Skywest Inc Q4 FY2022 Earnings Call

Good afternoon. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWest, Inc. Fourth Quarter and Annual 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you for your patience. Mr. Rob Simmons, you may begin the conference.

Thanks everyone for joining us on the call today. And 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 2021 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 and thanks for joining us on the call here today. Today, SkyWest reported a pretax loss of $62 million or $0.93 per share in the fourth quarter of 2022. Reflecting in those results were $69 million of deferred revenue related to successfully amending the majority of our flying contracts, a $36 million noncash impairment on 10 CRJ700 aircraft, and an $11 million accelerated lease expense. We expect moving forward, we will be discussing deferred revenue regularly until the fleet utilization normalizes. Despite the noise in the fourth quarter, I want to point out that over the past year we have set ourselves up to be a fundamentally different and better company. We have done this by focusing on the core areas of our business that will help us set up for growth in 2024 and beyond and ensure we have a solid sustainable future. These fundamentals include: enhancing our partnerships and arrangements to adapt to a new industry and ensure we continue to deliver on our partners' needs; shoring up our operating processes and IT systems; effectively and efficiently utilizing our industry-leading fleet flexibility today and in the future; maintaining a healthy and strong balance sheet, which is a key SkyWest differentiator; and last and most importantly, ensuring that we take care of our people and create value for our shareholders. We are confident our ongoing execution of these fundamentals will ensure we are able to deliver value for all of SkyWest stakeholders. As we discussed last quarter, we invested heavily in our people throughout 2022, including increased pay for nearly every workgroup when finalizing a pilot agreement in the third quarter. While this pilot agreement represents a significant cost increase, we are pleased to have worked with the majority of our partners to amend our contracts to help offset these higher crew costs. We continue to strengthen our partnerships and we appreciate their continued support and deep engagement in our efforts in the new environment. We remain committed to working with our partners to evolve, adapt and provide strong solutions to their needs. Our focus on dual-class flying continues to deliver with 83% of our flying now dual-class. We took four E175 aircraft in the fourth quarter and are expecting three more by the middle of 2024. Additionally, as we near the end of this fleet transition capex cycle, this leaves us capacity for growth and drives free cash flow within the existing fleet. The pandemic fundamentally changed our industry and our ongoing environment. We have spent the past couple of years identifying vulnerabilities and refining and reinforcing our operations and systems. Post-pandemic realities have had an impact on every aspect of our operation from fuel supply and airport staff to lodging and accommodations for our crews. We spent a large part of 2022 ensuring that we have the resources, processes, and systems in place to run the most reliable operation and to mitigate negative impacts on our people and our customers. We also remain transparent with our partners about our constraints and are disciplined in ensuring we deliver on our commitments. As we've seen throughout the industry, over-commitment without the ability to execute is a recipe for disaster. As a result of our continued focus, I can proudly say our teams delivered some of the strongest operating performance in 2022 with over 99.9% adjusted completion for the fourth quarter. This performance included the peak Christmas holiday travel period during which we experienced severe winter weather. In fact, SkyWest experienced severe weather disruptions in every key location across this geography. But we were able to proactively manage through this challenge with extensive planning and resources, and as a result, our teams delivered exceptionally well to get 2 million passengers safely to their destinations between December 16 and January 2. I also want to commend SkyWest people for over 180 days of 100% adjusted completion for the full year in 2022. Our teams have done a tremendous job as we develop the new normal and continue to provide the best product in the regional industry. Thanks again to all of our amazing people. We're making good headway in our captain imbalance and we're cautiously optimistic as we plan for the years ahead. We continue to fill our new hire pilot classes and are maximizing our training resources with priority on upgrades as we work to rebalance our crews. SkyWest is clearly recognized as one of the most desired career destinations. We continue to believe it will take some time over the next couple of years to rebalance our crews and restore production and full utilization of our highly accretive fleet. As we rebalance, our ability to restore even a portion of production becomes accretive within our existing fleet mix. We've made great progress with our SkyWest charter entity, and once operationally ready, we expect to conduct charter flights in the second quarter. SkyWest looks forward to raising the bar in the Part 135 space with the implementation of several proven safety programs not required within existing Part 135 operations. This entity represents another strong opportunity to utilize existing assets and deliver critical service in small and underserved communities. Overall demand for our products remains stronger than ever. As we execute on our business fundamentals, we remain laser-focused on executing reliably for the long game and ensuring we are best positioned to respond to opportunities and the exceptionally strong demand for our products. Rob will now take us through the financial data.

