Skywest Inc Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the SkyWest Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Rob Simmons, SkyWest Chief Financial Officer. Please go ahead, sir.

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?

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 2020 Form 10-K and other reports and filings with the Securities and Exchange Commission. And now, I'll turn the call over to Chip.

Thank you, Rob and Eric. Good afternoon, everyone. Thank you for joining us on the call today. We continue to see very strong demand for our product during the fourth quarter and beyond. While we're facing new headwinds as the industry prepares to operate in a post-pandemic environment, we remain focused on delivering an exceptional product as we enter the next phase of the recovery. Recapping our fourth quarter results, we reported pretax income of $5 million and net income of $4 million. As expected and previously communicated, Q4 results are absent any PSP grants or concessions, which concluded in the third quarter. The holiday travel period was disrupted by the rapid surge in the Omicron variant that began the last week in December and through the month of January. The combination of winter weather and the surge in COVID cases over the final peak travel period of the year led to a lengthy irregular operation even as we began the New Year and well into January. There were countless accounts of employees who went above and beyond during this challenge, and I want to thank our people for their flexibility and good work during this difficult period. I want to address the current environment and where we are today. We continue to experience very strong demand for our flying in all fleet types. We expect to place 46 new E175s into service this year and one more in 2023, putting us at 240 E175s in service by early next year. Our refleeting that has been in progress for the last several years continues to be a priority as we execute on our long-term strategy. While demand is solid, we are facing new headwinds as the industry prepares to operate in a post-pandemic environment. SkyWest is fortunate to enjoy the ability to attract and retain exceptional professionals across our operation. We maintain a robust hiring pipeline and strategy for all work groups and have new hire pilot classes filled well into summer. We have long been preparing for an increase in the mainline pilot retirements. However, the 6,000 early retirements taken at the majors during COVID and the steep demand recovery has resulted in a new, much higher demand for experienced SkyWest pilots, particularly captains. This demand has created an imbalance of pilots here and across the regional industry. Of course, pilot attrition was anticipated and planned for in our models and strategies. However, the rapid increase in captain attrition was not. So while our pipeline for new pilots is strong, we expect that upgrade timing creates an imbalance and production constraint for the next year or so. To help correct this imbalance, we're working with our major partners to notably reduce schedules for the foreseeable future and have worked with our pilot group to implement upgrade and retention incentives. We have also worked with our partners to offer our pilots sustainable pathways, including guaranteed pilot interview programs for captains. Overall, these disciplined strategies to work with both our partners and our pilot group have already begun producing results. But given the timing required for training and upgrade, this imbalance will likely constrain production into early 2023. This pilot imbalance is an industry-wide challenge as services in various ways, and we are working together with our people to ensure that we remain in the best position to manage it aggressively. With 46 new E175s going into service in 2022, we continue to play the long game. We had embedded flexibility in our prorate model to allow for the flex up and down of our prorate flying. And we are utilizing that flexibility going forward to significantly reduce prorate so that we can continue to deliver the highest reliability across our operation. In short, we are aggressively reducing our prorate flying now with the option to flex back up as resources allow. Against this backdrop, we're very honored and humbled to have been named one of Forbes' best large employers for the second year running in 2022. The past couple of years have been incredibly challenging for all of our teams, and our ability to work together with our people is the reason for our success. I want to thank our nearly 15,000 employees for their dedication and teamwork. In summary, 2022 looks to be the next phase of our COVID recovery, and while demand for our product has never been stronger, the current staffing imbalance and ongoing refleeting doesn't allow us to monetize that demand in the short term. As a result, we expect block hour production in 2022 to be down 10% to 15% from the 2021 production. We expect this will be another transition year with breakeven profit similar to 2021, excluding government grant income. Our strong balance sheet and cash position remain key differentiators for SkyWest. We are focused on rebalancing our pilot staffing and ensuring our resources are well allocated to deliver a solid and reliable product. We remain aggressive and deliberate in the steps we're taking now to ensure we are well positioned for 2024 and beyond. Rob will now take us through the financial data.

