SKYW - NASDAQ

Good day, everyone, and welcome to the SkyWest Incorporated First Quarter 2023 Results Call. Today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Rob Simmons, SkyWest's Chief Financial Officer. Please go ahead.

Thanks everyone for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest's Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, 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 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 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. Our foundational work over the past year has provided solid traction during the first quarter. So SkyWest reported a pretax loss of $26 million or $0.45 loss per share for the first quarter of 2023, reflected in those results were $63 million of deferred revenue. As previously shared, we expect moving forward, we will be discussing deferred revenue regularly until 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 in our people during 2022, including increased pay for nearly every work group and have 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 of 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 provide strong solutions to their needs. During the first quarter, we purchased 5.1 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're focused on the importance of creating value for all stakeholders, including our shareholders to provide the best value proposition in the industry. This quarter's results also included early lease buyouts of 32 aircraft for $125 million. We deployed this capital to create future fleet flexibility for our partners as we work through the industry-wide captains imbalance. Rob and Wade will cover more specifics about that transaction in a minute. We're making good headway on our captain imbalance, and while we are prioritizing upgrades, we continue to fill new hire pilot classes as we work to rebalance our crews. Additionally, captain attrition has begun showing signs of stabilization and was lower than planned for the quarter. As a result, our previous outlook on block hours for 2023 is slightly improved compared to our 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 cruise and restore production and full utilization of our fleet. With the addition of 25 E175s last year alone, our existing fleet can accommodate large future growth without additional CapEx spend. We have continued to shore 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. Despite the quarter's winter weather affecting our key geographies, we continued 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. We successfully completed its first commercial flight 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 its subsidiaries is always safety. SkyWest Charter will enhance safety in the Part 135 space with active flight dispatching, advanced qualification programs through 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 and underserved 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 our first quarter GAAP net loss of $22 million or $0.45 loss per share. Q1 pretax 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 is up 2% sequentially from Q4 2022 and down 6% from Q1 2022. Q1 revenue breaks down with contract revenue up 2% from Q4 and down 7% from Q1 2022. Prorate revenue was $77 million in Q1 down 4% from Q4 and down 2% from Q1 2022. Leasing and other 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 expected deferred revenue of approximately $60 million per quarter for the next three quarters before these balances begin to reverse 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 5.1 million shares of SkyWest stock in the open market, approximately 10% of the outstanding shares of the company for $100 million and we acquired 32 CRJ aircraft 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 unlock 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 a $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 in 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 "modestly profitable" 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 cost reimbursements with all four of our partners. Two, our outlook for block hour production that we expected to be down 19% in 2023 from 2022 has improved, which Wade will discuss in a minute. 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 5.1 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 3/31/2023 are $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 new noncash depreciation from the 32 CRJ aircraft acquired under this transaction. Consistent with last quarter's comments, we continue to expect total 2023 GAAP results to be down from 2022, but 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 continue to reverse for several years thereafter. In spite of the 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 35% future growth without incremental capital investment, Wade will give more quantification around this in a minute. Number two, we expect CapEx to be down over $300 million year-over-year in 2023 compared to 2022. Number three, we expect cash at the end of 2023 to still be near $1 billion including expected debt repayment in 2023 of $400 million. Number four, this year's CapEx reduction, improving production outlook and partner contract amendments could drive the best free cash flow in the last five years. And number five, the 10% reduction in shares outstanding from the first quarter share repurchase activity will set the stage nicely for EPS growth when we return to GAAP profitability. 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, prorate and leasing businesses. As discussed last quarter, we are nearing completion of our strong delivery schedule. We have four remaining E175s on order. We anticipate taking two of those in the fourth quarter of 2023, one in 2024 and the last E175 in 2025. This will bring our E175 fleet total to 240 aircraft. As we previously discussed, we've 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 our 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 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 quarter as compared to the first quarter. As Chip discussed, we have seen a positive trend in our captain attrition. With the captain attrition lower than planned, we anticipate that our 2023 block hours will be down 14% as compared to 2022 which is an improvement from the 19% we communicated last quarter. As we look to 2024 and beyond, we can add approximately 20% more block hours to our ERJ fleet without any additional aircraft. This same number is over 35% for our CRJ 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 CRJ aircraft under an early lease buyout. These leases were 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 the progress of our new airline. However, we have still not received commuter authority from the DOT. The commuter authority application is primarily meant to demonstrate the fitness of the carrier in terms of financial, managerial and operational matters. Among other things, we believe SkyWest Charter is well - is a well-capitalized entity and has some of the best operational leaders in the industry. We have provided the DOT with all the information they requested and are still waiting for them to approve and issue the commuter authority. Once granted, commuter authority SkyWest Charter will be able to better serve small communities. Regardless of the status of our commuter application, we are moving forward with our plans for SkyWest Charter to operate on-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 selling some of our excess CRJ 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 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.

[Operator Instructions] We'll take our first question from Mike Linenberg with Deutsche Bank.

Hi. Good afternoon, everyone. Just a couple here. Rob on the share repurchase program, the $100 million, although there was an authorization of $139 million. Do you still have another $39 million of dry powder or would you have to go back to the Board and get that reauthorized. I guess I know it had been outstanding for some time, and I'm just curious of the status of that?

