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spk08: Good afternoon. Thank you for standing by and welcome to the SkyWest Inc. Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Rob Simmons, SkyWest's Chief Financial Officer. Thank you. Please go ahead.
spk00: 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. 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 only. Eric? Eric?
spk01: 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. 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 2020 Form 10-K and other reports and filings with the Securities and Exchange Commission. And now I'll turn the call over to Chip.
spk06: Thank you, Rob and Eric. Good afternoon, everyone, and thank you for joining us on the call. Today we announced agreements for 12 additional aircraft, including 11 more CRJ-700s for American and one more E-175 for Alaska. That E-175 is in addition to the eight others for Alaska that we announced last quarter. These agreements reflect the current work we're doing to help lead the recovery as well as the importance of the dual-class fleet in that effort. We placed six CRJ700s into service during the second quarter while securing extensions on over 50 aircraft with various partners to minimize our risk. Overall, we continue to make meaningful progress on our fleet transition during the quarter by adding dual-class aircraft, enhancing fleet flexibility, and mitigating risk. During the second quarter, we reported pre-tax income of $81 million and net income of $62 million. The pre-tax results include $114 million in payroll support program grants, as reflected in our operating results. This improvement is a result of significant increase in production since last year and a 17% increase over the first quarter. While we continue watching the COVID-19 data closely, We believe our fleet will remain critical in the recovery, even if that recovery slows. Our strong balance sheet and cash position remain key differentiators for SkyWest. Based on what we're seeing today, we expect demand for our product will continue to increase and currently anticipate reaching pre-pandemic levels by early 2022. The quarter's revenue was up 23% from last quarter and up 88% compared to the same quarter last year. As we've witnessed, demand is returning first domestically and particularly in the size of markets that we serve. We continue to prepare for and invest for the long term, and this includes significant investments in maintenance and building reliability into our fleet. Maintenance costs associated with that investment and with bringing used aircraft into service remain elevated, and the volume and duration of these maintenance events are much higher than they've been historically. We expect these costs to plateau this year before trending back down next year. We continue our efforts to lead the recovery by working to provide the best possible product for our partners and customers. This has not been a simple task as operations across the industry have increased against a nationwide backdrop of fuel supply issues, MRO provider delays, and general infrastructure challenges from hotel staff to ground transportation. These issues have affected the entire industry and we're certainly not immune to those challenges. Operational performance remains a focus. And despite the clear difficulties associated with an uneven recovery, we achieved 99.96 adjusted completion for the quarter with nearly 100,000 more scheduled flights than the same quarter last year. We're working across all areas of the operation to ensure we're continually adapting to the changing climate and responding to what our partners need from us. I want to thank our incredible team of professionals who continue to demonstrate flexibility, teamwork, and dedication to delivering an exceptional product in any situation. Taking care of our people remains a priority at SkyWest. We have never furloughed a pilot, flight attendant, mechanic, or dispatcher in our nearly 50 years. a claim we are especially proud of after the most difficult year in our industry's history. Additionally, we have fully resumed our hiring and our pilot pathway and mechanic apprentice programs and are again accepting new participants, which is great news for the many aspiring aviation professionals across the nation as well as for the industry. We're very focused on staying proactive and continuing to attract the best professionals as we navigate through the end of this pandemic and beyond. In summary, while we are still below 2019 levels, we remain optimistic about the shape of the recovery so far, and we are confident our fleet will continue to fill a critical role in the return to travel. We're focused on remaining aggressive and deliberate to take care of our people and our customers as we preserve our liquidity and execute on the recovery to emerge as a better, stronger business. Rob will now take us through the financial data.
