SkyWest Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 8 speakers on the call.

Operator

And welcome to the SkyWest Incorporated Second Quarter 2023 Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Speaker 1

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 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.

Speaker 1

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 and A session With our sell side analysts. Eric?

Speaker 2

Today's discussion contains forward looking statements that represent 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 ks and other reports and filings with the Securities and Exchange Commission. And now I'll turn the call over to Chip.

Speaker 2

Thank you, Rob and Eric. Good afternoon, everyone, and thank you for joining us on the call again today. Today SkyWest reported net income of $15,000,000 or $0.35 per diluted share. Reflected in those results were $60,000,000 of deferred revenue. Halfway through 2023, we're making strong progress on all of our strategic objectives including 1, enhancing our partnerships and ensuring we continue to deliver on our partners' needs 2, effectively and efficiently utilize our 3 leading flexible fleet 3, maintaining a healthy strong balance sheet and 4, continuing to ensure that we take care of our people and create value for our shareholders.

Speaker 2

We are pleased to exceed all our internal all of these internal targets for the 1st couple of quarters in a row now. The Q2 was the 1st full quarter reflecting our updated partner contracts helping to offset our new pilot costs. We appreciate the confidence that each of our partners have in our product and their continued support of our efforts in the new environment. We remain committed to working with them to evolve, adapt and provide strong solutions to their needs. During the second quarter, we purchased 3,300,000 shares for 94,000,000 under our previously communicated share repurchase plan and have acquired 17% of total shares outstanding year to date.

Speaker 2

Captain availability remains an industry wide constraint and we are making good headway. We also continue to work with our pilot group to ensure SkyWest remains a career destination and not just a stepping stone for exceptional pilots. We are prioritizing upgrades. While prioritizing upgrades, we continue to fill new higher pilot classes. Additionally, captain attrition has continued to stabilize, although we've seen a slight increase in first officer attrition.

Speaker 2

Overall, attrition was slightly lower than planned for the quarter. These improved metrics continue to improve our outlook on block hours for 2023, which are now expected to be about 11% lower than 2022. It will take some time over the next couple of years to regain our crew balance and restore production and full utilization of our fleet. I would remind you that as we do so, our ability to restore even a portion of production becomes accretive with our existing fleet mix. Our existing fleet can accommodate large future growth without additional CapEx spend.

Speaker 2

We invested heavily in our people over the past year and continue to believe it is our most important investment. To that end, SkyWest became the only regional and 2nd airline ever to implement flight attendant boarding pay during the Q2. This is in addition to last year's pay increases. 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.

Speaker 2

Constant strong operating performance is a key differentiator for SkyWest and we remain disciplined in ensuring we deliver on our commitments. Our teams began the 2nd quarter by ranking number 1 in the Department of Transportation's on time performance list for April and Producing over 99.9 percent adjusted completion for the quarter. I also want to mention that so far this year, SkyWest has recorded over 160 days of 100% controllable completion. This feat does not happen without extensive planning And resource allocation to manage through challenges. Our people continue to do a tremendous job as we adapt and lead the industry.

Speaker 2

I want to thank them for their commitment to reliability and great service. SkyWest Charter or SWC has continued to Successfully complete on demand charter flying as we await the DOT's approval of a commuter authority. It is unclear to us why this approval has taken longer than similar applications. However, we are committed to seeing this application through to completion. SWC has completed all requirements necessary to provide what is already available to numerous operators within the existing regulations and well established precedent.

Speaker 2

Additionally, we've committed that SWC will enhance safety in the Part 135 space by hiring ATP pilots in both seats, Active flight dispatching, advanced qualification program training, SMS, FAR 117 rest rules And many more enhancements to Part 135 requirements even above what is being done at some 121 carriers, particularly low cost carriers. We are committed to doing the right thing regardless of what is required. Small airports have suffered With the loss of connectivity in recent years and we continue to believe SWC is the best possible answer for small community air service. While SWC will be a small portion of our overall business, we look forward to continuing to raise the bar for the National Aerospace and utilize existing assets deliver critical service in small and underserved communities. Overall demand for all of our flying remains exceptionally strong.

Speaker 2

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. We are putting solid components in place and have set ourselves up to be a fundamentally better company 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.

