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Skywest Inc (NASDAQ:SKYW)
Q2 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the SkyWest Inc., Second Quarter 2019 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Robert J. Simmons -- Chief Financial Officer

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 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 -- Chief Accounting Officer

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 2018, Form 10-K and other reports and filings with the Securities and Exchange Commission.

With that, I'll turn the call over to Chip.

Chip Childs -- President and Chief Executive Officer

Thank you, Rob, and Eric. Good afternoon everyone and thank you for joining us on the call today. The second quarter contributed to a strong first half of 2019, as we continue to monetize our fleet transition initiatives and to move forward as a single airline with a more efficient footprint.

Our second quarter results reflect the strong schedule we flied [Phonetic] from Memorial Day through Labor Day. And while severe weather in June affected several of our key hubs, our employees delivered a solid 99.85 adjusted completion for the quarter.

I want to thank our nearly 14,000 employees for their efforts to work together and to deliver a great product for our customers. We are currently executing on the initiatives announced earlier this year, including a multi-year extension of another 38 aircraft with American along with two new contract plans. Today, we announced another contract for 10, CRJ700s with American and except to start putting them into service starting in 2020. Supporting our developing leasing business, we have also signed an agreement to lease 40 engines to Delta beginning in late 2020.

Wade will give some more details on these contract wins in a few minutes. These deals along with other progress that we have made recently set us up for growth in future years and illustrate our ability to unlock growth opportunities with our partners' existing scope limitations, while also making market share gain. None of this would be possible without our ability to consistently deliver reliable product and efficient product.

The people at SkyWest continue working together to ensure, we remain agile and responsive to our customers needs and focussed on delivering quality service onboard more than 2,400 daily departures, providing a seamless product for our four distinctly different and important partners is not a simple job and that's something our people do better than any other carrier.

We intend to continue leveraging our position in the market to optimize the value of the assets within our operational scope. We are also in the fortunate position to be able to convert strong pilot availability into market opportunity and to respond quickly to our partner's needs.

With our highly desirable team culture, quality product and strong opportunities pilot hiring and recruiting continues to be strong and is still running more than 20% above last year's levels, more than 50% of our current hiring is coming from our internally developed pipeline, which is up from 10%, five years ago. This is another risk area we feel has been reduced meaningfully over the past year.

The January closing of the ExpressJet sell combined with these latest fleet announcements, reduces our overall enterprise risk and will help us drive a healthy balance of earnings growth and cash flow generation. We remain very focused on sustainable opportunities that position us for long-term success. I again want to thank our great team of aviation professionals for their excellent work during the second quarter. Rob?

Robert J. Simmons -- Chief Financial Officer

Today, we have reported net income of $88 million or $1.71 per share for the second quarter of 2019, compared to $76 million or $1.43 per share in the second quarter of 2018.

Pre-tax income of $115 million for Q2 2019 is up 17% from pre-tax income of $98 million in Q2 2018. Our diluted share count of $51.5 million is down 1.4 million shares from Q2 last year. Our effective tax rate in Q2 was a little under 24%. We continue to expect our tax rate to be approximately 25% for the second half of 2019. Let me say a couple of things about our balance sheet as of June 30th. We ended the quarter with cash of $550 million, up from $544 million last quarter. Primary uses of cash in the quarter included $35 million per share repurchases, $111 million in CapEx, including the acquisition of four new E175s, and $20 million in early debt pay down for the 900s being placed on lease at Air Canada.

Debt for the quarter ended at $3.1 billion, down slightly from last quarter, including the effect of adding $80 million in new debt to finance the four new E175s, that we will flight for Delta under a previously announced contract.

Let's turn for a minute to capital expenditures. As you recall the last few years we have invested heavily in growth aircraft for our fleet. In 2018, we spent $1.1 billion in CapEx, driven primarily by the acquisition of 39 new E175s. In 2019, we expect only to deploy a little over $500 million in CapEx and here is the map on that number.

CapEx for Q1 was $252 million, and Q2 CapEx was $111 million for $363 million CapEx for the first half. In the second half of 2019, we would expect to spend approximately $160 million toward a handful of used CRJ700s rotables and spare engines. We expect that by the end of 2019 debt levels will continue to come down to under $3 billion. Just a reminder that all of our debt is financing aircraft and the bulk of our $3.1 billion in debt is financing our fleet of 151 E175s that are under flying contracts largely coterminous with the related debt.

