Look out ExpressJet...

[flyboy321]

A clip from the Q&A section of the SkyWest Inc, earnings Conference call:
(seems pretty clear how they intend to "right the ship")

Helane Becker - Cowen and Company
Okay and then can I just ask one more question? On ExpressJet, when did you ? I mean this has been a problem for years as you pointed out, so when did you decide that this has to ? there is like almost an end date?

Have you been talking about this at the board level for several months or just is this just start? I am kind of surprised you didn?t start to take some of these, could you guys are pretty good at being profitable and focused on your business. Then you didn?t start to take some of these initiatives last year rather than this year?

Brad Rich - President
So, look, we have been working on some of these initiatives very, very specifically for several years. And as you know, some of the ? several things that have ? that are ? let me just say there are things that have changed within ExpressJet and the network that we operate.

Some of the improvements and the cost reductions and the initiatives we have been working on have been overshadowed by other inefficiencies in the system. We have some cost increases in some, I mean, I hate to make excuses and call them uncontrollable.

But for example, in maintenance, we have some escalating costs, primarily due to age of ? either age of aircraft or the utilization on the airplanes that are causing increases in maintenance that are escalating higher than our rates are escalating.

So, we knew when we bought ExpressJet that we had to get some efficiency and productivity and integration savings and but we also knew that in the near-term, the results would underperforms relative to our normal expectations, because we didn?t have tail risk.

We knew the rates were on the very low end of the market, but as the natural terminations happen and we expect to ? the original thesis I will say was to renew and extend contracts at what would then be market rates. Well, in the meantime, the system has changed.

The system has been spread out. It was very concentrated in Newark and Cleveland and Houston and now we are flying in Chicago and Denver, the utilization on the airplanes have gone up.

The spare ratios are not adequate. I mean, there is just a number of complicating factors here that have kind of exacerbated the problem and in the meantime, we haven?t achieved the joint collective bargain agreements that we need to get and that?s delaying some of the efficiency and productivity improvements that we needed to realize.

And so, look all of this has just, I mean, yes, the board has been talking about this for a long time and yes, as you can imagine, the board is not very patient with this and so, things are just moved to a higher priority and a sense of urgency and that's where we are.

 

[wmuflyguy]

Look out for what exactly?

 

[jetstream]

Only thing I get out of that is that buying ExpressJet was a mistake.

Oh, and BTW, I ain't paying for their screw-up.

 

[Clutch]

Ima look out.

 

[Freebrd]

Ima look out.

You're a retard! No wonder you voted YES on the TA!

 

[Mickey Mouse]

The topics and the type of language used in that particular board meeting have been occurring for years now at SKYW Inc. Executives at SKYW are in a very difficult position in the current regional marketplace. They are basically experiencing cost pressure and revenue pressure at the same time. They have done a pretty good job of cost control for the past three years, as far as they could go with it. The cost control program has caused some performance degradation in many departments. Unfortunately, it has also caused damage in the quality of the product being delivered to mainline partners. You get what you pay for. SKYW must increase its revenue by other means than employee concessions. It's employees are underpaid or being paid market wages. Regional airlines must stop subsidizing the higher wages and lucrative benefits of the mainline employees. Regional airlines must stop being the sweatshop of the airline world. The pilots of XJT and Eagle have already indicated they are not going to work under those conditions. SKYW may need to take a more aggressive approach to increasing revenue. They are smart. They have a good chance of succeeding.

 

[Freebrd]

Well said Mickey, agree 100%! They really need to renegoiate their contracts with the majors. The problem is not going away, and it's going to get worse this summer.

 

[N4niner206]

To me its, look ? obvious that the problem esallated to? I hate to point fingers and ? margins can't keep. Simply we need ? pilots fault. Next question please.

 

[BoilerUP]

Brad Rich - President
We knew the rates were on the very low end of the market, but as the natural terminations happen and we expect to ? the original thesis I will say was to renew and extend contracts at what would then be market rates. Well, in the meantime, the system has changed.

The deal has been altered - pray they don't alter it any farther.

 

[wms]

The context of the statement is they don't really know what the problems are and have no viable solution. Until Skyw comes in, cleans out the middle levels of the occ and operates xjet with the same policies, standards and initiatives as themselves, we will continue to sink.

