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Q4 2023 SkyWest Inc Earnings Call

Participants

Rob Simmons; CFO; SkyWest, Inc.

Eric Woodward; Chief Accounting Officer; SkyWest, Inc.

Chip Childs; President & CEO; SkyWest, Inc.

Presentation

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWest, Inc., fourth quarter and full year 2023 earnings results conference call. (Operator Instructions)
I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Rob Simmons

Thank you, Regina, 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; 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?

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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, whether as a result of new information, future events or otherwise. 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 2022 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, and good afternoon, everyone. Thank you for joining us on the call again today. Today, I will recap our fourth quarter and full year 2023.
Throughout the year, we executed on our business objectives to first and foremost take care of our people, to deliver on our partner commitments, and to maximize our risk as we optimize our capital deployment. Our unique model of collaborating with our people enables us to rapidly respond to both challenge and opportunity, as well as deliver the best product in the regional industry. We believe this unique collaborative approach not only benefits our people and our product; it's been a fundamental part of our success for over 52 years, and will continue to help the SkyWest's team lead the industry forward in 2024 and beyond.
I'm very proud to share that in 2023, SkyWest teams delivered a historic 300 days of 100% adjusted completion, besting our last annual completion record by over 100 days. Safely and reliably connecting people with global access via our four major partners is the business of our product, and we're proud to do it better than anyone else in our space. This extraordinary achievement takes significant planning, preparation, and teamwork. And I want to thank our nearly 14,000 people who worked together to provide an exceptional product to 38 million passengers last year alone.
Today, SkyWest reported net income of $18 million, or $0.42 per diluted share, for the fourth quarter of 2023, and full year 2023 net income of $34 million, or $0.77 per diluted share. Overall, our partnerships are strong and demand for our product remains extremely high.
While 2023 was a little bumpy, we're pleased with the performance and our expectations for production and profit are improved since our estimates last quarter. As shared last quarter, captain attrition has begun to improve, and the fourth quarter showed the lowest attrition we've experienced in two years. With industry-wide hiring also seeming to stabilize, we expect continued progress in 2024. As we all know, captain development takes extensive time, and it will still be years to fully restore our crew balance and production.
As I mentioned earlier, we are continually looking for ways to best take care of our people through ongoing investment in enhanced compensation packages over the past couple of years, as well as improved opportunities for those who are looking to transition to mainline. We recognize the pilots have more options than ever before and appreciate that they are recognizing the value proposition at SkyWest.
In Q4, we announced a new pilot program with United exclusively for SkyWest's pilots. This program provides a clear path to United early in SkyWest's pilot career, with a conditional offer from United at 400 hours for those accepted. This innovative program benefits both our pilots who want to transition to United as well as those who want to build a successful career at SkyWest by ensuring that those in the program contribute flying through SkyWest's captain requirements.
Shifting gears, we recently completed the acquisition of a 25% stake of Contour airlines, a small operator in the Part 135 space, for $25 million. This minority interest stake strategically positions us to further monetize our existing CRJ assets through an asset provisioning agreement and to establish another pipeline for pilot supply. We will continue to evaluate opportunities to smartly and accretively deploy our capital.
SkyWest Charter, or SWC, has continued to successfully complete on-demand charter flying since it began operations last year. We continue to believe that SWC is the best possible answer for small community air service. And regardless of the status of our pending application for commuter authority at DOT, we're pleased with the strong demand for SkyWest's product and are very optimistic about its future.
That said, it is and will remain a small part small portion of our overall business, with our primary focus remaining on our contract flying and major partner relationships. As always, we remain disciplined to ensure capital is deployed effectively and profitably.
Overall, demand for each of our products remains exceptionally strong, and we remain aggressive and disciplined to advance our position at the forefront of the regional industry for our people, our partners, and our shareholders. As we deliver on our business fundamentals, we remain laser focused on executing reliably for the long game. Looking forward, there are still headwinds, but we believe no regional entity is better positioned, and we're optimistic about the opportunities ahead.
Rob will now take us through the financial data.

