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spk00: Good day, and thank you for standing by. Welcome to the SkyWest Incorporated Fourth 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 zero. I would now like to hand the conference over to your speaker for today, Mr. Rob Simmons, SkyWest Chief Financial Officer. Please go ahead, sir.
spk06: Thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer, Wade Steele, Chief Commercial Officer, and Eric Woodward, Chief Accounting Officer. I'd like to start today by asking Eric to read the Safe Harbor. Then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results. Then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our cell site analysts.
spk01: Eric? Today's discussion contains forward-looking statements that represent our current beliefs, expectations, and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statements. 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.
spk07: Thank you, Rob and Eric. Good afternoon, everyone. Thank you for joining us on the call today. We continue to see very strong demand for our product during the fourth quarter and beyond. While we're facing new headwinds as the industry prepares to operate in a post-pandemic environment, we remain focused on delivering an exceptional product as we enter the next phase of the recovery. Recapping our fourth quarter results, we reported pre-tax income of $5 million and net income of $4 million. As expected and previously communicated, Q4 results are absent any PSP grants or concessions which concluded in the third quarter. The holiday travel period was disrupted by the rapid surge in the Omicron variant that began the last week in December and through the month of January. The combination of winter weather and the surge in COVID cases over the final peak travel period over the year led to a lengthy irregular operation event as we began the new year and well into January. There were countless accounts of employees who went above and beyond during this challenge, and I want to thank our people for their flexibility and good work during this difficult period. I want to address the current environment and where we are today. We continue to experience very strong demand for our flying in all fleet types. We expect to place 46 new E-175s into service this year and one more in 2023, putting us at 240 E-175s in service by early next year. Our refleeting that has been in progress for the last several years continues to be a priority as we execute on our long-term strategy. While demand is solid, we are facing new headwinds as the industry prepares to operate in a post-pandemic environment. SkyWest is fortunate to enjoy the ability to attract and retain exceptional professionals across our operation. We maintain a robust hiring pipeline and strategy for all work groups and have new hire pilot classes filled well into summer. We have long been preparing for an increase in the mainline pilot retirements. However, the 6,000 early retirements taken at the majors during COVID and the steep demand recovery has resulted in a new, much higher demand for experienced SkyWest pilots, particularly captains. This demand has created an imbalance of pilots here and across the regional industry. Of course, pilot attrition was anticipated and planned for in our models and strategies. However, the rapid increase in captain attrition was not. So while our pipeline for new pilots is strong, we expect that upgrade timing creates an imbalance and a production constraint for the next year or so. To help correct this imbalance, we are working with our major partners to notably reduce schedules for the foreseeable future and have worked with our pilot group to implement upgrade and retention incentives. We have also worked with our partners to offer our pilots sustainable pathways, including guaranteed pilot interview programs for our captains. Overall, these disciplined strategies to work with both our partners and our pilot group have already begun producing results. But given the timing required for training and upgrade, this imbalance will likely constrain production into early 2023. This pilot imbalance is an industry-wide challenge. It services in various ways, and we are working together with our people to ensure that we remain the best position to manage it aggressively. With 46 new E175 going into service in 2022, we continue to play the long game. We have embedded flexibility in our prorate model to allow for the flex up and down of our prorate flying. And we are utilizing that flexibility going forward to significantly reduce prorate so that we can continue to deliver the highest reliability across our operation. In short, we are aggressively reducing our prorate flying now with the option to flex back up as resources allow. Against this backdrop, we're very honored and humbled to have been named one of Forbes' best large employers for the second year running in 2022. The past couple of years have been incredibly challenging for all of our teams, and our ability to work together with our people is the reason for our success. I want to thank our nearly 15,000 employees for their dedication and teamwork. In summary, 2022 looks to be the next phase of our COVID recovery, And while demand for our product has never been stronger, the current staffing imbalance and ongoing refleeting doesn't allow us to monetize that demand in the short term. As a result, we expect block-hour production in 2022 to be down 10% to 15% from the 2021 production. We expect this will be another transition year with break-even profit similar to 2021, excluding government grand incomes. Our strong balance sheet and cash position remain key differentiators for SkyWest. We are focused on rebalancing our pilot staffing and ensuring our resources are well allocated to deliver a solid and reliable product. We remain aggressive and deliberate in the steps we're taking now to ensure we are well positioned for 2024 and beyond. Rob will now take us through the financial data.