Yes, thanks Mike. Just to clarify, going into the first quarter, we had $139 million that was still available under a previously approved program. During the first quarter, we deployed $100 million of that. And in the month of April, as Chip mentioned, there was another $30 million done. So as of the end of April, we will only have about $9 million available under that original program.

Great. Thanks for clarifying that. I missed that second point. Then just on the airplanes, the 32 I think that were just purchased off lease. Are those all in productive service with SkyWest or some of those leased out to other carriers, what's the status of those airplanes?

Hi Mike, this is Wade. So yes, there were 32 CRJ assets as you said. They're all in the SkyWest Airlines fleet. There are, like I said in my script, we thought there was a $100 million worth of engines. So those engines are clearly all flying today within the SkyWest Airlines fleet. Some of the airframes may be on the ground as we're optimizing for our captain and 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 your - the last of your four partners. Typically when these deals get done, there's always some element of a quid pro quo, anything that you can share as it relates to length of contract? Obviously, you have better economics, but were 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 that we just have to kind of be watching out for with that one partner? Thanks for answering my questions.

Hi Mike, this is Wade. So that's a great 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 are primarily just additional rate reimbursements that are under these agreements, all of them are very consistent with that. So there was really nothing unusual. We didn't take any airplanes out of contract, there was nothing like that done. It was primarily just a reimbursement for the additional pilot costs.

Okay, great. Thanks everyone.

We'll take our next question from Helane Becker with TD Cowen.

Thanks very much, operator. Hi, team. Thanks for the time here. So 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 on new pilots for that operation.

Okay. And then do you have a flow-through agreement or I don't know what you want to call it, the mainline SkyWest?

So there is not necessarily any type of a flow between the two entities at this moment. To be candid, I think they're going to be very different from each other. The type of flying will be very different from each other. There's no doubt we may have some opportunities to move from charter to SkyWest Airlines as 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 high-wealth individuals and corporations and those types of flying, we'll continue to do the hiring and we need to fill that demand separately from SkyWest Airlines.

Okay, that's perfect. Thank you.

Thank you.

We'll take our next question from Savi Syth with Raymond James.

Hi, good afternoon, everybody. It's Matt covering for Savi here. First, on the block hour guide, you gave - can you give me, what you expect the quarterly progression to look like over the next several quarters?

Yes. So, Mike, great. So, Matt. So listen, this is Wade. Yes, sorry about that. So, yes, so from Q4 to Q1, we said it was down 3% and then going from Q1 to Q2, we're up 2% and then for the entire year of 2023 compared to 2022. We anticipate being up 14% and so or down, sorry, excuse me, down 14%. So we - that's what we gave in my script. And you can kind of fill in the blanks from there comparing what's out there publicly.

Okay, perfect. Thanks for clarifying that. And then could you talk about the - I think there was 20 CRJ 200s that shifted and maybe one CRJ 700 reduction. Was I looking at that correctly? And is that a short-term reduction or related to pilot availability or a permanent or any color there on the fleet could be helpful?

Yes, so that's in the fleet numbers and the release. Those are primarily airplanes that would just do some heavy maintenance and some of the prorate stuff that has expired, that have gone away and we've parked those airplanes at this point.

Okay, thanks. Do you still expect to get to a 100, 700 American at some point?

Currently our agreement right now calls for 90.

Thanks for the clarification. I appreciate it.

We'll take our next question from Catherine O'Brien with Goldman Sachs.

Hi, good afternoon, gentlemen. Thanks for the time. Maybe my first one just a quick follow-up to Mike's question. So on the fourth partner agreeing to the reimbursement on pilot costs which congratulations by the way. So last quarter, I believe you told us that the agreements with your three other partners got you to about 60% to 70% covered on the increase in pilot costs. With this fourth partner now, are you now closing in on like a 100% being pass through?

Yes, we are close to the vast majority of our pilot increases now covered off.

That's great. Okay. 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 like GAAP pretax loss was somewhere in the $200 million range. We also expect results to be down from the GAAP $73 million profit last year, can you help us think about how much the pilot pass-through and greater block hours swing us between the two onset range? Thanks so much.

Yes, thanks Cathy. Look, I think that as we talked about in the script, there are a number of different elements that play into that our '23 outlook that we've got. Part of that was the block hour outlook improving from what we originally last quarter expected to be 19% down to 14% down. The completion of the final partner agreement amendment that's part of this. The transaction with the early lease buyout as we've talked about is 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 a lot of things that have evolved and a lot of elements of our model that have improved, we're pleased with that, but we are far from declaring victory still at this point.

I'm trying to tabulate all the pauses in my head as we go here, but could we be looking at a GAAP breakeven result this year or that's too aggressive?

Well, look, 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. And maybe just one last quick one on the New York City and DCA slot waivers, is that impacting your operations at all? Do you have to move any capacity around? And I guess like, so long as you get a decent amount of notice, is there any cost to SkyWest to move capacity around for your partners or is that just to give it in the business? Thanks so much for all the time.

Thanks Cathy. Yes, this is Chip. Yes relative to the northeast corridor in the slots, we just don't do enough flying up there that has a big impact on what our operation is, we're clearly mostly Detroit to Chicago West. And from that perspective, we do work very well with our partners to make sure that we're flying in the right bases and locations because you still have even other 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, so.

Thank you.

And there are no further questions at this time. I'd 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 and the winter months went relative to reliability and what we were able to accomplish for our partners. We will end the call today. We appreciate you joining, and we'll talk to you next quarter. Thank you.