Speaker 1

Today, we reported a second quarter GAAP net profit of 15 $1,000,000 or $0.35 earnings per share. Q2 pretax income was $18,000,000 Our weighted average share count for Q2 was 44,200,000 and our effective tax rate was 13%. First, let's talk about revenue. Total Q2 revenue of $726,000,000 Is up 5% sequentially from Q1 and down 9% from Q2 2022. Q2 revenue breaks down with contract revenue up 5% from Q1 and down 9% from Q2 'twenty two.

Speaker 1

From Q2 2022. Leasing and other revenue was down $3,000,000 sequentially and flat year over year. These GAAP results include the effect of $60,000,000 of revenue deferred this quarter compared $63,000,000 deferred in Q1 $16,000,000 that was released in Q2, 2022. As of the end of Q2, we have $248,000,000 of cumulative deferred revenue that will be recognized in future periods. As indicated last quarter, we expect to defer revenue of approximately $60,000,000 per quarter In Q3 and Q4, we anticipate we will begin to recognize previously deferred revenue in Q1 2024 and beyond.

Speaker 1

Let me move to the balance sheet. We ended the quarter with cash of $862,000,000 down $74,000,000 from $936,000,000 last quarter. The $74,000,000 reduction in cash this quarter includes the accretive actions of Number 1, repaying $114,000,000 in debt and number 2, buying back 3,300,000 shares of SkyWest stock in the open market for $94,000,000 at an average price of $28 per share. During the first half of twenty twenty three, we repurchased 8,400,000 shares or approximately 17% of the outstanding shares of the company for $194,000,000 at an average price of $23 per share. Our CapEx during the Q2 was $31,000,000 We ended Q2 with debt of $3,200,000,000 Down from $3,400,000,000 as of year end 2022.

Speaker 1

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 positive free cash flow also benefits from a lower investment in CapEx than in prior years. We also continue to have well over $1,000,000,000 of unpledged collateral that could be deployed for additional liquidity if ever needed. Our strong balance sheet and strong liquidity continue to be powerful tools to create shareholder value, Tools that have helped us repay over $200,000,000 in debt and repurchase nearly $200,000,000 in stock just in the first half of twenty twenty three. 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.

Speaker 1

We now anticipate achieving GAAP income both in the second half and for the full 2023 year, driven by improved production forecast resulting from favorable attrition trends. We're pleased several elements of our model have improved in the last 90 days. We expect Q3 pretax income to be flat to up from the Q2 results announced today, And we would expect Q4 to be seasonally down from Q3 as usual. Our outlook for block hour production that we expected last Quarter to be down 14% in 2023 from 2022 has improved, which Wade will discuss in a minute. We now expect block hours to be down approximately 11% for 2023 based on improving Captain attrition metrics.

Speaker 1

As I mentioned earlier, strong cash flow enabled us to buy back 8,400,000 shares We're approximately 17% of the company's outstanding stock for $194,000,000 during the first half of twenty twenty three Under our repurchase plan, this is an important data point as analysts rebuild their EPS targets For the second half of twenty twenty three and twenty twenty four, total shares outstanding as of June 30 were 42,400,000 Down from $50,600,000 at year end. As of June 30, we had $186,000,000 available under our current repurchase authorization. There are four points I would like to call out regarding our return on invested Capital trajectory. Number 1, the fleet in place today can accommodate 20% to 35% future growth in block hours Without incremental capital investment, Wade will give more quantification around this in a minute. Number 2, the 17% reduction in shares outstanding in the first half of the year will set the stage nicely for EPS growth as we expect Generate GAAP profitability in the second half and full year of 2023 and beyond.

Speaker 1

We expect CapEx to be down over $300,000,000 year over year in 2023 compared to 2022. And this year's CapEx reduction along with our improving production outlook although still negative year over year Could drive the best free cash flow in 2023 that we have had in the last 5 years. We believe that our strong cash position and the actions we are taking now to prepare the way over the next couple of years For incremental utilization of our fleet, to work through the pilot 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.

Speaker 3

Wade? Thank you, Rob. I'll provide a fleet and production status update as well as an update on our charter and prorate businesses. As discussed last quarter, we are nearing completion of our strong delivery schedule. We have 4 remaining E175s on order.