spk06: Today, we reported fourth quarter gap net income of $4 million or 9 cents diluted earnings per share. Q4 pre-tax income was $5 million. Our diluted share count for Q4 was 50.8 million shares, and our effective tax rate in Q4 was 14%. First, let's talk about revenue. Total Q4 revenue of $777 million is up 32% from Q4 2020, consistent with our year-over-year block hour production increase of 30%, and Q4 revenue is up 4% from Q3. As discussed last quarter, our Q3 revenue included certain revenue concessions to our partners related to government COVID support. Q4 revenue breaks down with contract revenue up 29% from Q4 2020 and up 9% from Q3. Pro-rate revenue was $109 million in Q4, up 53% year-over-year and down 15% from last quarter. Leasing and other revenue is up 28% year-over-year and flat sequentially. These gap results include the effect of a release of $23 million of deferred revenue this quarter compared to $19 million released in Q3 and $21 million that was deferred during Q4 2020. As of the end of Q4, we have $104 million of cumulative deferred revenue that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals or reversals into revenue depends on the shape and cadence of the recovery of our flying. All deferred revenue will be reversed into revenue by the end of the various contract periods. As expected, we did not have any additional grant income recognized in Q4. Let me move to the balance sheet. We ended the quarter with cash of $860 million, down from $913 million last quarter. Our CapEx during the fourth quarter was $322 million for 12 new E175 aircraft, four used CRJ700 aircraft, and other fixed assets. Total 2021 CapEx was $556 million, including the purchase of 18 new E175 aircraft, 11 used CRJ700s, and other fixed assets. This compares to $438 million in CapEx in 2020. We ended Q4 with debt of $3.1 billion, down from $3.2 billion as of year-end 2020. The only government debt we have on our balance sheet is a total of $201 million in PSP 10-year unsecured, no amortization, low coupon loans. Let me say a couple things about liquidity. As of December 31, 2021, our cash position of $860 million included the effect this quarter of having repaid an incremental $92 million of debt before adding $237 million of debt financing for the 12 new E175s. We also have approximately $1.5 billion of unpledged collateral that could be deployed for additional liquidity if ever needed. As of 12-31-2021, our debt net of cash balance is actually $224 million lower than it was pre-COVID at the end of 2019. Additional flexibility comes from the fact that including partner-owned aircraft, over 50% of our fleet and 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. First, at this time, we expect 2022 to be roughly break-even for earnings, flat with 2021 excluding over $200 million of government grants, net of partner revenue concessions that were recognized in 2021. Similarly, we expect EBITDA in 2022 to be in the neighborhood of $500 million, also similar to 2021, adjusted for the net grant benefit. Second, we expect block hour production in 2022 to be down 10% to 15% from 2021 production related to the staffing imbalance as we focus on growing our ERJ fleet and pulling down some of our CRJ fleet. The staffing challenges related to COVID, mix, and attrition have extended our COVID transition for another year or two. Third, We won't see the full-year impact of the 47 accretive new E175 aircraft going into service in 2022 and early 2023 until 2024. Thirty-one of these are growth aircraft. Sixteen are replacing other CRJ900 flying. We will continue to focus on liquidity and expect to end 2022 with a strong cash position in spite of having a strong delivery pipeline of 28 accretive new E175s this year. 2022 being flat with 2021 with break-even profitability is caused primarily by lower expected year-over-year production from the labor imbalance, higher investments in labor and training to go after the imbalance, offset partially by lower maintenance expense in 2022. We believe that the actions we are taking now to focus on the growth of our ERJ fleet work through the pilot imbalance affecting the industry, and preserve the optionality of bringing back CRJ opportunities over time will position us strongly in the regional sector.
