SkyWest's (SKYW) CEO Chip Childs on Q1 2017 Results - Earnings Call Transcript

| About: SkyWest, Inc. (SKYW)
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SkyWest, Inc. (NASDAQ:SKYW) Q1 2017 Results Earnings Conference Call April 27, 2017 4:30 PM ET

Executives

Rob Simmons - CFO

Chip Childs - President and CEO

Wade Steel - Chief Commercial Officer

Eric Woodward - Chief Accounting Officer

Terry Vais - ExpressJet Airlines Chief Operating Officer

Analysts

Helane Becker - Cowen & Co

Savanthi Syth - Raymond James

Michael Linenberg - Deutsche Bank

Operator

Good day and welcome to the SkyWest Incorporated First Quarter 2017 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. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Rob Simmons, Chief Financial Officer. Please go ahead.

Rob Simmons

Thanks Anita and thanks everyone for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest’s Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, Chief Commercial Officer; Eric Woodward, Chief Accounting Officer; Mike Thompson, SkyWest Airlines Chief Operating Officer; and Terry Vais, ExpressJet Airlines Chief Operating Officer.

I would like to start today by asking Eric to read the Safe Harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell side analysts. Eric?

Eric Woodward

Thank you, Rob. Today’s discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statements. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2016 Form 10-K and other reports and filings with the Securities and Exchange Commission. Chip?

Chip Childs

Thank you, Rob and Eric. First quarter almost always brings the most challenging weather patterns of the year which is something we always plan for. However, our people handled the weather challenges extremely well, too well this winter, which resulted in better than planned performance our entities. In the competitive landscape that we're in today this level of performance continues to set our airlines apart in the industry and with our partners.

We continue to have great relationships with our four partners and we're in a solid position to expand our relationships with each of them. Operational performance for our airlines during the first quarter was as follows. SkyWest Airlines delivered a solid 99.9% adjusted completion for the quarter during which time they received 7 new E175 aircraft and transitioned several more CRJ700s within the fleet.

ExpressJet delivered 99.6% adjusted completion for the quarter as they transitioned 10 CRJ700s into their American fleet. Both of our airlines are delivering top performance within our partner's portfolios. Once again after the first quarter one or both airlines have been the top performing carrier in the United's network for more than two years now. Together our two entities operated nearly 270,000 flights in the quarter and as I mentioned they held the quarter's challenges very well.

I want to say that the work that our people do in the front line is far from easy and they've done and continue doing outstanding job providing exceptional service and at time when every move is evaluated we will continue to ensure our people have the right support, tools, and resources to make smart decisions to maintain our values of safety, service and reliability each day. I want to thank our more than 19,000 aviation professionals for their commitments to these values during the first quarter and beyond.

During the first quarter we continued progress on our fleet plan with positive results. We added 7 new E175s, redeployed several CRJ700s aircraft from our United operations to our American and Delta operations and removed an additional 27 50-seat aircraft. During the first quarter ExpressJet successfully launched 10 CRJ700s executing our plan to grow their dual class fleet. As we've discussed previously this transition is an important part of ExpressJet's progress.

Staffing across our industry remains challenged as we've stated before we are not immune to those challenges. Though both of our airlines attract top professionals, SkyWest Airlines is recruiting pilots of record numbers while ExpressJet is experiencing slightly higher pilot attrition. Our strategy to stabilize ExpressJet as a smaller more efficient and successful entity is moving forward.

We are currently working with our partners for a profitable contract extension for ExpressJet and anticipate that ongoing process will produce positive results. We remain committed to ExpressJet's long term stability and success.

Overall we continue to see strong demand for our product. Our objective is to ensure we are best positioned to meet very strong industry demand and improving our overall fleet mix while delivering strong performance continues to meet that objective. I want to again thank our more than 19,000 professionals for their excellent work during the quarter and everyday across their operations.

Rob?

Rob Simmons

Today we've reported net income of $35 million or $0.65 per share for the first quarter of 2017 up from net income of $27 million or $0.52 from Q1 2016. Our pretax income increased 18% year-over-year to $52 million. Revenue was $765 million in Q1 2017 up $3 million from Q1 2016. With fewer aircraft in service the moderate increase in revenue included the net impact of 45 additional E175 aircraft less the removal of 61 50-seat jets and 8 CRJ700s from service. We expected for the 11 more E175s in this service during the remainder of 2017 to bring our total fleet of the E175s to 104.

