Q3 2022 SkyWest Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Good afternoon, My name is Emma and I will be your conference operator today.
This time I would like to welcome everyone to the Skywest third quarter earnings Conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, Chris to start one. Thank you Rob Simmons Chief Financial Officer, you may begin.
The conference.
Yeah.
Thanks, everyone for joining us on the call today.
As the operator indicated this is Rob Simmons Skywest Chief Financial Officer 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.
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.
Actual results will likely vary and may vary materially from those anticipated estimated or projected for a number of reasons.
Some of the factors that may cause such differences are included in our 2021 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. Thank you for joining us on the call today.
Demand for Skywest product during the third quarter remain exceptionally high with our main constraint being our crew imbalance. Despite the challenge to production inhibiting our ability to fully monetize this demand we reported a pretax income of 57 million and a net income of $48 million.
Operationally our teams delivered outstanding performance to accomplish 99, 9% adjusted completion and to be a top three on time performer on the D. O T lift for several months of the year I want to thank our people for their teamwork and efforts to deliver strong operating performance.
We received nine E 175 during the third quarter and we received four more this year, we've modified some timelines on future deliveries to better manage resources and continue to expect a total of 240 <unk> hundred 70 fives planned in service once our current orders are complete.
Our re fleeting continues to be a priority in our long term strategy during the quarter, 80% of our block hours were flown utilizing our dual class fleet.
We were able to secure new pilot agreement during the quarter, including large pay increases enhancements for our pilots. This four year agreement is a significant investment in our pilots and became effective in mid September .
While it is still early we expect the agreement to help manage attrition and encourage career progression into the left seat. We're proud of our ability to work directly with our people to provide more stable and rewarding long term pilot careers here at skywest as well as career opportunities with a choice of our four major partners.
We are uniquely positioned to provide more stability opportunity and options for pilot and any other regional carrier.
We remain fortunate to continue attracting a high level of talent and have filled our new higher pilot classes well into 2023.
A large number of upgrades scheduled over the next few months to help address our captain imbalance and continue to expect and plan for ongoing high demand for pilots.
We have long been investing in tuition reimbursements incentives and other and various other partnerships and methods to reduce barriers to entry and clear the path to help increase equality in the pilot profession.
While these strategies are producing results and demand for our product has never been stronger we continue to expect that the timing required for training and upgrades will likely constrained production into late 2023 to early 'twenty four.
We continue to work with our people to aggressively manage this challenge and we believe theres, a solid upside potential as we mitigate attrition and rebalance our crew staffing.
We continued making progress on operationalized, our skywest charter entity during the third quarter as we shared earlier this year, we plan to enter this strong business.
With standard on demand charter service as well as scheduled charter service under additional community authority, all within existing regulations and requirements.
We've been working with the department of transportation on our commuter authorization and we appreciate the strong support from many communities and airports who are very interested in this service.
The process is essentially a fitness review of the entity and we believe skywest charter exceed all measures of fitness regarding commuter authority.
We undoubtedly have the asset base high standards and expertise to execute this operation well and hold Skywest chartered to exceptionally high standards of safety and service.
We're making steady progress and plan to begin on demand charter service as early as Q1 2023.
Yes.
We are moving a number of strategic pieces into place to ensure we are well positioned for 2024.
First we anticipate that as we initiate our new pilot agreement, we will stabilize attrition and our crew balance second we're in productive conversations with our partners regarding agreements to align with these labor investments.
Within our operating entities, we continue to work through our fleet optimization at Skywest Airlines and are on track to operationalize Skywest charter by year end.
Our execution of these initiatives will help ensure we're best positioned to capitalize on opportunities in the marketplace.
Although we continue to expect the recovery to remain choppy as we worked through some headwinds, particularly over the next year, we remain aggressive and deliberate in the steps we're taking to ensure we are well positioned for 2024 and beyond.
Rob will now take us through the financial data.
Yes.
Today, we reported third quarter GAAP net income of $48 million or 96 cents diluted earnings per share Q.
Q3 pretax income was 57 million our diluted share count for Q3 was $50 $6 million and our effective tax rate was 15%, which included a $7 million benefit from the release of an uncertain tax position liabilities.
First revenue.
Total Q3 revenue of $789 million was down 1% sequentially from Q2 2022.
And up 6% from Q3, 2021, Q3 revenue breaks down with contract revenue down 2% from Q2 and up 13% from Q3 2021.
Pro rate revenue was $95 million in Q3 flat with Q2 and down 26% from Q3 2021.
Leasing and other revenue was up 2% sequentially and year over year.
