Q3 2024 SkyWest Inc Earnings Call
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Hello and welcome to the Sky West Incorporated 3rd Quarter 2020-24 results call.
Officer Smith, for currently an innocent only mode, later we will conduct a question in the answer session. Dr. Ask a question simply press star followed by the number one on your telephone keep that. To remember yourself from the key, again, just press star followed by the number one.
Speaker Change: As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.
Thanks everyone for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest Chief Financial Officer.
On the call with me today are Chip Childs, President and Chief Executive Officer, Wade Steele, Chief Commercial Officer, and 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 cell site 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 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.
Speaker Change: Some of the factors that may cause such differences are included in our most recent Form 10-K and other reports and filings with the Securities and Exchange Commission. And now I'll turn the call over to Chip.
Thank you Rob and Eric. Good afternoon everyone and thank you for joining us on the call today. The third quarter brought a strong hurricane season and while geographically there wasn't a significant impact to our flying operations, our hearts go out to those who lost homes and even loved ones in Hurricane Celine and Milton on the East Coast.
In true SkyWest fashion, our people rallied to provide monetary and humanitarian support for our colleagues and others affected by these storms. We truly have amazing people here at SkyWest.
Speaker Change: SkyWest was also honored to be named one of America's best mid-sized companies by Time magazine during the quarter.
as we completed over 20,000 more flights than the same quarter last year, delivering 99.9% adjusted completion. This recognition by Time Magazine is the latest in a series of awards that have underscored our focus on providing an exceptional product.
for our customers and remaining the employer of choice for more than 14,000 aviation professionals. I want to thank our team for their great work in continuing to deliver an outstanding product.
Today SkyWest reported net income of $90 million or $2.16 per diluted share for the third quarter of 2024.
We are very pleased to announce that we have reached an agreement with United to place 40 CRJ-550s under a multi-year agreement at SkyWest Airlines, with the majority of those aircraft being covered from our existing CRJ-700 fleet.
Additionally, I would remind you that from the fourth quarter of this year through 2026, we have 20 additional E175 slated for delivery, bringing us to 278 by the end of 2026.
Over 87% of our block-hour production was from our dual-class aircraft during the third quarter, and the ongoing Strong Demand and Delivery Book continues to position us for increased regional market share.
Speaker Change: We're also pleased with the continued improvement in our captain availability and overall pilot staffing balance.
We have a very strong pathway program, and our new hire classes are filled through August of next year. As we restore production, we are confident the measures we have in place will help stabilize our pilot staffing over the long term.
Speaker Change: With this continued progress, we expect block-hour production for this full year to be up about 13% compared to last year. We anticipate it will be at or near full partner requested utilization by the end or by the middle of 2025 and just below pre-COVID levels.
We still see significant demand for regional lift nationwide, particularly as the industry works to right-size capacity.
with a very strong demand for our product and the opportunities in small and underserved markets. We do expect maintenance expense to increase in the coming year as we increase utilization and return aircraft to service. Wade will speak more about that in a minute.
Speaker Change: Overall, our well-positioned fleet, ongoing improvements in captain staffing, and our strong partnerships and demand, we remain optimistic about the remainder of 2024 and 2025.
In summary, we continue to play the long game and are focused on the core elements of our business, our people, our fleet, and our partners to ensure we remain extremely well positioned in the industry.
We've spent the last several years investing heavily in our fleet and in our people To ensure we are the in the best possible situation to respond to market demands Rob will now take us through the financial information
Today we reported a third quarter gap net income of 90 million dollars or 216 earnings per share.
Q3 pre-tax income was $116 million.
Our weighted average share count for Q3 was $41.6 million, and our effective tax rate was 23%.
First, let's talk about revenue.
Rob Simmons: Total Q3 revenue of $913 million. It's up 5% sequentially from $867 million in Q2 2024 and up 19% from $766 million in Q3 2023.
Q3 revenue breaks down with contract revenue at $761 million, up 4% from Q2 2024, and up 20% from Q3 2023.
Leasing and other revenue was flat sequentially at $29 million and up by $5 million year over year, reflecting additional leasing opportunities.
