Q4 2022 SkyWest Inc Earnings Call
Good afternoon, My name is Devon, and I will be your conference operator today at this time I would like to welcome everyone to the Skywest, Inc. Fourth quarter and annual 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
And if you would like to withdraw your question at any time at press the pound key.
Thank you for your patience Mr. Rob Simmons you may begin the conference.
Thanks to 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 and thanks for joining us on the call here today.
Skywest reported a pretax loss of $62 million or <unk> 93 per share in the fourth quarter of 2022 reflected in those results were $69 million of deferred revenue related to successfully amending the majority of our flying contracts a $36 million noncash impairment on 10 CRE.
J 700, aircrafts, and then $11 million accelerated lease expense.
We expect moving forward, we will be discussing deferred revenue regularly until the fleet utilization normalizes.
Despite the noise in the fourth quarter I want to point out that over the past year, we have set ourselves up to fundament to be fundamentally different and better company. We have done this by focusing on the core areas of our business that will help us set up for growth in 2024 and beyond and ensure we have a solid sustainable future. These fundamentals include.
Enhancing our partnerships and arrangements to adapt to a new industry and ensure we continue to deliver on our partners' needs.
To shoring up our operating processes and it systems, three effectively and efficiently utilize our industry, leading fleet flexibility today and in the future.
For maintaining a healthy and strong balance sheet, which is a key skywest differentiator.
And last and most importantly, continuing to ensure that we take care of our people and create value for our shareholders.
We are confident our ongoing execution of these fundamentals will ensure we're able to deliver value for all of the skywest stakeholders.
As we discussed last quarter, we invested heavily in our people throughout 2022, including increased pay for nearly every workgroup and finalizing our pilot agreement in the third quarter. While this pilot agreement represents a significant cost increase we are pleased to have worked with the majority of our partners to amend our contracts to help offset these higher.
Crew costs, we continue to strengthen our partnerships and we appreciate their continued support and deep engagement and our efforts in the new environment.
We remain committed to working with our partners to evolve adapt and provide strong solutions to their needs.
Our focus on dual class flat flying continues to deliver with 83% of our flying now dual class.
He took for E 175, aircrafts in the fourth quarter and are expecting three more by the middle of 2024.
Additionally, as we near the end of this fleet transition Capex cycle. This leaves us capacity for growth and drives free cash flow within the existing fleet.
The pandemic fundamentally changed our industry and our ongoing environment. We have spent the past couple of years, identifying vulnerabilities and refining and re force and reinforcing our operation and systems post pandemic realities have had an impact on every aspect of our operation from fuel supply and <unk>.
Our staff to lodging accommodations for our crews we spent a large part of 2022 ensuring that we have the resources processes and systems in place to run the most reliable operation and to mitigate negative impacts on our people and our customers.
We also remain transparent with our partners about our constraints and are disciplined in ensuring we deliver on our commitments as we've seen throughout the industry overcommit meant without the ability to execute is a recipe for disaster.
Okay.
As a result of our continued focus I can proudly say our teams delivered some of the strongest operating performance in 2022 with over 99, 9% adjusted completion for the fourth quarter. This performance included the peak Christmas holiday travel period during which we experienced severe winter weather.
In fact, skywest experienced severe weather disruptions in every key location across this geography.
But we were able to proactively manage through this challenge with extensive planning and resources and as a result of our teams.
As a result of our teams delivered exceptionally well to get 2 million passengers safely to their destinations between December .
And gender December 16th in January .
I also want to commend skywest people for over 180 days of 100% adjusted completion for the full year in 2022, our teams have done a tremendous job as we develop the new normal and continued to provide the best product in the regional industry. Thanks, again to all of our amazing people.
We're making good headway in our captain imbalance and we're cautiously optimistic as we plan for the years ahead, we continue to fill our new higher pilot classes on our maximizing our training resources with priority on upgrades as we work to rebalance our crews Skywest is clearly recognized as one of the most desired career destinations we can.
Turning to believe it will take some time over the next couple of years to rebalance, our crews and restore production and full utilization of our highly accretive fleet.
