SkyWest, Inc. (NASDAQ:SKYW) Q2 2022 Results Conference Call July 28, 2022 4:30 PM ET
Company Participants
Rob Simmons – CFO
Chip Childs – President and CEO
Wade Steel – CCO
Eric Woodward – CAO
Conference Call Participants
Savi Syth – Raymond James
Michael Linenberg – Deutsche Bank
Helane Becker – Cowen
Operator
Good day and welcome to the SkyWest Inc. Second Quarter 2022 Earnings Call. [Operator Instructions]
I would now like to turn the conference over to Mr. Robert Simmons, Chief Financial Officer. Sir, please go ahead.
Rob Simmons
Thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest’s Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, Chief Commercial Officer; and Eric Woodward, Chief Accounting Officer.
I’d like to start today by asking Eric to read the safe harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric?
Eric Woodward
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.
Chip Childs
Thank you, Rob and Eric. Good afternoon, everyone. Thank you for joining us on the call today.
SkyWest celebrates 50 years in 2022 commemorating our first departure in June of 1972. With the past five decades, SkyWest has weathered many storms it continues to adapt and evolve to lead the regional industry. That’s a testament to our more than 14,000 people who are truly unparalleled. We wouldn’t be where we are today without the outstanding work of our people and I’m humbled and grateful that I get to work alongside them.
Demand for SkyWest product during the second quarter remain exceptionally high with our main constraint being crew imbalance as we discussed last quarter. We made good headway during the quarter to realign our schedules and resources, producing results that were slightly better than we anticipated. We reported pre-tax income of 73 million and net income of 54 million. Improvement in our second quarter results from the first quarter was largely driven by outstanding operational performance, including a 99.9% adjusted flight completion rate during the quarter, as well as the block our production increase of 13% on our E175 fleet and an increase in prorate revenue. I want to thank our people for their teamwork and efforts to deliver strong operating performance as we launched a very busy summer travel season.
We received eight E175 during the second quarter and will receive 16 more this year with a total of 240 E175 planned in service by early next year. Our re-fleeting that has been in progress for the last several years continues to be a priority as we execute on our long term strategy. During the second quarter, nearly 80% of our block hours were flown utilizing our dual class fleet. While demand is solid clearly our largest constraint is captain availability.
SkyWest is fortunate to maintain a robust hiring pipeline and strategy for all workgroups, and to have new hire classes filled through year end. We expect that the ongoing high demand for pilots will continue to result in SkyWest pilots being the most sought after in the industry and are planning our models accordingly.
We have long been investing in tuition reimbursements, incentives, and various other partnerships and methods to reduce barriers to entry and clear the path to help increase equality among the pilots profession. Notably of those who have joined our pilot pathway program this year, over 40% are women or people of color.
As we discussed last quarter, we’ve taken a number of steps to address our new crew imbalance including managing schedules with our partners, working with our pilot group to implement upgrade and captain retention centers and offering sustainable career pathways including guarantee pilot interview programs for our captains. While these disciplines strategies are producing results, the timing required for training and upgrades will likely constrained production into late 2023 and early 2024.
We will continue to work with our people to ensure we remain best positioned to aggressively manage this challenge. We are currently in pay conversations with our pilots and expect to increase our pilot investment going forward to ensure we continue to provide more stability, opportunity and options than any other regional carrier can provide.
During the second quarter we formed SkyWest charter as an additional entity of SkyWest Inc. Our intent is to enter the strong charter business within existing regulations. And we have applied for commuter authority with the department of transportation. We appreciate the strong support from many communities and airports as well as the efforts of the DOT, and FAA to enable this service that would provide essential connections that many small airports rely on.
We undoubtedly have the asset base, best fleet, high standards and expertise to execute this operation well, and intend to hold SkyWest charter to the exceptional high standards of safety and service associated with the SkyWest name. While demand for our products has never been stronger, the current staffing imbalance and ongoing re-fleeting doesn’t allow us to monetize that demand in the short term. We continue to expect 2022 production to be reduced by about 5% from 2021 production. We also continue to expect production the second half of the year to be lower than the first half due to the crew imbalance.
