Q2 2021 SkyWest Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference call will begin in a minute until that time. Your line will again be placed on hold and thank you for your patience.
And ladies and gentlemen, as ACC operator.
The Beast conference call will begin in a minute until that time your lines will again be placed on hold thank you for your patience.
[music].
Good afternoon. Thank you for standing by and welcome to the Skywest, Inc. Second quarter 2021earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I'll ask a question during the session you will need to press star.
Star 1 on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Rob Simmons Skywest Chief Financial Officer. Thank you. Please go ahead.
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.
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 Q&A session with our sell side analysts only.
Eric.
Today 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.
Debt estimated or projected for a number of reasons.
Some of the factors that may cause such differences are included in our 2020 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, we announced agreements for 12 additional aircraft, including 11 more C. R. J 7 hundreds for American and 1 more E 175 for Alaska.
That E 175 is in addition to the 8 others for Alaska that we announced last quarter. These agreements.
The current work, we're doing to help lead the recovery as well as the importance of the dual class fleet in that effort.
We placed 6 C. R. J 7 hundreds into service during the second quarter, while securing extensions on over 50 aircraft with various partners to minimize our risk overall, we continue to make meaningful progress.
Reflecting our fleet transition during the quarter by adding dual class aircrafts enhancing fleet flexibility and mitigating risk.
During the second quarter, we reported pretax income of $81 million and net and net income of $62 million. The pretax results include $114 million.
Payroll support program grants as reflected in our operating results.
This improvement is a result of significant increase in production since last year, and a 17% increase increase over the first quarter.
While we continue watching the COVID-19 data closely we believe our fleet will remain critical.
Yes recovery, even if that recovery slows.
Our strong balance sheet and cash position remain key differentiators for Skywest.
Based on what we're seeing today, we expect demand for our product will continue to increase currently and currently anticipate reaching pre pandemic levels by early.
2022.
The quarter's revenue was up 23% from last quarter and up 88% compared to the same quarter last year.
As we witnessed demand is returning first domestically and particularly in the size of markets that we serve.
We continue to prepare.
<unk> in 4 and invest for the long term and this includes significant investments in maintenance and building reliability into our fleet.
Maintenance cost associated with that investment and with bringing used aircraft into service remain elevated and the volume and duration of these maintenance events are much higher than they've been historically.
We expect these costs to plateau this year before trending back down next year.
We continue our efforts to lead the recovery by working to provide the best possible product for our partners and customers. This has not been a simple task has operations across the industry have increased against a nationwide backdrop.
We have fuel supply issues.
Morrow provider delays and general infrastructure challenges from hotel staff to ground transportation.
These issues have affected the entire industry and we're certainly not immune to those challenges.
Operational performance remains a focus and despite the clear difficulties.
<unk> with an uneven recovery, we achieved 99.9.96 adjusted completion for the quarter with nearly 100000 more scheduled flights than the same quarter last year.
We are working across all areas of the operation to ensure we're continually adapting to the changing climate.
And responding to what our partners need from us.
I want to thank our incredible team of professionals, who continue to demonstrate flexibility teamwork and dedication to delivering an exceptional product in any situation.
Taking care of our people remains a priority and its Scott.
So short priority at Skywest, we've never furloughed, a pilot flight attendant mechanic or dispatcher and are nearly 50 years at claim we were especially proud of after the most difficult year on our industry's history. Additionally.
Additionally, we have fully resumed our hiring and our pilot pathway and mechanic apprentice.
Prime warms and are again accepting new participants, which is great news for the many aspiring aviation professionals across the nation as well as for the industry.
We're very focused on staying proactive and continuing to attract the best professionals as we navigate through the end of this pandemic and beyond.
In summary, while we are still below 2019 levels, we remain optimistic about the shape of the recovery. So far and we are confident our fleet will continue to fill a critical role in the return to travel.
We're focused on remaining aggressive and deliberate to take care of our people and our customers as we preserve.
Our liquidity and execute on the recovery to emerge as a better stronger business.
I will now take us through the financial data.
Today, we reported second quarter net income of $62 million or $1.22 of diluted earnings per share.
Q2 pretax income was $8.
In.
Our diluted share count for Q2 was 57 million shares and our effective tax rate in Q2 was 23, 8%.
First let's talk about revenue total Q2 revenue of $657 million is up 88% from Q2.2020 and is.
1.3% from last quarter Q2, 2021 revenue is only down 12% from Q2.2019 as the recovery continues our.
Our Q2 block hour production was up 17% sequentially from Q1 compared to the 23%.