Let me provide some color on a few items included in our quarterly results. The $0.13 improvement in our EPS over Q1 last year included a discrete tax benefit associated with equity compensation deductions of approximately $0.05 per share under the new equity compensation accounting standard update we adopted January 1. Our provision rate for the quarter was 34%.

The timing and amount of future related tax impacts on our provision rate will vary based on stock option exercises, restricted shares vesting, stock price performance and other factors. Generally we anticipate a future effective rate of between 38% and 39% Q2 through Q4 and between 37% to 38% for all of 2017. Also as part of adopting this accounting standard our diluted shares increased by 350,000 in Q1 which we anticipate will continue for run rate purposes.

Our total fuel cost per gallon averaged $1.97 during the first quarter up from $1.49 per gallon in Q1 2016. The increased fuel cost per gallon cost us $4 million or $0.05 reduction in our earnings per share from a year ago under our pro rate business model. With the tax benefit offsetting the impact of higher fuel costs during the quarter the remaining $0.13 improvement year-over-year in earnings per share was primarily attributed to the execution of our fleet transition since Q1 2016 including the addition of 45 E175 aircraft and removal of unprofitable 50-seat aircraft.

Last quarter we articulated the expectation that our results this quarter could be fairly similar to the $0.52 we posted Q1 a year ago. The outperformance from that guidance for Q1 was primarily attributed to the $0.05 discrete tax benefit I previously described, $0.05 from our team's handling of the Q1 weather events better than anticipated and strong production in March from executing on partner requests for scheduled increases.

You can see in the release our depreciation expenses are $2 million from Q1 2016 and this increase includes additional depreciation from 45 E175 aircraft we acquired partially offset by the reduction in 50-seat aircraft related depreciation. The $70 million depreciation expense in Q1 could be viewed as our run rate depreciation going forward subject to future E175 deliveries and other owned aircraft removals.

Let me say a couple of things about our balance sheet. We ended the quarter with cash of $586 million up from $565 million at year end and $442 million of last year at this time. We issued $158 million in due long term debt during Q1 2017 to finance the 7 new E175s delivered during the quarter, with total debt increasing by $69 million net of debt service. Total debt as of March 31, 2017 was $2.6 billion up from $2.5 billion at year end. SkyWest also used $26 million in Q1 2017 for other capital investments.

We ended the quarter with $380 million of prepaid aircraft rents under our long-term lease agreements. We anticipate this asset will amortize over the next several years as non-cash rent expense that will contribute to our operating cash flows and will enhance the cash flow quality of our earnings. And finally during Q1 we repurchased $10 million of stock under our $100 million stock purchase authorization announced last quarter.

Wade?

Wade Steel

Thanks Rob. I'll review our fleet changes for the first quarter and then discuss our current fleet expectations for the remainder of 2017. We continue to execute on our strategy of removing aircraft from unprofitable agreements and transitioning our fleet to larger new aircraft as well as redeploying aircraft with extended flying terms to mitigate financing risk. From the 2016 to March 31, 2017 we moved from a total of 652 aircraft to 632 aircraft in our fleet.

During the first quarter we added seven new E175s to our fleet including two E175s under our United agreement for a total of 60 under contract with United, five E175s under our last agreement for a total of 20 under contract with Alaska. This brought our E175 aircraft count to 93 at quarter end. We also made changes to our 50-seat fleet during the first quarter.

We removed 22 ERJ145s from our fleet, 14 of which were removed from unprofitable United contract, 8 from our American contract. Additionally as part of our planned transition of ExpressJet CRJ operation to primarily dual class we anticipate removing 52 CRJ200s throughout 2017.

In addition to the five CRJ200s we removed from service during the quarter we sold 15 CRJ200s to a third party that we continue to operate under a short-term lease agreement. We also reached an agreement to lease six additional CRJ200s to a third party. These aircraft will transition later in the year. We anticipated the remainder of the aircraft will be returned to the leasers or redeployed within our fleet.

ExpressJet also began operating 10 CRJ700s for American during the first quarter under a multiyear agreement as we move ExpressJet CRJ operation to primarily dual class. Looking ahead to the remainder of 2017 I'll review our anticipated fleet forecast and provide some color on our anticipated changes.

We expect to take delivery of 11 additional E175s during 2017, which will conclude the delivery cycle of this round of E175s. We expect 10 of those 11 aircraft will be delivered and placed under contract with Delta and United during the second quarter of 2017. In total we anticipate 104 E175s in our fleet by the end of 2017.