Speaker 3

We anticipate taking 2 of those in the Q4 of this year, 1 in 2024 and the last E175 in 2025. We also returned 1 partner owned aircraft to that partner during the Q2. This will bring our E175 fleet total 2 39 aircraft. As we previously discussed, we worked with each of our mainline partners to address The increased pilot pay agreement ratified last year. The second quarter was the 1st complete quarter We appreciate all of our partner support and continued confidence in our product with this additional cost reimbursement.

Speaker 3

Let me review our production. The 2nd quarter block hours Increased by approximately 2% as compared to the Q1 of 2023. Based on the current schedules we have from our major partners, For Q3, we anticipate that our block hours will increase by approximately 2% in the 3rd quarter as compared to the 2nd quarter, 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 11% as compared to 2020 2, which is an improvement from the down 14% we communicated last quarter. As we look into 2024 and beyond, We can add approximately 20% more block hours to our ERJ fleet without any additional aircraft.

Speaker 3

The 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, We are very engaged in supporting our efforts to restore production. Let me give a brief update about the status of SWC, 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.

Speaker 3

We are pleased with the progress of our on demand charter business and look forward to the fall when the sports charter demand increases substantially. However, we still have not received commuter authority from the DOT. The commuter authority application is meant to demonstrate the fitness of the carrier in terms Financial, managerial and operational matters among other things. We believe SWC is a well capitalized entity And have 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.

Speaker 3

Once granted commuter authority, SWC will be able to better serve small communities. Regardless of the status of our commuter application, we are moving forward with our plans for SWC 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.

Speaker 3

We have spent the last several years reducing risk 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.

Speaker 1

Okay. Operator, we're now ready for the Q and A.

Operator

Thank Your first question comes from the line of Duane Pfennigwerth of Evercore ISI. Please go ahead. Duane, perhaps your line is on mute. Duane, are you there? Move on to the next question.

Operator

Next question comes from the line of Savi Syth of Raymond James. Please go ahead.

Speaker 4

Thanks. Hey, good afternoon, everyone. The point about and congratulations on the results here. I was kind of curious on the point about kind of being able to increase your block hours, 25% to 30% Without incremental investment, I'm curious if you can share a little bit more about, do you have the pilots Need it to kind of get to that level of increase or like how long would it take to get that increase Into your block hours and what kind of kind of if there are any kind of OpEx cost investments that need to be made as we try to figure out what your once you have At full utilization, what your cost of block cover might look like?

Speaker 2

Yes, Savi, this is Chip. That's a great question. We appreciate it. I think from our perspective, I mentioned a little bit of it in the script. We have a lot of Under utilization within our fleet today and we do need pilots to get the utilization back up.

Speaker 2

As I mentioned in the We believe that this is going to take place over at least an 18 months to 2 year period. I think we've also indicated we're gaining some optimism about what's going on with the trajectory and rates of attrition. So look, we're hopeful. I would also add we're keeping a very close eye on what's going to happen this fall. But as we've seen some trends compared to the previous years 18 months, look, we're gaining an optimism that even that it's going to take a while to produce capping.

Speaker 2

We think we've got a good stable base. We've got some good things in place to make sure that we maximize what we can do relative to the fleet, But it's going to take a couple of years still to get to that pre pandemic very high utilization among our fleet, which has even increased Since 2019 as well. So look, we're hopeful, but we still have to continue to be patient and hope that some of the rates and trajectory turnaround as well.

Speaker 4

Is it so maybe without asking kind of a specific cost of the law cover, is it that given where you're at, you should be able to get Once you're at full utilization, you should be able to get a kind of similar pretax margin as 2019. Is that right or?

Speaker 2

We'd have to see what it looks like because it's going to take a little bit of investment to get there, but we're optimistic that we would be back to the Pre pandemic margins by the time we get our fleet fully utilized.

Operator

Thank you. Your next question comes from the line of Helena Becker of Cowen, please go ahead.

Speaker 5

Yes. Thanks very much, operator. Hi, everybody, and thank you for the time here. So just a point of clarification, are you on the share repurchase program and what you have left, are you thinking of getting the whole program done this Here then, is that how we should think about that?

Speaker 1

Hi, Helane. It's Rob here. So the $185,000,000 or $186,000,000 that we've got left on the current program does not have a specific Time frame for executing it. So, we intend to be somewhat about this, so but no timeframe. But again, as in many years in the past as we've demonstrated, Typically, when we get a Board program approved, it's executed.

