SKYW
#Thanks, everyone, for joining us on the call today.
As the operator indicated, this is <UNK> <UNK>, SkyWest's Chief Financial Officer.
On the call with me today are <UNK> <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 <UNK> for some comments.
Following, <UNK> 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, <UNK> and <UNK>.
Good afternoon, and thank you for your interest in SkyWest.
During the fourth quarter and throughout 2016 we continue to execute on our plans to reduce our risk and evolve our entities to become better, more efficient operations that add value for our people, our partners and our shareholders.
To start, I think it's important to point out our significant fleet movement during 2016.
Over the past 12 months we've added, removed or redeployed more than 125 aircraft across our base fleet of 652 aircraft.
Our ability to execute these significant transitions while successfully operating more than 1.1 million flights is only possible with the exceptional work of the 19,000 professionals across our organizations.
It is clearly no small task to deliver strong reliability and service through significant fleet movement, and I want to thank our people for once again doing an exceptional job.
The evolution of our fleet continues to reduce our risk, improve our capital flexibility and ensure we adapt to our partners' long- and short-term needs.
Reducing our CRJ700 tail risk, ensuring strong liquidity, combined with our pilot availability also help reduce our risk moving forward.
As a result, in 2016 we achieved 38% growth in adjusted EPS over 2015, which <UNK> will touch on later in the call.
During the fourth quarter we continued to make progress on our fleet transition plan, and this evolution continues to produce positive outcomes.
We added new E175s to our Alaska, Delta and United operations.
We redeployed several CRJ700 aircraft from our United operation to our American and Delta operations.
And we began removal of the CRJ200 from our ExpressJet operation as we move to a primarily dual-class CRJ operation with that entity in 2017.
At the same time, we announced a new agreement with ExpressJet to operate CRJ700s for American.
In fact, as we reduce the 50-seat aircraft at ExpressJet, we will grow the dual-class fleet at that entity, an important evolution for long-term viability there.
Additionally, it's worth noting that for the 2016 year, ExpressJet produced a $30 million financial improvement over 2015.
Although we're removing the CRJ200 fleet at ExpressJet, from an overall perspective we continue to see strong industry demand for 50-seat flying with proper economics.
By the end of 2017 we will expect to have removed 200 50-seat aircraft from our fleet over the last three years, but we are confident that our anticipated 50-seat fleet aircraft levels outlined in today's release will stabilize after 2017.
Our objective is to ensure we are best positioned to meet industry demand, and our ability to optimize our overall fleet mix and deliver strong performance continues to meet that objective.
Strong operating performance and service is paramount to what we do on a daily basis.
Our two entities continue to deliver exceptional operating performance during the quarter.
SkyWest Airlines delivered an impressive 99.9% adjusted completion for the quarter, an exceptional mark during any quarter, but especially noteworthy as they accepted 19 new E175s in the same period.
ExpressJet delivered a solid 99.8% adjusted completion for the quarter.
Both of our airlines are delivering top performance within our partners' portfolios.
Once again, after fourth quarter, one or both airlines has been the top-performing carrier in United's network for more than two years now.
Together, our two entities operated more than 270,000 flights in the quarter and continued to deliver consistent exceptional reliability and service.
Our operational success continues to drive demand for our product, and we're well positioned to deliver on that demand with our pilot availability and fleet flexibility.
Looking forward, we expect to complete delivery of this round of new E175 aircraft, improve cash generation, and ensure we are best positioned for continued opportunities and strong demand across the industry through 2017.
As many of you know, the airline industry is often about being in the right position at the right time, and our ability to execute on our current strategy has positioned us well for continued success along those lines.
As we've experienced recently, additional new flying can come unexpectedly in changing conditions, and as we continue to improve our position we are focused on remaining the partner of choice for our existing and new growth.
We believe we're exceptionally positioned today, as our capital and pilot allow us to respond immediately to these opportunities.
As we harvest cash flow and delever our balance sheet over the next few years, we plan to be well positioned in the industry if and when scope or other conditions evolve.
So, although our current delivery cycle of E175 is completed in 2017 we are very well positioned for any new future opportunities.
