Q4 2020 SkyWest Inc Earnings Call
[music].
Good day, and welcome to Skywest incorporated fourth quarter and full year 'twenty 'twenty results call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero on your telephone keypad.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question Press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Rob Simmons Chief Financial Officer. Please go ahead.
Yeah.
Thanks, operator, and thanks, everyone for joining us on the call today.
As the operator indicated this is Rob Simmons Skywest Chief Financial Officer on.
On the call with me today are chip Childs, President and Chief Executive Officer, Wade Steel Chief Commercial Officer, 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 for.
Following Wade we will have the customary Q&A 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 ask.
<unk> 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 for joining us on the call today.
I want to begin by saying how proud I am on the Skywest teams and how they've pulled together to confront this incredibly challenging and unpredictable environment. This past year has tested the metal of our industry, our business and our people on every possible way.
We know we're still a long way from getting returning to our 2019 demand levels and we also know our industry will never be the same despite the ongoing volatility our teams continued to demonstrate remarkable flexibility.
We've stayed proactive maintained our focused and learned and valuable lessons to adapt to this new environment and keep our people passengers and business said.
During the quarter, we reported a net loss of $46 million and for the full year 2020, we reported a net loss of $9 million. While we are still clearly in the midst of the crisis. We appreciate Congresses continued recognition of the critical nature of our employees and the industry with the extension of the payroll support program.
Through the 2021 Appropriations Act, we have received half of that 233 million funding and expect to receive the rest of this month, Rob will discuss more about this in just a minute.
As we anticipated we did see an uptick in fourth quarter production compared to third quarter. Although it is still down by almost 30% from what we saw a year ago based on the current forecasts. We believe we continue to expect a choppy recovery period, and maintain and remain prepared to respond as necessary.
Our ongoing agility remain a will remain a critical component of our recovery strategy, we're working closely and collaboratively with each of our partners to ensure we are best positioned to meet their needs.
Very early in the pandemic, we set key priorities to ensure we successfully emerge from the crisis and ensure we play a key role in the recovery.
First the personal health and well being of our people on passengers.
Maintaining strong cash and liquidity and third remaining strong and agile and working with our partners as we will discuss today, you've held firm to those priorities and are fortunate to maintain a strong balance sheet and product.
And to have successfully avoided furloughing any crew member or mechanic.
During the most difficult year in our industry's history, we're honored to be named a Glassdoor employees Choice Award for the second year in a row this year being named the top 50% and the only regional airline company on the list.
This type of recognition is something we've worked together with our people to earn every single day and I'm incredibly proud of our outstanding team of professionals well done.
Against the challenging backdrop of 2020, we maintained our focus to successfully execute on our agreements and ensure we are prepared to play a central role in responding to demand recovery.
Throughout the year, we maintained our strong delivery schedule, while remaining flexible with our partners and their needs.
We received 37, <unk> hundred 70, fives for United and Delta.
Moved 62, 50 seat aircraft from service and our Delta and American operations.
We also acquired additional aircrafts within our leasing entity and have ensured that business is focused on assets within our operating footprint.
We successfully resumed continued qualification training with expanded COVID-19 testing across the operation and maintain stringent requirements and processes for social distancing cleaning and face coverings.
We stayed ahead of the latest industry and federal health guidance and our teams are successfully achieving things we couldn't have imagined a year ago I want to thank them for their outstanding work.
This year, we're scheduled to take delivery of 18, New E 170, fives for American as we announced last quarter will place 25, additional <unk> seven hundreds into American service, ensuring we're a solid partner is important to our business and we've maintained tremendous flexibility and support to ensure we work with our partners toward demand.
We continue to invest in our fleet and maintenance programs as part of our long term strategy to build reliability into our fleet.
Undoubtedly the next several months will be turbulent.
But we're optimistic about the shape of the recovery so far as demand returns. We are confident our fleet. We will continue to fill a critical role in return to travel we are focused on maintaining aggressive.
We were on.
Remaining aggressive and deliberate to take care of our people and our customers as we preserve our liquidity and plan for recovery to ensure we emerge as a better stronger business, Rob will now take us through the financial data.
Today, we reported fourth quarter net loss of $46 million or <unk> 93 loss per share.