Today, we reported fourth quarter GAAP net income of $4 million or $0.09 diluted earnings per share. Q4 pretax income was $5 million. Our diluted share count for Q4 was 50.8 million shares and our effective tax rate in Q4 was 14%. First, let's talk about revenue. Total Q4 revenue of $777 million is up 32% from Q4 2020, consistent with our year-over-year block hour production increase of 30%, and Q4 revenue is up 4% from Q3. As discussed last quarter, our Q3 revenue included certain revenue concessions to our partners related to government COVID support. Q4 revenue breaks down with contract revenue up 29% from Q4 2020 and up 9% from Q3. Prorate revenue was $109 million in Q4, up 53% year-over-year and down 15% from last quarter. Leasing and other revenue is up 28% year-over-year and flat sequentially. These GAAP results include the effect of a release of $23 million of deferred revenue this quarter, compared to $19 million released in Q3 and $21 million that was deferred during Q4 2020. As of the end of Q4, we have $104 million of cumulative deferred revenue that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals or reversals into revenue depend 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. As expected, we did not have any additional grant income recognized in Q4. Let me move to the balance sheet. We ended the quarter with cash of $860 million, down from $913 million last quarter. Our CapEx during the fourth quarter was $322 million for 12 new E175 aircraft, four used CRJ700 aircraft and other fixed assets. Total 2021 CapEx was $556 million, including the purchase of 18 new E175 aircraft, 11 used CRJ700s and other fixed assets. This compares to $438 million in CapEx in 2020. We ended Q4 with debt of $3.1 billion, down from $3.2 billion as of year-end 2020. The only government debt we have on our balance sheet is a total of $201 million in PSP 10-year unsecured no amortization, low coupon loans. Let me say a couple of things about liquidity. As of December 31st, 2021, our cash position of $860 million included the effect this quarter of having repaid an incremental $92 million of debt before adding $237 million of debt financing for the 12 new E175s. We also have approximately $1.5 billion of unpledged collateral that could be deployed for additional liquidity if ever needed. As of December 31st, 2021, our debt net of cash balance is actually $224 million lower than it was pre-COVID at the end of 2019. Additional flexibility comes from the fact that including partner-owned aircraft, over 50% of our fleet in service now has no financing obligation. 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, at this time, we expect 2022 to be roughly breakeven for earnings, flat with 2021, excluding over $200 million of government grants, net of partner revenue concessions that were recognized in 2021. Similarly, we expect EBITDA in 2022 to be in the neighborhood of $500 million, also similar to 2021 adjusted for the net grant benefit. Second, we expect block hour production in 2022 to be down 10% to 15% from 2021 production related to the staffing imbalance as we focus on growing our ERJ fleet and pulling down some of our CRJ fleet. The staffing challenges related to COVID, mix, and attrition have extended our COVID transition for another year or two. Third, we won't see the full-year impact of the 47 accretive new E175 aircraft going into service in 2022 and early 2023 until 2024. 31 of these are growth aircraft; 16 are replacing other CRJ900 flying. Fourth, we will continue to focus on liquidity and expect to end 2022 with a strong cash position in spite of having a strong delivery pipeline of 28 accretive new E175s this year. 2022 being flat with 2021 with breakeven profitability is caused primarily by lower expected year-over-year production from the labor imbalance, higher investments in labor and training to go after the imbalance, offset partially by lower maintenance expense in 2022. We believe that the actions we are taking now to focus on the growth of our ERJ fleet, work through the pilot imbalance affecting the industry and preserve the optionality of bringing back CRJ opportunities over time will position us strongly in the regional sector. Wade?