Additionally, our ability to attract and retain top aviation professionals continues to set SkyWest apart in our industry and to provide added value to our employees, our partners and our shareholders.
I want to again thank our more than 19,000 professionals for their exceptional work in delivering world-class service for our passengers, our partners and for each other.
<UNK>.
Today we reported a GAAP net loss of $270 million, or $5.22 loss per share, for the fourth quarter of 2016, compared to net income of $41 million, or $0.78, from Q4 2015.
Adjusted net income for Q4 2016 was $29 million, or $0.54 per diluted share, up from adjusted net income of $25 million, or $0.49, from Q4 2015.
As we previously announced, the adjusted results for Q4 2016 exclude a $466 million pretax noncash impairment charge and $7 million in early lease return charges.
GAAP net loss for the 2016 year was $162 million, or $3.14 loss per share, compared to net income of $118 million, or $2.27 per diluted share, for the 2015 year.
Adjusted net income was $143 million, or $2.73 per diluted share, for 2016, up from the adjusted net income of $103 million, or $1.98 per diluted share, for 2015.
Revenue was $758 million in Q4 2016, up $5 million from Q4 2015.
The increase in revenue included the net impact of adding 19 additional E175 aircraft during the quarter, the most deliveries we have ever taken in a quarter.
We expect to put 18 more into service during 2017, to take our total fleet of E175s to 104.
Our total fuel cost per gallon averaged $1.85 during the fourth quarter, almost flat with the $1.84 per gallon in Q4 2015 and up from $1.75 per gallon in Q3 2016.
Average fuel cost per gallon in 2016 was $1.70, down from $2.09 in 2015.
Let me touch on the two items we excluded from our $0.54 adjusted EPS this quarter.
In December 2016 we announced that our ExpressJet operation expects to transition to flying primarily dual-class aircraft in its CRJ operation by removing its 50-seat CRJ200 aircraft from service over the next year.
<UNK> will provide more color on this shortly.
Additionally, we announced in December the early termination of our residual value guarantees by Bombardier on 76 CRJ200 aircraft owned by SkyWest Airlines and ExpressJet.
As a settlement for this early termination, Bombardier paid us $90 million by the end of the year, along with other consideration.
Both the required sale of each aircraft and the anticipated cash requirement to SkyWest of returning the aircraft to mid-time condition, were points of risk and uncertainty for SkyWest that this termination agreement eliminates.
Consequently, we reduced the estimated residual value on our CRJ200 aircraft based on current market conditions.
As a result of the Bombardier RVG termination agreement, current market values of CRJ200 aircraft without a Bombardier residual value guarantee and the scheduled removal of over 40 CRJ200s from service in 2017, SkyWest evaluated its total 50-seat CRJ200 fleet and related long-lived assets for impairment in Q4 2016.
So, as I indicated earlier, we recorded a noncash impairment charge in Q4 2016 of $466 million pretax on our CRJ200 aircraft and related assets, which is net of the $90 million in cash proceeds from the Bombardier termination agreement.
As I also mentioned earlier, we recorded a $7 million noncash early lease return charge this quarter.
This completes the lease return charges of $10 million to $15 million we had estimated in last quarter's conference call.
Let me say a couple of things about our balance sheet.
We ended the quarter with cash of $565 million, up from $498 million a year ago.
We issued $429 million in new long-term debt during Q4 2016 to finance the 19 new E175s delivered during the quarter, with total debt increasing by $320 million net of scheduled debt service payments.
Total debt as of December 31, 2016 was $2.5 billion, up from $2.2 billion as of September 30, 2016 and $1.9 billion from December 31, 2015.
SkyWest also used $24 million in Q4 2016 for other capital investments, $17 million for an early retirement of debt, and $76 million to purchase the 19 E175s.
We are very bullish on our ability over the next few years to generate free cash flow net of scheduled debt payments.
The cash required for the final 18 E175s in 2017 will be reduced by a $40 million deposit that we expect to utilize.
We believe we will end 2017 up nicely in cash on our balance sheet over the current level, absent any additional investment opportunities beyond the 104 E175s.