spk00: Today, we reported second quarter net income of $62 million, or $1.22 of diluted earnings per share. Q2 pre-tax income was $81 million. Our diluted share count for Q2 was 50.7 million shares, and our effective tax rate in Q2 was 23.8%. First, let's talk about revenue. Total Q2 revenue of $657 million is up 88% from Q2 2020, and is up 23% from last quarter. Q2 2021 revenue is only down 12% from Q2 2019 as the recovery continues. Our Q2 block hour production was up 17% sequentially from Q1 compared to the 23% sequential increase in revenue. Q2 revenue breaks down with contract revenue up 76% from Q2 2020 and up 20% from Q1. We have temporary partner revenue concessions impacting Q1 and Q2 of 2021 and in Q2 2020 for comparative purposes. Q3 will likely be the last quarter with temporary revenue concessions. Pro-rate revenue was $103 million in Q2, up 185% year-over-year, and up 50% from last quarter due to seasonality and the recovery of the industry. As we have previously said, pro-rate revenue is nicely levered to a demand recovery. Leasing and other revenue is up 76% year-over-year and 3% sequentially. These gap results include the effect of a deferral of $6 million of revenue this quarter compared to $21 million deferred during Q1. As of the end of Q2, we have $138 million of cumulative deferred revenue that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals and the reversal thereof into revenue depends on the shape and cadence of the recovery of our flights. All deferred revenue will be reversed into revenue by the end of the various contract periods. At this point, it appears likely that we will begin reversing some deferred revenue in the second half of 2021. Let me move to the balance sheet. We ended the quarter with cash of $956 million, up from $836 million last quarter. Our CapEx during the second quarter was $16 million for two used aircraft, spare engines, and other fixed assets. Our expectation for 2021 CapEx is approximately $600 to $650 million, including the purchase of 18 new E-175s later this year under our previously announced contract with American. This compares to $438 million in CapEx in all of 2020. We ended Q2 with debt of $3 billion, down from $3.2 billion as of year-end 2020. Our debt net of cash is lower as of June 30th than it has been since Q4 of 2017. Let's talk about liquidity. As of June 30th, 21, our cash position was $956 million, including the effect of of having repaid fully the $60 million outstanding under our CARES Act secured loan. We made the decision to cancel that $725 million government loan facility, which released $1.5 billion of pledged collateral back to us. We also have approximately $40 million available on our bank-revolving line of credit. During Q2, $114 million in PSP3 grants was recognized as income in the form of a contra expense laid out clearly as its own line item in our P&L. This is a change from grant income of $193 million recognized in Q1. We would expect a similar grant P&L benefit in Q3, as in Q2, absent any PSP3 top-up amounts. $45 million of the funding of PSP-3 this quarter was in the form of a low-interest 10-year unsecured no amortization loan. We now have a total of $201 million in PSP loans. In total, we have issued 785,000 warrants to Treasury with exercise prices ranging from $28.38 to $57.47. At the beginning of the year, with cash of $826 million, we estimated that we would burn cash in the first half of 2021 at a rate of about $250,000 per day or $7 million per month. Based on June ending cash of $956 million, we are pleased to have achieved better than our target for the first half. As previously discussed, we completely repaid the $60 million CARES Act secured loans during the quarter. We also placed another $60 million in deposits during the first half toward future aircraft deliveries. During Q2, we received $285 million in PSP funding from the government before the payment of related temporary concessions to our partners. Depending on the pace of the recovery, we expect to generate meaningful cash from operations and EBITDA in the second half of 2021. If the economic effects turn out to be worse and the recovery slower than we currently expect, We have additional liquidity tools we can call on, including our cash balances, our revolver, and the $1.5 billion of unpledged collateral that we have now freed up from the decision to let the CARES Act facility expire. In addition to our strong core liquidity position, we are expecting 21 and 22 to be years where we continue to focus on our balance sheet. As of 6-30-21... Our net of cash balance is actually $416 million lower than it was as of 12-31-19. In 2021, we expect to repay over $400 million in principal debt balances related to existing aircraft financing. Of course, we continue to expect to take delivery of additional aircraft in 21 and 22 that, as usual, will be financed with long-term debt financing. But over the next couple of years, we expect to reduce both our absolute debt balance along with our calculated leverage while maintaining strong liquidity. Including partner-owned aircraft, over 50% of our fleet in service now has no financing obligation. Especially in times of great uncertainty like this and consistent with our policy and practice, we are not in a position to give any specific EPS guidance at this time. But let me give you a little color. On a GAAP basis, including the net benefit from PSP grant income, less temporary partner concessions, we expect Q3 to be similar to our Q2 GAAP results. Q4 is not expected to have any net PSP benefit and will likely be much lower than Q3, but still EPS and cash flow positive. Continued headwinds to our model include several factors I'd like to call out. Number one, our prorate business was still slightly unprofitable in Q2. Wade will talk more about this in a minute. Number two, maintenance expense was down $13 million from Q1 as we continue to prepare our fleet for ongoing and future customer demand. Maintenance expense for the rest of 2021 will likely continue at approximately $200 million per quarter before finding a lower new normal level in 2022. Number three. Deferred revenue was $6 million in Q2 2021 and is now a cumulative $138 million. And number four, COVID is still creating some uncertainty about the shape and timing of the recovery. And now some tailwinds. Number one, deliveries of new growth aircraft are not far out, with 20 American 175s, nine Alaska 175s, and 21 additional 700s going into service with American. Number two, deferred revenue may begin reversing later in 2021, pending the timing of the recovery. We are excited that the actions we are taking now and expect to take over the next few quarters are setting us up nicely for the new normal in the future. Wade?