Two for pre tax loss was $59 million, our basic share count for Q4 was $52 million and our effective tax rate in Q4 was 21, 8%.
First let's talk about revenue total revenue was down 21% from Q4 2019, but it is up 29% from last quarter.
This breaks down with contract revenue down 16% from Q4 to 19 and up 30% from Q3.
Pro rate revenue was still down 47% year over year, but was up 18% from last quarter.
As we've previously said pro rate revenue is nicely levered to a demand recovery full year 2020 revenue is down 28% from 2019.
These GAAP results include the effect of a deferral of $12 million of revenue this quarter down from $30 million deferred in Q3 and $69 million in Q2.
As discussed last quarter, the timing and amount of future deferrals and the reversal thereof 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 until later 2021, when it may begin to reverse.
Let me move to the balance sheet, we ended the quarter with cash of $826 million up from $822 million last quarter. Our capex. During the fourth quarter was $258 million comprised of $230 million for for <unk> hundred 70, fives and 20.
To see our J seven hundreds with $28 million in aircraft engines and other parts.
This puts us at $438 million in Capex for the full year 2020.
Our expectation for 2021, Capex is approximately $650 million to $700 million.
Including the purchase of 18, new <unk> hundred 70, fives under our contract with American.
Ended the year with debt of $3 2 billion up.
Up slightly from $3 billion as of year end 2019, the increase in debt from year end 2019 through year end 2020 is driven primarily by the cares Act funding from the government, including $60 million of five year Cares Act secured debt and 100.
$5 million of 10 year unsecured low cost PSP debt.
We expect to make a gross pay down of $400 million in aircraft debt principal 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 of December 31, 2020, our cash position was $826 million. In addition to availability of $665 million.
Undrawn in our cares act loan and $40 million on our revolving line of credit.
We have until May 2021 to decide how much in additional draws we will make under the cares Act secured loan facility if any.
During Q4 $3 million in PSP grants was recognized as income in the form of a contra expense laid out clearly as its own line item in our P&L. This is down from grant income of $190 million recognized in Q3.
Subsequent to year end Skywest entered into an agreement with the U S Treasury for $233 million in funding under the PSP to funding program for airlines $40 million of this amount represents a low interest no amortization 10 year loan.
$193 million of the $233 million as a payroll grand expected to be recorded as income largely in Q1 2021.
Last quarter, we estimated that we would burn cash through the end of 2020 at a rate of about $250000 per day or $7 million per month based on December ending cash of $826 million, we actually did a little bit better than our forecast we expect.
Spec to continue to burn cash at a modest rate through the first half of the year at a rate similar to our Q4 expectation again of $250000 per day or $7 million per month.
Depending on the pace of the recovery, we could reach cash burn breakeven by mid year 2021.
If the economic effects turn out to be worse and the recovery slower than we currently expect we have additional liquidity tools, we can call on including our cash balances our revolver and the $665 million Undrawn availability under our secured cares Act loans.
Facility.
In addition to our strong core liquidity position, we are expecting 2021, and 2022 to be years. When we continue to focus on the balance sheet as of 12 31 2020, our debt net of cash balance is actually lower than it was at 12 31 2019.
In 2021, we expect to repay at least $400 million in principle debt balances related to existing aircraft financing of course, we continue to expect to take delivery of additional aircraft in 2021 debt will be financed with long term debt financing.
Over the next couple of years, we expect to reduce our absolute debt balance while maintaining strong liquidity, we love the flexibility that having a strong balance sheet gives us we continue to enjoy the position were approximately 33% of our fleet has no financing on it this number goes to 45%.
When you include partner owned aircraft that we operate we also continue to have minimal tail risk of around $100 million.
The dollar Delta between financing term and contract term on our fleet. Our next pocket of tail risk is now out to late 2022.
Especially in times of great uncertainty like this and consistent with our policy and practice, we are not in a position to give any specific EPS guidance at this time, but let me give you a little color first I will say that including the recognition of approximately $193 million.
Of PSP to grant income in Q1, we expect to report GAAP profit in Q1.
At this point, we would expect Q2 2021 to be less than breakeven.
Continued headwinds to our model includes several factors I'd like to call out number one pro rate revenue was still weak down 47% or $63 million from Q4 of last year.
For two.
