Q3 2020 SkyWest Inc Earnings Call
Good day.
Skywest incorporated third quarter 2020 earnings call.
That will be in listen only mode.
[laughter], placing the conference specialist my Crystal ball.
Key then zero on your telephone keypad. After todays presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please.
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I would now like to turn the conference over to Rob Simmons Chief Financial Officer go ahead.
Thanks, everyone for joining us on the call today as the operator indicated this is Rob Simmons Skywests Chief Financial Officer.
On the call with me today are chip Childs, President and Chief Executive Officer, Wade Steel, Chief Commercial Officer, and Eric Woodward, Chief Accounting Officer.
I'd 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 Q1 eight session with our sell side analysts Eric.
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 statement 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 2019 form 10-K, and other reports and filings with the Securities and Exchange Commission and now I'll turn the call over to chip.
Thank you, Rob and Eric Good afternoon, everyone and thank you again for joining us on the call today.
I want to begin by saying how proud I am of the way our teams have pulled together to confront this incredibly challenging and unpredictable environment eight.
Eight months into the pandemic our industry has dramatically changed our teams are working nonstop to stay focused on the health and safety of both our people and our passengers and remain remain flexible in responding quickly to deliver on our partners network and schedule changes.
We have successfully resumed continued qualification training with pre pre attendants cobot testing as well the stringent requirements for social distancing cleaning and face coverage. We continue working to stay ahead of the latest CDC guidance and our teams are successfully achieving things we couldn't have imagined a year ago I want to thank them.
Again for their outstanding work.
Early on in this pandemic reset key priorities to ensure we were able to successfully emerged from the crisis and play a key role in the recovery.
First priority was a personal health and well being of our people and passengers second priority was maintaining strong cash and liquidity and the third priority review with remaining strong and agile as we work with our partners. We remain focused on these three.
Priorities and on ensuring we're able to evolve with the changing industry landscape.
Some of that evolution was announced earlier this week when we share changes in our senior leadership, Greg Wally was named Executive Vice President of operations stepping into his role with a tremendous background, leading almost every aspect of regional airline operations over his 25 year career and most recently overseeing our ground handling operation.
He has wholeheartedly embraced the skywest culture and commitment to excellence and I'm confident he's the right person for this position, particularly in this uniquely challenging landscape. We have also transition some of our other leaders into senior Vice president roles and streamline our overall management and administrative staff. These changes better reflect our current.
Operation and will provide the focus needed to deliver a stronger than ever operating product will also help ensure we remain agile in responding to our partners.
We are focused on the long game and we're lucky to have the best leadership team in the business I believe this team will be the difference between skywest and our competition in the coming months as we prepare for recovery.
Today, we announced an agreement with American for 20 use Crj seven honors to enter service throughout next year. These are in addition to the 70 Crj seven hundreds already under agreement with American.
We are maintaining a strong delivery schedule and are working with each of our partners on their fleet and network needs. Our dual class fleet is playing a strong role than recovery and our ability to deliver for our partners will remain a key differentiator for US we continue to invest in our fleet and maintenance programs as part of our long term strategy to build reliability.
Into our fleet and creating flying opportunities just like this one we just announced.
During the third quarter, we reported net income of $34 million. This includes the 190 million in payroll support program funding under the cares Act that we recognized as income during the quarter.
Without a new extension. This this nearly marked the completion of our care as payroll support grant funding, Rob will talk more about liquidity in a minute.
We are working closely with our people to take steps to manage cost in this environment and we are fortunate to have very positive relationships with all of our employee workgroups their work productively with us to minimize the negative impacts to our people as much as possible, while ensuring that we remain flexible and raised provide critical support to our partners.
This positive relationship with our labor groups will help ensure our long term viability and success.
Our third quarter production was an improvement over the second quarter, but what is usually our peak quarter was about 60% of what we flew a year ago with about 1600 daily departures as of today, we're expecting a slight uptick in production in the fourth quarter. However, we are prepared to respond if the climate deteriorates are on.
Going agility will remain a key component of our recovery strategy and while we're clearly focused on working with our partners our contract concessions are mostly complete.
We're working closely and collaboratively with each of our partners to ensure we're the best positioned to meet their needs.
This cobot environment shined, a spotlight on the importance of how weve been de risking our business model over the past five years well no one in our industry is immune to the economic effects of the cobot crisis, we feel good about how we are positioned to weather the storm.
