SkyWest, Inc. (NASDAQ:SKYW) Q3 2023 Earnings Call Transcript

SkyWest, Inc. (NASDAQ:SKYW) Q3 2023 Earnings Call Transcript October 26, 2023

SkyWest, Inc. beats earnings expectations. Reported EPS is $0.55, expectations were $0.4.

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWest Inc. Third Quarter 2023 Results Call. [Operator Instructions] It is now my pleasure to turn today’s call over to Rob Simmons, Chief Financial Officer. Sir, please go ahead.

Robert Simmons: Thanks, everyone, for joining us on the call today. As Brent 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 and 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?

A family boarding an airplane with their suitcases, symbolic of the company’s reach into the global travel industry.

Eric Woodward: 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.

Chip Childs: Thank you, Rob and Eric. Good afternoon, everyone and thank you for joining us on the call today. I want to start by saying how devastated we are by the horrific attacks on Israel and the escalating conflict in the Middle East that has put millions of innocent lives at risk. While we do not operate in these areas, the SkyWest team is made up of thousands of people from different backgrounds, countries and cultures and together, we mourn the loss of innocent lives. We’re working where we can to provide opportunities to aid in the humanitarian response and look forward to an end to the violence in the region. Today, SkyWest reported net income of $23 million or $0.55 per diluted share and announced new flying contracts with United for 19 new E175 aircraft over the next 3 years.

Also during the third quarter, we purchased 1.2 million shares for $50 million under our previously communicated share repurchase plan and have acquired 19% of total shares outstanding year-to-date. The quarter’s results demonstrate that the SkyWest playbook continues to work as intended. This playbook is focused on our team, our fleet, our partnerships and a strong balance sheet. We continue to one, execute our multiyear fleet transition with focus on dual class and maintain an efficient and flexible fleet. Two, enhance our partnerships and ensure we continue to deliver on our partners’ needs. Three, maintain a healthy and strong balance sheet that continues to help create opportunities benefiting our people, our partners and our shareholders.

SkyWest teams continue to deliver exceptional performance, helping the airline achieve top 3 DOT on-time carrier status now for several months out of the year. So far this year, SkyWest has delivered a record of more than 240 100% completion days when adjusted for weather, the most in a single year in our history. This is an outstanding achievement but even more so when you realize that we report performance at more than 240 airports nationwide. This feat doesn’t happen without extensive planning and resource allocation to manage through challenges as well as exceptional teamwork. Our people do a tremendous job and I want to thank them for their commitment and reliability and great service. Pilot availability and specifically captain availability has been an ongoing challenge here and across the industry and we continue efforts to stabilize our crew balance.

We recognize that pilots have more options than ever before and appreciate that they are recognizing the value proposition at SkyWest. Both for those who choose to make a career here and those who want to transition to one of our major partners. We’re fortunate to have positive working relationship with our labor representatives that enables us to move quickly on behalf of our teams. This unique relationship continues to benefit our people and helps us consistently deliver an outstanding product. Captain attrition has continued to stabilize through this quarter and attrition was again slightly lower than planned. We are still prioritizing upgrades while filling new higher pilot classes. And it will take some time to regain our crew balance and restore production and full utilization of our fleet.

However, our existing fleet can accommodate large future growth without additional CapEx spend. And with the captain situation beginning to stabilize, we feel good about adding another 19 175s over the next 3 years. I want to shift gears to SkyWest Charter or SWC which has continued to successfully complete on-demand charter flying since it began operation earlier this year. Demand for these charters is extremely strong and we are encouraged by SWC’s business. While commuter authority at the Department of Transportation has languished for no regulatory reason, we still believe SWC is the best possible answer for small community air service. Regardless of the status of that application, we’re pleased with strong demand for SWC’s product and are very optimistic about its future.

In fact, charter demand is stronger than we originally anticipated with the SWC fleet now at 13 aircraft. We did not anticipate this level of flying within our original plan operating under commuter authority. SWC is certainly exceeding expectations even without commuter authority. That said, it is and will remain a very small portion of our overall business with our primary focus remaining on our contract flying and major partner relationships. As always, we remain disciplined to ensure our assets are deployed efficiently and profitably. Overall demand for each of our products remains exceptionally strong. As we deliver 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.

Rob will now take us through the financial data.

Robert Simmons: Today, we reported a third quarter GAAP net profit of $23 million or $0.55 earnings per share. Q3 pre-tax income was $24 million. Our weighted average share count for Q3 was $42.6 million and our effective tax rate was 4% which reflected an $8 million benefit from the lapse of an uncertain tax position. First, let’s talk about revenue. Total Q3 revenue of $766 million is up 6% sequentially from Q2 2023 and down 3% from Q3 2022. Q3 revenue breaks down with contract revenue up 2% from Q2 and down 5% from Q3 2022. Prorate revenue was $110 million in Q3, up 33% from Q2 and up 16% from Q3 2022. Leasing and other revenue is down by less than $2 million sequentially and year-over-year. These GAAP results include the effect of $57 million of revenue deferred this quarter compared to $60 million deferred in Q2 and $13 million that was released in Q3 2022.