Maintenance expense is up $37 million from Q3, or 25% consistent with a 29% increase in revenue maintenance expense will likely plateau in 2021 compared to Q4 2020.
Number three deferred revenue was $69 million in Q2 $30 million in Q3 and $12 million in Q4, we expect to defer additional revenue until later in 2021, when it could start to reverse and number for next quarter Q1 is seasonally one of the week.
Of the year.
And now some tailwind number one production should continue to trend slightly higher number two new the new PSP to program brings us $193 million in grant income in Q1 before any new partner concessions.
Number three the discreet increase to our credit loss reserve in the second half of 2020 is not expected to recur.
For depreciation is trending lower coming out of 2020 and should be similar in 2021 to the queue for 2020 run rate.
And number five deferred revenue is trending lower and again may begin reversing later in 2021 pending the timing of the recovery.
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 as of today, We have 65, <unk> seven hundreds under contract with American and 25 additional <unk> seven hundreds to be placed into service from our existing fleet through.
The year, bringing the American C. R. J 700 fleet total to 90 by year end 2021. These 25 aircraft have been in long term storage for the past few years.
We also have 20, new E 175 scheduled to go into service in 2022.
And the American system with delivery scheduled for Q3 of this year to the first quarter of 2022, bringing our total American fleet to 110 aircraft in 2022.
Let me talk briefly about our Delta agreement during the fourth quarter, we took delivery of for new E 170, fives under our Delta agreement. This brings our E 175 fleet total to Delta 271, we plan to take delivery of our final Delta Finance TR <unk> 900 during the first half of <unk>.
1021, you may recall that we had 55 C. R. J 200 scheduled to expire under our Delta agreement at the end of 2020, we returned the 19 Delta owned aircraft to Delta. The remaining 36 aircraft are Skywest zone with no remaining financing obligations and our fully.
These assets will be ready and available to respond to support the return of demand.
Under our under our United Partnership We've signed we signed an extension for 70 <unk> hundred in early 2020. We also took delivery of 25 used <unk> hundred 75 aircraft during the year all of which are current currently under contract on flying this brings our current <unk>.
<unk> <unk> hundred 75 fleet totaled $2 90, we are currently working with all of our major partners on a second round of contract concessions that could include temporarily waving contract minimums and a temporary rate reduction we anticipate the majority of these concessions will be completed in.
Q1, we are working proactively with each partner to provide creative solutions to the industry to current challenges.
Let me review our current production during the fourth quarter or our completed block hours were down by approximately 27% compared to the same quarter last year.
Based on based on the current schedules, we have from our major partners for the first quarter of 2021, we anticipate that our block hours will be up by approximately 5% compared to the fourth quarter of 2020. The E. 175 fleet continues to fill an important need for our major partners, while the majority of the reduction in.
Block hours have been on the <unk> 200 fleet, our Q4 E 175 block hours were down by 7% compared to Q4 last year, while our Q4 <unk> 200 block hours were down by 50%.
As of December 31, 2019, we had 156 <unk> hundred 70 fives under contract with our major partners by the Middle of 2022, we expect to have 213, <unk> hundred 70 fives under contract with our partners, Let me talk a little bit about our pro rate business during the fourth quarter we.
Reduced our pro rate block hours by approximately 24% and revenue decreased by 47% or approximately $63 million compared to Q4 2019, we anticipate our pro rate block hours for Q1 to be up by approximately 3% and the pro rate revenue will be seasonally down.
Compared to last year last quarter.
Our pro rate model is nicely levered to the recovery with pro rate revenue down 47%. We expense, we expect the incremental revenue coming back to the pro rate business will have attractive margin characteristics. Let me shift gears to our leasing business last quarter, we announced an agreement to acquire 21.
Used <unk> seven hundreds into 50 seat configuration and lease the aircraft under our multi year term to another regional operator, we closed on the purchase of all 21 aircrafts during Q4, including the related lease agreement today. We're also announcing that we signed a purchase agreement to.
Acquired 13, UC RJ 700 as of today, we have closed on four of the 13 aircrafts and expect to close on the others. Throughout 2021, we are working with several parties for skywest to either operate or lease. These aircraft. Following the purchase of these 13 aircraft we will.