Rob Simmons

Today, we reported a fourth quarter GAAP net profit of $18 million, or $0.42 earnings per share. Q4 pretax income was $24 million. Our weighted average share count for Q4 was 41.8 million and our effective tax rate was 28%.
First, let's talk about revenue. Total Q4 revenue of $752 million is down 2% sequentially from Q3 2023 and up 10% from Q4 2022. Q4 revenue breaks down with contract revenue down 2% from Q3 and up 8% from Q4 2022. Pro-rate and charter revenue was $111 million in Q4, flat from Q3 and up 37% from Q4 2020 to leasing and other revenue was flat sequentially and down by 3 million year over year, reflecting a reduction in airport customer service contracts. These GAAP results include the effect of 63 million of revenue deferred this quarter compared to 56 million deferred in three and 70 million that was deferred in Q4 2022 as of the end of Q4, we have 367 million of cumulative deferred revenue that will be recognized in future periods. As indicated last quarter, we expect to recognize previously deferred revenue of roughly 5 to 10 million in Q1 and approximately 50 to 70 million in 2024. Additionally, for modeling purposes, about half of our non-operating below the line. Other income in the fourth quarter included a nonrecurring cash gain associated with the resolution of a prior year matter.
Let me move to the balance sheet. We ended the quarter with cash of 835 million, up 15 million from 820 million last quarter. The $15 million increase in cash during the quarter included the accretive actions of number one, repaying 116 million in debt. Number two, buying back 1 million shares of SkyWest's stock in Q4 for 45 million at an average price of 45 20 per share. During the full year 2023, we have repurchased 10.6 million shares or approximately 21% of the outstanding shares of the company for 289 million at an average price of 27 30 per share, and number three, acquiring two new E. one seven five aircraft that were debt financed. Our CapEx during the fourth quarter was 86 million. We ended Q4 with debt of $3 billion, down from EUR3.4 billion as of year end 2022. These cash related numbers tell an important story about the quarter that we continue to generate positive free cash flow from operations. Despite production constraints, our strong free cash flow also benefits from a lower investment in CapEx than in prior years. Our balance sheet and solid liquidity continue to be powerful tools to create shareholder value tools that have helped us repay over 400 million in debt and repurchase over 21% of our outstanding stock during 2023. 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 on 2024 from last quarter from last quarter's color, we now expect 2024 to be even more profitable from higher expected production. This improvement versus our expectations a quarter ago is driven by Q4's pilot attrition being at the lowest level in two years as Wade will discuss in a minute, we now anticipate our 2024 block hours to be up 3% to 5% over 2023, up from the expectation of flat year-over-year production a quarter ago. Our expectation for growth in block hours in 2024 is driven by improving pilot attrition, increasing utilization and ongoing strong demand for our production from our partners. We anticipate our 2024 income tax rate will range between 25% to 27% as the 2023 GAAP noise from deferred revenue starts to reverse in 2024 and including the benefit from our share repurchase activity this year, we expect our 2024 GAAP EPS to again have a $6 handle where we were pre-COVID, reflecting our stronger production outlook. Our solid balance sheet, reliable cash flow from operations and strong demand for our product, provide a catalyst for improving our return on invested capital, including the following as a result of repurchasing 10.6 million shares during 2023, we had 40.2 million shares outstanding as of December 31st, 2023. As of December 31st, we had $91 million remaining under our current share repurchase authorization. We anticipate continuing to be opportunistic in repurchasing shares going forward although likely at a significantly slower cadence than in 2023. Over 2023, we executed on our balanced capital deployment by also repaying over 400 million in debt our debt net of cash continues to be lower than our pre pandemic levels of 2019. The under utilization of the fleet in place today can accommodate 14% ERJ future block hour growth and 35% CRJ future growth in block hours. Wade will give more color around this in a minute.
Our capital expenditures were 252 million in 2023, including an early lease buyout on 35 CRJs earlier in the year and the acquisition of two new E. one seven five aircraft. We anticipate our 2024 CapEx will be approximately 275 to $325 million, including the purchase of five new E. one seven fives in 2024. Our investment in contour mentioned earlier by Chip will give us an important channel to deploy and monetize our excess CRJ 200 aircraft and engines in underserved communities. 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 shortage affecting the industry and to preserve the optionality of monetizing strong demand opportunities over time will position us well to drive total shareholder return. Wade?
Thank you, Rob. Last quarter, we announced a flying agreement for 19 new E. one 75 to replace 19 CRJ seven hundreds under our United contracts. We anticipate four of the E. one 70 fives will be delivered in the fourth quarter of this year, seven in 2025 and eight in 2026. These 19 are in addition to the two remaining each one 75 currently on order. During the fourth quarter, we received two E. one 70 fives under our Delta contract. We expect delivery of one more in 2024 and the last in 2025. At the end of 2026, our E. one 75 fleet total will be 258, continuing to solidify Sky West as the largest Embry Air operator in the world, there are still over 100, 65. There's still over 100, 65 to 76 seat aircraft to be awarded and we are optimistic about our chances to operate some of the scope aircraft. The debt remaining on the 19 CRJ seven hundreds will be repaid by the time they come out of contract with United. We are working to place the seven hundreds under flying agreements and believe they will be extremely valuable to our partners as they move to replace single class 50 seat product with dual class aircraft. These aircraft are some of the newest next-gen CRJ seven hundreds in the world.
Let me review our production. Fourth quarter completed block hours were flat as compared to the third quarter of 2023. Based on the current schedules we have from our major partners for Q1, we anticipate that our first quarter block hours will be consistent with the fourth quarter.
With regard to staffing, we have seen an improving trend in our captive nutrition and anticipate that our 2024 block hours will increase by 3% to 5% as compared to 2023. I would also remind you that we can add approximately 14% more block hours to our ERJ fleet before adding any aircraft. This same numbers, over 35% for our CRJ fleet and makes each additional block hour accretive to the model. Our partners remain very engaged in supporting our efforts to restore production during the quarter. We also came to an agreement with United on a pilot pathway program for SkyWest's pilots. This new agreement will allow our current pilots to interview and receive a job offer with United at as early as 400 hours of flying time with Sky West. The pilot will then transition to United once they have flown as a Sky West captain for a certain amount of time. This new program provides enhanced career clarity for all of the Sky West pilot to join. We also announced today we acquired 25% ownership stake in contour airlines, a Part one 35 carrier for 25 million. This arrangement also includes an asset profit provisioning agreement under which SkyWest's will provide CRJ airframes and engines to contour this ownership stake as part of our strategy to accretively monetize our CRJ 200 assets, we have very little book value for our CRJ 200 assets and no debt. And we have approximately 5 million cycles remaining to monetize on our CRJ engines through a variety of different platforms, both Sky West Airlines and SWC. our new charter business will also continue to utilize our CRJ 200 assets. We continue seeing very good demand for selling and leasing these assets. For example, we sold over $15 million of CRJ assets during 2023.
Let me give give a brief update about the status of SWCSWC. began operating on-demand revenue charter flights last April, and we have been investing in training and hiring of employees. Since that time, we are pleased with SWC.'s progress and the sport charter bookings for this winter have been significantly higher than we had originally anticipated. While SWC. did not contribute to our Q4 earnings, we anticipate SWC. will have a positive contribution to our earnings during Q1 of 2024.
As far as our prorate business, the demand remains extremely strong. Just like the rest of the industry, we are seeing very strong yields and great community support. We will continue to work with the communities we serve on the best way to continue our service. We feel good about our ongoing efforts to reduce risk and enhance fleet and financing flexibility and remain committed to continuing our work with each of our major partners to provide creative solutions to the continued exceptional demand for our products.

