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Skywest Inc (NASDAQ:SKYW)
Q3 2020 Earnings Call
Oct 29, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to SkyWest Inc. Third Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. 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 statement. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2019 Form 10-K and other reports and filings with the Securities and Exchange Commission.

And now 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, again, for joining us on the call today. I want to begin by saying how proud I am of the way our teams have pulled together to confront this incredibly challenging and unpredictable environment. eight months into the pandemic, our industry has dramatically changed. Our teams are working nonstop to stay focused on the health and safety of both our people and our passengers, and we remain flexible in responding quickly to deliver on our partners' network and schedule changes. We have successfully resumed continued qualification training with pre attendance COVID testing as well as stringent requirements for social distancing, cleaning and face covering. We continue working to stay ahead of the latest CDC guidance, and our teams are successfully achieving things we couldn't have imagined a year ago. I want to thank them, again, for their outstanding work. Early on in this pandemic, we set key priority is to ensure we're able to successfully emerge from the crisis and play a key role in the recovery.

Our first priority was the personal health and well-being of our people and passengers. Second priority was maintaining strong cash and liquidity. And the third priority is remaining strong and agile as we work with our partners. We remain focused on these three priorities and on ensuring we're able to evolve with the changing industry landscape. Some of that evolution was announced earlier this week when we share changes in our senior leadership. Greg Wolly was named Executive Vice President of Operations, stepping into his role with a tremendous background, meeting almost every aspect of regional airline operations over his 25-year career, and most recently, overseeing our ground handling operation.

He has wholeheartedly embraced the SkyWest culture and commitment to excellence, and I'm confident he's the right person for this position, particularly in this uniquely challenging landscape. We have also transitioned some of our other leaders into Senior Vice President role and streamlined our overall management and administrative staff. These changes better reflect our current operation and will provide the focus needed to deliver a stronger-than-ever operating product. We'll also have to ensure we remain agile in responding to our partners. We are focused on the long game, and we're lucky to have the best leadership team in the business. I believe this team will be the difference between SkyWest and our competition in the coming months as we prepare for recovery. Today, we announced an agreement with American for 20 used CRJ700s to enter service throughout next year. These are in addition to the 70 CRJ700s already under agreement with American. We are maintaining a strong delivery schedule and are working with each of our partners on their fleet and network needs.

Our dual-class fleet is playing a strong role in the recovery and our ability to deliver for our partners will remain a key differentiator for us. We continue to invest in our fleet and maintenance programs as part of our long-term strategy to build reliability into our fleet, and creating flying opportunities just like this when we just announced. During the third quarter, we reported net income of $34 million. This includes the $190 million in payroll support program funding under the CARES Act that we recognized as income during the quarter. Without a new extension, this nearly marks the completion of our CARES payroll support grant funding. Rob will talk more about liquidity in a minute. We are working closely with our people to take steps to manage costs in this environment, and we are fortunate to have very positive relationships with all of our employee work groups. They work productively with us to minimize the negative impacts to our people as much as possible, while ensuring that we remain flexible and ready to provide critical support to our partners.

This positive relationship with our labor groups will help ensure our long-term viability and success. Our third quarter production was an improvement over the second quarter, but what is usually in our peak quarter was about 60% of what we flew a year ago with about 1,600 daily departures. As of today, we're expecting a slight uptick in production in the fourth quarter. However, we are prepared to respond if the climate deteriorates. Our ongoing agility will remain a key component of our recovery strategy. And while we're clearly focused on working with our partners, our contracting sessions are mostly complete. We're working closely and collaboratively with each of our partners to ensure we're best positioned to meet their needs. This COVID environment shines a spotlight on the importance of how we've been derisking our business model over the past five years.

While no one in our industry is immune to the economic effects of the COVID crisis, we feel good about how we are positioned to weather this storm. Undoubtedly, the next several months will be turbulent, but we're pleased with the shape of the recovery so far. As demand returns, we are confident that our fleet will continue to feel a critical role in the return to travel. We are focused on navigating this crisis aggressively and deliberately to take care of our people, our customers as we preserve our liquidity and plan for recovery to ensure we emerge as a better, stronger business.

Rob will now take us through the financial increments.

Robert J. Simmons -- Chief Financial Officer

Today, we reported third quarter net income of $34 million or $0.66 per share. Our diluted share count for Q3 was $50.6 million, and our effective tax rate in Q3 was 27%. These GAAP results include the effect of the deferral of $30 million of revenue this quarter, down from $69 million deferred in Q2. As discussed last quarter, the timing and amount of future deferrals and the reversal thereof into revenue depends on the shape and cadence of the recovery of our flying. All deferred revenue will be reversed into revenue by the end of the various contract periods. We currently expect to continue to defer some revenue into late 2021 or 2022 when it may begin to reverse. First, let's talk about revenue. Total revenue is down 40% from Q3 2019, but is up 31% from last quarter. This breaks down with contract revenue down 35% from Q3 2019 and up 28% from Q2. Pro rate revenue is still down 58% year-over-year, but was up 69% from last quarter.

