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Edited Transcript of SKYW earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 SkyWest Inc Earnings Call

St. George May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of SkyWest Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric J. Woodward

SkyWest, Inc. - CAO

* Robert J. Simmons

SkyWest, Inc. - CFO

* Russell A. Childs

SkyWest, Inc. - CEO, President and Director

* Wade J. Steel

SkyWest, Inc. - Chief Commercial Officer

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Conference Call Participants

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* Helane Renee Becker

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the SkyWest Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Rob Simmons, Chief Financial Officer. Please go ahead.

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Robert J. Simmons, SkyWest, Inc. - CFO [2]

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Thanks, Anita, and 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; Eric Woodward, Chief Accounting Officer; Mike Thompson, SkyWest Airlines' Chief Operating Officer; and Terry Vais, ExpressJet Airlines' Chief Operating 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?

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Eric J. Woodward, SkyWest, Inc. - CAO [3]

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Thank you, Rob. 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 2016 Form 10-K and other reports and filings with the Securities and Exchange Commission. Chip?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [4]

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Thank you, Rob and Eric. First quarter almost always brings most challenging weather patterns of the year, which is something we always plan for. However, our people handled the weather challenges extremely well this winter, which resulted in better-than-planned performance across our entities. In the competitive landscape that we're in today, this level of performance continues to set our airlines apart in the industry and with our partners. We continue to have great relationships with our 4 partners and we're in a solid position to expand our relationships with each of them.

Operational performance for our airlines during the first quarter was as follows. SkyWest Airlines delivered a solid 99.9% adjusted completion for the quarter, during which time, they received 7 new E175 aircraft and transitioned several more CRJ700s within the fleet. ExpressJet delivered 99.6% adjusted completion for the quarter as they transitioned 10 CRJ700s into their American fleet. Both of our airlines are delivering top performance within our partners' portfolios. Once again, after the first quarter, one or both airlines have been the top-performing carrier in United's network for more than 2 years now. Together our 2 entities operated nearly 270,000 flights in the quarter and, as I mentioned, they handled the quarter's challenges very well.

I want to say that the work that our people do on the frontlines is far from easy. And they have done, and continue to do, an outstanding job providing exceptional service. In a time when every move is evaluated, we will continue to ensure our people have the right support, tools and resources to make smart decisions that maintain our values of safety, service and reliability each day. I want to thank our more than 19,000 aviation professionals for their commitment to these values during the first quarter and beyond.

During the first quarter, we continued progress on our fleet plan with positive results. We added 7 new E175s, redeployed several CRJ700 aircraft from our United operation to our American and Delta operations and removed an additional 27 50-seat aircraft. During the first quarter, ExpressJet successfully launched 10 CRJ700s, executing on our plan to grow their dual-class fleet. As we've discussed previously, this transition is an important part of ExpressJet's progress.

Staffing across our industry remains a challenge and, as we stated before, we're not immune to those challenges. But both of our airlines attract top professionals. SkyWest Airlines is recruiting pilots at record numbers while ExpressJet is experiencing slightly higher pilot attrition. Our strategy to stabilize ExpressJet as a smaller, more efficient and successful entity is moving forward. We're currently working with our partners for profitable contract extensions for ExpressJet and anticipate that ongoing process will produce positive results.

We remain committed to ExpressJet's long-term stability and success. Overall, we continue to see strong demand for our product. Our objective is to ensure we are best positioned to meet very strong industry demand and improving our overall fleet mix while delivering strong performance continues to meet that objective. I want to again thank our more than 19,000 professionals for their excellent work during the quarter and every day across our operations. Rob?

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Robert J. Simmons, SkyWest, Inc. - CFO [5]

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Today we reported net income of $35 million, or $0.65 per share for the first quarter of 2017, up from net income of $27 million or $0.52 from Q1 2016. Our pretax income increased 18% year-over-year to $52 million.

Revenue was $765 million in Q1 2017, up $3 million from Q1 2016. With fewer aircraft in service, the moderate increase in revenue included the net impact of 45 additional E175 aircraft, less the removal of 61 50-seat jets and 8 CRJ700s from service. We expect to put 11 more E175s into service during the remainder of 2017 to bring our total fleet of E175s to 104. Let me provide some color on a few items included in our quarterly results.