Today, we reported a fourth quarter GAAP net loss of $47 million or $0.93 loss per share. Q4 pretax loss was $62 million. Our weighted average share count for Q4 was 50.6 million, and our effective tax rate was 24%. First revenue, total Q4 revenue of $681 million is down 14% sequentially from Q3 2022 and down 12% from Q4 2021. Q4 revenue breaks down with contract revenue down 14% from Q3 and down 11% from Q4 2021. Prorate revenue was $81 million in Q4, down 15% from Q3 and down 26% from Q4 2021. Leasing and other revenue is up 3% sequentially and up 6% year-over-year. These GAAP results include the effect of an increase of $69 million of deferred revenue this quarter compared to $13 million released in Q3 and $23 million that was released in Q4 2021. As of the end of Q4, we have $125 million of cumulative deferred revenue that will be recognized in future periods. Let me move to the balance sheet. We ended the quarter with cash of a little over $1 billion, up slightly from last quarter. Our capex during the fourth quarter was $111 million for four new E175 aircraft and other fixed assets. Total 2022 capex was $645 million including the purchase of 25 new E175 aircraft compared to $556 million in capex for 2021. We ended Q4 with debt of $3.4 billion, up from $3.1 billion as of year-end 2021, with this increase driven by the 25 new E175s delivered and financed in 2022. Just a reminder that 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 31, 2022, our cash position of $1 billion included the effect this quarter of repaying $110 million of aircraft debt. Additionally, we added $78 million of debt financing for the four new E175s delivered during the quarter. We also have over $1 billion of unpledged collateral that could be deployed for additional liquidity if ever needed. Additional flexibility comes from the fact that including partner-owned aircraft, 50% of our fleet in service has no financing obligation. Consistent with our policy and practice, we are not giving any specific EPS guidance at this time, but let me give you a little color. Last quarter, I stated that we expected Q4 earnings to be down from Q3 levels, but still be slightly profitable. Q4 actual results of a pretax loss of $62 million included the following items not factored into last quarter's comment: number one, $69 million of revenue deferred in Q4 related to the successful amendment of the majority of our flying contracts; number two, a $36 million impairment charge on 10 CRJ700s that were placed into a held for sale arrangement during the quarter; and number three, $11 million in accelerated lease expense on 21 CRJ aircraft being stored prior to lease expiration. Consistent with last quarter's comments, we currently expect total 2023 results to be down from 2022 but remain modestly profitable before the effect of roughly $60 million per quarter in deferred revenue in 2023. This new deferred revenue expectation in 2023 comes from future variability in the fixed monthly reimbursement component of our newly revised flying contracts; the future shift to a partially variable model for fixed monthly reimbursements is causing this timing difference for GAAP where cash is received before the revenue is recognized. The revenue deferred will be fully collected in cash in the quarter deferred with performance obligations fully met and the cash is not refundable. Excluding the effect of this estimated $240 million in deferred revenue in 2023, we expect a modest GAAP profit in 2023. We expect this deferred revenue balance will reverse by approximately $10 million to $15 million per quarter in 2024 with $240 million of this balance expected to reverse by the end of 2026. In spite of the GAAP loss expected in 2023, there are seven points I would like to call out: the fleet in place today can accommodate large future growth without more capital investment. Wade will give more quantification around this in a minute; we expect capex to be down over $400 million year-over-year in 2023; we expect cash at the end of 2023 to still be near $1 billion including expected debt repayment in 2023 of $450 million; we expect debt at the end of 2023 to be below 2019 levels with ongoing annual principal reductions expected to be over $400 million; our leverage at the end of 2023 could be the lowest in the last five years; debt net of cash at the end of 2023 could be $500 million lower than at the end of 2019; this capex reduction could drive the best free cash flow in the last five years; we believe that our strong cash position and the actions we are taking now to prepare the way over the next couple of years for incremental utilization of our fleet to work through the pilot imbalance affecting the industry and to preserve the optionality of monetizing strong demand opportunities over time will position us well to drive total shareholder returns. Wade?

