SKYW
#Thanks, everyone, for joining us on the call today.
As the operator indicated, this is Rob <UNK>, SkyWest's Chief Financial Officer.
On the call with me today are Chip <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Chief Commercial Officer; <UNK> <UNK>, Chief Accounting Officer; Mike Thompson, SkyWest Airlines' Chief Operating Officer; and Terry Vais, ExpressJet Airlines' Chief Operating Officer.
I'd like to start today by asking <UNK> 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 <UNK> will discuss the fleet and related flying arrangements.
Following <UNK>, we will have the customary Q&A session with our sell-side analysts.
<UNK>.
Thank you, Rob and <UNK>.
The first quarter is generally a challenging one, particularly in terms of weather, but both of our airlines delivered well during the quarter.
Our fleet and business plan continued to move forward, and we accepted a number of new E175 aircraft, including the first of our E175 special configuration aircraft for our Delta operation.
I want to thank our more than 17,000 professionals for their ongoing commitment to delivering an exceptional product during the quarter.
We operated, during the quarter, approximately 250,000 flights with strong operating reliability.
SkyWest Airlines delivered 99.8% adjusted completion factor, and ExpressJet, despite being affected by severe weather in their East Coast operations, delivered an impressive 99.9% completion when adjusted for that weather.
Looking forward to the remainder of the year, we continue to see very strong demand for both our 50-seat and dual-class products.
We anticipate an additional 34 E175s on property by year-end and expect these aircraft will continue to create solid growth and cash flow in 2018 and beyond.
Specific to our ExpressJet business, I want to remind you as we'd mentioned in our previous guidance, we do not expect that any to break even this year.
However, they are making strong progress, and as this quarter's operational performance shows, they are more focused than ever with a smaller footprint.
This progress sets them up well for 2019 improvement.
We also continue working through opportunities in some of our legacy contracts and financing of aircraft, which Rob and <UNK> will provide more color on in just a minute.
This is a critical part of our evolution as we focus on reducing terror risk and improving economics.
From a big-picture perspective, both within our organization and across the industry, we continue to see solid opportunity and demand.
As we've discussed previously, 2018 is another busy year in our fleet transition that should set us up well for a very strong 2019 and beyond.
We're looking ahead to a busy summer and remain focused on our disciplined execution of our strategic business objectives.
Again, I want to thank our 17,000 aviation professionals for their outstanding work during the quarter.
Rob.
Today, we reported net income of $54 million or $1.3 per share for the first quarter of 2018, up from net income of $35 million or $0.65 earnings per share from the first quarter of 2017.
Pretax income of $67 million during Q1 was up 28% from $52 million in Q1 2017.
Revenue was $783 million in Q1 2018, up $36 million from Q1 2017.
This increase in revenue included the net impact of adding 19 new E175 aircraft since Q1 2017, partially offset by the removal of 71 unprofitable or less profitable aircraft over the same period, including 46 50-seat aircraft.
Our total fuel costs per gallon averaged $2.40 during the first quarter, up from $2.01 per gallon in Q1 2017.
The line item in our P&L for aircraft fuel was $9 million higher pretax than a year ago, reflecting both the higher rate and higher volume under our prorate business model.
Just a reminder that over 90% of our model is not subject to fuel risk.
Similar to Q1 last year, where we had a tax provision about 4 points lower than the annual rate because of new accounting rules around equity compensation, this quarter's 19% effective tax rate was also several points lower than what we would expect for the rest of the year.
The lower provision in Q1 was primarily driven, both last year and this year, by the fact that we had certain equity grants (inaudible) during the first quarter.
We would expect this pattern and trend to continue as our board typically only issues new grants once a year, during the first quarter.
The timing and amount of future-related tax impact on our provision will vary based on restricted share vesting, stock price performance, stock option exercises and other factors.
We continue to expect our tax rate to be approximately 25% for the remaining 3 quarters of the year.
The full year should still be in the 24% to 25% neighborhood as we estimated last quarter.
This quarter, we recorded a net gain of $3 million in other income that was a mark-to-market gain on an investment net of other items.
Let me say a couple things about our balance sheet, an important point of differentiation in our model.
We ended the quarter with cash of $646 million, down from $685 million last quarter, and up from $586 million last year at this time.
We issued $160 million in long-term debt during Q1 2018, financing 5 new E175s and acquiring 9 used aircraft off of lease.
Total debt as of March 31, 2018, was $2.8 billion, up slightly from last quarter.