As we have previously said, pro rate revenue is nicely levered to a recovery, as you can see in these numbers. Let me move to the balance sheet. We ended the quarter with cash of $822 million, up from $762 million last quarter. Our capex during the third quarter was $10 million, comprised of aircraft engines and parts. At this point, our expectation is to pull back our capex for the year from $636 million last year to approximately $430 million this year, including the acquisition of four new E175s and 21 CRJ700s in a 50-seat configuration coming up in Q4. We ended the quarter with debt of $3.1 billion, up slightly from $3.0 billion as of year-end. The increase in debt from year-end through the end of September is driven primarily by the CARES Act funding from the government, including $60 million of five-year CARES Act secured debt and $105 million of 10-year unsecured low-cost PSP debt. We expect to make a gross paydown of $400 million in aircraft debt financing next year before the financing of new aircraft acquired next year or other draws on our CARES Act facility.

Let's talk about liquidity. As of September 30, our cash position was $822 million, in addition to availability of $513 million undrawn in our CARES Act loan and $40 million on our revolving line of credit. During Q3, we received $144 million in payroll support program funding under the CARES Act, of which $101 million is a grant and $43 million is a low interest loan. This number includes a $12 million top-up from Treasury near the end of the quarter. At the end of Q3, we closed on our CARES Act secured loan in the amount of $573 million. In October, the U.S. Treasury increased that amount by $152 million to $725 million. Coincident with the initial closing of the secured debt facility, we drew the required minimum of $60 million, leaving undrawn availability of $665 million as of today. This debt is secured by aircraft engines and spare parts. We have until March 2021 to decide how much an additional draws we will make under the secured loan facility, if any. During Q3, $190 million in PSP grants was recognized as income in the form of a contra expense laid out clearly as its own line item in our P&L. $3 million remains to be recognized in the fourth quarter.

Last quarter, we estimated that we would burn cash through the end of the year at a rate of about $500,000 per day. Based on September ending cash of $822 million, estimated year-end cash of $800 million, we are now estimating cash burn on average through the end of the year to be approximately $250,000 per day. This year-end cash forecast does not assume any incremental Q4 draws against either our CARES Act secured loan facility or our revolver. If the economic effects turn out to be worse and the recovery is slower than we currently expect we have additional liquidity tools we can call on, including that revolver and the $665 million in undrawn availability under our secured CARES Act loan facility. In addition to our core liquidity position, I'm going to remind you of a couple of things that are nice to have during this time of uncertainty and give us more flexibility than others in our space.

First, approximately 1/3 of our fleet has no financing remaining on it. This number goes to 45% when you include partner-owned aircraft that we operate. And second, we have minimal tail risk of around $100 million, the dollar delta between financing term and contract term. Our next pocket of tail risk is now out to 2023 and is 0 on the delta 200s expiring by year-end. 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. I will say that we expect to report GAAP losses over at least the next two to three quarters, driven by the following and other factors, including the recovery curve. Let me start with some headwinds. Number one, pro rate revenue is still weak, down 58% or $85 million from Q3 of last year. Number two, maintenance expense is up $29 million from Q2 or 24%, consistent with a 31% increase in revenue and will likely be higher in Q4, coinciding with anticipated Q4 production increases and then will likely plateau in 2021.

Number three, deferred revenue was $69 million in Q2, $30 million in Q3 and is expected to still reduce recognized revenue for the next few quarters until it starts to reverse based on production levels. Number four, PSP income from grants received has been recorded as contra expense with $190 million in Q3, going down to $3 million in Q4, absent a new PSP out of the government. Number five, the next two quarters, Q4 and Q1 are seasonally the weakest of the year. And now some tailwinds. Number one, production should continue to trend slightly higher. Number two, partner concessions from Q2 and Q3 have mostly ended. Number three, the discrete increase to our credit loss reserve in Q3 is not expected to recur. Number four, depreciation is trending down. And number five, deferred revenue is trending lower and may begin reversing in late 2021 or '22, depending on the timing of the recovery.