The increase in revenue Q2 revenue breaks down with contract revenue up 76% from Q2, 2020 and up 20% from Q1, we.
We have temporary partner revenue concessions impacting Q1 and Q2 of 2021.
And in Q2 'twenty.
Sequentially for comparative purposes.
Q3 will likely be the last quarter with temporary revenue concessions.
Pro rate revenue was $103 million in Q2 up 185% year over year and up 50% from last quarter due to seasonality in the recovery.
20 industry.
As we have previously said pro rate revenue is nicely levered to a demand recovery leasing and other revenue was up 76% year over year and 3% sequentially.
These GAAP results include the effect of the deferral of $6 million of revenue this quarter compared to 20.
Free of $1 billion differed during Q1.
As of day end of Q2, we have $138 million of cumulative deferred revenue that will be recognized in future periods 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 flight.
All deferred revenue will be reversed into revenue by the end of the various contract periods.
At this point it appears likely that we will begin reversing some deferred revenue in the second half of 2021.
Let me.
When the balance sheet, we ended the quarter with cash of $956 million up from $836 million last quarter. Our capex. During the second quarter was $16 million per 2 used aircraft spare engines and other fixed assets.
Our expectation for 2021.
Capex is approximately $600 million to $650 million, including the purchase of 18, New <unk> hundred 70 Fives later this year under our previously announced contract with American this.
This compares to $438 million in Capex in all of 2020.
Move to the <unk> Q2 with debt of $3 billion down from $3.2 billion as of year end 2020.
Our debt net of cash is lower as of June 30th than it has been since Q4 of 2017.
Let's talk about liquidity as of June 30th 20.
1 our cash position was $956 million, including the effect of having repaid fully the $60 million outstanding under our cares Act secured loan.
We made the decision to cancel that $725 million government loan facility, which released $1.5 billion.
A pledged collateral back to US we also have approximately $40 million available on our bank revolving line of credit.
During Q2 of $114 million in PSP 3 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 a change from grant income of $193 million recognized in Q1, we would expect a similar grant P&L benefit in Q3 as in Q2 absent any PSP 3 top up amounts $45 million of the funding of PSP III.
Quarter was in the form of a low interest tenure unsecured no amortization loan.
We now have a total of $201 million in PSP loans in total we have issued 785000 warrants to treasury with exercise prices ranging from 28.
$8.38 to $57.47.
At the beginning of the year with cash of $826 million, we estimated that we would burn cash in the first half of 2021 at a rate of about $250000 per day or $7 million.
Per month.
Based on June ending cash of $956 million. We are pleased to have achieved better than our target for the first half.
As previously discussed we completely repaid the $60 million cares act secured loans during the quarter. We also placed another $60 million in deposits.
During the first half toward future aircraft deliveries during Q2, we received $285 million in PSP funding from the government before the payment of related temporary concessions to our partners.
Depending on the pace of the recovery we expect.
Partner, a meaningful cash from operations and EBITDA in the second half of 2021.
The economic effects turned out to be worse than the recovery is slower than we currently expect we have additional liquidity tools, we can call on including our cash balances our revolver and the $1.5 billion.
Billion dollars of Unpledged collateral that we have now freed up from the decision to let the cares act facility expire.
In addition to our strong core liquidity position, we are expecting 21, and 'twenty 2 to be years, where we continue to focus on our balance sheet as of $630.21.
2 our net our debt net of cash balances actually $416 million lower than it was as of 12.31 19.
In 2021, we expect to repay over $400 million in principle debt balances related to existing aircraft financing.
Of course, we continue to expect to take delivery of additional aircraft in 'twenty, 1 and 'twenty 2 that as usual will be financed with long term debt financing.
But over the next couple of years, we expect to reduce both our absolute debt balance along with our calculated leverage while maintaining strong liquidity.
Including partner owned aircraft over 50% of our fleet in service now has no financing obligation.
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 on a GAAP basis, including the net benefit from PSP Grant income less temporary partner concessions, we expect Q3 to be similar to our Q2 GAAP results.
Q4 is not expected to have any net PSP benefit and will likely be much.
Lower than Q3, but still EPS and cash flow positive.
Continued headwinds to our model includes several factors I'd like to call out number 1.
Our pro rate business was still slightly unprofitable in Q2 weighted will talk more about this in a minute.
Much load to maintenance expense was down $13 million from Q1, as we continue to prepare our fleet for ongoing and future customer demand maintenance expense for 'twenty. The rest of 2021 will likely continue at approximately $200 million per quarter before finding a lower.
Number of new normal level in 2022.
Number 3 differed revenue was $6 million in Q2, 2021, and is now accumulative $138 million and number 4 COVID-19 is still creating some uncertainty about the shape and timing of the recovery.