The data will be the next several months, we'll be turbulence.
But we're pleased with the shape of the recovery so far as demand returns. We are confident that our fleet will continue to feel like critical role and the return to travel we're focused on navigating this crisis aggressively and deliberately to take care of our people our customers as we preserve our liquidity and plan for recovery to ensure we are.
It is a better stronger business, Rob will now take us through the financial information.
Today, we reported third quarter net income of $34 million or 66 cents per share our diluted share count for Q3 was 50.6 million and our effective tax rate in Q3 was 27%.
These GAAP results include the effect of a deferral of $30 million of revenue this quarter down from $69 million deferred in Q2.
As discussed last quarter, the timing and amount of future deferrals and the reversal there up into revenue depends on the shape and cadence of the recovery of our flying all deferred revenue will be reversed into revenue by the end of the various contract periods. We currently expect to continue to defer.
Some revenue into late 2021 or 2022, when it may begin to reverse.
First let's talk about revenue total revenues down 40% from Q3, 2019, but it's up 31% from last quarter.
This breaks down with contract revenue down 35% from Q3, 2019 and up 28% from Q2.
Prorate revenue was still down 58% year over year, but was up 69% from last quarter.
We have previously said prorate revenue is nicely levered to a recovery as you can see in these numbers.
Let me move to the balance sheet, we ended the quarter with cash of $822 million up.
From $762 million last quarter, our capex during the third quarter was $10 million comprised of aircraft engines and parts at this point our expectation is to pull back our capex for the year from $636 million last year to approximately 400.
$30 million this year, including the acquisition of four new Eone hundred 70, Fives and 21 Crj seven hundreds in a 50 seat configuration coming up in Q4.
We ended the quarter with debt of $3.1 billion up slightly from 3.0 billion as of yearend.
The increase in debt from year end through the end of September is driven primarily by the cures Act funding from the government, including $60 million of five year care sector secured debt and $105 million of 10 year unsecured low cost P. S P debt.
We expect to make a gross pay down of $400 million in aircraft debt financing next year before the financing of new aircraft acquired next year or other draws on our cares Act facility.
Let's talk about liquidity as.
As of September Thirtyth, our cash position was $822 million. In addition to availability of $513 million and drawn in our cares act alone and $40 million on our revolving line of credit.
During Q3, we received $144 million in payroll support program funding under the cares Act.
Which $101 million is a grant and $43 million is a low interest loan. This number includes a $12 million top up from treasury near the end of the quarter.
The end of Q3, we closed on our carriers that secured loan in the amount of $573 million in October the us treasury increase that amount by $152 million to $725 million.
Coincident with the initial closing of the secured debt facility. We drew the required minimum of $60 million leaping undrawn availability of $665 million as of today.
This debt is secured by aircraft engines and spare parts, we have until March 2021 to decide how much in additional drugs, we will make under the secured loan facility if any.
During Q3, a $190 million and PSP grants was recognized as income in the form of a contra expense laid out clearly as its own line item in our PML $3 million remains to be recognized in the fourth quarter.
Last quarter, we estimated that we would burn cash through the end of the year at a rate of about $500000 per day.
Based on September ending cash of $822 million estimated year end cash of $800 million. We are now estimating cash burn on average through the end of the year to be approximately $250000 per day.
This year end cash forecast does not assume any incremental Q4 drugs against either our carriers that secured loan facility or our revolver.
The economic effects turned out to be worse and the recovery is slower than we currently expect we have additional liquidity tools, we can call on including that revolver and the $665 million in undrawn availability under our secured chairs backed loan facility.
In addition to our core liquidity position I'm going to remind you of a couple of things that are nice to have during this time of uncertainty and give us more flexibility than others in our space first approximately a third of our fleet has no financing remaining on it. This number goes to 45% when you include.
Partner owned aircraft that we operate and second we have minimal tail risk of around $100 million. The dollar delta between financing term and contract term. Our next pocket of tail risk is now up to 2023 ended zero on the Delta two hundreds expiring by you.
Correct.
Especially in times of great uncertainties like this and consistent with our policy and practice, we are not in a position to give any specific EPS guidance at this time.
I will say that we expect to report GAAP losses over at least the next two to three quarters driven by the following and other factors, including the recovery curve. Let me start with some headwinds number one pro rate revenue is still weak down 58% or 85 mill.