spk03: Thank you, Rob. I'll provide a fleet and production status update as well as an update on our prorate and leasing businesses. To update my partner, today we announced an agreement to add 11 CRJ-700s with American. We anticipate these aircraft will be placed into service beginning late 2022 through the middle of 2023. We also extended 22 CRJ-700s with American for another three years. those 22 aircraft were beginning to expire in the back half of 2022. During the first half of 2021, we put 15 CRJ-700s into service with American. Including those announced today, we still have 21 more CRJ-700s to add to our contract, bringing our American CRJ-700 fleet total to 101 by the middle of 2023. The majority of these CRJ700s have been in long-term storage for the past few years and require extensive maintenance work to return to service. Also with American, we have 20 new E175s scheduled for service next year, with delivery scheduled from Q3 of this year to the fourth quarter of 2022. Together, these E-175s and CRJ-700s will bring our total American fleet to 121 by the middle of 2023. We also announced an agreement with Alaska to add one more E-175 in addition to the eight we announced last quarter. We expect to place eight of those aircraft into service during 2022 and one aircraft during 2021. the first half of 2023, bringing 41 total aircraft under long-term contracts with Alaska. We have also extended the current fleet of 32 E-175s, which put all of these aircraft under contract with Alaska for the rest of this decade. Let me talk briefly about our United agreement. As of June 30, 2021, we have 179 aircraft under contract with the United. This includes 90 E-175s, 19 CRJ-700s, and 70 CRJ-200s. Our CRJ-200s start to expire towards the end of 2024. We have no debt left on these aircraft, and we believe the book value of these assets approximates the part-out value of the aircraft. During the quarter, we worked with all of our major partners on a third round of contract concessions that included temporary rate reductions. These concessions are reflected in our second quarter results and will also be reflected in our third quarter results. all concessions will expire at the end of the third quarter. Let me review our current production. During the second quarter, our completed block hours were down by approximately 13% compared to the same quarter in 2019. Based on the current schedules we have from our major partners for the third quarter of 2021, we anticipate that our block hours will increase by approximately 13% compared to the previous quarter. As we look at the fourth quarter, we anticipate that our block hours will be approximately 3% lower than Q4 2019, pending continued improvement in the recovery curve. The E175 fleet continues to fill an important need for our major partners. While the majority of the reduction in block hours have been on the CRJ200 fleet, our Q2 E175 block hours were up by 12% compared to Q2 2019, while our Q2 CRJ200 block hours were down by 44%. Let me talk a little bit about our prorate business. During the second quarter, our prorate revenue decreased by 24%, or approximately $33 million compared to Q2 2019. As we see demand continuing to recovery, we anticipate our prorate revenue to increase by 20% as compared to Q2 2021. Our prorate model is nicely levered to the recovery. With prorate revenue down 24% as compared to Q2 2019, we continue to expect that incremental revenue coming back to the prorate business will have attractive margin characteristics. Let me shift gears to our leasing business. We have previously announced that we signed a purchase agreement to acquire 13 additional used CRJ-700s. As of today, we have closed on eight of the 13 aircraft and expect to close on the others throughout 2021. With the contract announced with American Today, all of our CRJ-700s are either under long-term flying agreements or long-term leases to a third party. Following the purchase of these 13 aircraft, we will own or control 169 CRJ700 aircraft. The CRJ700 is an exceptional asset that will continue to set SkyWest apart with strong demand from our major partners. Let me talk briefly about our current maintenance expense, which continues to run higher than our historical norms. This increase is primarily due to the recovery of our flying and bringing the aircraft for the American agreement out of long-term storage. We currently have over 30 lines of heavy maintenance at our third-party providers, and the ramp-up of these suppliers have been slower than anticipated. To provide some context, this level of maintenance is unprecedented in our history. We anticipate that we will continue maintenance at roughly these levels through the end of this year and expect to trend down starting next year. We have spent the last several years reducing risk and enhancing fleet and financing flexibility to ensure we're well positioned. We are committed to continue our work with each of our major partners to provide creative solutions as we work toward full demand recovery.
spk00: Okay, operator, we're ready for our Q&A now.
spk08: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, you may press the pound key. Please stand by while we compile the Q&A roster. Your first question comes in the line of from Raymond James. Your line is now open.