 

[General Lee]

Steer Clear of SkyWest, Inc.
By Adam Levine-Weinberg | Motley Fool
February 18, 2014

Last summer, I described regional airline operator SkyWest (NASDAQ: SKYW ) as a "business under threat" due to its heavy exposure to the 50-seat-jet business. SkyWest currently operates around 500 of these small regional jets for various legacy carriers but particularly Delta Air Lines (NYSE: DAL ) and United Continental (NYSE: UAL ) .

However, 50-seat jets are a dying breed. Delta is in the midst of radically reducing its fleet of small regional jets, having recognized that these little planes burn way too much fuel and are too expensive to maintain. United is finally coming to the same conclusion, and has begun reducing its 50-seat-jet fleet in favor of more profitable 76-seat regional jets.

SkyWest operates about 200 of these larger regional jets today, and this fleet is growing. This part of SkyWest's business is quite profitable. Unfortunately, it is still not clear how long it will take to wind down the 50-seat jet business (or return it to profitability). Until SkyWest manages to fix its 50-seat-jet business, investors should probably stay away.

A tale of two businesses

SkyWest has two main business segments: SkyWest Airlines and ExpressJet. SkyWest Airlines operates a mixed fleet of 50-seat regional jets and larger regional jets, along with a smaller set of 30-seat turboprops. Today, the 50-seat regional jets slightly outnumber the large regional jets, but that situation will be reversed by next year.

SkyWest flies hundreds of 50-seat jets like this one, primarily for Delta and United.

Due to the relatively high proportion of large regional jets in the SkyWest Airlines fleet, along with favorable flying contracts and good labor relations, SkyWest Airlines is solidly profitable. Last year, segment profit was $140 million on revenue of $1.83 billion. That represents a very respectable 7.6% profit margin.

By contrast, 50-seat jets make up more than 80% of ExpressJet's fleet. ExpressJet also has an unfavorable flying contract with United. Lastly, ExpressJet has fairly poor labor relations. Unlike SkyWest Airlines, ExpressJet is heavily unionized, and none of those unions has a long-term contract in place.
As a result, ExpressJet has been stubbornly unprofitable. Last year, ExpressJet lost $49 million on revenue of $1.47 billion. That represented a setback after the company had managed to narrow ExpressJet's loss to $18 million in 2012.


Downsizing the 50-seat-jet fleet

SkyWest's management recognizes that ExpressJet's losses need to be fixed ASAP. On the company's recent earnings call, SkyWest President Brad Rich laid out a three-point plan for returning ExpressJet to profitability.
The first goal is to drive cost reductions through improving labor productivity and getting better deals with vendors.

The second goal is to improve operational reliability by putting more spare aircraft throughout the network and instituting new best practices. Both of these programs seem promising and should deliver improved results in the next year or two.

However, the third and most important point is the renegotiation or termination of contracts, and particularly the "legacy ExpressJet contract" with United. This may be harder to pull off successfully. United is unlikely to agree to material rate increases, as the operating economics of 50-seat jets are barely acceptable even at the current below-market rates.

The alternative is for SkyWest to downsize ExpressJet's fleet of 50-seat jets fairly rapidly in the next few years. This scenario seems more likely -- indeed, SkyWest already plans to remove about 50 small regional jets from the combined SkyWest Airlines and ExpressJet fleets in 2014. In the long term, downsizing will end ExpressJet's losses, but SkyWest could bear significant costs in the meantime.

First, SkyWest is locked into long-term contracts on most of its 50-seat jets. Based on the expirations of its current flying contracts, SkyWest's fleet size could fall from about 750 aircraft today to 495 by the end of 2017, with most of the aircraft removals being 50-seat jets. However, that will still leave around 250 of the 50-seat regional jets in service beyond 2017. This is likely to drag out ExpressJet's losses.

Second, even when SkyWest does remove 50-seat jets from the ExpressJet fleet, doing so is not free. The company typically incurs lease return costs when its leases expire. This is usually not very expensive on a one-off basis, but with dozens of airplanes likely to exit the fleet each year, lease return costs could add up.