In our 50-seat fleet we anticipate removing 37 ERJ145s during the last nine months of 2017, 31 of which are under an unprofitable United contract. Our United ERJ145 contract has an expiration of December 31, 2017. However, United has two one-year renewable options at modestly improved economics. Today United has exercised its first one-year option to extend the contract through 2018. We continue to work with United on a mutually beneficial long-term solution for the ERJ145s.

Demand for our remaining 50-seat aircraft remained very strong and we are working with each of our major partners to meet their ongoing 50-seat needs. We have recently extended 22 CRJ200s with American and nine CRJ200s with Delta under contracts with SkyWest Airlines. We expect fleet transition to continue throughout 2017 as we reduce unprofitable flying, redeploy aircraft with other partners and place larger new aircraft into service to minimize our risk and continue to deliver on our commercial agreements.

Okay. And here we're ready for Q&A now.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] First question comes from Helane Becker with Cowen & Co. Please go ahead.

Helane Becker

Sorry I just dropped the phone. Okay, thanks guys I really appreciate it. That was so much information on the other moving parts, with the fleet and so on and just a point of clarification. Do your requests for say release from United fall on deaf ears or are they were responsive, can you just talk about, the response there?

Chip Childs

Hey, Helane this is Chip. How are you? I appreciate your question. I can tell you relative to all of our partners including United we have an extremely active dialogue. I can say that we've worked with United for several years. I can also confirm that as we continue to work we are very impressed with the momentum that we have currently with them to resolve what are some tough issues with the ExpressJet side of our house as well as some opportunities for them and on the SkyWest side. So we feel very comfortable with the pace and momentum of which our current commercial conversations are happening.

Helane Becker

Okay and then do you think, you can still see double-digit earnings growth for this year or how should we think about that given the sort of purchase program and kind of all the other changes?

Rob Simmons

Certainly, so that last quarter we made the comment that we expected low double-digit growth for all of 2017 and that hasn't changed.

Helane Becker

Okay, perfect. All right, well thank guys.

Chip Childs

Thanks Helane.

Operator

The next question comes from Savi Syth with Raymond James. Please go ahead.

Savanthi Syth

Hey guys, how are you?

Chip Childs

Hey Savi, sorry about that.

Savanthi Syth

On the CRJ200 side, this is a quick clarification question, it looks like there are maybe 11 more 50-seaters that you're expected to exist the year with and I wasn't sure if the comment rate I think you made on the 22 with American and the 9 with Delta that was extended if that was, things that were coming off this year that was extended or contracts that were coming up next year that were extend? So wondering if you could just provide a little bit more clarity on what's happening there and maybe if those rates are just being renewed or if there is maybe improvement in the rates as well?

Rob Simmons

Yes, Savi so the, thanks for the question. So on the 50-seaters we talked about 22 CRJ200s with American and 9 CRJ200s with Delta under contract, but the 22 with American it's a combination of extensions that have happened in Q1 and then there's also makes it, so there's also some extensions that we're working on and that are happening in the fourth quarter as well. And Delta's are some additional extensions that have happened during the Q1 and Q2 timeframes. And then as far as the rates they're pretty consistent with what we've had in the past.

Savanthi Syth

Alright thanks for that and then just on the pilot contract side, could you remind me again what the contract, what you have with SkyWest and how long the SkyWest Airline side and how long that goes? And I know on the ExpressJet you got an extension and I know Chip you mentioned having some discussions there, could you just provide a little bit more color on what we have and what you might be trying to achieve?

Chip Childs

Yes, thanks Savi. So the way that the contracts are set today both contracts at ExpressJet, both the CRJ side and the ERJ side that extension expires at the end of 2017. And on the SkyWest side the last agreement we had with them goes until I believe June of 2018. So from that perspective we're - it is typically within our culture that we continue to have active dialogues whether we're in contract or not. I mean we fundamentally believe it's inherent within our business model to evolve, evolve quickly.

We're in a position as a regional carrier with the things that we have in front of us that we want to make sure that we are set up for the long haul and the long term stability, but yet also we evolve with our partners needs. So as you can imagine we're always in active dialogue about certain elements of the contracts and I can say as of today we're having conversations with all three of pilot groups.

Savanthi Syth

And Chip this is the higher attrition at ExpressJet that you mention is that, is there an acceleration there or is that just a continuation and I think that’s the same trend that we saw last year as well?

Chip Childs

Yes, I think, it’s certainly a trend that we've seen for a bit as we've done some things with the fleet at ExpressJet. I will say certainly this year we've seen as of the recent months that it certainly has picked up and but that's not necessarily too surprising to us because of what we announced in Q4 where we're taking away like 94 50-seat aircraft in order to continue to modify that model more long term sustainable and competitive.