As we rebalance our ability to restore even a portion of production becomes accretive within our existing fleet mix.
We've made great progress with our Skywest charter entity and once operationally ready, we expect to conduct charter flights in the second quarter Skywest looks forward to raising the bar in the part 135 space.
With the implementation of several proven safety programs not required within park existing part 135 operations. This entity represents another strong opportunity to utilize existing assets and deliver critical service in small in underserved communities.
Overall demand for our products remains stronger than ever as we execute on our business fundamentals. We remain laser focused on executing reliably for the long game and ensuring we are best positioned to respond to opportunities and the exceptionally strong demand for our products.
Rob will now take us through the financial data.
Today, we reported a fourth quarter GAAP net loss of $47 million or <unk> 93 loss per share Q.
Q4, pre tax loss was $62 million our weighted.
Average share count for Q4 was $56 million and our effective tax rate was 24%.
First revenue total Q4 revenue of $681 million is down 14% sequentially from Q3, 2022 and down 12% from Q4 2021.
Q4 revenue breaks down with contract revenue down, 14% from Q3 and down 11% from Q4 2021.
Pro rate revenue was $81 million in Q4 down 15% from Q3 and down 26% from Q4, 2021 leasing and other revenue is up 3% sequentially and up 6% year over year.
These GAAP results include the effect of an increase of $69 million of deferred revenue this quarter compared to $13 million released in Q3 and $23 million that was released in Q4 2021 as of the end of Q4, we have $125 million.
Accumulative deferred revenue that will be recognized in future periods.
Let me move to the balance sheet, we ended the quarter with cash of a little over $1 billion up slightly from last quarter. Our capex during the fourth quarter was $111 million for four new <unk> hundred 75 aircraft and other fixed assets.
Total 2022, Capex was $645 million, including the purchase of 25, New <unk> hundred 75 aircraft compared to $556 million in Capex for 2021.
We ended Q4 with debt of $3 4 billion up from $3 1 billion as of year end 2021, with this increase driven by the 25, New 170 fives delivered and financed in 2022.
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 December 31, 2020 to our cash position of $1 billion included the effect this quarter of repaying $110 million of aircraft debt.
Additionally, we added $78 million of debt financing the four new <unk> hundred 70 fives delivered during the quarter.
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 color.
Last quarter I stated that we expected Q4 earnings to be down from Q3 levels, but still be slightly profitable Q4 actual results of a pre tax loss of $62 million included the following items not factored into last quarter's comment number one.
$69 million of revenue deferred in Q4 related to the successful amendment of the majority of our flying contracts number two.
A $36 million impairment charge on 10.
<unk> seven hundreds that were placed into a held for sale arrangement during the quarter and number $311 million in accelerated lease expense on 'twenty, one <unk> aircraft being stored prior to lease expiration.
Consistent with last quarter's comments. We currently expect total 2023 results to be down from 2022, but remain modestly profitable before the effect of roughly $60 million per quarter in deferred revenue in 2023.
This new deferred revenue expectation in 2023 comes from future variability in the fixed monthly reimbursement component of our newly revised flying contracts the future shift to a partially variable model for fixed monthly reimbursements is causing this timing difference for gas.
GAAP, where cash is received before the revenue is recognized the revenue deferred will be fully collected in cash in the quarter differed with performance obligations fully met and the cash is not refundable, excluding the effect of this estimated $240 million in deferred.
Revenue in 2023, we expect a modest GAAP profit in 2023.
We expect this deferred revenue balance will reverse by approximately $10 million to $15 million per quarter in 2024 with $240 million of this balance expected to reverse by the end of 2026.
In spite of a GAAP loss expected in 2023, there are seven points I would like to call out.
The fleet in place today can accommodate large future growth without more capital investment wave will give more quantification around this in a minute, we expect capex to be down over $400 million year over year in 2023, we expect cash at the end of 2023, there's still be.
Near $1 billion, including expected debt repayment in 2023 of $450 million.
We expect that at the end of 2023 to be below 2019 levels with ongoing annual principal reductions expected to be over $400 million our leverage at the end of 2023 could be the lowest in the last five years debt net of cash at the end of 2023, it could be 500.