These GAAP results include the effect of a release of $13 million of deferred revenue this quarter compared to $16 million released in Q2 and $19 million that was released in Q3 2021.
As of the end of Q3, we have $55 million of cumulative deferred revenue that will be recognized in future periods.
Let me move to the balance sheet, we ended the quarter with cash of $1 billion.
From $979 million last quarter, our capex during the third quarter was $224 million for nine new <unk> hundred 75 aircraft and other fixed assets totaled 2022, Capex is expected to be a little under $700 million.
Including the purchase of 25, new <unk> hundred 75 aircraft compared to $556 million in Capex for 2021.
We ended Q3 with debt of $3 4 billion up from $3 1 billion as of year end 2021.
Just a reminder, that the only government that we have on our balance sheet is a total of $201 million in PSP 10 year unsecured no amortization low coupon loans.
Let me say a couple of things about liquidity.
As of September 32020 to our cash position of $1 billion included the effect this quarter of repaying $100 million of aircraft debt and adding $40 million in engine financing.
Additionally, we added $182 million of debt financing the nine new <unk> hundred 70 fives delivered during Q3.
We also have over $1 billion of Unpledged collateral that could be deployed for additional liquidity if ever needed additional flexibility comes from the fact that including partner owned aircraft, 50% of our fleet and service has no financing obligation.
Consistent with our policy and practice, we are not giving any specific EPS guidance at this time, but let me give you a little directional color.
We expect Q4 earnings to be down from Q3 levels.
<unk> still be slightly profitable.
Q1, 2023 may look seasonally similar to Q4 2022 as usual we expect total 2023 earnings to be down significantly from 2022 that remain modestly profitable as we continue to put the pieces together for a successful.
<unk> 2024 and beyond.
In spite of only modest profits expected in 2023, there are six notable expectations for 2023 that I would like to call out.
Number one.
We expect capex to be down over $400 million year over year in 2023 number two this capex reduction could drive the best free cash flow in the last five years number three we expect cash at the end of 2023 to still be near 1 billion.
Number four we expect that at the end of 2023 to be below 2019 levels number five our end of 2023 leverage could be the lowest in the last five years and number six debt net of cash could be $400 million lower.
Then at the end of 2019.
We believe that the actions we are taking now to prepare the way over the next year or so for incremental utilization of our fleet to work through the pilot imbalance affecting the industry and to preserve the optionality of monetizing strong demand opportunities over time will position us well.
For a successful 2024 and beyond.
Wade. Thank you, Rob I'll provide a fleet and production status update as well as an update on our charter pro rate and leasing businesses. As we've discussed we are nearing completion of our strong delivery scheduled this year, we previously announced an agreement with Delta for 16, New E 175 to replace <unk>.
Older Skywest CR J 900 aircraft during the quarter, we took delivery of seven aircraft for Delta, bringing us to nine of those 16 aircraft, we anticipate taking delivery of four <unk> hundred 70 fives during the fourth quarter.
We also came to an agreement with the Embraer Air and Delta to extend the timeline of our last three delta deliveries until the end of 2023 in the middle of 2024, as we work to resolve our captain imbalance.
After we received these aircraft we will have 87, <unk> hundred 70 fives under long term contracts with Delta we.
We have an agreement with Alaska to add 11 E 170, fives to our contract of which we have received 10. This year, we came to an agreement with Alaska and Embraer to extended the delivery of the last day 175 until the middle of 'twenty 'twenty five we currently have 42 aircraft under long term contract.
With Alaska following delivery of the remaining eight currently on order or E 175 billion will be 240 aircrafts.
As chip discussed during the quarter, we came to an agreement with our pilots on the new pay package. The cost of the package is significant as you can imagine we have been working with our major partners on addressing these new costs. We anticipate that we will have come to an agreement with the majority of our partners on reimbursement of the new pilot rates prior to year.
And let.
Let me review our current 2022 production based on the current schedules, we have from our major partners for the first fourth quarter, we anticipate that our block hours will be down by approximately 13% to 14% in the fourth quarter as compared to the third quarter as we look to 2023, we anticipate that our <unk>.
2023 block hours will be down by 20% as compared to 2022, let me give a brief update about the status of Skywest charter in June we purchased a part 135 air carrier. Shortly thereafter, we applied to the dot for commuter authority to operate scheduled pubs.
Charters as permitted by both Dod and FAA. The commuter authority application primarily is meant to demonstrate the fitness of the carrier in terms of financial managerial and operational matters. We believe skywest charter is well capitalized entity and has some of the best operational leaders in the industry we have pre.
<unk>.