Thank you, Rob. I'll provide a fleet and production status update as well as an update on our charter, prorate, and leasing businesses. As we've discussed, we are nearing completion of our strong delivery schedule. We previously announced an agreement with Delta for 16 new E175s. During the quarter, we took delivery of four aircraft for Delta, bringing us to 13 of those 16 aircraft. We anticipate taking delivery of the last three Delta aircraft at the end of 2023 and the middle of 2024. After we receive these aircraft, we will have 87 E175s under long-term contracts with Delta. We have an agreement with Alaska to add 11 E175s to our contract, of which we have received 10. We anticipate taking delivery of the last Alaska delivery in the middle of 2025. We currently have 42 aircraft under long-term contracts with Alaska. Following the delivery of the remaining four currently on order, our E175 fleet will be 240 aircraft. As we discussed last quarter, we came to an agreement with our pilots on a new pay package during the third quarter, which is a significant cost. During the fourth quarter, we came to an agreement with most of our mainline partners on addressing these new costs. We appreciate their support in this additional cost reimbursement. As Rob mentioned, we anticipate deferring $60 million per quarter of revenue during 2023. This is primarily related to turning the fixed reimbursement to a variable rate towards the end of some of the contracts. The fixed rate does not turn variable for several more years. The cash will be fully collected. There will be no additional performance obligations after the flight is completed, and we will have reconciled the monthly invoices with our partner. We put the emphasis on optimizing economics, cash flow, and risk mitigation. We chose cash flow and risk mitigation over a better accounting method. Let me review our production. The fourth quarter block hours were down by approximately 12% as compared to the third quarter. Based on the current schedules we have from our major partners, we anticipate that our block hours will be down approximately 3% to 4% in the first quarter as compared to the fourth quarter. As we look to the full year of 2023, we anticipate that our 2023 block hours will be down 19% as compared to 2022. As we look to 2024 and beyond, we can add approximately 30% more block hours to our ERJ fleet without any additional aircraft. This same number is over 40% for our CRJ fleet and makes each additional block hour very accretive to the model. Given our conversations with our partners, they are very engaged in supporting our efforts to restore production. Let me give a brief update about the status of SkyWest Charter, our new charter business. In June, we purchased a Part 135 aircraft carrier. Shortly thereafter, we applied to the DOT for commuter authority to operate scheduled public charters as permitted by both the DOT and FAA. The commuter authority application primarily is meant to demonstrate the fitness of the carrier in terms of financial, managerial, and operational matters, among other things. We believe SkyWest Charter is a well-capitalized entity and has some of the best operational leaders in the industry. We have provided the DOT with all the information they requested and are waiting for them to approve and issue the commuter authority. Regardless of the status of our commuter application, we are moving forward with our plans for SkyWest Charter to operate on-demand charters under its existing DOT authority once we are operationally ready. We anticipate that our first revenue flights will be in March or April of 2023. As far as our prorate business, the demand has been extremely strong just like the rest of the industry. We have seen very strong yields and great community support. We will continue to work with the communities on the best way to continue our service. Shifting gears to our leasing business. We have a total of 40 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. We placed a few more engines under third-party leases last year and anticipate placing several more engines under leases during 2023. The demand for our engine leasing business will not fully be realized until the flying levels for the regional industry start to rebound. During the quarter, we also made the decision to part 21 CRJ aircraft prior to lease expiration, resulting in an accelerated lease expense of $11 million. We also are having success in selling some of our excess CRJ assets. During 2022, we sold over $7 million of assets and we currently have signed letters of intent to sell approximately $20 million of assets. We anticipate these transactions will close during the first and second quarter. 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 to the continued exceptional demand for our products.