spk04: Wade? 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, last quarter we announced an agreement with Delta to add 16 new E175s. We anticipate these aircraft will be placed into service beginning in the middle of this year through the first part of 2023. These aircraft will replace 16 older SkyWest-owned CRJ900 aircraft currently operating under contract with Delta. After we take delivery of these aircraft, we will have 87 E-175s under long-term contracts with Delta. Under our American contract, we currently have 90 CRJ-700s under contract and in service. We placed 25 CRJ-700s into service during 2021. We also have 20 new E-175s scheduled for service throughout this year. We have received 18 of those during the third and fourth quarter of 2021 and will receive two in the second quarter of this year. Together, these E-175s and CRJ-700s will bring our total American fleet to 110 by the end of 2022. We have an agreement with Alaska to add 11 E-175s to our contract. We expect to place 10 of those aircraft into service this year and one more during the first half of 2023. For a total of 43 aircraft under long-term contracts with Alaska. After we take delivery of the E-175s currently on order, our fleet will be 240 E-175s. The demand for our E-175s remain very strong and is becoming the backbone of our flying. Let me review our current production. Based on the current schedules we have from our major partners for the first quarter of 2022, we anticipate that our block hours will decrease by approximately 5% compared to the fourth quarter of 2021. As we look to Q2 2022, we anticipate that our Q2 block hours will be 11% lower than the fourth quarter of 2021. Let me talk a little bit about our prorate business. We anticipate that our prorate model will continue to decrease during 2022 and 2023, as we expect to reallocate most of these block hours to our contract fleet. We have intentionally built flexibility into our prorate model and will preserve that flexibility to return this flying once we are comfortable with our staffing balance. Shifting gears to our leasing business, we currently have 39 CRJ 700s and 900s under long-term leases with third parties. This line of business has very good cash flow and strong margin characteristics. Demand for our engine leasing business is returning, and we anticipate placing several engines under long-term leases this year. Next year, we'll have 16 CRJ 900s that come out of the Delta contract, and are not currently placed. We anticipate placing these aircraft in our leasing entity after removal from the Delta contract where we may pursue leasing opportunities for the aircraft or engines. 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 solutions.
spk06: Okay, operator, we're ready for our Q&A.
spk00: Thank you, Mr. Simmons. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question is from Salvi Sith with Raymond James. Your line is open.
spk03: hey good good afternoon everyone um could you provide a maybe way you know you appreciate the block cover uh kind of cadence a little bit as well through the year um but i was curious is that mostly then coming out of cpro rates and and and cpa stays a little bit more steady or could you provide a little color as to kind of where that reduction is coming from in terms of segments and and maybe kind of aircraft type and um
spk04: the you know and how this has maybe changed versus how you were thinking about it during the last earnings call yes this is this is wade um yeah so as i said in my script you know we expect um q1 to be down about five percent um compared to q4 2021 and q2 to be down 11 compared to q4 2021 The majority of that, as I talked about, we are reallocating several of the block hours from our prorate model into our contract models. We have also seen kind of an overall decrease in utilization primarily in our CRJ fleets, but we've seen a little bit of reduction also in our E-175 daily utilization as well.
spk03: Got it. And then... And Rob, maybe this is for you. As you talk about break-even profits for the year, is that fair to assume that making money over the summer and losing income in 1Q, 4Q? Or is there something about this year where the normal seasonality would not play out?
spk06: Yeah, I mean, you know, the break-even guidance is obviously, you know, meant for the full year. But, yeah, there will be some of the usual cadence throughout the seasons.
spk03: Got it. And if I might ask one last kind of longer-term question. Chip, you mentioned that, you know, a lot of this hopefully kind of gets resolved as we get into 2023. I'm just kind of curious. Is there anything that you're seeing today that's a little bit more kind of a permanent change where maybe certain aspects of your kind of business model that worked in kind of the prior business cycle maybe does not come back when things recover?