Million dollars lower than at the end of 2019.
This capex reduction could drive the best free cash flow in the last five years.
We believe that our strong cash position and the actions we are taking now to prepare the way over the next couple of years 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 to drive total shareholder returns 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 discussed we are nearing completion of our strong delivery schedule. We previously announced an agreement with Delta for 16, New <unk> hundred 70 fives during the quarter, we took delivery of.
For aircraft for Delta, bringing us to 13 of those 16 aircraft, we anticipate taking delivery of the last three delta aircraft at the end of 2023 in the Middle of 2024. After we received these aircraft. We will have 87, <unk> hundred 70, fives under long term contracts with them.
<unk>.
We have an agreement with Alaska to add 11, <unk> hundred 70 fives to our contract of which we have received 10, we anticipate taking delivery of the Alaska. The last Alaska delivery in the Middle of 2025. We currently have 42 aircraft under long term contracts with Alaska.
Following delivery of the remaining four currently on order or E. 175 fleet will be 240 aircraft as we discussed last quarter. We came to an agreement with our pilots on a new pay package during the third quarter, which is a significant cost during the fourth quarter. We came to an agreement with most of our.
Mainline partners on addressing these new costs. We appreciate their support in this additional cost reimbursement.
As Rob mentioned, we anticipate differing $60 million per quarter of revenue. During 2023. This is primarily related to turning to fixed reimbursement to a variable rate towards the end of some of the contracts. The fixed rate does not turn variable for several more years. The cash will be fully collected there will be no additional.
Performance obligations. After the flight is completed and we will have reconciled the monthly invoices with our partners. We put the emphasis on optimizing economics cash flow and risk mitigation, we chose cash flow and risk mitigation over a better accounting answer let me review our production the fourth quarter block.
Hours were down by approximately 12% as compared to the third quarter based on the current schedules, we have from our major partners.
And we anticipate that our block hours will be down approximately 3% to 4% in the first quarter as compared to the fourth quarter as we look to the full year of 2023, we anticipate that our 2023 block hours will be down 19% as compared to 2022 as we look to.
2024, and beyond we can add approximately 30% more block hours to our E. RJ fleet without any additional aircraft. This same numbers over 40% for our <unk> fleet and makes each additional block hour very accretive to the model given our conversations with our partners there.
We're very engaged in supporting our efforts to restore production.
Let me give a brief update about the status of Skywest charter our new charter business in June we purchased a part 135 air carrier. Shortly thereafter, we applied to the Dod for commuter authority to operate scheduled public charters as permitted by both the Dod and FAA.
The commuter authority application, primarily is meant to demonstrate the fitness of a carrier in terms of financial managerial and operational matters. Among other things. We believe skywest charter is a well capitalized entity and as some of the best operational leaders in the industry. We have provided them with all the information they request.
<unk> and are waiting for them to approve and issues that commuter authority, regardless of the status of our commuter application. We are moving forward with our plans for Skywest charter to operate on demand charters under its existing Dot's authority. Once we are operational operationally ready, we anticipate that our <unk>.
First revenue flights will be in March or April of 2023.
As far as 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 we placed a few more engines under third party leases last year and anticipate placing several more engines under leases during 2023, the demand for our engine leasing business will not.
Not fully be realized until the flying levels for the regional industry start to rebound.
During the quarter. We also made the decision to park 21, <unk> aircraft prior to lease expiration resulted resulting in an accelerated lease expense of $11 million. We also have we also are having success in selling some of our excess <unk> assets during 2022 weeks.
Hold over $7 million of assets and we currently have signed letters of intent to sell approximately $20 million of assets. We anticipate these transactions will close during the first and second quarter. We have spent the last several years, reducing risk and enhancing fleet and financing flexibility to ensure we are well.
Positioned we're committed to continuing our work with each of our major partners to provide creative solutions to the continued exceptional demand for our products.
Okay, operator were ready now for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from Savi <unk> with Raymond James.
Hey, good afternoon, everyone.
Kind of curious on the <unk>.
Pilot front, you said kind of cautiously optimistic I wonder if you can provide a little bit more color.
