Helane Becker - Cowen and Company
Thanks operator. Hi, guys, thank you very much for the time. I just have a couple of questions. One is on the – I don’t know how much you can talk to the terms of the new pilot contracts, but does it provide for starting salary increases at the first level at the joining level?
Brad Rich - President
Helane are you talking – when you say the new pilot contract, we do have – the SkyWest Airlines pilot devoted in their agreement is that the one you are referring to?
Helane Becker - Cowen and Company
Yes, yes, yes, because the ExpressJet pilots I think you mentioned and I saw a couple of weeks ago rejected the TIs.
Brad Rich - President
That’s correct.
Helane Becker - Cowen and Company
So on the new – for the compensation agreement for the pilots at SkyWest Airlines, do they provide for a base salary increase? Because we are seeing discussions in the press that pilots and this is generic, start at regional airlines as low as 20,000, I am not sure how that comps to your guys, but I was wondering maybe you could just speak to that directly.
Brad Rich - President
Okay, I’ll ask Chip Childs, President and COO of SkyWest Airlines to address that.
Chip Childs - Chief Operating Officer, SkyWest Airlines
Helane, it’s a great question. I think we have to get to the point when we talk about pilot pay. We have a conversation and little bit we got to divide it up between RJs and resilience, because I think from our perspective we have the unique line of business where we fly – along the West Coast and in Salt Lake City.
And we have about 45 or so of those airplanes. And a lot of our new hires come into fly the – so there is flat pay package. Not taking into specifics it did increase that pay quite a bit to attract folks into the – which we think is a very viable business.
From the perspective of going directly into an RJ, because some of our pilots go directly into a jet. We did not make any modifications to those rates or higher than that and I think when you look at our competitive base compared to where a lot of the industry is particularly when you look at what we have been on the – side.
We are very well within the range of being able to attract pilots. In fact, I spent some time with our new hired class last week and we have tremendous group of pilots that continue to have interest in SkyWest and coming a lot flight for us and it’s an exciting story relative to a lot of things you hear out the media.
Helane Becker - Cowen and Company
Can you say what your pilot turnover rate has been or what you think it will be this year?
Chip Childs - Chief Operating Officer, SkyWest Airlines
I think for SkyWest Airlines, I’ll speak specifically for SkyWest and that Brad Holt speak to ExpressJet. Last year, in 2013, we budgeted about to lose about 20 pilots a month and on average last year, we were on the 13 pilots a month range. So we were last year significantly lower than what we had anticipated for 13.
In the fall, it jumped up a bit like it did throughout the industry at closer to 20 and we are budgeting slightly more than 20 this year and so far what we have seen for January and February, we are slightly below those estimates.
Brad Holt - President and COO, ExpressJet
Well, Helane, on the ExpressJet side, we are running – if you look at an average over the rolling 12 months, we are running between 8% and 10% turnover. That equates with our size fleet to about 30 pilots average a month and of course, that’s up and down. We have very high months and then there is very low months and that’s all dependent on the major airline hiring, but on average it takes 10% at present.
Helane Becker - Cowen and Company
Okay. And then, just on the ExpressJet specifically, I don’t know how the CPA works, but I know that you get bonuses if you reach certain goals. Do you have to pay your major partner if you fall below and do you get a buy for weather?
Brad Rich - President
So, Helane, that's a very good question and the answer is yes and no depending on which contract we are operating in because even within ExpressJet, of course, we’ve got two different major carriers and we also within United have several different contracts. So, yes, the contracts have performance incentives.
And on a large portion of the ExpressJet contract, there - the contract calls for performance bonuses and penalties. And so, yes, if you fall below a certain liability, there are penalties. On the ExpressJet side, the contracts – I will just say this generally there – again they are different by carrier.
But generally there is very little and in most of their cases no compensation for weather related cancels. That’s why the impact of this is so disproportionate both location and the impact of the contracts all the legacy ExpressJet contracts did not allow for any compensation for weather cancellations.
Helane Becker - Cowen and Company
Okay, but, they must - I mean, we see the numbers everyday they must understand you can’t operate with them canceling 500 to a 1000 flights a day on some weather days.
Brad Rich - President
Well, yes, they do realize that and look in most of these real severe days like what we have going on today, yesterday and today. A lot of the flights are just pre-canceled and in some cases, we just had, I mean, virtually just hard stops. I mean, our flights are just pre-canceled.
Helane Becker - Cowen and Company
Great. Gotcha, and then what about the MRJ order? Is there any update to that how – what’s the timing? I know they are behind, I think about a year, so, are you making pre-delivery payments on those? Or can you suspend those waiting for them to catch-up or can you just update us on that?
Brad Rich - President
So, as you will see from our financials, there was a big increase in the quarter in pre-delivered deposits. That was all related to the E175 contract and that level of deposit is capped.
So, we will not make any further pre-delivery payments and as far as the MRJ side goes, look there are no changes from what you have seen previously as reported by Mitsubishi relative to the timing. As it relates to us, our deliveries were originally scheduled for first quarter of 2017 and are now moved to second quarter of 2018. But there are no remaining pre-delivery deposits to be made.
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.
Helane Becker - Cowen and Company
Great. I really appreciate the depth and breadth of your answers. Thank you very much.
Brad Rich - President
You are welcome Helane.