However, there are three components in the environment today that gives us great confidence in SkyWest as an investment. First, there’s undoubtedly significant unmet demand for regional flying. Second our strong pipeline and our ability to attract train and retain captains is far greater than our competitors, and third SkyWest asset value is unparalleled in the market.
Our disciplined approach over the last decade in acquiring profitable assets at strong economics will enhance our ability to meet our objectives in this new economy. Although we continue to expect the recovery will remain choppy as we work through some headwinds over the next couple of years 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.
Rob Simmons
Today we reported second quarter GAAP net income of $54 million or $1.07, diluted earnings per share. Q2 pre-tax income was $72.7 million. Our diluted share count for Q2 was 50.6 million shares and our effective tax rate in Q2 was 26%.
First let’s talk about revenue. Total Q2 revenue of $799 million is up 9% sequentially from Q1, 2022 and at 22% from Q2, 2021. Q2 revenue breaks down with contract revenue up 8% from Q1, 2022 and 28% from Q2 a year ago. Prorate revenue was $95 million in Q2 up 20% from Q1, 2022 and down 8% from Q2, 2021. Leasing and other revenue is down 7% sequentially and up 5% year-over-year.
These GAAP results include the effect of a release of $16 million of deferred revenue this quarter, compared to $11 million released in Q1 and 6 million that was deferred during Q2, 2021. As of the end of Q2, we have $69 million of cumulative deferred revenue that will be recognized in future periods.
This quarter’s results also include two items I wanted to note. The first is a $15 million impairment charge we took this quarter on four of our older CRJ-700 that were part of our Express Jeff fleet and are held for sell. This impairment is in the line item other operating expense. The second is a $10 million mark to market gain on our investment in Eve as it started trading publicly during the second quarter. This gain is recorded below the line in other income.
Let me move to the balance sheet. We ended the quarter with cash of $979 million up from 856 million last quarter. Our CapEx during the second quarter was 197 million for eight new E175 aircraft and other fixed assets. Total 2022 CapEx is expected to be approximately $775 million, including the purchase of 28 new E175 aircraft compared to $556 million in 2021. We ended Q2 with debt of 3.3 billion up slightly from 3.1 billion as of yearend 2021.
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 things about liquidity. As of June 30, 2022 our cash position of $975 million included the effect this quarter of having repaid an incremental $103 million of debt before adding $191 million of debt financing for eight new E175 and $25 million in engine financing.
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 and service has no financing obligation. 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 directional color.
Q2 results were slightly better than expected for a variety of reasons referenced earlier by Chip, including optimizing our schedules by aircraft type, strong demand that we monetized opportunistically, and benefits from our evolving fleet mix. We expect Q3 results, however, to be slightly down from Q2 due to labor constraints and costs. The second half of 2022 will likely be worse than the first half of 2022 for similar reasons with the second half of 22 modestly profitable.
We don’t expect to rebuild production from this pilot imbalance challenge until the end of 2023. Second, we won’t see the full year impact of the 47 accretive new E175 going into service in 2022 and early 2023 until 2024. Our actions today are setting us up for success in 2024. Third, we will continue to focus on liquidity and expect to end 2022 with a strong cash position in spite of the investment we’re making in 28, accretive new E175 this year. We believe that the actions we are taking now to invest in the growth of our ERJ fleet work through the pilot imbalance affecting the industry and preserve the optionality of monetizing strong demand opportunities over time will position us well for 2024.
Wade?
Wade Steel
Thank you, Rob. I’ll provide a fleet and production status update as well as an update on our prorate and leasing businesses. We continue a strong delivery schedule this year as we’ve discussed in recent quarters. We previously announced an agreement with Delta for 16 new E175 to replace 16 older Sky West owned CRJ-900 aircraft. During the quarter we took delivery of two of the 16 aircraft. We anticipate taking delivery of the remaining 14 E175 during the second half of the year, and will be placed into service beginning in the third quarter of this year through the first part of 2023. After we received these aircraft, we will have 87 E175 under long term contracts with Delta.