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, last quarter, we announced an agreement with Delta to add 16 new E175s. We anticipate these aircraft will be placed into service beginning in the middle of this year through the first part of 2023. These aircraft will replace 16 older SkyWest-owned CRJ900 aircraft currently operating under contract with Delta. After we take delivery of these aircraft, we will have 87 E175s under long-term contracts with Delta. Under our American contract, we currently have 90 CRJ700s under contract and in service. We placed 25 CRJ700 into service during 2021. We also have 20 new E175 scheduled for service throughout this year. We have received 18 of those during the third and fourth quarter of 2021 and will receive two in the second quarter of this year. Together, these E175s and CRJ700s will bring our total American fleet to 110 by the end of 2022. We have an agreement with Alaska to add 11 E175s to our contract. We expect to place 10 of those aircraft into service this year and one more during the first half of 2023, for a total of 43 aircraft under long-term contracts with Alaska. After we take delivery of the E175s currently on order, our fleet will be 240 E175s. The demand for our E175 remains very strong and is becoming the backbone of our flying. Let me review our current production. Based on the current schedules we have from our major partners for the first quarter of 2022, we anticipate that our block hours will decrease by approximately 5% compared to the fourth quarter of 2021. As we look to Q2 2022, we anticipate that our Q2 block hours will be 11% lower than the fourth quarter of 2021. Let me talk a little bit about our prorate business. We anticipate that our prorate model will continue to decrease during 2022 and 2023, as we expect to reallocate most of these block hours to our contract fleet. We have intentionally built flexibility into our prorate model and will preserve that flexibility to return this flying once we are comfortable with our staffing balance. Shifting gears to our leasing business, we currently have 39 CRJ700s and 900s under long-term leases with third parties. This line of business has very good cash flow and strong margin characteristics. Demand for our engine leasing business is returning and we anticipate placing several engines under long-term leases this year. Next year, we'll have 16 CRJ900s that come out of the Delta contract and are not currently placed. We anticipate placing these aircraft in our leasing entity after removal from the Delta contract, where we may pursue leasing opportunities for the aircraft or engines. We have spent the last several years reducing risk and enhancing fleet and financing flexibility to ensure we're well positioned. This flexibility will continue to be a differentiator for us and we are committed to continuing our work with each of our major partners to provide solutions.

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

Thank you, Mr. Simmons. Our first question is from Savi Syth with Raymond James. Your line is open.

Hey, good afternoon everyone. Could you provide maybe Wade, appreciate the block hour kind of cadence a little bit as well through the year? But I was curious is that mostly then coming out of safety prorate and CPA stays a little bit more steady? Or could you provide a little color as to kind of where that reduction is coming from in terms of segment and maybe kind of aircraft type? And how this has maybe changed versus how you were thinking about it during the last earnings call?

Yes, Savi, this is Wade. Yeah, so as I said in my script, we expect Q1 to be down about 5% compared to Q4 2021, and Q2 to be down 11% compared to Q4 2021. The majority of that, as I talked about, we are reallocating several of the block hours from our prorate model into our contract models. We have also seen kind of an overall decrease in utilization and primarily in our CRJ fleet, but we've seen a little bit of reduction also in our E175 daily utilization as well.

Got it. Rob, as you discuss the expected breakeven profit for the year, is it reasonable to assume that we'll make money over the summer but lose income in the first and fourth quarter? Or is there something unique about this year that might affect the typical seasonal trends?

Yeah, I mean the breakeven guidance is obviously meant for the full-year. But yeah, there will be some of the usual cadence throughout the seasons.

Got it. And if I might ask one last kind of longer-term question. Chip, you mentioned that a lot of this, hopefully, kind of gets resolved as we get into 2023. I'm just kind of curious, is there anything that you're seeing today that's a little bit more kind of a permanent change where maybe certain aspects of your kind of business model that worked in kind of the prior business cycle maybe does not come back in kind of when things recover?

That's a great question because it highlights something foundationally changed in our business model. As we navigated through January, we faced significant recruiting challenges, particularly with pilot attrition rates being higher than before. We're adapting to increased attrition, but our overall hiring continues to exceed these rates. Recently, we've felt pressure on recruiting captains, especially from our major partners. Previously, attrition was balanced at about 50-50 between first officers and captains, but it's now shifted to roughly 75-25. Given this sensitivity, we're reassessing how we allocate resources for long-term investments, such as captain upgrades, that align with our business model. There is a degree of conservatism in our breakeven analysis and block hour reductions, but our focus remains on ensuring we pivot at the right moment and in the appropriate manner to secure our long-term positioning.