Speaker Change: These GAP results include the effect of recognizing $19 million of previously deferred revenue
As of the end of Q3, we have $342 million of cumulative deferred revenue that will be recognized in future periods.
We anticipate recognizing a similar amount of previously deferred revenue in the fourth quarter that was recognized in the third quarter.
Speaker Change: Let me move to the balance sheet.
We ended the quarter with cash of $836 million, slightly up from $834 million last quarter and $835 million at year-end.
The moderate increase in cash during the quarter included the accretive actions of repaying over $112 million in debt.
and buying back 217,000 shares of SkyWest stock in Q3 for $16.3 million at an average price of $74.98 per share.
Since the beginning of 2023, we have repurchased 11.1 million shares, or approximately 22% of the outstanding shares of the company, for $327 million at an average price of $29.45 per share.
Speaker Change: Our CapEx during the third quarter was $97 million, including the acquisition of one new E-175 aircraft. We ended Q3 with debt of $2.7 billion, down from $3 billion as of year-end 2023.
Speaker Change: These numbers tell an important story about the corridor, that we continue to generate solid, positive, free cash flow from operations.
Our strong balance sheet and well-grounded liquidity continue to be powerful tools to create shareholder value.
tools that we expect will help us repay over four hundred million dollars in debt in 2024, allow us to take advantage of future growth opportunities including financing the 20 E-175s we have on order through 2026.
all while continuing to execute on our share repurchase program.
As we remain focused on improving our return on invested capital, we would like to highlight the following.
As a result of repurchasing over 11 million shares since the beginning of 2023, we had 40.3 million shares outstanding as of September 30th, 2024, compared to 50.6 million as of the start of 2023.
We anticipate continuing to be opportunistic in repurchasing shares going forward.
Speaker Change: We are on track in 2024 to repay over $400 million in debt, a similar number to our debt repayment in 2023, before new aircraft financings.
Our debt, net of cash, and leverage ratios are at their lowest point in over a decade.
We continue to anticipate our total 2024 CapEx will be approximately $320 million to $350 million, including the purchase of four new E-175s in Q4 2024.
We expect 2025 CAPEX to be in the neighborhood of $500 million, with the year-over-year increase driven by aircraft and engine acquisition, mostly new 175s.
Consistent with our policy and practice, we're not giving any specific EPS guidance at this time, but let me give you a little additional color on 2024 and 2025.
Speaker Change: As Wade will discuss in a minute, we now anticipate our 2024 block hours to be up approximately 13% over 2023, up from the expectation of up 9-11% a quarter ago.
Speaker Change: Our modestly improved outlook in our 2024 block hours is driven by improving captain availability, improving fleet utilization, and ongoing strong demand for our production.
We expect 2025 block hours to be up roughly 10% over 2024.
Speaker Change: We expect our 2024 GAAP EPS to be in the low $7 area, slightly better than last quarter's expectation for the year and above where we were pre-COVID, reflecting our updated production outlook.
Speaker Change: We expect Q4 earnings to be seasonally below Q3.
We expect our 2025 GAAP EPS to be in the mid $8 area if we are successful in executing on the opportunities in front of us.
Speaker Change: We are optimistic about our growth possibilities going into 2025 and 2026, including the following three focus areas. First,
growth in underserved communities through our pro-rate business, along with the deployment of 40 CRJ-550 contract aircraft announced today with United.
Second, improved aircraft utilization on our ERJ and CRJ fleets, and third, placing the 20 new E-175s into service between Q4 2024 and the end of 2026.
We believe that our strong balance sheet and liquidity, the actions we will be taking to invest in incremental deployment of our fleet, and the opportunity to monetize and optimize strong demand opportunities over time, will position us well to drive total shareholder returns.
Speaker Change: Wade
Thank you, Rob. Today, we announced a new multi-year flying agreement for a total of 40 CRJ-550s with United.
which includes the 11 aircraft announced by United earlier this month. We anticipate four of these aircraft will be operating by the end of this year.
Speaker Change: and with a total of 30 by the end of 2025, and the last 10 going into service during 2026. Of the 40 CRJ 550s,
Speaker Change: 29 will be modified from our existing CRJ 700 fleet and 11 will be purchased from United and are new to our fleet.