Own or control 169, <unk> 700 aircraft, we're fortunate to be in a unique position to purchase these aircrafts as we believe the <unk> 700 is an exceptional asset that will continue to set skywest apart with strong demand from our major partners, Let me talk.
Briefly about our current and forecast maintenance expense over 2021 maintenance expense is up $50 million from Q4, 2019, or 36% and we expect our for our first quarter maintenance expense to be up slightly from the same quarter last year. This increase is primarily due to any.
<unk> recovery of our flying and bringing the 25 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 well positioned we are committed to continuing our work with each of our major par.
<unk> to provide creative solutions through this difficult time in our industry.
Okay, operator, we're ready for the Q&A now please.
We will now begin the question and answer session to ask a question. Please press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys is that any time. Your question has been addressed and you would like to withdraw your question. Please press star.
And then two at <unk>.
This time, we will pause momentarily to assemble our roster.
Our first question is from Helane Becker from Cowen.
Thanks, very much operator, hi, everybody on thank you very much for the time on this is actually going to ask a question about maintenance on the 25 aircrafts that have been in storage.
On one would you kind of answered in your prepared remarks weighted but once those aircraft to come back.
What is the cadence for maintenance beyond that for 2021.
Yeah.
So Helane I think the question is so our maintenance expense, what we said in our prepared remarks.
Our maintenance expense is up $50 million from Q4 to Q4, we anticipate Q1 to be fairly consistent.
The rest of 2021. It will continue we are going to continue to bring aircraft out of long term storage throughout the remainder of 2021 the levels that we had in Q4 will probably be fairly consistent for Q2, Q3 and Q4 as well.
During 2021, that's what we currently anticipate to bring those airplanes out of storage and get them reliably backup into the fleet.
Gotcha, Okay and then my follow on question is with respect to your partners.
Green brick.
In February.
Is there any indication that we.
At the beginning of March for the end of March is starting to see signs of improved traffic numbers.
Hey, Helane. This is chip Thats a great question, there's a couple of challenges in predicting that stuff, we certainly would probably.
Given the nature of our business on our relationship with our partners.
Glean more from what they reported and what Theyre seeing.
From our perspective.
Debt levels that we've kind of discussing this in the script per kind of predictable where we are we don't we don't see it.
Terrific change from kind of what the levels that we have anticipated for March Theres no scrambling for March.
But again remember that the.
One thing that pandemic has done is has created a situation where the predictability of this stuff is very very volatile bookings are much shorter routes on what they've been in the past. So look we're we are prepared for a reasonably strong.
March but we're not.
Outside of that we haven't done anything in a desperate fashion to try to find more lift now.
Okay. That's very helpful. Thank you very much everybody.
Our next question is from Duane <unk> from Evercore go ahead.
Hey, guys. This is actually ray on for Duane.
The commentary regarding the current conversations on the additional concessions.
As we look.
As for recovery on the table and driven by these vaccines. When do you think you could get back for the contractual minimums.
Or maybe what a historical level should we be looking at.
Good idea of what that level could be.
Yes, so we've talked about.
This is wade so in my script I talked a little bit about on some of the concessions one of them would be.
On potentially waiving some of our contract minimums. The majority of our fleet is currently very close to or at the contractual minimums. There are a couple of contracts there.
Slightly below but the majority of our fleet is at or will be at the contractual minimums during Q1.
Okay, great. Thanks, a lot going on.
Our next question is from Savi <unk> from.
Raymond James go ahead.
Hey, good afternoon, everyone.
Just on the pro rate side of the business.
How many aircraft do you have flying today with with United and Delta each and.
Just kind of wondering what youre seeing there from a trend perspective, it sounded if I understood the guidance and it sounds like block hours will be up in <unk>, but revenue down.
Just curious, what's driving that and what youre thinking about that business.
Going out if youre still thinking that would be a smaller business I think the last call is that maybe 70% of normal at some point, but just curious what your thoughts on that on that business.
Yes, Tobey this is wade.
So yes. So during Q4, we were down about 24% in block hours and our revenue was down about 47% and what we said is.
On that we anticipate.
Dissipate that our block hours will be up maybe 2% to 3% in Q1, but revenue would be seasonally down.
With January and February they are seasonally weaker than what we typically see in Q4, but it will be fairly consistent with Q4, maybe slightly slightly down.