And now some tailwind.
Number 1 deliveries of new growth aircraft are not far out with 20 American 175, 9 Alaska 170, Fives and 21 additional 7 hundreds coming into service with American.
Number 2 deferred revenue may begin.
First thing 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 in production.
Ruben status update as well as an update on our pro rate and leasing businesses to update by partner today, We announced an agreement to add 11, <unk> 7 hundreds with American we anticipate these aircraft will be placed into service beginning late 2022 through the middle of 2023.
Production, we also extended 22 <unk> 7 hundreds with American for another 3 years. Those 22 aircrafts were beginning to expire in the back half of 2022.
During the first half of 2021, we put 15 <unk> 7 hundreds into service with American income.
Including those announced today, we still have 21 more <unk> 7 hundreds to add to our contract, bringing our American C. R. J 700 fleet total to 101 by the Middle of 2023, the majority of the ECR J 7 hundreds have been in long term storage for the past few years.
And require extensive maintenance work to return to service.
Also with American we have 20, new E 175 scheduled for service next year.
With deliveries scheduled from Q3 of this year to the fourth quarter of 2022 together. These <unk> hundred 70 fives.
And <unk> 7 hundreds will bring our total American fleet to 121 by the Middle of 2023, We also announced an agreement with Alaska to add 1 more E..175. In addition to the 8 we announced last quarter, we expect to place 8 of those aircraft into service during.
During 2022 and 1 aircraft during the first half of 2023, bringing 41 total aircrafts under long term contracts with Alaska. We have also extended the current fleet of 32, <unk> hundred 70, fives, which put all of these aircraft under contract with Alaska for.
For the rest of this decade, let me talk briefly about our United agreement as of June 32021, we have 179 aircraft under contract with the United. This includes 90 <unk> hundred 70, Fives 19 C. R. J 7 hundreds and 70 <unk> 2 hundreds are CRE.
R. J 200 start to expire towards the end of 2024, we have no debt left on these aircraft and we believe the book value of these assets approximates the part out value of the aircraft during the quarter. We worked with all of our major partners on a third round of contract concessions that included temporary.
Rate reductions. These concessions are reflected in our second quarter results and we will also be reflected in our third quarter results. All concessions will expire at the end of the third quarter, Let me review our current production.
During the second quarter, our completed block hours were down by approximately 13%.
<unk> compared to the same quarter in 2019 based on the current schedules, we have from our major partners for the third quarter of 2021, we anticipate that our block hours will increase by approximately 13% compared to the previous quarter as we look at the fourth quarter, we anticipate.
<unk> that our block hours will be approximately 3% lower than Q4.2019 pending.
<unk> improvement in the recovery curve. 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.
<unk> fleet, our Q2 E 175 block hours were up by 12% compared to Q2.2019, while our Q2 <unk> 200 block hours were down by 44%.
Let me talk a little bit about our pro rate business during the second quarter, our pro rate revenue decreased by.
4% or approximately $33 million compared to Q2.2019.
As we see demand continuing to recovery, we anticipate our pro rate revenue to increase by 20% as compared to Q2.2021, our prorate model is nicely levered to the recovery.
'twenty with pro rate revenue down 24% as compared to Q2.2019, we continue to expect that incremental revenue coming back to the prorate business. We'll have mark will have attractive margin characteristics, let me shift gears to our leasing business.
We have previously.
Free play announced that we signed a purchase agreement to acquire 13 additional use C. R. J 7 hundreds as of today, we have closed on 8 of the 13 aircraft and expect to close on the other others throughout 2021 with the contract announced with American today, all of our <unk> 7 hundreds.
Previous either under long term flying agreements or long term leases to a third party. Following the purchase of these 13 aircraft, we will own or control of 169.
<unk> 700 aircraft. This CR J 700 is an exceptional assets that will continue to set skywest apart with strong demand.
Demand from our major partners, let me talk briefly about our current maintenance expense, which continues to run higher than our historical norms.
This increase is primarily due to the recovery of our flying and bringing the aircraft per American for the American agreement out of long term storage. We currently.
Currently have over 30 lines of heavy maintenance at our third party providers and the ramp up of the suppliers have been slower than anticipated to provide some context. This level of maintenance is unprecedented in our history. We anticipate that will continue maintenance at roughly these levels through the end of this year.
Expect to trend down starting next year, we have spent the last several years, reducing risk and enhancing fleet and financing flexibility to ensure we're well positioned we are committed to continue our work with each of our major partners to provide creative solutions as we work towards full demand recovery.
