SKYW CEO Earnings Call Excerpts

[XPOO]

Source link can be found here.

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.

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.

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.

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.

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.

 

[XPOO]

Question and Answer Session

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 - President
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 - Chief Financial Officer and Treasurer
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 - Chief Financial Officer and Treasurer
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.

 

[XPOO]

Question and Answer Session - Continued

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 - President
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 - President
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 - President
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.

 

[XPOO]

Question and Answer Session - Continued

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

Chip Childs - Chief Operating Officer, SkyWest Airlines
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 - Chief Operating Officer, SkyWest Airlines
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 - President and COO, ExpressJet
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 - President
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 - President
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 - President
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 - President
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 - President
You are welcome Helane.

 

[Plainsman]

I think these guys are in over their heads.

 

[russtgol]

I think these guys are in over their heads.

How so? Explain what you mean.

 

[cybourg10]

How so? Explain what you mean.

They have no idea what they are doing. XJT ALPA offered the company the current SKW pilot "contract" in exchange for one list and the company said no. That offer would have saved Inc about $30 million a year in XJT pilot concessions alone but Inc decided against it. Inc could also achieve many more millions in synergies by combing the two airlines but they still say no so when they talk about needing concessions and cost reductions Inc has shown that they are not really serious about creating maximum value for their shareholders and instead they just want XJT employees to take a pay cut to counteract the ever increasing amount of inefficiencies coming from ATL. They took a stance on not combining companies and it is costing them millions every week. This is why they are in over their heads.

 

[russtgol]

They have no idea what they are doing. XJT ALPA offered the company the current SKW pilot "contract" in exchange for one list and the company said no. That offer would have saved Inc about $30 million a year in XJT pilot concessions alone but Inc decided against it. Inc could also achieve many more millions in synergies by combing the two airlines but they still say no so when they talk about needing concessions and cost reductions Inc has shown that they are not really serious about creating maximum value for their shareholders and instead they just want XJT employees to take a pay cut to counteract the ever increasing amount of inefficiencies coming from ATL. They took a stance on not combining companies and it is costing them millions every week. This is why they are in over their heads.

I don't think I asked you a question did I? But since you answered, I think they found a way to save money by parking the 145's on unprofitable routes. You did say you wish mainline took the flying back right?

 

[701EV]

They have no idea what they are doing. XJT ALPA offered the company the current SKW pilot "contract" in exchange for one list and the company said no. That offer would have saved Inc about $30 million a year in XJT pilot concessions alone but Inc decided against it. Inc could also achieve many more millions in synergies by combing the two airlines but they still say no so when they talk about needing concessions and cost reductions Inc has shown that they are not really serious about creating maximum value for their shareholders and instead they just want XJT employees to take a pay cut to counteract the ever increasing amount of inefficiencies coming from ATL. They took a stance on not combining companies and it is costing them millions every week. This is why they are in over their heads.

cybourg,

When did XJT ALPA offer to take the SKYW contract in return for One List?

What date did this occur on ?

 

[amcnd]

Think the CPA's would still be in the negitive at SkW rates... Its more a contract problem... You cant expect to have the same performance goals as the easy going west coast nature of SKW and expect SkyEast to meet those goals...