The overall fleet and pro rate is fairly small compared to.
What we've got going on.
We're less than 50 airplanes in our pro rate model on that split fairly consistently between each of our major partners Delta and United So.
Going forward.
We'll be we'll continue to evaluate opportunities as they come our way and just make sure that we're being very selective on what we have in front of us and make sure. We think it will be good and accretive and profitable for us as we go forward. Yes. Savi. This is chip just to add just a little bit to that.
As modeling that going forward.
It's very closely tied to what the yields.
Our with our partners. So obviously the yields are way way down on pro rate.
And even as activity in that side of the business model comes back with more volume.
I think you can see what's out there on the industry the yields got to come back and Thats going to take quite some time.
That makes sense I appreciate that.
And just.
I think I saw a headline about maybe looking to convert some aircraft. It also.
Gary cargo.
In the passenger compartment I think you've seen some of the.
On the day of scheduled service Airlines do that last year wondering what if any if that is a correct headline and what's behind that move now.
Yeah, Savi, it's interesting that even was a headline.
Let me I mean, our approach is always that we are.
Our job.
Particularly on a pandemic is try to find any business models that we think are going to work on our take rate is probably about 5% one in 'twenty and when we saw this extension are we saw this open up at the beginning of the pandemic I myself wondered why you would ever close it.
So this is a great door to open I will be candid and say there is nothing on the other side of the door right now, but we don't think it's a door that should ever close relative to our passenger fleet. These airplanes should be easy to go back and forth from cargo to passenger we fundamentally believe that so for the record there are absolutely no.
No current plans in place to do anything with cargo, but understand we have a very large fleet with which we love fleet flexibility to do multiple things with them.
That's why we filed a very small.
Extension with the FAA, but it's certainly in our view is something that we do every single day trying to make sure that we're providing flexibility within this big fleet that we have.
But there is no current plans for us to jump into that anytime soon.
Thanks, so much.
Our next question is from Catherine O'brien from Goldman Sachs Go ahead.
Hey, everyone. Thanks for the time.
A quick a quick question on the CR day, two hundreds that came out of the Delta agreement.
I found the release you noted that your Delta DRG 200 per agreement and then.
Are you planning to hold onto some of those aircraft potentially to fly in that program.
Or what or what else is the plan I mean, I know that they're fully depreciated note financing. So are there are there any costs that hold those just in case opportunities come down the line.
Yes, Catherine this is this is wade.
So as we said we had 55 airplanes under our Delta agreement 19 of those were actually owned by Delta and we return those are we have returned those to delta. So theres 36 remaining airplanes those are not flying in pro rate right. Now there is no current.
Got to fly those in pro rate right now they are in temporary storage.
As I said in my script.
Demand and yields come back as we think we do have some flexibility to bring some airplanes back up.
Into service, but currently there is no current plans for those airplanes.
Okay. That's it for long term.
For now just in case.
Okay got it and then on one of your partners on one of their calls this season.
Called out cost savings from consolidating regional partners.
Two questions on that for you for.
First based on your current conversations are you optimistic that you could gain some share as demand rebounds with your partners. Hopefully later this year and then second on the cost savings. They referenced we should just be assuming that's less operational complexity for them and it wasn't meant to imply that skywest for example, it too.
When from share Theres, some kind of discount given to get that share right.
Yes. This is chip I mean, I think philosophically for us.
There certainly are a fair amount of rumors about industry consolidation.
All over the place through the industry, both both mainline and regional all that other kind of stuff and to our to our focus.
We're very much there are certain elements that we can provide for our major partners.
Any given time today, there is a tremendous amount of value we can provide with opportunities with our partners. We have a very strong balance sheet. We can provide a lot of capital. If there is any type of.
Way in which they want to consolidate we're not interested as we've said on previous calls and acquiring an airline, but we can certainly utilize our balance sheet to provide.
Value.
On cost savings to our partners and like I say like I said earlier I mean, we're we're having a lot of conversations with them on that I think a lot of those conversations are still where we.
Waiting to let the recovery plan play out but to the extent of what we can control the value that we provide for partners as the best professionals in the industry.