The $0.13 improvement in our EPS over Q1 last year included a discrete tax benefit associated with equity compensation deductions of approximately $0.05 per share under the new equity compensation accounting standard update we adopted January 1. Our provision rate for the quarter was 34%. The timing and amount of future related tax impacts on our provision rate will vary based on stock option exercises, restricted share vesting, stock price performance and other factors. Generally, we anticipate a future effective rate of between 38% to 39% Q2 through Q4 and between 37% to 38% for all of 2017. Also, as part of adopting this accounting standard, our diluted shares increased by 350,000 in Q1, which we anticipate will continue for run rate purposes.

Our total fuel cost per gallon averaged $1.97 during the first quarter, up from $1.49 per gallon in Q1 2016. The increased fuel cost per gallon cost us $4 million or a $0.05 reduction in our earnings per share from a year ago under our prorate business model. With the tax benefit offsetting the impact of higher fuel costs during the quarter, the remaining $0.13 improvement year-over-year in earnings per share was primarily attributed to the execution of our fleet transition since Q1 2016, including the addition of 45 E175 aircraft and removal of unprofitable 50-seat aircraft. Last quarter, we articulated the expectation that our results this quarter could be fairly similar to the $0.52 we posted Q1 a year ago. The outperformance from that guidance for Q1 was primarily attributed to the $0.05 discrete tax benefit I previously described, $0.05 from our team's handling of the Q1 weather events better than anticipated, and strong production in March from executing on partner requests for schedule increases.

You can see in the release, our depreciation expenses up $2 million from Q1 2016. This increase includes additional depreciation from 45 E175 aircraft we acquired, partially offset by the reduction in 50-seat aircraft-related depreciation. The $70 million depreciation expense in Q1 could be viewed as our run rate depreciation going forward subject to future E175 deliveries and other owned aircraft removals.

Let me say a couple of things about our balance sheet. We ended the quarter with cash of $586 million, up from $565 million at year-end and $442 million last year at this time. We issued $158 million in new long-term debt during Q1 2017 to finance the 7 new E175s delivered during the quarter, with total debt increasing by $69 million, net of debt service. Total debt as of March 31, 2017, was $2.6 billion, up from $2.5 billion at year-end. SkyWest also used $26 million in Q1 2017 for other capital investments.

We ended the quarter with $380 million of prepaid aircraft rents under our long-term lease agreements. We anticipate this asset will amortize over the next several years as a noncash rent expense that will contribute to our operating cash flows and will enhance the cash flow quality of our earnings. And finally, during Q1, we repurchased $10 million of stock under our $100 million stock repurchase authorization announced last quarter. Wade?

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Wade J. Steel, SkyWest, Inc. - Chief Commercial Officer [6]

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Thanks, Rob. I'll review our fleet changes for the first quarter and then discuss our current fleet expectations for the remainder of 2017. We continue to execute on our strategy of removing aircraft from unprofitable agreements and transitioning our fleet to larger new aircraft as well as redeploying aircraft with extended flying terms to mitigate financing risk.

From the end of 2016 to March 31, 2017, we moved from a total of 652 aircraft to 632 aircraft in our fleet. During the first quarter, we added 7 new E175s to our fleet, including 2 E175s under our United agreement for a total of 60 under contract with United; 5 E175s under our Alaska agreement for a total of 20 under contract with Alaska. This brought our E175 aircraft count to 100 -- to 93 at quarter end. We also made changes to our 50-seat fleet during the first quarter. We removed 22 ERJ145s from our fleet, 14 of which were removed from unprofitable United contract, 8 from our American contract. Additionally, as part of our planned transition of ExpressJet CRJ operation to primarily dual-class, we anticipate removing 52 CRJ200s throughout 2017. In addition to the 5 CRJ200s we removed from service during the quarter, we sold 15 CRJ200s to a third-party that we continue to operate under a short-term lease agreement. We also reached an agreement to lease 6 additional CRJ200s to a third-party. These aircraft will transition later in the year. We anticipate the remainder of the aircraft will be returned to the lessors or redeployed within our fleet.

ExpressJet also began operating 10 CRJ700s for American during the first quarter under a multiyear agreement as we move ExpressJet's CRJ operation to primarily dual-class. Looking ahead into the remainder of 2017, I will review our anticipated fleet forecast and provide some color on our anticipated changes. We expect to take delivery of 11 additional E175s during 2017, which will conclude the delivery cycle of this round of E175s. We expect 10 of those 11 aircraft will be delivered and placed under contract with Delta and United during the second quarter of 2017. In total, we anticipate 104 E175s in our fleet by the end of 2017. In our 50-seat fleet, we anticipate removing 37 ERJ145s during the last 9 months of 2017, 31 of which are under an unprofitable United contract. Our United ERJ145 contract has an expiration of December 31, 2017. However, United has 2 one-year renewal options at modestly improved economics. Today United has exercised its first one-year option to extend the contract through 2018. We continue to work with United on a mutually beneficial long-term solution for the ERJ145s. Demand for our remaining 50-seat aircraft remained very strong and we're working with each of our major partners to meet their ongoing 50-seat needs. We have recently extended 22 CRJ200s with American and 9 CRJ200s with Delta under contracts with SkyWest Airlines.