Appreciate that, thanks.

Next, we have Mike Linenberg with Deutsche Bank. Your line is open.

Hey, good afternoon everyone. Just, I guess, a quick question here, Wade. What is the fleet count, the total fleet count at the end of 2022 versus the end of 2021? Do you have those numbers handy?

At the end of 2021, as noted in our release today, we have a total of 509 aircraft. Following the delivery of all our current E175s, we will have 240 E175s under long-term contracts. The CRJ side, particularly the CRJ200, offers us more flexibility. If we continue with strong hiring and recover our balance, we will be able to opportunistically reintroduce some of those into service. Therefore, we will have significant flexibility moving forward in our operations. While it may be too early to predict our fleet count at the end of 2022, we are certain that we will maintain 240 E175s under long-term contracts.

Okay. And then when you lose a Captain to a major, and I guess more specifically a major who happens to be one of your partners. As a consequence, we're seeing all airlines being forced to take rates up. And so, what sort of protection do you have under the CTA that as you take up your pay rates for first officers and Captains so that you can continue to get a healthy flow of feedstock that does not undermine your margins in your CPAs? Are you protected especially when some of this is being driven by your partners, some of this wage inflation?

So, Mike, this is Chip. That's an exceptional question that we've been addressing for many years. We anticipated some of these challenges when we became aware of the pilot shortage five, six, or even ten years ago. From our perspective, there are a couple of dynamics to consider regarding our fleet and contract lengths. We have many rate renewals approaching, starting at the end of 2023 and increasing in 2024 and 2025. To provide some insight, our strategy typically involves entering short-term contracts for assets like our CRJ fleet, which is flexible and valuable, usually spanning two to three years. However, for a significant investment like 175 aircraft, we aim for longer-term contracts. As we evaluate this issue and focus on attracting and retaining skilled aviation professionals while ensuring they receive appropriate training, we've taken these economic factors into account. While we can't resolve everything within a year, we are engaged in constructive discussions with our partners about the long-term business plan as we navigate this situation.

Sure. Just one last question. When considering your fleet and the role of the E175 as a core element, especially with its service to many smaller cities, I'm curious about the challenges related to 5G that airlines are encountering, particularly those operating smaller jets like Embraer aircraft near airports, such as in Key West or other similar markets. What observations do you have on that matter? Do you have an estimated timeline for when these issues will be resolved, particularly regarding alternative compliance methods? Will there be a resolution for the Embraer planes soon, or is this a problem we might still face in three to six months? This situation will likely affect your operational capabilities and increase costs, so any updates on this would be appreciated. Thank you.

I think regarding our fleet, we have encountered an issue, but we haven't experienced a significant amount of disruption from it like some other regional carriers have.

Great.

That's your bigger question, do we think something will happen soon to resolve this? I'm not optimistic about that. This is a significant issue between the aviation industry and cellular carriers. From our perspective, we will prioritize safety in our approach to this. We will be very transparent in collaborating with the FAA and our manufacturers. We're fully engaged with the issue. It's substantial enough that I wouldn't assume we'll be rid of it anytime soon or find a permanent solution.

Okay. Thanks, Chip. Thanks, everyone.

Next, we have Duane Pfennigwerth with Evercore. Your line is open.

Thank you. Appreciate the time. Can you help us frame the gap between demand and your ability to execute? So for example, obviously, the 1Q is a little squirrely, but if you think about the June quarter relative to that block hour guidance that you gave us, how much higher would that be if you didn't have these constraints? And is it all prorate flying that you're cutting? Or is there some CPA flying that you just can't really deliver in this environment?

Yes, Duane, this is Wade. We have been collaborating with all of our major partners on our schedules as we discussed. Demand is incredibly strong. It could be about 10% to 15% higher if we could resolve our imbalance and staffing issues. It's been a combination of factors. We have lowered both prorate and reduced utilization on our contract fleet. The demand remains very strong. We will continue to work with our partners, but we will maintain a balanced strategy between prorate and decreasing contract utilization.