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

Our first question comes from Savi Syth with Raymond James.

Good afternoon, everyone. I'm curious about the pilot situation that you mentioned you are cautiously optimistic about. Could you provide a bit more detail? I understand it may take a couple of years to return to full operations as you experienced before, but could you elaborate on the timeline and what level you expect to reach by the end of 2023?

Yes. Thanks, Savi. This is Chip. That's a great question. We have spent a lot of time evaluating, like we have in the past, particularly throughout 2022. While we didn’t provide specific numbers, we can share our overall outlook on what’s ahead. I would say we are growing more optimistic, although we aren't ready to make major changes to our data or models at this time. However, there are aspects of our current pilots and the overall environment that make us cautiously optimistic about our progress. It’s important to note that 2022 was challenging; we lost a significant number of pilots, particularly in cabins, and it takes considerable time to mathematically return to a point where we can increase utilization by 30% to 40% compared to our current levels. That’s about all we can share at this moment. The new pay package has certainly helped, but until we gather more data as we approach summer, we aren't prepared to make significant adjustments to our models.

That's helpful color and especially around the timing of when you might have a better idea. Thanks, Chip. And then just on the asset sales, I was curious what type of assets you're kind of taking off the books right now? And just any general kind of thoughts on where you want the fleet to be over the next couple of years? Obviously, the E175 fleet is what it is and will get to 250. But just curious on the CRJ fleet, what are the moves that you'd like to do and how you'd like to size that?

Yes. Savi, this is Wade. So as we said there, we did have some excess, and we do have some excess CRJ assets. They are primarily CRJ200 assets that we are selling right now. There's good demand right now in the market for those assets. People like assets that have been well maintained and have good engine time on them. And so we are able to monetize some of those assets out there. There is some demand also for some of our CRJ700s as well, but primarily what we have sold and what is under letters of intent are CRJ200 assets.

Got it. All right. I'll get back on the queue. Thanks.

Yes. Hey, good afternoon. Just a couple here. Just the 21 airplanes that were parked, the lease CRJs, what's the model?

Yes. Mike, this is Wade. There's a combination of assets in there. We have one big lease structure that's remaining. And these are primarily CRJ200 and CRJ700 assets.

I was under the impression that the CRJ200s would be the first to be phased out, yet you have some 700s and an additional 10 available for sale. Can you explain what's happening? Are they being replaced by the more efficient E170 and E175 or are the CRJ900s influencing this decision? I thought these would be valuable assets that you would want to keep.

Yes, most of our current sales are CRJ200s, but we do have some CRJ700s as well. Right before COVID, we acquired some CRJ700s at very favorable prices, and we are successfully selling those for good returns. We will continue to explore the market for additional opportunities, especially if we have surplus CRJ700s available for trading.

Mike, this is Chip as well. I think it did not get too lost in what's hitting the for sale block. We still have a tremendously large base of both CRJ700s and CRJ200s, and not only a large base of it but a large buffer of aircraft we can still fly before we get to these. So I think from our perspective, as we manage the assets, these are assets that it's good for us to put in a for sale scenario because we don't see that we have so many still leftover that we can utilize in the next two to three years. I think it's just smart asset management to kind of see what other people can do with this stuff, and the response has been pretty good. So it's good cash flow as well, particularly if we don't likely think we're going to get back to flying them many times soon.

Okay. That's helpful. And then just one more before I get back in the queue. Just to talk about the deferred, so it's $240 million deferred, right? $60 million per quarter, and then it releases $10 million to $15 million, so let's call it $10 million, that's your two years 2024, 2025, or 2025, 2026. Just trying to think. I guess it maybe a slower rate?

Yes, Mike, let me clarify that for you. For 2023, we are expecting deferred revenue of around $240 million, which breaks down to $60 million each quarter. Over the years 2024 through 2026, we anticipate that $240 million will be released.

