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>.
For the second quarter, we continued with good progress on our overall business and fleet plans as demonstrated by the results outlined in the press release.
The quarter also brought about planned increases in total production as we prepared for peak summer months and both airlines delivered strong reliability overall.
I want to thank our more than 18,000 employees for their great work during the quarter.
There's a lot of noise about airlines this year and our employees have done a great job focusing on strong service and reliability.
I appreciate the dedicated efforts of our people to deliver a very good competitive ---+ in a very competitive environment.
The number of flights our 2 entities operate across North America is very significant.
And together we operate more than 280,000 flights during the quarter.
Operational reliability for our airlines was as follows: SkyWest Airlines continues its exceptional operating reliability with 99.94% adjusted completion in the second quarter, even with increased total departures in June.
ExpressJet also delivered strong 99.85% adjusted completion for the quarter.
Both of our airlines have great reliability and have been top performers in United's portfolio for over 2 years.
During the second quarter, SkyWest Airlines secured a 4-year extension to its existing pilot contract with a new agreement through mid-2022.
We believe it's important to continue to invest in our people and while we don't disclose the details of these agreements, it delivers competitive compensation within the industry and positions us well to continue to attract and retain exceptional professionals.
Importantly, securing this agreement provides a solid foundation in which to pursue opportunities within the marketplace.
Pilot staffing is a central issue across the airline industry and it's a challenge we're continuing to monitor at each of our entities.
During the second quarter we experienced reduced attrition at both of our entities and each remain well staffed.
From an industry perspective, however, there is no question that it's a challenge that we come ---+ that will become more acute.
We are focused on proactively addressing the issue and ensuring we continue to provide exceptional pilot careers.
Also during the quarter, we continued progress on our fleet plan which <UNK> will cover in detail in just a minute.
To date, we have 103 E175s on property and expect to have 104 by year-end.
We have nearly completed our CRJ700 transition from United to our Delta and American operations and removed 50-seat aircraft from unprofitable contracts as we previously discussed.
Demand for all aircraft types from each of our four partners remains very strong.
It's been a very dynamic few years in the regional space and our proactive evolution has helped us continue to meet our partners' needs.
We have built and maintained very strong relationships and credibility with each of our four partners and that remains a key focus going forward as we continue to adapt and respond to what we're seeing as strong demand for solid, efficient and reliable operations.
I will say that operational performance has been somewhat of a challenge in certain areas of ExpressJet operations and we continue to work for evolving that entity towards stability.
As we've stated in previous quarters over the past couple of years, the long-term success of ExpressJet requires significant change as we make progress toward a smaller, more efficient and productive airline.
And we're increasingly optimistic about that progress, as we successfully evolve and move forward the stability and long-term outlook at ExpressJet's model continues to improve.
Overall, we continue to see strong demand for our product.
Our objective is to ensure we are the best positioned to meet the industry's demand, better than anyone else.
Again, I want to thank our more than 18,000 professionals for their work across our operations during the quarter and every day.
Rob.
Today, we reported net income of $50 million or $0.95 per share for the second quarter of 2017, up from net income of $40 million or $0.77 from Q2 2016.
Our pretax income increased 22% year-over-year to $81 million.
Revenue was $810 million in Q2 2017, up $9 million from Q2 2016.
With fewer aircraft in service but with an improving mix, the moderate increase in revenue included the net impact of 47 additional E175 aircraft, less the removal of 51 ERJ145s, 18 CRJ200s and 7 CRJ700s from service compared to 1 year ago.
We expect to put 1 more E175 into service during Q4 of 2017, to bring our total fleet of E175s to 104 by year-end.
We also completed the transition of 49 CRJ700s from other partners to American under a previously announced multiyear agreement, further mitigating our financing tail risk on those aircraft.
<UNK> will provide some color on the fleet in a minute.
The tax provision rate for the quarter was just a little under 38% and benefited slightly from the new equity accounting rules that went into effect starting with Q1.
Our future provision rate may vary, based on the timing and amount of stock option exercises, restricted share vesting, stock price performance and other factors.
Generally, we anticipate a future effective tax rate between 38% to 39% in Q3 and Q4 and between 37% to 38% for all of 2017.
Our total fuel cost per gallon averaged $1.89 during the second quarter, up from $1.69 per gallon in Q2 2016.
The increased fuel cost per gallon cost us about $2 million or a $0.03 reduction in EPS from a year ago under our prorate business model.
You can see in our release that the expense line item for aircraft maintenance is up about $10 million year-over-year.
This increase largely relates to a higher percentage of our engines now being covered by long-term Power by the Hour maintenance agreements, including the 47 new E175s in our fleet, since last year at this time.
We believe our engine Power by the Hour agreements significantly reduce volatility in future engine maintenance costs.
The vast majority of our engines are now covered either by long-term agreements or are a direct expense pass-through to our partners.
Let me say a couple of things about our balance sheet, a critical point of differentiation in our model.