As of the end of Q3, we have $305 million of cumulative deferred revenue that will be recognized in future periods. As indicated last quarter, we expect to defer revenue of roughly $60 million in Q4. We anticipate we will begin to recognize previously deferred revenue in Q1 2024 and beyond. Let me move to the balance sheet. We ended the quarter with cash of $820 million, down $42 million from $862 million last quarter. The $42 million reduction in cash during the quarter included the accretive actions of number one, repaying $110 million in debt. Number two, buying back 1.2 million shares of SkyWest stock in the open market for $50 million at an average price of $42 per share. During the 9 months ended September 2023, we have repurchased 9.6 million shares or approximately 19% of the outstanding shares of the company for $244 million at an average price of $25 per share.

And number three, paying $36 million in aircraft deposits toward our order for 19 new E175 aircraft we announced today as we continue to invest in our fleet transition. Our CapEx during the third quarter was $32 million. We ended Q3 with debt of $3.1 billion, down from $3.4 billion as of year-end 2022. These cash-related numbers tell an important story about the quarter that we continue to generate positive free cash flow from operations despite production constraints. Our strong free cash flow also benefits from a lower investment in CapEx than in prior years. Our balance sheet and solid liquidity continue to be powerful tools to create shareholder value. Tools that have helped us repay over $330 million in debt and repurchase over $244 million in stock during the 9 months ended September 30, 2023.

Consistent with our policy and practice, we are not giving specific EPS guidance at this time but let me give you a little color on Q4 and the preliminary outlook for 2024. We expect Q4 to be modestly profitable on pre-tax GAAP basis, including approximately $60 million of deferred revenue but seasonally down from Q3 as per normal. As Wade will discuss in a minute, we anticipate our Q4 block hours to be flat to down slightly from Q3, primarily due to seasonal factors. Although many variables can impact our 2024 production outlook, we are currently planning for our 2024 block hours to approximate our 2023 block hours with pilot availability the gating factor. As the GAAP noise from deferred revenue goes away in 2024 and including the benefit from our share repurchase activity this year, our 2024 GAAP earnings per share could again return to the high $5 handle where we were pre-COVID.

Our solid balance sheet, reliable cash flow from operations and strong demand for our product provide a catalyst for improving our return on invested capital, including the following. As a result of our year-to-date purchase activity, repurchase activity of 9.6 million shares, as of September 30, 2023 we had 41.2 million shares outstanding. As of September 30, we had $136 million remaining under our current share repurchase authorization and we anticipate continuing to be opportunistic in repurchasing shares going forward. Over the first 3 quarters of 2023, we executed on our balanced capital deployment by also repaying over $330 million of debt. Our debt net of cash continues to be lower than our pre-pandemic levels of 2019. The underutilization of our fleet in place today can accommodate 14% ERJ future block hour growth and 35% CRJ future growth in block hours before the incremental capital investment in the 175s announced today.

Wade will give us more color around this in a minute. We continue to expect our 2023 capital expenditures to be approximately $300 million lower than 2022. And as announced today, we continue to deliver fleet solutions for our partners with 19 new E175s being added for United. We now expect to take delivery of 23 new E175 aircraft starting next quarter through 2026. 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 shortage 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?

Wade Steel: Thank you, Rob. Today, we announced a new flying agreement to acquire 19 new E175s and place them under a long-term contract with United. These new E175s will replace 19 CRJ700s. We anticipate 4 of the E175s will be delivered in the fourth quarter of 2024, 7 in 2025 and 8 in 2026. These 19 are in addition to the remaining 4 E175s we have on order. We anticipate taking 2 in the fourth quarter of this year, 1 in 2024 and the last E175 in 2025. At the end of 2026, our E175 fleet total will be 258. This order will continue to solidify SkyWest as the largest Embraer operator in the world. The debt remaining on the 19 CRJ700s will be repaid by the time they come out of contract with United. We expect working to place these 700s under flying agreements and believe they will be extremely valuable to our partners as they move to replace single-class 50-seat product with dual-class aircraft.

These aircraft are some of the newest next-gen CRJ700s in the world. Let me review our production. The third quarter block hours increased by approximately 3% as compared to the second quarter of 2023. Based on the current schedules we have from our major partners for Q4, we anticipate that our fourth quarter block hours will be consistent with the third quarter. With regard to staffing, we have seen an improving trend in our captain attrition and anticipate that our 2024 block hours will be flat as compared to 2023. I would also remind you that we can add approximately 14% more block hours to our ERJ fleet before adding any aircraft. This number is over 35% for our CRJ fleet and makes each additional block hour accretive to the model. Our partners remain very engaged in supporting our efforts to restore production.

