left. Okay, so there are a number of things that could play out here that could result in fewer aircrafts at a smaller fleet.

Duane Pfennigwerth - Evercore Partners

Thank you guys.

Brad Rich

You are welcome.

Operator

Our next question will come from Glenn Engel of Bank of America. Please go ahead.

Glenn Engel – Bank of America

Good morning. A few questions. First on the CRJ side, as you return those planes, is there return cost to those aircrafts under certain conditions and two on the engine mismatch, there was a $3 million good guy this quarter in the engine mismatch, and is that likely to continue in 2014?

Mike Kraupp

Okay, this is Mike again, Glenn. With regard to your questions, yes, typically when an aircraft goes back, we do incur some cost. It really depends on the condition of the aircraft, but we’ve got negotiated provisions primarily under our leases that we have to return those results. So, yes, there could be some small level costs depending where that aircraft is on its cycle.

With regard to the second part of your question, yes, your observation is correct and that we had a small good guy in this quarter. And for the remaining quarters of 2014 and for the year, we do anticipate that that United engine overhaul event will be a good guy to the tune of about another $3 million over the course of the year. So, similar but a little bit higher next year.

Glenn Engel – Bank of America

And the CRJ return cost, your comments will be – you don’t think they are going to be large numbers affecting estimates?

Brad Rich

I would – this is Brad. I would just say, I don’t expect this to be a material number. Look, with the size of the fleet we have in our experience of returns our maintenance teams are very focused on operating these airplanes to return conditions and then dealing with those required return conditions relative to it in service and all that. So, our teams are getting very efficient that this and I don’t expect that to be a material number.

Glenn Engel – Bank of America

On the pilot side, can you give us a sense roughly of just applications to openings?

Brad Rich

You are saying the – relativity of how many people we have and kind of an active hiring pool relative to positions available?

Glenn Engel – Bank of America

Correct.

Chip Childs

This is Chip. We have I think excellent coverage. We are planning for a very strong month in March and we are planning for a very, very busy season in the summer months with the inception of bringing in the 175. And so far, there is no question it’s a little tougher. You got to work and dig a little harder to get the right candidates to fly the airplanes, but from where we are and what we see for the next six, seven months, we are comfortable with our position.

Glenn Engel – Bank of America

But, I mean, I think I remember an airline telling me they get like – maybe with Southwest nine applications for every job opening they have when you have a pilot opening, how many applications do you tend to get per opening?

Chip Childs

I don’t necessarily have those details and I will tell you I am sure that the majors have a lot more applications per opening that they have than we do. There is no question about that. To the specifics, I go back to my original message. I think we are getting very qualified candidates to implement our business plan on our side and do we have to work harder, no question, but it’s part of what we do Glenn.

Glenn Engel – Bank of America

On the pro-rate side, you were kind enough to give the revenues, can you give us a sense of profits on pro-rates in 2013?

Mike Kraupp

Actually, we can’t do that, and I think consistent with the previous asks on this sorry, we do treat that like a contract and don’t offer specifics. So I will give with the revenues.

Glenn Engel – Bank of America

And then I guess, final question is that, when you lose flight – let’s say you lose a lot of that Cleveland flying that currently is unprofitable, even though you are losing – flights that are losing money does it didn’t have a negative impact on the remaining flights because you’ve got higher overhead for the things spread out over same overhead is being spread out over much of your flights?

Brad Rich

So, there certainly is a potential for a very short-term negative impact, but look, it’s our responsibility to manage those remaining costs and over the long-term, we think we do not believe that will be the case. I mean, that will be, I mean, if we discontinue on profitable flying, if you don’t extend with higher rates, then, no, we over the long-term, we have to be able to reduce the flying and mitigate the loss.

Glenn Engel – Bank of America

Thank you very much.

Brad Rich

You are welcome.

Operator

(Operator Instructions) The next question will come from Bob McAdoo of Imperial Capital. Please go ahead.

Bob McAdoo – Imperial Capital

Hi, guys. You’ve obviously spread out a lot of different kinds of projects that you are working on. If you could kind of magical y wave a wand and everything got fixed at once how big a swing is it?