With all of the information they requested and are waiting for them to approve and issue. The commuter authority regardless of the status of our commuter authority. We are moving forward with our plans for Skywest charter to operate on demand charters under its existing Dot's authority. Once we are operationally ready as far as <unk>.
Our pro rate business. The demand has been extremely strong just like the rest of the industry. We have seen very strong yields and great community support we will continue to work with the communities on the best way to continue our service shifting gears to our leasing business. We have a total of 40 <unk> seven hundreds and nine hundreds under long term leases with third parties.
This line of business has very good cash flow and strong margin characteristics demand for our engine leasing business is returning and we have placed a few more engines under third party leases during the year and anticipate placing several more engines under leases during 2023 demand for our engine leasing business will not.
Not fully be realized until flying levels for the regional industry start to rebound. We have spent the last several years, reducing risk and enhancing sweet and financing flexibility to ensure we're well positioned the flexibility will continue to be a differentiator for us and we are committed to continuing our work with each.
The major partners to provide creative solutions for our products.
Okay, we're ready for the Q&A now.
If you would like to ask a question again simply press star one on your telephone keypad.
Your first question today comes from the line of Mike Lindenberg with Deutsche Bank.
Your line is now open.
Hey, good afternoon gentlemen.
Wait I just want to go back on the numbers. So if I heard you right.
It looks like Theres eight E 170, fives could deliver so for in the fourth quarter and then I guess for over the next I guess Q3 years 'twenty three 'twenty four 'twenty five is that is that currently what's on the books.
Yes, Mike. This is this is wade yeah. So you're right. We have eight <unk> hundred 70 fives left to deliver.
<unk> will be in the fourth quarter.
Two will be in 2023, one in 2024 and one in 2025, Okay and then so when I think about the block hour total that you gave us for 2023 down 20%.
Assuming no additional deliveries it seems like that's probably a pretty good steady state for the next few years does that is that fair I mean, theres, probably some a few tweaks.
Tweaks here and there, but the main operation not the charter piece.
So Mike this is Wade again, so the 20% Theres definitely.
In 2024, and 2025 as we look out there are opportunities to increase the utilization of our current fleets and get back to higher levels of block hours.
Okay.
And you also made the comment that the pilot deal.
Well an agreement with your major partners about higher labor costs, you'll get something by the end of this year and so that will start flowing through the P&L.
In 2023.
Just based on.
Rob sort of characterization of your earnings trajectory for next year, which is low.
How much of it.
How much of the.
Labor cost increase do you think you'll be able to recapture through the negotiations with tier four partners.
A good chunk of that is it a small piece of that because.
The earnings Depression next year May may have a lot to do with training and transition and a slowing of growth and it sounds like an underutilization of the current fleet I'm trying to sort of parse out what are the pain points that take down profitability next year and I'm trying to figure out how much of it is just labor and being on.
Being able to pass on those higher costs I realize it's a multi pronged question will be my last question. So however, you and Robin to answer it maybe even ship to thank you. Thanks for taking my questions.
Hey, Mike This is shared with an exceptional question.
Layers, there, but I think that your overall thinking is right.
Given the circumstances for 2023, I will start by saying that our major partners are very engaged in regional pilots. They are very engaged in making sure that stability is paramount that we achieve in 2023 and <unk>.
Yet at the same time, making sure that they are the ones that are.
Being able to provide exceptional careers for the pilots at skywest that want to move on relative to the profitability conversation you're exactly right. There is some pain points relative to training and infrastructure that we're going to work hard on given the fact of the block hours are coming down we're very very focused on the dual class fleet.
Typically the 175, but I will say that after 2023 as you stabilize.
The Labor force that there is tremendous non capital upside just an increased utilization back to getting the 175 fleet and the other CRE J dual class fleet back up into the high utilization numbers that we're accustomed to seeing back pre pandemic.
Also being set back with our partners, we fundamentally our conversation with them are extremely positive we have the most in demand pilot group. There is mostly because of our ability to recruit our ability to train and they're just exceptional professionals. So we want to make sure that we're taking care of them.
The career needs that they want but at the same time.
We used to be a carrier that would say we can afford to pay the rates that the majors are the discount carriers can pay and right. Now we don't have to have that argument our objective to be a destination airline and also have our folks flow to our partners and we're going to continue in the upcoming months.
To make sure that part of the stabilizing what we wanted to do is we're collaborating with both our pilots and our major carriers in closing that gap, but we're confident.
There is still a tremendous amount of infrastructure and training that we have to get it.
Behind us in 2023, but our partners are deeply engaged in making sure that they are participating in these challenges.
Okay.
Very good thanks chip.
You bet.
Your next question comes from the line of Savi Smith with Raymond James Your line is now open.
Hey, good afternoon.