Okay. In the fourth quarter, we had $69 million, which brought the previous deferred amount up to $125 million. Does that amount decrease over time? Does it impact the $240 million? I'm trying to understand that component.

Yes. So the $125 million is the ending deferred balance as of the end of the year. In 2023, we're saying that there's going to be another incremental approximately $240 million. And then starting in 2024, it starts to reverse and bleed off.

It’s $10 million to $15 million over 36 months instead of 24 months, that makes sense. Now I have that figured out. That's great. Thank you.

Hey, thanks. Rather than the accounting treatment, can you just expand a little bit on why this variable versus fixed component of your contracts makes sense. What drives a higher reimbursement versus a lower reimbursement in the future or I guess revenue recognition in the future?

Yes, this is Wade. That's a great question. In our agreements with partners, we aimed to optimize cash flow and minimize risk. Over the next few years, we don't anticipate much change, but as we approach the end of some contracts, certain fixed rates may shift to a variable structure. At that time, we expect utilization to return to normal levels. The economics indicate that cash flow will be sound and will cover our current costs. We do expect future increases in utilization. The recovery's shape is directly linked to revenue, which is generated based on the block hours we operate.

Okay. So effectively removing minimums towards the back end of the contract, but the expectation that you're going to well exceed those minimums at some point down the road.

Yes. Yes, you got it.

Could you clarify the 19% decrease in block hours for next year? Is this considered a base case, or is it a conservative estimate? Is this the maximum your team can manage, or are there potential staffing developments throughout the year that could lead to higher levels than the anticipated decrease?

I believe that 19% is a strong indicator of where we expect attrition to head, especially when considering the development of cabins in 2023. If attrition rates revert to last year's levels, we could see a figure lower than 19%. We need to observe how this evolves as we approach summer, but we remain optimistic about the current ratios. If those ratios hold, which may not be guaranteed, there could be potential for an increase above 19% by the year's end. However, when we look back at January and February, the predictive nature of those months is not great; they were notably lower than last year's figures. We aim to monitor trends as we move into spring and summer. The sentiment among pilots and the outlook we have this year feel different from last year, but we're not prepared to make a sweeping change. This reasoning contributes to our 19% estimate, but it’s likely a figure we might not precisely achieve, and we can't predict exactly how this will unfold until we get closer to summer.

All very fair. Thanks for the thoughts.

Thanks very much, operator. Hi, everybody. Thanks for the time. So just two questions. One, can you actually be more specific on attrition? What was attrition last year, and what does it look like currently?

Yes, Helane, this is Chip. I'm sorry, I can't. Those are kind of some things that we've decided to make sure that we keep kind of with us and our partners. We have some confidence we have relative to a lot of our contracts. But I will say that, like I indicated to Dwayne earlier, so far, December, January, and February are less than they were last year. And when we have the pay package that we have this year, we see tremendous demand for folks to come to SkyWest. And there's a lot of things we hear anecdotally about pilots that have left and want to come back, a lot of pilots that have had commitments to leave and turned them down and stayed. So look, the only thing that we can say is that attrition is not quite as bad as it was last year, and we're growing in some optimism. But again, we have to see more on the meaty side of what happens this spring or before summer before we can really make a wholesale model assessment.

Great. That's really fair. Thanks. And then just for my follow-up question. So when you negotiated these contracts with your pilots, did you get input from your partners? I mean, obviously, they had to sign off that they were okay with you raising pay as much as you did and willing to reimburse some portion of it. So when you are having those conversations, was there a lot of pushback? Were they thinking maybe they would reduce their reliance on your aircraft and move to other operators? How did that go?

This is Chip again. We're going through a challenging time, and I believe that what SkyWest has done over the last 50 years is adapt, support our people, and collaborate with our partners better than anyone else in the regional industry. It's certainly a stressful period, and it's not just about pilots; we've had discussions with all our workgroups. Initially, we had to coordinate with some partners who started this process, which led us to reassess our plans. The events of 2022 regarding regional pay were significant. Did we have to commit to the pay before receiving full agreement from our partners? Yes, we did because that's how labor negotiations function. I commend our team's efforts as we needed to close gaps to benefit both our people and our partners. As I mentioned earlier, our operational credibility and the caliber of our 14,000 professionals are critical. Our strong relationships with partners, our effective collaboration with workgroups, and the stability of our operations throughout history have made navigating this difficult situation much more manageable. We're pleased with the outcome, which has had the desired impact for everyone involved.