Speaker 5

Okay. That's very helpful. Thanks, Rob. And then just for my follow-up question, unrelated, maybe even a follow-up to Savi's. Have you guys looked at What happens if the pilot retirement age is successfully raised from 65 to 67 in terms of the number of pilots Who avoid retirement, and what that does to the ability To continue to get those captains in the left seats, A.

Speaker 5

And then B, the other part of the question is on the charter Is there a political element to the DOT not giving you the approval, do you think?

Speaker 2

Well, again, Helane, thanks. This is Chip. I'll address both of the issues. I think To your first point, we've evaluated the age 65 rule in several different factors. And to us, in our situation With Charter and SkyWest Airlines and what our major partners are hiring, we're largely neutral on what the data is showing.

Speaker 2

I know that there are some special interest groups that are talking about the biggest concern about it is the fact that it does some things internationally with seniority of the list, Which complicates it from the major carrier perspective. From our perspective, we're in favor of it. From a Pure perspective should someone older than 65 fly an airplane, but you have to understand we're coming from the point of view Where we probably have one of the best pilot training and monitoring programs in the entire world. So from our perspective, We have our own bars you have to meet. We have our own programs that monitor all these things.

Speaker 2

We don't believe a birth certificate It's necessarily the key element that's going to make somebody a safe pilot or not, just like we're not sure that 1500 hours is going to do the same thing. We believe in the programs And the safety programs and the training programs that are going to find out how good and how safe pilots are. We there's a lot of 1500 young 1500 hour pilots that do not cut the bar every month here at SkyWest. And so from our perspective, It's a view that we are quite candidly supportive of because of the confidence we have in our training and monitoring program. But I think net net, it's largely we think it would be good for SkyWest.

Speaker 2

On the Charter side, do we think that it's political? I would suspect it is. I fundamentally do believe that the Department of Transportation has a very strong internal priority And they want to solve the solution with small community service. So from that perspective, Us and the DOT are absolutely perfectly aligned in what that overall objective is. There's no doubt that There's a lot of special interest group that don't want us in this space.

Speaker 2

Our objective here is, as Wade said, The on demand charter business is doing really well. We are flying a lot of wealthy individuals as well as sport teams around right now and It's not what we necessarily want to put our priorities at. We 50 plus years ago, SkyWest was built on small community service. We fundamentally Have a passion for that and that's why we're going to do and continue to pursue what we need to relative to Charter. So I think generally we're aligned.

Speaker 2

There's obviously probably our biggest problem is that we're probably the most qualified applicant in Process that the DOT has ever seen from a capital perspective, a safety perspective and an operating reliability perspective. So We thought that it would be easy, but it's definitely harder than what we thought it would be. But we're going to continue to pursue it.

Speaker 5

Okay. Thank you very much.

Operator

Your next question comes from the line of Michael Linenberg of Deutsche Bank. Please go ahead.

Speaker 6

Yes. Hey, good afternoon, everyone, and nice results. Just a couple of quick ones here. The block hours Going from down 14 to down 11. Just remind us at the start of the year, the initial guide, we're looking at what I think it was minus 19.

Speaker 6

Is that where our starting point was and We're at minus 11 now.

Speaker 3

Yes. Michael, this is Wade. Yes, you're right on it. It was 2019 and we have seen as we said in our scripts, It's we've had some positive trends in our captain attrition. We've been able to benefit from that.

Speaker 6

Okay. And then, Wade, on the attrition front, I think I did hear you say that first officer attrition though went up and I or maybe it was Chip who said that and Curious what's the dynamic there on 1st officers going up?

Speaker 2

Yes, I think Michael, I think as We go through this pilot shortage process now. And we talk about pilot shortage, it is absolutely real. Otherwise, Our results would be higher than what it is today, which we like. To the extent that we go through this Journey that we started post pandemic. As time goes on, the demand for pilots sort of changed.

Speaker 2

I don't think there's any doubt what we're trying to do with captains at SkyWest is certainly motivating them to stay. And as that happens, then I think that And I think that the recruiters of the low cost carriers and others have to go down a little bit further from our seniority list and We are seeing some things hit from a First Officer perspective. Now from our perspective of that, it's very easy to replace the First Officer at SkyWest. Honestly, our cadet program and our long term classes can be full for several, several months based on the candidates we see out there. We don't like as much churn as what we have.