We continue to expect to delever via repayment of $350 million to $400 million in debt each year through the embedded amortization of principal in this mortgage style term debt before any new financings for new aircraft pursuant to future new orders if any.

We expect strong cash generation over the next couple of years that will allow us to maintain strong liquidity, delever our balance sheet and maintain the agility to respond quickly to any incremental market opportunities. During Q2, we repurchased $35 million in stock under our $250 million program approved by the Board in February.

This leaves us a $195 million in authorization remaining under this program. We remain committed to returning capital to shareholders via a combination of dividends and share repurchases. We feel good about how the first half of the year has gone and last quarter's expectation of low double-digit growth for full-year 2019, of 2018s earnings per share of $5.30 has not changed. With the usual seasonality in the incremental fleet opportunities announced earlier today, representing 2020 growth elements we would expect Q3 to look pretty similar to Q2 with the normal seasonal fall off in Q4.

Our visibility to future cash flow gives us the confidence to continue to make disciplined investments to create shareholder value. As we continue to demonstrate when and if new investment opportunities come, we will be ready with a strong and liquid balance sheet. This future capital deployment could include organic growth opportunities in contract flying, pro rate flying or leasing.

In addition to organic growth opportunities, of course, we will also continue to look at returning capital to shareholders via share repurchase and dividends. As Chip mentioned, we are striving to drive a healthy balance between earnings growth and cash flow.

Wade, will now give you some details on today's contract announcements, fleet movements and other commercial opportunities and initiatives. Wade?

Wade J. Steel -- Chief Commercial Officer

Thank you, Rob. I'll review our latest agreements and fleet updates that occurred during the second quarter and then discuss the implementation of these changes, as well as additional opportunities. As Chip mentioned, today we're pleased to announce 10 additional CRJ700 with American Airlines. This is a new long-term agreement with service expected to launch in 2020 along with the extension of the 38 CRJ700s and the addition of the two CRJ700s we announced last quarter. This brings our fleet total to 70 CRJ700s under long-term agreements with American.

We anticipate acquiring seven CRJ700s from a third party to help fund this growth. We're happy with the progress we're making with American and we'll continue working with them to meet their long-term fleet needs. To summarize our new aircraft delivery stream we received four new E175s during the second quarter for Delta, and we're scheduled to take delivery of four more during 2020 which will bring our total E175 fleet to 155 by the end of next year.

We also received three, CRJ900s during the second quarter, we expect to take delivery of one, CRJ900 during Q3 and the remaining eight during 2020. These CRJ900s are owned and financed by Delta. Let me shift gears to our leasing business, where we continue to leverage opportunity. This quarter we delivered the first of 29 CRJ700 aircraft under our previously announced agreement with the domestic third party. These aircraft are under a 10-year lease agreement and we anticipate the remaining aircraft will be delivered through the middle of next year. The majority of these aircraft will be sourced from the 30 CRJ700s from our previous ExpressJet operation.

We have also delivered the first of five CRJ900s leased by Air Canada under a six-year lease agreement. We anticipate delivering the full -- the remaining four aircraft during the third quarter of 2019. Separately, our 16 CRJ200s under lease with ExpressJet will return to SkyWest during the second quarter.

However, we expect to receive lease payments on the majority of the aircraft through the end of the year. We anticipate that SkyWest will operate the majority of these aircraft. Finally, during Q2, we also entered into an agreement to lease 40, CF34-3 engines to Delta with an anticipated five-year term. This is in addition to the 13

CF34-8 engines already under lease with Delta. We expect the deliveries on the 40 engines to begin late next year through mid-2021, as I've discussed, we continue to utilize our flexible fleet and flat platform to -- for profitable opportunities. Leveraging the unique position, we've built over the past several years to enhance our model at a minimize risk.

We anticipate ongoing execution of these agreements will help ensure we're well positioned for the remainder of 2019 and beyond.

Robert J. Simmons -- Chief Financial Officer

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

Questions and Answers:

Operator

We'll now begin the question-and-answer session.[Operator Instruction] The first question comes from Michael Linenberg of Deutsche Bank. Please go ahead.

Matthew Fell -- Deutsche Bank AG -- Analyst

Hi guys, it's actually Matt Fell on for Mike. So when you look at the business going forward. Call it one or two years. What is the most compelling opportunity to earnings outside of incremental contacts or expenses?

