Participants

Robert Simmons; Chief Financial Officer; SkyWest Inc

Eric Woodward; Chief Accounting Officer; SkyWest Inc

Russell Childs; President, Chief Executive Officer, Director; SkyWest Inc

Wade Steel; Chief Commercial Officer; SkyWest Inc

Mike Linenberg; Analyst; Deutsche Bank

Savanthi Syth; Analyst; Raymond James Ltd.

Tomas Fitzgerald; Analyst; TD Cowen

Presentation

Operator

Hello and welcome to the SkyWest Incorporated Third Quarter, 2024 Results Call. (Operator Instructions)
I would like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Robert Simmons

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 Steel, Chief Commercial Officer; and Eric Woodward, Chief Accounting Officer.
I'd like to start today by asking Eric to read the Safe Harbor. Then I will turn the time over to chip for some comments following chip. I will take us through the financial results. Then Wade will discuss the fleet and related flying arrangements following Wade. We will have the customary Q&A session with our sell side analysts. Eric.

Eric Woodward

Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise, actual results will likely vary and may vary materially from those anticipated estimated or projected for a number of reasons.
Some of the factors that may cause such differences are included in our most recent Form 10-K and other reports and filings with the securities and exchange commission and now I'll turn the call over to Chip.

Russell Childs

Thank you, Rob and Eric. Good afternoon everyone and thank you for joining us on the call today.
The third quarter brought a strong hurricane season and while geographically, there wasn't a significant impact to our flying operations, our hearts go out to those who lost homes and even loved ones in hurricane Helene and Milton on the east coast in true SkyWest fashion. Our people rallied to provide monetary and humanitarian support for our colleagues and others affected by these storms. We truly have amazing people here at SkyWest.
SkyWest was also honored to be named one of America's best mid size companies by Time Magazine during the quarter as we completed over 20,000 more flights than the same quarter last year delivering 99.9% adjusted completion. This recognition by Time Magazine is the latest in a series of awards that have underscores our focus on providing an exceptional product for our customers and remaining the employer choice for more than 14,000 aviation professionals.
I want to thank our team for their great work and continuing to deliver an outstanding product. Today, SkyWest reported net income of 90 million or $2.16 per diluted share for the third quarter of 2024.
We're very pleased to announce that we have reached an agreement with United to place 40 CRJ550s under multi-year agreement at SkyWest Airlines with the majority of those aircraft being covered from our existing CRJ700 fleet.
Additionally, I would remind you that from the fourth quarter of this year through 2026 we have 20 additional E175 fleet for delivery bringing us to 278 by the end of 2026. Over 87 percent of our block hour production was from our dual class aircraft during the third quarter and the ongoing strong demand and delivery book continues to position us for increased regional market share.
We're also pleased with the continued improvement in our captain availability and overall pilot staffing balance. We have a very strong pathway program and our new hire classes are filled through August of next year. As we restore production, we are confident the measures we have in place will help stabilize our pilot staffing over the long term.
With this continued progress, we expect block hour production for this full year to be up about 13% compared to last year. We anticipate that we will be at or near full partner requested utilization by the end or by the middle of 2025 and just below PRE COVID levels, we still see significant demand for regional lift nationwide particularly as the industry works to right size capacity with a very strong demand for our product and the opportunities in small and underserved markets.
We do expect maintenance expense to increase in the coming year as we increase utilization and return aircraft to service. Wade will speak more about that in a minute overall. Our well positioned fleet, ongoing improvements in captain, staffing and our strong partnerships and demand. We remain optimistic about the remainder of 2024 and 2025.
In summary, we continue to play the long game and are focused on the core elements of our business, our people, our fleet and our partners to ensure we remain extremely well positioned in the industry. We spent the last several years investing heavily in our fleet and in our people to ensure we are in the best possible situation to respond to market demands. Rob will now take us through the financial information.