Eric Woodward

Okay.

Chip Childs

Operator, we're ready for the Q&A with our sell-side.

Question and Answer Session

Operator

As a reminder, to ask a question, press star one on your telephone keypad. Our first question will come from the line of Savi side with Raymond James. Please go ahead.

Hey, good afternoon. I was wondering if you could I know it's a smaller part of your business, but I was wondering if you could elaborate a little bit more on Southwest charter and then how that interplays with maybe some of the appropriate? I know you mentioned $111 million the prorate and Southwest charter kind of balance each other out in the sense that it takes out the seasonality of that line item and and you grew the aircraft there to 16. Just wondering how you're thinking about a selfless chart as you get into 2024 and Savi, this is Chip.

Eric Woodward

Thanks some that look, SkyWest's charter is a great entity from our perspective that has a tremendous opportunity in the future.
On the number one thing that SFBC is doing today is largely doing on-demand charter for sports teams, which is a very on surprising market. I think we talked about last quarter. It's doing exceptionally well, strong demand. We're watching for the springtime to see what happens there. And again, so we are limited today to just do on-demand charter business. There's a lot of other things that are happening besides just sports teams. But as of today, that's the primary basis of that business model. We still need to receive commute authority before we can go back in as some of the cities that we would like to the smaller communities we would like to serve. That's what our objective is all along, and there's tremendous tremendous demand on from that standpoint, but we still are limited to the flying that we can do today.