spk07: Again, this is Chip. That's a great question because I think back to a couple of your questions, you know, there's something that's foundationally changed in our business model relative to this. I would honestly say that as we made our way through particularly the month of January, on the backdrop that we have incredible recruiting of pilots, attrition is certainly higher and we're adapting to higher attrition. We also have adapted to higher hiring. And so, you know, for the record, our overall hiring continues to outpace attrition. But I think that one of the things that we've experienced, you know, just recently is the pressure on the captain seat relative to specifically our major partners, you know, hiring primarily captains. Probably the paradigm has been in the past our attrition was like 50-50, first officer to captain, and then probably moved to 75-25. Look, I think that as you can understand the sensitivity in some of these models, we certainly have relooked at the way we are going to, you know, allocate resources and do the things we think are good for the long term to invest in the right level at the right place within our business model with captain upgrades and those types of things that are going to get us to where we need to be in the long term. So there's a bit of – you know, conservatism and caution and the break-even analysis and the block-hour reductions. But again, everything is making sure that we, you know, pivot in the right timing and in the right way to be positioned really, really well for the long-term.
spk03: Appreciate that. Thanks.
spk00: Next, we have Mike Lindenberg with Doja Bank. Your line is open.
spk10: Oh, hey. Good afternoon, everyone. Just, I guess, a quick question here, Wade. What is the fleet count, the total fleet count at the end of 2022 versus the end of 2021? Do you have those numbers handy?
spk04: So at the end of 2021, you can look in our release today. You know, as of today, we have, or as of the end of the year, we have 509 aircraft. You know, a couple of things that we'll be working on, as I talk to my script, after we take delivery of all of our current E-175s, we will have 240 E-175s under long-term contracts. The CRJ side is more, you know, especially the CRJ200 is more of a flexible fleet, right? And so we are going to have a lot of flexibility around our CRJ200 fleet. If, you know, we continue to have good hiring, get caught back up on, you know, our balance, you know, we will be opportunistic and be able to put some of those back in there. So, you know, we're going to have a lot of flexibility going forward on what we do. So, you know, right now it's probably a little too early to say what we will be at the end of 2022, but we do know we will have 240 E-175s under long-term contracts.
spk10: Okay. And then when, you know, you lose a captain to a major, and I guess more specifically a major who happens to be one of your partners, As a consequence, we're seeing all airlines being forced to take rates up. And so what sort of protection do you have under the CTA? That is, you take up your pay rates for first officers and captains so that you can continue to get a healthy flow of feedstock. that that's not going to undermine your margins and your CPAs. Are you protected, especially when some of this is being driven by your partners, some of this wage inflation?
spk07: So, Mike, this is Chip. That's an exceptional question that we certainly have been dealing with, in all honesty, for decades. The idea of rate resets and the strategies around all of that, you know, we have anticipated – Some of that, when we knew about the pilot shortage five years ago, six years ago, ten years ago, and from our perspective, there's a couple of dynamics that we have. As you look at our fleet and the length of contract, we have a lot of rate renewals coming up starting at the end of 2023. They get heavier in 2024 and 2025. To give color, our strategy is always – With a fleet like our CRJ fleet that is very unencumbered yet very valuable, we typically enter into short-term contracts for those, shorter-term, two to three years. Certainly when we're going to go and put this type of capital outlay for a 175, those are longer-term. But the way we – handle those in the contract. There's a couple of opportunities to look at it, but back to your question, as we've evaluated this issue and what we have to do to make sure that we get good aviation professionals into our system, retain them, train them, and do the things that, you know, provide the value that they do for us. We contemplated those economics, and, you know, that's We can't fix it in a year, but as we move forward with our partners, there's a good dialogue and conversation about the long-term business plan in this situation.