Okay. That's super helpful. And then maybe as a follow-up to one of Mike's questions. Can you speak to this from a network perspective, what is the profile of markets that are losing service here? Is this all about frequency, kind of any anecdotes you could share about the markets that are losing as a result of these constraints would be great.

Yeah, so Duane, this is Wade again. So it's a combination once again of both. We've looked at frequency. There may have been a market pre-pandemic that we're having three to four flights a day into that market. Now we're down to one or two something like that. There are certain markets that are going to go dark, right, that just won't have service going forward from SkyWest. So it's going to be a combination of both frequency and there'll be certain markets that just aren't going to have service.

Okay. And then maybe just for my last on this Eve partnership, I know it's very early, but when do you think you'd be in a position to take delivery of some of these new aircraft types? And then just conceptually, how are you thinking about utilizing these? Would you be flying them on behalf of majors? Would it be your own service? And any thoughts on the type of pilot that would be required to operate that. Thanks for taking the question, guys. Really appreciate it.

Yeah, Duane, this is Wade again. So as far as the good partnership with them and the Eve entity, we think it's a great thing for our sustainability initiatives as well. As far as delivery of these, these are going to be more in the back half of the decade for sure. We're still working on potential commercial solution for this. We don't have those quite yet. We're still developing an operating plan. So this is still very much a work in progress, but we want to get out in front of it and start working with Embraer and some potential solutions here.

Okay. I'm so sorry to be persistent there, but again, super long range conceptually would this potentially replace some of the flying that you've done historically on like 50-seat CRJs? Or is it just a totally different network thought?

It's a completely different network concept. The 50-seat planes typically operate with an average stage length of 350 to 400 miles, whereas this aircraft will not have a similar range. It's designed more for urban settings than for the traditional regional markets.

Thank you.

Next we have Helane Becker with Cowen. Your line is open.

Oh, thanks very much. Hi, everybody and thank you very much for your time. Just maybe a couple of questions. The one question I had was one of the issues you guys talked about last year with maintenance and the ability to get spare parts to getting aircraft out of maintenance, is that an issue that's now behind you?

Yes, this is Wade. In 2021, we made a significant investment in preparing our fleet. By the end of the year, we had about 30 lines of C checks or heavy maintenance in progress. That situation is currently improving, and we are positioning ourselves well. Looking ahead to 2022, we anticipate a reduction in our maintenance expenses.

Okay, that's very helpful. Thank you, Wade. My other question is about the cancellations or however you want to classify them, but regarding the reduced block hours, do you have to pay penalties, or can you negotiate those away?

Yeah, so Helane, this is Wade again. So we've been working with our major partners on these issues and many other issues during the pandemic. Now as we emerge from the pandemic, we've been dealing with utilization issues for a while. And we've been able to work with them very collaboratively on solving these issues. And so that's something that we're working very, very much hand-in-hand with our partners right now. And we've got great relationships with all of our major partners. And so that's something that we're working through as we speak.

Are there penalties included as a deduction to revenue for last year? Can you explain how the revenue is affected by the credits provided for government financing, and how that is offset by the penalties for not meeting your commitments due to staffing issues caused by them hiring your people away?

Yeah, and that's the complexity with this issue, Helane, is that a lot of this is related to industry challenges. In our forecast, we definitely anticipate a decrease in our block hours and the corresponding revenue.

Next we have Catherine O'Brien with Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. My first question I think is a bit of a follow-up to something along lines Helane and Duane are both asking you, so forgive me. But I understand staffing is what's driving the lower block outlook for this year. But could you like walk us through how that decision gets made between you and your partners? Like for 2022 specifically is that you're going to them to say, you only have crew to fly x number of block hours? Or is some of that decision also your partner is coming to you to say they need you to fly less than you're technically capable of because they don't have ground staff and some other workers, they need to run a full regional operation?