Is that maybe is just how does kind of Contour fit into this is Contour. It sounds like it's a way to put your CRJ assets and to kind of operate there. But is there kind of opportunity to build kind of pilot hours and kind of build your Captain roles as well? Or just any just kind of curious as that, so strategic relationship there.

Eric Woodward

Yes. Let me maybe expand a little more than what we talked about on our opening comments. So I think I would probably say there's about four reasons why we were interested in the Contour transaction first and foremost, it's a good financial investment that's anchored in small community demand. And we continue to say this a lot in the industry, you know, as as the United States the urbanized during the pandemic. There's a tremendous amount of demand in these small communities, and we are very pro small community. I mean, that's the foundation of what we started with 52 years ago, and that's only becoming more and more enhanced. So the good investment in a very strong space that we really really like on two, you're right, it's a way to deploy unused CRJ 200 aircraft and assets engines and the like. I think that that is a fantastic aircraft, particularly at the 30 seat level to really enhance the economics of small communities and the demand for that product is extremely strong today. And as we deliver in that space, we think it's only going to get stronger just the same way that we've been doing on it SWC. So this is good for us and them on again.
The other thing is that you have you touched on the expansion of supply. Our pilot supply path is very, very strong. Here. We can do some things. We didn't really mention in the opening comments, but the flight schools today are extremely full on. So for that, given our captain, you know, constraints, we may not be able to hire as much that's out there or certainly as much as we feel like we should hire. But to the extent that we can expand that on, particularly with this relationship with contour.
That's fantastic. And last, you know, it does provide some opportunity and some flexibilities for us in one 35 expansion down the road. We can do some various things down the road with contour that I think could be representative of our commitment to serve small communities in the one 35 space. So strategic, it's a great partnership on. We've had this conversation with them for a while. And I think this is going to be something that works very well for both of us, but that's super helpful.

Just a clarification. Do they have a charter at Charter authority as a commuter authority?

Eric Woodward

Yes, they do have commute authority. And ironically, as we've been constrained with captains and have had to come out of certain, you know, Essential Air Service cities, they've been the ones that have gone back and replace this along the East Coast. So they can do some things that we can't as of today, but we are going to be very aggressive in continuing to pursue commute authority for SWC. as well, even with the Contour investment.

Sam.

Thank you.

Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.

Eric Woodward

Thanks.

Chip Childs

Good afternoon. Just on the 14% headroom on ERJ, can you just remind us what percent of your mix that is and what how much higher could you take sort of system growth on system block-hour growth given that 14% headroom. And I guess relatedly, my follow up, I guess pilot attrition continues to trend favorably on how much higher could this up three to five be in 2024.

Rob Simmons

Hey, Duane, this is this is Wes. Just on the 14%, the overall mix, the ERJ fleet is a bigger fleet right now. Than our CRJ. And those numbers are disclosed in the 10 Q, but the overall system, we said that it's 14% unused capacity. On the ERJ side, we said about 35%. So the mix to blend is over 20% that we could still increase without adding any additional aircraft in there. So there's still plenty of headroom with our current fleet that we have there that's under contract.

Chip Childs

And on the wildly?
Yes, sir?

Eric Woodward

Yes. On your second question on pilots, let me let me add some color to that and maybe some more color than we've gone to in the past. We are still, you know, when we when we were in pre-pandemic on volumes, we've had about 53 to 54 hundred pilots on property at Skyworth being mostly SkyWest Airlines. Obviously, as of today, we're still about 1,000 pilots short of that number on sort of get back to pre-pandemic levels we need about 1,000 more pilots, 500 of them capped and the other 501st officers, like I say, the schools are on well supplied, and that's not a prominent about the 500 counties. The demand that we see long term is that we probably could use another 1,000 pilots on top of that. So when we when we talk about small community service and we talk about demand, the conversations with our partners to get back to the previous levels. We need another 1,000 on pilots, and we think there's demand for another 1,000 pilots on top of that, of which we have taken several aircraft since 2019 on. So this is a long term, you know, dig ourselves out of this hole. This is not going to take one year, two year. It's going to take a couple of years when we say we're optimistic about the captain. It's supply model. I can say that we are producing captains as of today, but not as many as we want. And throughout 2024, we're going to evaluate additional programs to make sure that we're vertically vertically integrated with our partners to tried to expand that cap in production even further. So I don't know if that kind of helps put some framework around your question or not, Glenn, you know, it does.

Rob Simmons

Very helpful.

Eric Woodward

Thank you.