We expect our debt at the end of 2017 to peak at around $2.6 billion once the last tranche of E175s is delivered.
Again, absent any additional investment opportunities, our total debt net of cash could fall by up to $1 billion from the end of 2016 to the end of 2019, including our expected growth in cash net of scheduled debt repayments.
Again, consistent with past practice, we will not give formal specific earnings guidance.
That being said, let me provide a little color.
For the full year 2017 we would expect EPS, excluding special items, to grow by a low-double digit rate over our 2016 adjusted EPS of $2.73.
Q1 is benefiting from the new E175 flying we have put in place over the last year but is being negatively impacted year over year by temporarily higher pilot carry and training cost, higher fuel costs and adverse weather compared to Q1 2016.
Thus we would expect Q1 of 2017 to be roughly flat with our Q1 2016 results.
We would expect completing the CRJ700 transition to American and our strong pilot situation to benefit us in our seasonally stronger second and third quarters.
<UNK>.
We're not going to get into too much detail on that, but we can give you a little color.
<UNK> can help you a little.
Yes, <UNK>, this is <UNK>.
Thanks for your call.
Appreciate it.
And great question, and one that we certainly spend a lot of time on.
And I think it's interesting to note from a strategic perspective and what we spend a lot of our calories doing, there's a fair share that we monitor new 76C aircraft that may be coming down the pipeline.
As you know, this last year we've had a couple of new mainline agreements with Delta and United that didn't provide any relief along those lines.
And so from our perspective, though, when you look at what strategically we're doing, that's kind of why I started at the beginning of the script in talking about the number of agility type of items that we had internally to moving our existing fleet around for new opportunity.
When we discuss fleet flexibility and changing market demands, only a small portion of that has anything to do with new aircraft.
So I think that we are very optimistic about our position that we're in today to respond to a lot of what we anticipate changing market conditions before the next round of RFPs come.
So that's our priority.
We love to take a look at new aircraft.
Certainly our people love new aircraft.
But there's no question that we also still see some good, strong internal opportunities just in sort of the regional chaos, if you will.
But that being said, we also continue to have long-term conversations with pretty much all four of our partners about what happens in the next two, three, four, five years as it relates to new aircraft.
Yes, so in the fourth quarter, <UNK>, we had what you could sort of think of as two nickels worth of softness, a nickel related to pilot training and carry costs, roughly, as we were preparing for the E175 deliveries, and just the overall pilot situation was very good and very strong for us.
And then we had the transition cost for the 700s that ---+ both of those things are continuing into the first quarter, but both of them are definitely temporary in nature.
I mean, the pilot situation is sort of a great problem for us to have right now that creates opportunity for us in our seasonally stronger Q2 and Q3.
And the transition costs from getting those 700s pushed over to new partners, I mean, that's huge to us from an elimination of tail risk perspective.
It pushes a couple more years of contract extension on those.
And that transition should also be complete by roughly midyear.
Yes, that's probably fair.
Again, Q2 and Q3 are seasonally our best quarters.
But as we get through these transitions and push those 700s into service that'll be largely second half.
So let me give you a little more color on that, <UNK>.
Thanks for the question.
This is <UNK>.
And just briefly I think for the year ExpressJet basically ended up at a slight loss.
And I would anticipate next year we're probably going to be in the same position, even though we're eliminating some unprofitable flying with the 50-seat aircraft.
And a lot of it is more transition costs.
We are growing in optimism, clearly, with that strategy of what happens at the end of 2017 with it being an all dual-class fleet.
It provides strategically more agility for the enterprise to respond to market demands and that type of stuff.
But it's a great operation.
They deliver an unbelievably well-performed and safe operation.
Great people out there.
Almost made profitability this last year and we anticipate will be roughly about the same in 2017.
And so let me be clear what I said.
So, yes, there will be ---+ the debt should peak at the end of 2017 at about $2.6 billion.
The $1 billion was a debt net of cash.
So we expect between now and 2019 to both reduce our debt and increase our cash.
And so debt net of cash from 2016 to debt net of cash in 2019 could be down as much as $1 billion.