<unk> and <unk>.
Operator, we're ready for our Q&A now.
As a reminder to ask a question you will need to press star 1 on your telephone.
A question you May press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Zalviso from Raymond James Your line is now open.
Hey, good afternoon.
Yes.
And they.
News reports that possibly skywest is talking to Bombardier about starting up.
Free and billing.
<unk> 7 hundreds and I know you've been.
Collecting a lot of them here just.
Your view on kind of the outlook for the C. R. J 700, and what more you'd like to do in that area.
Well Savi. This is chip thanks for your for your question. It's a good question I.
And Theres a fair amount of.
Always a fair amount of information floating around given what we would like to see or some things that we would like to.
<unk> continued to pursue we as you know we are deeply invested in the CRE J fleet.
I can tell you from our strategic perspective, where we.
I think in a lot of things.
Trying to anticipate what we can do long term to share up this fleet.
Right now we're in a big process of taking a lot of 175 aircraft, we love that aircraft, but in the event that we continue to see strong demand across the board for the regional space, which we do believe post pandemic.
We're doing we will be talking to a lot of people about ways in which we can re fleet.
So I wouldn't say there is a tremendous amount of substantiate, but certainly some of the rumors are consistent with what our strategy is is to find ways in which we can continue to provide great service to our partners and the flying public.
Rick.
That's helpful. Jeff and then if I might ask on the pilot side, just curious I know you had talked about.
Bringing the training back starting hiring what are you seeing in terms of attrition with the legacy partners starting to hire here again.
Patients into what might need to be done or are they kind of the next year. It to take to make sure you have the right staffing levels.
Well I think that's a good question as well. This is chip I think back to the point that I think that we've talked about the last couple of quarters.
Blessed to have a great culture at Skywest.
I expect we are very deliberate pre pandemic in the pipeline that we developed relative to identify and recruit the best rigs.
Our recruits in the entire industry and from our perspective.
We are full.
We're full set on moving forward it at levels that are.
I was strong if not even stronger than in 2019 level in pre pandemic. We've said a couple of quarters ago, I think last quarter, specifically where were amazed at the interest in Skywest. Our pipeline is extraordinarily full with that being said, we certainly do anticipate some different levels of attrition.
Or as we've seen in the past primarily because of the circumstances of coming out of a pandemic and some of the things of the major carriers have done but at this point.
You know, we're going to lean on a tremendous culture. Some of the comments that I've that I had mentioned in my script about.
How we feel about good strong professionals here at Skywest.
Tristan our priority of taking care of them, which is a big part of what we're trying to do during this busy season, and a very strong pipeline and an interest out there we feel very confident in the things that we can do in the next couple of years and maybe even capitalize in the industry.
Okay from that just to follow up on that is it fair to.
Our attrition rates aren't any different right now like you havent really seen that step up.
Now we've seen a step up certainly since the last.
Since last fall, we've seen sort of a steady increase.
In attrition, but the starting point last fall was was was relatively low so our anticipation is going to be consistent with what we've.
And then working on with our pipeline in the 2019 levels.
We're certainly not there yet, but we arent we anticipate that.
We may very well need to plan for that but again the focus is still making sure that we're identifying.
A very good strong pool of candidates today.
Okay.
Thank you.
Okay.
Your next question comes from the line of Michael Lindenberg from Dish Bank. Your line is now open.
Oh, Hey, good afternoon, everyone.
Just a couple of questions here wait.
Wanted to just talk about on the pro rate business you talked about.
Having you know attractive margin characteristics as it as it ramped back up.
You know I guess.
This last quarter revenue was down 24% versus 19, and then I think you guided to the third quarter being up 20% versus Q.
<unk> 2021 so.
We're getting back there, but would that tie.
The improvement is will prorate be profitable or do you still is it another quarter or 2.
Improvement.
Get back to these.
These attractive margins that you mentioned.
What's the timing there yes.
Yeah, Mike This is Wade yeah. So as we said you've got those.
Right on.
We are down 24% compared to Q2.2019.
We're not profitable this quarter and Q2.2021 and pro rate and I think Rob said that in his script, but as it continues to improve all of the cost and the reason why we.
Number it has attractive margin characteristics because all of the costs are essentially in in our model right now and as the revenue comes back it's just.
It's.
Its revenue without any cost and so that's why it has attractive margin characteristics and so we will get.
Price there'll be a couple more quarters, but we will work.
Say, some very good bookings and it's trending in a very good direction. So.
And can you remind me how many airplanes are there now what is it like 50.60 airplanes that were pro rate.
Yes, it's somewhere in that range, it's probably a little above 60 right now okay. Okay. That's helpful.
