SkyWest Inc. Q1 2023 Earnings Call
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Good day, everyone and welcome to the Skywest incorporated first quarter 2023 results call today's call is being recorded.
And as 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 one on your telephone keypad. If you've found your question has been asked you BANT remove yourself from the queue by pressing star one again.
I would now like to turn the conference over to Rob Simmons Skywest Chief Financial Officer. Please go ahead.
Yeah.
Thanks, everyone for joining us on the call today as.
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, whether whether as a result of new information future events or otherwise.
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 2022 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 are foundational work over the past year has provided solid traction during the first quarter.
Those skywest reported a pretax loss of $26 million or <unk> 45 loss per share for the first quarter of 2023.
Afflicted and those results were $63 million of deferred revenue.
As previously shared we expect moving forward, we will be discussing deferred revenue regularly and tell utilization normalizes as we advance through 2023, we're pleased with the progress we're making in our strategic objectives that provide unmatched value for our people our partners and our shareholders.
I talked last quarter about our significant investments investments in our people during 2022, including increased pay for nearly every work group and a finalized pilot agreement.
During the first quarter, we were able to finalize all partner contracts to help offset our new pilot costs.
We appreciate the confidence in each of our partners in our product and their deep engagement with our efforts in the new environment.
As always we're committed to working with our partners to evolve adapt and provides strong solutions to their needs.
During the first quarter, we purchased five 1 million shares for $100 million under our previously authorized share repurchase plan and have acquired $6 3 million shares or 13% of total shares outstanding totaling approximately $130 million year to date, we are focused on the <unk>.
Important of creating value for all stakeholders, including our shareholders to provide the best value proposition in the industry.
Action in a minute.
'twenty three is slightly improved compared to work comments last quarter I would remind you that as we rebalance our ability to restore even a portion of production becomes accretive with our existing fleet mix. We continue 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 fleet with the addition of 25 to <unk> 75 last year alone our existing fleet can accommodate large future growth without additional capex spend.
We have continued to show up our operational processes and resources, we remain disciplined in ensuring we deliver on our commitments during the first quarter. Our teams produced over 99, 9% adjusted completion and their commitment to reliability and great service continues to set our operations apart.
Spite, the quarter's winter weather affecting our key geographies, we continue to proactively manage through these challenges with solid planning and resources. Our teams continue to do a tremendous job as we adapt and lead the industry. Thank you to our team.
We made exceptional progress with our Skywest charter entity during the first quarter as well, which successfully completed its first commercial flights this month.
While there have been some unfounded claims made by special interest groups Skywest charter has completed all regulatory requirements necessary to provide what is already available to numerous operators within the existing regulations and well established president.
I want to be clear that as always the first and foremost priority for Skywest and has it and its subsidiaries is always safety Skywest charter will enhance safety and the part 135 space with active flight dispatching advanced qualification programs with two training SMS.
Part 117 rest rules and many more enhancements to part 135 requirements, even above what is being done at some part 121 carriers, particularly low cost carriers Skywest charter looks forward to raising the bar in this space and utilize existing assets to deliver critical service in small in <unk>.
They're served communities.
Overall demand for each of our products remains exceptionally strong 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.
As I discussed last quarter, we have set ourselves up to be a fundamentally different and better company.
We have done this by focusing on the core areas of our business that will set us up for growth in 2024 and beyond and ensure we have a solid sustainable future.
Rob will now take us through the financial data.
Today, we reported a first quarter GAAP net loss of $22 million or <unk> 45 loss per share.
Q1 pre tax loss was $26 million.
Our weighted average share count for Q1 was $49 4 million and our effective tax rate was 15, 5%.
First revenue.
Total Q1 revenue of $692 million was up 2% sequentially from Q4, 2022 and down 6% from Q1 2022 Q.
Q1 revenue breaks down with contract revenue up 2% from Q4 and down 7% from Q1 2022.
Pro rate revenue was $77 million in Q1 down 4% in Q4 down 4% from Q4 and down 2% from Q1 2022.
Leasing another revenue is up 5% sequentially and up 3% year over year.
These GAAP results include the effect of $63 million of revenue deferred this quarter compared to $69 million deferred in Q4 and $11 million that was released in Q1 2022.
This $63 million of deferred revenue in Q1 relates to $63 million of cash received with related performance obligations completed during the quarter.