SkyWest used $38 million in cash toward equity for new planes and planes acquired off lease, $30 million in other CapEx, along with $10 million in cash for share repurchases.
Non-aircraft acquisition capital spending in 2018 should continue to run in the $20 million to $30 million per quarter range.
With the remaining 34 E175s expected to be delivered this year, we plan to invest $120 million of our own capital and raise approximately $675 million in new term debt by the end of the year for these planes.
We expect that by the end of 2018, our debt will be approximately $3.2 billion, up only $400 million from where we are now because of the $275 million in normal principal payments embedded in our fully amortizing term debt over the next 3 quarters.
Assuming an end of 2018 peak in debt and no additional new orders for airplanes, we expect that in 2019 and 2020, we will continue to pay down debt in excess of $300 million per year.
We would expect cash at the end of 2018 to be up from where are now, including our plan to invest $120 million of this year's free cash flow in equity toward another 34 new airplanes by the end of the year.
We will continue to explore accretive opportunities to deploy the free cash flow we are generating.
As I referenced earlier, during Q1, we repurchased another $10 million in stock under our 3-year $100 million repurchase program authorized by the board last year.
We now have $70 million in authorization remaining under this program and expect to fully utilize it.
2018 is expected to be another busy year for us with many fleet movements as <UNK> will discuss in a moment.
Let me finish today with a little commentary on capital allocation.
Earlier, I made a reference to a small transaction where we had the opportunity this quarter to acquire 9 aircraft off of lease, negotiating our way out of an unattractive, inflexible lease structure and reducing our financing tail risk.
The $20 million in equity capital that we deployed in that transaction will drive a $0.07 annual EPS benefit to 2019 and beyond and represents a 25% pretax return on capital.
This is just another example of the type of opportunities we are exploring to drive value creation through accretive financial engineering and risk reduction within our legacy fleet.
Because of all the ins and outs around the fleet in 2018, last quarter, we made the comment that we would expect our earnings per share to come in under $4.50 for 2018.
Including our actual GAAP results in Q1, we would update last quarter's comments by adding another $0.25 to that number.
<UNK>.
Okay, operator, we're now ready for Q&<UNK>
Savi, it's Chip.
Let me just make a couple of quick observations about pilot supply.
I think as we usually update relative to our current position with pilots, I can tell you that right now, we're still in a very good position.
Going into the summer, we feel very comfortable being able to fly with what we have forecasted and being able to meet our partners' needs.
The ever-changing pilot supply model, we do see some things that are happening within the pipeline.
I believe the longer that we continue to go down the pathway of dealing with this struggle, the pipeline gradually continues to grow.
It's not necessarily growing as fast as it would have ---+ probably should, but we're ---+ we spend a lot of time and energy and effort with the ---+ with schools in the front end of our pipeline of both of the ---+ both carriers to make sure that we got a good strong recruiting footprint, and we're still ---+ we still continue to be optimistic about that.
ExpressJet does have a pathway with United relative to the 50-seat flying that they do, and it's been something that I think has been able to provide some good clarity for those pilots as they progress throughout their career.
And in relation to this being an opportunity to do some additional things in the future, I think that it's safe to say that this is a dynamic enough situation that we do have a lot of conversation with our partners, all centered around making sure that we can provide further needs in a number of different ways.
This is just one of those ways we continue to have a conversation with.
So look we're optimistic.
We're not oblivious that it can continue to be an issue, but we spend a significant amount of time and effort making sure that we can honor the good commitments that we have with our major carriers.
It's just a small investment that had a mark-to-market on it during the quarter net of a couple other items and outline item, but it's $3 million net.
It's just an equity investment that we had.
Yes, so for 2018, we've had a good conversation about ExpressJet several quarters in a row.
We continue to transition that fleet.
The main goal is to make sure that we have a transition to where it is long-term sustainable.
So in my script, I said that it's going to not be breakeven this year.
So it's still going to lose a bit of money this year.
And that's embedded within our forecast, but it's actually a significant transition this year, particularly with us.
We're pulling out all of the Delta flying and transitioning it to primarily United and American in 1 year.
It's been ---+ it is taking a lot of costs and the main reason why we're saying what we are about losing money.
So our #1 priority in this transition is to make sure that there is no service interruption with our partners, so we can say we have ---+ pulling the fleet down that much, we have plenty of professionals, maintenance and pilots and flight attendants throughout that transition to make sure that it's a good strong solid operation during the summer and throughout the rest of the year for our partners.
But it does set us well to turn the other way hopefully in 2019.