Yeah, so Katy, this is Chip. Just relative to the process on that, it's actually a very seamless process. It's one thing I think that we have demonstrated, we're probably one of the best at in the entire industry, where we foundationally feel that, that communication and transparency is absolutely critical, primarily because of the demand that our partners want us to fly today. Back to a previous question, I mean, our reduction in block hours that we're talking about is based upon what we thought we were going to likely be able to provide three months ago. I can tell you that the actual demand for that what we thought we were going to produce three months ago is even much higher than that. So to go back to your point, who says what? I mean right now, they are asking us to fly a tremendous amount of flying more than we have even contracts for. Our perspective is, we are very transparent with them about our staffing needs. Given the fact that they're hiring our people, they know exactly what is happening to the model as well. And in the spirit of three main things, one, we want to provide an outstanding opportunity for all of our aviation professionals to go directly through these partners that we fly for. That's an outstanding model that our partners have absolutely embraced. And two, we are typically the ones that are saying that here's our staffing models. We want to make sure that we deliver for you, we know we can, particularly in the most sensitive times. And we give them what our estimate is and they digest it and work through it and it can even be domicile and location specific, but also in general we do this long ways out. So to get to the plan that we've presented to you guys so far, there's been a lot of thought going into it, there's been a lot of assumptions going into it. And there's been some caution this year quite candidly with all of our partners and they all have worked really well with that dialogue. And goes to the fact that they value the product that we produce on a daily basis and yet also value our employees, which is also outstanding from our view.

Okay, that's really helpful to understand the relationship between demand and staffing. It would be great to get some statistics on attrition. For low-cost carriers, attrition is usually around 5% or 6%, but now it's in the low double digits according to commentary from other airlines regarding their pilot hiring. I assume this might be more acute for you. Can you provide us with any recent figures on attrition compared to where you were in 2018 or 2019?

Given the sensitivity we have with our partners and our brand compared to others, we will likely keep those statistics internal. However, I can share that the reduction in flying in 2022 by 10% to 15% is probably in line with our attrition rates. That's about all I can say, considering the nature of our relationships with our partners.

Okay. Got it. I won't push. Maybe just one more quick modeling one if I can. With block hours down 10% to 15% for next year, do you expect to book deferred revenue from prior periods? Just trying to get a sense of what like the threshold is for that as you did book deferred revenue in the last two quarters, the block hours down a bit, the relative compare was a little bit closer to '19 than what you're expecting over the course of next year. Thanks.

Hey, Katy, this is Rob. Regarding deferred revenue as we enter the New Year, we have approximately $100 million in deferred revenue recorded. The timeline for how this will be recognized is still uncertain and will depend on the pace of our recovery. The important point is that we've already collected cash for this revenue. However, I don't anticipate spending too much time trying to model it exactly. Ultimately, all that revenue will be recognized by the time the individual contracts associated with that $100 million of deferred revenue expire, so it will definitely flow through.

Okay. Do you think it's like really going to come back to you on that one, Rob?

Sure.

Because I think in the past you've guided to is that as you approach '19 levels of block hours, that's when we should start to see that come back online. And that's held like down 5, 10 block hours in the fourth quarter, we saw some of that revenue show back up. I guess just like looking back historically in a quarter where you might have been even down 10%, 15%, have you been able to book that deferred revenue or no? Thanks so much for all the time.

Sure, Katy. No, that's fine. So look, I think if you go back and look at 2021 as an analog, some of the early quarters of the year, which were still sort of in recovery mode. We did book a little more revenue in the first half of the year. And then unwound $19 million in Q3 and then unwound $23 million in Q4. So you've got the cadence of how the block hours work there. So I think as you go forward, it will unwind slowly over the next few years as those contracts again approach their expiration point. And again, if things get stronger than we expected in '23 or '24 that will be likely wiped out by the end of that window.

Thank you very much. And to get to you 111 CRJ700s with American by mid-2023 or because of the current issues, is that getting deferred? And it also seemed like there were maybe a couple more with the last seven we had heard before. Wondering what the changes were there?

Yeah, Savi, this is Wade. So just on the American side, we are working with them on the timing of that. I do not anticipate that the 700s will come in the first half. Right now, we have the ability to work with them and push them out into the second half and we'll continue to work with those guys on our staffing models as we get better clarity. And yes, on the Alaska question, that is correct, they were two more added, so...