It seems like and I know you said, then it'd probably take a couple of years to kind of get back to.
To kind of flow.
The operations that you saw before but just curious if you can provide a little bit more color on the cadence there and you know what.
Or you think you might exit total trade through it.
Yeah. Thanks, Savi. This is chip Thats a great question and one we spent we spend most of our time evaluating.
Like we've done in the past, particularly through 2022, we didnt give any specific numbers, but we can kind of give you how we feel about what's out on the horizon we are.
I would say growing and optimism yet not ready to do a wholesale.
Change in our data or models going forward, but I think that there are some things within the tone of our existing pilots.
What's happening in the environment out there that we're gaining.
Being cautiously optimistic about how we can do it I think that the big thing is is that 2022 is a big year. We lost a lot of pilots specifically captains and it just takes a lot of time to mathematically get back to the math that where we can increase our utilization you know, 30% to 40% compared to where we are today. So.
I would say.
You know that's about as much as we can say today I think we're.
Certainly when we've got with the new pay package, that's helped quite a bit but until we get some more data closer to summer time, we're not ready to really.
Make a big modification in our models.
That's helpful color and especially around the timing of when you might have a better idea. Thanks, Chuck and then just on the asset sales and I was curious what type of assets, you're you're kind of.
Taking off the books right now in general.
Kind of thoughts on.
Where you want the fleet to be.
Yeah over the next couple of years, obviously that you want 75 fleet is what it is and we will get to choose <unk>, but just curious on the on the <unk> what are the moves that you'd like to do and how you'd like to size that.
Yes, Savi this is wade.
As we said there we did have some excess and we do have some excess CRT assets. They are primarily C. R. J 200 assets that we're selling right now there is there's good demand right now in the market for those assets. They people like assets had been well maintained and have good engine time on them and so we are able to monetize some of the ASP.
Its out there there is some demand also for some of our <unk> seven hundreds as well, but primarily what we have sold and what is under.
Letters of intent or Crs 200 assets.
Got it all right I'll get back in the queue. Thank you.
Our next question comes from Mike Lindenberg with Deutsche Bank.
Oh, Yeah, Hey, good afternoon, just a couple here just the.
The 21 airplanes that are that were parked the lease C. R J's, what what's the model.
Yes, Mike This is up yes, Mike this is Wade theres a combination of of assets in there we have one big lease structure that's remaining.
And these are primarily C. R. J 200, NCR J 700 assets.
Okay. Okay.
Yes.
Given the fact that.
I was under the impression that the <unk> hundreds would be the first to go.
The fact that you'd have some seven hundreds there and then you have another 10 that are available for sale.
What's going on is it just theyre getting pushed out by the better E 170, <unk> hundred 70 fives is it CRE J nine hundreds what.
I figured that these would be valuable assets you'd want to hold on to them.
Yeah. The majority of what we are getting what we are selling right now are <unk> two hundreds for sure.
There are some pockets of some C. R J seven hundreds we.
Before right before Covid, we purchased some <unk> seven hundreds for some extremely good prices and we are able to flip those.
At good good values and so we are going to be in the marketplace. If there are good assets that we can trade, where we have some excess <unk> seven hundreds we will we'll look at those and we'll start trading some of those.
Yes, Mike This is chip Mike This is chip as well just I think I think did not get too lost in whats.
Hitting the Purcell block.
Still have a tremendously large base of both CRH, a seven two hundreds and.
Not only a large base of it but a large buffer of aircraft. We can still fly before we get to these so I think from our perspective as we manage the assets. These are assets that I think it's good for us to put for.
Or sell scenario.
Because we don't see that we have so many still leftover that we can utilize over the next two to three years.
I think it's just smart asset management to kind of see what other people can do with this stuff and the response has been pretty good. So it's good cash flow as well, particularly if we don't like we think we're going to get back to flying them anytime soon so.
Okay.
That's helpful. And then just one more before I get back in the queue.
Just to talk about the deferred so it's $240 million deferred rate 60 per quarter.
And then it releases $10 million to $15 million, so lets call it $10 million. That's your two years 'twenty four 'twenty five.