In dollars from Q3 of last year number.
Number two maintenance expenses up $29 million from Q2, or 24% consistent with a 31% increase in revenue and will likely be higher in Q4, coinciding with the anticipated Q4 production increases and then we'll likely plateau in 2021.
Yeah.
Number three deferred revenue was $69 million in Q2 $30 million in Q3, and it's expected to still reduce recognized revenue for the next few quarters until it starts to reverse based on production levels number for PSP income from grants received.
He has been recorded as contra expense with the $190 million in Q3 going down to $3 million in Q4 absent a new PSP out of the government.
Number five the next two quarters Q4, and Q1 are seasonally the weakest of the year.
And now some tailwinds number one production should continue to trend slightly higher number two partner concessions from Q2, and Q3 have mostly and number three the discrete increase to our credit loss reserve in Q3 is not expected to recur number four.
Depreciation is trending down and number five deferred revenue is trending lower and may begin reversing in late 2021 or 22, depending on the timing of the recovery.
Lastly, there are many moving parts impacting the earnings calculus as we continue to operate in this co bid environment.
To boil down the net impact of the anticipated headwinds and Tailwinds going into Q4, we are hopeful that we can offset in Q4 almost half of the $190 million PSP income that will essentially go away in Q4, driven by higher expected production and the.
Offsets just enumerated assuming no meaningful improvement to our schedules by Q1 2021, we anticipate Q1 2021 results may look fairly similar to Q4 2020, the modest cash burn of $250000 per day, we are currently.
Expecting in Q4 should turn neutral or positive mid next year.
We are excited that the actions we are taking now and expect to take over the next few quarters are setting us up nicely for the new normal in the future Wade.
Thank you, Rob I'll provide a fleet and production status update as well as an update on our pro rate and leasing businesses to update by partner today, We announced an agreement to place 20 used crj seven hundreds under a multi year flying contract with American.
These aircraft will be sourced from our current fleet of aircraft that have been in long term storage for the last couple of years as of today, we have 61 crj seven hundreds under contract with American as a reminder, we still have nine more crj seven hundreds that will be placed into service under a previously announced agreement.
The 29 undelivered Crj seven hundreds four crj seven hundreds are anticipated to go into service during Q4, Twentytwenty and the other 25 ratably through Twentytwenty one.
As we shared last quarter, we worked with American to modify the timing of our 20, new Eone hundred 75 deliveries. We now expect to receive a handful of these aircraft during the fourth quarter of 2021, and the rest through the middle of Twentytwenty two.
Let me talk briefly about our Delta agreement. We currently have four new Eone hundred 70 fives on order under our Delta agreement, which are scheduled for delivery during the fourth quarter, we plan to take delivery of our final Delta Finance Crj 900 during the first half of next year.
You may recall that we have 55 crj two hundreds scheduled to expire under our Delta agreement by the end of this year. We have returned the 19 Delta owned aircraft to Delta the remaining 36 aircraft or Skywest alarmed with no remaining financing obligations and will be fully depreciated.
By the end of the year.
All of our current park partner contract concessions expired and either September or October the largest concession during the quarter was deferring payment due from our partners related to certain aircraft ownership costs of approximately $90 million for GAAP purposes, we still recognize the revenue and so.
Shaded with the deferred payments related to aircraft ownership during the third quarter, we expect the deferred ownership amount to be paid back over the remaining SCPA contract term let.
Let me review our current production.
During the third quarter, our completed block hours were down by approximately 40% compared to the same quarter last year based on the current schedules. We have from our major partners for the fourth quarter, we anticipate that our block hours will be down by approximately 30% to 35% compared to the fourth quarter of last year. The one seven.
The five fleet continues to fill an important need for our major partners. While the majority of the reduction in block hours have been on the Crj 200 fleet, we anticipate that our Q4 Eone hundred 75 block hours will be down by approximately 10% as compared to Q4 last year.
While our Q4 Crj 200 block hours will be down by approximately 50% as of December 31, 2019, We had 156 Eone hundred 70 fives under contract with our major partners by the Middle of 2020, we expect to have 213, Eone hundred 70 fives under contract with our.
Runners.
Let me talk a bit about our pro rate business during the third quarter, we reduced our prorate block hours by approximately 38% and revenue decreased by 58% or approximately $85 million, we anticipate our prorate block hours to be reduced by approximately 25% during the fourth quarter.