No, I think that's a pretty fair assessment, and you can imagine a lot of the investments we've made over the past couple of years to get it to that point, but <UNK>, you're pretty on track.
That's a pretty fair assessment to be set up to be in the black next year.
<UNK>, it\
Yes, I'll give you just some very high levels about ---+ I know there is a lot of dialogue about fuel today.
I can tell you in all of the sensitivity analysis that we've evaluated given yields, capacity and fuel, none of those 3 factors, at least as we view it, are causing us to change any direction our strategy in the near or long term.
It's hard to speculate what's going to happen with fuel.
Certainly, Rob indicated on his script that we're like ---+ 90% of our entire business model is totally immune from fuel.
But prorate side of our business, we're still comfortable with what we're seeing in speculation out there in fuel prices and continue to execute as planned.
Yes, it was 9 aircraft that had been under sort of a long-term leverage lease-type structure, but we're not big fans of ---+ now those sort of lease structures tend to be sort of detrimental to our partners' strategy as we're executing this model.
So we're exploring any and all opportunities to go back and cure some of those inflexible lease structures, and we had a small transaction this quarter where we were able to deploy $20 million in equity capital in an accretive way and took away the tail risk for 9 additional airplanes and gave ourselves more flexibility.
And we'll continue to look at incremental opportunities to do that across our legacy fleet.
Well, I think that it's ---+ it all is going to come down to economics.
We're going to be smart about the way that we do this.
Obviously, we're only going to deploy capital against opportunities like this to the extent that we can do it in an accretive way.
But stay tuned.
I mean, we're hopeful that there will be more to come.
Yes, Steve, it's Chip, Let me just ---+ I'll kind of give you a barometer of what we see for demand out there.
I fundamentally believe that, as we've mentioned earlier with respect to scope, we're engineering kind of our business model to be able to continue to be sustainable and successful without scope.
With that, people can be concerned about scope.
But if there is no scope, there is still certainly demand for the regional model.
And so at a very high level, Steve, I would reiterate that the demand for the regional model, just a pure economics, that's out there relative to what we do for major carriers is a very, very good model today.
From our perspective, we look at it in terms of what's sustainable from growth, and we are taking a lot of new aircraft this year, in '18, at SkyWest Airlines.
And to the extent that it's probably the maximum that we can take and be able to do it in a good orderly manner, and so from ---+ on a future perspective, fundamentally look at their scope relief.
There is ---+ certainly the economics of these aircraft are very, very good if we get scope relief.
If not, then we can certainly backfill more with 50-seat.
So the more likely scenario for us, if there is not scope relief, we could do a lot with 50-seat aircraft to the extent that we have a very large fleet of them, and we can continue to invest capital in them to be an extremely good product for what our business model is.
So look in general terms, it's hard to predict the details of where it's going to go.
It's mostly our job to continue to put ourselves in a position with outstanding operating performance, good aircraft financing, disciplined cost approach that meets the demanding needs of our partner.
We've seen recently that good things happen as long as we're focused on those 3 or 4 elements.
Yes, yes, so let me give a little bit more color.
I probably should have done that on the previous question.
I mean, I think, from our perspective, where we are with pilots today, we're seeing consistent attrition, across our platform that's pretty much the same as it's been over the last couple of years.
Our hiring is as strong as it's been in the last couple of years, and we're spending ---+ just as a matter of diligence, we do have a good healthy respect for what the retirements of the major carriers still are.
So we do fundamentally believe that we can continue to work to make the pre-regional aircraft pipeline bigger through the schools and the operators that are producing pilots for us.
That's an imperative investment for us to continue to make.
But as it relates to now, through the near term, and our commitments with our partners, I don't want to call it status quo, but we do feel as comfortable as we ever have given the commitments that we've got to fly.
And that being said, it's also, like I said before, it's a very strong year for additional 175 growth at SkyWest, which we've got put a lot of ---+ a lot more numbers to that.
So look everything is working today.
We've got great cultures at both of our enterprises that are able to recruit with credibility, and we're optimistic, but we're also extremely diligent on the front end of the pipeline as well.
Thanks, Jamie.
Again, thanks for joining us on the call today.
I think in summary, we continue to remain focused on our strategic objectives by maintaining strong mainline partnerships, delivering good, solid operating reliability and continue to attract the best aviation professionals that are out there.
We continue ---+ as we continue executing our business plan, we believe that there is a very strong demand for our product going forward, and look forward to meeting the demands and needs of our customers and partners.
So with that, we look forward to talking to you next quarter.
