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Skywest Inc (NASDAQ:SKYW)
Q4 2020 Earnings Call
Feb 4, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. Welcome to SkyWest Inc. Fourth Quarter and Full Year 2020 Results Call. [Operator Instructions] [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, operator, and 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.

Russell Childs -- President and Chief Executive Officer

Thank you, Rob and Eric. Good afternoon, everyone, and thank you for joining us on the call today. I want to begin by saying how proud I am of the SkyWest teams and how they have pulled together to confront this incredibly challenging and unpredictable environment. This past year has tested the metal of our industry, our business and our people in every possible way. We know we're still a long way from returning to our 2019 demand levels, and we also know our industry will never be the same. Despite the ongoing volatility, our teams continue to demonstrate remarkable flexibility. We've stayed proactive to maintain our focus and learned invaluable lessons to adapt to this new environment and keep our people, passengers and business safe. During the quarter, we reported a net loss of $46 million, and for the full year 2020, we reported a net loss of $9 million.

While we are still clearly in the midst of the crisis, we appreciate Congress' continued recognition of the critical nature of our employees and the industry with the extension of the payroll support program through the 2021 Appropriations Act. We have received half of that $233 million funding and expect to receive the rest this month. Rob will discuss more about this in just a minute. As we anticipated, we did see an uptick in fourth quarter production compared to third quarter, although it is still down by almost 30% from what we saw a year ago. Based on the current forecast, we believe -- we continue to expect a choppy recovery period and maintain and remain prepared to respond as necessary. Our ongoing agility will remain a critical component of our recovery strategy. We are working closely and collaboratively with each of our partners to ensure we're best positioned to meet their needs. Very early in the pandemic, we set key priorities to ensure we successfully emerge from the crisis and ensure we play a key role in the recovery.

First, the personal health and well-being of our people and passengers; second, maintaining strong cash and liquidity; and third, remaining strong and agile and working with our partners. As we'll discuss today, we've held firm to those priorities and are fortunate to maintain a strong balance sheet and product and to have successfully avoided furloughing any crew member or mechanic. During the most difficult year in our industry's history, we're honored to be named a Glassdoor Employees' Choice award for the second year in a row. This year, being named the top 50% and the only regional airline company on the list. This type of recognition is something we work together with our people to earn every single day, and I'm incredibly proud of our outstanding team of professionals. Well done. Against the challenging backdrop of 2020, we maintained our focus to successfully execute on our agreements and ensure we are prepared to play a central role in responding to demand recovery.

Throughout the year, we maintained our strong delivery schedule while remaining flexible with our partners and their needs. We received 37 E175 for United and Delta and removed 62 50-seat aircraft from service in our Delta and American operations. We also acquired additional aircraft within our leasing entity and have ensured that business is focused on assets within our operating footprint. We successfully resumed continued qualification training with expanded COVID testing across the operation and maintain stringent requirements and processes for social distancing, cleaning and face base covering. We've stayed ahead of the latest industry in federal health guidance, and our teams are successfully achieving things we couldn't have imagined a year ago. I want to thank them for their outstanding work. This year, we're scheduled to take delivery of 18 new E175s for American. As we announced last quarter, we'll place 25 additional CRJ700 into American service.

Ensuring we're a solid partner is important to our business, and we've maintained tremendous flexibility and support to ensure we work with our partners toward demand recovery. We continue to invest in our fleet and maintenance programs as part of our long-term strategy to build reliability into our fleet. Undoubtedly, the next several months will be turbulent, but we're optimistic about the shape of the recovery so far. As demand returns, we are confident our fleet will continue to fill a critical role in the return to travel. We are focused on maintaining aggressive and -- remaining aggressive and deliberate to take care of our people and 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 data.

Robert J. Simmons -- Chief Financial Officer

Today, we reported fourth quarter net loss of $46 million or $0.93 loss per share. Q4 pre-tax loss was $59 million. Our basic share count for Q4 was 50.2 million, and our effective tax rate in Q4 was 21.8%. First, let's talk about revenue. Total revenue was down 21% from Q4 2019 but is up 29% from last quarter. This breaks down with contract revenue down 16% from Q4 '19 and up 30% from Q3. Prorate revenue is still down 47% year-over-year but was up 18% from last quarter. As we've previously said, prorate revenue is nicely levered to a demand recovery. Full year 2020 revenue is down 28% from 2019. These GAAP results include the effect of a deferral of $12 million of revenue this quarter, down from $30 million deferred in Q3 and $69 million 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 flight.