Compared to last year.
We currently expect that 20% of our block hours will be removed for the foreseeable future. We expect our prorate revenue will be approximately $75 million less during the fourth quarter 2020 compared to last year, our prorate business model is nicely lever to the recovery.
While prorate revenue down 58% incremental revenue coming back to the pro rate business will have attractive margin characteristics.
Specific to our Crj 200 fleet, we had over 200 of them flying and our system prior to the onset of code in the United States.
With the reductions that delta and to our Prorate fleet, we estimate reducing our Crj 200 fleet by approximately 70 aircraft by year end as I said earlier, we have returned 19 crj two hundreds to Delta. We are in that we're also in the process of returning 10 aircraft to a third party lessor, we currently anti.
Dissipate, having 40 access crj two hundreds by the end of this year and expect to sell or part out several of these aircraft. We will also evaluate additional flying opportunities if the flying demand begins to recover.
Let me shift gears to our leasing business today, we announced an agreement to acquire 21 used crj seven hundreds and 850 seat configuration and lease the aircraft under a multi year term to another regional operator, the aircraft purchases and leases are expected to be completed.
In Q4 of this year, we are fortunate to be in a unique position to purchase. These aircraft. We believe the Crj 700 is an exceptional asset that will continue to set skywest apart with very strong demand from our major partners. After the completion of this transaction, we will have 34 crj seven.
Hundreds under lease to a third party, we are starting to see demand return for our engine leasing business. During the quarter. We signed 12 80 engines under short term lease agreements between that 20 aircraft, we signed up with American the 34 aircraft under lease with a third party and the 12 inch and leases.
The vast majority of our AC fleet or AC engines will be and productive revenue producing agreements by the end of next year.
Let me talk briefly about our current and forecasted maintenance expense over the next year maintenance expense is up $29 million from Q2, or 24% and will likely be higher in Q4 and next year. The increase is primarily due to anticipated recovery are flying and bringing.
And the 20 aircraft for the American agreement out of long term storage.
We have spent the last several years, reducing risk and enhancing fleet and financing flexibility to ensure we are positioned to navigate this challenging environment. We are committed to continuing our work with each of our major partners to provide creative solutions through this difficult time in our industry.
Okay, operator were ready for Q and a now.
We will now begin the question and answer session.
Good question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Our first question is from savvy sales.
From Raymond James Go ahead.
Thanks, Good afternoon everybody.
This is a question for weight I think at the Crj seven hundreds have had so many death partners and you've been buying from aircraft as well I was wondering if you could help me out by.
Detailing how many you have with each partner today and how many are sitting without partners can you talk about some in storage and then what you expect that to be by year end 2001.
Yeah Savi this is wade.
So our Crj 700 fleet I'll first talk about American So American we have 61 today, we have nine more that are going to be delivered and then the 20. We just announced will also be delivered all all of those so we'll have 90 under contract with American all of those will be in service by the end of 2021, we have.
19 under contract with United.
And those are under long term agreements and we also have.
Five with Delta that are under long term agreements and so after these 20 go in with American we will have no additional crj seven hundreds.
Any excess crj seven or all of our Crj seven hundreds will be under SCPA contract.
Okay. That's helpful. And then just the United partner your Subleasing too is that different than the partner before because I just want to make sure that you need to get comfortable that this isn't like the 29 aircraft that you had in the on the only place 13.
So it is they are different airplanes.
We did buy those but it to the same United Express regional partner.
So you're comfortable that.
That they can take at this time.
These aircraft are already flying there and have already been converted and in the 550 configuration and are there already operating in their system today.
Okay that makes sense.
Okay. Thanks.
Our next question is from Joseph Denardi from Stifel. Please go ahead.
Oh, Thanks, good afternoon.
Rob or weak can you just maybe frame for us if we assume a 20% reduction in block hours and.
As many of the two hundreds coming out as you talked about can you just frame for us what.
What sort of.
CPA revenue that that in that environment would would produce.
So this is wade.
So the 20, so the delta contract. It has 55 airplanes that are coming out on Delta owned 19 of those and we were just leasing those for a nominal amount and so the revenue associated with those are very are very minimal those airplanes have not had a lot of utilization.
On them over the past couple of quarters Q2, and Q3. So there is an impact there.