Your next question comes from the line of Mike Linenberg with Deutsche Bank. Please go ahead.

Oh, hey, good afternoon, Wade, I want to go back to what Tom you talked about, I guess 165, 76 seat type opportunities among I guess, amongst your partners and I guess I want some some clarity clarification of that. Is that 165 available available of spots for 76 seaters, 70 seaters, 66 seaters. Is it just the three or I should say actually four carriers that you do business with, does that include other major carriers that may be looking at bringing on a regional, maybe you can just provide a little bit of color around that space.

Yes.

Rob Simmons

No, it's a great question, Mike, on. So first of all, just to clarify what I said in my script, that was a lot of numbers that I was saying, but it was 165 to 65 to 76 seat aircraft. So it's 100 airplanes in that scope category, right? So there's 100 airplanes that are available to be awarded between 65 and 76 seats between all of our major partners. And so just to add a little color. We've obviously got of our existing fleet that we have. We have some assets that are still not under contract that are fall into that category. There. Obviously new airplanes out there. And there's obviously other carriers that have 70, 60 or 70 seat aircraft that are that are not flying.
Great. And so there's three very good buckets out there of potential opportunities to come to potentially get some of those 100 aircraft.

Right.

Okay, great. And then I just want to go back to Contour. Is that on first off, I guess on Rob, is that going to be accounted for under the equity method at 25% stake for now?

Eric Woodward

Yes.

Well, will that be a contributor to your P&L in 2024 or a detractor or maybe just even?

Yes.

Chip Childs

What we said is that it was not a contributor in the fourth quarter of 2023, but that we would expect we would expect that.
I'm sorry that I'm speaking of the RSWC. operation.
Yes, I'm talking Kantar Media or sorry, ISWC. will be a contributor Contour. We've got a 25% ownership in that we'll wait and see and give more color down the road.

Eric Woodward

Okay.

And then how many how big is Kantar, how many pilots contour have today?

Rob Simmons

Yes, Mike, this is Wade. They have about 30 aircraft in summer around a 200 pilot somewhere somewhere in that range.

Eric Woodward

Okay. Okay. That's helpful.

And then on just contour today, like other part one, 35 carriers like Silver and Cape Verde today have interline agreements with various carriers or they don't have any affiliation with anyone?

Rob Simmons

Yes, Mike, great question. So currently, as of as of the closing of the transaction, they have an interline agreement with American Airlines.

Okay, great. And then just one last one, if I can squeeze in on this topic because it is an interesting one. As I recall, you did have an investment in the southern Airways Express, but I now know that that's been kind of rolled into the surface where I'm not even sure if you have a residual stake there, what does this get you that maybe that could get you or maybe this structure with surface air and Southern Air was Express wasn't a clean one. And this is a lot a lot easier to start kind of with a de novo type investment or any color on that? And thanks for answering my questions.

Eric Woodward

Yes.

Rob Simmons

So Mike, I'll take the first part of that, and then Chip will tackle the last part of it on. So as far as our investment in subs there and as part of their transaction with Serve, we divested of our ownership stake and that's where we no longer have ownership, so.

Eric Woodward

Okay. And Michael, on the second half of that, that there's some big differences between Southern and Kanpur, obviously, on the Buchanan contours, almost exactly like SWC. and when we'd like to accomplish with SWC., I mean, it's the same type of aircraft. You have same type of the same type of flying on and Southern, which is just a smaller aircraft, single-engine turboprop, that type of stuff. So the fleet and asset on connection is the number one difference on and there's a lot of alignment and strategically with both of the carriers could do. And from that perspective, it seemed to work very, very well.
Great. Great.

Thanks.

Thanks for taking my questions.

Your next question comes from the line of Helane Becker with PD. Cowan. Please go ahead.

Thanks very much, operator.
Hi, Tim, and thank you for this time. Are you weighing debt repayment versus buybacks for capital allocation how should we think about that like priorities?

Eric Woodward

Yes.

Chip Childs

Thanks, Lane. And I would say that, Vinod, I don't see them as being mutually exclusive. You know, obviously, we're very focused on deploying capital in an in an optimal way. And I think we've done a pretty good job in that, but we definitely want to leave plenty of dry powder for flying opportunities that may be out there, you know, like and wait and ship have been talking about that 100 scope airplanes that are out there. We would love to obviously continue to grow that way. But we will continuing and we have an open share repurchase program as well, but we'll probably slow the cadence of that at the levels we're at now. But I think that will we'll take things sort of a quarter at a time and you know, and look to potentially continue to do both.