We expect fleet transitions to continue throughout 2017 as we reduce unprofitable flying, redeploy aircraft with other partners and place larger new aircraft into service to minimize our risk and continue to deliver on our commercial agreements.

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Robert J. Simmons, SkyWest, Inc. - CFO [7]

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Okay, Anita, we are ready for Q&A now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Helane Becker with Cowen & Company.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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That was so much information on the moving parts -- with the fleet and so on. I just -- a point of clarification. Do your requests for, say, relief from United fall on deaf ears or are they responsive? Can you just talk about the response there?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [3]

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Helane, this is the Chip. Appreciate your question. I can tell you relative to all of our partners, including United, we have an extremely active dialogue, I can say that. We've worked with United for several years. I can also confirm that as we continue to work, we're very impressed with the momentum that we have currently with them to resolve what are some tough issues with the ExpressJet side of our house, as well as some opportunities for them, and on the SkyWest side. So we feel very comfortable with the pace and the momentum of which our current commercial conversations are having.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [4]

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Okay. And then, do you think you can still see double-digit earnings growth for this year? Or how should we think about that given the share repurchase program and kind of all the other changes?

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Robert J. Simmons, SkyWest, Inc. - CFO [5]

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Certainly. And so last quarter, we made the comment that we expected low double-digit growth for all of 2017 and that hasn't changed.

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Operator [6]

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The next question comes from Savanthi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [7]

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On the CRJ200 side I just had a quick clarification question. It looks like there may be 11 more 50-seat RJs that you're expected to exit the year with. And I wasn't sure if the comments, Wade, I think you made on the 22 with American and the 9 with the Delta, that was extended, if that was things that were coming off this year that was extended or contracts that were coming off next year that were extended. So I wonder if you could just provide a little more clarity on what's happening there and maybe if those rates are just being renewed or if there is maybe improvement in the rates as well?

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Robert J. Simmons, SkyWest, Inc. - CFO [8]

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Yes, Savi. So thanks for the question. On the 50 seaters, we talked about 22 CRJ200s with American and 9 CRJ200s with Delta under contracts. The 22 with American is a combination of extensions that have happened in Q1. Then there is also mixed in -- So there is also some extensions that we're working on and that are happening in the fourth quarter as well. And Delta's are some additional extensions that have happened during the Q1 and Q2 time frames. And then as far as the rates, they're pretty consistent with what we've had in the past.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [9]

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All right. And then just on the pilot contract side, could you remind me again what the contract -- what you have with SkyWest and how long the SkyWest Airlines side and how long that goes? And I know on the ExpressJet side, you got an extension and I know Chip you mentioned having some discussions there. Could you just provide a little bit more color on what we have and what you might be trying to achieve?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [10]

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Yes. Thanks, Savi. So for the way that the contracts are set today, both contracts at ExpressJet, both the CRJ side and the ERJ side, that extension expires at the end of 2017. And on the SkyWest side, the last agreement we had with them goes until, I believe, June of 2018. So from that perspective, we're -- it is typically within our culture that we continue to have active dialogues whether we're in contract or not. We fundamentally believe it's inherent within our business model to evolve, evolve quickly. We're in a position as a regional carrier with the things that we have in front of us that we want to make sure that we're set up for the long haul and the long-term stability, but yet also evolve with our partners' needs. So as you can imagine, we're always in active dialogue about certain elements of the contracts and I can say as of today, we are having conversations with all 3 of the pilot groups.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [11]

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And, Chip, is the higher attrition at ExpressJet that you mentioned, is that -- is there an acceleration there or is that just a continuation of -- I think that's a trend that we saw last year as well?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [12]

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Yes, I think, it's certainly a trend that we have seen for a bit as we've done some things with the fleet at ExpressJet. I will say certainly this year we've seen as of the recent months that it certainly has ticked up. But that's not necessarily too surprising to us because of what we announced in Q4, where we're taking away like 94 50-seat aircraft in order to continue to modify that model, more long-term sustainable and competitive. So to a certain extent, the attrition is somewhat necessary given what we're doing with the fleet. But remember that the decision we made in Q4 was because of those portions of our fleet were also unprofitable. So some of this attrition is actually tied to certainly those fleet decisions and is what we've actually planned on. What we think we need to do to, though, I mean it's imperative as we say that we're going to continue to focus on the long-term viability of ExpressJet, we fundamentally believe that we're going to be providing more visibility with the professionals at ExpressJet as we continue to evolve some of the legacy contracts within their business model. And our feedback is that that's the #1 thing that they are looking forward to and it's our #1 priority to make sure that we stabilize that entity right now.