Okay, great. Thank you. And I don't know if this is for Chip. I know they're kind of conceptual industry question. Just I realize maybe M&A is unlikely for SkyWest given your size, but do you think from a regional airline industry perspective, the whole industry might benefit from further consolidation so that you're not wasting resources in terms of recruiting and training pilots and fly defendants and mechanics? And more importantly, what's your sense of with your partners have the appetite to see kind of further consolidation in the regional airline industry.

Yeah, Savi, this is Chip. I'm not sure how our partners would perceive that. We are currently quite opposed to mergers and acquisitions since our history shows that they haven't been beneficial for us. From our viewpoint, we still prefer to grow and recover through an organic process despite the current situation. We have the capability and reputation to attract exceptional aviation professionals, and as we mentioned earlier, this is not the challenge we are facing right now, and it remains strong. Therefore, the strength of that data point effectively removes mergers and acquisitions from consideration for us.

Thanks. All right, thanks.

Next, we have Duane Pfennigwerth with Evercore. Your line is open.

Thanks for the follow-up. I just wondered if there was any movement on the 1,500-hour rule. I mean, if you look at what used to be here in the US and clearly much, much lower requirements in other geographies in Europe, et cetera. Do you think there's any chance for kind of movement just given the constraints we're seeing across the industry?

Duane, this is Chip. That's a great question. We have been addressing this issue for a decade. Regarding your previous question, as we get out of various smaller communities, some cities will lose service entirely while others will see a significant reduction in frequency. We have been in discussions with these small communities, and finally, politicians are getting involved after years of discussions. I can't predict if there will be movement on the 1,500-hour rule, but the engagement in this conversation is stronger than ever. Even with ESG considerations, it's clear that there are much more efficient and safer ways to achieve our goals, and the data supporting this is impressive. We're ready to continue this discussion, especially with politicians. The real-life examples we've shared highlight what we've been advocating for over ten years. I'm hopeful about the data indicating progress, but the political landscape is quite complex. We believe the FAA can play a crucial role in making improvements that will help create a safer and more efficient path for individuals pursuing aviation careers, and we are excited about the possibilities. We're optimistic that we can gain more momentum than ever before.

Appreciate the thoughts.

Next we have again Mike Linenberg with Deutsche Bank. Your line is open.

I was reflecting on Duane's question as well as Helane's about how to address this situation. You mentioned that you prefer organic growth, but there are significant Part 135 carriers with many pilots available. This could potentially introduce a different type of aircraft and a substantial number of qualified pilots, many of whom are approaching the 1,500 flight hour requirement. Additionally, some of the markets you have exited might be suitable for these smaller aircraft. It might even be advantageous to invest in mobility solutions that wouldn't be constrained by the 1,500-hour rule, yet unfortunately, it seems we won't have that platform for quite a few years. Have you considered looking into a 135 carrier? There are several available in the market.

Michael, this is Chip. You got cut off, but I think I know what your question is going to be, and I will answer it. Regarding what you mentioned about 135 operators, we have a different perspective. We have strong relationships with several excellent 135 operators. If there are opportunities for partnerships or additional operations in that area, we would be very interested in exploring them. However, going back to the earlier question about 121 operators, we would not be interested in any consolidation in that space.

And there are no further questions at this time. I'll turn the call back to Chip Childs for closing remarks.

Thank you, Eli and thanks to everyone for joining us again on the call today. We appreciate your interest in SkyWest. I'll just close by saying a couple of things. Despite some of the headwinds we're facing, the demand for our product has really never been stronger. We will continue to work with our partners and our people to navigate the next phase of the recovery and we're confident in a very strong hiring pipeline as we work through this current staffing and balance. Again, I want to thank you and thank our people for the great work that they do and the continued flexibility that they have and their ability to look at the things that we need to accomplish long-term. With that, we'll end the call and talk to you next quarter.

And this concludes today's conference call. Thank you all for your participation. You may now disconnect.