spk10: Okay, great. And just so I can squeeze in one last one, you know, when I think about, you know, your fleet and the fact that the E-175, as you said, it is the backbone, and you do fly into a lot of smaller cities, and, you know, you can see some of the issues, the 5G issues, that carriers are facing, especially those who operate some of these smaller jets, the Embraer aircraft, and in and around airports, say like a Key West, for example, which is a market that you may go in and out of or other markets around. What are you seeing on that front? what do you have a good sense of timing when this will actually get resolved you know these alternative sort of methods to deal with this you know the alternative methods of compliance are we going to get something very soon with the Embraer airplanes are we going to still be dealing with this problem three to six months from now and obviously that will have some impact on your ability to dispatch and operate and you know obviously you know consequently take costs higher just any sort of light at the end of the tunnel on this thank you
spk07: Yeah, look, I think from our fleet specific, look, we've got an AMOX out there for our fleet. We have not seen a major amount of disruption on this issue like maybe other regional carriers have. Great. But to your bigger question, do we think that there's something going to happen in the near term to fix this, I'm not optimistic about that. This is a big issue between the aviation industry and – the cellular carriers. And so, look, I think that this is something from our perspective, first and foremost, we're going to be safe in our approach to this. We're going to be very transparent and, you know, collaborating with the FAA and our manufacturers. So we're all over the issue. It's a big enough issue. I wouldn't assume that we're going to be rid of AMOX anytime soon and have a permanent solution. Okay. Thanks, Jeff. Thanks, everyone.
spk00: Next we have Dwayne Fetig with Evercore. Your line is open.
spk05: Thank you. Appreciate the time. Can you help us frame the gap between demand and your ability to execute? So, for example, obviously the 1Q is a little squirrely, but if you think about the June quarter relative to that block hour guidance that you gave us, You know, how much higher would that be if you didn't have these constraints? And is it all prorate flying that you're cutting, or is there some CPA flying that you just can't really deliver in this environment?
spk04: Yeah, Duane, this is Wade. So, yeah, we've been working with all of our major partners on our schedules, as we've talked about. You know, the demand is extremely strong. You know, we're probably 10% to 15% higher. you know, if we're able to fix our imbalance in our staffing issues. And it's been a mix of both. You know, we've pulled down both prorate and we've reduced utilization on our contract fleet as well. So, you know, the demand is extremely strong out there. You know, we're going to continue to work with our partners. But, you know, we are going to have a balanced approach on how we do this between prorate and decreasing contract utilization.
spk05: Okay, that's super helpful. And then maybe as a follow-up to one of Mike's questions, can you speak to this from a network perspective? What is the profile of markets that are losing service here? Is this all about frequency? Any anecdotes you could share about the markets that are losing as a result of these constraints would be great.
spk04: Yeah, so, Dwayne, this is Wade again. So it's a combination, once again, of both. You know, we've looked at frequency. You know, there may have been a market pre-pandemic that we were having three to four flights a day into that market. Now we're down to one or two, something like that. There are certain markets that are going to go down. dark, right, that just won't have service going forward, you know, from SkyWest. So it's going to be a combination of both, you know, frequency and there'll be certain markets, as you've probably seen, that just aren't going to have service.
spk05: Okay. And then maybe just for my last, on this EVE partnership, I know it's very early, but when do you think you'd be in a position to take delivery of some of these new aircraft types and And then just conceptually, how are you thinking about utilizing these? Would you be flying them on behalf of majors? Would it be your own service? And any thoughts on the type of pilot that would be required to operate that? Thanks for taking the questions, guys. Really appreciate it.
spk04: Yeah, Duane, this is Wade again. So, you know, as far as the EVE opportunity, you know, we worked very closely with Embraer on this. We really liked the opportunity. You know, we thought it was, you know, a good partnership with them and the EVE entity. We think it's a great thing for our sustainability initiatives as well. As far as delivery of these, these are going to be more in the back half of the decade for sure. We're still working on potential commercial solutions for this. We don't have those quite yet. We're still developing an operating plan. So this is still, you know, it's still very much a work in progress. But, you know, we wanted to get out in front of it and start working with Embraer on some potential solutions here.
spk05: Okay. I'm so sorry to be persistent there. But, again, super long range conceptually, would this potentially replace some of the flying that you've done historically on, like, 50-seat CRJs, or is it just a totally different network thought?
spk04: Yeah, it's a totally different network thought. You know, the 50-seaters, you know, have an average stage length of 350 to 400 miles. You know, this aircraft or this vehicle will not have near that range. And it's something, you know, it's more in urban-type settings than it is in the regional historical markets. Thank you.
spk00: Next we have Helene Becker with Cohen. Your line is open.