Is the total target trying to clean up a $20 million negative cash flow a quarter or $20 million a year or give us a ballpark on – can you give us a ballpark on how big an issue is this? If everything and you got really lucky and everything works, how much – what kind of a swing would it be?

Mike Kraupp

Okay, so Bob, look, and what we have reported publicly so far, you can gather from that that the ExpressJet entity has lost a significant amount of money this year, I mean, in the neighborhood of $50 million. Okay, so first priority is to eliminate that loss.

Bob McAdoo – Imperial Capital

Okay.

Brad Rich

Okay, so there is a $50 million swing. Then we continue to operate this size of an entity with no financial return, no, so, we’ve got to get – we’ve not only got to eliminate the loss.

But we’ve got to get producing back to an acceptable return is are those returns at the same level as the rest of our business, look, we have to account for the fact that we don’t have tail risk on any of those airplanes and at least on the legacy ExpressJet side and all those things. And so, look, we take all that into account.

But it has to – but, by the way, that’s also dealt within the amount of equity that we invested. So, because we don’t own the fleet, we’ve got a smaller equity investment. So our return on capital invested requirement has not changed. But it is a smaller amount of net income per aircraft months, because of there is a lower investment per aircraft as well.

So we are taking all that into account. We have to eliminate the loss and we have to get it back to acceptable level of profitability. Okay, so, I mean you can do your estimates of what equity we got invested and how many airplanes we have and the return per aircraft and then you come to an amount that is in excess of $50 million swing.

Bob McAdoo – Imperial Capital

So, the obvious thing there is that then what you do report as income on the SkyWest Airline side is whatever you guide here plus $50 million is how much you are making on that side obviously what you got a different kind of investment there than maybe you have on the other side.

Brad Rich

We’ve got a number of things that are different. We’ve got a different level of equity invested. We’ve got a different environment. We’ve got different contracts, I mean, just a lot of things that are different.

Bob McAdoo – Imperial Capital

When you think about – when you go back and think about what your co-investment is on the ExpressJet side, there is the new ExpressJet side that came out of Houston, et cetera and then there is the old ExpressJet side which is the residual of the Atlanta side, and there was a big chunk of money put out at that point if I recall when you bought that company, I assume you think about that as something you need to get a return on as well right?

Brad Rich

We do, so if you go back to 2005 and look at the original ASA acquisition, for the first few years of that acquisition, we generated very strong earnings and very strong cash flow.

We had the impact of some very valuable tax assets that were acquired in that transaction. And so, the investment was recovered fairly quickly on the original ASA acquisition.

Today, we have an entity that combined and then look, we’ve gone through rate resets and all those things on the Delta side and so, the entity in total combining both the legacy Express and the legacy ASA, both systems are – in today’s terms are not meeting their return objectives. If that helps answer your question.

Bob McAdoo – Imperial Capital

That's helpful. That's helpful. Okay, gives us a way to think about it. Appreciated.

Mike Kraupp

Okay.

Operator

And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Brad Rich for his closing remarks.

Brad Rich

Okay, well thank you very much to all of you for participating. Again, I know I recognized our employees earlier. I always feel just the desire to express appreciation to all of the dedicated employees and their – not just their dedication, but just their day-to-day efforts to help us be successful.

So, I again thank you. I thank those of you from the financial market side and your interest in the company. We have been very – I think very detailed, not only in our prepared remarks, but in our - I mean, we’ve been, we’ve tried to be very transparent with you this morning in our responses to questions.

We know that we have some areas where we need to keep our heads down and just keep focused and keep producing. We have some challenges in many areas, on the pilot side and those things that we have discussed the initiatives that ExpressJet again we’ve tried to be very candid and very transparent about our issues there.

And so we know we’ve got work to do. Our overall objective and we recognize very clearly is our responsibility to allocate assets and resources in a way that will increase value. That is our focus and our priority and we will continue to work very hard to that end. And with that, we again will thank you for your participation and terminate the call. Thank you very much.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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