spk10: Hey, good afternoon, everyone. I guess on the CRJ side, there were news reports that possibly SkyWest was talking to Bombardier about starting up, building those new CRJ 700s. And I know you've been collecting a lot of them here. Just your view on kind of the outlook for the CRJ 700 and what more you'd like to do in that area?
spk06: Well, Savi, this is Chip. Thanks for your question. It's a good question. I think that there's always a fair amount of information floating around, given what we would like to see or some things that we would like to continue to pursue. As you know, we're deeply invested in the CRJ fleet. I can tell you from our strategic perspective, we're doing a lot of things you know trying to anticipate what we can do long term to sure up this fleet um right now we're in a big process of taking a lot of 175 aircraft we love that aircraft but in the event that we you know continue to see strong demand across the board for the regional space which we do believe post pandemic um we'll be talking to a lot of people about you know ways in which we can refleet um So I wouldn't say there's a tremendous amount to substantiate, but certainly some of the rumors are consistent with what our strategy is, is to find ways in which we can continue to provide great service to our partners in the flying public.
spk10: That's helpful, Chip. And then if I might ask on the pilot side, just curious, I know you talked about bringing the training back, starting hiring. What are you seeing in terms of attrition with the legacy partners starting to hire here again and your expectations into what might need to be done over the next year or two to make sure you have the right staffing levels?
spk06: Well, I think that's a good question as well. This is Chip. I think back to the point I think that we've talked about the last couple of quarters, we're blessed to have a great culture at SkyWest. We are very deliberate pre-pandemic in the pipeline that we developed relative to identify and recruit the best recruits in the entire industry. And from our perspective, you know, we are full, we're full set on moving forward at levels that are as strong, if not even stronger than in the 2019 level and pre-pandemic. We've said a couple of quarters ago, I think last quarter specifically, we're amazed at the interest in SkyWest. Our pipeline is extraordinarily full. With that being said, we certainly do anticipate some different levels of attrition that we've seen in the past, primarily because of the circumstances of coming out of a pandemic and some of the things that the major carriers have done. But at this point, you know, we're going to lean on a tremendous culture to Some of the comments that I've mentioned in my script about, you know, how we feel about good, strong professionals here at SkyWest and then our priority of taking care of them, which is a big part of what we're trying to do during this busy season. And, you know, a very strong pipeline and interest out there. We feel very confident in the things that we can do in the next couple of years and maybe even capitalize in the industry.
spk10: Just to follow up, Chip, on that, is it fair to say that your attrition rates aren't any different right now, like you haven't really seen it step up?
spk06: No, we've seen a step up certainly since last fall. We've seen sort of a steady increase in attrition, but the starting point last fall was relatively low. So our anticipation is going to be consistent with what we've been working on with our pipeline in the 2019 levels. We're certainly not there yet, but we anticipate that we may very well need to plan for that. But again, the focus is still making sure that we're identifying a very good, strong pool of candidates today.
spk08: Excellent. Thank you. Your next question comes in the line of Mike Lindenberg from Douche Bank. Your line is now open.
spk07: Oh, hey. Good afternoon, everyone. Just a couple questions here. Wade, I want to just talk about on the pro-rate business. You talked about it having, you know, attractive margin characteristics as it ramped back up. You know, I guess this last quarter, revenue was down 24% versus 19. And then I think you guided to the third quarter being up 20% versus 2Q 2021. So we're getting back there. But with that type of improvement, is... Will prorate be profitable or do you still, you know, is it another quarter or two of improvement to get back to, you know, these attractive margins that you mentioned? What's the timing there?
spk03: Yeah, Mike, so this is Wade. Yeah, so as we said, you know, you've got those numbers right on. You know, we are down 24% compared to Q2 2019. You know, we're not profitable this quarter, you know, in Q2 2021 in pro rate, and I think Rob said that in his script. But, you know, as it continues to improve, you know, all the costs, and the reason why we say that it has attractive margin characteristics, because all of the costs are essentially in our model right now, and as the revenue comes back, it's just, you know, it's revenue without any cost. And so that's why it has attractive margin characteristics. And so we will get, you know, it'll probably still be a couple more quarters, but we'll, you know, we're starting to see some very good bookings, and, you know, it's trending in a very good direction, so. Okay.
spk07: And can you remind me, how many airplanes are there now? What is it, like 50, 60 airplanes that were in prorate?
spk03: Yeah, somewhere in that range. It's probably a little above 60 right now. Okay. Okay, that's helpful.