Speaker 2

And so look, we're doing some things internally and with some various programs with our partners to make sure that we have People that are going to be willing to stay here longer, if their eventual objective is to go to our major partner, which By the way, that will be our long term objective for both captains and first officers is to make sure that we have programs aligned with going from directly from SkyWest Directly to a major carrier. And then, admitting that it's taken us some time, but I think there's going to be some very cool things come out here in the next month or 2. So It's just it's a journey. And I think the fact that first officers are a part of the thing that we see an uptick, it does give us confidence that we're at least on the right pathway, although we're not done, Making sure we're retaining the captains in a better fashion than we want because we're very, very invested in that.

Speaker 6

Great. And just if I could sneak in a quick tax question for Rob, I heard that effective tax rate of 13%. How should we think about that for the rest of the year? And Rob, when you gave us the earnings guidance for the next two quarters, You're referencing a pretax number, right? Not an after tax or an EPS.

Speaker 6

You're looking at pretax, just to clarify. Thank you. Thanks for taking my questions.

Speaker 1

Sure. Yes, Michael, the comment on next year is that we expect to be GAAP profitable in The second half and for the full year, so that would be pretax and EPS, both. And then on the tax question, As you know, when your numbers go from negative to positive during a year, It's a little funky with tax rate. So the tax rate for the 2nd quarter was 13%, Which is obviously a little below what a normalized rate would look like. We expect that Q3 will also be unusually low And then Q4 will pop back up.

Speaker 1

And then 2024 and 2025, we think that we'll start to get back To a more normalized tax rate, but for now, 13% is a little lower than expected, That's why some of the volatility there.

Operator

Thank you. Your next question comes from the line of Catherine O'Brien of Goldman Sachs. Please go ahead.

Speaker 7

Hey, good afternoon, gentlemen. Thanks for getting me on. So maybe just first a follow-up to Savi's question On upside to block hours at full utilization on your ERJ and CRJ fleets. Are all those aircrafts you're talking about multipart ones, so forgive me in advance, but are all of those aircraft currently on contract, 1? And then 2, I know you removed some of the minimum block hour language in your contract recuts, but obviously the industry is short capacity.

Speaker 7

So I'm guessing Your partners who want to flex up as much as you can. But I guess do you agree on that? And then 3, If your staffing issues were solved tomorrow, would we see the ERJ fleet start flying 20% more And the CRJ's are flying 35% more or are there some other things that go into equation that we need to solve besides testing? Thanks so much.

Speaker 3

Yes. So, Katy, just I'll tackle a couple of these questions. So, the first one was, just on the fleet itself, Are all of those airplanes currently under contract? And I'll answer it a couple of different ways, right? The ERJ fleet, Yes, 100% of those airplanes are under contract.

Speaker 3

The CRJ fleet, there are some CRJ200s That we have had that are no longer under contract and are parked in the desert and would require some maintenance on. And so as far as bringing up the fleet to full utilization, what I will say on that is the ERJ fleet, all of them are flying today. They're all being maintained today. And so to get to that level of utilization, if we have the pilots available, yes, those could be flexed up very quickly and staff. There would be no maintenance constraints.

Speaker 3

On the CRJ side, we would need to definitely spool up some of our MRO capacity To get all of the benefit of that CRJ utilization, but the ERJ would be ready to go, as soon as we have the pilots to staff that. So, Chip, I'd

Speaker 2

Yes. And Katie, this is Chip. Just on your third point there about if our attrition sort of solved itself, How fast do you get back to those pre pandemic utilization? I would say, it depends on what your definition of We had a fair amount of attrition back pre pandemic that we are accustomed to. If it got back down to those levels, We're still, as we've talked about the last couple of years, in a deep hole.

Speaker 2

I mean, I don't think that we're not Serious about some of the communication we put out there about small communities that we've had to get out of because this situation is real And it's going to take us some effort to get out of. But if our attrition went to 0, we'd be very optimistic at which the Speed that we could get the utilization back up. But we continue to evaluate what the fall looks like. We continue to evaluate what the Holiday season and the middle parts between those look like so that we can give some better projections for 20 24 and beyond. But, I think you know that we're relatively conservative about our view about this And we're going to continue to be that way until we start to see some really good data further out on the horizon.