There's not a it's not a major impact to contract revenue and as we've talked about with the Crj two hundreds we there's no book exposure will these will all be.
Please leave depreciated by the end of the year, there's no financing obligations on any of these aircraft as well.
Okay, and then Rob can you just walk through some of the structural.
[music].
Initiatives that you've taken to I guess adapt the cost structure to a lower block hour environment going forward.
Yes, well first of all thanks, Joe for you or for your questions I think that is.
As we look at this environment, obviously, we are.
Trying to position ourselves with as much liquidity as possible and flexibility. So that we can meet the needs of our partners going forward.
As we mentioned in the script, we have started taking some actions, but again, we do we don't have any intention.
Two.
To go deeper than we said in the script at this time and so I think that everyone. In this environment is looking for opportunities to be more efficient and I think you heard us like enumerate a lot of those.
Actions that we've been taking to get more efficient.
And I understand that the commentary around the 20% reduction in block hours is that where you think you'll be once the additional American aircraft come in.
The net of the Delta aircraft that are going out or are you just see a 20% reduction kind of overall demand for your service.
Yet.
Thank you Joe This is chip just real quick I think that Theres a lot of moving pieces that you it's difficult to speculate on because a lot of what we're talking about with aircraft coming in come.
Come in throughout the rest of 2021, and when we talk about 20% reduction it's what we know today relative to 200 and the things that we know today.
The big outlier for us when we get to the end of 2021 is what does this virus do we are clearly looking at the next four months of November Gen November December January and February and are extremely cautious because its winter. We don't have a vaccine yet we're taking a look at the infection rates. These.
But there is still the number one thing that we feel is important is to stand ready.
For.
The things that may happen in March and the summer months. So from that perspective, there is a delicate balance between making sure that we have an absolute lean cost structure for what we know today, but as again most importantly, it make sure that we stand ready for what May happen in March in the summer month.
To be ready to resume what could be some some impressive demand, particularly with the smaller sized aircraft fleet that we have in where we fly so.
Again, I think that hopefully gives you some color, but there's a tremendous amount of uncertainty.
Uncertainty still that we're trying to understand starting in March of 2001 through the end of 21.
Got it thank you.
Our next question is from Catherine O'brien from Goldman Sachs Go ahead.
Hi, good afternoon, gentlemen, thank you for the time.
So a couple of years just <unk>.
And your expectation that you'll be deferring some level of revenues to the end of next year or maybe even early 2022 should we assume that means it will take until those periods get back until into pre co. Good levels of block our production and then can you just remind us what the bar is free to stop being.
As required to defer revenue is it is it block hours recovering to 100% pre cobot level or can you start you know.
Looking some back before then and then lastly on this topic, where I've. Another follow up is you know it is somewhat tied to concessions I wasn't sure if because lead alluded to that in his remark am I misunderstanding I know there is a couple of there. So thanks for the time.
Hi, Katy. Thanks. This is Rob I look let me talk about deferred revenue it conceptually first of all.
One thing to remember is a 100% of the revenue that's deferred that was deferred last quarter that has been done deferred this quarter and will be deferred possibly over the next several quarters all of that will be reversed into revenue by the time that each of those individual contracts expire so.
Under no circumstances will be not recapture that weve received the cash there's no ongoing.
Performance obligation under though so we will.
All of that deferred revenue will will reverse now the timing of when it starts to reverse again. It is hard to guess at this point, it's going to depend.
On on getting back to something some semblance of quote unquote normal whatever that means in this environment.
But look our best guess right now is that.
As you saw deferred revenue came down pretty significantly from Q2 to Q3, we think that there will be some modest deferred revenue.
Deferred over for at least several more quarters, and then again potentially start to reverse depending on what this recovery turns out to look like but in no circumstances will that revenue may not be fully recognized by the time that each of the individual contract periods ends.
Okay got it got it so just like there is a little bit of an assumption that already next year, you don't completely recovered to pre cobot block hour.
Production is that is that right that's right okay.
Got it understood.
Thanks, and then you know given that your major just on the deal you announced today given that your major partners for the most part you see actually to shrink their fleet can you just help us think through like what the new American.
Feels good out there stemming from you know or.
Are you seeing a partner is seeing a need for a net increase in regional lift in the next couple of years or where are you winning share block in the field. Thanks.