spk07: And then just on the deferred revenue, Rob, you indicated that we could see a turn in the second half. And I guess presumably since this deferred revenue is tied to multiple contracts, I guess – we could see some reverse before others. And so I guess in the back half of the year, you're going to give us a net number. Is that how we should think about it? Because not every single contract is structured the same way.
spk00: Yeah, that's right. When we record that deferred revenue, you'll see that as a single net number. But yeah, we do expect that in the second half of the year, we'll likely start to see the reversal of that $138 million of cumulative deferred that we've put on our books, you know, during this COVID window.
spk07: Okay, great. And then just lastly on the extensions, congrats on getting lots of different extensions there, 175s, CRJ 700s. How do you shake out now with respect to tail risk? Previously, where were you with respect to, like, coverage? You know, as I recall, you always were in a very good position lining up you know, the liabilities on the aircraft when they came due with when the contracts ended. And now that you've been able to extend some of these contracts, I suspect that your tail risk situation is even better. Is there any way that you can just give us some color on maybe how that shifted because of some of these recent wins on extending on current airplanes? Thanks. Thanks for answering my question.
spk03: Yeah, Mike, this is Wade. I think last quarter we talked about tail risk a little bit and said we had approximately about $100 million of tail risk, you know, on our fleet. And that number obviously got better recently. this quarter, right? So it's gone down. We still have some very small pockets of tail risk that are out there, but we are, you know, very optimistic that we'll be able to work with our partners to extend those airplanes and continue to fly those, you know, with our partners. So I think we've got a lot of that covered off.
spk07: Great. Very good. Thanks, everyone.
spk08: Your next question comes from the line of Katherine O'Brien from Goldman Sachs. Your line is now open.
spk02: Hey, good afternoon, everyone. So, you know, the theme of this earnings season for the U.S. airline industry seems to be that demand is coming back faster than expected and airlines are just ramping up capacity more quickly than even planned several months ago. I know you had these additional 10 aircraft announced today. But just thinking through the puts and takes going forward, some of these legacy carriers retired, you know, meaningful portions of their fleets. Right now they can kind of backfill with stuff, you know, aircraft that might be typically used in international, but maybe that changes next year as international demand comes back. Like, can you kind of give us some color on the conversations you may or may not be having on incremental lift for next year to maybe help plug some of these capacity shortfalls? Thanks.
spk06: Yeah, Katie, this is Chip. That's a very good question. I can tell you right now the dialogue that we're having with all four of our partners is extremely positive. There is some, I don't want to call it confusion, but we're certainly with the strong demand of the summer and with some of the things that we've outlined in the script, the challenges that we have just kind of from an infrastructure basis, We're looking at all the opportunities with our eyes wide open, making sure that we are doing the things we need to with people inside and outside of SkyWest to be able to deliver what our partners want. I can tell you right now that some of these external challenges are you know, having an impact on what we feel like we can do in the near term. But we're optimistic in 2022 that, you know, we can work through some of these things, the fuel shortages, you know, some of the hotel issues and that type of stuff to where we can get back to having a really, really solid product. Because we get a little bit – I don't want to say we get nervous, but we get cautious when we don't have all things running in a very fluid and efficient manner. That's why we're spending so much time and effort relative to a reliable fleet and making sure that we've got everything moving in the right direction. We also have interesting conversations. You know, if we would have seen this world 12 months ago, we probably would have done a couple of things different. We probably would have done some different things with maintaining aircraft. But in summary... Katie, the overall conversation with all of our partners is very positive about Lyft, and we're focused internally to make sure that we have the processes that are stronger than what they even were back in 2019 when we were performing so well, to get back to that performance, you know, in 2022. So, you know, I think that there's some good color around all these conversations with the partners. There's good, strong demand that we're cautious about, making sure that we're delivering what we've always been able to deliver.
spk02: Got it. And then maybe, you know, last quarter you noted that concessions largely offset PSP funds. and that netting these two impacts would result in a close to breakeven June quarter result. You obviously did better than that. I guess first, what drove that? And then going forward, do you still expect concessions to largely match PSP? Because you noted earlier that you expect fourth quarter EPS to decline versus third as PSP rolls off. But if your concessions match the PSP, why would that be so? A little bit of a complicated question. I hope I explained it well.
spk00: Hey, Katie, it's Rob here. So, yeah, let me just say, look, we're not going to get into the details of partner concessions, but what I can say is that, you know, what you see in the gap results in Q2 will be very, very similar to what you see in Q3. You know, the gap grant income that was recognized this quarter was was about $114 million. It'll be very similar next quarter, as well as the the partner concessions will be similar quarter to quarter. So I think that's really all we can say about that. By the time we get to the fourth quarter, some of this noise will be behind us, and it will be a little more straightforward in the fourth quarter.