If I might pick up and ask a follow up question to Mike.
Mike last one here.
A two part.
Clearly.
The industry changing a little bit here somewhat structurally by.
By being as you say the victim of being the destination Airlines for pilots.
Wonder if you could talk about like one what that means for your kind of value proposition to managers if that changes at all.
And the type of market that you can serve and then two I was curious because it seems like you go from.
Losing pilots to low cost carriers and ultra low cost carriers do not doing that but then on the other side youre going to start to have to compete with low cost and ultra low cost carriers in sourcing pilots directly because it seems like a lot of the Ccs at least are going and kind of building relationships at flight schools in <unk> and.
And colleges.
Starting now on program. So there might be some kind of competition on this front and I Wonder if you could talk about those two dynamics.
Yeah. So those are two great questions as well and to give more on your first one relative to the value proposition at Skywest look we just barely.
Past pilot package about a month ago, we're evaluating the impact on attrition so far the recent Tommy we thought it would take six weeks to two months before you really saw the impact on it and we're already seeing some good benefits, particularly on the captain side and I think from our perspective.
That's the first step we're going to execute some additional steps here internally at Skywest to do some things with pilots to make sure that day.
That they understand what their value is as all of our employees are valuable, but but it's been an interesting dynamic over the past several years at skywest and the evolution of where we are today is.
We have a conversation with many of our senior pilots and senior employees that.
Honesty have helped me the backbone of the operation and they've given us good reasons of why we shouldn't be a destination airline.
To your second point destination airline with tremendous opportunities if they want to go to our major partners and there'll be more programs I believe that will enhance those vertical pathways.
That will there will be a benefit to all of us, particularly our pilot second of all relative to the sourcing of that our sourcing is extraordinarily strong.
Right now we have seen is some of the low cost carriers may go directly to schools and to be candid.
Given where we are with the imbalance of our pilots I think that we would certainly applaud and understand where wherever you want to be a destination pilot to the pathway to get there is probably shorter than ever and if you want to go fly for a discount carrier you may have the opportunity to do it right out of.
School, we're not afraid, particularly with this pay package and competing with that.
Approach combined with the fact that you still have optionality to go to one of the best Airlines in the World. So I still fundamentally believe that if it came down to a sourcing issue from schools in the pipeline, we're very comfortable with what's happening with schools and the pipeline is as robust as we've ever seen it that having.
Ben said, we still fundamentally believe that.
We applaud and a shorter pathway to destination, where pilots want to go but we know we still will be the most.
Promising option for pilots as we continue to work through our culture and become a destination airline as well as be able to have the option to go to the four best Airlines in the world. So.
And I suspect that skywest, probably stands out amongst the regionals on that front too.
If I might just add on.
The block hour production kind of commentary I was just super helpful.
When do you see kind of the Q over Q levels kind of stabilizing within that outlook I know there is probably still.
Maybe you can come in better if attrition side that area or maybe get moved around but.
When do things stabilize on the block hour production fronts.
Hey, how are we doing.
Go ahead, Oh, sorry go ahead.
That was my question.
So yes. This is wade so when we start to stabilize we think 2023 is still going to be.
A little choppy, we think we'll start to see the stabilization starting in 2024 and so that's that's how our models are built right now and that's how we're looking at it and so we look towards 2020 for to see that.
Okay.
Declines in the fourth quarter.
So so Q1, so when you look at it a little bit Q4, Theres definitely I gave 13% to 14% decrease between Q3 and Q4 Q1, we start to find a little bit of stability.
And then it just there may be some small decreases as you go along throughout the year.
And some of it depends on operationalize in charter and some other things that are out there.
But that's what we're that's what we see right now.
Okay.
And Savi. This is chip I would add that the numbers that we're referring to is basically.
I mean, I don't want to I don't want to.
To get too detailed on the numbers, but we're evaluating our numbers based upon current trends with modest.
Impact from the from the pay package on attrition, we do see some upside in this.
At the same time, there is a lot of variables I mean this this crew imbalance is a situation where wed love to see some long term data that shows some things, but there are some things that could have a relatively strong impact on it.
Im not saying that we're pessimistic in our approach, but I would say, we're pretty conservative in our approach and there are various other factors that could have an impact I mean, there could be an impending recession that is always good for regionals and staffing in those types of items that could happen, but at this point, we're not comfortable giving any more long term feedback.
And just providing some some very what we think is solid conservative estimates of what what's going to happen relative to block hours in the future, but if it does change we do have four partners that are with goblet block hours like Crazy Thats for sure.
That's all very helpful. Thank you.
Your next question comes from the line of Duane <unk> with Evercore.