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 later 2021 when it may begin to reverse. Let me move to the balance sheet. We ended the quarter with cash of $826 million, up from $822 million last quarter. Our capex during the fourth quarter was $258 million, comprised of $230 million for four E175s and 22 CRJ700s with $28 million in aircraft engines and other parts. This puts us at $438 million in capex for the full year 2020. Our expectation for 2021 capex is approximately $650 million to $700 million, including the purchase of 18 new E175s under our contract with American. We ended the year with debt of $3.2 billion, up slightly from $3 billion as of year-end 2019. The increase in debt from year-end 2019 through year-end 2020 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 pay down of $400 million in aircraft debt principal 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 December 31, 2020, our cash position was $826 million in addition to availability of $665 million undrawn in our CARES Act loan and $40 million on our revolving line of credit. We have until May 2021 to decide how much in additional draws we will make under the CARES Act secured loan facility, if any. During Q4, $3 million in PSP grants was recognized as income in the form of a contract expense laid out clearly as its own line item in our P&L. This is down from grant income of $190 million recognized in Q3. Subsequent to year-end, SkyWest entered into an agreement with the U.S. treasury for $233 million in funding under the PSP two funding program for airlines. $40 million of this amount represents a low interest, no amortization 10-year loan, and $193 million of the $233 million is a payroll grant expected to be recorded as income largely in Q1 2021. Last quarter, we estimated that we would burn cash through the end of 2020 at a rate of about $250,000 per day or $7 million per month. Based on December ending cash of $826 million, we actually did a little bit better than our forecast.

We expect to continue to burn cash at a modest rate through the first half of the year at a rate similar to our Q4 expectation, again, of $250,000 per day or $7 million per month. Depending on the pace of the recovery, we could reach cash burn breakeven by mid-year 2021. 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 our cash balances, our revolver, and the $665 million undrawn availability under our secured CARES Act loan facility. In addition to our strong core liquidity position, we are expecting 2021 and 2022 to be years when we continue to focus on the balance sheet. As of 12/31/2020. Our debt net of cash balance is actually lower than it was at 12/31/2019. In 2021, we expect to repay at least $400 million in principal debt balances related to existing aircraft financing. Of course, we continue to expect to take delivery of additional aircraft in 2021 that will be financed with long-term debt financing.

But over the next couple of years, we expect to reduce our absolute debt balance while maintaining strong liquidity. We love the flexibility that having a strong balance sheet gives us. We continue to enjoy the position where approximately 33% of our fleet has no financing on it. This number goes to 45% when you include partner-owned aircraft that we operate. We also continue to have minimal tail risk of around $100 million, the dollar delta between financing term and contract term on our fleet. Our next pocket of tail risk is now out to late 2022. Especially in times of great uncertainty like this and consistent with our policy and practice, we are not in a position to give any specific EPS guidance at this time, but let me give you a little color. First, I will say that including the recognition of approximately $193 million of PSP two grant income in Q1, we expect to report GAAP profit in Q1. At this point, we would expect Q2 2021 to be less than breakeven. Continued headwinds to our model includes several factors I'd like to call out.

Number one, prorate revenue is still weak, down 47% or $63 million from Q4 of last year. Number two, maintenance expense is up $37 million from Q3 or 25%, consistent with a 29% increase in revenue. Maintenance expense will likely plateau in 2021 compared to Q4 2020. Number three, deferred revenue was $69 million in Q2, $30 million in Q3 and $12 million in Q4. We expect to defer additional revenue until later in 2021 when it could start to reverse. And number four, next quarter, Q1 is seasonally one of the weakest of the year. And now some tailwinds. Number one, production should continue to trend slightly higher. Number two, the new PSP two program brings us $193 million in grant income in Q1 before any new partner concessions. Number three, the discrete increase to our credit loss reserve in the second half of 2020 is not expected to recur. Number four, depreciation is trending lower coming out of 2020 and should be similar in 2021 to the Q4 2020 run rate. And number five, deferred revenue is trending lower and again, may begin reversing later in 2021, pending the timing of the recovery.

We are excited that the actions we are taking now and expect to take over the next few quarters are setting us up nicely for the new normal in the future. Wade?