We expect to complete these purchases by the middle of next year. I want to point out that this agreement represents net
Speaker Change: growth aircraft, along with additional new E-175s arriving between now and the end of 2026. We are excited about the continued partnership with United.
Speaker Change: We successfully launched flying of our first CRJ-550 for Delta during July, and we anticipate transitioning 15 CRJ-550s to our Delta fleet by the first quarter of 2025.
With these new CRJ 550 agreements with Delta and United, we have approximately 25 additional CRJ 700s that have contract expirations in 2025.
This aircraft is an ideal replacement for single-class CRJ-200s, and we are making strong progress with each of our partners to productively place the remaining CRJ-700 aircraft under prorate and contract flying agreements.
You'll recall that earlier this year we announced a flying agreement for 20 United-owned E-175s from another United Express carrier to replace 20 CRJ-200s under our United contract.
Speaker Change: As of October 1st, we had transitioned 19 of these aircraft.
and expect that all 20 will be transitioned to SkyWest this year. These 20 are in addition to the 20 new E-175s currently on order, 19 for United and one for Alaska.
During the third quarter, we took delivery of one E-175 under our Delta agreement.
Speaker Change: We expect delivery of four more during the fourth quarter, eight in 2025 and eight in 2026. At the end of 2026, our E-175 fleet total will be 278.
continuing to enhance SkyWest's position as the largest Embraer operator in the world. With the addition of the large dual-class aircraft to our fleet, our regional market share has increased to 30% of the large dual-class aircraft from 23% in 2019.
We are excited about our market share improvement.
Speaker Change: Let me review our production.
We expect 2025 block hours to be up roughly 10% over 2024, approaching our 2019 levels.
We also expect Bockauer Seasonality to return to the model as utilization improves during the strong summer months.
We still have approximately 30 dual-class CRJ aircraft and over 40 CRJ single-class CRJ-200s that are parked and could be returned to service either through additional contract or pro-rate flying.
As flying quickly returns and we place CRJs into service, we are continuing to experience challenges in our third-party MRO network, including labor and parts challenges.
as far as our maintenance expense.
We anticipate $40 million increase in the second half of 2024 as compared to the first half of 2024.
We expect our maintenance expense to average $20 million a quarter during 2025 as we bring aircraft out of long-term storage and service the current fleet as production continues to increase.
Speaker Change: As you would expect, the maintenance expense will happen before the aircraft goes back into service. Our partners remain very engaged in supporting our efforts to restore production.
I also want to review our plans to monetize our CRJ-200 assets. We still own over 140 CRJ-200 aircraft. These aircraft have very little book value and no debt, and we have approximately 4.5 million cycles remaining to monetize.
Our priority to monetize these assets is to fly them at SkyWest Airlines under contract with our partners or in our pro-rate business.
Our next priority is to operate these aircraft at SkyWest Charter or SWC. We currently have 17 SWC aircraft on-demand charter service.
Speaker Change: You'll also recall that our minority ownership stake in Contour includes an asset provisioning agreement under which SkyWest will provide CRJ airframes and engines to Contour.
As far as our pro-rate business, the demand remains extremely strong, and we have great community support. We are seeing opportunities to return SkyWest service to several communities as we restore our CRJ production.
We will continue to work with the communities we serve on the best way to expand our service. As we continue to increase our pro-rate business, we will see more seasonality reintroduced into our model.
Speaker Change: As typical with all airlines, Q2 and Q3 are strong revenue quarters, and Q1 and Q4 are softer.
We feel good about our ongoing efforts to reduce risk and enhance fleet and financing flexibility and remain committed to continuing our work with each of our major partners to provide creative solutions to the continued demand for our products.
Okay, operator, we're ready for our Q&A now.
Perfect and just as a reminder to ask a question simply press star followed by the number one
All right our first question comes from the line of Mike Linenberg from Deutsche Bank. Please go ahead.
Good afternoon, everybody. On the 40 airplanes that are going into United, the 11 CRJ-550s they used
Are they
Mike Linenberg: coming from another United carrier or is that incrementally new lift for United and then sort of as a adjunct to that the remaining 29 CRJ 700s
Are those airplanes that are currently grounded for you, that you have an inventory and that you're going to induct into United, or are they converting from United Express into the 550s?