Obviously, there are many moving parts impacting the earnings calculus as we continue to operate in this COVID environment. To boil down the net impact of the anticipated headwinds and tailwinds going into Q4, we are hopeful that we can offset in Q4, almost half of the $190 million PSP income that will essentially go away in Q4, driven by higher expected production and the offsets just enumerated. Assuming no meaningful improvement to our schedules by Q1 2021, we anticipate Q1 2021 results may look fairly similar to Q4 2020. The modest cash burn of $250,000 per day, we are currently expecting in Q4 should turn neutral or positive mid next year. We are excited that the actions we are taking now and expect to take over the next few quarters are setting us up nicely for the new normal in the future. Wade?

Wade Steel -- Chief Commercial Officer

Thank you, Rob. I'll provide a fleet and production status update as well as an update on our pro rate and leasing businesses. To update by partner, today, we announced an agreement to place 20 used CRJ700s under a multiyear flying contract with American. These aircraft-s will be sourced from our current fleet of aircraft-s that have been in long-term storage for the last couple of years. As of today, we have 61 CRJ700s under contract with American. As a reminder, we still have nine more CRJ700s that will be placed into service under a previously announced agreement. By the end of 2021, we are scheduled to have 90 CRJ700s under contract with American. Of the 29 undelivered CRJ700s, four CRJ700s are anticipated to go into service during Q4 2020 and the other 25 ratably through 2021. As we shared last quarter, we worked with American to modify the timing of our 20 new E175 deliveries.

We now expect to receive a handful of these aircraft during the fourth quarter of 2021 and the rest through the middle of 2022. Let me talk briefly about our Delta agreement. We currently have four new E175 on order under our Delta agreement, which are scheduled for delivery during the fourth quarter. We plan to take delivery of our final Delta-financed CRJ 900 during the first half of next year. You may recall that we have 55 CRJ200 scheduled to expire under our Delta agreement by the end of this year. We have returned the 19 Delta-owned aircraft to Delta. The remaining 36 aircraft are SkyWest owned with no remaining financing obligations and will be fully depreciated by the end of the year. All of our current partner contract concessions expired in either September or October. The largest concession during the quarter was deferring payment due from our partners related to certain aircraft ownership costs of approximately $90 million. For GAAP purposes, we still recognize the revenue associated with the deferred payments related to aircraft ownership during the third quarter.

We expect the deferred ownership amount to be paid back over the remaining CPA contract term. Let me review our current production. During the third quarter, our completed block hours were down by approximately 40% compared to the same quarter last year. Based on the current schedules we have from our major partners for the fourth quarter, we anticipate that our block hours will be down by approximately 30% to 35% compared to the fourth quarter of last year. The E175 fleet continues to fill an important need for our major partners. While the majority of the reduction in block hours have been on the CRJ200 fleet. We anticipate that our Q4 E175 block hours will be down by approximately 10% as compared to Q4 last year, while our Q4 CRJ200 block hours will be down by approximately 50%. As of December 31, 2019, we have 156 E175s under contract with our major partners. By the middle of 2020, we expect to have 213 E175s under contract with our partners. Let me talk a bit about our prorate business. During the third quarter, we reduced our prorate block hours by approximately 38%, and revenue decreased by 58% or approximately $85 million.

We anticipate our prorate block hours to be reduced by approximately 25% during the fourth quarter compared to last year. We currently expect that 20% of our block hours will be removed for the foreseeable future. We expect our pro rate revenue will be approximately $75 million less during the fourth quarter 2020 compared to last year. Our prorate business model is nicely levered to the recovery. While pro rate revenue is down 58%, incremental revenue coming back to the prorate business will have attractive margin characteristics. Specific to our CRJ200 fleet, we had over 200 of them flying in our system prior to the onset of COVID in the United States. With the reductions at delta and to our prorate fleet, we estimate reducing our CRJ200 fleet by approximately 70 aircraft by year-end. As I said earlier, we have returned 19 CRJ200s to Delta. We are also in the process of returning 10 aircraft to a third-party lessor. We currently anticipate having 40 excess CRJ200s by the end of this year and expect to sell or part out several of these aircraft. We will also evaluate additional flying opportunities if the flying demand begins to recover.

Let me shift gears to our leasing business. Today, we announced an agreement to acquire 21 used CRJ700s in a 50-seat configuration and lease the aircraft under a multiyear term to another regional operator. The aircraft purchases and leases are expected to be completed in Q4 of this year. We are fortunate to be in a unique position to purchase these aircraft-s. We believe the CRJ700 is an exceptional asset that will continue to set SkyWest apart with very strong demand from our major partners. After the completion of this transaction, we will have 34 CRJ700s under lease to a third party. We are starting to see demand return for our engine leasing business. During the quarter, we signed 12 8C engines under short-term lease agreements. Between the 20 aircraft we signed up with American, the 34 aircraft under lease with a third-party and the 12 engine leases, the vast majority of our 8C, our 8C engines will be in productive revenue-producing agreements by the end of next year. Let me talk briefly about our current and forecasted maintenance expense over the next year.