Our 25% 26.
I'm just trying to think I guess, it maybe yes, maybe yes, it might've been at a slower rate.
Yes, Michael Let me help you with let me help you with that Mike So yes for 2023.
We're expecting a deferral.
Revenue deferred of about $240 million, that's the $60 million per quarter.
Over 20 years 24 through 26, we expect $240 million to be reversed.
Uh-huh.
Okay, what about so we had we.
We had 69 in the fourth quarter, which I think Rob you said that brought.
The previous deferred amount up to 125 does that also lead out so does that that no longer builds right does that offset the $2 40, I'm just trying to.
Hey, good that other component there.
Yes, so the $1 25 is the ending deferred balance as of the ended the year 2023 were saying that theres going to be another incremental approximately $240 million and then starting in 2024, it starts to reverse and bleed off.
Again, yes it.
Is it 10% to 15 over 36 months instead of 24 months that makes sense okay.
Ed.
I have that figured out.
That's great. Thank you.
Okay.
Our next question comes from Duane <unk> with Evercore ISI.
Hey, thanks.
Rather than the accounting treatment can you just expand a little bit on why.
This variable versus fixed.
A component of your contracts makes sense.
What drives a higher reimbursement versus a lower reimbursement in the future I guess revenue rack in the future.
Yes. This is this is wade so a great question. So what we tried to do in all of these these agreements with our partners, we tried to optimize cash flow and risk mitigation right and so what we focused on was the next several years, there's not really much of a change, but as we get into some of the back end of some of these contract.
Some of the fixed rates will turn more variable right and at that point in time. There is some anticipation that the utilization will be back to normal and so really the way. The the economics are working on this the cash flow is going to be good.
Good and reimburses for the costs that we're incurring now.
But there is some.
Some anticipation that the utilization will go up in the future and just the shape of the recovery is really bringing in the rig count the revenue that is how the block hours. It's based on the block hours that we fly as how the revenue gets brought back in.
Okay, so effectively removing minimums towards the back end of the contract, but the expectation that youre going to well exceed those minimums at some point.
Down the road, yes, yes, yes, you've got it okay and then on the on the down 19 on block hours next year.
Can you just speak a little bit is that kind of base case or is that conservatism is this your upper limit is that what youre staff to support or are there.
Kind of staffing events that could unfold over the course of the year that could take that could give you a higher level than that down 19.
Yes, so I would I would say that 19 is a very.
Good.
Dichter of where we think attrition is going to be combined with development of captains in 2023.
If the attrition levels like I said earlier.
Two last year's attrition levels, then it would be less than 19, if we gain some.
Like I said, we're going to have to see how this plays out closer to summer, but we're optimistic of what the ratios are today and if those continue to hold which I don't know that theyre going to hold us perfectly then there could be some upside of that 19% by the end of the year, but I think that the factor is is when we're sitting here in.
January and February these are not great predictive months. These are lower than last year. These are lower than last year's January and February by a fair amount, but we want to see what's happening in the spring time going into summer and see what that is.
Again, it looks that the mood of pilots the horizon of what we can kind of see out there. It feels a lot different this year than last year, but we're not ready to do a wholesale model and that's that's kind of how we got to the 19%, but there's probably a number that we're not going to hit one way or the other we just don't know which way perfectly how thats going to go till we get closer to <unk>.
Sure.
All very fair thanks for the thoughts.
Our next question comes from Helane Becker with Cowen.
Thanks, very much operator, hi, everybody. Thanks for the time.
So just two questions. One can you actually be more specific on nutrition, what was attrition last year and what does it look like currently.
Yes, Helane this is chip I am sorry.
Yes.
Those are kind of some things that we've decided to make sure that we keep kind of with us and our partners and we have some confidentiality that we have relative to a lot of our contracts, but I will say that like I indicated to Duane earlier.
So far.
Jan and February are less than they were last year and when we have the payback is that we have this year, we see tremendous demand for folks to come to Skywest and.
There's a lot of there's a lot of there's a lot of things we hear anecdotally about pilots that have left I want to come back a lot of pilots.