Wade Steel -- Chief Commercial Officer

Thank you, Rob. I'll provide a fleet and production status update as well as an update on our prorate and leasing businesses. To update by partner. As of today, we have 65 CRJ700s under contract with American and 25 additional CRJ700s to be placed into service from our existing fleet throughout the year, bringing the American CRJ700 fleet total to 90 by year-end 2021. These 25 aircraft have been in long-term storage for the past few years. We also have 20 new E175 scheduled to go into service in 2022 in the American system, with deliveries scheduled for Q3 of this year to the first quarter of 2022, bringing our total American fleet to 110 aircraft in 2022. Let me talk briefly about our Delta agreement. During the fourth quarter, we took delivery of four new E175s under our Delta agreement. This brings our E175 fleet total to Delta to 71. We plan to take delivery of our final Delta finance CRJ900 during the first half of 2021. You may recall that we had 55 CRJ200 scheduled to expire under our Delta agreement at the end of 2020. We've returned the 19 Delta-owned aircraft to Delta.

The remaining 36 aircraft are SkyWest owned with no remaining financing obligations and are fully depreciated. These assets will be ready and available to respond to support the return of demand. Under our United partnership, we have signed -- we signed an extension for 70 CRJ200 in early 2020. We also took delivery of 25 used E175 aircraft during the year. All of which are currently under contract and flying. This brings our current United E175 fleet total to 90. We are currently working with all of our major partners on a second round of contract concessions that could include temporarily waiving contract minimums and a temporary rate reduction. We anticipate the majority of these concessions will be completed in Q1. We are working proactively with each partner to provide creative solution to the industry's current challenges. Let me review our current production. During the fourth quarter, our completed block hours were down by approximately 27% compared to the same quarter last year.

Based on the current schedules we have from our major partners for the first quarter of 2021, we anticipate that our block hours will be up by approximately 5% compared to the fourth quarter of 2020. The E175 fleet continues to fill an important need for our major partners. While the majority of the reduction in block hours have been on the CRJ200 fleet, our Q4 E175 block hours were down by 7% compared to Q4 last year, while our Q4 CRJ200 block hours were down by 50%. As of December 31, 2019, we had 156 E175s under contract with our major partners. By the middle of 2022, we expect to have 213 E175s under contract with our partners. Let me talk a little bit about our prorate business. During the fourth quarter, we reduced our prorate block hours by approximately 24%, and revenue decreased by 47% or approximately $63 million compared to Q4 2019. We anticipate our prorate block hours for Q1 to be up by approximately 3%, and the prorate revenue will be seasonally down compared to last year -- last quarter. Our prorate model is nicely levered to the recovery.

With prorate revenue down 47%, we expect the incremental revenue coming back to the prorate business will have attractive margin characteristics. Let me shift gears to our leasing business. Last quarter, we announced an agreement to acquire 21 used CRJ700s and a 50-seat configuration and lease the aircraft under a multiyear term to another regional operator. We closed on the purchase of all 21 aircraft during Q4, including the related lease agreement. Today, we are also announcing that we signed a purchase agreement to acquire 13 new CRJ700. As of today, we have closed on four of the 13 aircraft and expect to close on the others throughout 2021. We are working with several parties for SkyWest to either operate or lease these aircraft. Following the purchase of these 13 aircraft, we will own or control 169 CRJ700 aircraft. We are fortunate to be in a unique position to purchase these aircraft as we believe the CRJ700 is an exceptional asset that will continue to set SkyWest apart with strong demand from our major partners.

Let me talk briefly about our current and forecast maintenance expense over 2021. Maintenance expense is up $50 million from Q4 2019 or 36%, and we expect our fourth -- our first quarter maintenance expense to be up slightly from the same quarter last year. This increase is primarily due to anticipated recovery of our flying and bringing the 25 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 well positioned.

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 the Q&A now, please?

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Helane Becker from Cowen. Go ahead.

Helane Becker -- Cowen -- Analyst

Thank you very much for answering my question. Good afternoon. Thank you very much for the time. I was actually going to ask a question about maintenance on the 25 aircraft that have been in storage. One, which you kind of answered in your prepared remarks way. But once those aircraft comes back, what is the cadence for maintenance beyond that for 2021?

Wade Steel -- Chief Commercial Officer

So Helane, I think the question is, so our maintenance expense, what we said in our prepared remarks, is our maintenance expense is up $50 million from Q4 to Q4. We anticipate Q1 to be fairly consistent.

Helane Becker -- Cowen -- Analyst

Okay.