Maintenance expense is up $29 million from Q2 or 24% and will likely be higher in Q4 and next year. The increase is primarily due to anticipated recovery of our flying and bringing the 20 aircraft for the American agreement out of long-term storage. We have spent the last several years, reducing risk and enhancing fleet and financing flexibility to ensure we're positioned to navigate this challenging environment. We are committed to continuing our work with each of our major partners to provide creative solutions through this difficult time in our industry.

Robert J. Simmons -- Chief Financial Officer

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Savi Syth from Raymond James.

Savi Syth -- Raymond James -- Analyst

This is a question for Wade, I think. Your CRJ700s have had so many dance partners, and you've been buying some aircraft as well. I was wondering if you could help me out by kind of detailing how many you have with each partner today and how many are sitting without partners? Because you talked about some in storage? And then what you expect that to be by year-end 21?

Wade Steel -- Chief Commercial Officer

Yes. Savi, this is Wade. So our CRJ700 fleet, I'll first talk about American. So American, we have 61 today. We have nine more that are going to be delivered. And then the 20 we just announced will also be delivered. All of those, so we'll have 90 under contract with American. All of those will be in service by the end of 2021. We have 19 under contract with United, and those are under long-term agreements, and we also have five with Delta that are under long-term agreements. And so after these 20 go in with American, we will have no additional CRJ700s, any excess CRJ 700. All of our CRJ700s will be under CPA contracts.

Savi Syth -- Raymond James -- Analyst

Okay. That's helpful. And then just the United partner you're subleasing to, is that different than the partner before? Because I just want to make sure that you to get comfortable that this is not like the 29 aircraft that you had and you only placed 13.

Wade Steel -- Chief Commercial Officer

So it is -- they are different airplanes. We did buy those, but it's to the same United Express regional partner.

Savi Syth -- Raymond James -- Analyst

Okay. But you're comfortable that they can take it this time?

Wade Steel -- Chief Commercial Officer

These aircraft are already flying there and have already been converted and in the 550 configuration, and they're already operating in their system today.

Operator

Our next question is from Joseph Denardi from Stifel.

Joseph Denardi -- Stifel -- Analyst

Rob or Wade, can you just maybe frame for us, if we assume a 20% reduction in block hours and as many of the 200s coming out as you talked about, can you just frame for us what sort of CPA revenue that environment would produce?

Helane Renee Becker-Roukas -- Cowen and Company -- Analyst

So -- this is Wade. So the 20 -- so the Delta contract, it has 55 airplanes that are coming out. Delta owned 19 of those, and we were just leasing those for a nominal amount. And so the revenue associated with those are very minimal. Those airplanes have not had a lot of utilization on them over the past couple of quarters, Q2 and Q3. So there is an impact. There's not a -- it's not a major impact to contract revenue. And as we've talked about with these CRJ200s, we -- there's no book exposure. These will all be completely depreciated by the end of the year. There's no financing obligations on any of these aircraft as well.

Joseph Denardi -- Stifel -- Analyst

Okay. And then, Rob, can you just walk through some of the structural initiatives that you've taken to, I guess, adapt the cost structure to a lower block hour environment going forward?

Robert J. Simmons -- Chief Financial Officer

Yes. Well, first of all, thanks, Joe, for your questions. I think that as we look at this environment, obviously, we are trying to position ourselves with as much liquidity as possible and flexibility so that we can meet the needs of our partners going forward. As we mentioned in the script, we have started taking some actions. But again, we do -- we don't have any intention to go deeper than we said in the script at this time. And so I think that everyone in this environment is looking for opportunities to be more efficient. And I think you heard us like enumerate a lot of those actions that we've been taking to get more efficient.

Joseph Denardi -- Stifel -- Analyst

And just so I understand the commentary around the 20% reduction in block hours, is that where you think you'll be once the additional American aircraft come in, like, net of the Delta aircraft that are going out? Or you just see a 20% reduction in kind of overall demand for your service?

Chip Childs -- President And Chief Executive Officer

Joe, this is Chip. Just real quick. I think that there's a lot of moving pieces. It's difficult to speculate on because a lot of what we're talking about with aircraft coming in come in throughout the rest of 2021 and when we talk about 20% reduction, it's what we know today relative to 200s and the things that we know today. The big outlier for us, when we get to the end of 2021 is what does this virus do? We are clearly looking at the next four months of November, December, January and February and are extremely cautious because it's winter. We don't have a vaccine yet. We're taking a look at the infection rates these days. But there's still -- the number one thing that we feel is important is to stand ready for the things that may happen in March and the summer months.