Under our American contract we have 20 New E175 scheduled for service throughout this year. We received 18 of those aircraft during the third and fourth quarters of 2021 and will receive two in the third quarter of this year. We have an agreement with Alaska to add 11 E175 short contracts. During the second quarter we took delivery of six and had already taken four during the first quarter of 2022. We expect to take delivery of the last E175 during 2023 for a total of 43 aircraft under long term contracts with Alaska.
Demand for our E175 product remains very strong. Following delivery of those currently on order our E175 fleet will be 240 aircraft. Let me review our current production in 2022. Based on the current schedules we have from our major partners for the third quarter, we anticipate that our block hours will be down by approximately 3% to 5% in the third quarter as compared to the second quarter. As we look to Q4 we anticipate our Q4 block hours will be down 13% to 17% as compared to the second quarter.
Let me talk a little bit about our prorate business. As we’ve discussed, we are experiencing a crew imbalance that is impacting our ability to fully meet the strong demand for our product. As a result of this imbalance during the first quarter, we filed a 90 day notice with the DOT to discontinue service to 29 essential air service communities. This was a very difficult decision and one we would have preferred not to make. We have been serving most of these communities for several years. It appears nine of these 29 communities will transition to another airline by year end. We continue working through this challenge and remain committed to help find good solution for these and other underserved communities.
Shifting gears to our leasing business. During the quarter, we entered into one long term lease for CR-700. This brings our total CRJ-700 and 900 under long term leases with third parties to 40. This line of business has very good cash flow and strong margin characteristics. Demand for our engine leasing business is returning. And we have placed a few more engines under third party leases during the second quarter and anticipate placing more engines under leases by the end of the year.
We have a strong delivery schedule this year and will continue to and we’ll continue working efficiently and effectively allocating our resources as we optimize our fleet mix. 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 creative solutions.
Okay, Lisa, we’re ready for the Q&A now.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] We’ll take our first question from Savi Syth with Raymond James.
Savi Syth
Good afternoon. I was just kind of curious American, passed a pilot contract for their in house subsidiaries which the base pay is quite a big increase, but when you include the bonus that supposedly is temporary, a pretty significant jump up. I was curious as to if you have seen any impact in terms of kind of retention or ability to attract since those tasks that or what do you think the kind of the read-through to the industry from that contract there?
Chip Childs
Well, Savi this is Chip, thanks for the question. It’s a good question. And candidly, I think when we look at what America has done with some of their wholly owned, there’s a couple of things that we can some ideas about it that we can embrace and some that we don’t embrace. I think one of the things that for our perspective, is that we want to long term find a solution for pilots over the long term, and not just for the next year or two. That package is very heavily, heavily weighted for the next 24 months. I said in my script, that we’re investing in our pilots, and we’re getting close to having some good things to work out with our pilots, but I think that there’s a little different color.
From our perspective, there’s no doubt in the economy that we’re living today that labor costs are a big issue for everybody. It’s not even just our industry, by the way. So I think the most important thing for us to do is to come together as we work with our pilot group and have that evaluation for what’s the most meaningful process for our pilots and our group and we’re getting some very good traction and having some good conversations with them.
As it relates to the industry obviously, there’s some things that some of our partners have done with wholly owned carriers that are very close to this, and we’re having good conversations with them as well as far as long term partnering ideas surrounding various labor shortages, especially with pilots. So, look I think we’ve got some very good momentum and some good direction. And think we’ve got some good solutions to help get us back on track, like we’ve said, close to the 2024 timeframe.
Savi Syth
That’s helpful. How should I think about clearly the department is well aware of these hiring constraints and needing to drive pay raises? How quickly do you think you’ll be able to pass that through across your contract like, there’s going to be kind of a five year process a two year process? How or could it be faster? How should we think about when once you pass that pilot pay agreement the hits and how long it would take to them to get back to kind of a normalized margin?
Chip Childs
Well, I don’t want to get into too many of the strategies that we have, but I will give you some assurances. One, we have a very good fleet renewal timeline from starting in 2023 through the next five or six years, and obviously, when you come up with that type of contract expiration and people want to renew, that’s the ultimate reset of some of these things. We also see some opportunity relative to the sooner that we can fix the turnaround relative to our captain issue, the faster we can go back at capacity.