spk11: Thanks very much. Hi, everybody, and thank you very much for your time. Just maybe a couple of questions. The one question I had was one of the issues you guys talked about last year was maintenance and the ability to get spare parts and getting aircraft out of maintenance. Is that an issue that's now behind you?
spk04: Yeah, Helene, this is Wade. So, you know, we made a very large investment during 2021 in getting our fleet prepared. And generally, from a sea check perspective, I think at the end of the year, we had approximately 30 lines of sea checks or heavy maintenance going on. And that issue is resolving itself right now, and we're getting in a very good position. And it will –
spk11: and our maintenance expenses we look forward into 2022 we do see a um a decrease in our maintenance expense going forward okay that's really helpful thanks wade and then my other question is with respect to the cancellations or i don't know how you want to classify them but flying the fewer block hours is it a um is it Do you have to pay penalties or are you able to negotiate that away?
spk04: Yeah. So, Helene, this is Wade again. So, we've been working with our major partners on these issues and many other issues during the pandemic. Now, as we emerge from the pandemic, we've been dealing with utilization issues for a while. And, you know, we've been able to work with them very collaborative on solving these issues. And so, you know, that's something that we're working very, very much hand in hand with our partners right now. And, you know, we've got great relationships with all of our major partners, and so that's something that we're working through as we speak.
spk11: Okay. So are there penalties included as a deduction to revenue then for last year? Maybe you can walk me through how the revenue comes in offset by the revenue you were or whatever you want to call it, credits. You were giving them for the government financing offset by the penalties for not being able to live up to the commitments you made because of the staffing issues that are caused by them hiring your people away.
spk04: Yeah, and that's the complexity with this issue, Helene. You know, a lot of this is on the industry issues. And, you know, in our forecast, we definitely have a reduction in our block hours and the associated revenue associated with that.
spk11: Okay. All right. I will be less persistent than my colleagues and let you go. Thank you.
spk00: Next we have Catherine O'Brien with Goldman Sachs. Your line is open.
spk02: Hey, good afternoon, everyone. My first question I think is a bit of a follow-up to something Longline that Helene and Dwayne, we're both asking you, so forgive me. But I understand staffing is what's driving the lower block outlook for this year, but could you walk us through how that decision gets made between you and your partners? For 2022 specifically, is that you going to them to say, you only have crew to fly X number of block hours? Or is some of that decision also your partner is coming to you to say they need you to fly less than you're technically capable of because they don't have ground staff and some other workers they need to run a full regional operation?
spk07: Yeah, so, Katie, this is Chip. Just relative to the process on that, it's actually – a very seamless process. It's one thing I think that we have demonstrated we're probably one of the best at in the entire industry where we We foundationally feel that that communication and transparency is absolutely critical, primarily because of the demand that our partners want us to fly today. Back to a previous question, I mean, our reduction in block hours that we're talking about is based upon what we thought we were going to likely be able to provide three months ago. I can tell you that the actual demand for that, what we thought we were going to produce three months ago, is even much higher than that. So to go back to your point, who says what, I mean, right now they are asking us to fly a tremendous amount of flying, more than we have even contracts for. Our perspective is we're very transparent with them about our staffing needs. Given the fact that they're hiring our people, they know exactly what is happening to the model as well. And in the spirit of three main things, one, we want to provide an outstanding opportunity for all of our aviation professionals to go directly to these partners that we fly for. That's an outstanding model that our partners have absolutely embraced. And two, we are typically the ones that are saying that here's our staffing models. We want to make sure that we deliver for you. We know we can, particularly in the most sensitive times. And we give them what our estimate is, and they digest it and work through it. It can even be domicile and location-specific, but also, in general, we do this a long ways out. To get to the plan that we've presented to you guys so far, there's been a lot of thought going into it. There's been a lot of assumptions going into it. There's been some caution this year, quite candidly, with all of our partners, and they all have worked really well with that dialogue. goes to the fact that they value the product that we produce on a daily basis and yet also value our employees, which is also outstanding from our view.
spk02: Okay, great. That's really helpful to understand that puts and takes between demand and staffing. Maybe just, you know, It would be great to get some stats on the attrition. We had a low-cost carrier call yesterday. You know, attrition for them is usually 5% or 6%. Now it's low double digits. You know, based on commentary from other airlines on where they're hiring their pilots from, I'm guessing that might be a bit more acute than you. Any figures you can give us on attrition lately versus, you know, where you're running at in 18 or 19?