So from that perspective, there's a delicate balance between making sure that we have an absolute lean cost structure for what we know today. But again, most importantly, to make sure that we stand ready for what may happen in March in the summer months to be ready to resume what could be some impressive demand, particularly with the smaller-sized aircraft fleet that we have and where we fly. So again, I think that hopefully gives you some color, but there is a tremendous amount of uncertainty still that we're trying to understand starting in March of '21 through the end of '21.

Operator

Our next question is from Casa O'Brien from Goldman Sachs.

Casa O'Brien -- Goldman Sachs -- Analyst

So a couple here, just based on your expectation that you'll be deferring some level of revenue through the end of next year or maybe even early 2022. Should we assume that means it will take into those periods to get back into pr-COVID levels of block hour production? And then can you just remind us what the bar is for you to stop being required to defer revenue? Is it block hours recovering to 100% of pre COVID levels? Or can you start booking some back before then? And then last on this topic where I have another follow-up is, is some of this tied to concessions? I wasn't sure if Wade alluded to that in his remarks. I might have been misunderstanding. I know there's a couple there so thanks for the time.

Robert J. Simmons -- Chief Financial Officer

Catie, thanks, this is Rob. Look, let me talk about deferred revenue conceptually. First of all, one thing to remember is 100% of the revenue that's deferred -- that was deferred last quarter that has been deferred this quarter and will be deferred possibly over the next several quarters, all of that will be reversed into revenue by the time that each of those individual contracts expire. So under no circumstances will we not recapture that. We've received the cash. There's no ongoing performance obligation under those so we will -- all of that deferred revenue will reverse. Now the timing of when it starts to reverse, again, it's hard to guess at this point, it is going to depend on getting back to something -- some semblance of "normal", whatever that means in this environment. But look, our best guess right now is that, as you saw a deferred revenue came down pretty significantly from Q2 to Q3, we think that there will be some modest deferred revenue deferred over -- for at least several more quarters, and then, again, potentially start to reverse, depending on what this recovery turns out to look like. But that in no circumstance as well that revenue not be fully recognized by the time that each of the individual contract periods ends.

Casa O'Brien -- Goldman Sachs -- Analyst

Okay. Got it. Got it. So just, like -- so there is a little bit of an assumption that through next year, you don't completely recover to pre COVID block hour production. Is that right?

Robert J. Simmons -- Chief Financial Officer

That's right.

Casa O'Brien -- Goldman Sachs -- Analyst

Okay. Got it. Understood, perfect here. And then given that you're major -- just on the deals you announced today, given that your major partners, for the most part, choosing actions to shrink their fleet, can you just help us think through like what the new American and United deals you announced are stemming from? Are you seeing -- are partners seeing a need for a net increase in regional list over the next couple of years? Or are you winning share by locking in these fields?

Chip Childs -- President And Chief Executive Officer

Yes. Thanks. This is Chip. Again, I think that -- I mean, some of your questions is probably better suited to our partners to be candid, and it's probably better for them to answer. A couple of things that we do look at. There certainly are some limitations given everybody's reduced schedules relative to -- and that has some impact on their regional fleets, respectively. Our job is not to get too tied up into that stuff because that's more of their business. And as we continue to press forward with this, we feel like we've got good economics on a good product that helps in recoveries. We've been in the industry for a long time. We've seen things like the financial crisis in 9/11. And certainly, with what we're facing today is somewhat similar where smaller aircraft have a good niche presence to not only maintain market share but make sure we're delivering the type of service to their entire market, and it gives them good flexibility. That having been said though, our job is to mostly work really, really closely with them, communicate frequently and stand, as we've said several times, agile for the long game and make sure that we're their partner of choice, not only when times are good, but also when times can be difficult like what we're in today, and that's our focus.

Casa O'Brien -- Goldman Sachs -- Analyst

Got it. Understood. I was just impressed to see new aircraft coming on in the middle of everything going on right now. If I could maybe just sneak one quick one in to Rob. Appreciate the time. How are you guys thinking about what level you will draw under your CARES Act secured loan? Is that just -- is that just dependent on like where demand goes? And then are you trying to minimize the amount drawn through that loan by potentially looking at other capital sources? Or you're happy with the terms, and that would be your first choice if there was a need for additional liquidity?