Wade Steel -- Chief Commercial Officer

The rest of 2021, it will -- we are going to continue to bring aircraft out of long-term storage throughout the remainder of 2021. The levels that we had in Q4 will probably be fairly consistent for Q2, Q3 and Q4 as well of -- during 2021. That's what we currently anticipate to bring those airplanes out of storage and get them reliably back up into the fleet.

Helane Becker -- Cowen -- Analyst

Got you. Okay. And then my follow-on question is with respect to your partners and spring break, we're in February, is there any indication that maybe not the beginning of March, but the end of March, is starting to see signs of improved traffic numbers?

Russell Childs -- President and Chief Executive Officer

Helane, this is Chip. That's a great question. There's a couple of challenges in predicting that stuff. We certainly would probably -- given the nature of our business and our relationship with our partners, lean more from what they've reported and what they're seeing. From our perspective, the fight levels that we've kind of discussed in the script are kind of predictable where we are, we don't see a terrific change from kind of what the levels that we have anticipated for March. There's no scrambling for March. But again, remember, the one thing that pandemic has done is has created a situation where the predictability of this stuff is very, very volatile. Bookings are much shorter out than what they've been in the past. So look, we are prepared for a reasonably strong March, but we're not -- I mean outside of that, we haven't done anything in a desperate fashion to try to find more lift, no.

Helane Becker -- Cowen -- Analyst

Okay. That's very helpful. Thank you very much everybody.

Operator

Our next question is from Duane Pfenningwerth from Evercore. Go ahead.

Ray -- Evercore -- Analyst

Hey guys. This is actually Ray [Phonetic] on for Duane. Appreciate the commentary regarding the current conversations on the additional concessions. As we look for potential recovery on the table driven by the exact scenes, when do you think you could get back to the contractual minimums? And what -- or maybe what historical levels should we be looking at as a good idea of what that level could be?

Wade Steel -- Chief Commercial Officer

Yes. So we talked about in -- this is Wade. So in my script, I talked a little bit about some of the concessions, one of them would be potentially waiving some of our contract minimums. The majority of our fleet is currently very close to or at the contractual minimums. There are a couple of contracts that are slightly below us, but the majority of our fleet is at -- or will be at the contractual minimums during Q1.

Operator

Our next question is from Savi Syth from Raymond James. Go ahead.

Savi Syth -- Raymond James -- Analyst

Hey. Good afternoon everyone. One just on the prorate side of the business, can I -- how many aircraft do you have flying today with United and Delta each? And just kind of wondering what you're seeing there from a trend perspective. It sounded, if I understood the guidance. It sounds like block coverage will be up in 1Q but revenue down. I'm just curious what's driving that and what you're thinking about that business going out. If you're still thinking that will be a smaller business, I think the last call is that maybe 17% normal at some point. But just curious what your thoughts on that business?

Wade Steel -- Chief Commercial Officer

Yes. Savi, this is Wade. So yes, so during Q4, we were down about 24% in block hours, and our revenue was down about 47%. And what we said is that we anticipate that our block hours will be up maybe 2% to 3% in Q1, but revenue would be seasonally down. Just with January and February, they are seasonally weaker than what we typically see in Q4, but it will be fairly consistent with Q4, maybe slightly down. The overall fleet in prorate is fairly small compared to our -- what we've got going on. We're less than 50 airplanes in our pro-rate model and that's split fairly consistently between each of our major partners, Delta and United. So going forward, we're -- we'll be -- we'll continue to evaluate opportunities as they come our way and just make sure that we're being very selective in what we have in front of us and make sure we think it will be good and accretive and profitable for us as we go forward.

Russell Childs -- President and Chief Executive Officer

Yes. Savi, this is Chip. Just to add just a little bit to that. As far as modeling that going forward, it's very closely tied to what the yields are with our partners. So obviously, the yields are way, way down on prorate. And even as activity in that side of the business model comes back with more volume, I think you can see what's out there in the industry, the yields got to come back, and that's going to take quite some time.

Savi Syth -- Raymond James -- Analyst

That makes sense. I appreciate that. And just -- I think I saw a headline about maybe looking to convert some aircraft to also carry cargo in the passenger compartment, I think you've seen some of the other scheduled service airlines do that last year. Wondering what's -- if that is a correct headline and what's behind that move now.

Russell Childs -- President and Chief Executive Officer

Yes. Savi, it's interesting that it even was a headline. Let me -- I mean our approach is always that we -- our job, particularly in a pandemic, just try to find any business models that we think are going to work, and our take rate is probably about 5%, one in 20. And when we saw this extension or we saw this open up at the beginning of the pandemic, I myself wondered why you'd ever close it. So, this is a great door to open. I will be candid and say there's nothing on the other side of the door right now, but we don't think it's a door that should ever close relative to a passenger fleet. These airplanes should be easy to go back and forth from cargo to passenger.