Yeah. Thanks. This is chip again, I think that I mean, so some of your questions probably better suited so our partners could be candidate is probably better for them to answer.
A couple of things that we do look at there. There certainly are some limitations given everybodys reduce schedules relative to that and that had some impact.
Impact on the regional their regional fleets, respectively. Our.
Our job is not to get too tied up into that stuff because that's more of their business and as we continue to press forward with this we feel like we've got good economics on a good product that helps and recoveries.
We've been in the industry for a long time, we've seen things like the financial crisis, and 911, and certainly with what we're facing today is somewhat similar where smaller aircraft have a good.
Niche presence to not only make.
Maintain market share, but make sure you're delivering that type of service to their entire market and it gives us good flexibility.
That having been said, though our job is to most of the work really really closely with them communicate frequently and standards. We've said several times agile for the long game and make sure that we're their partner of choice not only when times are good but also when times can be difficult like we're in today and that's our.
Welcome.
Got it understood I was impressed to see new aircraft coming on everything going on right now if I could maybe just sneak one quick one into.
I appreciate the time.
How are you guys thinking about what level you will draw on their carries a secured loan does that should that just depending on where demand goes and then are.
Are you trying to minimize the amount drawn on.
Do that loan by passenger looking other capital sources or you're happy with the terms and I'll be your first choice. If there was a need for additional liquidity. Thank you very much.
Yes, Thanks, Katy So look I think that number one we're we're grateful to the work that treasury and the government has has gone through to make that available to US again, we we drew the minimal.
Amount required under that facility and.
And we have $665 million outstanding that right now is a very inexpensive liquidity option for us.
So we're going to wait and see I mean, we've got until late.
March 2021 to make a final decision on on what if any we might want to draw on that facility and.
I think it's pretty likely that that will just wait till then and see what the recovery look like looks like see what are you now see what.
The situation is and then you know that make that call. Obviously this has impacted by whether or not there is another round of PSP in a number of things better but for now we think of it as an inexpensive liquidity option and were grateful to have it.
Great. Thank you.
Our next question is from Duane Pfennigwerth from Evercore ISI go ahead.
Hey, thanks.
Just just to follow up on.
On on Capex line of questioning there so.
I think in the in the fourth quarter here. The plan for American is to be down you know call it 50% in capacity all else equal.
And so can you just speak to who you're replacing because that would be the most obvious X.
Explanation is it is it a.
Is it a campus that's no longer flying is it a one of their wholly owns that there have been concerns about like why.
Why would they be adding shells with you.
Yes, Duane this is wade.
First of all just say American we've been working on this agreement with them for the past couple of months. This.
This is something that uniquely came up.
They have some unique scope is as you know they have a small argenta large RJ scope. The small RJ scope has 65 seat.
The Crj 700 is very much a very good aircraft to fill that scope, we were able to fulfill it very economically for them I you know I am not in a position to comment on who it's replacing or what it is doing I would ask you to follow up with them on that but you know that we.
Have an airplane that very very uniquely fits their scope and they seem to like it okay.
Okay, that's fair and I don't mean to.
Certainly put you on the spot I guess, you can speak to the regional industry and and you know a number of these smaller players that have fallen by the wayside I.
Can you speak to the number of RJ is that have kind of permanently left the industry. At this point you know since the pandemic started.
Okay.
Not at this is chip not really I think that that there is a lot of information out there that were candidly not privy to and to be candid, we really don't care.
What we're mostly focused on is what we can provide to our partners and we don't necessarily try to target certain things within the industry. We're just delighted that we're in a position and as Wade said in his script. We've worked on our position for the last five years to reduce.
[noise] risk to have the capital and have the outs.
To match the.
The block hour the completed block hours over the remaining contract term so it's a little bit different.
Okay I appreciate the thoughts.
Our next question is from Mike Linenberg from Deutsche Bank go ahead.
Hey, good afternoon, Hey, Rob on the a 21 airplanes that were acquired the seven hundreds is that a third quarter acquisition, our fourth quarter acquisition and can you just give us the rough capex hit.
Yes, sure. So in the fourth quarter, we expect capex to be somewhere in the neighborhood of $250 million. That's just the math of what was in my script.
So the 21 new airplanes represent.
A little over $100 million of that and then.
We've got the four you won seven fives coming in in the fourth quarter, that's roughly a $100 million Capex and then just some other wrote a bulls and usual spare parts okay.