spk02: Okay. Maybe if I could sneak one quick last one in. Your current liquidity balance is running higher than normal, like much of the rest of the industry, just given COVID uncertainty. In the release, you noted a number of deliveries over the next year or two. You plan to debt finance. Would you consider paying for these in cash to speed up deleveraging, given your current cash balances? Or are those very positive conversations with your partners we just talked about leading you to want more dry powder for other growth opportunities? Thanks so much.
spk00: Yeah, Katie, we're obviously, you know, one of our big jobs is to make sure that we're deploying capital in the most effective, you know, way possible. You know, we were pleased, you know, that, again, our balance sheet is looking very nice, you know, with our debt net of cash down $400 million from our pre-COVID, you know, level going into that. So, look, I think that you know, we will look at opportunities to deploy our cash in a way that's very shareholder-friendly and, you know, consider all of our opportunities there.
spk08: Your next question comes in the line of Juwan Fenningworth from Evercore ISI. Your line is now open.
spk04: Hey, thanks. Just to follow up on Katie's question, because I think it's a good one in trying to get to what the earnings power of the business here. If we just peel back PSP and concessions and deferred revenue and all these moving parts, with block hours down 13% in the 2Q and maybe having a shot of being close to flat in the fourth quarter, what is the underlying kind of core operating earnings here?
spk00: Well, one thing I can say, Duane, is that if you look at our results for the quarter, if you strip out the noise from PSP and partner concessions, we were still profitable. And as we indicated in the prepared remarks that we are anticipating that Q4, while it won't have, obviously, the benefit of some of that grant income, we do expect Q4 to be profitable and cash flow positive. So I think we're emerging at this point with a model that looks pretty good. As Wade mentioned a little bit in his prepared remarks earlier, maintenance will likely continue to run a little hot through the rest of the year and then begin to find a new lower level in 2022. So as some of these things start to normalize again, as our prorate business sort of comes back to a new normal level, as maintenance expense finds a new lower level, we feel like we're nicely set up going into 2022.
spk04: Okay. And then on the comment about if everything goes right, and we're not asking you to predict the future here, but if everything goes right and you're sort of back to quote-unquote normal in early 2022, based on what you've booked in terms of growth, what sort of block-hour growth would we be looking at in 2022, just kind of big picture?
spk03: Dwayne, this is Wade. Obviously, we've talked about some of the things that we have on our books right now. We have the 21 CRJ 700s for American. We have... And 10 of those are going to come in in the fourth quarter. Then we also have some 175s. We're not going to give specific guidance right now, but there will be some improvement from where we're at today and where we anticipate in the fourth quarter. But we'll continue to update you. As we see the demand recovery continues, it's still a pretty fluid market out there.
spk04: Okay, that's fair. And then maybe just lastly, can you help us understand – what is it that drives, sorry, the deferred revenue kind of flipping from deferred, you know, to recognize what is the event that causes that to happen, just practically speaking? And, you know, what sort of pacing, you know, what's the range of pacing on that $138 million, you know, in the back half of the year? You know, what could that be on a quarterly basis if it flips?
spk00: Yeah, Dwayne, so that $138 million that we've deferred cumulatively, that will unwind, you know, by the end of each individual contract that's part of that, and there are many contracts that make up that $138 million. So, you know, the timing of the unwind, you know, again, depends on the underlying contract and the volumes that and block hours that were flying under those contracts. The original point of the deferral was that our original volumes were so much below what was originally expected. As those volumes come back, that's what's going to create the reversal point and then eventually the complete unwind of that. But, you know, under no circumstances will that revenue not be unwound by the end of the contract period. So, you know, in other words, you know, it'll be unwound over the next, you know, sort of two to three years. That's helpful. Thank you.
spk08: Your next question comes in the line of Helene Becker from Cohen. Your line is now open.
spk09: Thanks very much, operator, and hi, everybody. Thank you very much for the time. Probably a long-dated question, but as you think about, and this maybe was sort of asked in a different way, as you think about capital allocation, how do you think about, you know, I think in the short term you can't necessarily restart the share repurchase program, but how do you think about getting back to, returning capital to shareholders in, say, 2022 second half or even 2023?
spk00: Hi, Helene. It's Rob. So, listen, I mean, as you know, you know, we're limited as to anything share or purchase or dividend-wise, you know, until, you know, over a year from now under our PSP agreement with the government. But, again, like we did this quarter, we found nice opportunities to sort of tactically repay certain debt. And, you know, so that was something that we found attractive. So, you know, we're going to look at. at capital allocation very carefully on a risk-adjusted basis. We're going to look at, you know, other opportunities to deploy that capital. But, you know, again, over time, I would say, you know, all options are sort of back on the table.