Speaker 2

But we're still look, we're still optimistic. And there's and I think to your point and your question is, is there is a tremendous amount of capital investment free upside in our business model Relative to the pilot recovery process that we're going to have over the next couple of years.

Speaker 7

That makes a lot of sense. Thanks so much. And then maybe just beyond listen, we saw 18 to 24 months as you said of upside from just utilization. So I do not want to underplay that. But longer term, as we look forward, maybe over the next 3 to 5 years, what do you think are the main buckets of Earnings growth from that point on.

Speaker 7

Is it adding net aircraft? Is it the impact of your charter and leasing businesses? Are there more accretive opportunities to buy aircraft off lease? And I guess I'm speaking about net income versus EPS, which Obviously, could continue to see upside from share purchases. Thanks so much.

Speaker 2

Yes. Katie, that's a great question because I think that The answer to what you're looking for, for the opportunities beyond the next 2 years is still continued all of the above of what we've been doing 7 years. There's no doubt there's some things we need to do with shareholders and number of shares that we have. We're likely To do those programs, based on the fact that we have invested so much in the model, in our people and in our partners, Even post high utilization, I can tell you we are very optimistic once we get a further good String of supply of pilots that all the things that we've done in the past 7, 8, 10 years are going to continue to have even greater opportunities in the future. And I hope that doesn't sound too optimistic.

Speaker 2

But from our perspective, I think that we've done some things right through the pandemic. And since the pandemic, We've made all the investments in all the right things. And again, as we say, we play the long game. So we're actually playing the long game beyond the next 2 years And we're optimistic about what both Charter and SkyWest Airlines can do with these 4 amazing partners With the best aviation professionals in the world. So look, we're pretty optimistic over the long, long game as well.

Operator

Thank you. Your next question comes from the line of Savi Syth of Raymond James. Please go ahead.

Speaker 4

Hey, thanks for the follow-up. Just curious, you called out your operational performance, which has been really stellar. And if I look at it, Partially there's a benefit on geography and not having as much more exposure to the Northeast. But if I look at some of your kind of competitors, They aren't doing as well on that. Is there something that's kind of different other than geography that's Driving SkyWest to kind of perform that much better.

Speaker 4

And are you seeing that in your conversations with partners and maybe perhaps a willingness to Can I give more responsibility or opportunity as things recover to take on more flying?

Speaker 2

Yes. I think Savi, 1st and foremost, I'm going to challenge your geography question a little bit. I mean, we talk a lot about The Northeast Corridor and I get all of that stuff. We still have 4 partners spread out all over the United States And we're always impacted by something, at least at 1 or 2 places every single day And holding 4 separate partners together as far as we're spread out is a feat as opposed to just flying in the Northeast quarter. And I get All of those elements.

Speaker 2

That having been said, I'll be very deliberate in my answer to that. We've learned hard lessons over the last 4 or 5 years relative to capacity and investment, and I know a lot of others have learned them this year. But I think We pride ourselves on agility. We pride ourselves on creativity and execution. And I will tell you that the investments that we've made Have all been centered around making sure that we take care of our people and our people want us to be an outstanding performer.

Speaker 2

We only recruit people that want to perform. We only want to hire folks that want to perform and that take Pride in the fact that we invest in the right systems. And look, we benchmark ourselves not against other regional carriers or low cost carriers. We benchmark ourselves In our investments, in our programs, in IT and everything against major carriers like our partners, the best carriers in the world, United and Delta and Alaska and American, that's our benchmark and we still want to even exceed them because we have the challenge of dealing with All 4 of them from a dispatch perspective when they're having the same storm that we are. So for us to be where we are, I think is, I will admit probably the biggest windfall is we do have a lot of assets that are not utilized as hard as they could be.

Speaker 2

As we get our utilization back up, I think that's going to be a challenge just because we surely have a lot of airplanes. That having been said, I think we've become a lot more sophisticated about the partners that we work with. From a vendor's perspective, I think our culture has gotten a lot better over the last 2 to 3 years. And I just can't say enough for the engagement on our team. Our team is absolutely second to none.