We ended the quarter with cash of $635 million, up from $586 million last quarter and $513 million last year at this time.
We issued $227 million in new long-term debt during Q2 to finance the 10 new E175s delivered during the quarter, with total debt increasing by $146 million net of debt service.
Total debt as of June 30, 2017, was $2.8 billion, up from $2.6 billion last quarter.
SkyWest also used $21 million in Q2 2017 for other CapEx along with $40 million in cash and deposits toward the acquisition of the 10 new E175s.
Absent new investment opportunities, nonaircraft acquisition capital spending in the second half of the year should continue to run in the $20 million to $30 million per quarter range, with only 1 remaining E175 aircraft left in this order by year-end.
Debt ---+ again, absent additional aircraft orders ---+ is likely at a near-term peak.
With little CapEx in the second half, we continue to expect strong cash flow ahead.
We ended the second quarter with $365 million of prepaid aircraft rents under our long-term lease agreements.
We anticipate this asset will amortize over the next several years as a noncash rent expense that will contribute to our operating cash flows and will enhance the cash flow quality of our earnings.
During Q2, we did not repurchase any stock under our 3-year, $100 million repurchase program authorized by our board in Q1.
We have $90 million in authorization remaining under this program and expect to fully utilize it.
And finally, net of the items mentioned earlier by Chip and the ongoing transitions, we would expect Q3 earnings to be slightly better than Q2.
<UNK>.
Okay, Drew.
We are ready for Q&A now.
That's right, yes.
That was ---+ we took delivery of 10 airplanes during the quarter, Mike, and that was ---+ we raised $227 million of new debt against those deliveries.
<UNK>, this is Chip.
I'm impressed how much detail you know about this from the perspective of the how it ---+ not that I don't think you are an extremely smart guy, but I think that (multiple speakers) the last month or so I've been living this a little bit in D.
C.
and talked to lot of people about the FAA reauthorization bill.
And in our view, look, we love the concept of it, but from our perspective it falls short in 2 distinct areas: One, it does not address the pilot issue.
And fundamentally from our perspective will it.
I hate to speculate.
I will tell you that if we look at the data it is absolutely positively clear if we're really going to move the dial on what is a very emotional safety issue, if we really want to look at concrete data to enhance safety relative to this situation, we have to address it through additional training programs and modify the pathway.
I'm actually for 1,500 hours but I'm also for alternate programs that clearly need to be evolutionary toward safety.
And I don't think anybody who has looked at the data or is willing to look at the data could argue that there's not some significant opportunity there.
And we're optimistic and we're very supportive of the overall process but in its current form today I can tell you it's falling short of what we think that several local communities ---+ both with the pilot issue and the funding issue, many local communities throughout America are going to have a big impact if this is not addressed in this bill.
Yes, <UNK>, salaries are correlated with production and as you can see we're down about 5% year-over-year in block hour production.
<UNK>, one more thing, this is Chip.
On a per unit basis I thinks it's up slightly but on a ---+ when you take that much production out on a gross basis, it shoves down.
But it ---+ I think that ---+ I think on a unit basis we're up a bit, which is in a balance where we want to be.
We want to make sure we're taking care of our folks the right ways.
Those are under capacity purchase agreements, so it's all contract.
Yes, <UNK>, this is Chip.
We continue with all workers on ExpressJet to have active dialogues about new contracts.
We have both pilot groups are coming due at the end of this year.
Our fundamental strategy, as we talked about it in the script, I think it's necessary for us to be transparent and provide some good long-term vision about a longer-term fleet strategy with ExpressJet and then enter into those dialogues more substantially.
So I can tell you right now that the dialogue that we have with the pilots of ExpressJet is fantastic.
There's good engagement and a good collaboration on long-term success of that entity.
Savi, it's Rob here.
So I would say that it's sort of more of what we've been talking about.
That we feel like there are still a number of opportunities from the legacy side of our fleet to make improvements.
In terms of turning pink squares to green in our presentation model.
I mean I think there's still a lot of opportunities to do that.
And so I think growth can still come from a number of different areas but we feel like we're far from the end at this point.
So the question is just on the block hours came down slightly from our entire guidance on block hours.
There's just been some ---+ as we're taking down some of the 46 CRJ200s, some of those are coming out probably a little quicker than we had originally anticipated, which is fine and stays within our models.
Steve, so I sort of hit that in my script but again a lot of it has to do with when you're looking year-over-year.
We have 47 new E175s, that are in there and they all have Power by the Hour maintenance agreements on their engines.
And so like a bigger percentage of our fleet year-over-year are under those Power by the Hour agreements where you accrue it as you go.
And ---+ so that explains the bulk of it.
Well, yes, I mean ---+ like we say, like right now, like virtually all of our engines are under either a long-term Power by the Hour type maintenance agreement or are pass-through expenses to our customers.
Thank you, and again we want to thank everybody for your continued interest in SkyWest, especially as we continue our long-term evolution and progress.
And we'll talk to you next quarter.
Thank you.