Robert J. Simmons -- Chief Financial Officer

Yes. Thanks, Catie. So look, I think that, number one, we're grateful to the work that Treasury and the government has gone through to make that available to us. Again, we drew the minimal amount required under that facility. And again, we have $665 million outstanding that right now is a very inexpensive liquidity option for us. So we're going to wait and see. I mean we've got until late March of 2021 to make a final decision on what, if any, we might want to draw on that facility. And I think it's pretty likely that we'll just wait until then and see what the recovery look like -- looks like, see what our -- see what the situation is and then make that call. Obviously, this is impacted by whether or not there's another round of PSP and a number of things. But for now, we think of it as an inexpensive liquidity option, and we're grateful to have it.

Operator

Our next question is from Duane Pfennigwerth from Evercore ICI.

Duane Pfennigwerth -- Evercore ICI -- Analyst

Just to follow-up on Catie's line of questioning there. So I think in the fourth quarter here, the plan for American is to be down, call it, 50% in capacity, all else equal. And so can you just speak to who you're replacing because that would be the most obvious explanation? Is it a Compass that's no longer flying? Is it a -- one of their wholly owns that they're having concerns about? Like, why would they be adding shells with you?

Wade Steel -- Chief Commercial Officer

Yes. Duane, this is Wade. First of all, I'll just say American, we've been working on this agreement with them for the past couple of months. This is something that's uniquely came up. They have some unique scope. As you know, they have a small RJ and a large RJ scope. The small RJ scope has 65 seats. The CRJ700 is very much a very good aircraft to fill that scope. We were able to fill it very economically for them. I am not in a position to comment on who it's replacing or what it is doing. I would ask you to follow-up with them on that. But we have an airplane that very uniquely fits their scope, and they seem to like it.

Duane Pfennigwerth -- Evercore ICI -- Analyst

Okay. That's fair. I don't mean to certainly put you on the spot. I guess you can speak to the regional industry and a number of the smaller players that have fallen by the wayside. Can you speak to the number of RJs that have kind of permanently left the industry at this point since the pandemic started?

Chip Childs -- President And Chief Executive Officer

This is Chip, Duane. Not really. I think that there's a lot of information out there that we're candidly not privy to. And to be candid, we really don't care. What we're mostly focused on is what we can provide to our partners. And we don't necessarily try to target certain things within the industry. We're just delighted that we're in a position. And as Wade said in his script, we've worked on our position for the last five years to reduce risk, to have the capital and have the outstanding professionals at our company that we have that enable us to be agile and aggressive with capital. And I think that from my perspective and for all of our strategies perspective, it's about working with partners, not working against competitors, and that's the key to our strategy, and that will be the key for a very, very long time.

Duane Pfennigwerth -- Evercore ICI -- Analyst

Okay. I appreciate that. And then maybe just lastly, in terms of kind of guaranteed minimums in the existing contracts. Can you speak to kind of maybe in the fourth quarter or the third quarter? And obviously, the third quarter is a little noisy with the PSP. But how much below your guarantees are you operating? And is that essentially what this deferred revenue is to kind of make you hold for that investment at some point in the future? And I appreciate you guys taking the questions.

Wade Steel -- Chief Commercial Officer

This is Wade. So as far as the contract minimums, every contract is a little bit unique. There -- some of -- and each of our partners are flying each aircraft a little bit -- a little bit differently. I will tell you, there are some of our contracts that are at the contract minimum. Some of them are slightly below it. And so it's kind of a variety of where we will be in the fourth quarter. And as far as the deferred revenue, the deferred revenue is a little bit different than the contract minimums. It's really deferring the fixed rate portion of our contract to match the block hour, the completed block hours over the remaining contract term. So it's a little bit different.

Operator

Our next question is from Mike Linenberg from Deutsche Bank.

Mike Linenberg -- Deutsche Bank -- Analyst

Rob, on the 21 airplanes that were acquired, the 700s. Is that a third quarter acquisition or fourth quarter acquisition? And can you just give us the rough capex hit.

Robert J. Simmons -- Chief Financial Officer

Yes, sure. So in the fourth quarter, we expect capex to be somewhere in the neighborhood of $250 million. That's just the math of what was in my script. So the 21 new airplanes represent a little over $100 million of that. And then we've got the four E175s coming in, in the fourth quarter. That's roughly $100 million of capex, and then just some other rotables and unusual spare parts.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. That's helpful. And then just for Wade, I know you had said you have 156 E175s now. And then I know I heard middle of 2020, you're going to have 213. That's obviously not right. What was it the middle of what year are you going to have 213 E175s?

Wade Steel -- Chief Commercial Officer

So the 156 number was at the end of 2019.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay.