Eric Woodward

Okay.

That's very helpful. Thanks. And then my follow-up question thinking about the time line back to pre-COVID margins. And I know how you're thinking about getting back to and just size with with the know the roughly 2000 pilots that you had? And how are you thinking about margins or how should we?

Eric Woodward

Yes.

Chip Childs

Thanks, Celine. So look, I think we're not back to 2019 margins yet. You know, and obviously, we're making good progress in that direction. But because of how we've deployed capital and the shares that we bought back, we are there from an EPS standpoint. So even though margins are not back to 2019 levels?
Yes, potentially in 2024, EPS will be.

That's helpful. And then if I could just question one more. And I don't know. And I don't even know if you would said Alaska Air and you do some flying for them has seen some book away since the middle of the month. And I'm just wondering if you would see any of that in your in the flying you do for them or if it's kind of been business as usual?

Eric Woodward

Yes. Elaine is chip in a lot of the breadth of business as usual on. In fact, you know, certainly given some of the things have been going on in the industry, we've been asked to fly more and that type of stuff. So it's not had a major impact relative to what our flying is. In fact, I think demand is strong. And I think when when demand gets a little stronger. Sometimes you don't even notice that where we are today. So that's kind of the situation with that.
Got it.

That's Roy. And that's really helpful. You guys.
Thank you.

Eric Woodward

Thank you.

Your next question comes from the line of Catherine O'Brien with Goldman. Please go ahead.

Good afternoon, everyone, and thanks so much for the time. Maybe one more on Encore Contour and the CRJs in general, you know that with these aircraft go into Contour, can you just remind us of how many of your CRJs are currently not on contract. I know there's some moving pieces. I just wanted to get a sense of, you know, what's non-contract now? What's about to come off and what are the options for those to be a home value of this new contour Avenue thing?

Rob Simmons

Yes, Katy, this is Wade. A great question. And so on the CRJ two hundreds side, we we own about 150 CRJ two hundreds. And between pro rate and contract, there's probably about around 50 to 60 of those that are not under current contracts. But as we said and right now, there's there's no debt. There's very little book value and we are monetizing those assets. As we talked about through, Scott was charter selling leasing. And so that's kind of the scope of it, our 700 than our nine hundreds, the vast majority of those are all under contract and have very high demand for those.

Our next question is a follow-up from the line of Savi side with Raymond James. Please go ahead.

Hey, thanks.

And I just wanted to follow up on your risk of response to Julien's question that was super helpful color there. I'm curious. So Al, how many captive or are you able to create content in any given year in your kind of and that happens, I suppose in your kind of main operation? And then just how much incremental is maybe Sky charter helping you YouthBuild as well?

Eric Woodward

So that's a complicated question, and we probably have a little bit of conservatism in our answer to that. And basically, today, a lot of our projections, I will say they get better all the time as we watch what's happening on. We've seen that change. And I want to add some context. As we build back captains and we're back building back the operation, we're building it in a way that we don't think that this problem goes away just this at this moment, over the next couple of years, we fundamentally think that over the next decade or so, we need to build a model that's resilient relative to captains and first officers, both. So as we build that back, we're doing it the right way back to your number, you know, how many do you think that you can produce. I'd back up and just say we'll have positive cap in production today, but it's still going to take at the rate we're going today several years to get back to the to the 2019 level.
Now the most important part that we probably would tag on to that is we're working very diligently with partners in creative ways in which we can produce captains faster than what we're producing today. That's the Contour investment. That's the pilot and the pilot program investment with United fundamentally And strategically, we are going to look to attract pilots that want to be either have a career position here at Sky West or career position at our four partners, but not career positions anywhere else. So we're going to continue to be far more surgical in the future than what we have been in the past, about identifying those that contribute to our culture and our partners' culture so I think like I said, we're producing positive the last couple of months, which is the first time we've been doing it in the last our 2.5 years on and it depends on a lot of levels of attrition. It can be capped in attrition that could even be first officer attrition right before they become captains, which honestly savvy, we really don't have a great grip on what those are going to be. The models are a little bit all over the place. We can get super optimistic and we can be super conservative. We're just not ready to get into that level of detail.
Now outside just summarize, we have positive production today. It's going to take a long time, but we're really focused on ways in which we can aggressively move this forward, not just for shareholders, but look, our people want this as well. We want high utilization for our employees and which obviously translates to the bottom line. But most importantly, it creates a lifestyle where captains are going to want to stay as well. So it's a cultural event as well that we're deeply focused on.