As of the end of Q1, we have $188 million of cumulative deferred revenue that will be recognized in future periods as indicated last quarter, we expect to defer revenue of approximately $60 million per quarter for the next three quarters before these balances begin to re.
<unk> into revenue in 2024 and beyond.
Let me move to the balance sheet, we ended the quarter with cash of $936 million down about $100 million from a little over $1 billion last quarter. This quarter, we repaid $107 million in debt, we bought back five 1 million shares of Sky.
<unk> stock in the open market approximately 10% of the outstanding shares of the company for $100 million and we acquired 32 C. R. J aircrafts under an early lease buyout agreement for $125 million.
The estimated fair value of the acquired aircraft and engines.
This transaction allows us to avoid paying future lease cash obligations of approximately $90 million. So instead of paying $90 million in future lease obligations, and then giving the assets back to the lessor.
We unlocked tremendous value by both avoiding $90 million in future lease costs and by acquiring and retaining the aircraft and engine assets worth $125 million all for $125 million.
Our capex during the fourth quarter was $103 million, including $86 million of net assets capitalized from the early lease buyout transaction and other fixed assets.
We ended Q1 with debt of $3 $3 billion down from $3 4 billion.
As of year end 2022.
These cash related numbers tell an important story about the quarter with cash falling only $100 million from last quarter in spite of repaying $107 million in debt buying back $100 million in stock and executing $125 million early lease buyout.
It illustrates that we generated strong cash flow during the quarter. This reflects positive free cash flow from operations, despite production constraints and higher labor costs combined with the benefit of a lower investment in capex than in prior years.
We also continue to have well 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 over 50% of our fleet and service has no financing obligation our strong balance sheet and strong liquidity.
Continue to be powerful tools to create shareholder value.
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.
From last quarter. When we commented that we expect 2023 results to be quote modestly profitable unquote.
Before the effect of roughly $60 million per quarter in deferred revenue in 2023, several elements of our model have improved.
One we have now completed amendments, reflecting higher pilot costs reimbursements with all four of our partners to our outlook for block hour production that we expect it to be down 19% in 2023 from 2022 has improved which Wade will discuss in the <unk>.
In it we now expect block hours to be down approximately 14% for 2023 based on improving captain attrition metrics.
Three we were able to buy back five 1 million shares or approximately 10% of the company's outstanding stock for $100 million. During Q1 under our previously authorized repurchase plan that had $139 million still unused before this Q1 activity.
This is an important data point as analysts rebuild their EPS targets total shares outstanding as of 331, 2023, or $45 7 million down from $50 6 million at year end.
And number four.
The early lease buyout transaction mentioned earlier will reduce our previously projected pretax operating expenses.
By approximately $10 million per quarter for the next four quarters note that there was not a similar impact on Q1 as the transaction closed near the end of the quarter. This $10 million quarterly P&L benefit includes lease expense avoidance net of <unk>.
New noncash depreciation from the 32 C. R. J aircraft acquired under this transaction.
Consistent with last quarter's comments, we continue to expect total 2023 GAAP results to be down from 2022 that remain profitable before the effect of roughly $60 million per quarter in deferred revenue in 2023, we expect this.
Deferred revenue balance will reverse by approximately $10 million to $15 million per quarter in 2024 and continued to reverse for several years thereafter.
In spite of a GAAP loss expected in 2023, driven by deferred revenue there are five points I would like to call out number one.
The fleet in place today can accommodate 20 to 30 or 35% future growth without incremental capital investment Wade will give more quantification around this in a minute.
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.
We 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 discussed last quarter, we are nearing it.
We're nearing completion of our strong delivery schedule, we have four remaining <unk> hundred 70 fives on order, we anticipate taking two of those in the fourth quarter of 2023, one in 2024 and the last E. 175 in 2025. This will bring our E 175 fleet total to 240.
Aircraft.
As we previously discussed we have continued working with each of our mainline partners over the last two quarters to address the increased pilot pay agreement ratified last year.
During the first quarter, we came to an agreement with a remaining mainline partners on increasing our rates for this new cost the second quarter will be the first complete quarter to include the full impact of all our partner reimbursements. We appreciate all of our partner support and continued confidence in our.
In our product and this additional cost reimbursement.
Let me review our production the first quarter block hours were down by approximately 3% as compared to the fourth quarter of 2022 based on the current schedules. We have from our major partners for Q2, we anticipate that our block hours will increase by approximately 2% in the second.