Your line is now open.
Okay.
Hey, Thank you.
So just just with respect to your down 20, you guys have been.
Pretty good at Star.
Starting with a conservative view and then maybe ratcheting it higher so I wonder.
How confident you are in that down 20 is.
Outside of industry factors is it is it just the compensation.
Consideration, where maybe that down 20, it could be something something better something closer to flat.
And then if youre down 20.
How would you mark.
Regional industry broadly I mean would it be down 30 down 40 down 50, how would you how would you mark your share within that down 20.
Yes. Those are good questions Duane I think I think down 20 for us is something that we're strategically.
Well prepared for but we're also very well prepared for upside an upside is easy.
Down 20 means we still have a tremendous amount of pilot and flight attendant and mechanic training it.
It does require some infrastructure.
Changes within the organization.
And those types of things is what we're mostly focused on and I think to your point I think we have been pretty good about being conservative in planning for it with some good operational upside. So look I think that that's what we know today like I said, it's hard to predict what would happen I would say if I was betting over under I would probably bet a little bit.
Over.
But at the same time when you take a look at the regional and where the rest of the regional world is going to be up or down 20, I couldnt necessarily speak to it because I don't know exactly what the specific crew imbalanced challenges are compared to ours.
I know as much as we and this is probably.
Not a bragging point, but an interesting point I know that through the reductions over the past two years and coming out of the pandemic.
Just naturally we have gained a tremendous amount of market share in the regional industry and <unk>.
And the fact that we have gained a tremendous amount of market share in the regional industry and when we can rebound if we have the capital aircrafts and things too to be able to respond we could respond very very quickly, but I really couldnt speak to the rest of the industry I'm assuming that it's probably.
I'm not hoping for anyone to have a tougher than we are but I think that we typically do whether these things better than the others do.
Okay.
Helpful. And then just if it's possible could we put some numbers to the pilots that you'll need to hit that down $20 like what would be the assumption on.
Attrition from here and what would be the assumption on hiring from here and where would you expect to get those folks from I mean, you probably have a pretty thoughtful view.
Into the pipeline and is this is this going to be dependent upon getting pilots from other airlines or do you feel like there's enough just sort of organic.
De Novo pilots in the pipeline to kind of hit that down 20. Thank you for these thank you for the thoughts on what it's obviously not.
Not an easy question.
Yes, I would.
Duane I would say this I would say that our assumptions are consistent attrition assumptions of what we've seen so far this year.
With organic timing and patients with upgrades.
We don't have to go do we don't have to go get predatory or with other pilots for the numbers that we've talked about this is I think we've said even on the last call when you don't hire.
Pilots until 2021 and it roughly takes two years to get a lot of your <unk> into an upgradable captain scenario. That's when it starts to given various levels of attrition. That's when it starts to turnaround in 2023 organically so by and large our assumption is relative.
<unk> consistent maybe a little more optimistic attrition and what we've seen in the past given our pay package.
Time and patients to get the captains into an upgradable position organically not dependent upon hiring from outside sources.
Okay. Thank you.
Your next question comes from the line of Savi <unk> with Raymond James Your line is now open.
Okay. Thanks for the follow up can I can you talk a little bit about pro rate Thats hung up well any thoughts on.
How that kind of progresses here.
The fourth quarter and as you look into 2023 crazy that the demand in the fares are there.
Yes, Robbie this is wade so pro rate.
I said in my script, it's been extremely strong just like the rest of the industry, we've seen very good yields.
A lot of these communities that we have per rates in its small communities. The communities are extremely extremely supportive of skywest and what we're trying to do from both Skywest Airlines and Skywest charter. There is just tremendous support there I believe what we will be able to do is continue to serve.
The vast majority of the communities that we have today.
And one of the entities that will be at Skywest right and so that is our goal and we're going to continue to do that and we're going to work with the communities on on on what that service looks like and how we'll do it in under what agreements, but we're still very optimistic about prorate the yields and the.
The flying has been very good for us so.
I appreciate it thank you.
There are no further questions at this time I'll turn the call back to chip Childs.
Thank you and I appreciate it we really appreciate everybody's interest in Skywest. Thank you for listening to the data points that we have and.
And for joining us again I wanted to.
Thank all of our.
Professionals here at Skywest I've, just done outstanding work, our operational performance is leading the industry and we continue to have just an outstanding product that is safe reliable and among the top in the industry as far as levels of service and I. Appreciate all of our people for the work that they've done with that we will.
We will circle back in at the end of the next quarter to do the year end summary, and we appreciate your interest. Thank you.
That concludes today's conference call. Thank you for attending you may now disconnect.
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