That's helpful. Thank you.

Our next question is a follow-up from Catherine O'Brien with Goldman Sachs. Please go ahead.

Hi again. Sorry about that. Rookie mistake hit a headset off is that of a new home.
So being basically back on on I had a follow-up for you, Wade, when you were talking about just like sparked my interest on Condor are you going to be leasing aircraft or selling them outright?

Rob Simmons

No, it's a great question. So the model that we currently have right now, we are selling the airframes to them and we are leasing them the engines and so that that's how we've currently structured that with them.

Okay, got it on. And then so can you just remind us what the trigger is for you to flip from deferring incremental revenues starting to recognize that deferred revenue balance? I know you've given us the guidance for next year. I think in the past you've noted tied to getting block hours closer to 2019. I'm not sure if the contract changes earlier this year changed anything about where we think about hitting that threshold and just sits in the context of like if that block our target for 2024 moves around potentially higher, how could that impact the recognition things?

Chip Childs

So yes, Katy, it's Rob.

Here.

Chip Childs

So the deferred revenue model does depend on, you know, sort of our projection or forecast for future production and future block hours. But it's hard to imagine a scenario right now that we sort of flip back the other direction. I think that starting in 2024, as we indicated that it will start to recognize sort of small amounts and quarterly, and we would expect that to continue for for many years kind of.

Yes.

I was just more wondering if maybe there was further upside to that recognition at the block hours, new tire pilot attrition was better, and we'll keep you posted on that.
Okay. As Kay and then maybe just squeeze one last one in you also, Rob, you mentioned you expect the pace of share purchases because going forward, is that a function of just CapEx stepping up over the next couple of years or something else? And, you know, kind of a rephrasing of Williams earlier question here. Free cash flow projections came in better than expected. Would you maybe change your tune on the pace of those repurchases funded? Thanks so much.

Chip Childs

For the time, certainly defense.

Eric Woodward

Yes.

Chip Childs

I mean, in terms of how we think about deploying capital, it starts, as you indicated with your generating free cash flow. And then we look at the best ways to deploy that, whether it be debt repayment, whether it be other operational initiatives, whether it's new flying. I mean, there's a number of ways that we can accretively deploy on capital. Obviously, you know, share repurchase has been a very good one in 2023. But as we go forward and continue to generate that free cash flow we'll look at the spectrum of capital opportunities we have and pick the best NPVs and go from there.

Eric Woodward

Got it.

And then I suppose my last one, but maybe silver allow it just on Southwest charter. Can you just help us think about what's the delta earnings should be between 4Q? I think I think you said it didn't contribute in 4Q and it's going to in 1Q. So how much of a drag was in 4Q and how much it will contribute the 1Q? And if you have that, thanks again for your time.

Yes.
Okay.

Rob Simmons

Just to wait for the specific profitability, we're not going to get into that now, but I can kind of directionally give you some some revenue and numbers that may be helpful for you. So like in the fourth quarter, it was around five or 6 million and then the first quarter we anticipate it being over 10 million. It's 10 to 12 million in revenue in the first quarter. And so there is a pretty big swing. We're still growing that entity right now. We're still learning a lot about the charter business we're still learning about the efficiencies and all of that. So we're still we're growing. We're learning, we're getting better at it every day. And so I think with all of those things, we're going to get more cost efficient. And then we're also going to we're finding more and more revenue opportunities as well.

Thanks so much for that. Appreciate that.

I'll now turn the call over to Chip Childs, closing remarks.

Eric Woodward

Great. Thank you. On Brazil, we're really pleased with what we've done in 2023. I mean, there's a lot of challenges and a lot of headwinds and thanks to our amazing professionals that SkyWest's on for everything that was done this last year. We really look forward to what's going to happen in 2024. We don't doubt that there will be any less headwinds and probably surprises along the way. But I think that we're in the process of making sure we're controlling the line of scrimmage, if you will, so that we have options and flexibility to work with our people and our partners to move forward in a very, very positive way. We appreciate the analysts that are following us as well and the interest that you you've given to our Company and we look forward to talking you next quarter.

Rob Simmons

Thank you.

And that does conclude today's conference. We thank you all for joining, and you may now disconnect.

Yes.