And then just on the diff.
Deferred revenue.
So you indicated that we could see a turn.
In the second half and I guess, presumably since this deferred revenue is tied to multiple contracts I guess, we could see some reverse before others and so I guess in the back half of the year Youre going to give us a net number or is that how we should think about it because not every single.
Raw contract is structured the same way.
Yeah, that's right when we record that deferred revenue, you'll see that as a single net number.
But yes, we do expect that in the second half of the year will likely.
<unk> see start to see the reversal of the $138 million of.
Cumulative deferred that we've that we've put on our books.
This COVID-19 window.
Okay, Great and then just lastly on on the extension congrats on getting lots of different extensions. There 175 C. R. J 7 hundreds.
How do you shake out now with respect.
To tail risk previously where.
Where where are you with respect to like coverage was at <unk> as I recall, you always we're in a very good position lining up.
Liabilities on the aircraft when they came due with when the contracts and it and now that you've been able to extend some of these contracts.
I suspect that your tail risk situation is even better is there any way that you can just give us some color on maybe how that shifted because of some of these recent wins on extending.
Current airplanes. Thanks, thanks for answering my questions.
Yeah. Mike. This is Wade I think last quarter, we talked about tell risk a little bit and said we had approximately about.
$100 million of tail risk.
On our fleet and that number obviously got better.
This this quarter right. So it's gone down we still have some very small pockets of tail risks that are out there.
But we are very optimistic.
Be able to work with our partners to extend those airplanes and continue to fly those.
With our partners. So I think we've got a lot of that covered off.
Great very good thanks, everyone.
Your next question comes from the line of Catherine O'brien from Goldman Sachs. Your line.
Is now open.
Hey, good afternoon, everyone.
So it was a theme this earning season from U S airline industry seems to be that demand is coming back faster than expected and airlines are just ramping up capacity more quickly than planned several months ago.
I know you had these additional 10 aircraft announced.
Today, but.
But just thinking through the puts and takes going forward. Some of these legacy carriers retired meaningful portions of their fleets right now they can kind of backfill with aircrafts that might be.
Typically use international but maybe that changes next year as international demand comes back.
Kind of give us some color on the comp.
Patients you might may or may not be having on an incremental lift for next year to maybe help plug some of these capacity shortfalls.
Yes, Katy this.
This is chip.
Very good question I can tell you right now the <unk>.
Dialogue that we're having with all 4 of our partners is extremely.
<unk> positive.
There is some I don't want to call. It confusion, but we're certainly with the strong demand of the summer and with some of the things that we've outlined in the script. The challenges as we have just kind of from an infrastructure basis.
We're looking at all the opportunities with our eyes.
Namely.
Making sure that we are doing the things we need to with people inside and outside of skywest to be able to deliver what our partners want I can tell you right now that some of these.
External challenges are.
Having an impact on what we feel like we can do in the near term, but we're optimistic.
Mystic in 2022.
We can work through some of these things the fuel shortages.
Some of the hotel issues and that type of stuff, where we can get back to having a really really solid product because we get it we get a little bit.
I don't want to say, we get nervous that we get cautious when we don't have all things running in a.
Very fluid and efficient manner. That's why we're spending so much time and effort relative to a reliable fleet and making sure that we've got everything moving in the right direction.
We also have interesting conversations if we would've seen this world 12 months ago, we probably would have done a couple of things different than we probably would have done some different things with maintaining aircrafts.
But in summary.
Katy the overall conversation with our all of our partners is very positive about lyft and.
We're focused internally to make sure that we have the processes.
That are stronger than what they even were back in 2019, when we're performing so well to get back.
To that performance in 2022, so I think that there is some good color around all of these conversations with the partners. There is good strong demand that we're cautious about making sure that we're delivering what we've always been able to deliver.
Got it and then maybe.
Last quarter, you noted that concessions with largely off.
Ask that PSP funds and that netting these 2 impacts of results close to breakeven June quarter result, you, obviously did better than that I guess first what drove that and then going forward do you still expect concessions to largely match PSP because because you noted earlier that you expect fourth quarter EPS.
The decline versus third as PSP rolls off, but if we're convinced concessions match. The PSP why would that be so little bit of a complicated question I hope I explained it well.
Hey, Katy it's Rob here. So yes, let me just say look we're not going to get into the details of our partnered concessions, but what I can say is debt.
What you see in the GAAP results in Q2 will be very very similar to what you see in Q3.
The GAAP grant.
<unk> that was recognized this quarter was about $114 million it'll be very similar.
Next.
Next quarter and as well as debt.