I said in my script, that the demand for our product is extremely high. You can see not just us but most other regional are pulling down significant capacity, which means there’s a tremendous amount of scope, we think in the next year or two, that’s going to be left out there that we could get pretty aggressive with. So I would suggest that this is not going to happen overnight. We don’t have any partner that’s going to just wonderfully write out a check for all of these costs, but it is a gradual process. And the more that we can deliver, the easier those conversations go because of the strong demand for flying, particularly in small and midsized communities today, so that’s kind of the way we’re looking at it without getting into any of the nuts and bolts.
Savi Syth
Last one, just following up on that, before I get back on the queue. It seems like you’re kind of into service timeline at American and Delta a little bit faster than you were thinking earlier this year. I’m guessing it’s a function of the operations have been good. It seems like you’re gaining more confidence. I’m kind of surprised to see that sequential drop from 3Q to 4 Q on block hours it seems like more than seasonal. So is there something that I’m missing in that forecast? Or is there a lot of conservatism in there?
Wade Steel
Yes Savi this is Wade. So the first part of your question about our timelines with American and Delta, those have been very consistent for the last couple of quarters, we’ve been saying that. There is really been no differences in the timeline of the one seven fives coming in. As far as the guidance coming forward, as we talked about, in our script, there is a crew imbalance that we’re working through right now. We’re obviously we are modeling it conservative as we’re looking at it. We’re trying to do the best we can to sure up and stabilize the fleet going forward. But there is that crew imbalance that we are working through over the next several quarters.
Operator
We’ll take our next question from Michael Linenberg with Deutsche Bank.
Michael Linenberg
Good afternoon, guys. I want to go back just on Savi’s question on the pilot, since I know you don’t have a union contract but that said, you still have kind of agreement? Is there a structure in place where rates are set for several years? And then you sort of negotiate and then they’re replaced by new rates? Like what’s the timing?
I’m just trying to get a sense of, if in fact, over the next year or two, we do see a meaningful bump up in pilot pay rates that we’re frankly, we’re seeing across the entire industry. And I just want to know whether or not it’s not going to show up until you guys renew some of your agreements, like Chip, you said, I think ‘23, ‘24, ‘25 things renew, and it’s, that’s usually a good time to kind of go back and discuss kind of where things are on the class side, etc.
Chip Childs
Yes, Mike, this is Chip again. Just to be clear, we have a very clear collective bargaining agreement with our pilots that is structured like any other contract with pilots. But our current agreement expires at the end of this year. We have been in conversation with our pilots over the last several months, it’s a long process. There is a lot going on in the world, a lot of concerns about various aspects of the industry. And the focus of our package is clearly on the captain side and retention and those types of things. So, but we intend, I mean, look, we’re pretty close.
We intend to have something probably coming out of agreement here within the next month or so. And even if we were not bound by an expiration of our pilot contract this year, we probably would, given the market circumstances we’ve always open things up if we feel like we’ve needed to, as we’ve done in the past, and would be here anyway. So the timing of the contract is what it is. But more importantly, we’re in a situation where we’ve always utilized some market opportunities to take care of our people and do it in a way that’s going to benefit them long term.
And I think that’s the, I think that’s the element that we want to emphasize of what our strategy is, is we want to a long perm element of our pilot contract that’s going to make sure that we can continue to achieve what we’ve achieved over the last several decades at SkyWest, and the conversations are going well, and we continue to go down that pathway.
Michael Linenberg
Okay, that’s helpful. And then back to maybe it was Rob or Wade who talked about just on the prorate revenue. 95 million is pretty good. I know it was down, I think 8% versus a year ago, but it was up 20% versus March quarter. I was kind of working under the assumption that that was really going to start to come down as you reduce block hours. And I guess, presumably, you may be benefiting from a strong pricing environment, strong revenue environment. So can you give us the block hours maybe that’s going to tell me that you did drop your prorate flying by a lot more than what the revenue suggests?
Wade Steel
Yes, Mike, this is Wade.
So we are on the prorate side, the block hours have definitely gone down quarter-over-quarter, year-over-year. Really the strong revenue is, our prorate is very similar to what the major partners are seeing right now. The yields are very strong. The demand is very good. And in a lot of these small communities, people are working with us to stay in there and do what we need to do. So the revenue environment on our prorate is very good. And so it’s really a yield. We’ve just seen the yields very strong and a lot of these communities over the last couple of quarters. And as we look forward into Q3 it looks pretty good as well.