Had commitments to leave and turn them down and stayed so look I. The only thing that we can say is that.
Attrition is not quite as bad as it was last year and we're growing in some optimism, but again, we have to see more on the media side of what happens this spring towards somewhere before we can really.
Make a wholesale model assessment.
Okay. That's really fair. Thanks, and then just for my follow up question.
<unk>.
So when you.
<unk> negotiated these contracts with your pilots.
Did you get input from your partners are I mean, obviously they had to sign off but they were okay with you raised.
Raising pay as much as you did.
And willing to reimburse some.
Some portion of it.
When you were having this conversation so is there a lot of pushback or are they thinking maybe they would reduce their reliance on your aircraft and moved to other operators.
Did that go.
Now this is chip again, youre going to take us through a dark period of our lives and honestly.
Got it alright.
I think that I think that.
Go back to what.
What we do at Skywest and that is to be able to evolve.
Take care of our people and take care of our par.
<unk> partners is I think with Skywest has done better than anybody else in the regional industry for the last 50 years. So.
Admittedly I will say that it is a very stressful time.
That as you go through and it's not just pilots we've had conversation with all of our work groups.
This was one of the first ones, where we certainly had to coordinate with some of our partners some of our partners.
Quite candidly started this process I mean, we were down the road with some things and we had one of the wholly owned carriers do.
Some things that caused us to completely rethink it so to the extent that it's a fluid market relative to what's happening, but what happened in 2022 with regional pay was.
It was an understatement did we have to commit to the pay before we got the complete commitment from our partners. Yeah, we did because thats the way labor negotiations work and I think it's hats off to the team of us.
Had to bridge some of the gaps to connect with what's best for our people and what's best for our partners.
And I'll go back and say, what I said in my script before Ken.
Candidly, our operational credibility and the quality of the team that we have here at Skywest from all of our 14000 professionals I can tell you. It comes down to the credibility that we have with our partners. It comes down with a very efficient ability to work with our work groups and it comes down to how.
So stable and solid of an operation that we've had throughout our history and when you combine all of those long term investments and long term approaches it makes difficult situation a lot easier and we're happy we're really happy about the outcome.
And it has I would say the desired effect for all the parties involved.
Yes, that's very helpful. Thank you very much.
Our next question comes from Catherine O'brien with Goldman Sachs.
Yes.
Hey, gentlemen, good afternoon, great feedback again this quarter.
My first one for Rob can you just help us think about some of the puts and takes on costs underlying the commentary.
And roughly breakeven ex deferred revenue for this year, how should we think about the fourth quarter being a good run rate for salaries and benefits given it has a full quarter of the new pilot agreement and then maintenance is a bit lumpy last couple of years, how do we think of that Chinese port Hudson.
Touch on a couple of the large line item.
Yes, I mean, obviously, if you look at each of the line items, we were up a little bit in labor in Q4.
Where the pilot deal was struck in Q3 and some of these reimbursements covered part of the quarter. So Q4 was a little bit of a noisy quarter, obviously with the.
Impairment the lease acceleration in the deferred revenue but.
All in all the net.
The net sort of operating results of the company, where we were pleased with.
Okay got it.
And then.
Great news on getting these contracts and then being able to pass through.
A portion of the higher pilot Rage leads you to help us think like really high level.
Much of the pilot constantly pass through and then on the portion that's not being passed through today, how far out are we out for negotiations on those contracts and I know, we're approaching like 10 or 12 year Mark for you on 75 delivery. So so maybe kind of coming up thanks again.
This is wade so a great question, so as far as the pilot reimbursement as we said we have worked with each of our major partners. Our four major partners most of them have reimbursed US there we're still working with one of the partners on the additional reimbursement so.
We are.
Well above.
60% to 70% right now covered where we're at so we feel pretty good about where we're at we're working with the other partners.
Going forward on on the other partner going forward to get the additional cost reimbursement so.
That's great.
If I could just sneak one more in on the charter business.
That's a great update can you just remind us how about how many players do you think in this space.
Okay Mary comprises.
Or maybe you haven't shared that before.