That's very helpful, thank you very much.

Hey gentlemen, good afternoon. Great to see you guys again this quarter. Maybe my first one's for Rob. Can you just help us think about some of the puts and takes on costs? Underlying the commentary on roughly breakeven ex deferred revenue for this year, should we think about the fourth quarter being a good run rate for salaries and benefits considering it has the full quarter of the new pilot agreement? And then I know maintenance has been a bit lumpy the last couple of years, how do you think about that trending forward just to touch on a couple of the large line items? Thanks.

In Q4, we experienced a slight increase in labor costs, partly due to the pilot agreement made in Q3 and some reimbursements that applied to this quarter. Q4 had its complexities due to factors like impairment, lease acceleration, and deferred revenue. However, overall, we were satisfied with the company's operating results.

Okay, got it. Understood. And then great news on getting these contract amendments done and being able to pass through a portion of the higher pilot wage rates, can you just help us think like really high level about how much of the pilot costs we passed through? And then on the portion that's not being passed through today, how far are we out from negotiations on those contracts? I know we're approaching the 10 or 12-year mark since the first E175 delivery, so maybe some of it is coming up. Thanks again.

This is Wade. That's a great question. Regarding pilot reimbursement, we've collaborated with each of our four major partners, and most have reimbursed us. We're still in discussions with one partner for additional reimbursement. Currently, we're covered at over 60% to 70%, and we feel good about our progress. We're continuing to engage with the other partner to secure the additional cost reimbursements.

That's great. I need to sneak one more in on the charter business, there's been an update. Can you just remind us about how many planes you think that this business ultimately comprises of or maybe you haven't shared that before? Just wondering how to think about pricing it? And then how is hiring going there on the pilot front? A couple of months out, I think you can tap into some additional pilot pool versus like your traditional in the main business. So any additional color will be great. Thank you again for the time.

Cathy, it's great to have you back. I hope everything is well with your family. Regarding the charter side, we have about 120 CRJ200s available for charter at this time. Historically, in 2019, we had around 50 CRJ200s in our prorate operation. Since then, demand has significantly increased. We will be flying on-demand charter flights starting in March, and we anticipate strong demand for non-scheduled service. There are many options available. The pilot situation is favorable for this operation because of the new seniority list. This can lead to attractive opportunities for pilots who want to join a new seniority list early. We believe this is one reason we lost pilots last year, as seniority lists have opened up across the country. In summary, demand for pilots in the charter operation looks very good, not only for new first officers but also for direct entry captains. We plan to be patient and ensure we execute this correctly. We expect to provide more updates after starting revenue flights in May when we have more visibility. This should give you a high-level idea of our opportunities and capacity.

That's great. Thanks so much for the time, everyone.

Thank you for the follow-up. Regarding Cathy's question, I wanted to clarify if the charter is a significant part of the breakeven earnings outlook, or if you're waiting for more information on its ramp-up before considering it.

Yes, Savi. This is Wade. So for 2023, we do not anticipate significant profitability as we are growing that entity. We are going to be doing maintenance events to get airplanes ready, training pilots, and so that is not a major driver in the overall breakeven for our program.

Got it. If I could ask a longer-term question based on the revised contracts you've secured and the increase in E175s since 2019, could you compare your expected profitability to your levels in 2019? Once you fully utilize your fleet, could you discuss what might be positive or negative in comparison to your 2019 earnings? Specifically, what aspects will improve and what might not be as favorable?