Robert J. Simmons -- Chief Financial Officer

Well, I would. Matt, Rob here. I would put it into sort of three categories. I would say growth driver number one would be our ability to creatively sort of work within existing scope limitations of our partners. The second would be ability for us overtime to make market share gain wins and then the third category, broad category would be ongoing opportunities as Wade sort of outlined within leasing opportunities, assets within our operational footprint that we have the opportunity to lease. I think over the next couple of years, I think you can expect us to execute against all three of those broad areas.

Matthew Fell -- Deutsche Bank AG -- Analyst

As a quick follow-up. I feel like the company, is at a real cash flow inflection point here, and so on use of cash. Could you just rank your priorities in terms of balance sheet deleveraging, returning cash to shareholders and responding to any market opportunities. Thanks for taking the questions.

Wade J. Steel -- Chief Commercial Officer

Sure, Matt. No, I'm not, just I'm prepared to rank them exactly, but I think we have a number of initiatives that we've laid out, including delevering our balance sheet over time to prepare for, if there is an next investment cycle out there we want to be prepared with a strong and liquid balance sheet that can help us take advantage of those market opportunities. We're clearly committed to continuing to do the right thing and returning capital to shareholders. But I think overall, we just want to be able to remain nimble and being able to, be prepared for whatever is out there in the future.

Operator

Is there a follow-up, Mr. Linenberg [Phonetic].

Matthew Fell -- Deutsche Bank AG -- Analyst

No, that's it from me. Thank you.

Operator

Thank you. The next question comes from Savi Syth of Raymond James. Please go ahead.

Savanthi Syth -- Raymond James & Associates -- Analyst

Hey, good morning -- good afternoon. I just wanted to ask on the news about Mitsubishi by CRJ per program and it sounds like they are shutting down the production of the CRJ program. Can you talk about kind of implications for our future aircraft buying and maybe the kind of the aircraft that you have in your footprint right now.

Robert J. Simmons -- Chief Financial Officer

Yes, obvious shift things, that's a great question and an important development here recently. Look, I think that we're excited about a new opportunity relative to our existing fleet. Yeah, we are disappointed that certainly that production line is closing down. But I think that as you know, the strong number of aircraft that we have with Bombardier. We believe that Mitsubishi will be able to embrace this business model and develop within their existing program and I think for us the important part is that they've got the ability to invest enhance what they can provide to us and we have a very firm expectations. That's what they'll do. But from our perspective, I think this is something that we look forward to working with Mitsubishi going forward and finding some new ways to develop this fleet in our existing fleet and just work within their parameters that they have was also their new aircraft as well. So I think that this opens a very good door for us, to do some different things that we potentially haven't had the ability to do in the past.

Savanthi Syth -- Raymond James & Associates -- Analyst

Do you see any kind of implications for maybe E175 cost or maybe the carrying values, book values on for the CRJs in-house already?

Robert J. Simmons -- Chief Financial Officer

I think the market is going probably go in that direction. We're fortunate with the commitments that we have with the existing manufacturers that we feel very comfortable with our position in those elements for the upcoming future. So that's not one of our primary concerns at this time.

Savanthi Syth -- Raymond James & Associates -- Analyst

Got it. And then, Chip. Maybe I can. The second question to you too. Congrats on being nominated for the next Advisory Committee chair. Just kind of curious, why that's important and if -- if there is anything kind of more specifically the regional airline industry. We're at this kind of NextGen initiatives that are important?

Chip Childs -- President and Chief Executive Officer

Yeah. Look I, by the way, thank you. I mean it's a very humbling appointment. There is a lot of things that have been involved with the knack for quite some time. And I can tell you, I think that first and foremost relative to SkyWest were very evolutionary company when it comes to technology we've embraced it in many capabilities.

We've got an outstanding IT department, we've got an outstanding flight operations and maintenance department that embrace this technology. I think as we look from an industry perspective, I think that there is a lot of things within the National Aviation System that can use a lot of help with technology, certainly there is things that new aircraft need to be addressing as they come off the production lines, including the ones that we're taking, we're happy with the new aircraft we're getting, but we have an existing fleet that's an outstanding fleet of aircraft that probably needs to have some investment to get to where we need to be.

So the number one thing for us is obviously equipment and so I think it's a dynamic thing within the regional industry that we have to take a good strong hard look at it. I think there is a lot of good ROI relative to the programs, and I'm excited to be more involved with it, there's tremendous professionals involved in the committee.

And I think some of the success stories we've seen as ADSB, and how that's produced some of the things that is extremely safe and efficient and there's a lot more that we need to do particularly on the regional side, we look forward to helping lead that effort at SkyWest.