Just wondering like to think about sizing it and then how's hiring going there on the pilot.
Couple of months out.
You can tap into additional pilot pool.
Thanks, Joe.
And the main business so any update there would be great. Thank you guys for the time.
Yes chip. This is Katie welcome back it's great to have your backup everything is well with your family.
Just going back to the charter side I think that if you look at the scope that we could make this I would suggest you look at a couple of numbers in the fleet I think we have about 120 <unk>.
<unk> two hundreds available that we could put into charter Max maximum.
For now I think that if you look at what our historical pro rate model was like back in 2019, we had about 50 Euro J 200 within a 50 seat model that would work within our pro rate operation.
And then I think if you pay for it from there I think that demand.
2019 has become significantly stronger so.
I think that hopefully gives you a couple of benchmark to think about I can't tell you exactly where we're going to be certainly as we discussed about charter we will be flying on demand charter flights starting in March we anticipate the demand for non scheduled service.
On demand charter business model is extremely strong right now as well so theres a lot of options here.
And then you get back to what we've what we've talked about.
The pilot situation is extremely good for an operation like this mostly because of it's a new seniority list.
I don't know that we're going to operate this.
Significantly differently with a different.
Circumstance of pilots and what we do with Skywest, but there certainly is some different availability in some compelling reasons to do some things within a separate certificate and assertive in a separate seniority list just because it seems like these days specific with pilots people want to get on a new seniority list and be an early early participant in that I think.
It's why we lost a lot of pilot this last year because of the seniority list throughout the country opened up and that's what we're doing here and so in a nutshell the pilot demand to come to the charter operation is extremely good.
Not just for new first officer entrants, but also for direct entry captains is extremely good. So look we're going to be patient, we're going to make sure we do it right.
As we usually do and we.
We're going to continue to work forward and give probably another good update after we start to operating some revenue flights in the May timeframe. When we call you again and hopefully have some more visibility on it. So hopefully that gives you a little bit of.
A little bit of an idea of high level of what of what some of the opportunities in capacity that may be.
Okay.
That's great. Thanks for the time everyone.
Our next question comes from Savi <unk> with Raymond James.
Hey, Thanks for the follow up just.
First one just on the <unk>.
Follow up on <unk> question, just on the charter.
Is that the significant portion of that breakeven earnings outlook or are you just not really including it until you have a better idea of how that ramps up.
Okay.
Yes, Avi this is wade so for for 2023, we do not anticipate cigna.
Significant profitability as we are growing that entity, we are going to be doing.
Maintenance events to get airplanes ready training pilots and so that is not a major driver in the overall breakeven for our for for Skywest, Inc.
Got it.
And then if I just might ask a bit of a slightly longer term question just based on the.
The kind of the revised contracts that you've gotten the fact that you'll have more even 75 that you had in 2019 I was just wondering if you can kind of compare to your level of profitability in 2019.
And kind of once we get back to you.
Yes.
Are you able to kind of fully utilize your fleet can you just talk about like maybe the things that our.
Positive or negative versus your 2019 earnings really like what's going to be better than what's going to be maybe a little not so great.
Yes, I think so.
Ivy. This is chip just real quick I think that there is some comparability on the 175 feet on a unit basis. Once we get to the utilization levels that we want that could be very comparable from a profitability perspective.
I think that we continue to have.
We continue to manage the fleet in a way that I think is going to be very good from a cost perspective, and I think again, we just we just on the on the <unk>, we have a 30% gap, we got to overcome which is purely non capital investment.
Very accretive block hours that we just have to start to get to the point, where we can fly. So I don't doubt that that is going to be that different from 2019, the other element.
Relative to what else was contributing to that as the CRE J fleet, particularly on the pro rate side as well, obviously, we've pulled out a significant amount of pro rate relative to what's happened in 2022, I will be very clear on the call that that was higher margin than what our contract margins were despite what some.
Entities in the United States.
We're not making money in small towns and are pulling out that's absolutely false. These flying prorate, an essential air service was very good profitability. So to the extent that we compare where we were in 2019 I would have to say it depends on what we can do relative to the non E. R. J and dual class <unk> fleet relative to charter Andrew.