Strong balance sheet and the best performance in the industry as well so along all those lines I think there are always evaluating value from that perspective, and that's what our job is to do to help enhance these partnerships and relationships and help get them out of the issues relative to the pandemic that we're all trying to work our way through.
Got it.
Let me get really quick one on here.
On the second round the concessions can you remind us how those agreements work is there any payback of the temporary rate reductions.
Cash and term is over or is that.
It's extraordinary times until you are willing to.
Just for getting some of that.
Great Slash.
<unk>.
For a short period and thanks for all the time.
Yes, Okay, we've been proactively working with all of our <unk>.
Your partners on on concession drive with our partners.
<unk> got great partners.
We've got a lot of flying for all of those guidance.
The concessions will look a couple of different ways it could be temporary waivers of.
Of minimum utilizations, some temporary rate reductions that probably wouldn't.
Theyre just rate reductions for a period of time no no give back but we're working with them on a lot of creative solutions and we've got very creative solutions and a lot of different ways in front of in front of our partners.
We're working with them.
And we'll see how they ultimately end up doing we hope that we can get most of these done during the first quarter.
And get these behind us.
Got it thanks.
Thanks Kenny.
Operator is there another question.
Okay.
Operator, we are waiting for another question.
Okay Pardon me sorry for the disruption. Our next question comes from Mike Lindenberg from Deutsche Bank.
Oh, Hey, Hey, good afternoon guys.
Hey, just a couple here.
Back on the partner concessions.
Wade and chip you sort of ran through I guess some of the more qualitative elements of it and I just Rob when you talked about receiving the PSP of 193 Easter Day, then went on to say that that was the for new partner concession, but im not sure. If you were.
Implicitly.
Indicating that.
Some portion of that.
Is going to be passed on to your major partners does that is that what you were.
Sort of alluding to or am I, just reading too much into it.
Yes.
Mike Thanks for thanks for joining today, yes, I think what we at this point what we expect is that there will be.
Of the $233 million in funding that we expect to get under PSP to $193 million of that will be in the form of a grant and most of that will run through the P&L in Q1.
So.
And what what Wade said in his script is that that at this point, we would expect debt. There will also be additional partner concessions.
A second round of partner concessions that will also for the most part run through in Q1.
Okay, Great and then just Ravi you mentioned that net debt.
Year end 2020, I guess I believe you said it was lower than 19, I think you said in 2021 your absolute debt will decline.
Care to give us a sense of what the net debt will look like at year end 2021 will be less in 2020 or slightly higher.
Look.
At this point.
It's hard to say with a lot of precision, but I will say that over over the next couple of years.
We would expect that our absolute level of debt debt currently sits at about $3 $2 million debt over the next couple of years that will.
That should continue to come down on an absolute basis.
Obviously.
What we're looking at right now is <unk>.
Part of that that could be.
Just related to the normal.
Amortization, that's built into a lot of our aircraft financings that are that are fully amortizing financing. So as we mentioned like every year for the next.
Several years, we will have about $400 million in debt principal reduction.
Before any new financing comes in at this point so.
The answer to the debt question ultimately is going to depend both on the combination of.
Sort of the cadence of debt repurchase.
The paydown, but also what the opportunities are for us to continue to grow our fleet and potentially bring new aircraft into service. So as we said earlier, we're obviously going to take over the next two years another 20.
Delivery of another <unk> hundred 70 fives those will all be financed with similar long term fully amortizing mortgage style debt.
As we have in the in the past so.
But again longer term over the next maybe two to three years, we do expect.
Michael that that absolute debt number will continue to come down.
And then Rob if I could just squeeze in one more I apologize I just.
With respect for the Nols on this.
The losses this last year, where your NOL position may now be and I know historically, you were not a cash taxpayer.
Based on the NOL position do you have a sense.
As you look out over the next few years, all likelihood that you are probably not going to be paying cash taxes.
I don't know Killen filling the line 2023 2020 for annual guidance. There I was just I'm curious obviously, it's going to be it's going to be dependent on what that recovery cadence looks like for us and for the industry and so it's hard to know, but right now I would say that we're still.
At least a couple of years out from being a cash taxpayer.
Okay.
Very helpful. Alright, thanks, Thanks, everyone.
Okay.
Our next question is from Joseph de Nardi from Stifel.
Ahead.