Okay. That's helpful. And then just wait I know you said you had said you have 156 Eone hundred 70, Fives now and then I know I heard middle of 2020, you're going to have to 13, that's obviously not right what was it the middle of what year are you going to have 213, Eone hundred 70 fives. So the 156 number was at the end of 29.
I mean.
Oh, Okay and then the 213 is the middle of Twentytwenty two out.
Okay. Okay, that's actually that's actually very helpful.
Rob the deferred revenue with your partners is that with all four major partners that you are actually deferring. The revenue is that what the math and block hours, yes. It's again as we've said it's the it applies to all four of our partners and applies to the fixed rate component of those SCPA spit under six so six needs to be.
Accounted for sort of consistent with the variable the other block hour production component of that.
Okay that makes sense and then just one last one here on on your pro rate flying.
You did indicate that 20% of that is I guess going away permanently and yet when I think about the world of demand for air travel today versus previously and you know your gauge and what you have available it would almost seem that there would maybe be more pro rate opportunities for you as margins.
Have been re size smaller not larger so I'm just is it the planes are sold and you just want to put them out to pasture or.
Maybe you have a full plate, but I would think that there would be more opportunities for markets, where the big guys would just back away from because they don't make sense today, because the volumes aren't there.
Is my thinking wrong on that or what what's so Michael this is wade.
Yes, so as as we said Mr. We probably have close to an excess of 40, Crj 200, and we're going to be a little bit patient with those airplanes right now okay. We obviously can can utilize engines, we can utilize some of the parts.
What we will do is we will monitor the demand and the recovery very closely and as we see things coming back and we work with our major partners on the demand thing they want to do themselves versus what we want to do.
We will do that.
And just as a reminder, those airplanes are the financing obligations are completely done and they're fully depreciated. So there's not a lot of financial risk and so we can be patient with this model a little bit and we will moderate the 20% number that I gave is just what we're seeing right now.
And so we'll continue to monitor that very very closely yes in late I would just add just shown as a last point I do believe that as best as I can tell you may be one of the last a viable operators of the Crj 200.
In the world So take advantage of it anyway, thanks for answering my questions.
Michael This is Jeff one more thing on that we recognize your last point and I want to emphasize that's going to continue to be a very strong strategic point for us. We don't anticipate that these airplanes are going to sit idle for very long, but it is.
The times, we live in relative to visibility of demand yes.
We're really not too worried about deploying them. We think that there is good economics. So so to your first question you're thinking about this perfectly we just need the whole world needs clarity on this on this pandemic right now and we think that that was that comes these will look it up.
Great very good okay. Thanks, everyone.
Our next question is how middling Becker from Cowen go ahead.
Thanks, very much operator, hi, everybody and thank you very much for the time and also thanks for all the information this afternoon.
So couple of questions first was there were there any transition costs in the quarter.
And and John can you just talk a little bit about and I'm, just kind of a boring modeling questions. Mike can you talk about DNA relative to the changes in the fleet.
Yes, let me talk about depreciation first Glenn this is Rob and thanks for your jumping on the calling and asking your question today.
Depreciation standpoint, as you have noted its been running a little hot the last couple of quarters, partially as a result of.
Some of these two hundreds.
That being.
Expected to come out of service by the end of the year and so we wanted to match up the depreciation schedule there, but so year over year, you can see that depreciation is up but sequentially from Q2, it's down and it will likely continue to trend down for a bit now that weve.
Yes sort of got some of these two hundreds behind us.
Okay. That's very helpful and then the.
The other thing.
Maybe this is what Mike was asking you know you are growing in a market that's declining.
And then as you think about that over the next few years.
Are there deals out there that you think you could still pick up that might be attractive and and also as part of that question why shouldn't we expect you to be more profitable coming out of the pandemic and the slow growth period than you were before it just seems like.
With.
Even 70 fives in the larger 70, seaters being a bigger part of your.
At folio.
You would be in a position in fact to see your growth and your revenue growth accelerate when things turned around no.
[noise] Helane how are you. Thanks. So much this is chip and those are two really good questions I'm going to go back to the first question.
The talks about we continue to see some opportunities for growth in a in a market is declining I'd kind of remind you as of today. The decline is still significantly so.
Stronger than what our growth or is are we still technically our fleet is still going to be down from what we anticipated it being at the beginning of the year.