Other essential Air service models now the flip side of that also savvy and you don't hear the big guys talking much about this but we will certainly talk about it is the fact that throughout the pandemic since 2019 small city demand as travel has just exploded.
We get a lot of calls its not us calling somebody else, we get a tremendous amount of calls from local cities and states and everywhere that are also non essential air service flying wanting us to find ways to serve their cities. So.
Certainly the Dearborn <unk> throughout the pandemic has gone.
Put demand back in our favor even though in our pre 2019 levels so from our perspective.
I'd say, we've got a great balance sheet, we've got great assets.
We're just going to continue to be patient and deliberate about taking care of our people in a way in which we can get our utilization on our fleet back up.
Then it will be more strategic about what we can do with partners in.
Additional aircraft are shifting some of that stuff around later, but we've got a lot of it we've got a lot of runway left to get utilization accretive utilization back up before we get to that time, so hopefully thats a helpful perspective.
That is thanks, Jeff.
Our final question comes from Michael Lindenberg with Deutsche Bank.
Oh, Yeah, Hey, I, just actually had Q here, thanks for giving me the follow up.
I just wanted to go back to the fact that you haven't.
Haven't closed deals with I guess, you said the majority of your partners I don't know if thats, one or two he said, 60% to 70% covered chip.
Is there anything that we should read into that or is it just timing that it just takes time to do each of these deals or is there some read through here.
I think I think it's mostly just timing honestly, Michael I think that we continue to have great dialogue with all of our partners.
That's the fun part about our job is collaborating and finding ways that works to do business with both of US are all of US all four of us and some are more aggressive than others and some are more patients than others and I don't think theres anything to be read into it I think.
If there is we'll probably be updating in the next quarter to quarter after but we're optimistic that.
They're all thinking of the same lines. The fact that we can offer incredibly good product, that's predictable and reliable and.
Stable and.
We try to do all we can to make their lives easier ne.
<unk> recognized that very clearly and as we work toward long term sustainability I think that we're very optimistic about all of our partnerships.
Okay. That's great and then just my second.
Thanks for giving us kind of a sense of your capacity to grow without adding channels. I think you mentioned by 2024.
You could add 30% block hour increase on the E. R J fleet without adding any additional shells and 40% on the senior James.
You only have a few airplanes coming over the next few years is the right way to think about it that you are really not planning to take delivery of anything beyond what you have order for the next several years is that how we should think about is that the planning for the next two to three years. It's just a few units it's all about stabilization.
Yes. This is chip again, I would agree with that Michael the only from the perspective that.
It's going to take a lot to get that utilization back I would reiterate we are having conversations with manufacturers and certainly creative conversations about long term ESG in fleets and so theres a lot of conversations about fleets. There is a lot of that conversation with our partners.
But there's just too much opportunity until we close off that gap of that utilization before we get serious about it because the other thing is I mean, you've got a couple of other things running against US you've got a higher interest rates.
Airplanes are expensive and so from our perspective, it's not that we're not looking down the road of continuing to grow the fleet.
It's more like let's be focused in making sure we get the accretion with without unnecessary investment first and then.
Which by the way if we're talking in the timeframe that we've talked about over the last little bit we should we need to pay attention to adding additional fleet because it takes a while to make aircraft. So I think it's rather fluid and we will keep you up to speed in the upcoming quarters about that but its we havent put the conversation on ice we're continuing the conversation we just.
It's more important to get the utilization up.
Okay, great. Thanks, Ken Thanks, everyone.
Okay.
There are no further questions at this time I will now turn the call back over to CEO , Mr Chip Childs.
Thanks, Devin and I appreciate your help with the call today, it's been a 2022 is a very exciting and eventful year.
Ill reiterate what we said in the script and throughout the call I think that we're in a fantastic position to continue to.
Capitalize on what Skywest is about what what things we have going for us.
And we're going to continue to be disciplined and work toward making sure that we take care of all the stakeholders at Skywest again, one more thanks out to the amazing people at Skywest and all the work that they do every single day to provide this reliability and we look forward to talking to next quarter. Thank you.