Wade Steel -- Chief Commercial Officer

And then the 213 is the middle of 2022.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. Okay. That's actually very helpful. Rob, the deferred revenue with your partners, is that with all four major partners that you're actually deferring the revenue? Is that with the math and block hours?

Robert J. Simmons -- Chief Financial Officer

Yes. It's -- again, as Wade said, it's -- it applies to all four of our partners, and it applies to the fixed rate component of those CPAs that under 606 needs to be accounted for sort of consistent with the variable -- the block hour production component of that.

Mike Linenberg -- Deutsche Bank -- Analyst

Okay. That makes sense. And then just one last one here on your pro rate flying. You did indicate that 20% of that is, I guess, going away permanently. And yet when I think about the world of demand for air travel today versus previously and your gauge and what you have available, it would almost seem that there would maybe be more pro rate opportunities for you as margins have been resized, smaller, not larger. So I'm just -- is it the planes are sold, and you just want to put them out to pasture? Or maybe you have a full plate, but I would think that there would be more opportunities for markets where the big guys would just back away from because they don't make sense today because the volumes aren't there. Is my thinking wrong on that? Or what's...

Wade Steel -- Chief Commercial Officer

So Michael, this is Wade. Yes. So as we said in the script, we probably have close to excess of 40 CRJ200s. And we're going to be a little bit patient with those airplanes right now. We obviously can utilize engines, we can utilize some of the parts. What we will do is we will monitor the demand and the recovery very closely. And as we see things coming back and we work with our major partners on the demand and things they want to do themselves versus what we want to do, we will do that. And just as a reminder, those airplanes are -- the financing obligations are completely done, and they are fully depreciated. So there's not a lot of financial risk. And so we can be patient with this model a little bit, and we will monitor it. The 20% number that I gave is just what we are seeing right now. And so we'll continue to monitor that very, very closely.

Mike Linenberg -- Deutsche Bank -- Analyst

Yes. And Wade, I would just add, just throw in as the last point, I do believe that as best as I can tell, you may be one of the last viable operators of the CRJ200 in the world. So take advantage of it.

Chip Childs -- President And Chief Executive Officer

Michael, this is chip. One more thing on that. We recognize your last point, and I want to emphasize that's going to continue to be a very strong strategic point for us. We don't anticipate that these airplanes are going to sit idle for very long. But it is the times we live in relative to visibility of demand, we're really not too worried about deploying them. We think that there is good economics. So to your first question, you're thinking about this perfectly. We just need to -- the whole world needs clarity on this pandemic right now, and we think that as that comes, these will get used.

Operator

Our next question is from Helane Becker from Cowen.

Helane Becker -- Cowen -- Analyst

And also thanks for all the information this afternoon. So a couple of questions. First, was there -- were there any transition costs in the quarter? And can you just talk a little bit about -- this is kind of a boring modeling question, but can you talk about D&A relative to the changes in the fleet?

Robert J. Simmons -- Chief Financial Officer

Yes. Let me talk about depreciation first, Helane, this is Rob. And thanks for your jumping on the call and asking your question today. From a depreciation standpoint, as you have noted, it's been running a little hot the last couple of quarters, partially as a result of some of these 200s being expected to come out of service by the end of the year and so we wanted to match off the depreciation schedule there. But -- so year-over-year, you can see that depreciation is up. But sequentially, from Q2, it's down, and it will likely continue to trend down for a bit now that we've sort of got some of these 200s behind us.

Helane Becker -- Cowen -- Analyst

Okay. That's very helpful. And then the other thing, I don't know, and maybe this is what Mike was asking. You're growing in a market that's declining. And then as you think about that over the next few years, are there deals out there that you think you could still pick up that might be attractive? And also as part of that question, why shouldn't we expect you to be more profitable coming out of the pandemic and the slow growth period than you were before. It just seems like with E175s and the larger 70-seaters being a bigger part of your portfolio, you would be in a position, in fact, to see your growth and your revenue growth accelerate when things turned around. No?

Chip Childs -- President And Chief Executive Officer

Helane, thanks so much. This is chip. And those are two really good questions. I'm going to go back to the first question that talks about, we continue to see some opportunities for growth in a market that's declining. I'd kind of remind you, as of today, the decline is still significantly stronger than what our growth is -- we still -- technically, our fleet is still going to be down from what we anticipated at being at the beginning of the year. But from that perspective, again, we have outstanding partners. We have outstanding relationships with them. And we do fundamentally see some opportunities to help them. As far as a deal out there, I can tell you that there is nothing that we see in the near future that would cause us to get overly interested. We want to stay in the lane that we've been in for the last five or so years and continue to do things organically and strategically through our operating entity and our leasing company.