Yeah, Mike, this is Wade. So first of all, on the 11 CRJ550s that we were purchasing from United, those have been parked in storage for the last couple of years, so they have not been operating for another United Express operator for several years.
On the 29, 19 of those are currently flying for United.
And as we bring in the new 175s, those will be transitioned to CRJ 550s.
Mike Linenberg: and so those are flying and the ten are being allocated from airplanes that are in storage and some that are operating. So it's a it's a little bit of a mix of all things as we're bringing those in.
Wade, after you bring the 10 out of storage, the CRJ 700s that now get converted into 550s, how many CRJ 700s do you have left grounded?
Well, so in my script, we talked about 30 dual-class CRJ airplanes that were grounded. And so that number will shrink by approximately 10 or so. And so we'll still have some opportunities there to bring some more back out and continue to fly.
Speaker Change: Okay great and then just my second question I guess it's just a clarifying. You talked about the increased maintenance expense. It sounded like you said $20 million a quarter.
but I think maybe you meant $200 million.
Yeah, Mike, it's Rob here. Yeah, it's no change from what we said last quarter that we expect maintenance expense this year will be in the neighborhood of $700 million going to about $800 million next year.
Okay. So about 200 million dollars a quarter.
Okay and then just my last question when I think about the number of cities
that SkyWest withdrew from, whether they were Delta and or United or even American cities, because of the pilot, the lack of pilots.
How many additional cities, how many of those cities do you believe could come back online in 2025? And I'm trying to get a sense of based on where you see your pilot availability.
Speaker Change: and I believe it was probably about 35 or 40 markets that lost SkyWest CodeShare service. Is there the opportunity where you could bring back...
you know, many of those cities, half of those cities, and in some cases I realize they'll be coming back with CRJ-200s.
Yeah, Mike, that's a great question.
Right now, yeah, we are looking at every one of those markets and you're very close to the right numbers. I think overall we're about 30% down from where we were.
And we're bringing those back up. You know, maintenance, I did talk about the constraints and maintenance in our MRO. So it may take, you know, 2025 and a little bit of 2026.
Speaker Change: But we are definitely actively looking at all of those markets that were out there and potentially even a few more. Mike, this is Chip. I'd kind of categorize it a little bit into three buckets. One, you've nailed the cities that we left.
entirely that we can still go back to.
I think there's still a tremendous amount of flying of existing cities that we didn't leave, that we can go back and increase service to those cities. There's a lot of that still yet to be done.
Speaker Change: And then most interesting to us is a lot of new cities that we were not looking at back pre-pandemic that we're looking to go to as well. So it's a lot of good opportunities, but it's not limited to try to getting back to the cities that we left, you know, with the captain issues that we had.
Speaker Change: Just on the new cities, the cities that have become new to you, is that largely a function of the fact that because of COVID, I think we saw the regional space overall contract pretty materially, and so when we look at where we are today versus five years ago,
It really looks like you're the only one out there who really has the platform to move into some of these cities. Is that the right way to think about it?
Speaker Change: I would definitely think that we are in the best position to do this but I also would do it on the backdrop that
throughout the pandemic we still yet to capitalize on the opportunities of the de-urbanization of the nation and a lot of people have moved out of bigger markets and smaller to mid-sized markets that you still have a good strong ability to feed with with like you've said with our platform
Speaker Change: Great. Thanks, everybody.
Our next question comes from the line of Sabi Sith from Raymond James. Please go ahead.
Hey, good afternoon. Actually, just a long clarification, a couple of Mike's questions there. The cities that you're talking about kind of going back into or kind of expanding service, is that related to prorate or kind of capacity purchase agreements? I was kind of curious as to what the break between the two.
It's a little bit of both but heavily weighted toward pro-rate.
And then just on the
the CRJ 550s, is there a conversion of those? Does that run through CapEx? Is that why kind of maybe CapEx I think earlier thinking 400 million next year now 500 million is that is that kind of inclusive of the investment necessary and is there anything else that we need to think about?
in terms of kind of the investment to get that flying done.
Yes, Avi, this is Wade. They will go through CapEx. The conversion of those do go through CapEx. We're also purchasing 11 of those from United as well, so those are the main reasons that the CapEx is going up, but the modification would go through CapEx.