Savanthi Syth -- Raymond James & Associates -- Analyst

All right, Thanks.

Operator

The next question comes from Duane Pfennigwerth of Evercore. Please go ahead.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hey. Thank you. Just with respect to your commentary about 2019 CapEx. What's your view today for the trend into 2020 off of this 525 level that you outline?

Robert J. Simmons -- Chief Financial Officer

Hi, Duane, it's Rob here. So, again its going to depend on what the future holds in terms of new orders, because obviously we want to be prepared for -- a future where, where there are some new orders coming, but again absent -- any absent -- any new orders out there we would expect that it's likely the CapEx in 2020 will fall at the same time, obviously, we would hope that EBITDA would rise so creating a strong cash flow environment going forward.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Thanks. And then with bad weather, with cancellation rates high for a number of carriers this quarter. Can you just help explain why that doesn't translate to SkyWest anymore. It used to maybe it was a function of this quarter was much more about mainline cancels and maybe was more about the lack of max availability but can you just comment on, is there something different structurally around your contracts or did you see some short-term uplift or increased demand due to main line [Indecipherable] this quarter?

Robert J. Simmons -- Chief Financial Officer

Well, I think that clearly there have been changes over the last few years contractually in terms of the way that weather cancels are handled that helps, but again during the quarter, we had a rough June. Gross completion was not -- was affected by weather and that affects our economics, but fortunately we had other other opportunistic offsets that allowed us to offset any of that the bad weather effects.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Do you think you are seeing any adhoc or short-term demand as it relates to the lack of availability.

Robert J. Simmons -- Chief Financial Officer

I mean, the simple answer is no, because we fly, a very different footprint and the Max does and it hasn't been a big effect to us.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay, thank you very much.

Robert J. Simmons -- Chief Financial Officer

Thanks Duane.

Operator

Your next question comes from Helane Becker of Cowen. Please go ahead.

Helane Becker -- Cowen and Company LLC -- Analyst

Thanks, operator. Hi, everybody. Thanks very much for the time and Chip, I'll add my congratulations to Savi's on your appointment and thanks for that.

Chip Childs -- President and Chief Executive Officer

Thanks. Thanks, Helane.

Helane Becker -- Cowen and Company LLC -- Analyst

Those comments. And then the question I had actually was with respect to 2019, you didn't update guidance or did you and I missed that?

Robert J. Simmons -- Chief Financial Officer

2018, did you say, Helane?

Helane Becker -- Cowen and Company LLC -- Analyst

I don't think so. I thought, I say '19, but you never know.

Robert J. Simmons -- Chief Financial Officer

Now, with respect to 2019, what we said was basically our outlook from last quarter is not changed, we are still expecting double-digit growth in 2019 half of the 2018 earnings per share of $5.30. So, that remains unchanged.

Helane Becker -- Cowen and Company LLC -- Analyst

Okay. And then on, I was happy to hear the comments you made on the pilot. Are you seeing -- let me think kind of ask this -- with respect to some airlines are like overstaffed right now because of the Max issue. Are you seeing people, who are interested in just keeping their hours along flying -- applying to fly for you?

Chip Childs -- President and Chief Executive Officer

Honestly, Helane we are not. I think within our model nothing has changed with or without the max issue, but we also made a comment that the majority -- actually at least 50% of the pilots, we're getting today have been developed within our existing pipeline and which also translates into pretty much all the pilots we're getting today are coming up through schools, they're getting their 1,500 hours. We are not getting anything from the other side relative to the issue with the max on pilot?

Helane Becker -- Cowen and Company LLC -- Analyst

Okay, all right. Well, that was really helpful and I appreciate the answers. Thank you.

Chip Childs -- President and Chief Executive Officer

Thank you.

Robert J. Simmons -- Chief Financial Officer

Thanks, Helane.

Helane Becker -- Cowen and Company LLC -- Analyst

Of course.

Operator

The next question comes from Joseph DeNardi of Stifel. Please go ahead.

Joseph DeNardi -- Stifel, Nicolaus & Co. -- Analyst

Yes, thanks, good afternoon. Rob, can you just talk about -- you talked about the opportunity to take share and grow organically. Can you talk about kind of the value proposition that you're offering to airlines? What gives you confidence that you can take share? And then whether there are kind of some bigger opportunities to do so, or if it's kind of evenly spread out over the next couple of years?