Robert Simmons

Today we reported a third quarter GAAP net income of $90 million or 216 earnings per share. Q3 pre tax income was 116 million. Our weighted average share count for Q3 was 41.6 million and our effective tax rate was 23%.
First. Let's talk about revenue. Total Q3 revenue of 913 million is up 5% sequentially from 867 million in Q2 2024 and up 19% from 766 million in Q3 2023. Q3 revenue breaks down with contract revenue at 761 million up 4% from Q2 2024 and up 20% from Q3 2023. Pro rate and charter revenue was $123 million in Q3, up 15% from Q2 2024 and up 11% from Q3 2023 due to increases in departures and passenger yields. Leasing and other revenue was flat sequentially at $29 million and up by $5 million year-over-year reflecting additional leasing opportunities.
These GAAP results include the effect of recognizing $19 million of previously deferred revenue this quarter compared to recognizing $6 million in Q2 2024 and deferring the recognition of $57 million of revenue in Q3 2023.
As of the end of Q3, we have $342 million of cumulative deferred revenue that will be recognized in future periods. We anticipate recognizing a similar amount of previously deferred revenue in the fourth quarter that was recognized in the third quarter.
Let me move to the Balance Sheet.
We ended the quarter with cash of $836 million. Slightly up from 834 million last quarter and 835 at year end, the moderate increase in cash during the quarter included the accretive actions of repaying over $112 million in debt and buying back 217,000 shares of SkyWest stock in Q3 for $16.3 million at an average price of $74.98 per share.
Since the beginning of 2023 we have repurchased 11.1 million shares or approximately 22% of the outstanding shares of the company for $327 million at an average price of $29.45 per share.
Our CapEx during the third quarter was $97 million including the acquisition of one new E175 aircraft. We ended Q3 with debt of 2.7 billion down from 3 billion as of year end 2023.
These numbers tell an important story about the quarter that we continue to generate solid positive free cash flow from operations.
Our strong Balance Sheet and well grounded liquidity continue to be powerful tools to create shareholder value, tools that we expect will help us repay over $400 million in debt in 2024 allow us to take advantage of future growth opportunities including financing the 20 E175s we have on order through all 2,026.
While continuing to execute on our share repurchase program as we remain focused on improving our return on invested capital. We would like to highlight the following, as a result of repurchasing over 11 million shares since the beginning of 2023, we had 40.3 million shares outstanding as of September 30, 2024 compared to 50.6 million as of the start of 2023.
As of September 30th, we had $53 million remaining under our current share repurchase authorization. We anticipate continuing to be opportunistic in repurchasing shares going forward.
We are on track in 2024 to repay over $400 million in debt. A similar number to our debt repayment in 2023. Before new aircraft financings, our debt net of cash and leverage ratios are at their lowest point in over a decade.
We continue to anticipate our total 2024 CapEx will be approximately 320 million to 350 million including the purchase of four new E175 In Q4 2024. We expect 2025 CapEx to be in the neighborhood of $500 million. With the year over year increase driven by aircraft and engine acquisition, mostly new 175s consistent with our policy and practice. We're not giving any specific EPS guidance at this time, but let me give you a little additional color on 2024 and 2025.
As we will discuss in a minute, we now anticipate our 2024 block hours to be up approximately 13% over 2023. Up from the expectation of about 9 to 11% a quarter ago. Our modestly improved outlook in our 2024 block hours is driven by improving captain availability, improving fleet utilization and ongoing strong demand for our production.
We expect 2025 block hours to be up roughly 10% over 2024.
We expect our 2024 GAAP EPS to be in the low $7 area slightly better than last quarter's expectation for the year and above where we were pre-COVID reflecting our updated production outlook. We expect Q4 earnings to be seasonally below Q3.
We expect our 2025 GAAP EPS to be in the mid-$8 area if we are successful in executing on the opportunities in front of us. We are optimistic about our growth possibilities going into 2025 and 2026 including the following three focus areas.
First growth in underserved communities through our pro rate business along with the deployment of 40 C RJ 550 contract aircraft announced today with United, second improved aircraft utilization on our ERJ and C RJ fleets. And third placing the 20 new E175s into service between Q4, 2024 and the end of 2026.
We believe that our strong balance sheet and liquidity, the actions we will be taking to invest in incremental deployment of our fleet and the opportunity to monetize and optimize strong demand opportunities over time will position us well to drive total shareholder returns. Wade.