Hi, Thanks, good afternoon.
Rob you talked about getting to cash flow breakeven by mid 'twenty. One I think if the recovery continues to progress can you just kind of quantify what sort of block hour production, maybe relative to pre COVID-19 that you think you need to get to in order to get to breakeven just trying to get a sense for how you.
Kind of looking at the various recovery scenarios and maybe what the baseline it.
Yes, Joe Thanks for joining today look I think we're not in a place to be able to start forecasting.
The second half of the year either in revenue our block hours or anything else Theres, obviously, a lot of uncertainty out there but.
Based on the recovery curve. So far we're pleased that the first half of 2021.
It looks like it's going to continue to be very very modest burn and then just depending on how things how things play out that could flip to be.
Positive in the second half or maybe it won't depending on what the recovery looks like but at this point, we're really not in a place to sort of forecast out there or do some pro forma modeling.
I think we do feel very good about our liquidity, we feel very good about.
The strength of our model at this point and the fact that we're that we're burning or expecting to burn just a very modest amount in the over the next six months.
Yeah.
Okay.
Chip I think you mentioned in your prepared remarks do you think air travel demand has changed for forever. I'm wondering if you could just expand on that and then what that means for your business model kind of what youre doing to the business model to adapt to that view. Thank you.
Yeah. Thanks, Joe that's a great question and it's something that we have.
Contemplate every single day.
And part of our business models to evolve quicker than anybody else and I think we've seen some strong evolution in the last year I don't know depending upon how the recovery process takes this year.
You probably were probably always and forever going to see a high level of mass.
On airplanes, and we're going to certainly be more cautious and adapt to the potential of a pandemic, which means that we're always going to.
Evaluate our processes that we have in place today I think the number one thing is as the things that are.
We see that we're optimistic about as we do like what we appeared to have some good strong domestic travel demand and the fact that we have.
On the right fleet and the right professionals in place to help within that recovery process. We also.
Fundamentally.
We do still have some more concerned about the effectiveness of the vaccines and although we're seeing a good trend downward in infection rates were always going to be watching that as an industry and being willing to respond certainly each state has their own.
On objectives in containing the virus and I think we're always going to be more cognizant of the destinations on which we fly on the sensitivities on all of those destinations, but but more importantly, I think for all of US that we are fortunate to have.
The philosophy of before the pandemic as this evolution.
Context that you have just got to be able to be flexible and change and be able to adapt to whatever comes your way.
And I think Thats whats going on forever change our industry and Luckily for US we've got like I said, we've got a great fleet, we've got a great balance sheet and we have the best professionals in the industry to help us be flexible to no matter what comes our way.
On into the future. So I think that's our primary take us to expect.
Many variables that may come our way in the future.
Thank you.
Our next question is from Steve O'hara from Sidoti <unk> go ahead.
Hi, good afternoon, Thanks for taking my question.
Could you just talk about the you talked about the concessions.
When you say additional concessions.
And maybe you didn't say that but are we talking about from sessions on top what.
Are already in place or were talking about replacing kind of the concessions that are maybe running out due to the timeframe of the agreement originally.
Yes, Steve This is Wade so we gave concessions to our major partners during Q2, and Q3 of 2020 and the majority of those concessions they expired at that point in time.
And now with as Rob said, we're getting 100 and another $193 million in grant there is some level of kind of renewed concessions that we're reviewing with our partners right now that would be.
Like I said in my script temporary rate reductions waving contract minimums. So those are the kind of things that we're working with them right now on.
Okay, Alright, thank you very much for that.
And then the I mean.
The deferred revenue.
That you guys have.
That is and that has nothing to do with the concessions or that's just.
Partners flying below the minimums, and that's more or less okay given the.
The agreements you have with them currently.
Yes, that's that's nothing to do with any concessions that just has to do with.
The structure of our revenue and the part of it that has to do with sort of fixed reimbursements being matched against the variable flying that happens and so as we said we expect we've been deferring revenue each of the last three quarters.
On the amount of future deferrals and when it sort of flips to start to come back into the P&L will really depend on on how much.
The timing of the demand recovery for the industry, but right now we would expect to continue to differ.
Revenue into 2021.
And again with the possibility that it could start to reverse.
Sometime later in 2021.