Michael Linenberg
And then just lastly, I know you’ve been making all sorts of interesting investments. You highlighted the Eve gain. Maybe I dreamed this or not, but southern airways express? Did you? Did you guys make a deal on a piece of that company? I can’t remember if you own another piece of another regional carrier.
Wade Steel
Mike, this is Wade again. So yes, we’ve made an investment in southern and [Indiscernible] that whole combination several years ago, and they’re a good partner, they’re growing, they’re doing a lot of good things. And we’re helping them with their strategic plans and how they’re moving forward. So yes, we do own them.
Michael Linenberg
And Wade are they 135 carrier?
Wade Steel
They are there, they primarily operate caravans under 135 certificate. That’s right.
Michael Linenberg
Would it ever make sense to use them to be the backbone of this charter operation? Or you want it makes maybe more sense on the mainland to do a de novo operation?
Chip Childs
Michael, this is Chip, I think it’s primarily relative to the fleet that we want to utilize relative to this, which we have a significant amount of assets in the CRJ-200. Look, there’s no doubt that as we strategically look, and make sure that we take care of the communities that we’re serving today want to serve, and some that we have to back out of. It’s all part of a bigger conversation with the communities.
I mean, we were deeply invested in these communities. We’ve invested in them for years. Sometimes it may make sense and southern backfills, some makes sense that we utilize a commuter authority to have a 30 seat CRJ-200 to do it. So what the best part about it is, is we’ve got a tremendous amount of assets, tremendous amount of expertise, relative to the situation with most importantly, a lot of flexibility with our other business relationships, including our partners to try to work some of these things out and given the current environment.
Michael Linenberg
Thanks, Chip. Thanks Wade. Thanks, everyone.
Operator
We’ll take our next question from Helane Becker with Cowen.
Helane Becker
Thanks very much operator. Hi, everybody. Thanks for the time. Can you say if there’s been any update on the application with the FAA on the part 135 carrier?
Wade Steel
Helane, this is Wade. We filed for commuter authority in the middle of June on the application and we had many communities that put letters of support in there. Right now we’re working through the application with the DOT. They’re currently reviewing it. So hopefully in the next couple of months, we’ll get this all sorted out the commuter authority and we’ll be able to start buying some flights.
Helane Becker
Yes. Is there a way we should it’s just like fourth quarter first quarter event. Is that how we should think about it?
Wade Steel
We’re still working through the exact timing I will tell you that we are going to operate this as a charter this is a charter as well as on demand charters. And we believe, we will start flying that on demand charters, definitely during some time during this year. As far as the commuter authority, we’re still working through with the DOT on some things on that. So I don’t know if I necessarily want to give an exact timeframe. But I don’t think it’ll drag on too long. But we are working through it, but we will be flying on demand charters here, hopefully, shortly.
Helane Becker
That’s very helpful. Thank you. Can I just shift gears and ask Rob one question on that on a cash position, like, how are you thinking about the right number for cash and liquidity going forward, because it seems cash exceeds revenue? And I’m not sure that’s the right level of cash to have, or maybe it is.
Rob Simmons
Yes, Helane, I look, I think, as we think of our liquidity position obviously I think the way that we have thought about it has evolved over the last couple of years through COVID, and whatnot. But I think that given what the next 18 months is likely going to look like for the industry, we’re happy having a higher than usual level of liquidity. And we think that it’s one of frankly, it’s one of our real competitive advantages that we’ve got out there the strength of our balance sheet, the fact that should other opportunities arise that we’ve got the ability to finance additional airplanes given the strength of our balance sheet. As you know that it’s like our debt net of cash really hasn’t budged through all of COVID. And I think it’s frankly, one of our competitive advantages that really helps us.
Operator
We have a follow up question from Savi Syth with Raymond James. Please go ahead.