Speaker 2

I'll put them up against anybody, particularly when there is a challenge from senior management to mid level management To the frontline employees, the only thing I can say is that they're among the best in the world and they continue to deliver. So that's our secret Right there. And it's probably not as eloquent as you want, but it's pretty straightforward.

Operator

Thank you. We have a follow-up question from the line of Michael Linenberg of Deutsche Bank. Please go ahead.

Speaker 6

Yes. Just a quick one, Team, the on demand charter business, which I know has now been running up up and running for several months now, what are we talking about Sort of magnitude wise on its contribution to top line, is this a $10,000,000 or $20,000,000 annual business? Is it different than that? I'm just Trying to get a feel from a modeling perspective. Thanks for taking the question.

Speaker 3

Yes, Michael, this is Wade. As you said, this business Just getting up and going and we're filling the we're testing the demand right now. And so we are definitely seeing that the fall And winter and spring are definitely busy seasons, right? And so we're staffing up for those times. We're working towards those.

Speaker 3

So we really we're still exploring what that's all going to be right now. We've got Airplanes ready, we've got pilots ready, we've got flight attendants ready to go. So as far as the top line number, at this moment, I think we're going to Hold off on giving any of that kind of stuff. We need to test and see what the demands are, but the preliminary indications is that it's going to be strong and it's going to be good. We're excited about that and we'll see where it goes this fall.

Speaker 2

Yes, Michael, this is Chip. I'd only add, I think that's good answer from Wade, but I would only add that this year it's not likely to make money because we are so heavy on cruise. I mean, we are stacked with pilots in this entity right now. We have almost 100 pilots in there and there's not enough flying for those almost 100 pilots and We have a very strong cadre of pilots that want to be a part of this organization. So Financially, it's not terrific right now.

Speaker 2

We think that it will be, as soon as we get some things in place with the DOT. But The commitments and everything that we've made to communities and what we're trying to do, we're investing in it now. It's not like we're going to invest in it later.

Operator

Thank you. We have a follow-up question from the line of Catherine O'Brien of Goldman Sachs. Please go ahead.

Speaker 7

Hey, thanks for letting me back on here. So maybe just digging into demand from your partners a bit more, can you just walk us through what percentage of your fleet Coming up to the end of its contract term over the next couple of years and how conversations on extensions are going. And then A lot to tackle as we already covered on getting back to full utilization. But from beyond there, Are your partners talking about adding net aircraft to SkyWest over the coming years? Is that a function of regional Growth there or is that share shift?

Speaker 7

Multi part question again for me. I really appreciate the color. Thanks.

Speaker 3

Yes. As far as the demand and the fleet renewals, in the Q, we do give a little bit of information about when some of our Contracts expire. We have a handful of airplanes that are expiring at the end of this year. We have some next year in 2024. But our 175s, which is the backbone of what we do right now, we signed up for 12 year contracts.

Speaker 3

The first expirations aren't for several more years on those, and so those are out there. As far as the conversations go about Renewals are very good. All the partners are very supportive on renewing. They want the fleets to be up. They want them to be I'm ready to go.

Speaker 3

So we are having great conversations with all of our partners about continuing to get the fleet where it needs to be and going. And so the conversations are very good with the partners. The demand is still very strong from our side. About fleet renewals, the growth, we are always having conversations with our partners about not only Our current fleet, about future fleets, about refreshing our existing fleet, so those conversations are always ongoing And they're ongoing today as well. So, the partners have been great and they're very supportive of what we've got going on.

Operator

Thank you. There are no further questions at this time. I will turn the call over to Chip Childs for closing remarks.

Speaker 2

Thank you again for everybody to joining us today and we really appreciate your interest. I think from the call you can We feel like we've got some very good momentum in some critical areas. Again, I want to reiterate a couple of things just briefly. One is that we continue to invest In the long game of our future and think that the things that we've been doing in the past are going to continue to magnify opportunities in the future. Lastly, I want to reiterate what we've talked about on the call relative to our people and our performance.

Speaker 2

At times, we get questions about what are your future Long term, short term, I can tell you we've got just the best partners to work with and we have the most amazing Group of people that are vested in the success of SkyWest now as much as ever and we're humbled by that opportunity and take it Seriously and hope that we can do what we need to return that value to all of our partners, people and shareholders. And with that, we appreciate your interest and we will talk to you next quarter.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
SkyWest Q2 2023
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