<unk> as we look to 2024 and beyond we can add approximately 20% more block hours to our E RJ fleet without any additional aircraft.
This same number.
Is over 35% for our <unk> fleet and makes each additional block hour very accretive to the model given our conversations with our partners. They are very engaged in supporting our efforts to restore production.
Additionally, during Q1 2023, we acquired 32 C. R. J aircraft under an early lease buyout. These leases where some of the most expensive and inflexible agreements. We purchased the aircraft for $125 million. We believe the fair value of the engines alone are worth over.
$100 million and we also avoided unnecessary lease return costs and lease cash payments of over $90 million.
Let me give a brief update about the status of Skywest charter our new charter business. During March we completed all proving runs and received all the approvals necessary from the FAA to operate as an airline during April we operated our first on demand revenue charter flight, we are very excited about.
Demand charters as far as our prorate business. The demand remains 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. We are also having some success of <unk>.
<unk> some of our excess <unk> assets during the past 15 months, we sold over $9 million of assets and we currently have signed letters of intent or purchase agreements to sell approximately $15 million of assets. We anticipate these transactions will close during the second and third quarters. We have spent the last several years.
Reducing risk and enhancing fleet and financing flexibility and 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 of our major partners to provide creative solutions to the continued exceptional demand for our products.
Okay, operator, we're ready for the Q&A.
Thank you as a reminder, everyone that is star one to ask a question, we'll take our first question from Michael Lindenberg with Deutsche Bank.
I missed the second point.
Then just the airplanes. The 32 I think that we're just purchased.
Off lease are those all in protective service with Skywest there are some of those leased out to other carriers.
Status of those airplanes.
Hey, Mike. This is Wade so yeah, there were 32 C. R J assets as you said.
They're all.
And the Skywest Airlines fleet there are.
Like I said in my script, we thought there was a $100 million worth of engine. So those engines are clearly all flying today within the Skywest Airlines fleet. Some of the airframes may may be on the ground as we're optimizing for our captain in our pilot situation right now, but they are all within the fleet right now Okay. Great and then just my last question.
Congratulations on getting a deal done with Youre the last of your four partners.
Typically when these deals get done there's always some element of a quid pro quo any thing that you can share as it relates to length of contracts, obviously, you have better economics.
Are there any sort of trade offs as it relates to terms tail risk number of aircraft that they wish to utilize under the contract anything we just have to kind of be.
Watching out for with that one partner thanks for answering my questions.
Hey, Mike This is wade.
Question. So like we said we finalized our last agreement with all of these agreements we did not extend the term on any of those and we purposely did not want to extend the term right now they're primarily just additional rate reimbursements that are under these agreements all of them are very consistent with that so there.
It was really nothing unusual we didn't take any airplane to out of contract. There was nothing like that done okay. It was primarily just.
A reimbursement for the additional pilot costs.
Okay, great. Thanks, everyone.
Sure.
Yes.
We'll take our next question from Helane Becker with TD Cowen.
Thanks, very much operator, hi, Tim Thanks for the time here.
On the Skywest charter.
Can you use some of your existing pilots to fly that or is that strictly going to be.
New hire pilots.
Hi, Helane. This is chip, yes, it's a completely different certificate completely different airline.
And we will be hiring as we have been.
With really good demand new pilots for that operation.
Okay, and then do you have a flow through of agreement.
I don't know what you want to call it in the mainline skywest.
So there's not necessarily any type of flow between the two entities.
At this moment to be candid I think theyre going to be very different from each other the type of flying will be very different from each other there is no doubt we may have some opportunities to move from charter to Skywest Airlines and some of those things may arise.
But like I say the demand to join Skywest charter is extremely strong we're very pleased with that and.
As we continue to build right now what we're building on demand charters with sports teams and I wealth individuals and corporations and those types of flying that we will continue to do the hiring that we need to fill that demand.
Separately from Skywest Airlines.
Okay. That's perfect. Thank you.
Thank you.
We will take our next question from Savi <unk> with Raymond James.
Hey, good afternoon, everybody, it's not covering for Savi here.
First on the the block hour Guide you gave could you give me what.
Do you expect the quarterly progression to look like over the next several quarters.
Okay.
Yes, so Mike great so that sorry, Matt.