We fundamentally believe that. So I mean, for the record, there are absolutely no current plans in place to do anything with cargo, but understand we have a very large fleet with which we love fleet flexibility to do multiple things with, and that's where we filed a very small extension with the FAA, but it's certainly, in our view, is something that we do every single day, trying to make sure that we're providing flexibility within this big fleet that we have. But there's no current plans for us to jump into that anytime soon.

Savi Syth -- Raymond James -- Analyst

That makes sense. Thanks alot.

Operator

Our next question is from Catherine O'Brien from Goldman Sachs. Go ahead.

Catherine O'Brien -- Goldman Sachs -- Analyst

Thank you. A quick question on the CRJ200s that came out of the Delta agreement. I saw in the release, you noted that you're Delta CRJ200 prorate agreement hadn't ended. Are you planning to hold on to some of those aircraft potentially to fly in that program? Or what else is the plan? I mean I know that they're fully depreciated, no financing. So are there any costs that hold those just in these opportunities come down the line?

Wade Steel -- Chief Commercial Officer

Yes. So Catherine, this is Wade. So as we said, we have 55 airplanes under our Delta agreement. 19 of those were actually owned by Delta, and we returned those -- or we have returned those to Delta. So there's 36 remaining airplanes. Those are not flying in prorate right now. There's no current thought to fly those in prorate right now. They're in temporary storage. As I said in my script, if demand and yields come back as we think, we do have some flexibility to bring some airplanes back up, up into service. But currently, there's no current plans for those airplanes.

Catherine O'Brien -- Goldman Sachs -- Analyst

Okay. And so as a long term for now, just in case. Got it. And then on one of your partners on one of their calls this season, they called out cost savings from consolidating regional partners. I guess two questions on that for you. First, based on your current conversations, are you optimistic that you could gain some share as demand rebounds with your partners, hopefully, later this year? And then second, on the cost savings they referenced. We should just be assuming that's less operational complexity for them. And it wasn't meant to imply that if SkyWest, for example, was to win some share, there's some kind of discount given to get that share, right?

Russell Childs -- President and Chief Executive Officer

Yes. This is Chip. I mean, I think philosophically, for us, there certainly are a fair amount of rumors about industry consolidation, all over the place through the industry, both mainline, regional, all that other kind of stuff. And to our focus, we are very much -- there are certain elements that we can provide for our major partners at any given time. Today, there's a tremendous amount of value we can provide with opportunities with our partners. We have a very strong balance sheet. We can provide a lot of capital if there's any type of way in which they want to consolidate. We are not interested, as we've said on previous calls in acquiring an airline, but we can certainly utilize our balance sheet to provide value and cost savings to our partners.

And like I said earlier, I mean, we're having a lot of conversations with them on that. I think a lot of those conversations are still -- we're waiting to let the recovery plan play out. But to the extent of what we can control, the value that we provide for partners is the best professionals in the industry, strong balance sheet and the best performance in the industry as well. So along all those lines, I think they're always evaluating value from that perspective, and that's what our job is to do to help enhance these partnerships and relationships and help get them out of the issues relative to the pandemic that we're all trying to work our way through.

Catherine O'Brien -- Goldman Sachs -- Analyst

Got it. Maybe if I can just sneak a really quick one in here. On the second round of concessions, can you just remind us how those agreements work? Is there any payback of the temporary rate reductions once the concession term is over? Or is that it's extraordinary times, and so you're willing to just forgive some of that rate/minimum hour for a short period.

Wade Steel -- Chief Commercial Officer

Yes, Cate, we've been proactively working with all of our major partners on concessions, right? We've -- our partners, we've got great partners, we've got a lot of flying for all of those guys. The concessions will look a couple of different ways. They could be temporary waivers of minimum utilizations, some temporary rate reductions that probably wouldn't -- they're just rate reductions for a period of time, no give back. But we're working with them on a lot of creative solutions. We've got very creative solutions in a lot of different ways in front of our partners. We're working with them, and we'll see how they ultimately end up doing. We hope that we can get most of these done during the first quarter and get these behind us.

Catherine O'Brien -- Goldman Sachs -- Analyst

Got it. Thanks.