The partner concessions will be similar quarter to quarter.
So I think look thats.
Really.
All we can say about debt by the time, we get to the fourth quarter. Some of this noise will be behind us.
<unk>.
It will be.
A little a little more straightforward in the fourth quarter.
Okay, maybe if I could just sneak 1 quick last 1 in.
Current liquidity balances is running higher than normal like much of the rest of the industry just given COVID-19 uncertainty in the release you noted.
Deliveries over the next year or 2 you plan to debt finance would you consider paying for these in cash to speed up deleveraging given your current cash balances or are those very positive conversations with your partners. We just talked about.
Leading you to want more dry powder for other growth opportunities. Thanks, so much.
Yes, Katy we're obviously.
Number 1 of our big jobs is to make sure that we're deploying capital in the most effective way possible we were pleased.
Again, our balance sheet is.
Is looking very nice with our debt net of cash down $400 million from.
From our pre Covid.
Level going into that so look I think debt.
We will look at opportunities to deploy our cash in a way that's very shareholder friendly and.
Consider all of our opportunities there.
Your next question comes into line of <unk> <unk> from Evercore ISI ISI. Your line is now open.
Hey, thanks.
Just a follow up on on Kt's question, because I think it's I think it's a good 1 and trying to get to like what the.
Earnings power of the business here, if we just peel back PSP and concessions in deferred revenue in all of these moving parts.
With with block hours down 13% you know in the in the <unk> and and and maybe having a shot of being close to flat in the fourth quarter.
You know what what what is the underlying.
Your line kind of core operating earnings here.
Yeah.
Well 1 thing I can say Duane is that if you look at our results for the quarter. If you strip out the noise from PSP and partner concessions, we were still profitable.
And as we indicated in the prepared remarks.
<unk> debt.
We are anticipating that Q4, while it won't have obviously the benefit of some of that ground income. We do expect Q4 to be to be profitable and cash flow positive. So I think we are emerging at this point with the model that looks pretty.
As Wade mentioned, a little bit in his in his prepared remarks maintenance will likely continue to run a little hot through the rest of the year and then begin to find a new lower level in 2022. So if some of these things start to normalize again, it's our prorate business sort of comes.
Back to you.
A new normal level as maintenance expense finds a new lower level.
We feel like we're nicely set up going into 2022.
Okay, and then on on the comment about.
If everything goes right and we're not asking you to predict the future here.
But if everything goes right and you're sort of back to a quote unquote normal in early 'twenty 2.
Based on what you've booked in terms of growth.
What what sort of block hour growth would we be looking at in 'twenty, 2 just kind of big picture.
Duane this is wade.
Obviously.
We've talked about some of the things that we have on our books right now we have the 'twenty 1 <unk> 7 hundreds for American we have.
And 10 of those are going to come in in the fourth quarter. Then we also have some some 170 fives, we're not going to give specific guidance right now, but there will be some improvement from where we're at today.
We anticipate in the fourth quarter, but.
We will continue to update you as.
As we see the demand recovery continues it's still a pretty fluid.
Market out there.
Okay. That's fair and then maybe just lastly can you help us understand.
What is it that drives.
Sorry.
And word revenue kind of flipping from from deferred you know to recognize what is the event.
That causes that to happen just practically speaking.
And you know what sort of pacing you know, what's the range of pacing on that $138 million in the in the back half of the year you know what could that.
The different quarterly basis, if it flips.
Yeah, Duane so that you know that 138 million that we've that has that we've deferred cumulatively that will unwind by the end of each individual contract. That's part of that and there are many contracts that make up that 130.
That billion dollar or so.
The timing of the unwind again, it depends on the underlying contract and the volumes.
In block hours that were flying under those contracts the original point of the deferral was debt.
Our original volumes were so much below what was originally expected as those.
As volumes come back.
That's what's going to create the reversal point and then eventually that complete unwind of that but.
Under no circumstances will that revenue not be unwound by the end of the the contract period.
<unk>.
In other words, it'll it'll be unwound over the next.
8 mill sort of 2 to 3 years.
That's helpful. Thank you.
Yeah.
Your next question comes from the line of Helane Becker from Cowen. Your line is now open.
Thanks, very much operator, hi, everybody. Thank you very.
For the time, probably a long dated question, but as you think about and this maybe.
It was sort of asked in a different way as you think about capital allocation.
How do you think about you know I know I know I think in the short term you can't necessarily restart the share repurchase program, but how do you think about getting back to returning capital.
You know from shareholders and say 2020 to second half or even 2023.
Hi, Helane, it's Rob so.
Listen I mean as you know.