spk09: That's fair. Thank you, Rob. And then the other question, I think, I think it was in Chip's prepared remarks, you talked about the pilot and mechanic training programs and you're accepting new applicants. Can you just talk about the quality of those applicants and how you're thinking about, you know, bringing them on? And then I just have one more little question.
spk06: Perfect, Helene. This is Chip. Yeah, we did discuss that in the prepared remarks. I think overall it's an interesting situation because coming out of a pandemic, you've got a lot of applicants. You know, from a pilot perspective, we've got our classes – full clear through march of 2022 um that's a tremendous and these are big classes um and and from our perspective we're excited about the number of people that want to come to work uh you know for skywest and we think that they are good candidates as you know and we talked about in the past we have a very strong, strong training program for pilots. And, you know, there certainly is a bar that you have to meet to fly at SkyWest. And our training program, I would argue, is the best in the industry. And so, look, I think that from our perspective, we've also gone further and deeper into the pipeline to evaluate the candidacy and the qualifications of each student. I mean, we do, you know, assess them along the way even before they come to SkyWest, and I think that's an outstanding opportunity for us to be involved in the 300 schools that we're involved with to help make sure we're getting the curriculum associated with those schools in a way where they can, you know, they can come to SkyWest and make the cut. So from that perspective, you know, there's just such a strong volume that we're seeing that as we continue to work through it, We're going to keep the bar high, and we're comfortable with how we're going to, you know, provide pilots for the airline. Same thing goes for mechanics. I think from our perspective, it's a completely different way of recruiting, a completely different way of training. We do see exceptional candidates out there that we're excited to have work for. Also, from our perspective, we may increase the scope of some of the things that we do. We've relied a lot on outside providers to do various things with maintenance that candidly as of today are not quite, you know, cutting the bar what we would like to see, and so we're probably going to expand some things that we do internally for a bit to make sure that we can get the right, you know, level of work done relative to our fleet. So that's probably a long answer as well, but I think that we're really excited about the energy of everyone who wants to come to work here at SkyWest, and we're ready to train them and then get them on a great career path.
spk09: No, that's actually very helpful. Thank you for that. And then my other little question is on, I guess, eVTOL. You know, Mesa is going down that path, and I'm just kind of wondering, it's not a short-term thing because it's like not even big aircraft, right? We're talking about up to seven passengers. So I don't know how you're thinking about getting involved or if you are, but, you know, I have to ask the question.
spk06: No, it's a great question, and I get the question quite a bit, but I would present it at a high level like this, Helene. At this point in time with SkyWest, I can tell you as we sit here as management, we are evaluating. I don't know of a time in our history where we have evaluated stronger opportunities within our core business model as well as strong opportunities outside of our core business model. So I would tell you that given, obviously, our 50-year reputation, what we've been able to do with just amazing people, that that reputation is translating into some things outside of what we normally do, and we have lots of people knocking on the door wanting us to get involved in a multitude of different opportunities. That having been said, it is imperative today, at this point in the world, that we remain absolutely positively focused on our people, and on our partners and our passengers. We fundamentally believe that burning most, if not all, of our calories in that effort is the right thing to do at this time. And as we continue to make our progress through that and get life back as an airline, we are certainly going to continue to entertain some of these other concepts that we think we have tremendous credibility in the sector to capitalize on.
spk09: Oh, that's great. Thanks for that detail. I really appreciate it. And have a great afternoon.
spk06: Thank you. Sure.
spk08: Your next question comes in the line of Joseph Dinardi from CFO. Your line is now open.
spk05: Oh, thanks. Good afternoon. Wade, just following up on a comment you made earlier on the maintenance side, just given how much maintenance you all have in front of you, can you talk a little bit more about what you're seeing in that market, maybe how much of that you're looking to bring back in-house, and then what some of the challenges you're facing with your third-party providers are?
spk03: Yeah, Joe, this is Wade. You know, I said in my script, you know, we have right now, we have over 30 lines of heavy maintenance going on right now, and we have great partners in these areas, right? You know, we do a lot of work with several different people in these areas. You know, what we talk about when we want to de-risk the model a little bit here and bring some of that work in-house so that we're not so reliant on, you know, the third parties. You know, obviously we've got a great reputation, as Chip has talked about, you know, bringing people into SkyWest. and we think we can take advantage of some of those situations and do some of that heavy maintenance in-house. So there will be some of that that will start to come in in-house, and we'll take that. We think they're ramping up as fast as they can. They're hiring our third-party providers. They're going to start getting to a normal level, we hope, in the back half of this year, and we start to see a lot of progress. So we're going to work hard with them, and we're going to work hard internally, and we'll get through this one.