Wade Steel -- Chief Commercial Officer

Okay. Operator is another question.

Operator we are waiting for another question.

Operator

Sorry for the distraction. The next question is from Mike Linenberg from Deutsche Bank.

Mike Linenberg -- Deutsche Bankq -- Analyst

Hey. Good afternoon guys. Just a couple here. Back on the partner concessions, Wade, and should be sort of ran through I guess, some of the more qualitative elements of it. And I just -- Rob, when you talked about receiving the PSP of $193 million, you sort of then went on to say that, that was before new partner concessions. And I'm not sure if you were implicitly indicating that some portion of that is going to be passed on to your major partners. Is that what you were sort of alluding to? Or am I just reading too much into it?

Robert J. Simmons -- Chief Financial Officer

Yes. Mike, thanks for joining today. I think what we -- at this point, what we expect is that there will be of the $233 million in funding that we expect to get under PSP 2, $193 million of that will be in the form of a grant, and most of that will run through the P&L in Q1. So -- and what Wade said in his script is that at this point, we would expect that there will also be additional partner concessions, a second round of partner concessions that will also, for the most part, run through in Q1.

Mike Linenberg -- Deutsche Bankq -- Analyst

Okay. Great. And then just Rob, you mentioned that net debt year-end 2020, I guess, I believe you said it was lower than 2019. I think you said in 2021, your absolute debt will decline. Care to give us a sense of what the net debt will look like at year-end 2021? Will it be less than 2020 or slightly higher?

Robert J. Simmons -- Chief Financial Officer

Look, at this point, it's hard to say with a lot of precision. But I will say that over the next couple of years, we would expect that our absolute level of debt that currently sits at about $3.2 million that over the next couple of years, that will that should continue to come down on an absolute basis. Obviously, what we're looking at right now is part of that, that could be -- that's just related to the normal amortization that's built into a lot of our aircraft financings that are fully amortizing financing. So as we mentioned, like every year, for the next several years, we'll have about $400 million in debt principal reduction before any new financing comes in at this point.

So again, the answer to the debt question ultimately is going to depend both on a combination of sort of the cadence of that -- of the pay down, but also what the opportunities are for us to continue to grow our fleet and potentially bring new aircraft into service. So as we said earlier, we're obviously going to take over the next two years, another 20 delivery of another 20 E175. Those will all be financed with similar long-term fully amortizing mortgage-style debt as we have in the past. So -- but again, longer term, over the next maybe two to three years, we do expect, Michael, that, that absolute debt number will continue to come down.

Mike Linenberg -- Deutsche Bankq -- Analyst

Great. And then, Rob, if I could just squeeze in one more, I apologize. I just -- with respect to the NOLs, I'm just -- the losses this last year, where your NOL position may now be? And I know historically, you were not a cash taxpayer. Based on the NOL position, do you have a sense of -- as you look out over the next few years, all likelihood that you're probably not going to be paying cash taxes until, I don't know, fill in the line, 2023, 2024? Any guidance there? I'm curious. Because...

Robert J. Simmons -- Chief Financial Officer

Well, yes, obviously, it's going to be dependent on what that recovery cadence looks like for us and for the industry. And so it's hard to know. But right now, I would say that we're still at least a couple of years out from being a cash taxpayer.

Mike Linenberg -- Deutsche Bankq -- Analyst

Okay. That's actually very helpful. Thank you. Thanks everyone.

Operator

Our next question is from Joseph DeNardi from Stifel. Go ahead.

Joseph DeNardi -- Stifel -- Analyst

Thank you. Good afternoon. Rob, talked about getting to cash flow breakeven by mid-'21, I think, if recovery continues to progress. Can you just kind of quantify what sort of block hour production maybe relative to pre-COVID you think you need to get to in order to get to breakeven? Just trying to get a sense for how you all are kind of looking at the various recovery scenarios and maybe what the baseline is.

Robert J. Simmons -- Chief Financial Officer

Yes. Joe, thanks for joining today. Look, I think we're not in a place to be able to start forecasting the second half of the year, either in revenue or block hours or anything else. There's obviously a lot of uncertainty out there. But based on the recovery curve so far, we're pleased that the first half of 2021, looks like it's going to continue to be very, very modest burn. And then just depending on how things play out, that could flip to be positive in the second half or maybe it won't, depending on what the recovery looks like. But at this point, we're really not in a place to sort of forecast out there or do some pro forma modeling. But I think we do feel very good about our liquidity. We feel very good about the strength of our model at this point and the fact that we're burning or expecting to burn just a very modest amount in the -- over the next six months.