Savi Syth
Thanks for the follow up here. I just kind of curious, I know, United on their call mentioned the current situation probably accelerating where they thought they would get to from a regional mix, which is a lot smaller. I think they’ve talked about it being maybe half the size. Clearly still, I think big fans of the large orgies that you do have, I think 70 CRJs-200 flying with United. And I wonder if you’ve had any conversations about kind of the interest on continuing with those CRJ-200 or if you expect that to kind of wind down and over the next kind of couple of years here.
Chip Childs
Yes Savi I think that fleet mix and strategies are going to be very dynamic over the next couple of years. And I think I would also just take two seconds to at least reiterate what our strategy as a regional carrier is. I think there’s a lot of news in the world is talking about less regional flying. And I think it’s not because of the demand for regional flying is going away, because we see it being the exact opposite. I think that the supply of regional flying is going to be a constraint. And that’s why we’re going to be aggressive and making sure we can fill that demand. So when it comes to CRJ-200, there’s a lot of conversations about 200. Certainly, the dual class, 175 and the larger CRJs are the priority relative to the capacity that they can carry, particularly with our major partners. CRJ-200 fit very well within the charter operation, and what we want to do flying charters.
And so look, it’s sort of a dynamic conversation about fleet all the way around and is going to continue to stay that way. We have been more than surprised at the interest in our charter operation since we’ve had some more development of it. And we’ve been more public about this last quarter. We are surprised about pilot interest in it. We are surprised about community interest in it. And we’re surprised also that there’s a lot of parties that want this thing to work and we’re excited about it now. Doesn’t mean we’re going to move all the 200 over. But it certainly gives us an opportunity to be flexible and prioritize the dual class fleet at SkyWest.
Savi Syth
That’s a good segue to my next question. So it kind of follow up on I think Helane was asking but the part 135 and starting that, like what would you I mean, it seems like you have the systems in place to be able to start selling those fairs and I’m guessing in our lining, perhaps with majors or how should we think about if that opportunity becomes feasible or when that opportunity becomes feasible, how much infrastructure you have in place today that you can just leverage off of, versus maybe there needs to be some investment to get that operation off the ground?
Chip Childs
Well, let me give you some perspective of what we’re trying to do. This is not, let’s remember, we’re not pioneering this business model. This is not a business model that needs to be invented. There are other carriers today with the authority that we’re seeking that are doing the exact same thing relative to scheduled charter service. There’s a lot of charter operators out there that we don’t need anything from the DOT to do this with.
And when you talk about flying charters in a 135, our perspective of this is to operate it at the exact same level of safety as SkyWest airlines and to leverage all of the expertise that SkyWest has developed over the past 50 years, and apply it to an existing business model that other people have the authority to do this with.
So from our perspective, when we talk about leveraging, usually the most difficult thing when you start an airline or transition is the intellectual property that you don’t have or the pilot pipelines that you don’t have or the connections or the relationships that you don’t have to get it up off the ground. We will knock that out of the park. We have all of those things in place. We have very strong assets and very strong expertise, many of our expertise is up SkyWest and is coming back and deeply interested in this stuff.
And again, we’re amazed at the outside interest in this business model. And so from our perspective, we’re not going to let this model ever be the baseline model is what we do. But it certainly is a great opportunity for us to capitalize on some assets and some expertise that we have. So from a timeline perspective, I think Wade basically said it, we expect in Q4 we’ll do some chartering of on demand charter operations. Like I said, employee interest and this is very, very high. And we’ll continue to work with the DOT to get the other authorities that we’re looking forward to, to continue to develop this business model.
Savi Syth
And just a follow up, probably a little bit of a dumb question in there. So if I think about how, what a great opportunity this is to kind of help bridge the gap for pilots coming out with that 250 hour and needing to build up. Like, how do you see kind of pilots moving through here and into SkyWest? Like, what would they be? What kind of hours will they get? And how will this help you address the captain supply side of things?
Wade Steel
I would suggest Savi, that 95% of this relative to pilots is captain supply. I’m going to go backwards and say, look, there are a lot of pilots available that we see in our pipeline that have 1500 hours. The captain supply is what becomes most intriguing to us because of the applications and the interest that we’ve seen from existing experienced captains in the industry.