spk07: Yeah, I mean, given the sensitivity that we have for partners and not our own brand compared to what others have, we're going to probably keep those statistics internal. But I would tell you that the statistics of us pulling down flying in 2022 by 10% to 15% probably match relatively well with what the attrition is. So I think that's about as far as given the nature – of our relationship with our partners, we're probably best not to leave it at that.
spk02: Okay, got it. I won't bug you. Maybe just one more quick modeling one if I can. With block hours down 10% to 15% for next year, do you expect to book deferred revenue from prior periods? Just trying to get a sense of what the threshold is. for that as you did book deferred revenue in the last two quarters with block hours down a bit, you know, the relative compare was a little bit closer to 19 than what you're expecting over the course of next year. Thanks.
spk06: Hey, Katie, this is Rob. So on the topic of deferred revenue, you know, going into the new year, we've got, you know, around $100 million of deferred revenue sitting on the books. You know, again, the timing of how that will be unwound will, you know, is still a little bit up in the air. It depends on sort of what the cadence of our recovery looks like. But, you know, the key to that is that's revenue that, you know, for which we've collected the cash already. So, you know, But I don't know that we're going to spend too many calories on modeling that to perfection. But, you know, again, it will all be reversed by the time the individual contracts that represented that $100 million of deferred revenue, by the time those expire, all that revenue will eventually flow through for sure.
spk02: Okay. If I could just, like, really quickly come back to you on that one, Rob. Sure. You know, because I think in the past, what you've guided us to is that as you approach 19 levels of block hours, that's when we should start to see that come back online. And that's held true, you know, like down 5% block hours. In the fourth quarter, we saw some of that revenue show back up. I guess just like looking back historically, in a quarter where you've maybe been down 10%, 15%, have you been able to book that deferred revenue or no? Thanks so much for all the time.
spk06: Sure, Katie. No, that's fine. So, look, I think if you go back and look at 2021 as an analog, some of the early quarters of the year, you know, which were still sort of in recovery mode, we did book a little more revenue in the first half of the year and then unwound $19 million in Q3 and unwound $23 million in Q4. So, you know, you've got the cadence of how the block hours work there. So I think, you know, as you go forward, you know, it'll unwind slowly over the next few years as those contracts, you again, approach their expiration point. And, again, if things, you know, get stronger than we expected, you know, in 23 or 24, that will be likely wiped out by the end of that window.
spk02: Thank you very much.
spk00: All right. Next we have Savi Seth with Raymond James. Your line is open.
spk03: Thanks for the follow-up. Wade, real quick on some of the updates that you gave around kind of suites being added with partners. It seemed like there was no mention. Are you still planning to get to 101 CRJ 700s with American by mid-2023, or because of the current issues, is that getting deferred? And it also seemed like there were maybe a couple more with Alaska than we had heard before. I was wondering what the changes were there.
spk04: Yeah. You know, Salvi, this is Wade. So just on the American side, we are working with them on the timing of that. I do not anticipate that the 700s will come in the first half. You know, right now we have the ability to work with them and push them out and into the second half, and we'll continue to work with those guys on our staffing models as we get better clarity. And, yes, on the Alaska question, that is correct. There were two more added.
spk03: Great. Thank you. And I don't know if this is for Chip, another kind of conceptual industry question. I realize maybe M&A is unlikely for SkyBus given your size, Do you think from a regional airline industry perspective, the whole industry might benefit from further consolidation so that you're not wasting resources in terms of recruiting and training pilots and flight attendants and mechanics? And more importantly, what's your sense of would your partners have the appetite to see further consolidation in the regional airline industry?
spk07: Yes, this is Chip. I don't know exactly how our partners would view that. I know we are so anti-M&A at this point, as our history has proven that it has not worked out great for us. I think that from our perspective, we still, even under the current situation, prefer an organic approach. process, you know, to grow and to recover and all the things we want to do. We have the ability and reputation to attract outstanding aviation professionals, and like we said earlier, that's not the headwind we're talking about right now, and that continues to be strong. So that data point being strong really does take the M&A side out of the equation for us.