Foolish wrap

If all of these medium- to long-term headwinds were not enough, SkyWest has also been hit with heavy costs due to weather-related cancellations this year. The company disclosed last week that it had to cancel a stunning 15,000 flights in the first six weeks of 2014, which will depress Q1 pre-tax profit by about $24 million.

Investors shouldn't worry too much about a short-term bump like this one -- the U.S. has had unusually severe weather this year. However, the problems at SkyWest's ExpressJet subsidiary are more troubling. The growing unpopularity of 50-seat jets gives SkyWest's legacy carrier partners little reason to help by renegotiating capacity purchase contracts.
As a result, SkyWest is likely to gradually phase out most of its 50-seat flying by the end of the decade. After it does so, profit is likely to improve. However, there could be a long painful time in between when losses from 50-seat-jet flying drag down companywide profitability. Investors would be wise to wait until there is more clarity on the pace of improvement at ExpressJet before investing in SkyWest,

There?s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it?s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.



Bye Bye---General Lee

 

[General Lee]

Well said Mickey, agree 100%! They really need to renegoiate their contracts with the majors. The problem is not going away, and it's going to get worse this summer.

From the Motley Fool opinion article above:

"However, the third and most important point is the renegotiation or termination of contracts, and particularly the "legacy ExpressJet contract" with United. This may be harder to pull off successfully. United is unlikely to agree to material rate increases, as the operating economics of 50-seat jets are barely acceptable even at the current below-market rates."



Bye Bye---General Lee

 

[Dannone]

Hey Mickey how do you increase revenue by concessions Wouldn't that be decreasing expenses?

 

[wms]

Refusing to bid because of JCBAs is a lame excuse. The fact is most of our losses at xjt are due mostly to operational waste and incompetent DM at the middle levels.

As far as Inc, they made some tactical errors, such as not getting in on the e175s early because they decided to play it cheap, using mrjs as negotiating leverage and betting on the large CRJs. Now they're in recovery mode and they don't know where to start. JA has been playing less of a role in the company and it shows with the remaining mgmt being left as deer in the headlights.

 

[Mickey Mouse]

Hey Mickey how do you increase revenue by concessions Wouldn't that be decreasing expenses?

They need money for shareholder value. They will try to get it anyway they can, by any legal means. You are correct though; pilot compensation is an expense. Unfortunately, I cannot help them in this area.

 

[jmreii]

SkyWest and other regionals are in the same boat or problem of sucking on their mother's milk in this case Delta and United. If these companies do not learn to be independent you can kiss this business model good by because improving the money pot will not solve the problem.

 

[General Lee]

SkyWest and other regionals are in the same boat or problem of sucking on their mother's milk in this case Delta and United. If these companies do not learn to be independent you can kiss this business model good by because improving the money pot will not solve the problem.

Independent? Can't do it thanks to the contracts. They can't have any planes larger than 76 seats or risk losing what is left of the contracts with the major partners. If they decide to drop all contracts with major partners, they would be left with a ton of expensive 50 seaters, and would have to do their own marketing, reservations, etc. A lot more responsibilities they aren't used to now, and that is expensive. How long did Indy Air last? As soon as they broke away, everyone pounced on them. So, I don't see much change coming up here.


Bye Bye---General Lee

 

[wms]

There is no opportunity for independence. It was a dream for some mgmts at one time, but that's not an option anymore. There won't be enough staffing.

 

[on autopilot]

The deal has been altered - pray they don't alter it any farther.

http://youtu.be/WpE_xMRiCLE

LOL! I get that joke!!!

 

[IBNAV8R]

Independent? Can't do it thanks to the contracts. They can't have any planes larger than 76 seats or risk losing what is left of the contracts with the major partners. If they decide to drop all contracts with major partners, they would be left with a ton of expensive 50 seaters, and would have to do their own marketing, reservations, etc. A lot more responsibilities they aren't used to now, and that is expensive. How long did Indy Air last? As soon as they broke away, everyone pounced on them. So, I don't see much change coming up here.


Bye Bye---General Lee

How big was Indy Air? How many aircraft? What you fail to get is that it costs money to go after another carrier in a price war. A fleet size of 85, with 37 cities is a bit more beatable than one with the world's largest fleet. When the bottom of your balance sheet no longer has parentheses, we'll talk further.