Wade Steel

Thank you, Rob. Today we announced a new multi-year flying agreement for a total of 40 CRJ 550s with United, which includes the 11 aircraft announced by United earlier this month, we anticipate four of these aircraft will be operating by the end of this year.
And with a total of 30 by the end of 2025 and the last 10 going into service during 2026 of the 40 CRJ 550, 29 will be modified from our existing CRJ 700 fleet and 11 will be purchased from United and are new to our fleet.
We expect to complete these purchases by the middle of next year. I want to point out that this agreement represents net growth aircraft along with additional new E175 arriving between now and the end of 2026. We are excited about the continued partnership with United.
We successfully launched flying of our first C RJ 550 for Delta during July and we anticipate transitioning 15 C RJ five 550s to our Delta fleet. By the first quarter of 2025. With these new CRJ 550 agreements with Delta and United. We have approximately 25 additional CRJ 700 that have contract expirations in 2025. This aircraft is an ideal replacement for single class CRJ 200s and we are making strong progress with each of our partners to productively place the remaining CRJ 700 aircraft under pro rate and contract flying agreements.
You'll recall that earlier this year, we announced a flying agreement for 20 United owned E175 from another United Express carrier to replace 20 CRJ200s under our United contract. As of October 1st, we had transitioned 19 of these aircraft and expect that all 20 will be transitioned to SkyWest this year. These 20 are in addition to the 20 new E175 is currently on order 19 for United and one for Alaska.
During the third quarter, we took delivery of one E175 under our Delta agreement. We expect delivery of four more during the fourth quarter, eight in 2025 and eight in 2026. At the end of 2026 our E175 fleet total will be 278 continuing to enhance SkyWest position as the largest Embry operator in the world.
With the addition of the large dual class aircraft to our fleet, our regional market share has increased to 30% of the large dual class aircraft from 23% in 2019. We are excited about our market share improvement.
Let me review our production. The third quarter completed block hours were up more than 5% compared to the second quarter of 2024. Based on the current schedules we have from our major partners for Q4. We anticipate that our fourth quarter block hours will increase by approximately 4% compared to the third quarter.
As our captain attrition continues to improve. We anticipate that our 2024 block hours will increase by approximately 13% compared to last year.
We expect 2025 block hours to be up roughly 10% over 2024 approaching our 2019 levels. We also expect block hours seasonality to return to the model as utilization improves during the strong summer months. We still have approximately 30 dual class C RJ aircraft and over 40 C RJ, single class C RJ 200 that are parked and could be returned to service either through additional contract or pro rate flying.
As flying quickly returns and we place C RJ S into service. We are continuing to experience challenges in our third party MRO network including labor and parts challenges. As far as our maintenance expense, we anticipate $40 million increase in the second half of 2024 as compared to the first half of 2024, We expect our maintenance expense to average $20 million a quarter during 2025. As we bring aircraft out of long term storage and service, the current fleet as production continues to increase.
As you would expect, the maintenance expense will happen before the aircraft goes back into service. Our partners remain very engaged in supporting our efforts to restore production.
I also want to review our plans to monetize our CRJ 200 assets. We still own over 140 CRJ 200 aircraft. These aircraft have very little book value and no debt and we have approximately 4.5 million cycles remaining to monetize, our priority to monetize these assets is to fly them at SkyWest Airlines under contract with our partners or in our pro rate business. Our next priority is to operate these aircraft at SkyWest charter or SWC. We currently have 17 SWC aircraft on demand charter service.
You'll also recall that our minority ownership stake in contour includes an asset provisioning agreement under which SkyWest will provide C RJ airframes and engines to contour. As far as our pro rate business, the demand remains extremely strong and we have great community support. We are seeing opportunities to return SkyWest service to several communities as we restore our C RJ production, we will continue to work with the communities we serve on the best way to expand our service.
As we continue to increase our pro rate business, we will see more seasonality reintroduced into our model. As typical with all airlines, Q2 and Q3 are strong revenue quarters and Q1 and Q4 are softer. We feel good about our ongoing efforts to reduce risk and enhance fleet and financing flexibility and remain committed to continuing our work with each of our major partners to provide creative solutions to the continued demand for our products.

Robert Simmons

Okay. Operator, we're ready for our Q&A now.

Question and Answer Session

Operator

(Operator Instructions) Mike Linenberg, Deutsche Bank.

Mike Linenberg

Oh yeah. Hey, good afternoon, everybody. On the 40 airplanes that are going into United, the 11 C RJ 5502, the used. Are they coming from another United Carrier or is that incrementally new list for United? And then sort of as a adjunct to that the remaining 29 C RJ 700? Are those airplanes that are currently grounded for you that you have an inventory and that you're going to induct into United or are they converting from United Express into the 550s?