Let me give a brief update about the status of SWC, our new charter business. SWC began operating on-demand revenue charters beginning in April and we have been investing in training and hiring of employees since that time. We are pleased with SWC’s progress and the sport charter bookings for this fall and winter have been significantly higher than we originally anticipated. We anticipate SWC could create a positive contribution to our earnings beginning in November. 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 have spent the last several years reducing and enhancing fleet and financing flexibility to ensure we’re well positioned.

This 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 Q&A now.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Michael Linenberg with Deutsche Bank.

Michael Linenberg: Just a couple here. You gave us, Rob, you gave us CapEx for this year. You said it was $300 million lower than — or this year lower than 2022. With the 19 E175s coming in, how should we think about your — what your CapEx was before and what the new number is for say ’24, ’25?

Robert Simmons: Yes, hi, Mike. Yes, for ’24, we expect to bring in a total of about 5 new E175s. Including the CapEx from those 5 next year, I would expect CapEx in ’24 to be flat to slightly up from ’23.

Michael Linenberg: That’s helpful.

Robert Simmons: And again, in ’25, Mike, the number of deliveries is 8.

Michael Linenberg: Okay. And then when we think about the CRJ700s, Wade, you said that they would replace as fuel class I guess 50-seat CRJs. But are those CRJ700s going to get converted from 70-seaters to 50-seaters like the CRJ550? Is that the future role of those airplanes? And will you be flying them?

Wade Steel: Mike, yes, this is Wade. As I said in my script, there’s lots of opportunities for those airplanes, both in what you just articulated. There’s also — you know American’s scope very well and they have a 65-seat CRJ700 that has a lot of demand for it as well. Both of those opportunities are out there for us and we would anticipate flying those in the near future.

Michael Linenberg: Okay, that’s great. And then just last, Rob, on your GAAP EPS for next year, if I heard you right, I think you said $5. What is the release per quarter? Is it just the reverse? Is it roughly $60 million of revenue that gets released for each quarter? Or is it a different number? I want to make sure my pacing is right.

Robert Simmons: Yes, sure. What we — first of all, let me just clarify. What I said about GAAP EPS next year was something in the high 5s, high $5 earnings per share for 2024. And that would include something between $40 million and $50 million of deferred revenue reversals for the entire year. Something like $10 million to $15 million reversal per quarter. Not a huge number for next year.

Michael Linenberg: And does it — beyond ’24, does it pick up actually? Or does it get released at that rate until you run through the entire $300 million plus?

Robert Simmons: Yes. What I would say is it’s going to be approximately that 24% rate for the next couple of years in all likelihood. It depends on a number of factors, including our overall production but ’25 should look quite a bit like ’24.

Operator: Your next question comes from the line of Savi Syth with Raymond James.

Savi Syth: Just curious on the E175 order with United, does that replace any of the aircraft that you’re flying for United today? Or how does that work?

Wade Steel: Yes, Savi, this is Wade. We have 19 CRJ700s that are flying for United today. And as the new 175s come in, they will replace those airplanes. And as we said, we anticipate that we would still work with our other — all of our major partners in placing the 700s elsewhere to replace potentially single-class 50-seat airplanes.

Savi Syth: Got it. I missed that comment and it makes sense what Mike was asking before. Thank you. And just on the pilot side, I wonder if you can provide a little bit more color. It seems like what we’re hearing everywhere is much slower growth next year. Some of those low-cost carriers might not even be doing extra hiring. Are you seeing that today? And just any kind of updated thoughts on how kind of the building up the captain supply will progress over the next year?

Chip Childs: Yes. Savi, this is Chip. That’s a great question. I think your — sort of your industry take from the last 10 days is sort of something that we’ve sensed over the past month or so. I think that when you look at the environment, we continue to say that there’s further stabilization of captains and pilots relative to what we’re seeing and in our models. And I think when you take a look at some of the events that are going on relative to capacity, relative to the number of pilots that all the major carriers already have, I think most of them have more pilots than they did before the pandemic. There’s a lot of factors that come into play when we try to predict what our models are going to produce. All of those are causing us to be more positive all the time.

We think that we are going to have and build some relatively good momentum in the back half of 2024 into 2025 with this. But as you know and as you paid attention the last couple of years, it’s still a very dynamic model that we are very keen to pay attention to and do what we can to make sure we continue to stabilize and get our production back up where we think it should be.

Savi Syth: Makes sense. I’ll get back in the queue. Thanks.

Operator: Your next question comes from the line of Helane Becker with TD Cowen.

Helane Becker: Thanks very much, operator. Hi team, thanks for the time. I’m just wondering about SWC because it seems like this is a good avenue for growth. And you mentioned — I think, Chip, maybe you mentioned that you don’t understand why the FAA isn’t approving this in a more speedy fashion. But aren’t American and Southwest kind of complaining about this whole developing sector of the business?

Chip Childs: Helane, this is Chip. Yes, I’m looking for a question in there but I will try to add some commentary on all of it if you will.

Helane Becker: I guess my question, I was just —