We're limited as to anything share repurchase or dividend wise.
Until you know over a year from now under our PSP agreement with.
With the government.
But again like we did this quarter, we found nice opportunities to.
Sort of tactically repay certain debt.
And so that was something that we that we found attractive so we're going to look at at capital allocation very carefully.
On a risk adjusted basis, we're going to look at other opportunities to deploy that capital.
But.
And over and over time, I would say all options are sort of back on the table.
That's fair. Thank you Rob and then the other question I think.
I was in chips.
Prepared remarks, you talked about the pilot and mechanic training programs and you're accepting new applicants can you just talking about the quality of those applicants and and how you're thinking about.
You know, bringing them on and and then I just have 1 more little question.
Perfect Helane. This is chip yeah, we did we did discuss.
<unk> said in the prepared remarks, I think I think overall.
It's an interesting situation because it's coming out of a pandemic you've got a lot of applicants.
From a pilot perspective, we've got our classes.
Full clear through March of 'twenty 'twenty 2.
A tremendous and these are big.
Big classes.
And from our perspective, we're excited about the number of people that want to come to work for Skywest and we think that they are good candidates as you know and we've talked about in the past we have a very strong.
Strong strong training program for pilots and Theres certainly is a bar that you have to meet to fly.
Weston our training program I would argue is the best in the industry and so look I think that from our perspective, we've also gone further and deeper into the pipeline to evaluate the candidacy and the qualifications of each student I mean, we do.
Assess them along the way even before they come to Skywest.
And I think Thats, a net outstanding opportunity for us to be involved in the 300 schools that were involved with to help make sure we're getting the curriculum.
Associated with those schools in a way where they can they can come to skywest and make the cuts. So from that perspective, there's just such a strong volume that we're seeing that as we continue to work through it we're going to keep.
At Sky High.
And we're comfortable with how we're going to.
Provide pilots for the airline same thing goes from mechanics, I think from our perspective, it's a completely different way of recruiting a completely different way of training.
We do see exceptional candidates out there that we're excited to have worked for us.
From our also from our perspective, we may increase the scope of some of the things that we do we rely a lot on outside providers to do various things with maintenance that candidly.
As of today or not quite cutting the bar, where we would like to see and so we're probably going to expand some things that we do internally for a bit.
To make sure.
The bar and get the right level of work done with relative to our fleet. So that's probably a long answer as well, but I think that we're really excited about the energy of.
Everyone, who wants to come to work here at Skywest, and we're ready to train them and get them on a great career path.
No that's actually very helpful. Thank you for that and then my.
My other question is on I guess, he VTOL MISO, when it's going down that path.
I'm just kind of wondering.
It's not on a short term thing because it's like not even big aircraft right. We're talking about up to 7 passenger cars. So I don't know, how youre thinking about getting involved or if.
Sure that we are but.
I have to ask the question.
No. It's a great question and I get the question quite a bit but I would I would I would presented at a high level like this helane I at this point in time with Skywest I can tell you as we sit here.
As management, we are a.
If you are waiting I don't know of a time in our history, where we have evaluated stronger opportunities within our core business model as well as strong opportunities outside of our core business model. So I would I would tell you that.
Given obviously, our 50 year reputation.
What we've been able to do with.
Just amazing people that that reputation is translating into some things outside of what we normally do and in some we have lots of people knocking on the door wanting us to get involved in multitude of different opportunities that having been said.
It is imperative today at this point in the World.
World that we remain absolutely positively focused on our people.
And on our partners and our passengers.
We fundamentally believe that burning most if not all of our calories in that effort is the right thing to do at this time and as we continue to make.
Progress through that and get get life back from global as an airline.
We are certainly going to continue to entertain some of these other concepts that we think we have tremendous credibility in the sector to capitalize on.
Oh, that's great. Thanks for that detail I really appreciate it.
Have a great afternoon.
Thank you.
Sure.
Your next question comes from the line of Joe assessing Archie from Stifel. Your line is now open.
Thanks, Good afternoon.
Just following up on a comment you made earlier on the maintenance side just given how much is maintenance you all have in front of you.
Good.
Our product about a little bit more about what youre seeing in that market and maybe how much of that you are looking to bring back in house and then what some of the challenges you're facing with your third party providers are.
Yes, Joe. This is this is Wade I said in my script, we have right now we have over 30 line.
Can he trains of heavy maintenance going on right now and we have great partners in these areas right.
We do a lot of work with several different people in these areas.
What we what we talk about when we want it we want to Derisk the model a little bit here and bring.
Some of that work in house, so that we're not so reliant on.
The third parties you know obviously, we've got a great reputation as chip has talked about.