I believe there is a possibility for the 175 fleet to achieve comparable profitability on a unit basis once we reach our desired utilization levels. We are managing the fleet in a manner that should be beneficial from a cost perspective. Currently, there is a 30% gap in the CRJ fleet that we need to address, which does not require capital investment, and we need to begin flying those hours. I have confidence this will not be significantly different from 2019. Furthermore, it's important to note that we reduced our prorate operations significantly in 2022, which had higher margins than our contract margins, contrary to some beliefs that we are not profitable in smaller markets. The essential air service and prorate flying proved to be very profitable. When comparing to 2019, it largely depends on our ability to manage the non-ERJ and dual-class CRJ fleet concerning Charter and other essential air service models. Additionally, since 2019, demand for travel to small cities has increased dramatically. We receive numerous requests from local cities and states for non-essential service flying, seeking ways to serve their communities. The trend of deurbanization during the pandemic has worked in our favor, returning demand to levels seen before 2019. Our balance sheet and assets are strong, and we intend to be patient and methodical in supporting our team while working to improve fleet utilization. We will strategically collaborate with partners and consider additional aircraft options as we progress, but we have ample opportunity to boost utilization before reaching that point. I hope this provides a clear understanding.

That is. Thanks, Chip.

I have a couple of follow-up questions. I want to revisit the fact that you mentioned you've closed deals with the majority of your partners. Could you clarify whether that means one or two partners? You mentioned being 60% to 70% covered. Is there anything we should take away from that, or is it simply a matter of timing for each deal?

I think mostly just timing, honestly, Michael. I think that we continue to have great dialog with all of our partners. That's the fun part about our job is collaborating and finding ways that work to do business with both of us or all of us, all four of us; and some are more aggressive than others, and some are more patient than others, and I don't think there's anything to be read into it. I think if there is, we will probably be updating in the next quarter or the quarter after. But we're optimistic that they're all thinking of the same lines, the fact that we can offer incredibly good products that are predictable and reliable, and stable and we try to do all we can to make their lives easy and they recognize that very clearly. And as we work toward long-term sustainability, I think that we're very optimistic about all of our partnerships.

Okay, that's great. Regarding my second question, I appreciate the insight into your ability to grow without adding more aircraft. You mentioned that by 2024, you could achieve a 30% increase in block hours with the ERJ fleet and a 40% increase with the CRJs, all without taking on additional aircraft. Since you have only a limited number of planes coming in over the next few years, should we assume that you do not plan to take delivery of any new aircraft beyond what you have already ordered for the next few years? Is this how we should interpret your planning for the next 2 to 3 years, focusing mainly on stabilization with just a few units?

Yeah, this is Chip again. I would agree with that, Michael, only from the perspective that it's going to take a lot to get that utilization back. I would reiterate, we are having conversations with manufacturers and certainly creative conversations about long-term ESG and fleets, and so there's a lot of conversations about fleet. There's a lot of that conversation with our partners, but there's just too much opportunity until we close off that gap of that utilization before we get serious about it. The other thing is, I mean, you've got a couple of other things running against this. You've got higher interest rates; airplanes are expensive. And so from our perspective, it's not that we're not looking down the road of continuing to grow the fleet. It's more like let's be focused on making sure we get the accretion without unnecessary investment first and then which by today if we're talking the timeframe that we've talked about over the last little bit. We should we need to pay attention to adding additional fleet because it takes a while to make aircraft. So I think it's rather fluid and we'll keep you up to speed in the upcoming quarters about that, but we haven't put the conversation on ice; we're continuing the conversation. We just, it's more important to get the utilization up.

Okay, great. Thanks, Chip. Thanks, everyone.

There are no further questions at this time. I'll now turn the call back over to CEO Mr. Chip Childs. Thanks.

Thanks, Devin. We appreciate your help with the call today. 2022 has been a very exciting and eventful year. I want to emphasize what I've mentioned in the script and throughout the call: we are in a great position to continue to take advantage of what SkyWest represents, and we will remain disciplined while ensuring we take care of all our stakeholders at SkyWest. I would like to express my gratitude to the incredible team at SkyWest for their hard work every day in providing reliability, and we look forward to speaking with you next quarter. Thank you.