And it’s been SkyWest that want to participate in this in this operation. So to the extent that how the pilots supply thing works with this I think it does help out on the captain side because you need captains to create captains. And I think that we have got a lot of work to do still to figure out exactly the flow of how pilots would work in and out of this. But I would assure you of something that’s important about how we run this charter operation. We intend to run it just like we run the commercial side of SkyWest as a 121 operator. We fundamentally will have SMS systems.
We will have ASAP systems, voluntary systems, we will continue to have accountability to the board. It’s important to note that over every single year SkyWest airlines, we actually fail several 100 pilots out of our initial training courses. And they have 1500 hours. They’re very well qualified by FAA standards, but they don’t meet the SkyWest standard. And that standard for this charter operation will be the exact same standard. So from our perspective, this is a prime opportunity, particularly as communities are facing other forms of service that may replace this as SkyWest airlines comes out. A great alternative to what I think these communities are looking for. That having been said, we’re also extremely excited about some of the feedback we’re getting as an on demand charter operator.
Operator
We will take a follow up question from Michael Linenberg with Deutsche Bank.
Michael Linenberg
Chip, just back on the charter operation. I know you mentioned that a lot of parties want it to work, it would seem that first and foremost, one of those parties would be the DOT given the fact that you’re out there looking to discontinue service to 29 small cities, and you got nine takers, but you still have 20 small cities.
And then there’s a lot of other major carriers with their regional partners, also pulling down small city services as well. So we’re looking at lots of airports that could be losing service. Do they see it the same way number one? Number two, the charter operation is envisioned are you looking to go back into some of those other cities that you’re pulling out of that you would backfill with this charter operation?
Chip Childs
Yes, Michael, I can’t speak for the DOT. I can just tell you what’s out there within the marketplace. And the nine that we’re coming out of there are some that are this exact same model with a different carrier and the same authority going back in. So from our perspective, I don’t know that you ever get an opinion, particularly from a government agency, but the data points were favorable, I would say.
Second I mean, secondarily, we’re not too concerned about what you could look at from an upside from the charter operation yet, because we’ve gotten so much work to just get the first 10 to 20 aircraft up and going and seeing how that works. But there certainly can be some opportunities, but that having been said, I will be candid a CRJ-200 with 50 seats is still a lot better than a CRJ-200 with 30 seats. So the priority is still going to be making sure that SkyWest Airlines is maximizing their capacity and doing what we can in these communities that can withstand an economically supportive 50 seat CRJs, as we continue to work through the crew imbalance issue.
Michael Linenberg
Yes, no, it just it seems like from a policy perspective, that this is a good solution. And I just read your filing, and you look at all the exhibits that are from chambers of commerce and Mayors and various cities that are going to lose all service and or that have lost service, and that are out there pushing for this and you start looking at the number of Americans who are potentially going to lose regional services. It’s a lot of people, a lot of voters, it may be 50, 60, I saw a number that I think it was 70 million people are at risk of losing a good portion or all of their air service. So this seems like a no brainer, but whatever. I’m just the pining here.
Wade Steel
Michael, the other thing from our perspective, and there is some resistance to this ironically, the other thing from our perspective, either you may lose service, you may in the very slim chance get service from another operator that seeking the same authority that we are or you may end up with service in a nine seat, single engine turboprop in an a completely different set of rules than we would ever consider in their service. So from our perspective I think that we’re you know, we’re in a good position relative to what our application processes.
Michael Linenberg
Well, thanks. Thanks for answering all the questions.
Operator
That does conclude today’s question and answer session. I would like to turn the call over to Chip Childs for closing remarks.
Chip Childs
Thank you all again for joining us on the call today. We appreciate your interest in SkyWest. Look, I mean, in conclusion, we want to reiterate, there’s a tremendous need for regional product in small and midsized and underserved communities. Reliable quality or service is unquestionable positive economic impact for any community. And we’re focused on ensuring we’re strategically positioned to respond to all of that demand. With significant available scope and incredibly strong demand we’re bullish on the long term future of SkyWest. Also, as we celebrate 50 years, I want to again congratulate and thank our people for their work, and great continued support and flexibility. With that we’ll end the call and reconnect with you next quarter. Thank you.
Operator
And that does conclude today’s presentation. Thank you for your participation. You may now disconnect.
Be the first to comment