Bringing people in to Skywest and we think we can take advantage of some of those situations and do some of that heavy maintenance in house. So there.
<unk> some of that debt will start to come in.
In house, and we will take that.
We think they're ramping up as fast as they can their hiring our third party providers, they're going to start getting to a normal level. We hope in the back half of this year and we start to see a lot of progress. So we're going to we're going to work.
There will be them and we're going to work hard internally and we'll get we'll get through this 1 okay.
Okay, Okay, and then Rob I was hoping.
Maybe it could be a little bit more specific with some of the qualitative guidance. You provided is Q4 thinly profitable or something better than that and then the maintenance expense decline youre expecting in 'twenty 2 can can you.
Card with the magnitude of that just given what we'd referenced in terms of bring more in house. Thank you.
Yes, so on the guidance I mean, we are in.
Intentional about not being specific given the caveats that I laid out in my prepared remarks, but again I think we're pleased that.
We're on a good recovery track.
Q4.
Almost certainly be a drop off from what we see in Q2 and Q3 because of the.
Because of the noise from the government programs and the partner concessions going away.
But.
Framed we are.
Comparable with the color that we expect to be both EPS positive and cash flow positive in the fourth quarter sort of on a standalone basis without some of the southern noise. We've got.
And then sorry, what was your other question.
If.
Maybe frame the magnitude of the maintenance expense decline youre expecting in 'twenty 2.
Yes look I'm not going to go beyond sort of what weighed on his script to say that we're going to run hot the rest of the year.
In the neighborhood of probably a couple of hundred million dollars.
Quarter in maintenance expense and then starting in 2022.
Those numbers are going to we believe we will start trailing off and find a new normal.
Level as we get through some of this backlog as Wade mentioned.
Okay. Thank you.
Of course.
We have a follow up question from Catherine O'brien from Goldman Sachs. Your line is now open.
Hey, guys. Thanks for the extra extra rod here maybe.
Maybe just 1 more actually.
Now I'll just generated a second follow up too.
2 quick modeling ones, but so.
Well, we've talked a lot about the reversal of deferred revenue.
I think you said earlier, it's over the next 2 to 3 years.
Could that be more front end loaded if you start to fly.
<unk>.
At above 2019 levels, maybe faster than anticipated.
I know Im just trying to I'm, just trying to kind of get my mind around is that straight line of remaining contract. Please.
Or is that really tied to how quickly you could make up.
Block hour production and then I would ask 1 more quick line maintenance after that thanks.
Sure Katy so look the model for that deferred revenue is based.
Just on <unk>.
On volumes on block hours over the expected over the remaining contract. So again the timing of that reversal is contingent upon.
Yeah.
Timing issue as you mentioned of volume sort of coming back debt.
Again, it's a.
Contract by contract basis that we look at it and we believe that debt all or most of that should be reversed over the next.
2 to 3 years.
Okay, and then maybe just 1 really quick 1 to Joe's question.
When we're talking about a new normal maintenance expense without being.
Specifically is that does that fall somewhere between 19, and and we were running at 2021 or or it's like closer to 'twenty, 1 or it's closer to 19, just like any really broad strokes on what that new normal looks like thanks again for the extra time.
So Catherine this is this is wade so I'll try to give you a little more specific.
From that so that it will not be down to 2019 levels it'll be somewhere between 2019 levels in 2021, and the reason why it won't be all the way down to 2019 levels. The mix of some of our contracts have changed as you've heard over the call today right. Some of all of our contracts that we're adding today are these.
Specific to the <unk>.
<unk> hundred 75 contracts were responsible for all the engine maintenance and all of that some of the contracts that have gone away. We are not responsible for some of the engine maintenance. So it's a different model that we have going forward and so it will be at a higher level than 2019, but the revenue models that we have will also reflect the increased.
These eaten its expense going forward and so we are going to find that normal level here.
In 2022, but it won't be all the way down to 2019 levels, but it will be somewhere in between and the biggest reason is just the mix of the flying contracts and how each of those flying contracts or are different on how we handled.
Mainly engine maintenance expense so.
I really appreciate that thanks, guys.
I am showing no further questions at this time I would now like to turn the conference back the Chief Childs, President and Chief Executive Officer.
Thank you appreciate it we want to thank everybody for joining us on the call today and your interest in Skywest, we are appreciative of the opportunities, which we have.
And we've got a lot of challenges in front of us over the next quarter on a lot of opportunity as well.
But we are certainly proud of our airline and our teams and the great work they're.
Primarily in light of all the challenges and opportunities we have and with that we'll talk with you next quarter. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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