Okay. Thanks, and then maybe just lastly.
Could you just talk about.
<unk>.
I mean, it seems like leisure is much stronger than business.
Sorry, we lost you for a second there can you go back to the start of year next year follow up.
Yeah sure sorry.
Okay.
Just in terms of your.
Passenger demand that you guys are levered to I mean, if we think about.
Major mainly leisure recovery through maybe at least for first half of the year and maybe you're starting to get the business traffic back in the latter half of the year.
Is that better or worse for Skywest are you guys kind of agnostic or business matter more for you guys and I know it's not on.
Yield issue, but I mean, I'm, just wondering maybe about the utilization.
For you guys if at all.
All leisure recovery versus all business or somewhere in between.
Yes, Steve This is chip so to your question relative to the what I would say the type of demand as it comes back if it's good for us or not at this point.
For us any kind of volume is good volume given the nature of our flying.
And but that doesn't mean, we're agnostic we trust me, we care a lot about the kind of demand in.
We love as demand that helps our partners.
Business demand or international demand is better for our partners. It's long term better for us so the pure tactical accident knows math of the beneficial thing to us it doesn't matter, if it's leisure travel or if its business travel right now.
That may come into play with yields on our pro rate model later, but that we see that as being a long way off but look we're I think we're fortunate as a regional carrier today to be flying more than almost anybody that's traveling in this space compared to where we were a year ago.
And that's very good for us I think it speaks to our operating credibility and our ability to execute but overall for the main answer to your question is any type of volume is good for us, but we're also not agnostic, we do want the right kind of demand to help our partners out of this pandemic as well.
Okay. Thank you very much.
Our next question again is from Savi Smith from Raymond James Go ahead.
Hey, Thanks for the follow up just a couple first I think there was some confusion when you talked about compression, but I think it's pretty clear because it's tied to them on getting that PST to and what we've done at what you've done into Q3, Q coming up here on <unk>, but I was kind of curious as contracts come up for renewal that I'm guessing that a lot has.
Do you expect those to look different than kind of pre COVID-19 contracts has there been any discussion around that and tied to that day.
You have I mean, you went into this that has shrunk on a balance sheet position and having taken a lot of risk off versus kind of the historical model, but anything that changes your view on how the business should be managed going forward outside of just being nimble.
Yes Savi. This is this is wade so.
The first part of your question there on.
As contracts expire.
And we have renewals do we expect the contracts to be different.
Our.
Our major partners, we're working with them very proactively on.
Things like that right now I think one thing is they do like us owning airplanes right. So we're working with them on those kind of things and so we do take a lot of that risk off from them and we put it on our balance sheet. That's one of our big competitive advantages that we have out there and.
Those will continue to go forward in the future and we can continue to help our partners in that way.
Yeah, I think Savi. This is chip I think.
I think there's no question as we move forward post pandemic that the contracts will be different.
It doesn't mean that they're going to be.
Better or worse, we like different we like to evolve we like to.
Find ways to add value with our with our partners and particularly in times like this.
<unk> has never been in a position like we are today to add a multiple.
Variable value to our partners and that it's more than just fine.
An airplane from point a to point B. There is a lot of things and a lot of creative solutions that we're striving to provide for our partners. So the contracts will likely look different.
But in our view that's a good thing for everybody. This is this is just a model that we need to continue to work on long term that can survive a lot of different things.
Still take care of these amazing employees of ours as well as our shareholders. So yes, they'll probably look slightly different as they expire and get renewed but that's not necessarily a bad thing for any of them.
That's helpful. And then just a clarification Robert on the cash for an outlook that you provided for the first half.
Does the <unk> outlook include PST to or the disconnect. Good day, because you're not sure about like how the concessions on Platte.
No look our outlook for the cash burn is all in it doesn't leave anything out.
So yes. It wouldn't it would include both the concessions as well as the funding for.
From the government.
Okay alright, thank you.
This concludes our question and answer session I would now like to turn the conference over to chip Childs for closing remarks.
Thank you Kate appreciate it look I want to thank everyone for joining us again on the call today, we really appreciate your interest in Skywest I, especially want to again, thank our people I am so proud of our airline and our teams and the great work, we're all doing to support each other and the long term success of Skywest and we appreciate.
Great at and we will talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.