Joseph DeNardi -- Stifel -- Analyst

Okay. Chip, I think you mentioned in your prepared remarks that you think air travel demand has changed forever. I'm wondering if you could just expound on that. And then what that means for your business model and kind of what you're doing to the business model to adapt to that view?

Russell Childs -- President and Chief Executive Officer

Yes. Thanks, Joe. It's a great question, and it's something that we contemplate every single day. I mean the important part of our business model is to evolve quicker than anybody else. And I think we've seen some strong evolution in the last year, I don't know. Depending upon how the recovery process takes this year, you're probably -- we're probably always and fever going to see a high level of mass on airplanes, and we're going to certainly be more cautious and adapt to the potential of a pandemic, which means that we're always going to evaluate our processes that we have in place today. I think the number one thing is the things that are that we see that we're optimistic about is we do like what we appear to have some good strong domestic travel demand and the fact that we have the right fleet and the right professionals in place to help within that recovery process. We also fundamentally do still have some more concern about the effectiveness of the vaccines.

And although we're seeing a good trend downward in infection rates, we're always going to be watching that as an industry and being willing to respond. Certainly, each state has their own objectives in containing the virus, and I think we're always going to be more cognizant of the destinations in which we fly and the sensitivities in all of those destinations. But more importantly, I think for all of us that we're fortunate to have the philosophy before the pandemic is this evolution context that you have just got to be able to be flexible and change and be able to adapt to whatever comes your way. And I think that's what's going to forever change our industry. And luckily for us, we've got -- like I've said, we've got a great fleet. We've got a great balance sheet, and we have the best professionals in the industry to help us be flexible to no matter what comes our way on into the future. So I think that's our primary take is to expect many variables that may, our way in the future.

Joseph DeNardi -- Stifel -- Analyst

Thank you.

Operator

Our next question is from Steve O'Hara here from Sidoti. Go ahead.

Steve O'Hara here -- Sidoti -- Analyst

Hi. Good afternoon. Thanks for taking my question. Could you just talk about the -- you talked about the concessions. When you say additional concessions or maybe you didn't say that, but are we talking about concessions on top of what are already in place or are we talking about replacing kind of the concessions that are maybe running out due to the time frame of the agreement originally?

Wade Steel -- Chief Commercial Officer

Yes, Steve, this is Wade. So we gave concessions to our major partners during Q2 and Q3 of 2020. And the majority of those concessions, they expired at that point in time. And now with, as Rob said, we're getting another $193 million in grant. There is some level of kind of renewed concessions that we're reviewing with our partners right now that would be -- like I said in my script, temporary rate reductions, waving contract minimums, those are the kind of things that we're working with them right now on.

Steve O'Hara here -- Sidoti -- Analyst

Okay. All right. And then the -- I mean just the deferred revenue that you guys have, that is -- that is nothing to do with the concessions or that's just partners flying below the minimums and that's more or less OK given the agreements you have with them currently?

Robert J. Simmons -- Chief Financial Officer

Yes. That's nothing to do with any concessions. That just has to do with the structure of our revenue and the part of it that has to do with sort of fixed reimbursements being matched against the variable flying that happens. And so as we said, we expect -- we've been deferring revenue each of the last three quarters. The amount of future deferrals and when it sort of flips to start to come back into the P&L will really depend on how much and the timing of the demand recovery for the industry. But right now, we would expect to continue to defer revenue into 2021. And again, with the possibility that it could start to reverse sometime later in 2021.

Steve O'Hara here -- Sidoti -- Analyst

Okay. Thanks. And then maybe just lastly, can you just talk about -- I mean it seems like leisure is much stronger than business, the outer.

Robert J. Simmons -- Chief Financial Officer

Sorry, we lost you for a second there. Can you go back to the start of your next -- your year follow-up?

Steve O'Hara here -- Sidoti -- Analyst

Yes, sure. Sorry. So just in terms of your -- the passenger demand that you guys are levered to. I mean if we think about major -- mainly leisure recovery through maybe at least the first half of the year, maybe you start to get some business traffic back in the latter half of the year. Is that better or worse for SkyWest? Are you guys kind of agnostic? Or does business matter more for you guys? And I know it's not a yield issue, but I mean, I'm just wondering maybe about the utilization for you guys if it was all leisure recovery versus all business or somewhere in between?