Chip Childs -- President and Chief Executive Officer

Joe, I know you're directing this to Rob, I'm going to -- this is, Chip. I'm going to take a crack at this, if you will, I think there is a couple of things over the last couple of years that our partners, we hope and think is true as gained confidence in us with a couple of things. First and foremost, we pride ourselves on being a carrier that A, has the resources both from a human and aviation professional perspective and a capital perspective to be in a position to deliver what we say at the onset. We don't love to be in a position where we have to go in and say, we don't have resources, we can't fly what we committed to for. And that's something that we've proven over some difficult times over the past years that we have gained a lot of trust and that we're going to do what we tell our partners that we're going to do and that goes a long way in these relationships with our major carriers.

Second of all, we're willing to be extraordinarily creative, one thing that's moved our strategic dial over the last several years is our ability not just to work with partners, but strategize with them long term and see some of the need that they have with the resources we have and help them design things. We've even had conversations with partners, where it didn't make sense for us to take all the flying that they may want us to take and we backed off and said, you should do some different things with that.

So look, I think first and foremost, I think by far our relationship and our strategic connection with all four partners given what they want is the number one thing that we have, besides our resources. And then as you say, how does that translate, I have to tell you that we're always in fluid and dynamic conversations with our partners.

I mean, today's focus at SkyWest is to continue to deliver strong performance through the summer schedule. Once that certainly backs off, then there is other things that happen relative to fleet management -- and how we capitalize that. But our partners have seen our 47 year history that we have. They know that we mean what we say and then we come with creativity that in my opinion and I've heard this from them and we believe it internally because it is our number one goal is to be their absolute provider of choice and that helps us get some visibility and some things that we think are unique. So that's where we get our confidence in being able to make some of those statements that Rob made.

Joseph DeNardi -- Stifel, Nicolaus & Co. -- Analyst

That's helpful. Thanks, Chip. I'll leave it at one. Thank you.

Robert J. Simmons -- Chief Financial Officer

Thanks, Joe.

Operator

The next question comes from Steve O'Hara of Sidoti & Company. Please go ahead.

Stephen O'Hara -- Sidoti & Company -- Analyst

Hi, good afternoon. I don't know if you could tell me just in terms of the kind of the, based on the fleet that you're taking next year and may be what the CapEx is, that's already kind of in the books. I mean what's the expected block hour growth next year based on the fleet moves you have right now baked in. And then maybe what's your maintenance CapEx and what's kind of the minimum level of CapEx beyond that, that's already planned. Thank you.

Robert J. Simmons -- Chief Financial Officer

Hey, Steve .Rob here. So I would say vis-a-vis the topic of CapEx again like I said earlier I think '19 over '20 CapEx levels are going to depend on things that we'll have to just stay tuned on, but again, all else equal, based on where we stand today. We would expect CapEx would likely fall in 2020. Baseline CapEx right now, again, X buying new airplanes is running about $50 million a quarter a little hotter than it did a year ago, largely because of opportunities within it within the engine market. And so, we're been a little more aggressive about buying engines out there in the market right now where we find opportunities. So baseline CapEx is running roughly $50 million a quarter and then aircraft if any would be on top of that?

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay. And then like Block hour growth. I mean, is there a way to kind of maybe bracket that for next year?

Chip Childs -- President and Chief Executive Officer

Yeah, I think, typically what we'll do is we'll -- we usually publish at the end of the year, full-year forecast going forward. And I think it's likely, we'll do that again this year. You'll notice in the press release that we've sort of updated it for -- through the end of 2019. And we'll likely give some more color next quarter on 2020.

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay. All right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Chip Childs for any closing remarks.

Chip Childs -- President and Chief Executive Officer

Thank you for your interest in SkyWest and joining us on the call today. We're happy with our business model and we think that this continued strategy of making sure that we've got the best aviation professionals in the industry working as a team as well as the ability for us to continue to invest in our business model and take care of our partners is one we'll continue to provide good strong results for our shareholders and we will talk to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Robert J. Simmons -- Chief Financial Officer

Eric Woodward -- Chief Accounting Officer

Chip Childs -- President and Chief Executive Officer

Wade J. Steel -- Chief Commercial Officer

Matthew Fell -- Deutsche Bank AG -- Analyst

Savanthi Syth -- Raymond James & Associates -- Analyst

Duane Pfennigwerth -- Evercore ISI -- Analyst

Helane Becker -- Cowen and Company LLC -- Analyst

Joseph DeNardi -- Stifel, Nicolaus & Co. -- Analyst

Stephen O'Hara -- Sidoti & Company -- Analyst

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