spk03: Excellent. All right, thanks.
spk00: Next, we have Dwayne Fenigworth with Evercore. Your line is open.
spk05: Hey, thanks for the follow-up. I just wondered if there was any movement on the 1,500-hour rule. I mean, as you look at what used to be here in the U.S. and clearly much, much lower requirements in other geographies in Europe, etc., Do you think there's any chance for kind of movement, just given the constraints we're seeing across the industry?
spk07: Dwayne, this is Chip. It's a great question. And I fundamentally, as you know, we have been working on this issue for a decade. And I think to your previous question, as we continue to get out of various flying in smaller communities. Some cities will lose service altogether. Some will drastically reduce frequency. I can tell you as we've had those conversations with the small communities, we are having politicians finally engaged after more than a decade of this talk. So I guess my point is, do we think there will be movement in 1500 hours? I will tell you, I don't know the answer, but there is more engagement than ever before in that dialogue. I think certainly even things like ESG and those types of things, why we are having people fly You know, a 172 for that much time where we know the data points are very clear. There are much more efficient and safer ways to get it done. That data is extraordinarily compelling. We are very much in a mindset that if somebody wants to continue, particularly politicians, have this dialogue. We have the data. We have real life now, as we've talked about on the phone call today, that's going to show what we've been saying for over ten years. Duane, I'm hopeful. The data points to something like this, but, you know, again, it's a very interesting political environment that we're at. We fundamentally believe that the FAA also has the ability to do some things with this that would be extraordinarily helpful, and we hope that that dialogue continues to take place, because at the end of the day, there are plans in place to make a safer and more efficient process for people to become aviation professionals. And we love the prospects. We've been talking about it for a long time, and hopefully we can get more traction now than ever.
spk04: Appreciate the thoughts.
spk00: Next we have, again, Mike Lindenberg with Deutsche Bank. Your line is open.
spk10: Yeah, you know, just, Chip, I was thinking on Dwayne's question and also with Avi's question about, you know, one, how do you address this? And, you know, obviously you said that you'd rather kind of grow organically. But, you know, there are some sizable Part 135 carriers out there with a lot of pilots. And I don't know, maybe it brings on another airplane type, but it does bring on a lot of capable pilots, many, you know, with hours that probably aren't that far away from 1,500. And maybe some of the communities that you've pulled out of, you know, those are markets that maybe would work with some of these smaller airplanes. Again, I, you know, that may be the beauty of like investing in these, you know, you know, either mobility, you know, that that becomes, you know, sort of your pipeline, because you don't have to worry about the 1500 hour rule. But unfortunately, we're not going to get that platform for, I don't know, five years, eight years, 10 years. So I don't know. I don't know if you've looked at, you know, a 135 carrier because there are several out there, and there's so many.
spk07: Michael, this is Chip. You cut off, but I think I know what your question is going to be, and I will – I will answer it. Just relative to what you're talking about for 135 operators, we do have a different view of that. We have a lot of relationships with some outstanding 135 operators. And from the perspective that we may be engaged in some partnerships or additional flying relative to that, we would be very much engaged in looking at those opportunities. But going back to the previous question, 121 operator, any consolidation there we would not be interested in.
spk00: And there are no further questions at this time. I'll turn the call back to Chip Childs for closing remarks.
spk07: Thank you, Eli, and thanks to everyone for joining us again on the call today. We appreciate your interest in SkyWest. I'll just close by saying a couple of things. You know, despite some of the headwinds we're facing, the demand for our product has really never been stronger. We will continue to work with our partners and our people to navigate the next phase of the recovery, and we're confident in a very strong hiring pipeline as we work through this current staffing imbalance. Again, we want to thank you and thank our people for the great work that they do and the continued flexibility that they have and their ability to look at the things that we need to accomplish long-term. With that, we'll end the call and talk to you next quarter.
spk00: This concludes today's conference call. Thank you all for your participation. You may now disconnect.
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