spk05: Okay. Okay. And then, Rob, I was hoping maybe you could be a little bit more specific with some of the qualitative guidance you provided. Like, is Q4 thinly profitable or something better than that? And then the maintenance expense decline you're expecting in 22, can you frame the magnitude of that, just given what Wade referenced in terms of bringing more in-house? Thank you.
spk00: Yeah, so on the guidance, I mean, we were intentional about, you know, not being specific, you know, given the caveats that I laid out in my prepared remarks. But, again, I think, you know, we're pleased that, you know, we're on a good recovery track. You know, Q4 will, you know, almost certainly be a drop-off from, you know, what we see in Q2 and Q3 because of the because of the noise from the government programs and the partner concessions going away. But, you know, we are, you know, comfortable with the color that we expect to be both EPS positive and cash flow positive in the fourth quarter, you know, sort of on a standalone basis without some of this other noise we've got.
spk05: I'm sorry, what was your other question? if you could maybe frame the magnitude of the maintenance expense decline you're expecting in 22.
spk00: Yeah, look, I'm not going to go beyond sort of what Wade went on his script to say that, you know, we're going to run hot the rest of the year, you know, in the neighborhood of probably a couple hundred million dollars a quarter in maintenance expense. And then, you know, starting in 2022, you know, Those numbers are going to, you know, we believe will start trailing off and find a new normal level as we get through some of this backlog, as Wade mentioned. Okay. Thank you.
spk08: We have a follow-up question from Katherine O'Brien from Goldman Sachs. Your line is now open.
spk02: Hey, guys. Thanks for the extra one here. Maybe just one more. Actually, now I just generated a second follow-up, two quick following ones. So I know we've talked a lot about the reversal of this deferred revenue. I think you said earlier it's over the next two to three years. Could that be more front-end loaded if you start to fly at above 2019 levels, maybe faster than anticipated? I'm just trying to... kind of get my mind around, is that straight line of a remaining contract life, or is that really tied to how quickly you can make up block hour production? And then I have just one more quick one on maintenance after that. Thanks.
spk00: Yeah, sure, Katie. So, look, the model for that deferred revenue is based on volumes, on block hours expected over the remaining contract. So, again, the timing of that reversal is contingent upon the You know, the timing, as you mentioned, of volumes sort of coming back that, you know, again, it's a contract-by-contract basis that we look at it. And, you know, we believe that all or most of that, you know, should be reversed over the next, you know, two to three years.
spk02: Okay. And then maybe just one really quick one to Joe's question. When we're talking about a new normal maintenance expense, without being too specific, like, Does that fall somewhere between 19 and where we're running at 2021? Or it's like closer to 21 or it's closer to 19? Just like any really broad strokes on what that new normal looks like. Thanks again for all the extra time.
spk03: So, Catherine, this is Wade. So I'll try to give you a little more specifics on that. So it will not be down to 2019 levels. It will be somewhere between 2019 levels and 2021. And the reason why it won't be all the way down to 2019 levels, the mix of some of our contracts have changed, as you've heard over the call today, right? All of our contracts that we're adding today are the E175 contracts. We're responsible for all the engine maintenance and all of that. Some of the contracts that have gone away, we are not responsible for some of the engine maintenance. So it's a different model that we have going forward. And so it will be at a higher level than 2019, but the revenue models that we have will also reflect that. the increased maintenance expense going forward and so you know we are going to find that normal level here um you know in in 2022 but it won't be all the way down to 2019 levels but it will be somewhere in between and the biggest reason is just the mix of the the flying contracts and how each of those flying contracts are are different on how we handle primarily engine maintenance expense so i really appreciate that thanks guys
spk08: I am showing no further questions at this time. I would now like to turn the conference back to Chief Childs, President and Chief Executive Officer.
spk06: Thank you. Appreciate it. We want to thank everybody for joining us on the call today and your interest in SkyWest. We're appreciative of the opportunity, which we have. And we've got a lot of challenges in front of us over the next quarter and a lot of opportunity as well. But we are certainly proud of our airline and our teams and the great work they're doing in light of all the challenges and opportunities that we have. And with that, we'll talk with you next quarter. Thank you.
spk08: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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