But from a transactional perspective, we don't see anything out there. And we've looked, quite candidly, but it has to -- for us to go back into that world, it has to be an incredibly unique situation. And then lastly, about post pandemic profitability. I hope your question certainly comes true. There's a lot of runway between here and there and a lot of things that have to happen. There's no doubt that we're living in a pandemic and political climate today that it's hard to see what that could mean. But our job is to continue to work on the fundamentals to make that a possibility to the extent that we can control that. But that's still, in our view, way down the road. And candidly, our partners have some recovery to do in that process that we're going to continue to assist them with. Because, again, we said it a couple of times a day and in scripts, we want to play this for the long game, and we think that if we do some things right today, that long game is very positive. But in comparison to the past, it's still too early to be able to predict that, but it's an outstanding question.

Operator

Our next question is from Savi Syth from Raymond James.

Savi Syth -- Raymond James -- Analyst

A little bit along the line of Mike's question. Just kind of curious, I think of kind of regional airline business, primarily as more focused on business markets, just given your higher unit costs. And just wondering in this current climate where business demand hasn't really picked up. And I know this is not what you planned, but where do you see your partners? Are your partners putting kind of SkyWest flights in different types of markets? Or just kind of curious what type of passengers that you are flying today? And does your kind of recovery outlook and maybe even looking at pro rate and thinking maybe 20% doesn't come back, is that based on kind of a business outlook?

Chip Childs -- President And Chief Executive Officer

Yes. Savi, that's a terrific question. This is Chip again. I would say that we do have some geographical shifts within our fleet, but that's mostly due to some of the consolidation happening, some of the efficiencies that our partners are gaining in some preferential places in which we are trying to schedule flights that quite candidly are being scheduled completely different than they were a year ago. Given the data -- I would also advise that given the data that we see about travel today, it's probably going to look 180 degrees different probably a year from now when we make our way through the pandemic a little bit better. So what we're seeing today is not a tremendous amount of market-based shift, more of a schedule-based shift. And certainly, volumes are down pretty much everywhere. We are flying outside of some of the consolidation I referred to earlier.

But to the extent that you see within the industry about speculation about what travel is going to look like down the road, there's some things that could be very compelling to the regional model. We know that there's a lot of movement out of larger cities into smaller cities, off the coast, more into the Midwest and those types of things, all those things certainly bode well for us. The commuter aspect of it, the business travel aspect of, but all these things are kind of crossed up right now, as you've probably seen from some of the other calls, but we're certainly paying very close attention to all of it and are generally optimistic about the fleet that we fly, how we can execute and how we can provide value to our partners. And I think that's probably as close to a solid answer to your question that we're comfortable giving right now.

Operator

Our next question is from Joseph Denardi from Stifel.

Joseph Denardi -- Stifel -- Analyst

Just a quick follow-up. Wade, there's obviously a lot of volatility in terms of how much your partners' mainline schedule that are able to fly. I'm wondering if you all have more visibility into your schedule over the next several months. So when we look at scheduled capacity for you all, is that firmer just because of the contractual nature of that? Or is that still in as much flux as the mainlines flying?

Wade Steel -- Chief Commercial Officer

Yes. So -- Joseph, this is Wade. So we obviously work very closely with our partners on our schedule. Pre-pandemic, we were probably getting visibility to our schedule six, nine months in advance. Now we're trying to give our partners as much flexibility as they need to match capacity with the demand that they're seeing. And so it's a lot closer in right now. We have very good visibility to, obviously, our November, and we're starting to get a lot more clarity on December as well. So that's about where we're at. There's not a lot more clarity from our schedules at this point.

Operator

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

Chip Childs -- President And Chief Executive Officer

Thank you, Kate, and thanks, everyone, for joining us on the call today. Again, we really appreciate your interest in SkyWest. Once again, I want to thank our people. I'm still proud of our airline and our teams for the great work they're doing to support each other for the long-term success of SkyWest, and we look forward to talking to you all next quarter. Thank you. [Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Robert J. Simmons -- Chief Financial Officer

Eric Woodward -- Chief Accounting Officer

Chip Childs -- President And Chief Executive Officer

Wade Steel -- Chief Commercial Officer

Savi Syth -- Raymond James -- Analyst

Joseph Denardi -- Stifel -- Analyst

Helane Renee Becker-Roukas -- Cowen and Company -- Analyst

Casa O'Brien -- Goldman Sachs -- Analyst

Duane Pfennigwerth -- Evercore ICI -- Analyst

Mike Linenberg -- Deutsche Bank -- Analyst

Helane Becker -- Cowen -- Analyst

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