And then if I might, just one last one, just on the pilot side, you know, you talked about how it's, you know,
Speaker Change: It's kind of settling down. I wonder if you could provide a kind of an updated view on where you are in terms of kind of captain levels and where you'd like to be to bring all that kind of CRJ flying that you're investing in to kind of maybe next summer or over the next couple of years.
Speaker Change: Yeah, that's a good question. I can kind of reconcile with what we've said in the past, you know, at the most dire
Part of our captain imbalance, we were probably just under 4,000 pilots. We now are approaching 5,000 pilots, or I think by the end of the year or by first quarter we'll be back to the same complement of 5,000.
Speaker Change: were the total pilots that we were pre-pandemic or pre-captain imbalance. So we're getting back to those numbers. And by the time you look...
backwards at the additional aircraft we've taken since we've, since COVID and since the pandemic, then we need, you know, I would say a lot more pilots than what we had and I think that by the time we get to the mid
Speaker Change: to, you know, third quarter of 2025, we should be in really, really good shape.
given the demand structure and the comments that Wade has made relative to getting to the utilization that our partners want. So look, from that perspective, I don't know exactly given, you know, trying to get aircraft out of
out of storage and that type of stuff when we want to get up to the higher numbers of pilots, but we know we'll have more pilots than we've ever had before.
and the demand is strong so you know we'll keep updated but our situation is significantly better than where we were.
Speaker Change: six months ago, a year ago, but we're still, you know, we're still growing, we're still hiring, like we said, throughout 2025.
Speaker Change: Thank you.
Our next question comes from Tom Fitzgerald from TD Cowen. Please go ahead.
Hi everyone, thanks so much for the time and congrats on another great quarter. Earlier in the year you had talked about there being about 165 to 76 seat aircraft out there to be awarded and feeling pretty good about your chances. Is that still the same opportunity set out there or would you mind updating us on how many of those are still out there to be taken?
Hey Tom, this is Wade. You know some of those have been allocated to our partners, but as we look at the opportunities out there in the landscape...
You know, you look at the large dual class scope.
and that's getting filled up very quickly. But there are still market share opportunities in there. But the small RJ scope, there's a lot of good opportunities with all of our partners to still take advantage of the small RJ scope that's out there and the demand.
Speaker Change: appears to be very strong for that airplane as well. So those numbers have been filled somewhat in the 165 that we were talking about, but they are definitely moving in the right direction.
Speaker Change: Okay, that's really helpful. And then, just thinking about capital allocation, you know, with where the stock's trading and how great of a shape the balance sheet's in, do you consider a dividend at all to maybe attract more investor flows?
Yeah, it's Rob here, Tom. I would say at this point, you know, we are not considering reinstating the dividend yet.
Speaker Change: Okay that's super helpful and if I could squeeze one more in, is there any update on the on the charter front if you head into next year after the strong momentum we've had the first year? Thanks again for the time.
Speaker Change: Yeah, Chip, this is, or Tom, this is Chip. We're.
We're still very optimistic about the charter operation. I think, from our perspective, we're going into a very busy season for charter.
and the bookings that we have throughout.
Speaker Change: The winter months are significantly bigger than what they were last year, which was significantly bigger than the year before that.
We have seen, you know, given just the dynamics of corporate travel as well as sports teams and that type of stuff, that the credibility that SWC brings to the market is incredible. And, you know, we're still optimistic about that relative to.
Community Authority. It's still stagnating quite a bit and we're going to continue to be serious about pursuing that because we see as we've already said on the Call a lot of good strong opportunities that small communities deserve. So very optimistic about SWC and it continues to progress
and others. Thank you.
That is all of the questions that we have in our queue, so I'll turn it back over to Chip Childs for closing remarks.
Great, Jeremy. Thank you. Again, we want to thank everybody and their interest for your interest in SkyWest. We appreciate the support we've had through the quarter. We're so proud to represent 14,000 amazing aviation professionals at the company.
and the hard work that they contribute.
to making sure that our company is as good as it is and we look forward to updating you at year end in the February time frame. Thank you.
That concludes today's conference. Have a pleasant day.