Wade Steel

Yeah, Mike, this is we so first of all on the 11 C, hey, on the 11 CRJ550s that we're purchasing from United, those have been parked in storage for the last couple of years. So they have not been operating for another United Express operator for, for several years on the 29, 19 of those are currently flying for United.
And as we bring in the new 175 those will be transitioned to CRJ 550s. And so those are flying and the 10 are being allocated from airplanes that are in storage and some that are operating. So it's a, it's a little bit of a mix of, of all things as we're bringing those in.

Mike Linenberg

So wait after you bring the 10 out of storage, the CRJ 700 that now get converted into 550s. How many C RJ 700 do you have left grounded?

Wade Steel

Well, so in my script, we talked about 30 CR dual class C RJ air planes that were granted and so that number will shrink by approximately 10 or so. And so we'll still have some opportunities there to bring some more back out and continue to fly.

Mike Linenberg

Okay, great. And then just my second question, I guess it's just to clarify. You talked about the increased maintenance expense. It sounded like you said 20 million a a quarter. But I think maybe you make 200 million.

Robert Simmons

Yeah, Mike, it's Rob here. Yeah, it's, it's no change from what we said last quarter that we expect maintenance expense this year will be in the neighborhood of $700 million going to about $800 million next year. So about $200 million a quarter.

Mike Linenberg

Okay. And then just my last question when I think about the number of cities that SkyWest withdrew from, whether they were Delta and, or United or even American cities because of the pilot, the lack of pilots.
How many, how many additional cities, how, how many of those cities do you believe could come back online in 2025?
And I'm trying to get a sense of based on where you see your pilot availability. And I, I believe it was probably about 35 or 40 markets that lost SkyWest code share service.
Is, is there the opportunity where you could bring back, you know, many of those cities, half of those cities and in some cases, I realize we'll be coming back with C RJ 200.

Wade Steel

Yeah, Mike, that's a great question. Right now, yeah, we are looking at every one of those markets. And you're very close to the right numbers. I think overall we're about 30% down from where we were. And we're bringing those back up, you know, maintenance. I did talk about the constraints and maintenance in our MRO and so it may take, you know, 2025 and a little bit of 2026 but we are definitely actively looking at all of those markets that were out there and potentially even a few more.

Russell Childs

So, yeah, Mike, this is Chip. I, I'd kind of categorize it a little bit into three buckets. One you've nailed the cities that we left entirely that we can still go back to. I think there's still a tremendous amount of flying of existing cities that we didn't leave, that we can go back and increase service to those cities because a lot of that is still yet to be done.
And then most interesting to us is a lot of new cities that we were not looking at that pre pandemic that we're looking to go to as well. So it's a lot of good opportunities, but it's not limited to try to getting back to the cities that we left. You know, with the captain of issues that we had.

Mike Linenberg

Just on the new cities, the cities that have become new to you is that largely a function of the fact that because of COVID, I think we saw the regional space overall contract pretty materially. And so when we look at where we are today versus five years ago, it really looks like you're the only one out there who, who really has the platform to move into some of these cities. Is that a right? Is that the right way to think about it?

Russell Childs

I, I would definitely think that we're in the best position to do this, but I also would do it on the backdrop that throughout the pandemic, we still have to capitalize on the opportunities of the de organization of the nation. And a lot of people have moved out of bigger markets and smaller to midsized markets that you still have a good, strong ability to feed with, with like you said, with our platform.

Mike Linenberg

Great. Thanks everybody.

Operator

(Operator Instructions) Savi Syth, Raymond James.

Savanthi Syth

Hey, good afternoon. Actually just along a clarification on a couple of my questions there, the the cities that you're talking about kind of going back into or kind of expanding service is that related to pro rate or the kind of capacity purchase agreement? I was kind of curious as to what the break between the two.

Russell Childs

It's a little bit of both but heavily weighted to pro.

Savanthi Syth

Makes sense. And then just on the the CRJ550s is there is in the conversion of those, does that run through CapEx? Is that why kind of maybe CapEx? I think earlier thinking 400 million next year now 500 million. Is that kind of inclusive of the investment necessary? And is there anything else that we need to think about in terms of kind of the investment to get that flying done?