Russell Childs -- President and Chief Executive Officer

Yes. Steve, this is Chip. So to your question relative to the -- what I'd say, the type of demand as it comes back, if it's good for us or not. At this point, for us, any kind of volume is good volume given the nature of our flying. And -- but that doesn't mean we're agnostic. We -- trust me, we care a lot about the kind of demand and we love the demand that helps our partners. And if business demand or international demand is better for our partners, it's long term better for us. So the pure tactical Xs and Os math of the beneficial thing to us. It doesn't matter if it's leisure travel or if it's business travel right now. That may come into play with yields on our prorate model later, but that -- we see that as being a long way off.

But look, we -- I think we're fortunate as a regional carrier today to be flying more than almost anybody that's traveling in this space compared to where we were a year ago. And that's very good for us. I think it speaks to our operating credibility and our ability to execute. But overall, the main answer to your question is any type of volume is good for us, but we're also not agnostic. We do want the right kind of demand to help our partners out of this pandemic as well.

Steve O'Hara here -- Sidoti -- Analyst

Okay. Thank you very much.

Operator

Our next question again is from Savi Syth from Raymond James. Go ahead.

Savi Syth -- Raymond James -- Analyst

Thanks for the follow up. Just a couple. First, I think there was some confusion when you talked about concessions, but I think it's pretty clear because it's tied to kind of getting that PSP two and what we've done -- what you've done in 2Q, 3Q coming up here in 1Q. But I was kind of curious, as contracts come up for renewal that I'm guessing, not a lot have, do you expect those to look different than kind of pre-COVID contracts? Has there been any discussion around that? And tied to that, do you have -- I mean you went into this with a strong kind of balance sheet position and having taken a lot of risk off versus kind of the historical model, but anything that changes your view on how the business should be managed going forward outside of just being nimble?

Wade Steel -- Chief Commercial Officer

Yes. Yes. Savi, this is Wade. So the first part of your question there on -- as contracts expire and we have renewals, do we expect the contracts to be different? Our major partners, we're working with them very proactively on things like that right now. I think one thing is they do like us owning airplanes, right? So we're working with them on those kind of things. And so we do take a lot of that risk off from them, and we put it on our balance sheet. That's one of our big competitive advantages that we have out there. And I think those will continue to go forward in the future, and we can continue to help our partners in that way.

Russell Childs -- President and Chief Executive Officer

Yes. I think, Savi, this is Chip. I think there's no question as we move forward post-pandemic that the contracts will be different. It doesn't mean that they're going to be better or worse. We like different. We like to evolve. We like to find ways to add value with our partners. And particularly in times like this, SkyWest has never been in a position like we are today to add a multiple variable of value to our partners. And that's -- it's more than just flying an airplane from point A to point B. There's a lot of things and a lot of creative solutions that we're striving to provide for our partners. So the contracts will likely look different. But in our view, that's a good thing for everybody. This is just a model that we need to continue to work on long-term that can survive a lot of different things. And still take care of these amazing employees of ours as well as our shareholders. So yes, they'll probably look slightly different as they expire and get renewed, but that's not necessarily a bad thing for any of us.

Savi Syth -- Raymond James -- Analyst

That's helpful. And then just a clarification, Rob, on the cash burn outlook that you provided for the first half. Does the 1Q outlook include PSP 2? Or you kind of exclude it because you're not sure about like how the concessions will play out?

Robert J. Simmons -- Chief Financial Officer

No. Look, our outlook for the cash burn is all in. It doesn't leave anything out. So yes, it would include both the concessions as well as the funding from the government.

Savi Syth -- Raymond James -- Analyst

All right. Thank you.

Operator

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

Russell Childs -- President and Chief Executive Officer

Thank you, Kate. Appreciate it. Look, I want to thank everyone for joining us again on the call today. We really appreciate your interest in SkyWest. I especially want to again thank our people. I'm so proud of our airline and our teams and the great work we're all doing to support each other and the long-term success of SkyWest, and we appreciate it, and we will talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Robert J. Simmons -- Chief Financial Officer

Eric Woodward -- Chief Accounting Officer

Russell Childs -- President and Chief Executive Officer

Wade Steel -- Chief Commercial Officer

Helane Becker -- Cowen -- Analyst

Ray -- Evercore -- Analyst

Savi Syth -- Raymond James -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

Mike Linenberg -- Deutsche Bankq -- Analyst

Joseph DeNardi -- Stifel -- Analyst

Steve O'Hara here -- Sidoti -- Analyst

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