But from that perspective again, we we have outstanding partners, we have outstanding relationships with them and we do fundamentally see some opportunities to help them as far as a deal out there I can tell you that there is nothing that we see in.
The near future that when that would cause us to get overly interested.
We want to stay in the lane Weve been in for the last.
Five or so years and continue to do things organically and strategically through our operating entity in our leasing company, but from a transactional perspective, we don't see anything.
Out there and Weve looked quite candidly, but but it has to for us to go back into that world. It has to be an incredibly unique situation and then lastly about you know post pandemic profitability I Hope I Hope your question certainly comes true.
There's a lot of runway between here and there and a lot of things that have to happen. There's no doubt that we're living in a endemic and political climate today that it's hard to see what that could mean, but our job is to continue to work on the fundamentals to make that a possibility to the extent that we can control that but that's still.
You know in our view weighed down the road and candidly our partners have.
Some recovery to doing that process that we're going to continue to assist them with because again, we've said it a couple of times a day and then scripts that we want to play this for the long game and we think that if we do some things right today that long game is very positive but in comparison to the past its still too early to be able to.
Perfect that but it's a it's an outstanding question. Thank you.
Thank you.
Our next question is from Savi.
From Raymond James.
Little bit along the line of Mike's question, just kind of curious.
I think as kind of regional airline business, primarily is more focused on business markets just given your higher unit costs and just wondering in this current climate where business demand hasn't really picked up and I know this is not what you plan, but where do you see your partners are your partners putting.
Kind of Skywest flight in different types of markets or.
And just kind of curious what type of pathogens that you are flying today and does your kind of recovery outlook and maybe even looking at pro rate and thinking maybe 20% doesn't come back is that based on kind of a business outlook.
Yes. So obviously that's a terrific question. This is chip again, I wouldn't say that we do have some geographical shifts within our fleet, but thats, mostly due to.
Some of the consolidation happening some of the efficiencies that our partners are gaining some preferential places in which we are trying to schedule flights that quite candidly are being scheduled completely different than they were a year ago. Given the data I would also advise that given the data that we see about travel today is probably going to look Uh huh.
And 80 degrees different probably a year from now when when we make our way through the pandemic a little bit better. So what we're seeing today is not a tremendous amount of Ah you know market based shift more of a schedule based shift and certainly volumes are down pretty much everywhere. We are flying outside of some of the.
Consolidation I referred to earlier, but to the extent that you see within the industry about speculation about what travel is going to look like down the road.
There are some things that are that could be very compelling to the regional model. We know that theres a lot of movement out of larger much larger cities into smaller cities.
You know off the coast more into the Midwest and those types of things all those things certainly bode well for us the commuter aspect of it you know the business travel aspect of what all these things are kind of crossed up right now as you've probably seen from some of the other calls, but we're we're certainly paying very close attention to all of it and are generally optimistic about.
The fleet that we fly how we can execute and how we can provide value to our partners and and I think thats, probably as close to.
A solid answer to your question that we're comfortable giving right now.
No. That's helpful. I appreciate the follow up.
Our next question is from Joseph Denardi from Stifel.
Thanks, just a quick follow up.
We there's obviously a lot a lot of volatility.
In terms of how much your partners mainline schedule, they're able to fly I'm wondering if you all have more visibility into your schedule over the next several months. So when we look at scheduled capacity for you. All is that firmer just because of the contractual nature of that or is that.
Still and as much flux is the main lines line. Thank you.
Yeah. So Joe this is wade so.
Yeah, we obviously work very closely with our partners on our on our schedule pre pandemic, we were probably getting visibility to our schedule six nine months in advance.
Now, we're trying to give our partners as much flexibility as they need to match capacity with the demand that they are seeing and so it's a lot closer end right now we have very good visibility to obviously are in November and we'll.
We're starting to get a lot more clarity on December as well. So that's about where we're at theres not theres not a lot more clarity from from our schedules at this point.
Okay. Thank you.
This concludes our question and answer session.
Session I would now like to turn the conference back over to chip Childs for closing remarks.
Thank you Kate and thanks, everyone for joining us on the call today again, we really appreciate your interest in Skywest once.
Once again I want to thank our people I'm, so proud of our airline and our teams for the great work, they're doing to support each other.
For the long term success of Skywest and we look forward to talking to you all next quarter. Thank you [noise].
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.