Wade Steel

Yeah. So this is why they will go through CapEx the conversion of those do go through CapEx. We're also purchasing 11 of those from United as well. So those, those are the main reasons that the CapEx is going up, but the modification would go through CapEx.

Savanthi Syth

Makes sense. And, and then if I might just one last one just on the pilot side, you know, you talked about how it's kind of settling down. I wonder if you could provide a kind of a updated view on where you are in terms of kind of captain levels?
And you know, where you'd like to be to bring all that kind of CRJ flying that, that you're investing into to kind of maybe next summer or over the next couple of years?

Russell Childs

Yeah, that's a good question. I can kind of reconcile with what we've said in the past, you know, at the, at the, at the most dire part of our captain imbalance. We were probably, you know, just under 4,000 pilots. We now are approaching 5,000 pilots or I think by the end of the year or by first quarter, we'll be back to the same complement of total pilots that we were pre pandemic or pre captain and balance.
So we're getting back to those numbers and by the time you look backwards at the additional aircraft we've taken since we've, since COVID and since the pandemic, then we need, you know, I would say a lot more pilots than what we had.
And I think that by the time we get to the mid to you know, third quarter of 2025 we should be in really, really good shape given the demand structure and the comments that Wade has made relative to getting to the utilization that our partners want.
So look from that perspective, I don't know exactly given, you know, trying to get aircraft out of out of storage and that type of stuff when we want to get up to the higher numbers of pilots, but we know we'll have more pilots than we've ever had before. And the demand is strong. So, you know, we'll keep updated, but our situation is significantly better than where we were six months ago a year ago. But we're still, you know, we're still growing, we're still hiring. Like we said throughout 2025.

Savanthi Syth

Sounds good. Thank you.

Operator

Tom Fitzgerald, TD Cowen.

Tomas Fitzgerald

Everyone. Thanks so much for the time and congrats on another great quarter. Earlier in the year you had talked about there being about 100 65 to 76-seat aircraft out there to be awarded and feeling pretty good about your chances. Is that still the same opportunity set out there or do you, would you mind updating us on how many of those are still out there to be taken?

Wade Steel

Hey, Tom, this is Wade. You know, some of those have been allocated it to our partners. But as we look at the opportunities out there in the landscape, you know, you, you look at the large dual class scope and that, that's getting filled up very quickly, but there are still market share opportunities in there.
But the small RJ scope, there's a lot of good opportunities with all of our partners to still take advantage of the small RJ scope that's out there and the demand appears to be very strong for that airplane as well. So those those numbers have been filled somewhat in in the 165 that we're talking about, but they are definitely moving in the right direction.

Tomas Fitzgerald

Okay. That, that's really helpful. And then just thinking about capital allocation, you know, the with where the stocks trading and, and how great of a shape the balance sheets. And do you consider a dividend at all? Maybe attract more investor flows?

Robert Simmons

Yeah, it's Rob here, Tom, I I would say at this point, you know, we are not considering reinstating the dividend yet.

Tomas Fitzgerald

Okay. That, that's super helpful. And if I could squeeze one more in, is there any update on the on the charter front? If you head into next year after the strong momentum, we got the 1st year. Thanks again. For the time.

Russell Childs

Yeah, Tom, this is Chip. We're we're still very optimistic about the charter operation. We're I think from our perspective, we're going into a very busy season for charter and the bookings that we have throughout the winter months are significantly bigger than what they were last year, which was significantly bigger than the year before that.
So we have seen, you know, given just the dynamics of corporate corporate travel as well as sports teams and that type of stuff that the credibility that SWC brings to the market is incredible.
And you know, we're still optimistic about that relative to community authority. It's still stagnating quite a bit and, and we're going to continue to be serious about pursuing that because we see, as we've already said on the call, a lot of good, strong opportunities that small communities deserve so very optimistic about SWC and to continue to progress.

Operator

That is all of the questions that we have in our queue. So I'll turn it back over to chip Childs for closing remarks.

Russell Childs

Great Jeremy. Thank you again. We want to thank everybody and their interest for your interest in SkyWest. We appreciate the support we've had through the quarter. We're so proud to represent 14,000 amazing aviation professionals of the company and the hard work that they contribute to making sure that our company is as good as it is. And we look forward to updating you at your end in the February time frame. Thank you.

Operator

That includes today's conference. Have a pleasant day.