Well, again, <UNK>, we're expecting to take the bulk of the remaining E175 deliveries in the first half of the year, so a lot of our pilots will be deployed against those new deliveries that'll happen.
So I think that some of the transition costs from the 700s and some of the pilot carry and training costs are going to carry into Q1, as we indicated.
But we also have some weather issues and higher fuel price that are going to be affecting Q1.
So that's why we were guiding to roughly flat with the year-ago number.
Yes, so we've obviously got a lot of what I would say fleet flexibility with our 50-seaters.
We expect our fleet to stabilize around 250.
And the reason why is the demand continues to be very strong.
We have dialog with every one of our major partners today about 50-seat lift.
And those conversations are going on today, and they're beyond ---+ and they're for lift beyond 2017.
And so we think that the demand will continue to stay strong.
We are a very strong 50-seat operator, and we continue to see the demand staying stable for us in that fleet type.
Yes, so there is an American contract that is also expiring in the first part of the year that was profitable.
Yes, so, I mean, this is <UNK>.
It's a great question, and I can tell you it's an issue that we spend probably more time on than anything, because of the value of what it does for the enterprise and that.
But we ---+ let me kind of present it in a way of ---+ there's a lot going on outside of our enterprise relative to what other folks are doing with pilots, but I think that what we've certainly seen at both entities is that our ---+ as we recruit pilots, pilots are very smart, they're very astute, and they know what they want.
Sometimes it's just money, but most of the times it's a lot of other things that we offer.
We have great domiciles.
We have some of the industry best training and safety programs, and that's a reputation that's worth more than any signing bonuses and those types of things most of the time.
But our outlook on it certainly is a complicated model where we look at what our partner demands are, look at what our fleet commitments are, and evaluate what our recruiting abilities are.
There is no question that between the two enterprises it's a little different picture.
Certainly it's easier as unprofitable aircraft goes away on the ExpressJet side to meet that demand and continue to do what we need to do.
That's part of the reason why we made that strategic move on the CRJ side to go to an all dual-class fleet, take out some of the more unprofitable (inaudible) 50-seaters and enhance some of the domiciles and that flying that the pilots love relative to dual class.
On the SkyWest side certainly we've had strong demand for our fleet as we continue to add 175.
And I can tell you that the folks at SkyWest are doing an outstanding job recruiting.
And we're always very, very careful about what we enter into from a commitment perspective with our partners, especially long term out.
Beyond 12 months the visibility of pilots become a little bit more gray than what they are in the next 3 months.
But part of what I think is going to make us successful going forward is to have a very good, solid operating platform that's reliable and safe, training pilots, in my view, better than anybody else in the industry.
We have excellent pay and benefits and everything here, and we're going to continue to be focused on taking a very complicated model with a lot of variables and molding that into first and foremost in a very safe manner, delivering what our major partners need.
So our outlook in 2017 is good.
We feel comfortable with our pilot levels in 2017.
2018 we like what our opportunities are and flexibilities are.
But the picture for 2018 is going to continue to develop throughout this year, and we'll keep you guys apprised of how that goes.
Yes, no, it's a fleet mix.
The dual-class planes obviously have more seats and longer stage length.
Steve, this is <UNK>.
Thanks for your question.
It's a great one, and I can say that as time goes on the way we've started to manage our fleet over the last two to three years as time goes on it continues to provide us more flexibility and less risk.
And so it's good.
The further we get out the more it's mitigated and the more flexibilities within our fleet to respond to the demands within the industry.
Sure, Steve.
I mean, like, it assumes, not surprisingly, that we get the 104 E175s by the end of the year and that for now there are no more investment opportunities this year.
So it's sort of playing out the current story that we see.
And the situation that we're in right now again with strong pilot situation, we hope that positions us.
As <UNK> mentioned, we've got the capital and we've got the pilots to hopefully monetize any unexpected opportunities that are out there.
Thanks, Andrea.
Again, just want to thank everybody for your continued interest in SkyWest.
We're pleased with our progress at both entities, and we're very pleased with the position that we are in as far as future opportunities will be, and we look forward to continuing this evolution and progress, and we'll keep you updated next quarter.
Thank you.