This is wade yeah, sorry about that so yes. So from Q4 to Q1, we said it was down 3% and then going from Q1 to Q2 were up 2% and then for the entire year of 2023 compared to <unk>.
<unk> thousand 22, we anticipate being up 14% and so our downtown excuse me down 14%. So we.
Thats, what we gave in my script and you can kind of fill in the blanks from their comparing what's out there publicly.
Okay perfect. Thanks for clarifying that.
Can you talk about I think there was 20 <unk> 200 that shifted maybe one <unk> 700 reduction.
Was that looking at that correctly and is that a short term.
Related to pilot availability from the removal or any color there fleet changes could be helpful.
Yes, so that's in the fleet numbers in the release those are primarily airplanes that were just do some heavy maintenance and some of the the prorate stuff that has expired that have gone away and we've park those airplanes at this point.
Okay. Thanks, you still expect to get to a 107 hundreds at American at some point.
Currently our agreement right now calls for 90.
Hi.
Thank you for the clarification again I appreciate it.
We'll take our next question from Catherine O'brien with Goldman Sachs.
Good afternoon, gentlemen, thanks for the time.
Maybe my first one just a quick follow up to Mike's question.
So on on the fourth partner.
Green because the reimbursement on a pilot costs, which congratulations by the way.
So lal.
Last quarter I believe you told us that the agreement is your three other partners got you to about 60%, 70% covered on the increase in pilot costs with with this fourth partner. Now are you are you are now closing in on like a 100% being faster.
Yes, yes, we are very close to the vast majority of our pilot increases now covered off.
That's great.
And then maybe just can you just help us flush out the changes to the 2023 outlook.
Last quarter, you had said modestly profitable excluding the $240 million in deferred revenues I guess.
GAAP pretax losses somewhere in that $200 million range.
We also expect results to be down from the GAAP 73 million profit last year can you just help us think about how much the pilot pass through and greater block hours swing us between the trends that range. Thanks, so much.
Yes. Thanks, Katie you look I think that as we've talked about in the script. There are a number of different <unk>.
Elements that debt.
<unk> into the 23.
Our 'twenty three outlook that we've got part of it was the.
The block hour outlook, improving from what we originally last quarter expected to be 19% down to 14% down.
Completion of this.
The final partner agreement Amendment.
That's part of this the transaction with the early lease buyout as we talked about.
It is very very good from a cash perspective, and also contributes approximately $10 million in P&L benefit.
Over the next four quarters so.
From 90 days ago. There are there are a lot of things that have evolved in a lot of elements of our model that that have improved we're.
We're pleased with that but we're far from declaring victory still at this point.
I'm trying to calculate all the pause is in my head as we go here, but could we be looking at.
GAAP breakeven result, this year or that's too aggressive.
Well look we're not going to we're not going to give.
GAAP guidance to that level of granularity.
But I can say that.
In the last 90 days, we've seen material improvement in our own outlook.
Got it had to try.
Maybe just.
Quick one on.
On the New York City in DCA slot waivers is that impacting your operations at all.
To move any capacity around and I guess like so long as you got a decent amount of notice is there any cost of skywest move capacity around for your partners or is that just given the business. Thanks, so much for all the time.
Thanks, Katy Yes. This is chip, yes relative to the northeast corridor and the slots. We just don't do enough flying up there that it has a big impact on what our operation is we're clearly mostly Detroit Chicago West.
And from that perspective, we do work very well with our partners to make sure that we're flying in the right basis in locations because you still have even though their airplanes and they fly all over you still have to have a very strong supportive infrastructure for that so anytime they want us to move it usually involves a pretty sophisticated conversation about.
That so from our perspective look we just don't do a lot of flying up there. So it doesn't have a lot of an impact.
Thank you.
And there are no further questions at this time I would like to turn the call back over to chip Childs for closing remarks.
Thank you Lisa and everyone. Thank you for your interest on the call today I think that this has been a great.
Sort of a pivotal moment in our and what we're trying to do long term here.
We think we're making some of the right strategic decisions to take care of all of our stakeholders again, I can't say enough about our teams and how well the first quarter in the winter months went relative to reliability and what we're able to accomplish for our partners.
We will end the call today, we appreciate you joining and we will talk to you next quarter. Thank you.
And that concludes today's presentation. Thank you for your participation you may now disconnect.
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