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Operator [13]

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The next question comes from Michael Linenberg with Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [14]

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Just a couple here. And this may be more strategic. Just with the recent moves where you had Air Wisconsin, is that moving away from American to United? I saw some of the headlines after that. It looks like American is going to have to reinduct E140s and bring them back into service to get backfill. Are there opportunities there for you or maybe the 22 CRJ200s going into American, maybe that is the opportunity and you're actually benefiting it -- from it in real-time. Is that what's going on there?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [15]

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Well, so I think, Michael, you're right on point in many respects there. I think that we have seen specifically with American, a strategic move, that they are certainly very hungry for lift. You obviously see what happened with Air Wisconsin. But I think as a general term today, Michael, that a lot of our partners, if not all or most of them, are very interested in 50-seat lift. So we don't fundamentally believe that the Air Wisconsin announcement had an impact on our existing 50-seat flying with United. But you are right in that there certainly is some opportunities for 50-seat lift with American and we're always in some good strong dynamic conversations relative to those specifically. But in general, as Rob mentioned, part of the uptick in the back half of the first quarter is, I mean, some of that increased profitability that we experienced more than we anticipated was in additional 50-seat flying that we were able to recover and evolve in mid-quarter. So from that perspective, it's a really good 50-seat story all the around right now.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [16]

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Okay, great. And then just one other strategic one -- look, JetBlue seems to be having a little bit of issues with whether or not the E190 is the right airplane for them. And so, kind of like a 2-part question here. One, I suspect, and you can confirm, that if you were to fly the E190 on a U.S. partner, you'd probably be in a violation of one of your other carrier's scope clauses. So just if you can confirm that. But, two, is there an opportunity where maybe JetBlue, instead of having all the E190s, a combination of A319s at the mainline and E175s being flown by someone who has just a much lower cost platform who can make those markets work for them. I mean is there -- is that -- again, strategically, I mean is there something there that maybe there is an opportunity? Because it sounds like they are having problems with that fleet and yet, I think they need that feed and I see a cost-effective solution out there kind of a mix between JetBlue and possibly a SkyWest opportunity. I mean -- what -- thoughts on that? Or does that just that not make any sense from your perspective?

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [17]

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No, look, Michael, you're asking the right questions that we certainly do evaluate. And for your first question, I can confirm. The 190, us flying the 190, does violate at least one that I've seen and maybe even more of the current flying contracts that we have today. And to the extent that other partners besides our 4 have the opportunity for lift, I fundamentally agree with you on some of those business models. I mean, in our (inaudible), we're going to sit here on the call and talk about anywhere from 70, 60-seat aircraft clear down to 50-seat aircraft and say there is strong demand for all of it. And there is probably strong demand outside of our 4 partners. What I will say from a strategic point is that today we have enough on our plate to make sure we absolutely deliver for the 4 partners that we have today. And as I said in my script, we think there is still good opportunity with the people that we're working with today and technically we haven't -- certainly had any material calls from anybody else, but there is enough great stuff that we're looking at with some outstanding partners today, that, that's our primary focus.

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Operator [18]

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This concludes the...

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Robert J. Simmons, SkyWest, Inc. - CFO [19]

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That's going to be a wrap for us.

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Operator [20]

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Okay.

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Robert J. Simmons, SkyWest, Inc. - CFO [21]

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So we will turn the time over to Chip for some closing remarks.

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Russell A. Childs, SkyWest, Inc. - CEO, President and Director [22]

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I mean, I just want to express thanks for your interest in SkyWest. We continue our evolution of progress. I think that we're -- this is the quarter whereby we've outlined a strategic plan several months ago. It's a quarter where we just want to continue to execute on our base principles of making sure we're delivering what our partners want and meeting the needs of our passengers and we're fortunate to do it with the best professionals I think in the entire industry. And with that, we'll talk to you next quarter.

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Operator [23]

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This concludes our conference. Thank you for attending today's presentation. You may now disconnect.