So to a certain extent, the attrition is somewhat necessary given what we're doing with the fleet. But remember the decision we made in Q4 was because of those portions of our fleet were also unprofitable. So some of this attrition is actually tied to certainly those three decisions and is what we've actually planned on. What we think we need to do though, I mean it's imperative as we say that we're going to continue to focus on the long term viability of ExpressJet.

We fundamentally believe that we're going to be providing more visibility with the professionals at ExpressJet as we continue to evolve some of the legacy contracts within their business model and our feedback is that’s the number one thing that they're looking forward to and it's our number one priority to make sure that we stabilize that entity right now.

Savanthi Syth

I appreciate that, thank you.

Chip Childs

Thank you.

Operator

The next question comes from Michael Linenberg with Deutsche Bank. Please go ahead.

Michael Linenberg

Yes, hi good afternoon guys, just a couple here and this may be more strategic. Just with the recent moves where you had Air Wisconsin is now moving away from America and to United. I saw some of the headlines out there that it looks like American is going to have to re-induct E140s and bring them back into service to get back fill. Are there opportunities there for you or maybe in the 22 CRJ200s going into America maybe that is the opportunity and you're actually benefiting from it in real time, is that what's going on there?

Chip Childs

Well so, I think Michael you're right on point in many respects there. I think that we have seen specifically with American strategic move that they are certainly very hungry for lift. You obviously see what happened with Air Wisconsin but I think there's a general term today Michael that a lot of our partners if not all are most of them are very interested in 50-seat lift.

So we don’t fundamentally believe that the Air Wisconsin announcement had any impact on our existing 50-seat flying with United, but you're right in that there certainly is some opportunities for 50-seat lift with American and we're always in some good strong dynamic conversations relative to those specifically.

But in general, as Rob mentioned, part of the uptick in the back half of the first quarter is I mean some of that increased profitability that we experienced more than we anticipated with an additional 50-seat client that we were able to recover and evolve in mid quarter. So from that perspective it’s really good 50-seat story all the way around right now.

Michael Linenberg

Okay, great and then just one other strategic one. You know, look JetBlue seems to be having a little bit of issues with whether or not the 190 is the right airplane for them and so, kind of like a two part question here one. I suspect and you can confirm that if you were to fly the E190 on a U.S. partner you'd probably be in violation of one of your other carriers' scope clauses. So I just if you confirm that?

But two, is there an opportunity where maybe JetBlue instead of having all the E190s combination of A319s at the mainline and E175s being flown by someone who has just a much lower cost platform who can make those markets work for them. I mean is there, is that, again strategically, I mean is there something there that, maybe there is an opportunity because it sounds like they're having problems with that fleet and yet I think they need that seat. And I see a cost effective solution out there kind of a mix between Jet Blue and possibly SkyWest, opportunity. I mean what, thoughts on that or does just not make any sense from your perspective?

Rob Simmons

Yes, no look, Michael, you're asking the right questions that we certainly do evaluate and for your first question I can confirm a 190 us flying the 190 does violate, at least one that I've seen and maybe even more of the current you know flying contracts that we have today. And to the extent that other partners besides our four have opportunity for lift, I fundamentally agree with you on some of those business models.

I mean in our case we were going to sit here on the call and talk about anywhere from 70, 60 aircraft cleared on the 50-seat aircraft and say there is strong demand for all of it and then probably a strong demand outside of our four partners. What I will say from a strategic point is that today we have enough on our plate to make sure we absolutely deliver for the poor partners that we have today.

And as I said in my – we think that there's still a good opportunity with the people that we're working with today and then technically we haven't certainly had any material calls from anybody else, but there's enough great stuff that we're looking out with some outstanding partners today that our primary focus.

Michael Linenberg

Okay, great. All right perfect, thank you.

Rob Simmons

Okay, that’s going to be a wrap for us.

Operator

Okay.

Rob Simmons

So we’ll turn the time over to the Chip for some closing remarks.

Chip Childs

I mean just, I want to express your thanks for the interest in SkyWest. We continue our evolution of progress. I think that we are - this is an quarter whereby, we've outlined a strategic plan several months ago. It’s a quarter where we just want to continue to execute on our base principles of making sure we're delivering what our partners want and meeting the needs of our passengers and we're fortunate to do it with the best professionals I think in the entire industry and with that we'll talk to you next quarter.

Operator

This concludes our conference. Thank you for attending today's presentation. You may now disconnect.

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